Renold Plc (LON:RNO), a leading international supplier of industrial chains and related power transmission products, has announced its audited results for the year ended 31 March 2023.
Financial highlights
| £m | 2023 | 2022 | Change | Change (constant currency)1 |
| Revenue | 247.1 | 195.2 | +26.6% | +18.8% |
| Adjusted operating profit2 | 24.2 | 15.3 | +58.2% | +46.4% |
| Return on sales2 | 9.8% | 7.8% | +200bps | +190bps |
| Adjusted profit before tax2 | 18.6 | 11.5 | +61.7% | |
| Net debt3 | 29.8 | 13.8 | ||
| Adjusted earnings per share2 | 6.5p | 4.3p | +51.2% | |
| Additional statutory measures | ||||
| Operating profit | 22.9 | 16.2 | +41.4% | |
| Profit before tax | 17.3 | 12.4 | +39.5% | |
| Basic earnings per share | 5.7p | 4.7p | +21.3% |
| • | Revenue up 26.6% to £247.1m (18.8% at constant exchange rates) (2022: £195.2m) |
| • | Adjusted operating profit of £24.2m (2022: £15.3m), up 58.2%; return on sales 9.8%, up 200bps |
| • | Reported operating profit up 41.4% to £22.9m (2022: £16.2m) |
| • | Net debt £29.8m, £16.0m increase in the year, facilitating successful YUK acquisition; ratio to adjusted EBITDA 0.8x (31 March 2022: 0.5x) |
| • | Adjusted EPS up 51.2% to 6.5p (2022: 4.3p); Basic EPS 5.7p (2022: 4.7p) |
Business highlights
| • | The Group delivered record results despite the difficult trading and macroeconomic backdrop, with the well-publicised inflation and global supply chain challenges |
| • | Order intake of £257.5m (2022: £223.9m), up 15.0% |
| • | Closing order book £99.5m, up 18.3% against 31 March 2022 |
| • | Significant £8.9m long-term military contract win, following a similar contract win of £11.0m in FY22 |
| • | Acquisition of Industrias YUK S.A. (“YUK”) in August 2022, for €24m, increases the Group’s access to the Iberian Chain and wider European Conveyor Chain markets. YUK is performing ahead of expectations |
| • | Successful capital investment; improving efficiency and capability of manufacturing locations |
1 See below for reconciliation of actual rate, constant exchange rate and adjusted figures
2 See Note 21 for definitions of adjusted measures and the differences to statutory measures
3 See Note 17 for a reconciliation of net debt which excludes lease liabilities
Robert Purcell, Renold Plc Chief Executive, commented:
“I am delighted with the Group’s robust performance during the last financial year which delivered record results and exceeded market expectations, reflecting the benefits of the strategic programmes implemented in recent years. Throughout the reported period, the business performance has been on an improving trend and our order books continue to be healthy though order patterns have been inconsistent in the early part of the new financial year. We recognise that there are still considerable economic challenges in many parts of the world; supply chain issues, although reducing in number and severity, are still prevalent and inflation and prices remain high, for both energy and materials. However, we have entered the new financial year with good momentum and confidence in the excellent fundamentals of the Renold business, although macroeconomic trends add a note of caution. Once again, Renold employees around the world have responded magnificently to the challenges we have faced and I thank them for their dedication and commitment to the Group and our customers.”
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 8.45am to be provided with access details.
