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Edited Transcript of RSW.L earnings conference call or presentation 1-Aug-19 8:15am GMT

Full Year 2019 Renishaw PLC Earnings Call

Gloucestershire Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Renishaw PLC earnings conference call or presentation Thursday, August 1, 2019 at 8:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Allen C. G. Roberts

Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director

* Chris Pockett

Renishaw plc - Head of Communications

* David R. McMurtry

Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board

* William Lee

Renishaw plc - Chief Executive, Member of the Executive Board & Director

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Presentation

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Chris Pockett, Renishaw plc - Head of Communications [1]

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Good morning, everyone. My name is Chris Pockett. I'm Head of Communications for the Renishaw Group. I would like to welcome you to this live webcast presentation of Renishaw's preliminary financial results for the year ended June 2019. Present in the room today are Sir David McMurtry, Renishaw's Executive Chairman, who will chair the later question and answer session. And today's main presenters Will Lee, Chief Executive and Allen Roberts, Group Finance Director.

Before I hand over to Will, I'd like to go through some basic housekeeping for this event. After the presentation, which will last around 25 minutes, there will be a Q&A session in which we will try to answer as many questions as possible before we close at 10:15. No questions will be answered during the formal presentation. However, for those of you joining us via the web, you will be able to submit questions both during and after the presentation via the Ask A Question button you can see located at the bottom left-hand corner of your screen.

For those of you joining us via the conference call facility, you will only be able to submit a question at the end of the formal presentation (Operator Instructions). I shall also point out that all financial information given during this presentation will be in pound sterling.

Thank you again for joining the presentation and I will now hand over to Will.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [2]

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Thank you very much, Chris. Thank you very much, everyone, for joining us this morning. So let's have a look at the results to start with. Revenue for the year was GBP 574 million, which was a decrease at constant exchange rates of 7%. The main driver behind this was the weakness in some markets in the APAC region where we actually saw a 19% decrease at constant exchange rates. I'll talk more about that very shortly.

But when we look to start with at the breakdown and some of the revenue from different product lines, was very nice to see actually was some of the newer product lines doing very well. We saw strong growth in our additive manufacturing product line, in the laser powder bed manufacturing equipment. We also saw good growth in our Equator flexible gauging systems which are becoming more and more accepted as a gauge of choice in the manufacturing industry and also in our fixturing product line.

We did see slowdown in demand for encoder and machine tool products in APAC which I will talk through shortly. Also very pleasing was in healthcare business where we report 15% increased revenue, strong growth there in spectroscopy which is a Raman analysis equipment and our medical dental product line, which is increasingly the utilization of our additive manufacturing equipment in healthcare markets.

So when we look at the numbers, as we flagged up in previous updates, the APAC market, we have talked about with U.S.-China trade uncertainty clearly has been a drag on the Asia market for some time now with uncertainty surrounding investment. What we have also seen in some of the markets that we operate in here, particularly in the electronic semiconductor flat panel display markets, are very cyclical. We supply a lot of our encoder products into the manufacturing equipment used into those and the (inaudible) softening in those markets has continued and is continuing at the moment.

What we've also seen is where we talked about in the past, the large end-user manufacturers and consumer electronics products where we have had large one-off orders in the past. We have not seen that there we believe predominantly due to actually weakening smartphone demand as we talked about before and some overcapacity in the supply chain there. We do see opportunities in the future particularly for the Equator gauge there going forward as we try and -- the manufacturers try and push up productivity. So we see opportunities in the future, but probably not immediately with the machine tool product line there.

From a positive point of view across the board what we do see in all the regions, there's no real erosion in our customer base and actually some good longer-term metrics that we're pleased with in terms of gaining market share, increasing product fitment rate and the strength for the future. So whereas we see in general weaker markets at the moment, we see longer term positive.

When we look at the impact of the reduced turnover and profit, then our adjusted profit before tax was down to GBP 103.9 million, a decrease of 28%. What we did see was a substantial increase where our target and our objective has been to breakeven in healthcare in the past, we've now grown on that to report a healthcare profit of GBP 3.1 million.

People remain key for us in terms of our delivering on our long-term growth strategy with new products and exploiting our technology in new markets. We have slowed our investment rate in terms of people. We continue to recruit graduates and apprentices as we see them as the future of the -- long-term future of the business and we recruited just under 120 of those this year.

We did continue to invest in capital expenditure, both in property and in plant, and Allen will talk through actually in more detail on both the U.K. investments and the overseas investments there, too.

We ended the year with a strong balance sheet with cash of almost GBP 107 million, slightly up from last year, and we are recommending a final dividend of 46p per share leaving a total dividend per share over the year unchanged at 60p.

Okay. So I'm going to hand over to Allen to talk through the financial results in more detail.

