Renold plc

Interim results for the half year ended 30 September 2021

("Renold", the "Company" or, together with its subsidiaries, the "Group")

 Significant revenue growth…Record orderbook…Strong cash generation

Renold (AIM: RNO), a leading international supplier of industrial chains and related power transmission products, announces its interim results for the six month period ended 30 September 2021.

Financial highlights

·      Revenue up 17% to £95.3m (22% at constant exchange rates).

·      Adjusted operating profit up 41% (49% at constant exchange rates) to £8.2m (2020: £5.8m).

·      Excluding one-off items adjusted operating profit of £7.0m⁴  up 21% and return on sales of 7.4% up 30bps.

·      Net debt £13.9m, £4.5m reduction in the period; ratio to adjusted EBITDA 0.6x (31 March 2021: 0.9x).

·      Adjusted EPS 2.3p (2020: 1.1p); Excluding one-off items Adjusted EPS 2.0p

Business highlights

·     The Group's markets recovered strongly during the first half, as activity levels rebounded from Covid impact, returning to 96% of pre-pandemic level.

·    Strong cash generation, with continuing focus on working capital and cost control, but allowing for inventory increases due to lengthened supply chains and a gradual restoration of capital expenditure.

·      Group order intake in the period £113.0m, up 48.8% YoY as reported (54.9% at constant exchange rates).

·      Orderbook at 30 September 2021, £72.1m, is a record high for the Group (30 September 2020: £46.5m).

·      Completed bolt-on acquisition of the conveyor chain business of Brooks Ltd, which is performing ahead of expectations.

¹ See below for reconciliation of actual rate, constant exchange rate and adjusted figures

² Adjusted operating profit divided by revenue

³ See Note 9 for a reconciliation of net debt which excludes lease liabilities

⁴ Non-recurring items include £1.7m of US Payroll Protection Program (PPP) loan forgiveness offset by £0.5m of dilapidation charges relating to closed sites

Robert Purcell, Chief Executive of Renold plc, said:

"The strong trading momentum experienced in the fourth quarter of the last financial year has continued into the first half, resulting in growth of both revenues and profitability. Despite the widely reported global supply chain and inflationary pressures that remain present, particularly with respect to materials, transport and energy costs, Renold continues to benefit from geographic, customer and market sector diversity. With a record order book at the period end, coupled with the strategic initiatives previously implemented, we approach the second half with confidence, but cognisant of the very volatile and inflationary world we operate in."

Reconciliation of reported, constant exchange rate and adjusted results

ENQUIRIES:

Cautionary statement regarding forward-looking statements

Some of the information in this document may contain projections or other forward-looking statements regarding future events or the future financial performance of Renold plc and its subsidiaries. You can identify forward-looking statements by terms such as "expect", "believe", "anticipate", "estimate", "intend", "will", "could", "may" or "might", the negative of such terms or other similar expressions. Renold plc (the Company) wishes to caution you that these statements are only predictions and that actual events or results may differ materially. The Company does not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of the Group, including among others, general economic conditions, the competitive environment as well as many other risks specifically related to the Group and its operations. Past performance of the Group cannot be relied on as a guide to future performance.

NOTES FOR EDITORS

Renold is a global leader in the manufacture of industrial chains and also manufactures a range of torque transmission products which are sold throughout the world to a broad range of original equipment manufacturers, distributors and end-users. The Company has a reputation for quality that is recognised worldwide. Its products are used in a wide variety of industries including manufacturing, transportation, energy, metals and mining.

Further information about Renold can be found on their website at: www.renold.com

Chief Executive's Statement

The Group's markets recovered strongly during the first half, as activity levels continued to rebound in the aftermath of the  Covid-19 pandemic. Group order intake during the period was £113.0m, an increase of 48.8% on a reported basis and 54.9% at constant exchange rates, over the comparative prior year period. Excluding the recently announced £11.0m long term military contract, order intake for the period increased by 34.2% or 39.7% at constant exchange rates. The resultant order book of £72.1m, represents a record high for the Group (30 September 2020: £46.5m).

Conversion of orders into sales was also encouraging, with Group revenue for the period of £95.3m, an increase of 16.9% on a reported basis and 22.0% at constant exchange rates, over the comparative prior year period. 

Adjusted operating profit increased to £8.2m (2020: £5.8m) with an adjusted operating profit margin of 8.6% (2020: 7.1%). Operating profit increased to £8.2m (2020: £5.3m), with operating profit margins increasing from 6.5% to 8.6%.

During the period the Group benefitted from the forgiveness of £1.7m of loans received under the US Government's Payroll Protection Program, offsetting this, the Group also incurred £0.5m of non-recurring costs relating to closed sites, including repair and maintenance expenditure. Excluding these one-off items adjusted operating profit from continuing operations increased to £7.0m (2020: £5.8m), with corresponding operating profit margins rising to 7.4% (2020: 7.0%)  despite the impact of the widely reported industry headwinds, including the impact experienced on the supply chain, raw material availability and inflation.

