Renishaw plc (OTC:RNSHF) Q4 2016 Earnings Conference Call July 27, 2016 5:00 AM ET
Chris Pockett - Head of Communications
David McMurtry - Chairman and Chief Executive
Allen Roberts - Group Finance Director
Ben Taylor - Assistant Chief Executive
Nick James - Numis
Stephen Swanton - Redburn
Good morning, everyone. My name is Chris Pockett. I am Head of Communications for the Renishaw Group. And I’d like to welcome you to this live webcast presentation of Renishaw’s Full Year Results for the Year-Ended June 2016.
Present in the room today, Sir David McMurtry, Renishaw’s Chairman and Chief Executive who will run through the results highlights and share the later question-and-answer session. He’ll be followed by today’s main presenters, Allen Roberts, our Group Finance Director and Ben Taylor, Assistant Chief Executive.
Before they speak, I would like to go through some basic housekeeping for the event. After the presentation, which will last around 30 minutes, there will be a question-and-answer session in which we’ll try to answer as many questions as possible before we close at 11 AM. No questions will be answered during the formal presentation. However, for those of you joining us via the Web, you’ll 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 by the conference call facility, you will only be able to submit a question at the end of the formal presentation by pressing the star key followed by the number one on your telephone keypad. I should 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 Sir David.
Thank you, Chris. And I’ll just go through the highlights of the chairman statements. Revenue for the year was £436.6 million that compares with the £494.7 million of last year. Underlying growth of 6% after excluding the exceptional Far East orders; good growth in measurement and automation; adverse manufacturing and encoder products line in the metrology business; growth in the medical and dental and neurological product line, in our healthcare business; capital expenditure of £53 million providing for our future growth around the world.
The headcount is gone up by 174, including 106 graduates and apprentice; strong balance sheet with a cash of £37 million at the end of the year, including £15 million in the Escrow account relating to security for the defined benefit pension scheme. The dividend has increased to 48.0 pence compared with 2015 of 46.5 pence.
And I’ll now hand over to Allen who will go through the financial highlights.
Thank you, David, and good morning everybody. As you will be aware, our financial year ended just one week after the EU Referendum was held. The subsequent weakening of sterling in that final week had no significant impacts on our income statement, but did have a bearing on our balance sheet and cash flow, which I’ll cover later.
You can see the revenue is £436.6 million compared to £494.7 million in prior year. We’ve experienced underlying growth of 6% and revenue benefit by £6.9 million when compared to prior year exchange rates. Revenue achieved in 2015 benefited from an exceptional level of orders from the Far East, which has not been repeated to the same extent this year. Ben will be explaining in more detail the rationale behind these in his presentation.
Pretax profit for the year of £90 million to £80 million and was within the forecast range we last announced in May. The effective range of tax this year was 14.3% compared to 15.8% last year, primarily reflecting a further reduction in UK corporation tax rates, the continuing pace again of the patent box benefit, and research and development tax credits. Earnings per share were 94.9 pence compared to 167.5 pence last year, and we are increasing our dividend to 48 pence per share, an increase of 3.2% over last year.
Taking a look at our income statement, in terms of our cost of sales, we received a margin of 2 percentage points, which represents a recovery of 1 percentage point from the half year position, which we anticipated at that time. As we reported in the interim accounts, the margin erosion was largely driven due to two factors; first, protected costs. While we’ve taken steps to manage protection resources to meet our demand inevitably, there is a level of fixed overhead that will be under-recovered, given the lower volumes we’ve experienced.
However, we now have increased manufacturing capacity to cater for anticipated growth in grant. And secondly, is product mix. In particular, lower margins on some of our newer products, which should improve, as volumes increase. I’ll discuss engineering and distribution costs detail in a moment.
Administration expense of £41 million was slightly lower than last year, primarily due to lower provisions accruals this year. Operating profits amounted to £79.5 million, which were profits from associates of £1.4 million, an increase of £0.5 million less net financial expenses of £0.9 million resulted in a profit before tax of £80 million. Operating profits generated from our metrology divisions were down by 43% to £86 million, again because of the reduction in Far East revenue, whilst there was a slight reduction in the loss in our healthcare sector by 400,000. The loss in healthcare without these factors -- our healthcare revenue suffered in the second half as a result of the variable fee income in certain territories and customers experienced late at year-end. We remain focused on moving this effect into profit.
We continue to invest heavily in research, engineering and associated expenditure and the total is up by 9% to just above £72 million. This reflects inflationary increases and further staff recruitment during the current and previous year. The amount of net R&D capitalized is marginally up at £3.1 million compared to £2.8 million last year. And this brings a net engineering cost down to shed over £69 million, representing 16% of total revenue. 87% of our engineering spend £60 million is within the metrology sector, up 9%, while healthcare accounts for remaining £9 million. Of the £69 million, 66% or £46 million represents spending on new product development, and Ben will elaborate later on specific at new product introductions.