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Allen C. G. Roberts, Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director [3]

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Thank you, Will, and good morning, everybody. By way of introduction, the results in this presentation are based on activities from continuing operations only. The adjusted profit before tax and adjusted earnings per share, alternative performance measures, are being consistently calculated year-on-year and eliminate the profit and loss impact of the forward contracts classified as ineffective in the statutory results.

These alternative performance measures are the basis by which the board evaluates the group's performance. As just covered by Will, we have achieved revenue in the year of GBP 574 million, a fall of 6% over last year or 7% at constant exchange rates.

Adjusted profit before tax is GBP 103.9 million compared to GBP 145.1 million in the prior year. This gives a return on revenue of 18% relative to 24% in the previous year and 20% in both the years 2016 and 2017. Statutory profit before tax is GBP 109.9 million compared to GBP 155.2 million last year, both adjusted, and statutory profit before tax included currency gain on intragroup trading balances of approximately GBP 6 million which I will refer to later.

The effective tax rate for the year is 16.1% compared to 14.7% in the previous year. There is a GBP 3.9 million fall in the patent box benefit this year due to lower profits in the U.K. which is the principal factor for the increase in the overall effective tax rate.

Earnings per share on an adjusted basis have reduced by 30% to 119.9p and to 126.7p on a statutory basis. A final dividend of 46p per share is proposed in respect of the year to be paid on the 31st of October 2019 to shareholders on the register on 27th of September 2019. This gives a total dividend per share in respect of the year of 60p which is the same in the previous year resulting in a dividend and cover of 2x relative to 2.8x last year.

Metrology sales at GBP 533 million were GBP 43 million lower than last year for reasons already covered by Will earlier. Adjusted operating profits generated from our metrology operations were GBP 90.6 million compared to GBP 142.8 million last year. This reduction reflects obviously the fall in turnover and increased costs including further investment in new product development programs, sales and marketing infrastructure and support costs.

Sales in the healthcare sector were GBP 41 million and 15% up on last year with strong growth in our spectroscopy and medical dental product lines. In terms of results, we've achieved further gains this year with operating profit of GBP 3.1 million, up from GBP 300,000 last year.

This profit bridge shows the movements that reconcile the adjusted profit before tax of GBP 145 million last year to the GBP 103.9 million this year. I'll cover these items in more detail shortly. However, to summarize the significant items, a GBP 30 million fall in gross margin largely is a result of the lower revenue. Engineering costs have increased by GBP 12.4 million. Distribution costs were up by GBP 5.4 million. Administration costs GBP 1.7 million higher. Other financial income is higher largely due to the currency gains on intragroup balances.

Looking into our income statement, the cost of sales percentage increased by 1% to 35% mainly due to an under-recovery of manufacturing overheads following the slowdown in demand in the second half of the year. As I mentioned earlier, net financial income includes currency gains of approximately GBP 6 million in relation to intragroup balances. In previous years, low-value intragroup currency gains and losses have been reported in administrative expenses. The current period gains are largely in relation to U.S. dollar-denominated loans between Renishaw plc and Renishaw Inc., our U.S. subsidiary, which have increased significantly in recent years to provide funding for the expansion of our U.S. operations.

To mitigate income statement volatility, a number of intragroup loans, including the loan with Renishaw Inc., were reclassified as permanent investments in December 2018 where gains and losses from currency movements and such balances accumulate in the currency reserve instead. Additionally, one month forward contracts are now used to mitigate remaining balances. As a result, we do not anticipate to seeing intragroup currency volatility or losses going -- on the scale going forward.

Our share of profits in associates and joint ventures increased by 27% to GBP 3.8 million reflecting strong performances in our joint venture companies RLS based in Slovenia and MSP in Northumberland.

Our commitment to research and development remains the core strategy for the business and this year we have a total spend of GBP 97.9 million, up GBP 14.3 million over last year, which represents 17% of total turnover. The amount of net R&D capitalized was GBP 3 million, 2018 it was GBP 2.1 million, and we have gained R&D tax credits of GBP 5.1 million compared to GBP 4.1 million last year.

Net engineering costs are therefore GBP 89.8 million compared to GBP 77.4 million last year, a growth of 16%. Engineering headcount has increased by 107 staff during the year.

Distribution costs are up by 4% to GBP 126.8 million. As well as normal inflationary increases, we made a small increment to global headcount to support the growth in sales volumes and in particular our end-user business. We also have additional running costs arising from the expansion of our overseas facilities in recent years.

In terms of our administrative overheads, there has been an increase of GBP 1.7 million to GBP 58.6 million. There is an offset arising from a reduction in bonuses in the year while the main factors giving rise to underlying increases are inflationary increases, headcount increase in the U.K. and overseas to support business growth, and increasing complexity, and a 800,000 charge for the estimated increase in the U.K. defined benefit pension scheme liabilities arising from the GMP equalization.

