A lot to go through today. Some key themes that we want to make the most of your time here to show you. First of all, we want to go through a bit of update on strategic progress. The good news here is we've got lots of really key new products to talk about. We want to showcase the output of our innovation engine. I think this output really highlights the effort that we've put in in terms of really trying to make our engineering, our new product development processes more productive. We want to talk a little bit on terms of how we want to develop our financial performance and this is really looking at.
Our primary strategy is still growth and profitable growth and growing the business, but particularly in these more uncertain times, we want to make sure that we're making the business as lean and focused as possible to really support that journey. Next, we want to showcase the capital and the engineering investments that we've put in. Particularly important here, we want to get you out and about and show you the investments that we've made in this site. It really is an excellent tool going on. What you'll see here is not just the investments we've put in place, but you'll also see our own technologies and how we're using our own hardware and software to really drive the productivity in our own manufacturing site. Lastly, we want to provide a bit of color on financial goals and new reporting segments.
First, just want to recap though on some information that most of you, seeing many familiar faces, would have heard before. I think it's worth refreshing on our purpose and our ambition now. Our purpose: helping our customers to make the products and the materials of the future. This is slightly more focused now. You'll have seen, hopefully from recent announcements, that we have closed and exited from our drug delivery business and we're in the process of divesting our neurosurgery business. We do now have a more focused purpose and that really allows us more attention on those key end markets. For us, from the machine shop to the semiconductor fab, ambition remains unchanged and is clear. We want to be this manufacturing technology powerhouse. You'll see today that innovation for an automated, sustainable world.
You'll see the new products helping to do that and you'll also see how we're deploying that ourselves to achieve that ourselves and still our ambition the same. Making sure we're number one, number two in these high growth markets and both in sensors and software enabled systems businesses. Now today in the presentations we want to go through some really key points. First is that driving revenue growth through accelerated innovation. Second, developing those operating profit margins. Next, that rationalization of the product portfolio and then looking at cash conversion and capital allocation. If we start with the driving revenue growth, it's important to reflect back on a model that we have shared with you a few times now, which is our value creation model. This sets a scene for where our innovation plays a key part.
On the left here you can see the business environment that we operate in. Critically, two things: the $6 billion addressable market, so plenty of room for us to grow, and also the underlying averaged out through cycle growth rate of over 5% a year. Now, that is from the drivers that we see going on, and I think by and large these are still true, even with the more challenging world that we see ourselves in today. Now, one of the drivers I think particularly positively for us changing, and we've been asked about a bit, is on that industrial automation and particularly with customers moving production, reshoring production from lower labor cost economies into higher labor cost, building in more and more automation becomes more and more important to make that viable.
We also actually see it where people are trying to dual source their supply chains and maybe set up additional production outside of China, in India. If you're setting up a new facility, the one thing you want to do is use best practice, integrate that automation from the start, and avoid having to go through the hassle of recruiting, training, and managing people for that process. We are in the fortunate position with the markets we operate in. We have also got a strategy to deliver outperformance. On the bottom here you can see our growth strategy with our organic growth strategy. Starting from early stage R& D through to these number one, number two businesses, I want to talk today a little bit more about the arrow, the focused execution.
Here it is really about how productive we can be in all areas of the business from our sales organization, from our engineering effort, and from our manufacturing to drive the bottom line profitability. We have our three strategic priorities from growing existing markets, increasing technology value, and extending into new markets. Let's have a look at those and see what's going on in terms of innovation here. The first thing which is always nice and makes my life easier is actually the engineering team. There's an awful lot of work that's been done, so there's a lot of new products to talk about. The number one thing to take away is the impact that we are having. Let's have a look at some of the specifics on here. First of all, growing in existing markets.
Normally when we talk about here we're talking about things where innovation is allowing us to drive up spindle pro fitment rates. It's about gaining new share of market share with encoders by capturing new accounts. Want to talk about a product line that we don't talk about so much, which is our high end laser encoders. These are primarily used in the machines for inspecting, so volume inspection of wafers as they're being manufactured in fabs around the world. Now these manufacturers are always facing increasing challenges, decreasing feature sizes, more complex wafers, need to measure more quickly. With our next generation of laser encoder which we're just launching, we're keeping actually ahead of their requirements and enabling them to meet their demands and challenges for the future. If we look at increasing technology value then we've talked about our new Tempest technology.
This allows actually you to process the powder bed whilst you are wiping and delivering the powder, the next layer of powder. This is now getting integrated with key customers and particularly those who are really embracing AM technology. Doing some really thin wall parts, this makes a big difference to their productivity and the quicker they can make the parts, the less they're costing, the more that drives their adoption. In our Raman business we've done some really clever innovation of actually taking the product, putting a lot of automation inside it to make it much easier to use from a hardware point of view and also new software simplifying it.
What this is doing is it's targeting, it's taking it away from the Raman scientists, the PhD scientist in the lab, and make it so it can be deployed by an applications engineer trying to solve a real world problem. We think this opens up significantly new markets for Raman technology across the board and we're making progress again extending into new markets with industrial automation. You will see this technology being used in us as across your tools today where we're using it ourselves, we're developing and increasing our range of sensors and software so interfacing with more and more different types of robot and doing more features here. What we are doing here is working with a number of key customers. This is both robot manufacturers, system integrators and end users, making sure we're getting their feedback and steering our product development program around them.
I also want to talk about Astria. Astria is our new rotary inductive encoder. This is designed with the inductive technology, it makes it really suitable for really nasty, harsh environments. What we're seeing from early customer feedback is this is really hitting quite a nice sweet spot with the defense sector, which is unfortunately quite a booming sector at the moment. We're working with those customers at the moment and there's a few tweaks in terms of communication protocols, mechanical size, but we really seem to have come up with a product we think is really well suited for them. Undoubtedly the star of the show here is in the middle, which is with our new Equator X and Modis IM software.