Distribution costs were up 11% to £98 million, which also reflects inflationary increases and increasing headcount globally to support new product introductions and the increasing number of customers and growth in provision of turnkey solutions. And Ben will also enlarge on this during his presentation.
Looking at the employee numbers, overall, we now have 4,286 employees in the organization worldwide, which represents a 4% increase and over 174 people from 12 months ago. Our production headcount has reduced by 93, while our design and marketing staff have increased by 146 and 122 people respectively. You can see that the number of UK employees in the 12 months due has risen by 57 people to 2,782.
We’ve recruited 114 people into design and engineering, and marketing and advertising staff only increasing by combined 12 people, production staff reduced by 69 people. Including these numbers, 64 graduates and 42 apprentices hired during the year taken on as part of our ongoing commitment to trading develop skilful resource for the Group; additionally, new response in 43 students at the UK and the universities mostly on engineering, science and software courses. Overseas, we’ve recruited 117 staff and we now employ 51 co-employees, an increase of 96.
On the next slide, the EPS on an adjusted basis, is being fluctuating over the past five years is now 94.9 pence, last year 167.5 pence. Our total dividend is 48 pence, an increase of 3% to 2% over last year. Our final dividend will be paid on October 17th.
I’ll now hand over to Ben who will review the Group revenue and new product introductions.
Good morning. Looking at our sales by region, you can see that Far East was actually down 24% and that’s at actual exchange rates. We did get currency benefits to some extent. And we’ve already indicated that lot of that was of course because of non-reoccurring big, big orders that are coming in the previous year. But you can see in Europe we had a 9% growth. In the Americas, we had bit of a softening with 4% reduction in UK and Ireland, which is 5% of our turnover, was down 9%.
Now looking at it by country, you can see that China is still our largest market. So, even though there was a reduction of 10%, it's still a very big market for us. In the U.S., we had less than 3% drop and it's £80 million this year. While Japan actually grew 12.3% and Germany grew by 8.5%, so we saw nice growth in those two countries. And we actually saw additional growth in other countries in Europe.
Now the one we did want to highlight is of course South Korea, where last year, it was £73.1 million turnover, a significant increase over the previous year. But those big orders that occurred in South Korea did not reoccur this year. So, we’re sort of back to the kind of turnover that we had in the previous year to last year and it was down 82%.
Now, in 2015, it was almost 17% of our turnover so it was a very big market, but only temporarily. And you can see on the right side of the slide the relative size of each of our market, the Far East is by far our biggest market, 45% of our turnover, Continent Europe number two with 26%, the Americas at 21% and then the UK 5%.
Looking at this next slide, you can see the slip of our turnover by business type. And our metrology business was down to 13%. We did see an increase in healthcare of 3%. And we had a benefit of £6.9 million when compared to previous year’s exchange rates. So the exchange rate was too our benefit.
If you look at the graph on the right, you can see the relative size of the first and second half for the last five years. And hopefully, you can see that in 2016, although we did not do as well as we did in 2015, we did substantially better than we had in the previous year. So, we are seeing growth. And looking at the first half of this year, at 198.5, other than last year we’d be all other years by quite a bit. So, we are seeing underlying growth, like mentioned before, still occurring even though we did not get the reoccurring business.
Now, looking at in more detail, our turnover by product site; metrology, we mentioned it was down 13%. And because the majority of our turnover the distribution of the sales are somewhat like it was for the total Company, where the Far East was down to 25%, Europe was up 7%, Americas down 2%, UK and Ireland down 11%. Now the operating profit was reduced from 150.7 to 85.9. But I should mention that operating profit, as a percent of turnover for metrology is still 21%, which I think for most companies is pretty good. And you can see the revenue as it is split by region on the right side.
Now, more detail, we had good growth in measurement automation that is our Equator product line. Additive manufacturing is growing and we’re very pleased to say also in encoder products, which is a product line that we’ve had for many years, is starting to see a significant growth now. We have increased R&D investment from £55 million in the previous year to £60.1 million this year. We introduced a number of new products throughout our product line, which I’ll go into more detail later. We announced plans for global network of solution centers for our additive manufacturing.
These will include facilities in the UK, Europe, the USA, Canada, India, and China. Of which, four are now established and operating. And they really are a big contributor to getting the world to understand what AM will do for their production. We now have new subsidiaries in Finland, Denmark and Hungary, and this is of course to expand our marketing, sales and service, and distribution infrastructure in Europe. Renishaw has strength not only in products and how we make them, but also how we can support them.
Now let’s go through some of the products in metrology. In the upper left hand corner, we’re showing a new controller that we developed to be able to support our new REVO-2 head, which provides additional capability and can carry different sensors. It can also carry high rate of data, because it has new data connection in it. On the right hand side, it shows the new vision probe. It’s being used in this photo, adjusting a combustor casing for an Halo engine. You might think from the picture that it's measuring that big hole in the red area on the part. Actually, in this picture it's actually measuring point 8 millimetre holes, the hundreds and hundreds among the casing, it would be impossible to measure with a tactical measuring device, and we can do it with our new optical probe.