The group now employs a total of 5,041 people, which represents a net increase of 179 from last year. In the U.K., headcount has increased by 122 since June, which includes the intake of 119 graduates and apprentices during the year as we continue to invest in skills for the future. Overseas, we have seen an increase of 57. Over recent years, we have recruited high caliber people to support growth opportunities. We are now well placed to benefit from these additions and not planning a significant increase in headcount this coming year.

In recent years, we have made significant progress in enhancing and simplifying financial reporting processes and systems to further improve the analysis of business performance. With a focus on increasing productivity and efficiency, further major systems deployments are in progress for our HR, engineering change management and marketing activities.

We recently committed to a new ERP system to replace our global finance, sales and marketing, and CRM systems. This will deliver many benefits to the business, including enhanced customer support and inventory management, and will provide the infrastructure to support our growing solution selling activities. The deployment program is planned to commence in early 2021.

Now onto the balance sheet. I'll cover property plant and equipment, cash and pension scheme separately. Intangible assets have increased by GBP 8 million primarily due to the increase in capitalized R&D costs, software purchases and our share of profits from our joint ventures, RLS in Slovenia and MSP. Inventories have increased by GBP 18 million since June 2018 primarily reflecting the impact of Brexit contingency preparations and the reduced demand we experienced in the second half of the financial year.

Debtors have decreased by GBP 18 million since June 2018, reflecting the record revenue in the final quarter of the previous year. Creditors have also reduced due to lower trading activity, loans, lower bonus accruals at June 2019 and lower corporate tax liabilities. We now have external borrowings totaling GBP 10.4 million at June 2019 across current and noncurrent liabilities. This is in relation to a Japanese yen-denominated loan entered into for the purchase of a new distribution facility in Nagoya in Japan, which is repayable over 5 years with interest rate of 0.81%.

Net derivative balances, which represent the fair value of foreign currency forward contracts and the options yet to mature, now total GBP 51 million net liability compared to GBP 29 million net liability at June 2018. This increase arises mainly from the weakening of sterling against the U.S. dollar over the last 12 months. Net assets equal to total equity has grown by GBP 35 million to GBP 583 million, a 6% increase.

Turning to the defined benefit pension scheme, a new funding agreement for the U.K. defined benefit pension scheme was completed in June 2019. The company following discussions with the pension regulator and the trustees has agreed to make payments of GBP 8.7 million per annum for 5 years effective from the 1st of October 2018.

At June 2031, the company is obliged to pay any remaining deficit unless self-sufficiency funding target is achieved before this date. Payments may reduce in the event of the funding target being achieved before the 30th of September 2023.

Under the previous funding plan, the company paid all monthly pension payments and lump sum payments and a transfer of payments up to a limit of GBP 1 million each year until the early of 2031 or reaching self-sufficiency funding target totaling circa GBP 4 million per annum. The scheme continues to have a charge over a number of U.K. properties and the pension scheme escrow account.

As of 30th of June, the net present value with a future committed payments into the fund under the new plan are less than the IAS 19 deficit and therefore the IFRIC 14 adjustment to liabilities is no longer required. This has resulted in a GBP 31.5 million reduction in the deficit, which has been offset by the actuarial loss of GBP 21.2 million mostly attributed to the reduction in the U.K. scheme discount rate from 2.8% to 2.3%. As noted in the interim results, a charge of GBP 800,000 to admin expenses was provided in December 18 in respect of the GMP equalization.

Turning to cash flow, this cash flow bridge tracks the movements of our opening cash balances of GBP 104 million to the closing position of GBP 107 million. Our profit after tax of GBP 92 million together with non-cash items totaling GBP 43 million gave a cash inflow of GBP 135 million. We've seen further net GBP 4 million cash inflow from changes in working capital with a decrease in debtor balances more than offset in an increase in inventory and reduction in payables.

Significant cash outflows included net capital expenditure of GBP 52 million -- more on this shortly -- R&D capitalized of GBP 18 million, dividend payments of GBP 44 million and tax payments of GBP 25 million. Cash inflows from the borrowings of GBP 11 million were used to fund the purchase of a property in Japan.

To finish our results review, a few words on capital expenditure for the year. We have invested GBP 56.8 million on fixed assets in the period compared with GBP 34.9 million last year. Expenditure on property totaled GBP 25.4 million, in the previous year it was GBP 10 million, including the commencement of a 94,000 square foot extension to our Innovation Centre here in Wotton-under-Edge. We also purchased land in Brazil for future development of a new distribution facility, the acquisition of the property we previously rented in Breda in the Netherlands and the purchase of property in Nagoya, Japan to support the expansion of our distribution function in Japan.