I avoid talking about this too much because you're going to get a demonstration of this later, but I did want to say a few words. What is Equator X? If you think traditionally on the shop floor you have a gauge. A gauge measures something extremely quickly, but it uses a master compare process. You have the perfect artifact and you're comparing it against there. You can work in nasty temperature environments and you can measure quickly. In the CMM lab you have something which is traceable but is slow. What we have done with Equator X is combine the best of both worlds. Now we are delivering shop floor metrology traceable, blisteringly quick. This is going to have a wow factor. Actually this is out now with some of our early adopter customers. Feedback has been extremely positive.
This has been digitally launched today, so we were just looking at the LinkedIn post of it going and it will be launched publicly at the EMO trade show in Hanover in September this year. It will be available with our traditional CMM software. It will be available as our other gauges are with third party, so other people's software. It will also be available with our new Modis IM Equator software. This is really quite transformative. This dramatically deskills the process of programming commissioning your Equator. What this does is it allows actually some really key strategic themes for us in terms of driving this business. The first thing it allows us to do is for third parties such as system integrated machine tool distributors, system integrators can now sell a complete solution and own it themselves.
They will sell a machine tool robot, Equator X, and they will program and deliver that solution with IM Equator. They do not need our help and support to do it. They can own it themselves. Secondly, this allows customers who previously would not have had the expertise to program using CMM software gauge to program themselves. They can program Equator and Equator X themselves, owning that solution. Thirdly, it means that when we are delivering turnkey solutions, our programming time and our skills to do it dramatically reduce, so we end up with a more efficient sale ourselves. This is why these two products together are so key for us, really driving the profitability of our IM systems business, dramatically increasing turnover whilst keeping our cost base under control. We have exciting opportunities here for growth.
What we want to make sure is we are giving ourselves every chance of delivering on profitability targets going forward by making sure we're more focused and lean as a business. Mark will talk through in more detail on the exact numbers, but I want to give a flavor of the themes that we have going on that we have as priorities to make sure we deliver on that target of getting back to 20% bottom line adjusted operating profit. First, very topical being here at one of our manufacturing sites is on production and driving down our manufactured cost. What you're going to see on your tour is some excellent examples of capital deployment. So CapEx and also engineering projects of helping us improve our performance.
You're going to see new machining platforms with really smart ways of setting that up using our technology and also being tended by machines to automate the process of loading and unloading so they can run for much longer unattended. You're going to see, particularly for some of our high-volume small sensors, our encoders. You're going to see the innovation, the engineering innovation that's gone in to take the more modern designs of encoders that have been built with automation in mind and now implement that automation. This again reduces manufacturing cost. It also has the additional benefit that as volumes ramp up, which they do very quickly in some of the markets, it means that we can respond far quicker as long as we've got the piece parts. We don't need to go out, recruit people, and train them to make these fiddly encoders.
Some real step forwards there. You're also going to see our new automation going into our warehousing, again designed to make sure we're more productive. Oh, you will also see clearly the investment that we're putting in here, and the scale is such that particularly on things from as far as encoders to Agility, we have the opportunity now to cope with the increased demand without the need for significantly more investment across the group. Now, engineering I've touched on already, and we made some changes here a few years ago from the engineering team. When you see Derek later, you can quiz him firsthand as he's talking to you about Equator X and Modis IM, and we talk about things such as flagship projects and MVP. I think you can simplify a lot of what we're talking about down to actually some common good practice.
We've been very strict to go into the projects of making sure that everything we do, there's a very clearly understood USP, unique selling points for the customers, that there is good gross margin in it and that we can protect that gross margin with strong IP and patents. Once we've got that and we understand very clearly the route to market we're going to sell it, then it's a case of making sure we prioritize the projects that are going to have the most impact and often most trickily stopping the things that we don't want to do so we can reallocate that resource and accelerate what is key. That's where we talk about the flagship projects. They're the ones that get the priority, they're the ones that are on that list that are going to make an impact that you saw earlier.
The other thing we're being very strict about is scope creep. There's always a feedback from someone saying, it'd be nice if it could do that or it'd be nice if it could do that, or it might be an advantage if it did. No, we know exactly the USPs that are going to make the difference to the customer. That's what we're doing. We're not delaying something to add something in that's a maybe nice to have. We are being fast, stricter on timescales and getting stuff to market on time quickly to make an impact. With us here, this means that what we want to do is achieve with the engineering investment that we put in, we want to have the impact we want to keep.
I want to be here talking in the future about all the new products we're coming through at the same rate as now, but keeping those engineering costs under control around about the 12% of revenue. Next, distribution. How do we get product to customers? Our sales and marketing cost. The first thing here is a prioritization call as well. What we see is strong markets over in Asia, particularly India and China. India, with really investment going in, where people are hedging their bets and investing there versus in China. We are making targeted investments in those areas. Whilst we're actually reducing our resource investment that we have in our EMEA region, we're also doing another thing here which is identifying that some of our businesses are quite different.
Particularly with additive and spectroscopy, we are running these more and more as separate entities and that holds for the sales organization as well. They are now much more dedicated. The rule in general is unless you are dedicated on to do with AM sales, you do not get involved in AM and likewise with spectroscopy. One of the things that we really need to drive our productivity across the sales organization is new systems. We have some relatively legacy IT systems in the group which, for us to enable the productivity that we want to get in sales, we need to get them replaced. That is one of our major new projects that we have going on at the moment. With Microsoft Dynamics 365, this is both ERP and CRM. This is due to go live early next financial year.
In the U.K. that is. That's going to be our first major installation from U.K. sales and then later on this calendar year that will be going live in Germany. Secondly, from a digital experience, our new web shop actually went live last week. The first two installations in France and Canada and that will be then rolled out quickly across the rest of the group. Really key projects that we've got to achieve for getting our productivity where we want it to be and efficiency. These are currently a headwind for us though in terms of group profitability. All the investment we put in here is not capitalized. It immediately impacts the profit. Right next in terms of rationalizing our portfolio and aligning into new business segments.