The bottom left we’re showing MODUS 2, which is new software for our CMM product range. It has a very innovative interface. It's very simple to use and to learn. It's faster the program and it results in unprecedented levels of productivity, with or without a CAD model, because you can actually program the part by having the part. We also have developed a diagnostic tip for our TONiC encoder. One of the reasons this was required of course as the encoder is being used more widely, it's being used in applications in assembly areas where it's much more difficult to use a traditional method.
So, we now have a method of setting the head up by actually visualizing the performance of the head while it's being set up without actually having to look at the head itself. And our UCC suite 5.0, it's our latest release. The CMM motion control software has new functionality, including scan blending for improved efficiency and data collection.
Also, we introduced a new absolute rotary encoder, this is from our associate company RLS. These are magnetic encoders. Absolute means that when it wakes up it knows exactly where it is along the scale axis. It doesn’t just laser motion, it also knows where it is and that’s a new product we just introduced. On the upper right hand we’re showing Inspection Plus with SupaTouch optimization. What it allows a program to do is optimize all the motion that a machine tool needs to make to capture measurement data on the part. And this now can be all automatically and it significantly improves and reduces the cycle time.
We also developed software, called FixtureBuilder. What this is it's a software that allows you to take the solid model of your part, bring it on to the screen and then automatically dictate what elements and it will do it itself automatically dictate what elements of the fixtures that we supply. It can be used to align the part and allow it to measured, we now have new software that does that. We also have software called Set and Inspect. It's an on-machine app because as CNC machines are getting smarter controllers, we can now use a controller itself to do the programming and this is new software that allows you to develop the program on the machine very effectively.
Now, in terms of our AM, our additive manufacturing line, we have the AM400. It’s a new system. It gets flexible metal additive manufacturing. It's a development of our original 250 platform but is the 400 watt laser. It has revised gas flow and better improved software. And it is a machine now that our customers have really been telling us they wanted to be able to develop this type of capability and we now have it.
Now in the future, in the near future, we’re going to be introducing -- we’ve already introduced and what we’re supplying the RenAM 500M. This is the metal additive manufacturing system, designed specifically for production parts. So, this will not be a machine that you might want to use to change the metal every other day. This is the machine that will be used to make parts in production, and we believe it will be the most effective machine to do that. It features automated powder and waste handling system that enable consistent process quality. It has reduced operator touch times and ensures a high standard of system safety. In-house designed optical system and controlled platform. So this is really a machine that now Renishaw has made a major contribution to what it is.
Also we have new software called QuantAM, as you build parts on an AM machine, you must first make sure that you design the machine to make this supports that are going to be required to hold the part as it's being made, and QuantAM allows that to be done. And it's our own software, very pleased with that.
Also in regard to our special measurement division, we have new software called Boretrak Viewer. This is software that’s used with Renishaw’s Cabled Boretrak and Rodded Boretrak deviation measurement system for safer and more efficiently planned drilling and blasting. When you want to blast at a quarry, you must drill hole behind the quarry wall. You want to make sure you understand what the thickness of the walk is between where you’re going to place an explosive and it's actual surface. And with this system, you can do it much more effectively and much safer.
Also we have the Merlin, which is a marine laser scanning developed specifically for cost effective offshore in England water survey. This device gets mounted to and interface to a boat that can travel up a river or through a dock area, along the coast line. And we can view the above water scanning with a laser to determine where everything is in the environment that we can stand to, and this is hundreds of meters. Underwater, of course, you could be using a sonar system. We can tie them together with the positioning of the boat and now you get a full 3D image of the area where you did your survey.
We also have new time based data capture software for our Ballbar. This is a device that’s used on machine tool. You ask the machine to make a circle or a partial ark, and we’re constantly measuring the actual radius. And this new software will allow you to open up new applications, including static monitoring and data capture for the ISO 10791-6 standard. It also reduces the test set up time for the system.
Now a characteristic of a machine tool that really regularly interested in, but it's always rather difficult to capture, and that is how accurate is a diagonal on a machine tool when it's moving at all three axis. If you can measure that diagonal easily, you can understand the contribution of the various areas on a machine tool. We now have a system that is used in conjunction with our XL-80 interferometer that allows you to more easily set up and measure the motion of the diagonal while the machine is checking just how accurately it can move.
Now looking at the healthcare. In healthcare, we did get a growth of 3%. It grew from 27.7% to 28.4%. The Far East it was down about 1%. In Europe it was up 30%. Unfortunately in Americas it was down 30%. Now you can see in the Americas £4.8 million was our turnover there, down from the £6.9 million and we did see that, as Allen mentioned before, we saw bit of softening in the second half in terms of these types of products. So, it resulted in an improved operating loss of £6.8 million to £6.4 million. And you can see the spread of our healthcare business and each of the regions on the graph on the right.