Expenditure on plants and equipment for the period was GBP 31.4 million as we continue to expand our manufacturing facilities mainly in the U.K. and continued investment in our global IT and distribution infrastructure. We also established a new European distributions facility at our existing Irish location to address the potential implications of the U.K. leaving the European Union.

And on the last slide for this section, we see here 2 photographs. Top left is the new facility that's being purchased in Nagoya in Japan, which gives us much greater flexibility. And on the bottom right, we have got the artist's impression of the new Innovation Centre extension which we're hoping to -- which will be completed by the end of this calendar year.

Thank you and back to Will.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [4]

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Thank you very much, Allen. Well, I'm going to take us through a little tour of what's being going on in some of the product lines and a little update there. So we start with industrial metrology. So clearly we talked about this in the start that this is a challenging market at the moment. We've talked about consumer electronics and weak demand there. Automotive is also going through a kind of strong rapid transition from the internal combustion engine technology over to electrification whereas aerospace continues solidly to invest for the future.

What we do see is despite maybe some of the short-term challenges, the long-term growth here we're very excited about as still those increasing component complexity, tolerances and skill shortages to achieve this, I mean, the demand for our products becomes stronger and stronger. When we look at what's going on here, so the message that we have preached and we have mentioned is making sure that the measurement is done ideally as close to the machine tool as possible.

Throughout the year we launched, for example, our new RMP400 probe. This brings our marketing-leading strain gauge technology for accuracy together with a very robust radio communication protocol. Probe has been very well received now due to its 40 ml compact size. So for measurements on the machine, we are making good progress. We are also increasingly promoting that if you really want zero cycle time complement what you do on the machine tool, by measuring next the machine with the Equator gauge and make sure your components don't go to the CMM at the end of the line a day later (inaudible) build in process controllers as you go.

What we've done here is with the Equator 500 that we launched recently, we are getting more and more growing install base there and regular customer feedback. And we've also increased the range of machine tool controllers that we can communicate with, and this is to give direct process control data back to the machine tool to keep high tolerance components on track as they're being manufactured. What we're also seeing is as Equators in particular are being built into more and more production lines. The move is from manual handling of parts from the machine tools to the Equator to more automated systems and to make it easier for robotic transfer, we now have the Equator loading system, which allows the robot to put the part on the Equator when it acts out of the direct measurement area.

Our vision still and what we are working on here is the fact that actually rather than moving often parts between multiple measurement stations for metrology that with the REVO and the flexibility of the different sensors on our REVO head, our automation vision here is that actually everything is done on the 1 CMM with the flexibility of REVO. And we have actually during this next year coming up some exciting new technology to launch on new REVO sensors.

Moving onto the position measurement market, again we talked about at the start that actually many of the industries here, particularly for our optical encoders and our laser encoders where there's a significant market going into the electronic production, semiconductor and flat panel, we are in a short-term cyclical times at the moment which is continuing. But there are again here positive long-term trends with new technologies coming through, the 5G technology to come through. And then also for the range of the encoder stuff, much more automation and robotics which actually drives particularly some of our magnetic technology which is very well suited for that market.

So when we look at some of the specifics going on in position measurement, then you can see here so for our high-end laser encoder which is used in a lot of semiconductor inspection equipment. The demand here is for more measurement axis, so that means more than 1 laser encoder per axis to measure not just linear, but angle too, so if we launch the multi-axis periscope to allow customers to do this. We have also the QUANTiC encoder which we talked about previously where we integrated our ASIC to digitize the cycle into the head. So rather than traditional analog signals coming through from the head, we have the full digitization going on there. We've now launched that with a rotary encoder to work with it as well. So now it'll measure linear and rotary axis.

That same ASIC that we used, have used and implemented in the QUANTiC has now been taken over to the ATOM family of encoders. These are our smallest encoders and we now have launched the ATOM DX. So this again with the ASIC on board puts directly digital quadrature interface to the controller and all still done in an extremely small package which you can see in the pictures there. This was just launched actually back at last month at SEMICON West in California.

Also from the position measurement side, the XM-60 product that we talked about predominantly targets at machine tool or stage calibration which measures all 6 degrees of freedom simultaneously, which has been very positive in our machine tool market has now been developed and upgraded for use on CMMs as well. And what is specifically done is targeted for customers who are using not just the Renishaw probe on that CMM, but a Renishaw probe and controller because it interfaces slickly to arrive effectively in automatic calibration when used in conjunction with our controller. So we're building this ecosystem of calibration system, controller and probe all based around Renishaw technology.

So moving onto additive manufacturing. When we look here, so the first thing to be clear on is the market effect of the wheel plating with additive manufacturing is the laser powder bed fusion. This is really targeted at the high-value metal part. The drivers that we have talked about on this technology is looking at machine productivity, which comes through as making sure the cost of part is effective and really then the process stability and part quality. Numerous markets are opening up for this, the most mature being aerospace, healthcare and tooling.

