Significant revenue and earnings rebound… Record order book… Continued net debt reduction
Renold plc (LON: RNO), a leading international supplier of industrial chains and related power transmission products, has announced its results for the year ended 31 March 2022.
Financial highlights
| Adjusted results at constant exchange rates1 | 2022 | Restated42021 |
| Revenue at constant exchange rates | £195.2m | £160.8m |
| Adjusted operating profit at constant exchange rates | £15.3m | £10.9m |
| Return on sales2 at constant exchange rates | 7.8% | 6.8% |
| Adjusted earnings per share | 4.3p | 2.3p |
| Net debt3 | £13.8m | £18.4m |
| Results at actual exchange rates | ||
| Revenue | £195.2m | £165.3m |
| Adjusted operating profit | £15.3m | £11.4m |
| Return on sales2 | 7.8% | 6.9% |
| Operating profit | £16.2m | £10.7m |
| Profit before tax | £12.4m | £6.1m |
| Basic earnings per share from continuing operations | 4.7p | 2.0p |
| • | Revenue up 18.1% to £195.2m (21.4% at constant exchange rates) |
| • | Adjusted operating profit of £15.3m (2021: £11.4m), up 34.2%, with return on sales of 7.8% up 90bps |
| • | Reported operating profit up by over 50% to £16.2m (2021: £10.7m) |
| • | Net debt of £13.8m, £4.6m reduction in the year; ratio to adjusted EBITDA 0.6x (31 March 2021: 0.9x) |
| • | Adjusted EPS up 87% to 4.3p (2021: 2.3p); Basic EPS 4.7p (2021: 2.0p) |
Business highlights
| • | Multiple businesses across the Group delivered record results |
| • | Renold’s markets rebounded strongly from the Covid-19 pandemic |
| • | Order intake of £223.9m (2021: £170.0m) up 31.7% |
| • | Closing order book of £84.1m up 57% vs FY21 at constant exchange rates |
| • | Significant £11.0m long-term military contract win |
| • | Successful strategic capital investment; improving efficiency |
| • | Strong performance despite significant economic uncertainty, cost pressure, material availability and global supply chain disruption |
| • | Record revenue, order intake and closing order book in Chain Europe and Americas |
| • | Successful bolt-on acquisition in the Chain division, with payback of less than two years |
1 See below for reconciliation of actual rate, constant exchange rate and adjusted figures
2 Adjusted operating profit divided by revenue
3 See Note 17 for a reconciliation of net debt which excludes lease liabilities
4 The results for the year ended 31 March 2021 have been restated, see Note 20 for details of the restatement
Robert Purcell, Chief Executive, commented:
“I am pleased with the Group’s robust performance through the pandemic which reflected the benefits of the strategic development completed in recent years. Our employees around the world have responded excellently to the challenges we have faced and I thank them for their dedication and commitment to the Group and our customers during this difficult period.
“Throughout the reported period the business performance has been on an improving trend and our order books have continued to grow in the early part of the new financial year. We are cognisant that there remain considerable Covid-19-related challenges in some parts of the world; supply chain issues are still prevalent and inflation is high. However, we have entered the new financial year with good momentum and a belief in the excellent fundamentals of the Renold business upon which we are building.”
Meeting for analysts and institutional investors
A virtual meeting for institutional investors and analysts will be held today at 9.30am BST. If you wish to attend this meeting please contact [email protected] or call Tim Metcalfe of IFC Advisory Limited (020 3934 6632) before 9.00am to be provided with access details.
Retail Investor presentation and Q&A session
Renold management will be hosting an online presentation and Q&A session at 5.30pm BST today, 13 July 2022. This session is open to all existing and prospective shareholders. Those who wish to attend should register via the following link and they will be provided with access details:
https://us02web.zoom.us/webinar/register/WN_z8p8HGEmQmywDFO-ub0MpA
Participants will have the opportunity to submit questions during the session, but questions are welcomed in advance and may be submitted to: [email protected].