Now, let’s look at some of the highlights. We had good growth in medical dental and neurological product lines. Medical dental is the use of AM machines to produce components used in the medical dental industry. These would be the frameworks for dental restorations, but they’re also now being used to be able to produce maxillofacial reconstruction implants. We have our second neuromate was installed in Spain. In fact, just recently, our robot was featured on one of the largest broadcasters in Spain, showing what the robot is contributing at the particular hospital.
The neuromate robot and neuroinspire software installations at Great Ormond Street Hospital, London’s King’s College Hospital in London, university hospital in Wales’ Cardiff and Alder Hey Children’s Hospital in Liverpool now have happened. We are seeing increased demand for consumable products, stemming from our higher installed robot base.
Now the neuroinspired software has now been approved for sale in Australia. As you know, healthcare products require approval, so it's not like we can introduce it just when it's ready, it has to go to approval first. We also launched the first product from Renishaw Diagnostics. This is a CE marked RenDx Multiplex Assay System together with its first assay, Fungiplex and multiplex diagnostic test for the detection of Candida and Aspergillus fungal infections. And we also won the best CAD/CAM company award at the Dental Laboratories Association Trade Awards. We recently received a CS Industry Award organized by the Compound Semiconductor magazine in metrology category for our inVia Raman microscope.
These are some of the products that we recently introduced. One is the inVia Qontor, which are our most advanced Roman microscope. It sees the addition of Renishaw’s latest innovation LiveTrack, which is focusing tracking technology, which enables users to analyze samples with uneven, curved or rough surfaces. In the past if you’re going to stand the curve of a -- let’s say medicinal tablet, you actually had to cut the tablets so you had a flat plain to scan. With this new software, you just put the sample and it will scan up the curve and back down the curve. In fact, it can even stand the edge of a screwdriver. It has that capability or so if you so wish.
We also are developing solutions for medical and dental additive manufacturing customers, helping to significantly reduce their product time to market. We work with clinicians and academics to offer metal 3D printing implants direct to hospitals. And we have the LaserImplants on the bottom right hand corner. These are 3D printed metal craniomaxillofacial implants used as part of a treatment for a trauma or disease as well as being used in neurosurgical robot -- surgery as part of the total Renishaw solution. You can see how a skull can be improved by putting a proper implant.
I am going to turn it over to Allen now.
Thank you, Ben. This cash flow slide tracks the movements from our opening cash balances of £82.2 million to the position at June 30th, £21.3 million, which was impacted significantly by the weakening in sterling during the year and particularly in the last week post Brexit.
Our profit before tax plus depreciation and amortization gave a cash inflow of nearly £110 million. And large cash outflows included capital expense of £54 million, more on this shortly, a dividend payment of £33.5 million and tax payments of £19.5 million.
This year we’ve seen an increase in working capital requirements. Of which, inventories have increased by £17 million, reflecting our policy of holding sufficient inventory to ensure customer delivery problems, given our shorter order book and to support future growth and strategic stockholdings in certain of our product lines.
Our creditors are reduced by £12 million, principally due to reduction in the annual bonus accrual, and that has shown an increase, partly reflecting exchange rate movements and debtors increasing a little from 67 to 70 days mainly because of the varying payment terms occurring in different geographic territories.
Cash balances have reduced by nearly £17 million due to the impact of the weaker sterling on the currency hedging overdrafts held in U.S. dollar, yen and euro. And the significant reduction arose during the final week after the EU Referendum results.
Balance sheet, as noted earlier, the balance sheet restructures one week after the EU Referendum vote. And the currency movements had a significant impact in two areas. The market valuation of the outstanding forward contracts the year-end the dollar, yen and euro, which contributed significantly to the £74 million adverse movement, principally dollar and the cash flow hedging reserve. The currency translation reserve reflects the net gain of £8.4 million arising from the translation of overseas currency net assets, which increased by £28.8 million, offset by an increase of currency hedging overdrafts of £20.4 million.
The post Brexit, the balance sheet still remains very strong with total non-current assets of £322 million of which fixed assets represent £241 million historically and intangible assets and new investments are £67 million. Net assets are £200 million compared to £241 million last year, principally due to the reduction in cash as mentioned earlier.
Long-term liabilities for deferred tax pension and deficit note payables amount to £141 million, an increase of around £67 million since last year. The pension fund deficit liabilities increased by nearly £20 million, resulting from the 2015 actuary revaluation being based on funding to self sufficiency. Other payables, which represent forward contract liabilities are up by £50 million, reflecting adverse currency exchange rates against the dollar, euro and the yen as of June 30th. Total equity of the Company now stands at £381 million, a decrease of £47.1 million compared to June 2015.
Turning to our results review, a few words on our significant capital spend on fixed assets. We’ll continue to make substantial investments of £253 million in the period in fixed assets, especially in property, facilities and production machinery to accommodate future growth. In the UK, the major items of expenditure are four fold.