So where are we with here at the moment? Well, when we talk about productivity, the main driver on productivity for us has been the additional moving from a single laser system to quad, and with all 4 lasers addressing the entire bed on our 500Q, what we see is exceptional productivity. What we've also done is significant improvements in terms of the gas flow on the machine and the part quality we are getting is very good coming through.

We now have 4 customers at wanting different range here. We have the S which is a single laser version of our quad machine and we are also doing more in terms of built-in quality and certification. Often a lot of cost of an AM part is post built certification. The more that can be integrated into the build process, the better. And with our new InfiniAM Spectral software, it allows you to put up a picture of what is happening and the quality of the part as you build it.

Now most of our additive manufacturing customers are confidential, but we do have a few that we can talk about. We continue our collaboration with Sandvik on an additive manufacturing side. They have our Q systems over there. And we are also working on them in terms of areas such as materials development and post processing with a combination of our metrology and their tooling equipment as well. We have in the U.S. Knust-Godwin, a supplier using our quad system for parts in the oil and gas sector. Siemens has invested in the U.K. subsidiary material solutions in the RenAM 500Q, and another customer, PrinterPrezz, over in the U.S. is selling into the healthcare market using our AM technology.

So from a healthcare point of view, as I mentioned earlier, I think we are very pleased in terms of the significantly increased profitability of our healthcare sector. Again here the long-term opportunities are significant with particularly increased life expectancy across the world meaning that actually there are more applications and more need for the technology for patient care and treating the generate diseases going forward.

So if we look at some of the more specifics here, then first of all starting with Raman spectroscopy, as we mentioned, the drive here has been taking the inVia Raman analysis equipment from very much a scientist-led experimentation from research into a application-specific solution to a problem which is the RA800 series. The RA816 is one targeted at specific biological problems, and very much targeted as with the rest of the 800 series in terms of ease of use on a go/no go analysis for a production challenge.

Neurosurgery, we have launched our new neurolocate 2D module. This allows easy registration between the robot and the patient and the brain, which is a very important part of the whole solution. Absolutely critical for us is clinical studies. We have a number of studies that are either in progress or are being planned. We mentioned some here to do with Parkinson's disease which is the GDNF trial which happened in Bristol, and CDNF which is underway in Scandinavia. But there is -- that is one particular application for our drug delivery, but there are many others that have been looked at, particular I think of interest is brain tumors and cancer where there is a number of discussions ongoing to get trial setup.

So Allen touched on Brexit earlier. We have made sure we had all our plans in place for earlier Brexit deadlines. Those contingencies are still in place for October 31. We do, as Allen mentioned, have the warehouse setup in Ireland. We have additional stocks reflecting our group inventory in place to make sure that we have contingency, whatever happens with any disruption. And we believe we are in a good place to face whatever challenges Brexit throws at us.

So in terms of the summary, going forward as we mentioned, we do have a challenging business environment particularly in Asia, but in general more globally at the moment. We expect that challenging business environment to continue during this year. Our vision very much remains unchanged. So we -- as you can see, the opportunities that we have for long-term growth are still very much there in the markets that we operate in. And we will continue to invest in the strategy of the long-term patented innovative products.

Our short-term focus is very much targeted this year while the market is dying and making sure that we make the most of all the investments that we have made both in terms of infrastructure and people and making sure that we push the productivity of the business to deliver more new products and more new sales with those investments.

So in general, we remain confident in the long-term prospects of the group due to the people that we have and the exciting product pipeline that we have coming through. Thank you.

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Questions and Answers

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Chris Pockett, Renishaw plc - Head of Communications [1]

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Okay. Thank you, Allen and Will. So we're now going to move to questions. We'll have around 30 minutes for that. And as usual there are many more people on the webcast and the conference call. So I'm going to start with some of the webcast questions. As usual, throughout I will try to group similar questions together. So it may not answer all individual questions. We're going to start with a question now from Michael Blogg in Investec. Good morning, Michael. This is a question relating to pension charges. Could you please confirm that you have included the one-off charges for pension equalization and goodwill impairment in adjusted profits?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [2]

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Okay. Allen this is for you.

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Allen C. G. Roberts, Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director [3]

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Yes, I would confirm that we have made provision for these costs. And we did them in the first half of this fiscal year. And we've done a review of the -- of our goodwill and there are no impairments this year.