Mark will go into this in more detail later, but following on from closure of drug delivery and exiting our planned exit from the neurosurgery business, it was an opportunity to refresh how we do our segmental reporting. First thing, let's go through industrial metrology. That's very much about the marketing message that we have with the production process pyramid of how do we help our customers optimize the performance of their machine shop. Position measurement is that range of encoders from the inductive Astria to the high end laser encoders, all about helping our end customers with their motion control needs. Then specialized technologies are those businesses that are somewhat separate in terms of the customers who we're talking to and the skills that we need to either sell or manufacture.
We will be introducing this next year and Mark will go through the details on this later. The next bit I want to talk about just is cash conversion capital allocation. Again, a great opportunity with you being here today to see our organic growth model and the investment that it takes firsthand. You will see the capital that has gone in for investing in this site to gear up for manufacturing and for productivity around the Renishaw sales network. We also have significant investments on how we interact with our customers and sell them. Our message, we think we are in a good place for growth now. We would expect CapEx to be more limited over the next few years as we grow to use the capacity that we have in place.
This means with ambitious growth plans and less demands for the cash on CapEx, we expect good cash flow and therefore we will continue with our progressive dividend. With our progressive dividend policy as our main way of returning cash to shareholders with excess cash, we often get asked about acquisitions and inorganic growth. Certainly you should not expect from us to see any major transformational acquisitions over the next few years. You know us hopefully too well for that. We will look at a few targeted smaller acquisitions that maybe could fill in some gaps in our portfolio that we have as a board. We are conscious one of the things we pride ourselves on always is a conservative balance sheet and making sure that in the cyclical industries that we operate in, we are well positioned as a board.
We are discussing this and looking at with the latest business plans on where we are and making sure that we have appropriate levels of cash within the business. Right. Sorry. That was good timing for my last slide. In terms of. Are you the London train? No, you're not.
That's okay.
Okay, perfect. You get the potted summary. In terms of stuff, the really pleasing stuff is the productivity that we're putting in and the output from the accelerated innovation that's going to be really powerful in terms of growing our business going forward. We want to supplement that, particularly in these more challenging times, by making sure we become a very focused, lean business. We're doing everything that we can to do that. Then a simplification. It's narrowing down in terms of our purpose and our mission and making sure we are targeted and there to deliver those shareholder returns. Right. I think with our new modified agenda, we're going to give a little bit of time still for Q & A with me and Allen. You get that unique. For those that have just joined, I don't know whether there's a.
There's a. We have a significant number of people not here due to train issues who will be joining shortly. We're having a bit of a slightly disrupted agenda today. We've got our first question. Allen's about to come up and join us with a microphone somewhere.
Yeah, it's just a comment really. You talked about the nice to have, how you were encouraging the staff not to accept the nice to have but to do what they plan, plan to do and to deliver the product on time and to cost and obviously to quality. That's all absolutely excellent. My sort of comment is I hope that you're actually retaining the information as to when the people say that's nice to have, writing it all down, who's made the comment, which company, why do they think that's useful? So that you've got that information so that you can use it for continual improvement as opposed to continuous improvement. I have the sort of intervals in, I guess from the smiles t hat is the strategy.
That's absolutely. Very good point. Normally the distractions are from our own internal people coming up with good ideas. Has Derek got a
I was going to say, if you want, I can. Pick up on the topic.
Yeah, go on, that'd be really good. [crosstalk] Okay, so it's a
Director for Industrial Metrology, so a bit closer to the innovation process.
Why don't we do this? Why don't I give my response and then Derek can give you from the real world what's happening. From my view, a lot of distractions come from internal. Whether it's the sales organization thinking they don't really want to go live until they have something extra in there or if someone's come up with what they think is a good idea, it can often create confusion and keeping focus on what is clear. But remembering those things for the future pipeline for the next version, particularly on software projects. Is there anything you want to say as a group, Derek, or while you've got everyone together?
Yeah, just as a group. I think you've seen the phrase minimum viable product on Will's slides and what that's tending to encourage us to do is to focus, focus on the minimum spec that we think we need to get into the market, but instead of considering that as job done, also then plan the further iterations as we get market feedback and as we're learning to make sure that we then do continuously evolve those products to be the best possible fit. That is really helping us. I think that early learning of getting product in market and getting customer feedback is super valuable and being able to start commercializing early and find out where the money is really coming from in the customer base, it's really helping us and it is a big mindset shift I think amongst the engineering community here.
Do you want the mic? Let's pass that round.
A question on Equator and it's about training the customer and commissioning. Could you give us a little bit more flavor on that particular aspect of a new product that's coming into market which the customer is going to take control of and manage?
Yeah. I think what you'll find is across the world we've got a very talented group of sales applications engineers which have very close relationships with large manufacturers. There's already a good knowledge of our Equator gauge. Actually, in terms of understanding, they will get immediately the advantages that the Equator X brings to them of actually having both that flexibility of not just master compare, but to do initial traceable measurements as well. I think that will be really well and quickly understood and that's certainly the feedback we're seeing that I'm sure again, Derek will comment on later from those early customers.
The more interesting bit I think will be on the new software of making sure and this probably goes back to that minimum viable product of making sure that we've got the core features that are in it so that they can measure the sorts of parts that are really well suited to gauging and onboard. I'm sure there will be some work that goes on after the launch in EMO in September on Modus, I am Equator, which is probably some priorities changing as we start to get more and more feedback on this is a key feature. We need to be able to do this or that. The platform, which is totally new service, is all from far more modular, far more structured. It is a totally new platform for that software. Feels like the progress the team are making and the enthusiasm is really fantastic.
We have a finance one.
Chris, why not just on the cost efforts that you're putting in here at the moment? Thinking about Renishaw, it's always been a company that's been more willing to focus on the long term and invest for that long term. You know, if the cycle is against us in the short term, it is what it is. Is there any change in that kind of perspective with this? Is there any more focus on flexibility of cost rather than just reducing cost? Or is it you feel that you're in a strong enough position that you can just keep focused on the horizon?
No.
I think internally we've always been quite cost focus of understanding. We are prepared. When we talk about the new laser encoder, that was a product that took a long time to come through, but we believed in it. It had the USPs, it had the margin, it had the IP around it. When we believe in something, then absolutely, we'll be patient and invest, but we need to be probably more understanding of, okay, there's a certain amount of stuff we can do which are the ones we most believe in and not do some other things. Also in terms of then just generally whether times are good or bad, it's that culture of really pushing on in terms of productivity across the group.