Reconciliation of reported and adjusted results
| Revenue | Operating profit | Earnings per share | ||||
| 2023£m | 2022£m | 2023£m | 2022£m | 2023pence | 2022pence | |
| Statutory reported | 247.1 | 195.2 | 22.9 | 16.2 | 5.7 | 4.7 |
| Amortisation of acquired intangible assets | – | – | 0.7 | 0.1 | 0.3 | 0.1 |
| Acquisition costs | – | – | 0.6 | – | 0.3 | – |
| Tax adjustments relating to prior year | – | – | – | – | 0.2 | – |
| US PPP loan forgiveness | – | – | – | (1.7) | – | (0.8) |
| New lease arrangements on sublet properties | – | – | – | 0.7 | – | 0.3 |
| Adjusted | 247.1 | 195.2 | 24.2 | 15.3 | 6.5 | 4.3 |
| Exchange impact | (15.3) | – | (1.8) | – | (0.9) | – |
| Adjusted at constant exchange rates | 231.8 | 195.2 | 22.4 | 15.3 | 5.6 | 4.3 |
Chair’s statement
I am pleased to report that 2022/23 was an excellent year for Renold in which we delivered a record financial performance and completed a significant strategic acquisition in Europe. I have also been impressed by the flexibility and adaptability of our people across the world, who have delivered an outstanding result despite the complexities resulting from the Russian invasion of Ukraine and challenging international supply chain and trading conditions.
Our turnover continued to grow strongly through the significant commercial and operational benefits delivered by the execution of our organic growth strategy, while the Group’s acquisition strategy bore fruit in the year, and it is pleasing to see that our new acquisition, Industrias YUK S.A. (“YUK”) performed ahead of our initial expectations.
Markets and trading performance
Over the year, Group revenue increased by 26.6% to £247.1m (2022: £195.2m), and adjusted operating profit improved by 58.2% to £24.2m (2022: £15.3m).
Return on sales improved by 200bps to 9.8% (2022: 7.8%), as the Group demonstrated its ability to successfully recover inflationary cost increases, whilst also benefiting from cost reduction and efficiency programmes, and the benefit of operational gearing.
Encouragingly, Group order intake at £257.5m was 15.0% ahead of the equivalent prior year period, and 16.8% ahead excluding the previously announced £8.9m long-term military contracts (2022: £11.0m), with YUK contributing £10.5m or 4.5% to the increase. The order book at 31 March 2023 of £99.5m was 18.3% ahead of the prior year figure.
Net debt increased during the period to £29.8m (31 March 2022: £13.8m) as the Group invested €20.0m to satisfy the initial cash consideration for the acquisition of YUK, whilst managing the impact of organic sales growth and inflation on working capital.
Strategic Developments
During the year, the Renold strategic change programmes across the Group once again delivered meaningful benefits, particularly in standardising and simplifying the business.
The completion of several major strategic restructuring initiatives, together with the relatively low level of net 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 growth in revenue, including for our existing products, adjacent sectors and by entry into under-represented applications and geographies. Most importantly, the Group will also benefit from significant production synergies by integrating acquired businesses.
The continuing review of capabilities across the Group has identified opportunities for the upgrade and development of existing manufacturing processes across our international footprint to create higher specification, higher performance products. This review will also facilitate standardisation across more product lines, which, in turn, will enable us to benefit more comprehensively from our geographic footprint and economies of scale. In addition, flexibility between manufacturing locations will aid increasing customer expectations for supply chain diversification for risk mitigation and a changing tariff environment, improving even further our value proposition.
During the year, the Group continued to develop a long-term sustainability strategy, including reduced energy consumption, raw material waste, packaging use and carbon dioxide emissions, whereby Renold is ensuring sustainability is one of its guiding principles. Renold is focussed on making a difference through real actions which, over a period of time, will deliver discernible benefits for the environment, our customers and the business. Our leader for sustainability is helping the Board to develop policies and strategies in this area, aimed at reducing the Group’s environmental impact and enhancing social development whilst also ensuring that the Company maintains its existing commitments to its communities and stakeholders. Renold is well positioned to contribute to a more sustainable future; our technical, product development and commercial teams are actively developing a more efficient and environmentally sustainable product offering which helps customers to reduce their carbon footprint by providing highly engineered chains that give longevity and life cycle benefits, or by being cleaner through reducing the need for product lubrication.
The Board
The Chair of the Board is primarily responsible for the composition of the Board and for ensuring high standards of governance. As Chair, I place great importance on the breadth of relevant experience, diversity and complementary skills amongst the Group’s Directors and management 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 during the financial year. 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.
Going forward, the Board will continue 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 that are available to the Group will deliver higher levels of shareholder return over the medium term than the payment of dividends in the near term. 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 2023.