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Chris Pockett, Renishaw plc - Head of Communications [4]

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Okay, thank you. And next question relates to research and development. And this is a question from Mark Davies Jones at Stifel. And the question is would you expect your R&D and engineering spend to reduce in absolute terms in fiscal 2020? Your statement suggest some moderation in the rate of investment.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [5]

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I think the simple answer is no, but I think Will will put some flesh on it.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [6]

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Thanks, David. So yes, as the question alludes to, we will be focusing on making the most of the resources and the skills and the people that we have in the business already with only very select targeted recruitment as and where we have exceptional needs. So, yes.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [7]

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We don't expect a reduction in activity.

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Chris Pockett, Renishaw plc - Head of Communications [8]

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Okay. I have a question now relating to revenue and it's a question again from Mark Davies Jones. And that question is, all of the revenue declines in the year came in APAC, but it appears that the metrology business also slowed in EMEA in the second half. Are you seeing a notable weakening in your business in Germany in particular consistent with the weak industrial leading indicators in that region?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [9]

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Okay. Well, yes, so good question. So certainly, I think as we talked about, all markets are certainly sluggish at the moment. So if we look at Germany in particular, there's pretty 2 distinct markets for us there in terms of the metrology business. There's lots of machine tool builders there, those machine tool builders, I think, as you alluded to in the question are seeing weaker growth. They have quite strong order backlogs, but there is definitely a reduction which is also echoed over in Japan with JMTBA numbers showing a gradual weakening of that market.

So for machine tool builders, that's very much a market where we will sell machines tool probe to them and they will sell it on quite often into export markets. We often -- we also more and more have selling to the end users. So in particularly in Germany, that's also a good and growing market for us. That market is often quite different because it will be upgrades, which often in recessionary times is something that where investment is spent. So it's probably different dynamics going on in these markets. But in general, certainly the machine tool market is going through a softening at the moment.

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Chris Pockett, Renishaw plc - Head of Communications [10]

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Okay. Thank you, Will. And there is a sort of multipart question from [Sanklay Gamuda] at UBS. And the question -- 4-part question actually. So how much is cutting tools impacted by auto slowdown? Can you give us an indication of significance of the major end markets? How do you see the encoder and smartphone market in first half of financial year '20? And how should we think about growth for 2020? Quite a lot to get your teeth in everywhere.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [11]

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The whole discussion for Will.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [12]

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So the first question, cutting tools impacted by auto slowdown, I mean clearly we don't sell cutting tools. I don't feel overly qualified to answer that one probably more than the cutting tool manufacturer. If we look at number 2, can you give us an indication of significance of the major end markets? That's probably number 3 maybe to start with, I think smartphone we have talked about during the presentation. When that recovers, I think is of much debate and we are as uncertain probably as most other people there.

The encoder stuff also, we have been expecting a more of a bounce back. There was a lot of talk on 5G technology coming through, where there are different stuff going on between the U.S.-China trade war that's been well publicized, has delayed some of that or not, I -- it's difficult to know. But what we are not seeing at the moment is any immediate recovery and I'd say even the people that we sell the encoders to who sell then on into some of those markets are probably also equally uncertain at the moment.

The other major end markets, if we look at some of them, as I said, aerospace, there is still strong investment in terms of certainly the drive to improve efficiency and because of the aerospace impact on environmentally. So that's still strong in terms of investment. And the switch in automotive is generating different opportunities that were there than before, either in terms of less outright investment into traditional powertrain, but more upgrades, retrofits and improvements of existing equipment, which can be very good for us. And also manufacturers understanding what technology is correct for new electrification, which we believe the Equator, particularly Equator 500, is an ideally sized technology.

So thinking about growth for 2020, we -- internally we like to think prudently that 2020, that the global market is not going to be strong and therefore we need to make sure that we are dealing with our productivity too and exploiting the opportunities that we have to grow the business and growing the profitability in what is likely to be a flat or depressed global economy.

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Chris Pockett, Renishaw plc - Head of Communications [13]

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Okay. Thank you, Will. Some number of questions similar to this. So this is a question from Lacie Midgley at Panmure Gordon. Good morning, Lacie. What was the weak -- what was behind the weak or no revenue growth in Germany, Japan and the U.S. in second half?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [14]

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So if I get down and start with, so as I have talked about, so we sell a lot of machine tool probes or CMM probes on to machine tool builders, CMM builders. They are seeing weaker market conditions at the moment and that was coming through in the second half of the year, particularly there for Germany and Japan. What we are doing to try and counteract that is growing some of our end-user business in terms of upgrades and retrofits and alternative routes to market to complement for our traditional customer base. Pass.

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Chris Pockett, Renishaw plc - Head of Communications [15]

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Okay. Now a question relating to China. I can't find that one. Here you go, yes, this one here. Okay. So this is a message from -- question, sorry, from William Turner, Goldman Sachs. Good morning, William. A major Swedish competitor of yours, I can't think who that is, recently said customers in China are restructuring supply chains and face restricted access to foreign technology. Are you experiencing this or seeing any signs of this?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [16]

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I don't think so, but what do you think, Will?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [17]

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No, we don't. We still see China as a good market for us. It is obviously a depressed market at the moment and, as we've talked about, there are Chinese competitors there, but actually we still see a strong demand for our products and technology there.