Firstly, the acquisition of CNC machine tools and other production equipment for our various manufacturing plants. Secondly, we carried out extensive property refurbishments and fit out of our Miskin site and project in South Wales. And just recently we eventually received a probably concerned for the development of the site that we’ve been talking about for several years now and so eventually come through. Thirdly, we have invested significantly in additive manufacturing facilities, including in-house produced machines for our solution centers. And last by no means, we’ve continued to make significant investment in our IT infrastructure and equipment to enable the organization to continue to grow.
Overseas, the expenditures predominantly been in the construction of the new facility in New Chicago for the relocation of our U.S. subsidiary Renishaw Inc later in the year, which you can see on the bottom right hand photograph, plus there is an architect’s impression that’s due to be finished in near-term.
Over to you David.
Thank you, Allen. And now I will move on to the Board of Directors report. And the first item on there of course you know is that Ben is retiring after 31 years, and it's end of an era. And I think the first executive director ever to retire, and so you must be shaking yourself. I can’t emphasize enough to his contribution over the years and particular help he’s given me and John. And so I think probably been said in the report and I just can’t emphasize anymore. And his contribution to the sales and service and the relationships with all the subsidiaries will pave the way for Will to take over, I think, and the very fact that he's mentored in both way that I think well as hitting the ground running. Thanks again and I hope you and Susan have a wonderful retirement.
The appointment of Will Lee as a member of the Executive Board and as a director of sales and marketing taking over Ben's responsibilities in this area, and the appointment to the Renishaw Plc board with effect of August the 1st and I welcome him aboard. And Alan takes over the responsibility for our HR, Quality, Social Responsibility and Financial PR formerly with Ben. The appointment of Kate Duran non-executive director and chair of the remuneration committee in place of Sir David Grant who remains senior independent director.
David, the knighthood of David Grant for the Queen's birthday honors list in 2016 for his wide ranging contribution to engineering, technology and education and which the company has benefited from greatly.
When I looking go on to the outlook and the group continues to invest in the development of new products, applications along with target investment in production and sales and marketing facilities around the world. Despite the current uncertainty surrounding Brexit and the significant fluctuations in currency exchange rate your directors remain confident in the long term prospects of the group and currently anticipate growth in both revenue and in profits for the next year. Thanks for everybody who contributed.
A - Chris Pockett
Okay, thank you David, Alan and Ben. We're now going to move to our question and answer session. We have around 30 minutes and as there are many more people on the webcast then the conference call I'm going to start with some of the webcast question. Throughout I will try to group similar questions together so we may not answer all individual questions. I'm going to start with a few questions that we've had on healthcare and we're going to start with a question from Mark David Jones Stifle who asks, medical appears to have had a slow second half, is this a function of the timing of uramate delivery, do you expect receleration in 2017, and can you give some indication of what share of medical revenues now come from the neurosurgical product lines.
Okay, that's clearly on the sales side Ben, so could you take it up.
I think I'll pick up the last point first and that is we actually do not give a breakdown within our medical group of what our neurosurgical robots or devices in that product line make up. But I will say this which I mentioned before. The majority of our healthcare is still our spectroscopy product line. So it's not necessarily indication that our robot is slowing down in the second half. It's more of the case that because of the predominant spectroscopy business in essence that was the reason why we had a second half slowdown. A lot of the investment that is being made in academia and there was a pause in the investment in some of the areas because of the uncertainty of how the Brexit vote was going to go and few other issues. So we did have a, we did see a slowing down, in fact we also saw a slowing down in the United States as you know in healthcare and site map, but most of that was due to spectroscopy not due to the robots.
Thank you Ben. And we also have a question from Michael Pooler from BFT, also related to healthcare. Michael asks, can you give an idea of when you expect the healthcare division to move into profit.
That is a difficult one, it has been improving each year and I think looking at the financial numbers I think Alan will have a better perspective on that.
We are looking to target improvements in the performance of healthcare, it is somewhat has Ben just articulated the influence of roman in this particular sector, it does have quite a significant impact but we are seeing growth in each of the, we are expecting growth in each of the product lines in this current year so we are expecting improvement in the performance of this and hopefully with maybe profitability not this year but maybe next year.
Okay, thank you Alan. Another question on relating to healthcare and this is from Brian Dwyer and we asks, healthcare obviously offers some exciting product opportunities, opportunities in a large regulated and growing market. Looking ahead five years, where would you reasonably sales to be for Renishaw, would you rule out an acquisition in this sector.
And I think in five years time some of the trials that we’re involved in at the moment will give results and that will greatly affect the prospects of the group and as acquisition is acquired it depends on what is right for the business at the time and I wouldn't like to comment any more than that. I don't know if you Alan or Ben would like to make any comments on it.
Okay David. I'm going to move to some questions, a number of questions around currencies you might imagine and the first one comes from Sangeet Solo, could you please comment on the implications of the recent GVT movement both financial year '16-'17 and '17-'18.