I think this is more about us getting lean in good times as opposed to saying, okay, we need to turn ramp up and down. There will always be a bit of that, but this is about us trying to make sure we're as supportive for the group profit all the time.
Maybe one more just on the balance sheet while we're here, the discussions you're having with the board, what sort of, what's the approach you're taking with that in terms of trying to figure out. I'm not looking for hard numbers or.
Lines of where you want to get.
To, but how do you approach that? How do you think about what is the right balance sheet structure for the company?
If I talk through generally and maybe Allen can add specifics. Our main bit here is looking through the five year planning process, understanding the challenges and downturns that we might face and also looking at the investments that we need to make as well and then understanding really that critical bit on that balance sheet of the cash we have and how much prudence to incite with that. Those discussions are ongoing. Once that is done, I think then it's understanding. Okay, with dividend policy, where are we and what else could we do? Okay, we'll see how many of these questions get repeated this afternoon with the others.
First of all, Will Garnett, I'm a private shareholder. Thank you for inviting us to Miskin. First of all, I've got two questions, but if I'm allowed that. First of all, just on the legacy replacement of that is probably a question for Allen, but on the replacement of the legacy systems, the admin systems, the new ERP and CRM, you said it's a GBP 6 million cost which will be expensed. What will be the benefits? Will there be a cost reduction? In due course. Can you talk about that?
Yeah, I mean, we're replacing systems that we introduced back in the 1990s basically with Sage and it's done a fantastic job for us over the last 20, 30 years. We are now moving forward with 365, which should bring with it a lot of improved efficiencies processing. We're looking to try and get far better standardization of processes across the group. If you're order processing in Brazil, it would be the same processes in Japan, China, the U.K., or Germany. We're trying to get standardization across the group, which should bring efficiencies with it. Part of it is also looking at stock control, management of inventory generally across the group as well. That hopefully is going to come as part of the implementation, but it's going to take another couple of years.
We've been using, because it's going to be cloud based, we have to push it through our P&L and it has been hitting us for the last couple of years and will do for another two or three years, I'm sure, until we get implementation through and that's our sort of CRM and ERP, F&O. We've also got to look at our manufacturing as well. We've kicked off another review meeting now on the next generation of manufacturing processing which we're going to be embarking on and we've got to get that done in the next four or five years as well, six years maybe. It's an ongoing process but looking at improved efficiency and productivity and the capability to do more with less, basically we're making good progress and fingers crossed.
Bottom line, you get the admin cost down to 10% of sales.
That's the objective. Of course we're being impacted by the costs that we're incurring now, which are P&L. Typically the accounting standard requires it, but otherwise we'd be capitalizing that and writing off over the next 10-20 years. You know, it's a hit that we're having to take now, but the objective is to get to the 10% admin costs as a percentage of revenue. Be much helped if our sales department doubled turnover. That would make life a little bit easier.
Second question, just generally China, 25% of sales. Can you just talk about the business there, competitive intensity, opportunities, threats, just general question.
Still loads of opportunity in China, lots of investment going in. There's certainly, as we talked about, there's a sort of bottom end of the market where a good enough product that might last for 12 months at a cheap price. It's almost a bit when you think of it in terms of machine tool probes, these may well be machines that in the past would have had no sensor technology on. At that price point, suddenly they may think, oh, I'll try one of these probes that may make this work for 12 months, while I got a contract for 12 months. There's definitely this emerging area there, some of which we're in and some of which we're probably not in at the moment and never have been. For us this means a few initiatives that we have going on.
The first is sort of a commercial pricing strategy. For the first time, do we want to have entry level products below our core products for that market? Probably China, only ones. I think our learning of trying out that strategy means it definitely has to have the Renishaw brand on it. We have tried with other sub brands and that does not seem to work. The other bit we will have to look at is then in terms of made in China and what we do, there is a strategy going forward. There is some stuff we are just starting to look at a bit more for doing there, but that will be on some fairly narrow areas potentially to start with over the next period. All in all it feels like there is still plenty of growth there.
Our customers are interested in price performance, whether it's a Western brand or a domestic brand. Quite exciting times. Somewhere I think we're spending quite a bit of time, I'm spending quite a bit of time just understanding the opportunities, which is why we're investing more there. People say China's going to be bad because India is taking all this on. It's not. There is so much domestic demand going on.
Unless I missed it, you did not mention the United States in the slides and sort of following on from that, I guess what your thinking is for reducing investment in EMEA.
Okay. In terms of U.S. tariffs, although they are constantly changing and interpretation of them is changing, I think we have a pretty good process in place with the U.K. team supporting. We have two product commodity codes.
We have some that have a standard 10%, some that fall within the aluminum, steel, 2, 3, 2 tariffs. This is on the import duty. We're passing on those prices to customers as a surcharge. Some are okay, some are more annoyed, but that's the situation that we are in. I think we have all the mechanisms and the team's done a great job of coping with that. The bigger challenge for us at the moment is just the uncertainty on where do customers invest and it feels particularly Mexico feels a bit more stable. Those investment plans are going on. Canada feels the one where there is the most uncertainty, both with automotive and aerospace customers deciding what are they going to do. That was the first bit and sorry, the second bit of your question Was.
Oh yes, yeah, EMEA. Our largest market in EMEA, Germany, if you look, the German machine tool market is really struggling at the moment. These markets are cyclical but the general consensus, and I would agree with this, is that it's not. Some of those customers are not going to come back to the levels they have been before. They used to rely strongly on a Chinese export market and those Chinese machine tool builders who are also customers of ours are becoming more competitive, that is squeezing the German machine tool builders. That is why, particularly in this market, we feel some of these opportunities are not maybe as profitable as investing our precious sales resource elsewhere. Japanese machine tool builders on the other hand are really benefiting from a weak yen at the moment.
Actually the Japanese, it's not strong with the JMTB index but they are doing okay. Just that really weak yen doesn't help us at the moment.