Summary
The Group has performed well in the face of significant economic and social turmoil and continuing inflationary pressures on materials, energy and labour that the war in Ukraine and the pandemic have caused. These pressures will undoubtedly remain in the new financial year. However, the strong financial performance for the year, combined with positive operating cash flow, 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, which have been key to delivering the strong results for the Group.
DAVID LANDLESS
CHAIR
12 July 2023
Chief Executive’s review
The strong momentum that the Group achieved in the previous financial year continued in financial year 2023, despite the economic headwinds experienced due in part to the Russian invasion of Ukraine, the subsequent impact on European energy prices and the tail-end pandemic-related economic issues.
In August 2022, the Group acquired YUK for €24m, which increases the Group’s access to the Iberian Chain and wider European Conveyor Chain markets. The business is performing ahead of the Board’s expectations at the time of the acquisition.
Group order intake during the year was £257.5m, an increase of 15.0% on a reported basis and 7.8% at constant exchange rates over the prior year. Encouragingly, the Group has now seen order intake grow for each of the last six sequential half year reporting periods. Excluding the recently announced £8.9m long-term military contract, and the £11.0m military contract announced in the prior year, order intake for the year increased by 16.8%, or 9.2% at constant exchange rates. YUK contributed £10.5m (or 4.5%) of Group order intake. The resultant year end order book of £99.5m gives the Group a strong foundation upon which to build in the new financial year (31 March 2022: £84.1m).
The growth in Group revenue to £247.1m was also encouraging, representing a year-on-year increase of 26.6% on a reported basis and 18.8% at constant exchange rates. Excluding the impact of the YUK acquisition, turnover increased by 21.2%, or 13.5% at constant exchange rates. Final quarter revenues at £70.0m were particularly strong and were £17.0m (32.1%) ahead of the comparable quarter last year, with North America especially delivering a particularly strong performance.
Group adjusted operating profit1 at £24.2m (2022: £15.3m) was 58.2% ahead of prior year on a reported basis, and 46.4% ahead on a constant currency basis. Profitability was particularly strong in the second half of the financial year, where the Group reported a return on sales of 11.2%. The incremental operating profit gearing2 was a creditable 17.1%, despite the impact of the widely reported economic headwinds, impacting raw material availability and inflation. The operating profit gearing was helped significantly by the swift action to pass on cost inflation. Statutory operating profit increased to £22.9m (2022: £16.2m).
The Group continued to benefit from the impact of the significant efforts undertaken in the year, 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, in terms of availability, lead times and increased input costs. Cost increases have been successfully recovered through selling price increases as well as cost reduction, simplification and standardisation programmes. We expect cost pressure on material, labour, energy and transportation to persist in the current financial year.
Renold continues to drive increased performance through specific projects aimed at better levels of operational efficiency and productivity, through automation, 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, and have concentrated on increased automation within all of our facilities. The Group’s operational capabilities are steadily improving as consistent levels of investment come to fruition, and we continue to develop our in-house technologies and investments, allowing us to produce higher specification and better performing chain that maintains our market leadership.
The strong focus on cash management remains a key priority for management. Closing net debt was £29.8m (31 March 2022: £13.8m), with the increase attributable to the £17.8m of initial acquisition cash consideration paid during the year for YUK. Excluding this acquisition consideration, the level of net debt reduced during the year by £1.8m and in the second half of the year by £4.2m. The resulting net debt to EBITDA ratio of 0.8x (2022: 0.5x) affords significant headroom against the Group’s banking covenants and, in turn, provides greater flexibility and funding capabilities to transact quickly on investment decisions, both organic and through acquisitions, to drive growth, efficiency and productivity.
Activity in the Chain division continues to be robust, with H2 external order intake showing a 17.4% improvement over the strong levels seen in H2 of the last financial year. Output has also continued to improve with H2 constant currency turnover increasing by 22.3% in comparison to the same period last year. In a similar vein the adjusted profitability of the Chain business in H2 has increased by 69.5% at constant rates, when again compared to the equivalent period in the last financial year, and return on sales for the year at 13.4% (2022: 11.9%) continues to show progress.