The Group continued to benefit from the impact of the significant efforts undertaken in the current and previous years to lower the fixed cost base, increasing flexibility and operational leverage. The Group has successfully managed a period of significant supply chain disruption to materials and transportation, both in terms of availability, lead times and increased prices, and whilst price increases have been passed through to customers, the Group expects further pressure on materials, energy and transportation to continue into the second half of the year.

Renold continues to make every effort to increase performance through specific projects aimed at better operational efficiency, through improved design and standardisation of products, better utilisation of machinery and workforce, including more flexible working practices, and leveraging the benefits of improved procurement strategies.

The Group reduced net debt by £4.5m during the period, to £13.9m (31 March 2021: £18.4m).

Acquisition

On 8 April 2021 Renold completed the acquisition of the conveyor chain business of Brooks Ltd ("Brooks") in Manchester, UK, for a total consideration of £0.7m, including £0.4m of deferred consideration. The business has been fully integrated into the Renold UK Service centre in Manchester. At the time of the acquisition, for the full year Brooks was expected to contribute incremental sales and Group operating profit of c.£1.0m and c.£0.2m respectively. Pleasingly, Brooks is performing ahead of these expectations.

Business and Financial Review

¹ Non-recurring items have been added back to the underlying business segments, these include to £1.7m of PPP loan forgiveness in the Chain division and £0.5m of dilapidation charges on closed sites in Head office costs.

Chain

The Chain division's revenue at constant exchange rates increased by 26.2% (£15.9m) to £76.6m.

Revenue recovered strongly in most regions:

·     Europe, recorded a 41.1% increase driven by strong domestic demand and being our main production centre also benefited from increased demand in other geographies, especially from the US.

·      The Americas, increased by 30.9%, with strong demand from the US OEM markets, especially for fork lift truck chain.

·      Australasia's revenue was broadly unchanged, as the business benefitted greatly last year from the Australian markets move to more domestically produced manufactured goods, which largely offset the impact of Covid.

·      India recovered strongly, and despite being subject to a pandemic related lock down in the current half year, recorded 64.2% revenue growth over the prior year comparator.

·      Domestic sales revenue in China increased by 22.5%, albeit from a low base, while strong demand from Europe, the US and notably India, resulted in an overall increase in revenue of 36.9%. Significant progress continues to be made in improving the performance of the new  factory in Jintan.

Divisional adjusted operating profit before non-recurring items was £9.0m, £3.5m higher than the prior year at constant exchange rates. The adjusted operating profit margin before non-recurring items was 11.7% (2020: 9.1%). Including the impact of non-recurring items, adjusted operating profit and margins were £10.7m and 13.9% respectively.

Order intake at constant exchange rates increased by 49.8% to £83.3m, resulting in book to bill (ratio of orders to sales) for the first half of the year of 108.8% (2020: 91.7%).

Torque Transmission

Divisional revenues of £20.6m were £0.8m higher than in the prior first half year mainly due to increasing activity on the contract to supply couplings for the Royal Navy. The Group announced it had secured an £11m order for the second phase of this contract in July.

Divisional profit reduced by £0.6m to £1.8m mainly because of the one-off benefit of UK government Covid support of £0.7m in the first half of last financial year. Excluding this, divisional operating profit advanced by £0.1m relative to the first half of last year, reflecting the higher revenues.

Momentum in this division, which has a later trading cycle than our Chain business, continues to be positive.

Cash Flow and Net Debt

¹Adjusted operating profit and the change in net debt in the period ended 30 September 2021 include the US PPP loan forgiveness of £1.7m.

Cash generation in the first half was strong, with net debt reducing by £4.5m from the position at 31 March 2021, to £13.9m.

A continued and disciplined focus on working capital saw a £6.3m increase in inventory driven by lengthening supply chains and material cost increases, being offset by a significant increase in payables. Receivables also increased, but at a rate in line with the recovery of turnover. Further inflationary pressures on materials, together with a significant lengthening of the time to supply product between operating sites, will continue to result in increased levels of inventory in the second half year. This coupled with higher input prices will result in a modest increase in working capital.

Net capital expenditure at £1.3m remains well below pre-pandemic levels as supply chain issues have increased lead times for machinery purchases. The spend on improving production capabilities in prior years means that lower levels of maintenance capex will not impact operational performance. However, the delay does postpone the significant operational benefits expected from planned projects. Strategic investments in improved heat treatment, other production capabilities and the standardised IT system for the Group continue and are expected to gather pace during the second half of the year.

Corporation tax payments on account increased to more normal levels, with a total £1.3m tax paid in the first half of the year. Significant efforts were made last year to review payments on account, which led to a recovery of £1.3m and resulted in a net tax cash inflow of £1.0m in the prior half year.

The Group acquired the conveyor chain business of Brooks Ltd in Manchester, UK, during the period, for a total consideration of £0.7m, with £0.3m paid on completion and £0.4m deferred.

Cash financing costs reduced from £1.8m in the prior half year to £1.0m this half year, due to the significant reduction in the average net debt.