Reconciliation of reported and adjusted results
| . | Revenue | Operating profit | Earnings per share | |||
| 2022 | 2021 | 2022 | (Restated)1 | 2022 | (Restated)1 | |
| £m | £m | £m | 2021 | pence | 2021 | |
| £m | pence | |||||
| Statutory reported | 195.2 | 165.3 | 16.2 | 10.7 | 4.6 | 1.8 |
| Amortisation of acquired intangible assets | – | – | 0.1 | 0.7 | 0.1 | 0.3 |
| US PPP Loan forgiveness | – | – | -1.7 | – | -0.8 | – |
| New lease arrangements on sublet properties | – | – | 0.7 | – | 0.3 | – |
| Adjusted | 195.2 | 165.3 | 15.3 | 11.4 | 4.2 | 2.1 |
| Exchange impact | – | -4.5 | – | -0.5 | – | – |
| Adjusted at constant exchange rates | 195.2 | 160.8 | 15.3 | 10.9 | 4.2 | 2.1 |
1 The results for the year ended 31 March 2021 have been restated, see Note 20 for details of the restatement.
Chair’s statement
I am pleased to be contributing to the Annual Report for the first time as the Renold Chair, having taken up the position at the end of last year’s Annual General Meeting. It is encouraging to see that the Group made good progress in FY22, as our markets recovered strongly from the effects of the Covid-19 pandemic, along with significant commercial and operational benefits accruing from the execution of our strategy. Due to the diligence of the executive team, our employees around the world, and the Board, the business has demonstrated that it has the resilience to weather the current economic turmoil. This is true, in terms of financial performance but also true for the flexibility and adaptability of our people across the world, who have delivered an outstanding result for the Group in what remains, with the Russian invasion of Ukraine and ongoing Covid disruptions, a very difficult global environment.
Our markets and trading performance
Over the year, Group revenue from continuing operations increased by 18.1% to £195.2m (2021: £165.3m), and adjusted operating profit improved by 34.2% to £15.3m (2021: £11.4m) excluding amortisation of acquired intangibles of £0.1m and non-recurring credits of £1.0m. Non-recurring items relate to gains from renegotiated lease arrangements offset by charges due to early exits from sublet properties no longer used by the Group, and US PPP Covid loan relief. Operating profit increased to £16.2m (2021: £10.7m)
Return on sales improved by 90bps to 7.8% (2021: 6.9%), as the Group demonstrated its ability to successfully implement price increases ahead of raw material and energy cost increases, together with the benefits of cost reduction and efficiency programmes.
Encouragingly, Group order intake at £223.9m was 31.7% ahead of the equivalent prior year period, and 25.3% ahead excluding the previously announced £11.0m long-term military contract. The order book at 31 March 2022 of £84.1m was a record for the Group and 57.0% ahead of the prior year figure.
The year saw strong cash generation, as a continued focus on cash management resulted in a £4.6m reduction of net debt to £13.8m (31 March 2021: £18.4m).
Strategic Developments
During the year, Renold made good progress in continuing to deliver strategic change across the Group.
The continuing review of capabilities across the Group has identified opportunities for the upgrade and development of existing manufacturing processes in India and China to create higher specification, higher quality products. This review of our manufacturing footprint and processes will facilitate standardisation across more product lines which, in turn, will enable us to benefit more completely from our geographic footprint and economies of scale. Furthermore, flexibility between manufacturing locations, which in light of increasing customer supply chain diversification demands, and a changing tariff environment, will add to our value proposition.
The completion of the major strategic restructuring initiatives, together with the lower level of net bank debt, puts the Group in a strong position to capitalise on accretive bolt-on acquisitions that augment our existing market position. This will allow us to accelerate our growth in revenue, including for our existing products into adjacent sectors, allow entry into under-represented applications and geographies, and most importantly, allow us to benefit from significant production synergies from acquired businesses.
During the year, the Group took the first steps along the path to developing a long-term sustainability strategy, including our energy and carbon dioxide emission proposals, whereby Renold will make sustainability one of its guiding principles. Over a period of time, our new leader for sustainability will help the Board to develop policies and strategies in this area, aimed at reducing the Group’s environmental impact, C02 emissions and enhancing social development, whilst improving Group operating results.