The Torque Transmission division is generally a longer lead time, later cycle business. External order intake continued to grow, with the H2 order intake some 44.7% higher than the equivalent prior year comparator. Excluding the impact of the long-term military contract of £8.9m announced in January 2023, underlying order intake improved by 14.2%. Similarly, turnover has improved, with sales in H2 30.3% up on the prior year equivalent figure, as the base load work that the military contracts provide is taken to turnover. The return on sales for the division was 11.1% (2022: 10.1%).
1 See Note 21 for definitions of adjusted measures and the differences to statutory measures
2 Operational gearing is defined as the year-on-year change in adjusted operating profit, divided by the year-on-year change in revenue.
Current operating environment
The volatile operating environment the Group has faced over recent years abated a little in financial year 2023. The effects of the Covid-19 pandemic, especially in the UK, Europe and the US, were less marked, only to be replaced with new economic uncertainties brought about by the war between Russia and Ukraine.
During the year Covid-related disruption to our Chinese facilities, located in the wider Shanghai region, delayed inventory shipments to other companies in the Group, and at times staff absenteeism in the facility approached 50% which has negatively impacted costs, productivity and service levels from the factory. At other facilities, and following government guidance, the enforcement of our Covid protocols and health measures to try to protect all our staff were relaxed.
Towards the end of the financial year, the impact of previously reported extended shipment times and increased freight costs throughout the world abated, allowing the Group to make inroads into clearing the overdue order backlog. Accordingly, the Group recorded a record turnover of some £70.0m in the final quarter of the financial year. The availability of trucks, drivers and container freight services has improved in both reliability and expense, but still remain far from pre-pandemic norms. The upward pressure on goods in transit inventory levels also abated, which together with utilisation of the buffer stocks built up in H1 ahead of potential German energy rationing, allowed the Group to achieve positive cash generation in H2 of £4.2m.
As reported in the previous financial year, whilst recognising the human tragedy unfolding during the war between Russia and Ukraine, ceasing trading 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 Group continued to support our agents and distributors in the non-sanctioned parts of Ukraine, but obviously maintained close scrutiny on the levels of credit risk to which the Group is exposed.
Chain performance review
Turnover grew markedly during the year, with total Chain turnover increasing 27.1% year-on-year to £202.4m; 19.3% at constant exchange rates. In August 2022 the Group acquired YUK and during the period of ownership YUK contributed turnover of £10.5m, representing 5.2% of Chain turnover at actual exchange rates and 5.4% at constant exchange rates. The final quarter of the year saw a further step-up in activity for the Chain division, with Q4 turnover some 23.5% higher than the prior year comparator at constant exchange rates, as the impact of extended shipment times abated and both the US and European businesses were able to clear order backlogs. The increased revenue resulted in return on sales improving by 150 basis points, to 13.4% (2022: 11.9%). The operational gearing1 on the increased activity at constant exchange rates was a creditable 21.8%, as the impact of increased prices, volumes and significant operational efficiency gains fell through to the bottom line. Adjusted operating profit was £27.2m (2022: £18.9m), £8.3m higher than the prior year level.
| 2023£m | 2022£m | |
| External revenue | 201.5 | 158.2 |
| Inter-segment revenue | 0.9 | 1.0 |
| Total revenue | 202.4 | 159.2 |
| Foreign exchange | (12.5) | – |
| Revenue at constant exchange rates | 189.9 | 159.2 |
| Operating profit | 26.5 | 20.5 |
| US PPP loan forgiveness | – | (1.7) |
| Amortisation of acquired intangibles | 0.7 | 0.1 |
| Adjusted operating profit | 27.2 | 18.9 |
| Foreign exchange | (1.6) | – |
| Adjusted operating profit at constant exchange rates | 25.6 | 18.9 |
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 18.6% year on year, with activity in both the US (+35.8%) and Australasia (+16.2%) showing a marked increase, especially during the final quarter of the year. External order intake in Europe grew by a headline rate of 5.8%, however, this is flattered by the YUK acquisition. Excluding the impact of YUK, underlying order intake in Europe fell 8.0% year-on-year, as the economic disruption of the Ukraine / Russia conflict was felt through the broader European economy, whilst European distributors destocked. In China, despite the Covid-related disruption during the year, external order intake grew by 33.6%, albeit from a low base. Order intake in India fell year-on-year by 6.3%, following a poor year in the agricultural market, coupled with a very tough comparator period.