Sorry, I might have missed this because I missed most of the presentation but just in terms of the capital intensity of the business over the last few years, I mean the fixed capital investment that's gone in, have you illustrated what you think the returns on that investment is? I guess secondly where you are in the completion of that capital phase, appreciating. Allen's just talked about the software phase and perhaps picking up a little bit of that. The returns of the business obviously look pretty low at the moment, partly because of the cycle, partly because you've just loaded a lot of capital into the business.
Yeah.
Actually, this might be quite good timing because Mark, as I see, prepped up, ready to talk through some more of the financial side, which is going to cover some segmentation side but also looking at return on invested capital and where we are there and what we need to do in terms of capital deployment in the future. I wonder if, with that question, unless there is anything Allen wants to add, whether we should let Mark do his presentation and go through, and then hopefully that gives some color.
That's perfect, thank you.
I would just add that in terms of major CapEx here at Miskin, you're sitting in it right now. This was completed a couple of weeks ago and the builders are pretty much off site now. So Halls 3 and 4 completed and this was now completed. Some minor work still on fit out yet to do but you know this has been a massive project over the last two or three years and it's cost us GBP 70 million-GBP 80 million to complete these. That level of expenditure is going to sort of dramatically reduce over the next few years in terms of buildings and structures.
Right. Will has obviously covered, you know, some of the sort of key themes of the day today and I'm going to pick up on some of those themes and give a little bit more detail around, particularly around how we intend to achieve our financial targets and also the business segmentation. Will talked about four topics. He spent a bit of time looking at the innovation side of things. I'm not going to go back there, but I'm going to look at each of the other three topics in a little bit more turn and I'm going to start by looking at operating margins. You saw this slide in Will's presentation. Briefly, it shows recent trends in our consolidated income statement and also some of the areas in which we intend to improve our operating performance.
Now, as a reminder, we have a target of 20% for adjusted operating margin and clearly right now we're operating at somewhat below that level. We will get there. We're going to do that through a combination of driving growth to achieve operational leverage. We're also investing in automation to drive productivity and we're also taking action on fixed costs. The table on the right shows how we intend each element of the P&L to evolve in the next few years. I'm going to start at the top and we'll look at gross margin here. The trend has been downwards. We were on 65% a few years ago, currently at around 61%. Now, there's a lot of factors that affect gross margin.
On the revenue side you've got things like pricing, discounting, currency, and on the cost side, we've got things like product mix, material cost and factory costs. There's lots of moving parts in here. When we look at it, the key thing that's been driving lower operating margin, low gross margin, sorry, in recent years has been inflation in production labor costs. On the next slide, we're going to look at some of the areas in which we're aiming to take the labor content out of our production costs, but also how the recent investments we've made give us a platform to pursue profitable growth in the future. The other area that we're looking to improve our P&L is in the fixed cost areas of the business.
This means controlling the rate of increase of costs in engineering, distribution, and in administration to a rate that's below that of our revenue growth. Once again, it is labor cost increases, inflation, and labor in pay that has been the main driver of cost increases in these areas in recent years. Controlling the size and the focus of these teams is going to be central to margin recovery. Of course, it is also the case that these functions are absolutely central to our ambition to be an innovative, growing, and responsible business. Clearly, we are going to continue to invest in areas that will drive our strategy, but at the same time seeking savings through productivity in the way that we work. I should say these objectives here are going to require concerted effort over time.
We won't necessarily achieve all of these goals in a single time period, but hopefully it gives you a sense of how we're thinking about managing the business in the years ahead. What I'm going to do over the next few slides is talk about some of the actions that we're taking in each area to move us in the direction we're aiming for. All right, starting with production costs, as I mentioned earlier, it has been cost inflation that has been the key driver of margin erosion over the last few years. We have seen some inflation in material costs, particularly two or three years ago during the semiconductor boom when things went a bit mad. Over the last few years we've seen that trend reverse. Actually nowadays our purchase costs are quite stable.
Where we have seen much more persistent inflation has been in labor costs. This is where we are focused now on the tours today. You're going to see lots of examples of where we are making investments in both capital and engineering, as Will has said, in various aspects of our manufacturing processes to improve productivity. We group these together under our Factory of the Future program and there are initiatives going on across the range of production activities from machining, process finishing, electronics assembly, product assembly, warehousing, and factory logistics. It is a very broad program and I should emphasize it is very much not a one size fits all size situation.
When you get out and about today, you'll see we have a range of production processes that extend from quite high volume, relatively physically small products, things like our position encoders and metrology sensors. At the other extreme, we also have much larger, lower volume, physically larger scale systems such as our Agility coordinate measuring machines and additive machines. There is quite a range of challenges there. When we roll all of this up and we look at the opportunities we have for saving labor content, we can see around 100 roles over the next, over sort of roughly a two year period that we can target and that makes a meaningful contribution to improving our gross margin tens of basis points, but it's not on its own going to be sufficient to get us to our 65% target.
For us to achieve that, we've all also got to exploit the platform that we built, the investments that we've recently made to pursue operational leverage as we grow. You'll see as you go out about the shop floor, there's actually rather a lot of space still. Although we've been occupying the new halls, there's plenty of expansion room for us to increase the throughput of some of our physically larger products without significant additional CapEx. We've also got many automated processes on some of our higher volume products which, as Will said, will allow us to scale production without the need to recruit and train additional labor. Pushing more volume through the asset base that we built up will improve our ROIC and will also help to drive us towards the gross margin targets that we have over time.
All right, I mentioned that we're also looking to make improvements in the fixed cost elements of our P&L. The charts on this slide give some historic context for recent years of our costs in engineering, in distribution, and in administration in relation to the size of the business as a percentage of revenues. On each slide you can see there's a gray sort of horizontal bar there that shows the historic range in which those costs have fallen over the last 10 or 15 years. Hopefully you can see that both the engineering and the administration costs are both towards the upper end of those historic ranges, whereas our distribution costs at the moment are somewhat closer to the midpoint. Our goal with all of these cost categories is to drive them towards the bottom end of those historic ranges.