The Board
My predecessor, Mark Harper, stepped down as Chair of the Board at the end of the 2021 AGM. On behalf of the Board and the whole Group , I would like to thank Mark for his guidance and leadership during his time as Chair. He left the Group in a far stronger position than when he joined. At the same time Andrew Magson took over the responsibilities of Audit Committee Chair, while Tim Cooper, the Chair of the Remuneration Committee, took on the responsibilities of Senior Independent Director.
The Chair of the Board is primarily responsible for the composition of the Board and for ensuring high standards of governance. As Chair, I will continue to place great importance on the breadth of relevant experience, diversity, and complementary skills amongst the Group’s Directors and on the continued development of the strategy for the Renold business. With this in mind, we welcomed Vicki Potter to the Board as a Non-Executive Director in May 2022. Vicki has broad operational and HR experience in multinational engineering and manufacturing companies. She is currently the Chief Human Resources Officer and Customer Services Director for Oxford Instruments plc, a global FTSE 250 technology and manufacturing business. Following a year in which the benefits of our succession planning are evident, the Board will be continuing to ensure that effective succession plans are in place.
Dividend
The Board fully recognises the importance of dividends as part of the overall value creation proposition for shareholders. However, the Board has carefully reviewed its capital allocation priorities, and believes that both organic and inorganic investment opportunities available to the Group, will deliver higher levels of shareholder return over the medium term than the payment of dividends. The Board will continue to review this approach over the coming periods. As such, the Board is not recommending the payment of a dividend on the ordinary shares of the Company for the year ended 31 March 2022.
Summary
The Group has performed well in the face of unprecedented economic and social turmoil and the disruption these events have caused to global supply chains. Supply chain disruption and continuing cost inflation will undoubtedly be key challenges in the new financial year, but the strong financial performance this year, combined with the end of our strategic restructuring programme, has generated the freedom to exploit future organic and acquisition-related growth opportunities. I would like to thank all our employees around the world for their diligence and commitment in supporting the delivery of strong results for the Group.
DAVID LANDLESS
CHAIR
13 July 2022
Chief executive’s review
The Group’s markets recovered strongly during the year, as activity levels continued to rebound in the aftermath of the Covid-19 pandemic. Group order intake during the year was £223.9m, an increase of 31.7% on a reported basis and 35.5% at constant exchange rates, over the prior year. Excluding the recently announced £11.0m long-term military contract, order intake for the period increased by 25.3% or 28.9% at constant exchange rates. Encouragingly, the second half order intake at £110.9m was 8.7% ahead of the underlying first half performance. The resultant year end order book of £84.1m, represents a further record high for the Group (31 March 2021: £53.6m).
Conversion of orders into sales was also encouraging, with Group revenue for the year of £195.2m, an increase of 18.1% on a reported basis and 21.4% at constant exchange rates, over the prior year. Group activity continued to ramp up over the second half year, with turnover at constant currency of £99.8m, some 4.8% ahead of the first half. Final quarter revenues at £52.9m broke the psychologically important £50m barrier for the Group.
| Year ended 31 March 2022 | External revenue£m | Operating profit£m | Return on sales% |
| Reported | 195.2 | 16.2 | |
| US PPP loan forgiveness | – | (1.7) | |
| New lease arrangements on sublet properties | – | 0.7 | |
| Amortisation of acquired intangibles | – | 0.1 | |
| Adjusted | 195.2 | 15.3 | 7.8 |
The strong revenue growth contributed to significantly improved trading during the year, together with a number of non-recurring items, shown in the table above, namely the forgiveness of £1.7m of loans received under the US Government’s Paycheck Protection Program, together with non-recurring charges regarding sublet properties relating to closed sites, which are less than previously anticipated, due to the recent short-notice cancellation of the lease by our long-term tenant. Excluding these non-recurring items and the amortisation of acquired intangibles of £0.1m, adjusted operating profit from continuing operations increased to £15.3m (2021: £11.4m), reflecting the commercial and operational improvements made to the business. The corresponding return on sales rose to 7.8% (2021: 6.9%). The incremental operating profit gearing1 was a creditable 13%, despite the impact of the widely reported industry headwinds, including on the supply chain, raw material availability and inflation. Operating profit increased to £16.2m (2021: £10.7m).
