Renishaw plc

Chris Pockett - Head of Communications Sir David McMurtry - Chairman and CEO Allen Roberts - Group Finance Director William Lee - Group Sales and Marketing Director

Mark Davies Jones - Stifel, Nicolaus & Company Unidentified Analyst - Stephen Swanton - Redburn Partners Unidentified Analyst - Unidentified Analyst - Unidentified Analyst - Henry Carver - Unidentified Analyst - Unidentified Analyst - Nick James - Numis Securities Unidentified Analyst - Jo Reedman - N+1 Singer

Okay, good morning ladies and gentlemen. My name is Chris Pockett, I am Head of Communications for the Renishaw Group and I would like to welcome you to this live webcast presentation of Renishaw's Interim Financial Results for the Six Months Ended December 2016.

Present in the room today are Sir David McMurtry, Renishaw's Chairman and Chief Executive. He will run through the results highlights and share the later question-and-answer session.

He will be followed by today's main presenters Allen Roberts, our Group Finance Director and Will Lee, Group Sales and Marketing Director. Before they speak, I just wanted to go through some basic housekeeping for the event.

After the presentation which will last around 35 minutes there will be a question-and-answer session in which we would try to answer as many questions as possible before we close around 11 o'clock. 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.

[Operator Instructions]. I should also like to point out that all financial information given during this presentation will be in pounds sterling.

Thank you again for joining the presentation and I will NOW hand over to Sir David.

Thank you, Chris. Now I'll just go through the highlights quickly before handing it over to Allen for the details.

The revenue for the first half of the year was 240.4 million compared with the 2016 which is 198.5 million. Growth of 21% or 12% at a constant exchange rate.

Metrology divisions particularly good growth in encoders and laser calibration and product lines. The health care, good growth in neurological product line with sales of more than -- with sales of two more robots -- surgical robots is encouraging.

Profits before tax of 35.7 million compared with the 2016 of 28.6 million we stated and we are going into the effective currency later. Strong balance sheet with cash of 14 million at the end of the period, capital expenditure of 25.9 million, and we are maintaining a dividend of 12.5 pence per share.

I will now hand over to Alan who will go into the detail on the financials.

Thank you, David and good morning everybody. By way of introduction I think it's worth noting our first half results are characterized by weaker sterling principally as a result of the EU Referendum last June.

We've been impacted both positively on revenues and negatively on costs, including some gross margin elements and the overall effect has been a benefit of 9.2 million to our pretax profit. Additionally in October 2016, the Board decided to discontinue its operations at Renishaw Diagnostics and their numbers are not included in any of the operating results in this presentation and are showing as a discontinued operation on the consolidated income statement.

You can see that the revenue of 240.4 million represents an increase of 21% compared to the first six months of last year with underlying revenue growth of constant exchange rates a healthy 12%. A number of our product divisions have contributed to this growth and Will Lee will be explaining in more detail the performance behind these numbers presently.

Operating profit for the six months is 35.6 million, an increase of 25% or 7.2 million reflecting the improved turnover. Earnings per share is 41 pence up from 32.4 pence in the corresponding period last year and we are maintaining last year's interim dividends of 12.5 pence.

Taking a look at our income statement in terms of our production costs ratio to sales is 36% which is the same as last year. The following factors have offset the margin benefits derived from the impact of currency on our revenues.

Our overseas manufacturing cost base particularly in India and Ireland has increased due to currency movements. The currency effects have also increased our imported raw material price and component costs.

In 2015 and 2016 manufacturing overheads were absorbed into inventory reflecting stock increases for new product introductions and safety stock to support special project opportunities. In the current year inventory is reduced resulting in a charge to the margin.

Additionally some of our indirect manufacturing resource has been utilized ensuring a rushed compliance. I will discuss our engineering and distribution cost in a little bit more detail in a moment.

Administration expenses of 23.6 million are up by just over 3 million compared to last year. Our this year's costs contain higher bones [ph] divisions and costs have been adversely affected by currency to the tune of 1.1 million.

So operating profits as already mentioned of 35.6 million and net financial expenses of 0.8 million and profits from associates of 0.9 million, the resultant pretax profits of 25% higher, up 35.7 million or 26.5 million at constant exchange rates compared to 28.6 million last year. As reporting on announced the research and development tax credit has stopped being taxable helping reclassify as a pretax item to achieve consistency with other parts of the companies.

We are continuing to invest heavily in research and engineering and associated expenditure up by 14% to nearly 40 million. This reflects inflationary increases and further staff recruitment during the current and previous years.