During the period the Group acquired shares in the employee benefit trust, totalling £1.8m. This will ensure no dilution when when share awards vest.

Pensions

The Group has a number of closed defined benefit pension schemes (accounted for in accordance with IAS 19R 'Employee benefits'). During the pandemic, the Group negotiated a £2.8m one-off reduction in annual contribution levels with the UK pension scheme trustees. Accordingly, contribution levels returned to normal levels during the period. The future repayment of the deferred contributions will commence on 1 April 2022, at approximately £0.6m per annum, for a period of five years, until April 2027.

Cash pension costs are sustainable, having remained consistent at approximately £5.5m for several years. The Group's IAS 19R retirement benefit obligation decreased from £102.4m at 31 March 2021 to £100.3m at 30 September 2021.

The ongoing subdued levels of corporate bond yields, which determine discount rates, have resulted in the continuing high levels of the deficits in the key UK and German schemes. In the UK, discount rates remained stable at 2.0% (31 March 2021: 2.0%) while the increase in the CPI inflation assumption, increasing to 2.9% (31 March 2021: 2.7%), has the effect of increasing the present value of future liabilities by £5.2m. Strong asset returns helped to mitigate the impact of the change in the financial assumptions, with the net UK deficit decreasing by £1.9m to £75.6m.

Pension liabilities in non-UK schemes reduced by £0.2m to £24.7m.

The net financing expense (a non-cash item) was £0.9m (2020: £1.0m).

Dividend

In light of the widely reported economic headwinds, including the impact on its supply chain, raw material availability, inflation and continuing investment in equipment and revenue expenditure to improve the performance of the business, the Board has decided not to declare an interim dividend. The dividend policy will remain under review as margin and cash flow performance continues to develop.

Going Concern

The interim condensed consolidated financial statements have been prepared on a going concern basis. In determining the appropriate basis of preparation of the financial statements, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future.

The ongoing uncertainty as to the future impact on the Group of the Covid-19 pandemic, alongside the resilient half year trading performance of the Group, have been considered as part of the adoption of the going concern basis. During the first half of the year, manufacturing facilities in Western Europe, the USA, China and Australia remained open. Facilities in China and Malaysia were shut down for a period of time due to national restrictions, but had fully reopened prior to September 2021, and have remained open since. Across the Group, public health measures advised by governments are being followed. The Group continues to closely monitor operating costs, and capital expenditure and other cash demands are being managed effectively.

As part of its assessment, the Board has considered downside scenarios that reflect the current uncertainty in the global economy, including significant material and energy supply issues, and transport delays, and continuing inflationary pressures.

The Directors believe that the Group is well placed to manage its business risks and, after making enquiries including a review of forecasts and predictions, taking account of reasonably possible changes in trading performances and considering the existing banking facilities, including the available liquidity and covenant structure, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the 12 months following the date of approval of the interim financial statements. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements.

Risks and Uncertainties

The principal risks and uncertainties affecting the business activities of the Group, as well as the risk mitigating controls put in place, remain those detailed on pages 40-46 of the 2020/21 Annual Report and Accounts. These include macro-economic and political uncertainty risks as well as various risks relating to Group treasury activities. Key operational risks are raw material prices, energy and other input cost prices.

During the period, risks relating to macro-economic factors and political uncertainty have continued, especially with regard to the impact of the global Covid-19 pandemic. The sustained effect of uncertainty has the potential to reduce demand in end-markets for the Group's products. Renold benefits from its geographic, customer and sector diversity which helps to mitigate the impact of localised issues, but cannot fully mitigate the effects of widespread reductions in demand.

The valuation of retirement benefit obligations can be significantly impacted by changes to the yields on corporate bonds and inflation prospects. The schemes' investment strategies provide a partial hedge against these risks, and other de-risking strategies are employed where sensible. However, it should be noted that the actual cash flows to support the pension scheme are quite stable and subject to long term funding plans which are reviewed every three years. The next triennial valuation will have an effective date of 5 April 2022.

Summary

Overall, activity in the first half was strong and in line with expectations, showing a good recovery as the worst effects of the pandemic receded.  Whilst this performance is expected to continue, supported by the record order book at the period end, the widely reported global supply chain issues are continuing to cause margin pressure, with significant inflationary trends being experienced, particularly with respect to materials, transport and energy costs. The Company is working to mitigate these headwinds as far as possible and the Group enjoys significant geographic, customer and sector diversity. With the Group benefiting from the strategic initiatives previously implemented, we are well placed for the future, with a robust business well positioned as markets continue to recover from the effects of the pandemic.

Responsibility statement

The Directors confirm that to the best of their knowledge:

·      the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting;

·      the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events and their impact during the first six months of the financial year and description of principal risks and uncertainties for the remaining six months of the financial year); and

·    the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

The Directors of Renold plc are listed in the Annual Report for the year ended 31 March 2021. A list of current Directors is maintained on the Group website at www.renold.com.

By order of the Board

Robert Purcell                                         Jim Haughey

Chief Executive                                       Group Finance Director

10 November 2021                                 10 November 2021