Yes, this is difficult question because we're now only a month post Brexit and there's been significant currency fluctuations since that time. A very weak sterling and who knows where that's going to go over the next year or so. However and there are a number of indications for us, 94% of our revenue is generated overseas. We are seeing, we will see a benefit based on the current exchange rates if they were to remain as they currently are, however we have fuller contracts which counterbalance that to some extent and our overseas costs by way of translation are also increased. However we do see a net benefit, we are working through what the indications are globally and so it is little bit early albeit moment we do it'll be a positive but we can't articulate just how much.
Okay, thank you Allen and also a question on currency from Steven Swanson of Redburn, if currency helped revenue by 6.9 million how much did currency help profits in 2016. What benefits will 2017 profits see from currency.
Currency helped, it was a, there's a benefit of 6.9 million of revenue line and about just slightly less than half of that would drop through to the profit line principally because of translation of our overseas cost in local currency on translation.
Thank you Allen, and another question relating to currency from Ben Tycho Argum Partners, appreciate you hedge revenues forward thereby delaying the impact. Can you give a field for translation benefit from weaker sterling in financial year '17 if rates were to remain around current level.
Yes, hedging of our contracts principally are in dollars and euro and yen, plus four contracts in euro and yen are concerned actually they're in well placed based upon the current exchange rates. The major impact has been on the translation, as at the end of June on the dollar forward contracts. And so the, because of the significant reduction in [indiscernible] sterling against the dollar. So our forecast takes that into account and of course as of the end of June there are unrealized losses, so we'll see how they unwind in the next couple of years.
Thanks Alan, now I'm going to ask, there's a couple of question on the additive manufacturing products line, and the first of those is from Chen Chen Lee, Credit Suisse. What has been the market reaction to the new AM 400 systems since its launch. Do you expect AM 400 to gradually become a more mainstream product replacing AM 250 as customers increasingly adopt AM technology through mass production and could you give us a little flavor on what the current end market exposure of your AM business is in terms of medical, energy, aerospace and automotive sectors?
Okay I think the introduction of the 400 is our next development in the offing and yes it will certainly replace and after that of course we have 500, so we have a progression of constant improvement in this area. So I do expect that the customers to migrate up to the new offering when they're available particularly the 500 coming next very quickly.
Yes, we might want to mention the AM 400 will completely obsolete the AM 250 and there's a plan to do that. The AM 400 is received very well but the AM 400 is still a system that you would benefit using if you wanted flexibility in terms of changing material and things like that. The 500 is the one that we believe will be used for mainstream production systems where the same part will be made over and over and over and it has a lot of characteristics that allow to take we believe, take that market has got some very big benefit that way. Now in terms of the various sectors of the market in your question in terms of what our exposure is, we're pursuing opportunities in each of the areas where you specify.
Of course there is a benefit in medical where you could make one off parts that are designed specifically for a patient's need, in energy there is a benefit, in aerospace of course there is some tremendous benefit and that the parts can be redesigned because we want to design them for being able to be made on the 3D printing machine and they can be made so they have the lowest weight possible and still perform their function. In automotive to some extent the same things apply and we're looking at that. Automotive also includes relatively fast one off production especially if you are part of a racing series where you want to be able to make a part slightly different for the next race and of course AM will allow for that.
I think I'll just add to that where we're different here and obviously the production machine, the single material production machine but we also have developed our own software that allows the customer to be able to build a part and this of course is totally in-house and we believe we'll give slightly advantage in this areas because this will give constructing build on the AM technology platform.
Thank you. Another question around the additive business and this comes from Jonathan Hern and the question there, this is a number of questions actually an overall submission but I am just going to do this one now for. On the third part of the question is that, can you give us an idea of the percentage of metrology revenue is to ride from the additive manufacturing line?
I don't think, Ben.
That's not something that we release. Our conventional metrology line is still by far our biggest element of our metrology business, but like we mentioned in the presentation additive manufacturing is an area for rapid growth. So when we did see a decline and some of our standard products being used in this special type of applications, additive is something that is fundamentally growing. And if you look at the prediction of additive as a size of the market in the number of years, it is going to be a very-very big market and we believe have something substantial to contribute.
Okay, thanks Ben. Now question relating to distribution costs and this comes from John Gilbert who is a longstanding private investor. And there David you've seen maximum results done just wondering why distribution costs are up 10 million when sales are back to trend, could you comment on the 90 million costs on derivatives, does this mean there will be no gain from lower 3, 4, 3 years?
Okay, I mean obviously the investment handover to Ben that was clearly to get us in good condition for the future of additive layer.
On the higher items or few items, last year you might remember where Korea was a tremendously big market for us and it grew -- it was our third biggest market after China and the United States. The business that went into Korea actually didn't stay in Korea, it was shifted to where the factory was and all those installations were supported for the most part by a distributor. So we didn’t need to add the people to get that tremendous growth. What we're investing in are the people and the area of the subsidiaries and the support we get back at base to be able to support our newer products that we're developing. And we do know that the solution centers we have to make a commitment and we have to make an investment in getting ready to roll out AM as a more convenient way of making parts really around the world. And that's why we are deciding to spend some more money. Also in some of the other businesses we are doing more of the solution provider to the customer. We used -- our biggest turnover used to be a part that went to an OEM and then the OEM did the support. Now we're actually doing the retrofitting and the installation of full systems in customer plant. Now, what this means is, we're going to need more people to be able to support that. So, that is why we're investing now for what we believe the business will be able to support even better in the future. But it requires the investment now. We have to get the people involved. Things like our Equator machine, that requires more people to be able to support it, then if we were just selling [bits][1:00] to an OEM.