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 input costs. Whilst price increases have been successfully passed through to customers, through selling price increases, the Group expects further pressure on materials, labour, energy and transportation to continue into the new financial year.
Renold continues to drive increased performance through specific projects aimed at better levels of operational efficiency and productivity, through improved design and standardisation of products, better utilisation of machinery and people, including more flexible working practices, and leveraging the benefits of improved procurement strategies. The Group’s capital investments returned to more normal levels following a period of lower spend in the prior year as a result of the pandemic. The Group’s operational capabilities are steadily improving as consistent investments come to fruition.
The strong focus on cash management continued, and delivered a further reduction in net debt of £4.6m during the year, to £13.8m (31 March 2021: £18.4m). The resulting net debt to EBITDA ratio of 0.6x (2021: 0.9x) affords significant headroom against the Group’s banking covenants and, in turn, provides greater flexibility and funding capabilities to transact quickly on investment decisions to drive growth and efficiencies.
Activity in the Chain division continued the strong recovery seen over the last 18 months, with order intake for H2 22 some c.60% higher at constant exchange rates than that seen during the pandemic. Output has similarly been ramped up with turnover seen in the last six months c.36% higher at constant exchange rates than at the low point of the pandemic. In a similar vein the adjusted profitability of the Chain business has increased by 43.2%, when again compared to the pandemic year and return on sales for the year at 11.9% (2021: 10.5% at constant rates) continues to show progress.
The TT division is generally a longer lead time, later cycle business. Order intake dipped to its lowest point during the pandemic in H2 21, when an order intake of £17.4m was recorded. Since this time, excluding the £11.0m long-term military contract, order intake has steadily recovered, with the H2 22 figure 37.2% ahead of the pandemic low point, at constant exchange rates. Similarly, turnover has improved, with sales in H2 22 6.2% up on the prior year equivalent figure.
During FY21, the TT division received £0.8m of non-recurring, pandemic support from the US Government; excluding the impact of this support, the return on sales for the division was 10.1% (2021: 10.7%).
Volatile operating environment – impact on operations and Renold’s response
The Group is facing an extremely volatile operating environment, the like of which I have not seen in my career, created primarily by both the ongoing effects of the Covid-19 pandemic, and the war between Russia and Ukraine.
At the start of the financial year, our operations in India were substantially closed for a six-week period as lockdown restrictions came into force, while at the end of the year Covid related disruption to our Chinese facilities, located in the wider Shanghai region, delayed inventory shipments to other companies in the Group. Our European, Australasian and US operations have continued to experience significant rates of Covid-related absenteeism, which has negatively impacted costs, productivity and service levels from our factories. The Group continues to enforce our Covid protocols and health measures to try to protect all our staff and to mitigate the impacts.
As was mentioned in our half year trading statement, we continue to experience extended shipment times and increased freight costs throughout the world. Container freight services are unreliable and expensive, shortages of trucks and drivers have been evident in many geographies and the war in Ukraine has removed the option of train transport from China to Europe. This has led to an upward pressure on inventory levels, as the Group attempts to maintain customer service levels through the use of buffer stocks, and increased goods in transit between facilities.
Whilst recognising the human tragedy unfolding during the war between Russia and Ukraine, ceasing trading relationships with sanctioned regions has little direct impact on the Group; sales to Russia and Ukraine during FY22 were low at c.0.5% of Group turnover. The wider impact on both material cost and energy prices is more significant, and during the second half year, the Group saw unprecedented increases in material costs, energy and other input costs. In response to this, Renold successfully implemented sales price increases ahead of these inflationary impacts. A significant amount of Group production comes from our German factories, and we are actively working on contingency plans and actions to deal with the impact of any disruption to German energy supplies that Russian action may bring about.
At the end of the financial year all major sites around the Group were open, but a surge of Covid cases within the wider Shanghai region and continued high levels of infection in parts of Europe and the US mean that the risk of further lockdowns, temporary site closures and disruption cannot be eliminated. Disruption to supply chains is causing long lead times for materials and significant inflationary pressure so the Group has had no option but to implement a series of price increases across the business aimed at fully recovering input cost inflation.