The amount of net R&D capitalized is marginally down by 1.4 million compared to 1.6 million last year. And this brings the net engineering cost to just over 38 million representing 16% of total revenue.

The gross spend is 17% of turnover. Distribution costs are up by 26% to 56.1 million which is an increase of over 1.4 million.

However, 7 million of this expenditure really leads currency so underlying increase is 10%. A lot of our market and distribution cost of course are incurred overseas.

We continue to invest in resources globally to support increased trading new product introductions and technical support. Additionally we're supporting establish additive manufacturing solution centers in -- in the UK, Canada, Germany, India, and China.

Looking at employee numbers overall we now are 4358 employees in the organization worldwide which represents a 5% increase, 195 people from 12 months ago and just 72 additions from June 2016. Including the six month period net increases -- the net increase are of 41 graduates and 35 apprentices thus maintaining our commitment to developing people through our training centers into highly skilled staff especially engineers for the future.

Excluding these graduates and apprentices, the number of employees has fallen by 4 in first half of the year. You can see that numbering of the UK employees in 12 months to December 2016 has risen by 87 to 2808, 85% of this increase represents 74 staff rather related to design and engineering while production, sales, and admin staff have seen only minimal changes.

Overseas we have recruited the under bank [ph] people and we now employ 1550. Of this increase 68 relate to sales and marketing and technical support employees and there have been 28 people added within design mainly in India.

The profit mark highlights the movement from our profit before tax of 28.6 million for the first six months of last year to our profit before tax of 35.7 million for the first half of this year. You can see that each element we have identified currency impact shaded in blue.

As discussed earlier we have had an increase in revenue lead to a margin gain of 26.6 million. However, constant exchange rate of this gain would have reduced by 17.7 million to 8.9 million.

Increased overheads starting 19.5 million with 8.5 million of this due to currency. Costs were also higher mainly because of the effects of July 1st pay review because we have more people in business compared to last year.

The above factors combined to lead the first half profits before taxes of 35.7 of which 9.2 was a direct result of currency. In terms of segmental analysis we are seeing good growth, good sales growth in our maturity divisions up 23% equating to over 42 million of which approximately 17 million relates to currency and result in 36% increase in operating profits.

Healthcare sales are marginally down and the loss of 6 million compared to 2.2 million last year and quarterly profits have suffered because a big proportion of the cost base overseas has been impacted by average currency factors. We're going into the second half of the year with strong orders in each of the healthcare businesses and we anticipate a full year results showing an improvement.

I'd like to now hand over to Will who will go into products and the change in healthcare performance overall.

Thank you very much Allen. So, first of all I'm going to give a bit more detail on where our revenue has come from and I'm going to look through some of the new products we've launched over the last six months.

So as Allen mentioned our total sales of over the six months have really benefit from currency. So we're up 21% but that is 12% in real terms looking at last year's FX rates.

The [indiscernible] area here really for us has been the Far East with 27% actual rates and 18% previous year and are particularly important for us because of the size of that market overall in absolute terms for the business. So if we break this down a bit further and actually look at the metrology side of the business then we see overall a larger percentage growth of 23% and the real change here you can see is Europe actually where Europe before overall was 18% growth here and the metrology side was 25% growth.

So, good growth across the board. If we now look at some of the highlights in the metrology that have helped us deliver that then we have seen particularly good growth as David said on our encoder and our laser calibration product lines.

Really we have seen a strong market in the semiconductor and the electronics CAPEX market which has really helped us with those businesses. We've established a new subsidiary in Turkey.

It is a growing market for us and so we are putting in the expenditure there for future growth. As part of our additive manufacturing strategy we have introduced a new AM solution sensor to get our customers familiar with the new technology of additive manufacturing and that is now up and running in Canada.

We were very pleased to be awarded the prestigious Company of the Year Award at the NMI Awards for electronic systems, microelectronics, and semiconductors. Also in terms of awards at the AMB Show in Germany we won the German Award of Innovation for our new XM-60 multi-axis laser calibrator which I will now talk about in a minute as one of our new products.

And we're also very proud to become the official supplier to Land Rover BAR and you can see some of the additive parts that we have made for the team in the picture on the right. But we've also supplied position encoders for motion control systems that they are using as well.

So looking at some of our new products that the -- the good thing for us in the market of operators is that they are demanding markets always requiring new technology. And the reason for this is that the parts that our customers are trying to make are increasingly complex with lot of tolerances.