Allen do you want to come in on the custom [indiscernible]
Yes, I think I covered that when I was talking about the [board] contracts which is primarily source of the changing the [indiscernible]
Okay, thanks very much. So, question now on pension. So, this comes from again Mark Davies Jones, Stifel. Could you indicate what the total ongoing annual cost is expected to be to Renishaw following the pension agreements?
What we've agreed with the trustees in the new recovery plan which came into effect on 30th of June was that we as a company are paying the pensions in payments which currently are running around about £2 million per annum. And we can -- also be paying lump sum payments and transfer -- and pension fund transfer is up to a £1 million annually. So, we're seeing it around about maybe 3 million for the current year, increasing as more of our employees retire over the coming years. So, that's pretty much that and, yes, that's pretty it.
So, a question here from relating to growth, it's from Jo Reedman, N+1 Singer. Do you expect underlying growth in metrology to be stronger in FY'17 then in '16?
There are definitely opportunities that with some of our newly released products. And we believe the investment [indiscernible] occur to be able to -- and there's a possibility that we could improve the growth next year. We're not predicting it if you notice in our forecast we're not giving numbers just yet. So, I think the best answer is there is an opportunity. The question is will that actually occur?
Okay, and similar, in terms of question [about] metrology prospects. Question again from Mark Davis Jones. At the Investor Day then, just that the possibility of break through contracts in the U.S. automotive industry. Could you update us on prospects here?
Yes, we're not going to give numbers of course. But the good news is that there's been a few major automotive manufacturers in United States that did a very serious testing on whether or not the solutions that we were providing using the revo and the sensors related to revo, whether they could replace their standard way of measuring their components, and we've been very fortunate to be able to prove this out to the point that they're now making their future investments utilizing the revo solution. So there is going to be growth, we can't give numbers you know they've contacted us to say, it will be our solution when we do the installation that'll be based on decisions that we make in the future. But the good news is that we've kind of cracked into an area that they were defending their competitors, defending very well.
Thank you Ben. Now we've got a question from a private shareholder Joseph Saparty, good morning Joseph, what is the reason behind the 10 million overdraft shown in the balance sheet.
That is, the group cash is spent not only in the UK but also in our many subsidiaries throughout the group, in the UK we have to show the UK balance. One of the principle reasons for this overdrive was actually the Brexit, translation of the currency overdraft that we used to match overseas assets [indiscernible] in UK and the immediate effect of the Brexit entry currency fluctuations arising from the Brexit was attending the reduction in the UK or increase in the overdraft so that reflected in a 10 million overdraft in the UK.
Thanks Allen. I've got a question around patents from Ian Keely he's a private investor. He asks, is there a greater tax benefit coming from patents as we go forward due to new tax regulation.
Yes a continued phasing in of the patent box benefit and we do benefit from that and it depends on the amount of profits that we generate in the UK and we do pay a 10% tax on patent box profits.
Okay, thank you Allen. Question from Jonathan Ern DB, inventory as a percentage of sales has increased to 22% of sales on an average 17% historically. Do you expect further inventory build in '16-'17.
Inventory has increased significantly during the year, primarily because of an increase in the inventory that we needed to introduce the additive manufacturing product line in particular and that is a much higher cost product compared to our traditional metrology products, however we do not anticipate a big increase or such a large increase in inventory in the current year.
Okay, thank you Allen. I'm going to ask one more question and then we're going to go the conference call lines, and this is a question from Steven Swanson, Redburn again. Did Renishaw benefit from any large project orders in Q4.
There were some what we classify as large projects. There was some business during that period but it wasn't anywhere near the magnitude of the previous year or another portion of our turn over the last few year, but we're regularly still doing that type of a project now. So it's actually an argument how we should we be calling that a normal project which should be called a large project. There still is the benefit and might be with different manufacturers and might not be with one the people are guessing it is because we're doing work with other as well.
The sizes would be more normal.
Sizes are more normal, yes.
Okay, thank you. And as already said, I am not going to move to people on conference calls to give them an opportunity. I can see that we've got one call and certainly one call of Nick James from Numis wanting to ask a question. So I'm here to ask Rosy [ph] who is the conference call operator to ask the next question, so over to you Rosy.
Thank you. So if we have the first question Nick James of Numis. Please go ahead with your question?
Morning, yes, two questions. The first regards to the outperformance all kind of coming in on the full year results of the higher end of expectation, could you comment that was due to larger orders are coming in at the higher end of all the underlying business?