Looking forward, Renold is well positioned to benefit further when the broader operating environment returns to something we may recognise as more normal.
Chain performance review
Turnover rebounded during the year, with total Chain turnover increasing 22.5% year-on-year to £159.2m; 26.1% at constant exchange rates. The final quarter of the year saw a further step-up in activity, with Q4 turnover some 27% higher than the prior year comparator, and 12% ahead of the next highest quarterly figure. The increased revenues resulted in return on sales improving by 140 basis points, to 11.9% (2021: 10.5% at constant exchange rates). The operational gearing1 on the increased activity at constant exchange rates was a creditable 17%, as the impact of increased volumes and significant operational efficiency gains fell through to the bottom line. Operating profit was £20.5m (2021: £12.9m), £7.6m higher than the prior year level.
| 2022£m | 2021£m | |
| External revenue | 158.2 | 128.9 |
| Inter-segment revenue | 1.0 | 1.1 |
| Total revenue | 159.2 | 130.0 |
| Foreign exchange | – | (3.8) |
| Revenue at constant exchange rates | 159.2 | 126.2 |
| Operating profit | 20.5 | 12.9 |
| US PPP loan forgiveness | (1.7) | – |
| Amortisation of acquired intangibles | 0.1 | 0.7 |
| Foreign exchange | – | (0.4) |
| Adjusted operating profit at constant exchange rates | 18.9 | 13.2 |
1 Operational gearing is defined as the year-on-year change in adjusted operating profit, divided by the year-on-year change in revenue.
Order intake in the Chain division increased by 30.4% year on year, as economies worldwide recovered from the impact of Covid related lockdowns and we were able to restart more normal commercial activity. Throughout the year, constant currency quarterly order intake figures have remained consistently high, remaining around the £40m level, with the exception of quarter four which saw a further upward step change, as the impact of price increases and the recovery of the US OEM market was reflected in the figures. Closing order books for the division finished the year at £53.9m.
Chain Europe, which is our largest Chain business, saw a sharp recovery in constant exchange rate revenues, which increased 36.0% over the prior year. Revenue strengthened significantly from the outset of the year, a trend which continued throughout each subsequent quarter. The increased activity, together with the benefit of price increases and renewed commercial initiatives, resulted in a substantial increase in underlying adjusted constant currency operating profit. During the year, the business successfully integrated the Brooks conveyor chain acquisition into our UK business, and completed the introduction of ISO9001, ISO14001 and ISO45001 certifications at all of our European manufacturing facilities. From a commercial perspective, Chain Europe launched the Renold Webshop, which enables UK-based customers to make online purchases of industrial, motorcycle and track cycle chains, while also launching the new Renold 3D Configurator software which enables customers to download specification, 3D step files and also raise quotations directly on our systems.
In the Americas, the market recovery seen following the US presidential elections and the lessening impact of Covid, was also marked. Order intake at £69m was at record levels, surpassing the previous high of c.£65m, with March 2022 representing a new record high for monthly order intake, while turnover, at £63m was 29.2% higher than the prior year comparator, using constant currency rates. Sales to OEM customers, especially in the forklift truck market, recovered strongly in the second half, while new business opportunities, especially in the ethanol, grain handling and forestry markets were also won during the year. Production capabilities continue to be enhanced with the introduction of an automated robotic assembly line. Underlying constant currency operating profit increased to a new record high.
Australasia was the region least impacted at the outset of the pandemic and financial year 2021 recorded constant currency revenue growth of 4.6%. This financial year saw additional improvements in constant currency revenues, which increased by a further 4.7% across the region. Australia itself had a good year with revenue at constant exchange rates up 7.3%, which followed last year’s 12.8% growth rate, with increased activity seen in the mining sector. We see continuing evidence of customers changing buying patterns to source more domestically produced goods as a result of on-going supply chain disruption of imported products, while we are also seeing the benefits of our product-enhancing engineering capabilities. We continue to invest in the production capabilities of our Melbourne factory. New Zealand also recovered strongly in the year, showing a 24.4% constant currency growth rate. Malaysia and Indonesia encountered more difficult trading conditions, particularly due to Covid restrictions and therefore saw reductions in activity in excess of 10%. The highlight of the region was Thailand where activity grew 63.3%, albeit from a low base. We are continuing to expand our sales into more industries in SE Asia, supported by a strong dealer network in Indonesia.