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Chris Pockett, Renishaw plc - Head of Communications [18]

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Okay. I'm going to take a question from Richard Paige at Numis. Good morning, Richard. To what extent do you feel are current impediments to sales, for example trade tensions are building some pent up demand or project activity, as you also mentioned overcapacity in the supply chain in consumer electronics?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [19]

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So I think the uncertainty is, at the moment, if you're a subcontract manufacturer or any manufacturer trying to decide where to invest in your new manufacturing facility, the obvious answer for the last few years has been in China. Probably both wage growth and the risk of tariffs, that is not such an obvious question at the moment. So we are seeing investment being looked at in different areas in Asia and people deciding where best to put manufacturing facilities. I think that's probably come at a time when there is also uncertainty with lots of investment that has gone in. So probably those 2 things coupled together has meant there has been a pushing back and a limited investment recently in that region.

In terms of pent up demand that we still see working with the original technology companies, we see lots of discussions on projects and potential for different technologies coming through for the future. Quite when any of that happens or how it manifests itself is up for debate still.

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Chris Pockett, Renishaw plc - Head of Communications [20]

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Okay. Thank you. And the very first question that we received today, this is a question relating to the recent news around Neuralink and Elon Musk in the States. And this is a question from Christopher Morgan. Good morning, Christopher, at Charles Stanley. And, yes, are you aware of any competition for the Neuralink brain implants current or planned, I think that's, are you aware, any -- is there any competition to Renishaw from Neuralink?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [21]

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Well, I think, I mean, obviously I think it'd be an opportunity for us when it arise because as you know, we've -- our leaders in the implant team -- acted implant team that guide tubes to target zones and when the electrodes or the treatment of Parkinson is already being done down the tubes and any future device can be very actively located at the target position, far more accurately can be done any other way than the pre-planned robot approach. So we see ourselves ideally suited to this sort of future opportunity.

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Chris Pockett, Renishaw plc - Head of Communications [22]

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Okay. Thank you, David. A question from Colm Fagan in Ireland. Good morning, Colm. Firstly, I would like to thank -- join in thanking Geoff McFarland for his service to the company and wishing him well for the future. Thank you for that, Colm. Turning to results, could you elaborate on Will's statement with the current global economic uncertainties are focused for the near term is on maximizing the benefits of the investment we have made over the past few years. Does this mean that Renishaw is cutting back on its longstanding commitment to R&D, a commitment that has delivered excellent results for shareholders over many years? And second part of the question is prompted by the current difficult market combined with Renishaw's strong financial position. Could this be a good opportunity to acquire a competitor that doesn't have Renishaw's financial strength to withstand the downturn unscathed? So a 2-part question.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [23]

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Okay. Will, you have crack at that one?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [24]

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Yes, if I start and then we can have -- so the first is absolutely not. So our long term -- so we've always been a company that has grown organically and that growth has come from us getting some wonderful new product site, that is our future. Our challenges as a board, as a company here is making sure we're as productive as we can be and we get the most value for money from our R&D. And we've been having lots of discussions, actually together with Geoff, he is working very closely with us on how do we maximize the benefit coming through from our R&D expenditure. Our challenge as always is we have too many really good product ideas and we are looking at how do we prioritize and make sure that we are productive from an R&D point of view as much as we can be.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [25]

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That's fine. That's exactly what Renishaw is all about.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [26]

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So in terms of that and actually with our financial strength, that is something again we want to make sure we maintain with a healthy cash balance and our investments will be making sure that through the current difficult market we maintain and ideally it will grow our financial position. If something comes along that has some niche technology that we want, then clearly we will look at. That is not our core strategy of acquisition. Our core strategy should always be the redevelop and have the ideas enhance ourselves. That's what has grown us into the company that we are today and there is no change from that strategy. So it is nothing though, it's a maybe, but it's not our core strategy.

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Chris Pockett, Renishaw plc - Head of Communications [27]

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Okay. Thanks, Will. And another question around health care. This comes from -- again from William Turner. Healthcare performed well. Does your order book give you confidence this good growth could continue into 2020 or accelerate or slow?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [28]

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You look after that, Will. Off you go, Will.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [29]

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So stereoscopy, we still see as having a good and growth for this financial year, and opportunities are there for the longer term too. So it's a yes, I think that's positive. I think there is also a growing amount with the experience we now have with additive manufacturing and into the healthcare sector. Our knowledge of regulation has really been key to helping people get up and running, utilizing actually what is now some really good productive technology we have with our additive manufacturing equipment. That combined with the regulatory we see as really growing this year. Anything to add?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [30]

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No, I think that's fine. I think we've already discussed the drug delivery side, isn't it?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [31]

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Yes.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [32]

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And the robot.