To be honest with you because we have such a small order book, it is maybe even a bit difficult to understand exactly what's going to happen in let's say the next two months. So we were fortunate that some of the orders that we were working on, but it wasn't because there was one of the real big orders came in, it was because we did see growth in a range of our products more than we were comfortably willing to predict. So it's more of a case that as we approach the end of the year, it's started to look like, it's possible to a bit better but what we had to do is do very better in the last month and the last month was our biggest month.
And then the cost on the inventory, could you give -- press release, do you have some entities or when we would start by five week, does that [Indiscernible] off to a strong?
I am sorry. I think I misunderstood you. I was talking about our order book.
It's a higher level of inventory to support a strong order book carrying into or is it just that it's the high level of inventory?
No, I think so David mentioned that one of the reasons for the inventory growth was the product mix. And we're introducing the AM 400 of course for that product line we had to increase the inventory because quite a bit of product was originally bought in, now we're making design changes to possibly offset that. But that can happen, so again because we have only about little over a month worth of backlog, it does become more difficult to predict but the last month was a record month for our turnover in terms of all the months we sold into last year.
And final moment just on AM 500, did you say that is now shipping or close to shipping just to now stay on timing shipping of the AM 500?
It's close to shipping. We expect it to about September time.
Question from the line of Stephen Swanton from Redburn. Please go ahead.
My question was also on the AM 500M, but are you confident you've solved all the technology issues? I know there's issues with supply chain and I think the couple of other things before?
No, we obviously, we're still struggling with some things and we're doing our very-very best to get it out and we will -- and I'm sure we will try and meet that date with success.
[Operator Instructions] Okay, we have no further questions coming.
Okay, thanks very much Rosy. We have a few more questions which we haven't yet covered. So, we'll do that, we'll -- if we run a few minutes over, it's not a problem and hopefully not a problem for people on the line as well. And related again to AM, further question from Jo Reedman who says, Ben mentioned hiring requirements for the AM solution centers. Will we see any other financial impact from this [indiscernible]?
Well, we're going to make some investments. The solution centers and cells requires some capital. The advantages of solution centers of course allow customers to understand the benefits of the system prior to buying it because it's not a cheap system to buy. But the other thing is it will produce the revenue because we're going to in essence rent out the systems and we'll also supply technical support which the customers will pay for. So, it's not just a selling tool, it's also going to produce income. So, that's why we see the benefit. It helps the sale but it also brings in revenue.
Thanks, Ben. Brexit is obviously [indiscernible] top of mind for many businesses at the moment. And there's another question from Michael [indiscernible]. How you would -- the Brexit will harm your ability to either export your products and recruit talent in the future? What are the concerns that Brexit raised for you?
We don't know at the moment.
Well I think that Renishaw actually is pretty well placed in many respects with regard to Brexit. We have large number of subsidiaries in Europe that undertake sales, marketing, manufacturing in Ireland and [indiscernible] research and development. And so, I think that we're well covered in terms of the ability [indiscernible] products in Europe. And so, hiring across borders, who knows what's going to -- what will emerge as a result of the agreements in process or will be in process later in the year. So, I think generally I think we're reasonably well placed. About 23% of our turnover goes into Europe, with the rest being in UK and all the rest of the world. So.
And I think, we're not using the word verdict, when we discussed what we have to consider doing to be able to make sure we get the most out of our future. Whatever occurs we think we can come up with a way to get the most benefit from it. So, at no time did I've been into a meeting where I always [indiscernible] discuss because of Brexit. So, I think we can get place for the future.
Okay, thanks Ben. Literally just two more questions I think we need to cover, so we're going to do that, so another question from Joe Riven from Singer, so how much are you budgeting for CapEx in next financial year or this financial year.
Right now we are looking at spending less this current year on CapEx expenditure, we got some rollover projects particularly the environment of our Renishaw Inc, facility near Chicago and there are one or two other overseas facilities that are being upgraded and refurbished to provide some additional capacity. In terms of production and production equipment think we’re reasonably well catered for at the moment, so we will not be spending as much this current year as last year.
Okay, thank you Allen, and finally a question from Sonia Solo and she asks, you usually provide financial guidance why not this year.
Well this year, bear in mind that we’re only a month after the Brexit vote which does bring uncertainty with it which is difficult to quantify at this point in time. We are very early in our financial year and as we’ve said early we do only at this point in time have approximately five weeks of order book. But what we have said in the outlook statement is that we do anticipate growth in both revenue and profits this year but I am really [indiscernible] we didn’t want to go by putting a range in at this point of time. We'll take more of a look at that later in the year.
Okay, well thank you everyone. So ends the question and answer session and indeed ends this morning's webcast and teleconference event. We will of course as usual aim to publish a recording of today's presentation and Q&A session on the investor relations section of our website by tomorrow morning. On behalf of Renishaw I'd like to thank you all for attending this event and hopefully has been valuable to all of you that have attended. And finally just a reminder that you can download a copy of the financial presentation that you've just seen from our investor relations webpages. Again thank you for attending, have a good day.
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