Closing order books for the division finished the year at £60.9m (2022: £53.9m), some 13% ahead of last year which positions the Group well for the current financial year.
Chain Europe, which is our largest Chain business, saw a sharp increase in external revenues, which increased 25.0% over the prior year. Excluding the impact of the YUK acquisition, underlying revenues increased by 9.2%. Book and ship sales were depressed in H1, but recovered through the second half of the year due to distributor restocking, with Q4 sales 28.6% above the same prior year period and 26.1% above the average of the first nine months of the year. Targeted sales activity in key sectors saw both our OEM and End User business develop strongly, growing 13.5% and 29.8% respectively, with particularly strong growth in the areas of materials handling increasing 22.4% and manufactured products up 15.3%. Revenue progressively strengthened from the outset of the year, a trend which continued throughout each subsequent quarter.
The increased activity, together with the benefit of cost reduction activities, both in the current year and in the prior year, and new commercial initiatives, resulted in a substantial increase in underlying adjusted constant currency operating profit. Plans are in place to expand the Renold Service Centre footprint through the opening of a location in Turkey, close to Istanbul. The introduction of this new stock-holding location, together with the utilisation of the newly acquired YUK warehouse, should allow reduced delivery times and increased customer service, and hence sales, throughout the southern European region.
In the Americas, activity again increased markedly. External order intake at £92.3m was a record high, exceeding the £68.0m record achieved in the previous financial year by 35.7%. Turnover at £85.5m was 35.8% higher than the prior year comparator, driven by both significant input cost recovery work and an increase in projects related to the marine, food machinery, theme parks and utilities sectors. Sales to OEM customers grew steadily, especially in the escalator and forklift truck market, while increased sales of transmission chain products sold through distributors steadily increased. New business opportunities, especially in the ethanol, grain handling and forestry markets, were enhanced by the introduction of new products. Production capabilities were continually enhanced with further investment in automated equipment and development projects, and a large infrastructure project is being undertaken to see that the Morristown facility is positioned to take advantage of future growth opportunities. Underlying constant currency operating profit increased to a new record high.
In Australasia we continued to deliver revenue growth with the region being less impacted than our other markets by the commercial impacts of the pandemic and recorded revenue growth of 20.8%. Australia itself had a good year with revenue up 19.6%, with continued improvement seen in a number of sectors including mining and sugar. The recent trend of customers increasingly buying more domestically produced goods appears to be continuing, even though ongoing supply chain disruption to imported products appears to be reducing. Customers are increasingly seeing the benefits of our product-enhancing engineering capabilities that deliver real value through better performance and longer chain life. We continue to invest in the production capabilities of our Melbourne factory, with the recent purchase of further CNC equipment. Sales in New Zealand continued to grow strongly during the year, showing a 10.4% increase. Malaysia and Indonesia reversed the decline seen in the last financial year, recording growth rates of 35.3% and 24.5% respectively. Thailand was the only country in the region which recorded a decline in activity, showing a reduction in excess of 10%. We are continuing to expand our sales into more industries in South East Asia, with an initial assessment of commercial potential in Vietnam being undertaken.
Revenue in India grew by 13.1% during the year, helped in part by the opening of the first of a series of regional distribution warehouses in Nagpur to offer our customers and distributors much better and quicker supply. Plans are in place for a further three regional distribution centres to help give significantly improved delivery times to all parts of India over the coming years. Investment plans for the Indian operation include the introduction of state-of-the-art technology used elsewhere in the Group for the manufacture of many component types and assembly. Plans are also taking major steps forward for the introduction of the Group ERP platform, M3, which is expected to provide significant operational benefits within the current year.