And that means the demands for us is really on products with increased capability and improved measurement performance. They also like everyone have the need to reduce costs and that typically comes through to us in increasing the speed of operation of our products.

And they also have the same challenges of addressing global skills shortages and that what they want is our solutions that we are delivering to them to be easier for them to use. So let's look at some of the products that we've done to address these needs.

So the first one which I talked about earlier which we won an award for is the XM-60 multi-axis calibrator. So, in the past people were very interested in how their machine tools moved and how far it moved.

The beauty of this new device is that it measures not just how far the machine is moving but how it moves in all six degrees of freedom from a single set up. So it is one of the award that has been very, very well received by our customers and it has a lot more measurement capability plus a significant ease of use at the same time and this is coupled with our new CARTO software which as a system has significant benefits.

From our encoder product line we have the new VIONiC and VIONiCplus. So what VIONiC encoder is you can see they are traditionally with that size of performance with an analog signal interface and analog signal which would go on to a digital circulator box.

What our engineers have come up with is to shrink bind the external box onto a single ASIC chip to do the interpolation on both the encoder. And what that means is it can output a digital signal from that which can be incorporated directly into our customer's control systems.

This makes a simpler system for them. And the additional benefit of it actually is because of the shrinking it adds on to a single chip.

We've actually improved the performance of VIONiCplus, now has a [indiscernible] plus or minus 10 nanometers. So that's the performance our customers are demanding for the future.

And also in terms of an ease of use, the advanced diagnostics tool now lies a simple way of checking and aligning and setting up the maintaining the health of encoders through a simple PC interface. Looking across our measurements with software in MODUS 2 which we have talked about before.

We have now released additional functionality for our MODUS 2 package. MODUS 2 is the way of programming our CMM products to measure parts in a very simple easy to use way.

The new functionality now allows this to be used on manual CMM's and we have echoed really an easy upgrade to retrofit kits which includes our controller software and positioning how the technology so that customers can upgrade existing technology with a suite of kit from us. From our special measurement division we have the new SLM 250 scanning and laser module.

This is a lighter device which retakes and forms a light beam which we allow customers to then integrate into the solutions and growth market here is actually in terms of security and detection where the light -- pickup and detect the position of different special features which are moving around for example an intruder. So the new system has a much higher speed of 36 kilohertz and a range of up to 250 meters.

If we switch over to the healthcare side of the business then again it is on the lead to earlier the sales for the first half -- slightly and what numbers they had masked really overall is the growth in the Far East offsetting a slow start in Europe for the year. We do see a balance there, a strong order book here, and we see positive signs for the second half particularly in Europe to catch up there.

So let's look at some of the healthcare highlights. Again as Sir David mentioned in the start we have seen good growth in our new neurological products line.

We're very pleased at the moment so we are working with Herantis Pharma with a drug trial which is at Phase 1, Phase 1 they held in Sweden. And this is supported by a 6 million Horizon 2020 grant.

So that this project will include a whole drug delivery system i.e. our robot, our software, and the implantibles, i.e.

the drug delivery system for that. Staying on neuro, we were very pleased last year that Carwyn Jones AM, First Minister of Wales came to visit us on our Miskin site to open our Healthcare Center of Excellence.

So in the Healthcare Center of Excellence we have a mock operating theatre. So this is all the kit and all equipment and it looks like an operating theatre but it's non star out.

So it's not some where we do operations but it is somewhere that we can use for doing training of our equipment, for using as a sales facility for showing and showcasing our equipment, and also somewhere where we can try on new products and new product testing. We also won some new LiveTrack.

So we mentioned LiveTrack at the last update. LiveTrack is essentially an autofocus system for Roman which allows us to scan uneven surfaces very quickly.

We say it is a real but it was going to change and we see it as a massive step forward in bringing Roman to make measuring services as opposed to just point measurement. I mean we are very pleased to win the Analytical Scientist Innovation Award for this product.

We also won the Collaborate to Innovate Award in the health and wellbeing category for our depths project and this is looking at maxillofacial implants so the additives be manufactured maxillofacial implants that we make promised insights. So let’s now look at a couple of new releases in healthcare.

So I mentioned just previously about our LiveTrack technology. What we also find is that Roman in BMI focus is becoming increasingly popular in the pharmaceutical industry.

So what we have now done is we coupled the new technology from LiveTrack to produce a dedicated instrument for the pharmacy industry. This makes it much easier for the pharmaceutical companies to use Roman technology.

And you can see that typical examples there and you can see uneven surfaces that we are scanning of tablets which can quickly and easily be done making benefit from our novel and patented LiveTrack technology. And finally on the neuro product line, we've also introduced the neurolocate.