I should emphasize that this is emphatically not a change of strategy. Our fundamental approach to driving innovation-led growth and operating through our vertically integrated business model remains. We're sticking with that, we're fully committed to it, but we do recognize that we need to operate more frugally. Our approach here, as Will said, is to balance a number of things. We're looking to continue to invest in areas where we see growth opportunities. Will mentioned India and China in our sales organization, for example, and we're also focusing those engineering resources onto those of the many opportunities that we have that we think will yield the strongest returns. We're continuing to go for growth, but we're also trying to make sure we manage the efficiency of the organization in the way that we work.
Again, Will touched on things like building recurring revenues from our key accounts, using our Modis IM software to streamline our route to market with Metrology systems, which is a key growth business for us. We are looking to do all of that. We have an IT transformation that I'll talk about a bit more on the next slide as well that will underpin a lot of our back office processes as well. There are lots of those things going on and those are long term strategies that we're aiming to stick with. We are also right now taking decisive action on fixed costs. We have a total of around 300 basis points of fixed cost reduction that we're implementing over the next few months. This includes two main things.
The exiting the drug delivery aspect of our neurological business, which we expect to yield around GBP 3 million of annualized margin improvement for us as we complete that project in the early part of next financial year. We have also today announced a new operating cost reduction program which intends to reduce payroll costs by around GBP 20 million over the next few months. These reductions are aimed primarily at indirect roles, so they will affect all of the cost categories that you can see on this slide. We are rolling this out over the next six months and we expect to incur exceptional restructuring costs both this year and next as those processes are completed. In the U.K. for example, at the moment we are running a voluntary redundancy scheme.
We will have sight of what that is yielding before the end of the financial year and will accrue those costs this year. I touched on IT transformation. This is really central to a lot of our longer term productivity goals. As Allen said earlier, we're replacing several legacy systems that underpin a lot of our day to day operations. This is going to allow us to offer better customer service, a better customer experience, but also automate many of the back office processes that we have in the business. This will make an impact on our production, on our distribution and on our administration cost areas in the future. It's not all in admin. Some of these costs appear further up the P&L as well. We're currently spending GBP 6 million on third party consultancy costs.
That is helping us to design and configure the new platforms. We are also investing in our in-house teams who will take on the deployment and the longer term support of those IT systems in the years ahead. It is not just that GBP 6 million external spend, there is more internal spend that we are incurring as well. As Will mentioned, all of that is being taken above the line as an expense. The programs that we are focusing on, I think Allen touched on all of these as well. Just briefly, the Sales ERP system. This is Microsoft Dynamics 365 replacing all of our customer facing activities, both pre-sale and post-sale activities. This is a project that is in a sort of critical stage at the moment with a key implementation going on right now and more for the year ahead.
We expect our expenditure in this area to sort of remain at its current level for the next three or four years as we roll this out across the group. The other area we have been spending quite heavily this financial year has been in digital experience. As Will mentioned, we have launched two new e-commerce sites and we have a load more to do over the next year or so. We have website upgrades coming as well. Expenditure on this is tapering and we expect to wrap up that project in about two years' time. The big one that is coming, as Allen hinted earlier, is our manufacturing MRP upgrade. This is likely to take around five years or more as it touches so many of the underlying processes not just in manufacturing but actually in the wider business as well.
The opportunity there is substantial savings potentially in direct and particularly indirect labor relating to production. That is what I wanted to cover on the sort of margin improvement points. Hopefully that has given you a bit more color. The next section is looking at our new reporting segments that we have also announced today. We have had feedback coming from investors for some time around wanting a deeper understanding of the business, particularly detail on the large manufacturing technologies business segments. We are introducing three new segments that are shown here and I am going to talk in a bit more detail over the next few slides to give you a flavor of what they are.
Our thinking around this is that these segments link well to particular customers and end markets and therefore to external demand drivers that investors can monitor and associate with our business and look for correlations. The changes also align with changes we're making in our organizational structure. It aligns neatly with both internal and external. You'll see from the pie charts here that there's a bit of a change in terms of the split. We're moving from a 95-5 split to roughly 60-30-10. There's a more even balance. I'll also mention that this is implementing from next financial year. We'll continue in this year's annual report to report on the current segments and then we'll introduce this new way of segmentation from next financial year. What we intend to do is shortly after the results are announced in September. Bless you.
Is to provide some historic data for a couple of years of history to help analysts to redevelop their models and align with the new segmentation. That is coming in September. This slide just gives you a bit more detail about how our various product lines map from both against our current segmentation and the new segmentation from next year. We have also on the right hand side of the slide indicated the maturity of the various product lines and this was a concept we introduced last year. Just as a reminder, our established businesses are those where we have a leading market position where we are achieving strong profitability in growing markets, whereas our emerging businesses are ones where we have not yet reached the target market position or our target profit. We need growth in order to get there.
That is the sort of key focus for those businesses. If we look at the various product segments here, Industrial Metrology, the largest one, around 60% roughly of group turnover, comprises a number of established product lines of sensor businesses combined with a couple of emerging businesses. In the field of systems and software in position measurement, around 30%, that is the other large segment that is primarily our encoder businesses and once again comprises some established lines where we are in strong positions but also a couple of newer product ranges that are at a much earlier stage of their development.
Finally, specialized technologies, that's a collection of independent product lines as Will talked about earlier. We're looking to try to make those more self-contained, which we think will help to drive their focus and their growth, but also give us flexibility in the way we develop those businesses in the future. It also includes the neurological business, which, as we said, is non-core and we are intending to divest. Those are the segments. Just a little bit more detail on each of them now so that helps you associate them with external metrics. Industrial Metrology, it's all about measurement and control. Will talked about the productive process pyramid, which is a sort of unifying concept that binds these products together and talks about how they help manufacturers to drive productivity in their processes.