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Chris Pockett, Renishaw plc - Head of Communications [33]

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Okay. We'll stay with healthcare, in that space at the moment. And this is a question from Sonia Fasolo. Good morning, Sonia. A 2-part question. Regarding your healthcare division, could you help us assessing how big it could be potential percentages of total sales and what sort of EBIT margins could you target? And second question, your CapEx has been increasing in '18-'19 financial year. How should we think about CapEx for '19-'20 or financial year 2020 given the uncertainties you mentioned, could you reduce CapEx in this year?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [34]

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All good questions for you, Will.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [35]

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Yes, if I start and then I will hand over to Allen. So in terms of the healthcare division, clearly the reason we've been investing for many years is that we see a significant opportunity there for long term. I guess, particularly the one didn't mention in terms of the short term in the last answer is neuro where clearly once we get through regulation, and further regulation and the trials. There is huge opportunity from a consumable part to do with drug delivery. So I think we all see this as having very favorable profitabilities and size for the long term. So, yes, and I'm certain we did increase CapEx this year with some strategic investments. We have some that will continue into next year, but we do see CapEx reducing for this year. Any more comment there?

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Allen C. G. Roberts, Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director [36]

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Yes. We've got a couple of major projects that are ongoing at the moment, particularly completion of our RIC extension here in Wotton and 1 or 2 other property developments, but we do are now looking to have a lesser CapEx spend this current year.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [37]

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Okay. Just to clarify, RIC is Renishaw Innovation Center.

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Chris Pockett, Renishaw plc - Head of Communications [38]

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So, okay. First question today on additive manufacturing remarkably, so this comes from Robert Davies, Morgan Stanley. Hello, Robert. In additive manufacturing, how willing are customers to purchase your additive manufacturing machines versus using Renishaw as an exhaust service provider where Renishaw does the 3D printing job for the customer?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [39]

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Well, our business is focused around selling machines, so other people can do the 3D printing. You would add anything to that, Will?

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [40]

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No, exactly, we...

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [41]

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We're focusing on selling machines, so other people can provide that sort of a service.

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William Lee, Renishaw plc - Chief Executive, Member of the Executive Board & Director [42]

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We might do a few initial parts to get someone up and running and help them in one of our -- on one of our machines. But about the priority is exactly as David says.

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [43]

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Yes.

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Chris Pockett, Renishaw plc - Head of Communications [44]

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Okay. Thank you. A question now relating to Miskin. And this is from Michael Blogg again at Investec. Please could you update us on plans for the area at Miskin, which is not being used by Renishaw?

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David R. McMurtry, Renishaw plc - Co-Founder, Executive Chairman & Chairman of Executive Board [45]

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There you are on. That's the...

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Allen C. G. Roberts, Renishaw plc - Group Finance Director, Member of the Executive Board, Secretary & Director [46]

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I can do that one. Yes, we are looking at the development of Miskin too, which will be looking at the outlay applying for the possible land of joining the current structure. For the other acreage, we are in discussions with the local authorities, and there are a number of plans going -- being under discussion, particularly with the review of the access from the M4 motorway to Cardiff Airport and there are some quite large construction proposals being discussed with the government by the Welsh government and the local authorities and we are involved in some of those discussions. So it's a watch-this-space on that one, but yes, there are discussions going on.

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Chris Pockett, Renishaw plc - Head of Communications [47]

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Okay. Thank you, Allen. I think we've covered all of the questions on the web. So I'm now going to give the people on the conference call an opportunity to ask questions. So I'm going to go over to Molly who is the conference call operator to see if there are any questions from attendees on the conference call. So over to you, Molly.

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Operator [48]

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Thank you. (Operator Instructions) We don't have any questions coming through just yet. (Operator Instructions).

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Chris Pockett, Renishaw plc - Head of Communications [49]

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Okay.

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Operator [50]

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We have no questions coming from the phone line. So I'll hand the call back.

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Chris Pockett, Renishaw plc - Head of Communications [51]

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Okay. Well, thanks for that, Molly. And we have no further questions that I can see from attendees online. So that now ends the Q&A session and this morning's webcast and teleconference call. We'll aim to publish the recording of today's presentation and the Q&A session on the Investor Relation section of our website by the end of today.

On behalf of Renishaw, I would like to thank you all for attending this event and hopefully it has been of value to you. Finally, just a reminder that you can download the report and a copy of the financial presentation that you've just seen from our Investor Relations web pages. Again, thank you and have a good day.