Domestic revenues in India recovered sharply in the year with constant exchange rate revenues 44.8% higher, despite the business being faced with a further government enforced shutdown, which subdued activity in the first half of the year. This was followed by a significant recovery in demand, which was partially satisfied through the manufacture and import of product from the Renold facility in China, which offset short-term material supply issues caused by the inability of domestic steel production to recover sufficiently quickly. This was a great example of two Renold businesses working together to satisfy customer requirements. We have opened the first of a series of regional distribution warehouses in India to offer our customers better and much quicker service.
Constant currency revenues in China, grew by 45.8% during the year, driven primarily by the significant recovery of intra group demand from Europe, the US, and now India. Efforts and investments are underway to continue to improve the quality and specification of products manufactured in China to make them equivalent to those manufactured in Europe. During the year, our Chinese team initiated a project to upgrade certain component manufacturing processes to use what we would consider to be state-of-the-art technology, while making significant investment in automated assembly lines to facilitate high volume sales growth in both domestic and overseas markets.
The Chain division continues to develop and evolve through investment in equipment, processes, engineering and sales and this provides us with a good base from which to benefit from the expected opportunities in this market.
Torque Transmission performance review
Divisional revenues of £40.4m were £1.3m higher than in the prior year due to a recovery in demand in our Couplings and Gears businesses. The Couplings business saw the planned increase in activity on the contract to supply large Hi-Tec couplings for the Royal Navy, while the Gears business saw a broad recovery in activity following the pandemic. In July 2021, the Group announced it had secured an £11.0m long-term supply agreement for the second phase of the military contract which is expected to deliver revenues over approximately the next eight years.
Divisional adjusted operating profit at constant exchange rates reduced by £0.8m to £4.1m due to the non-recurrence of the non-recurring benefit of US Government Covid support of £0.8m seen in the last financial year. Return on sales excluding the non-recurring prior year US PPP loan forgiveness was 10.1% (2021: 10.7%) and operating profit was £4.1m (2020: £5.0m).
Momentum in this division, which has a later trading cycle, and generally larger orders than our Chain business, continues to be positive.
| 2022£m | 2021£m | |
| External revenue | 37.0 | 36.4 |
| Inter-segment revenue | 3.4 | 2.7 |
| Total revenue | 40.4 | 39.1 |
| Foreign exchange | – | (0.7) |
| Revenue at constant exchange rates | 40.4 | 38.4 |
| Operating profit | 4.1 | 5.0 |
| Foreign exchange | – | (0.1) |
| Adjusted operating profit at constant exchange rates | 4.1 | 4.9 |
Order intake for the year increased 48.1% to £55.4m (2021: £37.4m), 51.7% at constant exchange rates, as the recovery from the Covid-19 pandemic spread through the global economy. Excluding the impact of the £11.0m long term military contract, order intake increased 21.6% at constant exchange rates. Recovery in order intake progressed steadily throughout the year, so that by the fourth quarter of the year, the division had experienced its fifth sequential increase in order intake, with the £12.5m recorded being some 60% higher than the low point seen through the pandemic.
The Couplings business, both the UK and Spanish units, saw a marked increase in turnover year-on-year being up 44.6% and 38.7% respectively. As planned, turnover in the marine business, which manages the long-term military contracts increased year-on-year by £0.5m, as delivery of the first phase of the contract was completed. Targeted marketing campaigns have proved successful with an increased interest from customers in the RBI rubber in compression product which offers users a number of clear advantages over other products available in the market, whilst on-going work to further enhance customer service has resulted in a number of interesting opportunities being identified.