The demand drivers here are some of the ones from the value creation model that Will touched on in his slides. It is around the increasing precision of manufacturing processes that are required to make the latest products. It is about automation and you need measurement to automate. It is about the frugal use of materials and energy in modern manufacturing. Those sustainability drivers as well, the sensor elements of this segment correlate strongly with demand for machine tools. There are various trade associations around the world that provide very helpful data, both historic data and in some cases forecast data around this market. The JMTBA, Japanese Machine Tool Builders Association, provides a particularly rich historic source of data and market trends, which we look at regularly when we look at the emerging systems and software businesses. They are also affected by the overall demand in the market.
Actually our growth here is much more around how we can gain market share through the new products, through the innovations and the sales strategies that we're implementing. We are slightly decoupled from market trends there. It is more about making our own weather. That is, if we move to the position measurement segment. As Will said, this is all about motion control and we supply equipment builders of a wide range of industrial machinery, robotics, and defense equipment. Here it is all about precision in motion control, helping customers to have their machines move with greater precision and speed and take on more and more demanding tasks. The drivers in the market here are once again the increasing complexity and sophistication of modern products and therefore the equipment that is required to make them. We see examples of this in the world of semiconductors.
Will talked about wafer inspection earlier with our new laser encoder range. We're also seeing it with advanced semiconductor packaging, for example, which is driving both greater precision but also the number of axes that we see on typical bits of production equipment in that segment. Again, driving demand. Semiconductor CapEx is a key external metric that's well worth looking at here. It's one that we look at and it helps to align with demand once again with the two emerging businesses in this area. Here we're providing motion control for machine tools and for defense equipment. Again, our growth here is much more about how we can gain share by winning customers, introducing new products and technologies to grow our business. We're slightly independent of market growth.
Finally, specialized tech, as I mentioned, a number of independent product lines in here, but they're each targeted at high growth industrial markets. Our established spectroscopy business, we have a leading position there with laboratory Raman instruments that are used in research, but increasingly in industry, and Will mentioned the new Strada instrument that we're going to be introducing next year. That really moves the game forward in terms of usability, and we think will open up more and more industrial markets for us there. It also complements nicely the Versa Raman analyzer, which is targeted at sort of process control applications also in industry. With additive, this is probably the product line where we've had, we've been making the biggest bet for longest with sustained investment in this technology because we really believe it's got a major future for us.
We have a leading capability, leading productivity with our existing products, with our multi-laser technologies and also the Tempest technology that Will touched on. We have a market-leading performance with our products already, but we're investing in the next generation, have been for a few years, and we intend to launch these in a few years' time. These will really move the game forward in terms of faster build rates and increased automation. Whilst additive is well established in certain segments at the moment for volume manufacturing, we really believe it's got a great opportunity as we continue to drive down the cost of additive parts. Finally, industrial automation. This is focused on the world of robotics. You'll get to see some of this as you go around our factory.
We have robots in various areas and you'll see how this technology is applied and is helping us. With industrial robots set to grow in their use again, we're confident that this is going to be a growing part of the Renishaw portfolio in the future. The final bit I wanted to touch on in this segment is an update on where our products are used and also how we sell them. The chart on the left is an estimate of for this year's business levels of where we think our products end up. I emphasize this every year. These are unaudited management estimates. We sell a lot of our products indirectly so we don't have perfect vision of where they go, but we make an estimate of it. Doesn't change hugely from one year to another.
We have seen an uptick this year in areas such as semiconductor and consumer electronics. Whereas, relatively speaking, automotive and healthcare have been a little bit weaker. The bigger table on the right shows how we sell our products and the way that we, the channels that we sell them through. We've always used a range of channels selling to machine builders. Most of our sensor products are sold to machine builders, but then most of our systems and software products are sold direct to end users. When we look at this at a group level, about half of our turnover is to machine builders, around a third direct to end users, with distributors making up the remainder. All right, the last section I'm going to talk about is metrics around cash conversion and return on capital.
Cash conversion, this was a KPI that we introduced a year ago to signal the importance that we attach to our efficiency in converting profit into cash. We set ourselves a target of 70% and that is in line with our sort of long term historic average and also takes account of the fact that we have a pretty capital intensive business with our vertically integrated business model. You can see here on the chart on the right, we had a bit of a dip in those metrics back in FY 2023, but more recently we have been performing much more strongly. The reason behind that, the two sort of main things that drive this metric are, of course, movements in working capital and also capital expenditure. On working capital, I have pulled out inventory as the key sort of factor there.
The thing that's changed the most in the last few years, just a few words around that. We increased stocks substantially during FY 2022 and FY 2023, particularly as we saw the boom in semiconductor demand for positioning encoders in particular coming out of COVID. Like many organizations, we got left with rather too much inventory when that cycle turned quite suddenly in FY 2023. Over the last couple of years we've been trying to work our inventory levels back down towards our targets and we retain strategic inventory to ensure that we can react in an agile manner to changes in demand. We're roughly at the levels we want to be now. That's helped a little bit with the recent improvement. The other sort of key factor here is CapEx, which the questioner asked about in the last Q & A.
Yes, we have had an elevated period of CapEx, particularly in FY 2023 and FY 2024, investing primarily in property, primarily on this site. You're going to see the fruits of that in a minute. That property investment is largely behind us now and we are not foreseeing significant property investment in the next few years. We want to sort of keep our property stocks roughly where they are. That means balancing much more limited additions with depreciation and disposals. That is on the property side. We will, however, continue to invest in plant and equipment where that makes sense, to pursue operating cost improvements and productivity and also our sustainability goals. We are going to continue investing there. We expect the stock levels of plant and equipment to basically trend roughly with revenue.
That will involve slightly more additions than disposals and depreciation, but not rapid growth in that area. Overall, we're looking at around GBP 40 million CapEx spend next financial year, which is broadly similar to what we expect this year to be. That hopefully gives you some sense of where we are with that. My final sort of slide on this is ROIC. This was another KPI that we introduced last year to signal our focus on allocating capital to profitable investments. We have a target of 15%. Clearly, we're not operating at that level at the moment and there are a couple of factors there. One is the increased invested capital that resulted from the investments we've made over the last few years in CapEx and also inventory increases. Those we touched on on the last slide.