Revenues in China grew by 7.9% during the year, driven primarily by a significant 12.9% improvement in domestic Chinese demand. Growth in intra-group demand from Europe and the US also increased significantly in the first half of the financial year, but slowed in the latter part of the year as intra-group order patterns were adjusted to take into account the improving delivery times to Western markets. Activities to correct stock holding patterns in our European and US warehouses, and the Covid-related disruption in the Chinese factory also subdued activity in the second half of the year. Efforts and investments to continue to improve the quality and specification of products manufactured in China bore fruit during the year, as product quality in the Chinese factory improved sufficiently to allow the transfer of the manufacture of several mid-tier Renold standard products and components to China. Manufacture of premium and high specification products will continue in our US and European facilities. During the year, our Chinese team initiated a project to upgrade certain component manufacturing processes to use 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, training and development of our people, engineering and sales, and this provides us with an excellent base from which to build benefits derived from the many opportunities in this market.
Torque Transmission performance review
Divisional revenues of £48.8m were £8.4m higher than in the prior year (+20.8%) due to a recovery in demand in our North American markets. Our North American manufacturing and distribution business, based in Westfield NY, saw turnover grow by 35.8% year-on-year. In January 2023, the Group announced it had secured an £8.9m long-term agreement to supply large Hi-Tec couplings for the initial phase of a military contract for the Royal Australian Navy, an agreement which followed a similar military contract to supply the second phase of a contract for the Royal Navy in FY22. Progress on both these contracts was recorded during the year, and contributed to a 7.1% increase in the Renold couplings business.
Divisional adjusted operating profit at constant exchange rates increased by 24.4% to £5.1m in the year. Return on sales for the division was 11.1% (2022: 10.1%), an increase of 100bps during the year.
Momentum in this division, which has a later trading cycle and generally larger orders than our Chain business, continues to be positive and improving.
| 2023£m | 2022£m | |
| External revenue | 45.6 | 37.0 |
| Inter-segment revenue | 3.2 | 3.4 |
| Total revenue | 48.8 | 40.4 |
| Foreign exchange | (2.8) | – |
| Revenue at constant exchange rates | 46.0 | 40.4 |
| Operating profit (and adjusted operating profit) | 5.4 | 4.1 |
| Foreign exchange | (0.3) | – |
| Adjusted operating profit at constant exchange rates | 5.1 | 4.1 |
Order intake for the year increased 2.1% to £53.3m (2022: £52.1m), a reduction of 3.2% at constant exchange rates. Excluding the impact of the £8.9m long-term military contract, and £11.0m military contract announced in FY22, order intake increased by 7.8% or 1.1% at constant exchange rates.
The North American business unit benefitted from a significant increase in demand for gears and couplings supplied intra group from the UK, but also experienced a significant uptick in demand for own manufactured gear spindles and shakers, both in the US domestic market and internationally. Demand for gear couplings to the US mass transit market also strengthened significantly. Demand for group-supplied products in both the Chinese and Australian distribution and service centres also grew by 44.6% and 32.5% respectively, as supply chain issues encountered in the last financial year were resolved.
The Couplings business delivered a 6.7% increase in turnover year-on-year. As expected, turnover in the marine business, which manages the long-term military contracts, increased year-on-year by £0.8m, as work commenced on the second phase of the UK military contract, as well as the initial phase of the Australian military contract. Product mix improved markedly in the second half of the year as the lower margin initial phase of the contract was completed, and the higher margin phase of the work commenced. Product development in the couplings division continued with new designs for couplings that expand the performance envelope of current products whilst adding new features and benefits, while sales of the RBI rubber in compression product continued apace.
The Gears business made good progress in order intake, turnover and margin despite facing significant material and energy cost increases. Notable product developments during the year include new products aimed at the escalator market, especially relating to metro systems, and a number of specialist niche products aimed at the water treatment market. Demand from OEM customers, particularly for larger projects in the US and UK which are our key geographic markets, remained strong during the year.
The broad strength of the Torque Transmission division sales and margin performance reflects the later cycle nature of the division in comparison to Chain.