The Chinese TT business grew steadily, showing a year-on-year increase of 4.3%, while supply chain issues in the Australian business resulted in turnover in the year being down 15%; however early indications suggest this shortfall should be largely recovered within the first few months of the new financial year. Activity in the US TT business remained subdued throughout most of the year, with turnover reducing 8.6%. Operational disruption, caused by direct labour shortages and supply chain constraints, held back activity. Order intake in the second half of the year improved markedly, as fresh impetus was brought to the business through the strengthening of the commercial team, and the introduction of Group standard business systems.
The Gears business continued to make good progress in order intake, turnover and margin improvements despite facing significant material and energy cost increases. Notable sales in the year included escalator gear units for the Budapest metro. Demand from the OEM sector, particularly for larger projects in the US and UK, which are our key geographic markets, showed further signs of improvement during the year.
As the Torque Transmission division operates on a slightly later sales cycle than the Chain division, we expect full recovery from the Covid-19 pandemic to become evident during the new financial year.
Strategic Plan – STEP2
As the world slowly emerges from the Covid-19 pandemic, I am delighted that we are launching the next phase of the Renold strategy: STEP2. This is an evolution of the current strategy, STEP 2020, and is built on the foundations that have been created. Whilst there are common threads and similar themes, the major thrust of STEP2 is achieved through both organic and acquisitive growth.
We will continue to modernise and drive efficiency and productivity in the business but also look to grow our revenues, margins and cashflows through both organic and acquisitive growth. We will continue to invest in service, products and operations.
Sustainability
Last year we announced that we would be making sustainability a guiding principle for Renold. Since then, we have taken some significant steps forward. In addition to our statement of intent in relation to sustainability, we have developed, agreed and widely embedded within the business a model of what sustainability means to us. Our Sustainability Steering Group has initiated and progressed a number of Group level projects focusing on areas identified as likely to have the most significant impact, including energy usage, carbon dioxide emissions, packaging and our products’ impact on customer sustainability. We have also galvanised our regional businesses across the world to develop their own sustainability project roadmaps, seeking to make our efforts relevant for the highly diverse regions within which we operate and to more fully engage our staff in sustainability activity.
In the coming year, we will intensify our focus on our Group projects, bringing them to fruition and where appropriate, initiating new ones. At a regional level we will continue to build on the considerable momentum we have gained, delivering ever more local success. More information on our progress and plans can be found in the sustainability section of the Annual Report.
Progress
Renold was consistently enhancing its operational capabilities through upgrading equipment and processes across the world before the pandemic. As we have become more confident in our ability to cope with all aspects of Covid-19 we have again started to push forward with our plans. Capital expenditure returned to £5.1m in the period, a considerable increase on the prior year and we expect it to rise again in the new year. We have made good progress in difficult circumstances, as supply chain issues have affected our equipment suppliers as much as ourselves.
We have a very clear vision of how our new Chinese factory fits into our global supply chain and our expectations for growth in the Chinese market itself. We are constantly upgrading capabilities in the new facility and we will be offering higher specification Chinese-made product into the domestic market as well as across the world.
In our Indian business, efforts continue to fully integrate the business into the Group supply chain. Investments in production capabilities, including improvements in the product quality and uniformity, are underway. India offers a very attractive market in its own right and an interesting and effective alternative to our Chinese Chain manufacturing site. India provides the Group with an alternative supply base as customers’ supply chains flex, driven by an awakening of concern about tariffs and the concentration of supply from a single region.
These projects highlight an intentional trend within our capital allocation decisions for the Group. With the large infrastructure projects complete, capital allocation decisions are now less frequently limited purely by a site’s domestic requirements but are focused on customer service, upgrading product specification capabilities and optimising profitability for the Group. For the Chain division especially, this allows us to access economies of scale and offer a truly global service with increasing relevance to large OEM customers. Renold is increasingly an integrated international supplier and less a series of regional businesses.