That has affected that. We have also seen lower profits obviously in the last couple of years as well. Those two factors combined are leading to our current position. The changes we are making around controlling working capital, limiting capital expenditure that we have talked about, and also the operational cost savings that we are making and the productivity that we are pursuing in operating costs, we believe, will drive our ROIC back into its target zone shortly. That is what I wanted to cover. I hope that has given you an insight into how we are thinking about improving the margins in the business and hopefully helped you to understand a little bit more about how the business is structured and how we are going to report in the future. Happy to take Q& A.
I don't know whether Allen would like to join me on the stage for the trickier questions. Are there any questions?
You said that the new segments.
Will be mentioned after the announcement in.
September, but obviously on the financial statement there's like a what the future.
What are you looking at in the future? Are you not planning to put anything in the FY 2024, sorry, FY 2020 in terms of what's ahead or what's the.
Brand new segment for the next?
We are going to reuse one of the charts that we saw here today which sort of mapped the product lines from the old segments to the new and that will appear in the annual report. We will explain, signpost if you like, in the annual report this year what those new segments are going to be, but we are not going to be reporting P&L results in those segments this year. We will, however. What we want to do is release the results, let the market absorb those for a few days, and then after that provide historic context in the new segmentation. Hopefully that will inform the market and allow analysts to do their work. Any other questions? Yes, sir.
Onto new Renishaw that it broadly aligns to the way that you're running the business anyway.
Yes.
If it broadly aligns, is that 80%, 90%? How disruptive could it be?
It's not going to be very disruptive, but we are moving just a few product lines around and reporting lines. There are a few limited changes that we're making. But you know, Derek is here, he's Director of Industrial Metrology. He's already leading that part of the business. We have a Director of Position Measurement. We don't have a Director of Specialized Technologies because they're not linked. So those ones will not have a unifying organization around them. But the two bigger business segments already have what we call product groups internally that are well established. It's a bit of minor adjustment around that rather than anything too dramatic.
Thanks.
For the new segments. Can you say anything about the levels of, sorry, can you say anything about the levels of profitability and how they differ between the segments? And are the profit targets for a group? Will they apply individually for at least the first two main segments?
We're not going to talk about profit detail now. That will come in September. I mean, you'll have seen that each of them have a combination. This is actually how we want it. We want a combination of established and emerging product lines in each segment to give the right mixture of profitability and underpin, but also with higher growth potential from the emerging businesses. The same level of profit target will apply to the two big product groups.
The ones in the specialized tech will be at their different stages of maturity and there will not be a collective target for those because they are not organized together. From what Will said earlier, is it the case that the specialized technology businesses still have the same gross margin target, at least at a broad level? At a broad level, there are some differences inherent to the nature of some of those businesses. Some of them are large CapEx bits of equipment, others are slightly different. They are not all performing at the same level. It is probably not realistic to target exactly the same gross margins. We do want to get to 20% operating margin in all of our businesses in the long term. That has got to be the goal. We have to manage the P&L and the engineering and sales and distribution expenses, etc.
Appropriately to provide that.
Mark, thank you for that presentation. Will you release the capital employed by segment?
That's not our current intention. I think that's one for us to take away and consider. Yeah, thanks, thanks for the question.
Thank you. I might have missed it, but did you say what the exceptional costs were going to be for next year?
I didn't say what they're going to be, no. We haven't quantified them and obviously it will depend on the, you know, the scale of the voluntary redundancy take up that we get in the U.K. as to how much of that would then be incurred this year and obviously the exact mix of employees that come forward and are accepted. Because, you know, there's a formula which depends on things like age and length of service and so on that we use to calculate the redundancy payouts. You know, we do offer an enhanced scheme. You know, our voluntary scheme is significantly enhanced compared to statutory.
You know, we're trying to do this in as humane a fashion as we can, but it's going to be in the millions, but I can't give you a precise number at the moment. They will be taken as, say, as exceptional costs, so they won't be impacting an adjusted P&L. You're getting your steps in today.
Hi there.
Thanks for the presentation. I wonder if you could talk about the systems and software part of your business at the moment. The percentage of sales that come from, you know, Modis and Renishaw Control, how fast they're growing and whether the kind.
Of more asset-light, kind of capital.
Intensity there is included in your OPM objectives. Thank you.
Derek will actually touch on this briefly in his Equator X talk a bit later. You know, we have seen double-digit growth in our metrology systems over the last few years and that is sort of systems and software combined because they are often sold together. It is an area that is, you know, it is an emerging business. We need high levels of growth. That is what we are targeting there and that is what we expect to continue with the innovations we are bringing. You know, I cannot tell you, I am afraid, what the proportion of that is in the group turnover. You know, that will sit within a business segment which we will be reporting overall, but not breaking that out individually. How are we doing? There is another question.
Yes, sir. Sorry, one more. Just listening to what you're saying, it—
Sounds a little bit like there's a.
Recognition that there's an opportunity in software and services that perhaps has been a little bit underplayed in the past. Is that a fair assumption?
I think we definitely see there are opportunities for both services and software within our portfolio. Software is a key driver of system sales. The ease of use that we're targeting there will really make a difference. That is important. Absolutely, those CapEx product sales come with an ongoing income stream from the customer in terms of maintenance and service support and potentially software licensing as well. We absolutely do see that as an opportunity. You know, I think if you look in our last annual report, our service revenue was roughly 10% of group turnover. It is a relatively small part of the group at the moment. There are definitely opportunities to drive that upwards. We are not about to become a software business. I think it is probably just worth stressing to manage expectations here.
We are still fundamentally making a lot of hardware, but software is an enabler for that. Yes, sir.
The obligatory AI question.
You haven't mentioned it in terms of.
Productivity and scope to look at costs that way.
It's definitely something we're looking at and we have a number of communities of practice that are working across the organization in different disciplines to look at how we exploit AI in our day to day operations in aspects like engineering as well as administration and so on. It absolutely is a thing we're looking at. I haven't drawn it out in the slides, but it is an underlying thing. We're also using it in certain aspects of our products as well for things like image recognition and so on. It's a technology that is definitely one that has potential to unlock improvements.