The importance of this is also we have a very accurate robots that we need to register the robot relative to the patient’s brain. Previous ways of doing this were slow, time consuming and what we now have with the neurolocate is a way of doing this in situ using either X-ray or CT to provide a combined image of the neurolocate attached to the robot and the patient about to undergo surgery.

Okay, I'm going to hand it back over to Allen now who is going to go through the CASH flow.

Thank you, Will. So, turning to our cash flow statement we’ve generated cash from operating activities of 51.3 million this year compared to 13.1 million last year.

The depreciation and amortization totally increased from 14.2 to 19.1 of which depreciation on tangible assets, fixed assets was up significantly from 8.7 to 10.7 reflecting our continued investment in property and plant in recent years. Amortization of intangibles 8.4 million was higher by 2.9 million of which 1.8 million related to the write off of goodwill arising from discontinuing Renishaw Diagnostics.

The share of profit from associates increased by 300,000 while net finance expenses were also higher by 300,000. Stock this year has fallen by 4 million since June for the reason we have talked about earlier.

Our debt has reduced by 8.4 million since June reflecting the traditional high sales in the final quarter of our financial year and debt to days remain constant at 70 days. The decrease in credit is 1 million so, overall working capital is reduced by nearly 12 billion since June.

We maintain a policy of setting supplier payments to agreed terms of two payments once each month. You'll notice the income taxes paid were much lower down 5.6 million which mirrors the lower profit recorded last year compared 2015.

Payments to the D B Pension Scheme of 2.4 million were higher by 1.1 million compared to the cost and period last year. This slide continues our cash flow report from operating activities through to net cash.

Net dividends paid in the first half were 25.5 million, 1.1 million higher than the prior year, and the level of fixed assets purchase of nearly 25 million was a decrease of 4 million compared to last year. Other intangibles and development cost capitalize at 7.2 million, an increase of 1.2 million.

So our net cash outflows was 5.9 million in a period compared to an outflow of 45 billion last year. Exchange rates changes adversely affect the cash to the tune of nearly 1.4 million even cash balances of little over 14 million as of December 2016 compared to 33.3 million last year.

You can see on the chart the various movements of which we reconcile the opening cash balance of June 2016 of 21.3 to the balance of December 2016 and 2014. Cash inflows generated from profit before depreciation and amortization of 55 billion.

And we have also benefit from 12 million reduction in working capital. Significant outflows into dividends paid of 25.5 million, capital expenditure and R&D capitalization of nearly 32 million and tax paid of 9.1 million.

Currency reduced cash balance is now growing nearly 1.4 million and the cost of discontinuing Renishaw Diagnostics was 3.5 million leading to a net cash of 14 million. And moving on to the balance sheet, our balance sheet continues to be strong with total net non-current assets of 343 million of which fixed assets represent 231 million, more on this shortly.

And intangible assets and investments of 67 million. Net current assets of 176.4 million which working capital inventory debtors and creditors account for 178 million down 4.4 million from June 2016 as discussed earlier.

Cash including the pension for an ESCROW account stands at 29.3 million down from 36.6 million in June. The derivatives liability is 31 million being the accumulative effect of the mark-to-market of foreign exchange contracts due to mature in the next 12 months.

Long-term liabilities for deferred tax pension fund another items including derivatives of 148.4 million, an increase of around 8 million since June. Total equity of the company now stands at 371 million, a slight decrease of 11 million compared to June 2016.

To finish our interim results review a few words on the significant spend on capital items. We’ve continue to make substantial investments in fixed assets to the tune of nearly 26 million in the period of which over 16 million was spent on property additions and refurbishments.

We have completed the building of the new headquarters for Renishaw, Inc which is now occupied. Additionally various property refurbishments have taken place notably in the UK, Spain, and Sweden.

In terms of plants and equipment a significant portion relates to investment in equipment for our additive manufacturing solution centers including a number of our own AM machine, additive manufacturing machines which have been capitalized. We invested in further production plant equipment as well as in our IT infrastructure and equipment.

This is our new Renishaw, Inc facility in Western Dundee in the Chicago area. And finally not withstanding current economic uncertainties, the Board remains confident in the future prospects of the group.

We are continuing to anticipate growth in both revenue and profit in this financial year and expect full year revenue to be in the range of 500 million to 530 million and profit before tax to be in the range of 85 million to 105 million. Thank you and back to David.

Thank you very much Allen and thank you very much Will. And I will hand back to the questions.