Having created a stronger operational platform for the Group and with the significant strengthening of our financial position, we have increased our focus on how we can accelerate performance through value-enhancing acquisitions, which will allow us to both benefit from increased geographical and product coverage, but also leverage synergies from increasing the throughput of our existing facilities. As a result, we have developed a pipeline of acquisition opportunities which we believe have the ability to meet our strict financial and operational criteria. These acquisitions will allow us to expand our product and service offering as well as our customer base, further expand our already diverse product portfolio into adjacent market sectors and allow us to capitalise on our ability to provide customers with extremely high specification products with real benefit for their own business performance.
The Board is observing disciplined criteria when prosecuting the new acquisition strategy, ensuring that potential targets will enhance the Group’s wider strategy and the earnings of the Group. Additionally, the Board is mindful of retaining a conservative capital structure, especially in light of the current economic backdrop, and will ensure that the long-term net debt to EBITDA ratio is maintained at an acceptable level.
The strategic progress made by the Group over recent years has been significant. Investments in both our production capabilities and our IT environment have resulted in significant benefits, with:
| • | improvements in productivity and operational efficiency as evidenced by growing sales per employee; |
| • | greater insight into the performance and opportunities in the business due to better and more complete data; |
| • | improvements in the specification and quality of products we are able to make across our multiple manufacturing sites; and |
| • | greater flexibility in the cost base as we start to reduce the correlation between revenue and direct labour. |
Following the ongoing recovery of our markets, the financial benefits of these improvements will come to the fore. The significant investment in infrastructure and cost of change is largely at an end. As markets further improve, cash generated from trading will no longer be required to support investment in substantial change programmes creating more flexibility in capital allocation decisions.
In the medium term, and despite the uncertainty caused by the war in Ukraine, market demand should continue to improve as the world recovers from the impact of the Covid-19 pandemic. The benefits of the strategic programme already delivered have left Renold well positioned to capitalise on this recovery in the years ahead.
Macroeconomic landscape and business positioning
With so many geopolitical and Covid-19 issues resulting in ongoing short- and medium-term uncertainty, it is necessary to look at the underlying fundamentals of the Group and the markets we serve to understand why Renold will continue to develop. Many of these intrinsic values have remained consistent over time but are continually being enhanced and increased. They include:
| • | Valued and recognised brand with well-respected engineering expertise |
| The Renold brand has been built up over our 150-year history and is trusted by customers to deliver exceptional products due to our world-class engineering and product knowledge. | |
| • | Global market position and unique geographical manufacturing capability |
| The global market position of Renold has existed for many years but following significant strategic investments in the Chain division, the geographic manufacturing footprint and capabilities we have are unique, permitting us to service customer demand with increasing levels of flexibility – a critical factor in a rapidly changing market environment. | |
| • | Relatively low cost, but business critical products |
| Chain and Torque Transmission products are fundamental elements of the systems into which they are incorporated. Our products are often a small proportion of the cost of the entire system, but critical to its operation. | |
| • | Broad base of customers and end-user markets |
| Renold products are used in an extremely diverse range of end applications, sectors, markets and geographies resulting in a huge spread of customers and industries served. Markets and applications will change and vary in the ever-altering environment we operate in but, with its wide spread of products, geographies, applications and customers, Renold is well positioned. | |
| • | High specification products delivering environmental benefits for our customers |
| Renold products have always been high specification, premium products which deliver exceptional benefits to customers. Whether through greater efficiency leading to lower power usage, longer life providing lower lifetime usage of materials and energy in their manufacture and logistics, or lower lubrication requirements, Renold products are well placed for an increasingly environmentally aware marketplace. Our products are capable of helping our customers meet their sustainability objectives whilst saving them money. |
Outlook
I am pleased with the Group’s robust performance through the pandemic which reflected the benefits of the strategic development completed over prior years. Our employees around the world have responded excellently to the challenges we have faced and I thank them for their dedication and commitment to the Group and our customers during this difficult period.
Throughout the reported period the business performance has been on an improving trend and our order books have continued to grow in the early part of the new financial year. We are cognisant that there remain considerable Covid-19-related challenges in some parts of the world; supply chain issues are still prevalent and inflation is high. However, we have entered the new financial year with good momentum and a belief in the excellent fundamentals of the Renold business upon which we are building.
ROBERT PURCELL
CHIEF EXECUTIVE
13 July 2022