Sustainability
Renold intensified its focus on Group projects during the year and significant efforts were made to collate energy and carbon-related statistics from throughout the Group to gain a proper base line from which to measure progress in both energy and carbon reduction projects. A full inventory of the Group’s energy intensive fleet of heat treatment facilities was undertaken, and the Group’s technical and operational management have started to formulate a strategy, working with the Group’s equipment suppliers, to reduce the environmental footprint of our heat treatment processes as the age of equipment approaches the point where replacement is required. This exercise has already had initial success as our German facilities adopted more energy-efficient working practices during the year, which allowed the number of furnaces continually operating at the plant to be reduced by 25%.
The Group Sustainability Committee drove a packaging project which is aimed at producing new standard transmission chain packaging designs which are made from recycled material and are themselves fully recyclable. All adhesives, inks and labels used in these new designs, which will be common across the world, are also recyclable. The new designs have been produced in such a way that they have significantly reduced the amount of packaging lines that individual plants are required to keep in stock.
At a regional level, our businesses across the world have been asked to develop their own sustainability project roadmaps, seeking to ensure that our efforts are relevant to the highly diverse regions within which we operate. We will continue to build on the considerable momentum we have gained, delivering ever more local successes.
Finally, our technical, product development and commercial teams are actively developing a more efficient and environmentally sustainable product offering for our customers, whether that be in terms of product life and replacement cycle, or through being cleaner by reducing the need for product lubrication. More information on our progress and plans can be found in the Sustainability section of the Annual Report.
Strategic Plan – STEP2 progress
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 benefit from both 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 financial and operational criteria. Such 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 high specification products that deliver real benefits for their own business performance.
The Board is observing disciplined criteria when executing the new acquisition strategy, ensuring that potential targets will enhance the Group’s wider strategy and earnings. 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.
During the year, Renold took the first significant step in the acquisitive growth phase of our strategy. In August 2022, Renold acquired the business of YUK, a Valencia-based manufacturer and distributor of high quality conveyor chain (“CVC”) and ancillary products. The acquisition not only provides the Group with high quality European-based CVC manufacturing capability, but also substantially increases the Group’s access to the Iberian market where historically we have been under represented. The acquisition will allow Renold to leverage YUK’s strong CVC market position in Spain and Portugal to expand sales of the Group’s existing range of premium European transmission chain (“TRC”) products, and enable sales of YUK products throughout Renold’s extensive European sales network beyond Iberia.
Organic growth and business improvement is a fundamental driver in the Group strategy moving forward. Renold is consistently enhancing its operational capabilities through upgrading equipment and processes across the world. Capital expenditure was £8.4m 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 clear vision of where our Chinese factory fits into our global supply chain and our expectations for growth in the Chinese market itself. External order intake in China grew by 33.6% year on year, while external sales revenue increased by 12.9%. We are constantly upgrading capabilities in the 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 new press equipment equivalent to the equipment available in our US and European factories, is providing improvements in product quality and uniformity. 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 increasing level of concern about international trade tariffs and the concentration of supply from a single region.
These projects highlight the intention in 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.
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. |
With the ongoing recovery of our markets, the financial benefits of these improvements will increasingly come to the fore. Renold is well positioned to capitalise on these developments in the years ahead.
Macroeconomic landscape and business positioning
The underlying fundamentals of the Group and the markets we serve provide confidence that Renold is well placed to continue to develop and deliver sustainable profitable growth. Many of these intrinsic qualities have remained consistent over many years but we are now proactively building on these fundamentals. 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 strong performance over the year, which reflects the benefits of the strategic developments completed over prior years and the hard work that all our employees across the world have contributed during a most difficult period. Our employees 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 these extraordinary times.
Throughout the reported period the business performance has been on an improving trend and finished particularly strongly as supply chains eased in the last quarter. We expect the current financial year to be no less challenging, but we remain vigilant in the environment within which we operate; however, we started the new financial year from a positive position with good momentum and confidence in the capabilities and fundamentals of the Renold business and the markets we serve.
ROBERT PURCELL
CHIEF EXECUTIVE
12 July 2023