We’ll now start the question-and-answer session.

Okay, thank you gentleman. So we're now going to move to questions as Sir David just pointed out.

So we have around 30 minutes. So I'm going to split the questions as evenly as possible between the webcast and conference call.

However as usual there are many more people on the webcast than the conference call. So I'm going to start with some of the webcast questions.

Throughout so I will try to group similar questions together. So we may not answer all individual questions.

So I'm going to start with a few questions we've had around revenue and we'll start with a question now from Mark Davies Jones who asks.

Metrology revenue growth accelerated and broadened geographically in the period. China looks to have been particularly strong, are there any lumpy pieces of business in this or can we see it as indicative of strengthening underlying demand trends?

I think when we look at the Chinese of course to the biggest opportunity we've got, our new products are helping that. And I do look forward to continuing growth in that area but I will hand it over to Will to put some detail into that.

Yeah, I think it suffice to say that there haven't been any of the exceptional huge orders that we've had that we saw a couple of years ago. But what we are seeing maybe is that the market slightly mature.

So it's still a very healthy business. But it may be slightly smoother unless exceptional.

So as they decide what is critical for us in the future as the product developments coming through to make sure we stay ahead in these emerging markets.

I will just stick to these exceptional items just to clarify, we got these exceptional items, a brand new mega factory goes in and we have to equip it. But that is really an exception that we have done a few years ago and our main line of business is supporting these factories once they're going with ongoing revenue.

Okay, thank you both. So next question again around revenue is from Michael Pollock [ph], thank you Michael.

So underlying growth in all regions in the first half, am I right in thinking that growth was negative in the Americas in Q1?

Allen you have the figures here?

No, I haven’t got the Q1 figures here. Well I think -– we haven’t got the figures in front of us here.

I wasn't aware that that was a significant review.

Okay, so we'll move on and come back to that when we got the…

Okay, we’ll pass that one for now. So now I'm going to move to a question regarding -- a couple of questions regarding our additive manufacturing business and here's a question from Stephen Swanton.

How do you view the entrance of General Electric into the additive manufacturing market, will it help or hinder Renishaw?

I think the way we are looking at this is GE is a mega manufacturing company and its bringing additive player in-house as a company that they've bought. Of course people will now look at that company and other people using that would be in competition with some of the key products and therefore it could be certainly a help but the downside of course is that we're likely to lose in selling into GE.

But the opportunities that they have created by taking away a competitor in-house certainly we would look at possibilities.

Yes, I think it certainly highlights with GE's interest to the future that is there for additive manufacturing and certainly the publicity and the marketing they are putting into promote additive in general must be a positive for us.

Yeah, and still it is like in early stages of its potential and as everybody is -- obviously it's a very hot topic and everybody's trying to satisfy the demand in that industry.

Okay, thank you. So another question around additive manufacturing, it’s from Tiari Cerraro [ph].

Can you talk about the AM business, are you seeing industrial customers buying machines as opposed to service centers or academia, how many machines do you expect to sell, what capital would you invest in your own service centers, so quite a few questions there?

Well yeah, obviously we're setting up obviously the service centers is essential part of the sales and of course the initial cost of getting into the business. We have our new lines in those centers and we have a lot of activity now starting in those centers which will lead to future sales.

But we're still in early days yet on this product line but certainly we see a great potential in it. Is there anything else you’d like to add to that.

Yeah, I think it is fair to say probably the background in sales in the past have been the academia because it is an emerging industry around and what we’re seeing now is actually probably moving from the industrial companies from their research into proper manufacturing which is why we feel that the RenAM 500M much more designed for manufacturing tool is the product of the future.

Yes you’re absolutely right Will, we will be focusing the manufacturing -- production manufacturing outside of it. This particular technology is absolutely fantastic for products that really can't be made any other way and laying out and developing machines that will satisfy those products and there is quite a lot that is coming now to the market.

Okay and one more question now around additive manufacturing, this is from probably a shareholder Tom Fagen [ph].

In the 2016 annual report you say that you've demonstrated RenAM 500M and establish four innovative AM solution centers to support the adoption of AM technology in volume production. Could you give us some update on the current status of this development, for example has the RenAM 500M now gone into full production?

If so when do you expect it to contribute significantly to the top line in 2017 and 2018?

Well taking the first part is that we have now got these machines into a solution centers working with the customers for the type of products we're talking about. The high volume production components that can really only be made this way.

And we do expect this will lead to the future sales and I do see quite a bit of future -- this going quite well in the future but, what was the other part of the question?

