Renold plc (LON:RNO) Chief Executive Officer Robert Purcell caught up with DirectorsTalk for an exclusive interview to discuss a strong set of results, dividend payment, performance of each division, the Davidson Chain acquisition, what investors can expect in the medium term, and the outlook for the business.
Q1: First off Robert, congratulations on a strong set of final results released this morning. Could you just talk us through the financial highlights?
A1: So, revenue was £241 million, that’s up 1% at constant exchange rates despite some quite tough markets. However, adjusted operating profit was up 22.7% at £29.7 million, slightly ahead of even the recent market upgrade that we put out. Return on sales was 12.3% so that’s up 250 basis points on last year, and indeed up 30 basis points on the first half of the financial year 2024.
Net debt was down £4.9 million to £24.9 million, even though we bought Davidson Chain in Australia in September 2023, which was part of just under about £12 million of various one-off payments and acquisition payments in the year. So, our cash generation has continued to develop very nicely, and we expect our cash flow to grow well over the next few years.
Earnings per share were up 20% to 7.8 pence, and we announced our intention also to resume dividend payments.
So in aggregate, a record set of numbers that we’re very proud of.
Q2: You just mentioned though that you intend to pay a dividend for the first time since 2005. Could you comment on that for us?
A2: Yes, you’re quite right. That’s the first time for 19 years that we’ve paid a dividend.
The strong cash generation and positive future cash flow expectations has allowed the Board to propose a resumption of dividend payments at 0.5p. This is significant because it will be the first payment, as I’ve just said, since 2005, and in my opinion is a clear indication of Renold leaving its rehabilitation phase and entering a more expansive stage of its development.
Clearly, we would not have made this proposal if we were concerned that it would impact our ability to continue to invest in the business, whether that be capital investment or acquisition so this is a clear positive sign.
Q3: Could you just run us through how each of the divisions have performed?
A3: Both divisions have performed very well, both increased profits and profit margins. Chain revenues declined a little as we faced currency headwinds and the removal of some transport energy surcharges from the prior year.
This didn’t impact on margins, far from it, chain increased its return on sales to 16.3% from 13.4% in the prior year.
TT increased sales by just under 10% as a number of commercial initiatives came to fruition and the military couplings business we’ve been winning took further steps forward. We expect more from the military couplings business over the next few years.
There was a slight reversal of roles with TT being the star of the show in financial year 24, it having been chain previously. TT return on sales was up at 15.7% as an increase from 11.1% in the prior year and that’s obviously an excellent performance.
So, we have two great businesses, both of which have done very well over the year in question. We’re very pleased.
Both divisions have been investing in new equipment to reduce costs in a number of ways, but especially through the use of robots and automation. We’ve also been improving our production capabilities to make sure we continue to produce the best premium, high performance, high specification products.
Q4: Now, as you mentioned earlier, on the 1st of September 2023, the group acquired the trading assets of Davidson. How has it performed and what does Davidson bring to the company?
A4: We’re very pleased with the Davidson acquisition and it is trading in line with our expectations. The two Davidson brothers have moved across with the business, which we’re really pleased about, and have brought all their knowledge and expertise to Renold.
The Davidson business is currently being moved the 45 minutes from the existing site onto our Melbourne site. We have space and ability to run the business there, which will remove overheads and allow us to gain various synergies.
We have a list of what we call hard synergies, i.e. the things we believe we can pretty much guarantee to achieve and we’re partway through the plan to achieving these. These include, for instance, insourcing third-party purchases to our own factories.
The business beefs up our core conveyor chain business in Australia, but it also adds weight to our adapted transmission chain business where we’re underweight.
We’ve been rolling out our Renold service centre concept in a number of locations, Davidson already operate in a similar fashion, so they will effectively jumpstart this in the Australian market.
So all in all, we’re very pleased. The business brings many benefits to us, and it’s performing as expected.
Q5: We know that you have a good track record of integrated acquisitions. What is the M&A landscape like, and what can investors expect from Renold in the medium term?
A5: You can expect more industrial chain acquisitions from us. To be clear, industrial chain is where we see the opportunity in terms of acquisitions, we’re number two in the world in this large £3 billion plus market.
I’m sure you’ve already realised that this means this is a very fragmented market, and we have less than 10% market share and probably less than 7% market share. Broadly, we’re aiming for one £15 million to £25 million revenue acquisition a year. We can do this level of acquisition using just debt, and over the medium term, with clear integration and synergy benefits, we expect the business to be considerably larger and more profitable than it is currently.
I believe that we’ve shown how acquisitions help us develop, and we expect more to come. The environment for acquisitions is never easy, we generally are dealing with family-owned firms who don’t need to sell, so it’s a case of finding a deal construction that’s good for all parties.
Renold has a good track record of making acquisitions, and we intend to keep using these skills.
Q6: Just looking forward, how has this year started, and how do you view the outlook?
A6: The global market is quite different in various regions, Europe and China are quiet, and the US and Australia are ok.
I think we are outperforming the market and our competitors, but the market is not buoyant. We have a huge diversity of customers, markets and applications. We believe about 75% of sales are repair and maintenance, and therefore repeatable. We think we’re about as well positioned as an industrial company can be, but we would like the underlying markets to be stronger.
We started the year from a positive position with good momentum and confidence in the capabilities and fundamentals of the business and the market we serve. We have many things, good things happening, and we hope that the global economy will support us.