I guess if you missed the question here again. First an AM situation that was very well received by customers as a really good way of getting into additive manufacturing and about the utilization rates of the ones that are open are doing very well.

The RenAM 500M is not in full production but we have got a number of customers and are using it either in our own solutions centers. Or some actually on their own that sort it just so it should be not long in the future.

Probably start getting some revenue from this product finally [indiscernible].

Okay thanks very much so just a general question here from the private shareholder Joseph Safarti [ph]. Good Morning Joseph.

How much do you expect your CAPEX to be for the whole year 2017?

That’s clearly over to you Allen.

Yes, well we do expect -- we're still so invested in a number of small properties. There is one in Detroit where we are building another facility for our subsidiary in Detroit.

And also we're looking to expand demand in Mexico is requiring additional space there. And so -- but we do expect CAPEX for the year to be less than last year's fiscal year.

So depending on the timing of the developments that is going on and capital expenditure on plant and machinery is less than we would have spent last year.

Okay, I suspect this one is coming Will's way. So here's a question from Henry Carver.

Good morning Henry.

Is the light off [ph] security product your first foray into security, what sorts of market opportunity do you see there?

Yes, I will -- so what we are providing here is a product which others can integrate. So one of the opportunities for it is security where we have people interested for using it.

We are not the ones that would be actually developing the whole system for the security. So we are providing a product with a number of opportunities.

I think it's really too early to say what an marked opportunity some of those areas are.

Its 2D scanning capability has a little potential.

3D scanning yes, or 2D scanning.

Okay, thanks very much. Now going to look at a couple of questions around healthcare and here's a question again from Mark Davies Jones.

He says you mentioned a better revenue outlook for healthcare in the second half, but do not comment on the bottom line for this division. Should it be closer to breakeven at these higher volume levels?

Yes, as I said in my overview we are expecting to see an improvement in the performance at the bottom line in the second half versus the first half. So that is the expectation, and that's what we're looking to achieve.

Well here is a similiarish question which is perhaps a little bit more detail is a question from Stephen Swanton.

Healthcare losses have deteriorated again despite the exit of Renishaw Diagnostics, what has caused this?

Well as we're putting more and more robots it is now going to out there. This is training support is going up and there are other things that you might want to comment on Will.

Yeah, I think I mean as we highlighted in the review the turnover for the first half is lower than it was last year. We are absorbing the inflationary costs and additional investment that’s going into this area.

And so we are expecting an improvement. We got a good look at the moment and we are expecting an improvement in the second half.

Bearing in mind that a lot of the products are going into the healthcare sector are capital items and timing of the sale of capital items and the installation it can vary and move from month to month or half the half. So, it's not quite as predictable as some of our other businesses.

Okay Alan. Thank you very much.

Another question broadly around revenue now and thank you for this question to Chian Chen Lee [ph].

Can you please comment on how much of your sales currently are of a recurring nature such as maintenance and services?

Yeah. Fairly low some -- most of our revenue is coming from David spoke to earlier is new investments and new capital equipment and purchases either directly from us or for our customers when we integrate our products into those.

So our revenue from maintenance and services is a relatively low proportion. As was alluded to that as we do that more capital equipment to the market we expect this to be a steadily increasing revenue for us over the next number of years.

Particularly the healthcare would be revenue on that and some of our additives on the machines as well, but not the current products.

Okay. Another question around revenue now and this is from Jonathan Herms.

So thank you Jonathan.

You saw a number of positive question some which I believe have already been answered. I'll take the second one of the second part of the question for now.

So what is the current sentiment among your metrology customers, are they more upbeat on their production spends for 2017 and how was the order book standing year-on-year?

Well it obviously depends on the product line and you look at the product lines and the encoders are doing very well.

Yeah, I'd say if we if we broke it down into the machine tool market it’s probably a fairly neutral stance at the moment. So there is investment that is going well but there is nervousness.

Certainly in terms of CAPEX in a semiconductor manufacturing then as we holler today that's going strongly at the moment and we don't see yet any signs of that abating.

Okay and another part of Jonathan's question which I don't think we particularly answered yet. So are we getting closer to completion of your strategy to be a solutions provider, how many more periods of larger headcount build out do you need?

Well we are a solutions provider and I don’t know, Allen do you want to...

Probably talk about it a little bit, yes. So, we are having all our products solve a problem otherwise no one would buy them when we talk about solutions.

Some of this is selling some of our metrology equipment particularly our quieter [ph] product line where I think we probably put a lot of resource in and we are starting to see the benefits of that in terms of what's critical for us and then repeat orders where we've gone through the hard work and we don't get repeat orders coming through that’s what we’re starting to see. And that's what will drive the profitability of those businesses in the future.

Yes on the automation. Any comment on headcount which jump the links to that...

We are recruiting additional technical support to support the demand for the solutions that we're putting in various parts of the world where there is a demand, high demand and support required we're putting the investment in to get the right people.

Okay, thank you. Let's move to a question around tax credits now.

This is from Michael Pollock [ph].

Who asked can you quantify the impact of the change in treatment of tax credits please and does this reduce the engineering cost or the admin cost?

Yeah, for the first half it was 1.1 million in the first half of the current year and 938,000 in the comparative period last year. For the year to the end of June it was 2.4 million and they’ve been reflected within the admin costs.

Thank you, Allen. We've got a couple of questions waiting, I can see a couple of people keen to ask questions on the conference call.

So I'm now going to go to the conference call and I'll come back to a couple outstanding questions that we have it now on the webcast. But our conference call listeners have been waiting patiently.

So look so we have a couple of questions at least lined up. So we're now going to move to that session I am going to ask Dave who is the conference call operator to ask the next question.

So over to you, Dave.

Good morning. Yes, I had a few clarifications.

I guess the first was on additive manufacturing. I think you talked about that some -- it shouldn’t be long in the future and we will start to see that going RenAM 500M going into full production and get significant demand, is that possible that it will happen in the second half of this financial year or is it more an FY 2018 sort of thing?

I think the second half is starting but we are not expecting anything really dramatic in the second half, it is after that, that we would be expecting things to happen.

Great, thank you. The second one was just on the kind of the large order dynamics, because I guess what you seem to be saying is that those customers who previously had large orders they’re still customers, this building business you're just not calling them out separately at this time, is that is that the expectation in the future now that we would be less likely to see kind of large orders of your customers go down?

Yeah, I think that's possible. We don't really know but our assumption is that, that would be the case that we wouldn't see such exceptional one off orders.

But you're right the various orders of customers are more are still customers of ours. But the nature of the business and the size of the order is changing.

As I said before these orders occur from brand new mega plants going in and at the moment they will go into the future again. But we haven't got any foreseeing going in the near future.

But in prior years was large orders only the mega plants, was it all of the demand from those customers who are building mega plants?

That’s what we call exceptional and then once they're in where we service that of course that becomes routine business.

Just the revenue that you kind of called out in prior years as large orders, is that all of the demand from a big consumer electronics manufacturer in that year or was it just the demand which related to a large factory build out that they were doing?

Yes, I would say --

We would include all those really. When we talked about it, it would include both the exceptional items and any more stuff within in that group.

Okay, perfect, thank you. And then the final one was just on FX which obviously has been a tailwind for this it was less than what I expected.

So, I guess in which regions do you price your products in sterling, in which regions do you price it in dollars, can you just give us a bit of a feel for how the pricing of product -- region?

Most of our revenue is in foreign currency. In the U.S.

for example they invoice in dollars, in Japan they invoice in Yen, and Europe most of our -- or all our subsidiaries are invoicing in Euro except of course in the UK we are invoicing in Sterling. There are one or two currency agreements that we have with one or two customers in certain countries but most of our revenue comes in foreign currency.

We do have a policy for contracts that we have a role in program for doing foreign contracts and I have had for a number of years and so that continues.

Great, thanks very much.

Good morning. I just had one question and it's about your input cost inflation that you're seeing, I guess within your UK manufacturing can you just kind of quantify how bad that is and does it get worse over the next couple of quarters as things filter through?

Yes, in terms of costs particularly in the UK we have quite a large capacity now and we are seeing growth, underlying growth in a number of product lines which is demanding direct labor requirement. And the inflation is mainly the salary increases that came into effect on July 1st.

The net headcount in the UK other than the recruitment of graduates and the apprentices was pretty much zero. And so we are putting quite a lot of effort into men managing the costs.

In terms of overseas obviously the currency has an impact which we can't really do much about but particularly in manufacturing where we've got manufacturing plants in India and Ireland.

And there's nothing in the UK that's making I would like to say a binding component or initial raw material is affecting your gross margins or making you think about your pricing, your own pricing going forward?

I did cover that in the financial review that there are components that we buy overseas and that is impacting our gross margin. But not -- it's relatively small.

It’s not a huge -- we haven’t seen massive price increases as a result of the weakening sterling.

Okay, thank you.

Okay, thank you to Dave for controlling that section. So I'm going to come back to as promised to some more webcast questions and I have one here from Michael Pollock.

Relating to our REVO 5-axis measuring system and he mentions Ben Taylor who I know is listening so good morning Ben. Ben said it was very hopeful on the prospects for REVO into the U.S auto OEMs.

Is this starting to come through and is the Detroit investment part of this?

I think Ben was absolutely right. And this is coming through.

And yes, he called that one correctly.

On the Detroit investment yes, because a lot of the stuff…

And as you say as we mention we’re putting investment into that area because of that connection.

Okay Thank You. Good morning to Ben Taylor who is also submitted a couple of questions.

The first part I think Ben we’ve already answered regarding large Fareast orders so we've already done that but I'll take your the second part of your question.

Is it reasonable to assume the currency impact will be enhanced in the second half of this financial year due to the live impact of the currency hedging policy?

Yeah. Good morning Ben, the forecast that we've highlighted is in our outlook for the year with our profit range of 85 million to 105 million.

Yes that picks up our anticipated impact of the currency in the second half.

Okay, thank you Allen. The next question, another question Chian Chen Lee [ph].

Do you currently have significant exports into the U.S., what would be the potential impact to the new tax rules been discussed that penalizes imports to the U.S.?

It is early days yet to know what that would be and what was the markets. It's clear that we export a lot into the U.S.

It is a major market for us as we highlighted in the numbers earlier. I guess we should be happy with [indiscernible] two things really comment on what's going to happen with any U.S.

policy.

I think customer demand will call the need for product because we don't have any real competition in the U.S. and it's the customers, the manufacturers, and the OEMs who want the product and I guess if they are already paying a certain amount of duty on import already so my guess is that they will continue to buy.

Okay, thank you. Another question here from Henry Carver, good morning Henry.

The outlook statement confirms you expect to see growth in both revenue and profits in the full year, can you confirm that you expect to see that to have constant currency for both?

I mean the forecast includes a low hanging growth on the impact of currency as we know today.

Okay, thank you Allen. Another question here on additive manufacturing this is from Jo Reedman.

Good morning Joe.

How many AM service centers do you have now, how many do you aim to have ultimately, and how many would you look to add per year, and what are the operating costs of an average AM center?

Okay, we’ll take that in two parts. The cost we will give to Allen but Will would you comment on the…

Yes, we've got a number of AM centers now up and running or just or just opening, which brings us up to five. The -- how we go forward I think very much depends that we have plans.

Some of that will depend on what capacity we can put into our existing centers and how much we decide to make them geographically diverse. What they are just, I mean I can't answer about the operating cost but we must see the solution centers as a way of customers.

As manufacturing parts for customers and teach them how to use AM but also as a prime channel for us developing AM sales. So the cost needs to be spread both across the revenue we got from the solutions center and the sales that we generate for problem.

And the feedback is essential for the future R&D.

Yeah, the solutions centers are there equipped with our AM machines. Plus all the finishing equipment, all the equipment appropriate for finishing them for the final processing of components produced.

And they are expected to be profit centers so they are generating revenue from customers which -- so we are expecting them to be profitable centers. And the cost of running them will be appropriate for the demand and the labor and the application engineers necessary to train the customers.

Okay, thank you Allen. And it's now just before 11 o'clock.

So I think we're going to end with this question which is actually the first question received this morning from again Tom Fagen [ph]. So thank you for that Tom.

Renishaw seems to find the formula for everlasting success, invest heavily in R&D and the future will look after itself. Does the management believe that this commitment to R&D will enable it to keep delivering market beating revenues and profits 5, 10, or even 20 years from now?

It's lasted 40 years already. So I do predict that the formula is still working well and no reason why that shouldn't happen.

I don't know if any of you on the sales side like to say we haven't come in.

I mean I think it is critical that we have the best products out there in the market, that’s what made us a success coupled with our distribution.

And we will continue investing in new R&D that gives us these products of course. Beyond 20 years from now.

Okay, well I think on that note we will call the conference to an end. So that ends the question-and-answer session, ends this morning's webcast and teleconference events.

So, thank you for attending. We are waiting to publish a recording of today's presentation and the Q&A session on the Investor Relations section of our website by tomorrow morning.

So on behalf of Renishaw I’d just like thank you all for attending this event and hopefully it's been valuable to all of you that have done so. And finally just a reminder you can download the ensuing report and a copy of the financial presentation that you've just seen from our Investor Relations webpages.

Again thank you for attending and have a good day.