Renold Plc (LON:RNO), a leading international supplier of industrial chains and related power transmission products, has announced its interim results for the six month period ended 30 September 2023.
| Financial summary | Half year ended | Change % (Constant currency)1 | ||
| £m | 30 September 2023 | 30 September 2022 | Change % | |
| Revenue | 125.3 | 116.3 | +7.7% | +10.7% |
| Adjusted operating profit2 | 15.0 | 9.6 | +56.3% | +59.4% |
| Return on sales2 | 12.0% | 8.3% | +370bps | +360bps |
| Adjusted profit before tax2 | 11.3 | 7.3 | +54.8% | |
| Net debt3 | 28.3 | 34.0 | ||
| Adjusted earnings per share2 | 3.8p | 2.7p | +40.7% | |
| Additional statutory measures | ||||
| Operating profit | 16.2 | 8.8 | +84.1% | |
| Profit before tax | 12.5 | 6.5 | +92.3% | |
| Basic earnings per share | 4.4p | 2.3p | +91.3% | |
Financial highlights
| · | Revenue up 7.7% (10.7% at constant exchange rates) to £125.3m (2022: £116.3m) driven by strong improvement in Torque Transmission (“TT”) activity levels and continued growth in Chain. |
| · | Adjusted operating profit up 56.3% (59.4% at constant exchange rates) to £15.0m (2022: £9.6m). |
| · | Return on sales increased by 370bps, (360bps at constant exchange rates) to 12.0% (2022: 8.3%). |
| · | Net debt as at 30 September 2023 of £28.3m (31 March 2023: £29.8m), despite acquisition of Davidson Chain Pty (“Davidson”) for £3.1m in the period and deferred payment of £1.7m for Industrias YUK S.A. (“YUK”). Net debt represented 0.7x rolling 12 months adjusted EBITDA. |
| · | Adjusted EPS up 40.7% to 3.8p (2022: 2.7p). |
| · | IAS 19 pension deficit reduced by 15.3% to £52.7m (31 March 2023: £62.2m). |
Business highlights
| · | Good progress on productivity improvements, cost reduction programmes and capital investment projects, accelerating the integration of Group-wide supply chain and increasing operational capabilities. |
| · | Strong first half sales performance, despite normalisation in order intake to £109.7m when compared to the prior H1 record order intake of £124.1m. |
| · | Order book at 30 September 2023 of £83.6m, compared to prior year’s record high (30 September 2022: £99.0m) as the duration of the order book shortened following normalisation of supply chains this year. |
| · | Acquisition of Davidson for AU$6.0m, increasing the Group’s access to the Australian conveyor and adapted transmission chain markets. The integration process is progressing well and the business is performing in line with expectations. |
| · | £2.2m exceptional profit from the assignment of a lease for a closed legacy site, resulting in a £0.7m per annum reduction in ongoing leased property costs. |
1 See below for reconciliation of actual rate, constant exchange rate and adjusted figures.
2 See Note 12 for definitions of adjusted measures and the differences to statutory measures.
3 See Note 8 for a reconciliation of net debt which excludes lease liabilities.
Robert Purcell, Chief Executive of Renold, said:
“I’m pleased to report continued progress which builds on the momentum the Group has enjoyed in recent periods, delivering a record half year result. Sales, margins, profits and cash generation have all progressed well. Global markets continue to be uncertain and we remain vigilant for changes in patterns of demand beyond the current order book shortening. We are delighted with the purchase of Davidson in Australia, which further builds our inorganic growth strategy and we remain well positioned to continue developing through acquisition. There remains uncertainty over the implication of global economic pressures in the medium term, however the Board is increasingly confident in delivering a result for the current year ahead of previous market expectations.”
Reconciliation of reported, constant exchange rate and adjusted results
| Revenue | Operating profit | Earnings per share | ||||
| H12023/24£m | H12022/23£m | H12023/24£m | H12022/23£m | H12023/24pence | H12022/23pence | |
| Statutory at actual exchange rates | 125.3 | 116.3 | 16.2 | 8.8 | 4.4 | 2.3 |
| Adjust for non-recurring items: | ||||||
| Assignment of lease of closed site | – | – | (2.2) | – | ||
| Acquisition and reorganisation costs | – | – | 0.5 | 0.6 | ||
| Amortisation of acquired intangible assets | – | – | 0.5 | 0.2 | ||
| Adjusted at actual exchange rates | 125.3 | 116.3 | 15.0 | 9.6 | 3.8 | 2.7 |
| Exchange impact | 3.4 | – | 0.3 | – | ||
| Adjusted at constant exchange rates | 128.7 | 116.3 | 15.3 | 9.6 | ||
Investor Presentation
The Company will conduct a live presentation and Q&A session for investors at 5:30 pm GMT today, 15 November 2023. The presentation is open to all existing and potential shareholders. Those wishing to attend should register via the following link and they will be provided with log in details:
https://us02web.zoom.us/webinar/register/WN_DwsvKoYLQumb8x1YZg-klw
There will be the opportunity for participants to ask questions at the end of the presentation. Questions can also be emailed to [email protected] ahead of the presentation.
Chief Executive’s statement
The Group’s performance in the first six months of the year continued to be strong, delivering an increase in revenues of 7.7% to £125.3m (2022: £116.3m). At constant exchange rates, revenues increased 10.7%. The TT division, which saw revenue increase by 25.2%, has had an especially positive start to the year, as the benefit of the long-term military contracts within Couplings, along with increased capacity investments in Westfield, our North American TT operation, has allowed the business to capitalise on the current strong North American market.
Group adjusted operating profit increased by 56.3% to £15.0m (2022: £9.6m) as the benefits of increased sales and prior year productivity improvements translated into better financial results. Return on sales increased by 370bps, to 12.0% (2022: 8.3%), a record high for the Group, driven by increasing levels of productivity investments and projects, benefits of increased sales volumes both organic and through acquisition, passing on cost inflation and acquisition integration synergies. Statutory operating profit increased to £16.2m (2022: £8.8m), as an exceptional profit of £2.2m was recorded on the assignment of the lease of the closed Bredbury site, offset by costs associated with the acquisition of Davidson, with the statutory operating profit margin for the period increasing to 12.9% (2022: 7.6%).
Net debt reduced during the period by £1.5m to £28.3m (31 March 2023: £29.8m) despite the Group acquiring the trade and assets of Davidson for £3.1m, making a deferred consideration payment for the YUK acquisition of £1.7m, and bringing forward a UK pension scheme payment of £2.6m that was originally scheduled for the second half of the year. The accelerated pension payment will enable efficiencies in the evolution of the scheme’s investment portfolio.
Order intake for the period was £109.7m, a decrease of 11.6% (2022: £124.1m), or a 9.0% decrease at constant exchange rates. YUK contributed £6.9m to order intake in the period. The order book as at 30 September 2023 of £83.6m remains higher than historic levels. However, there has been a normalisation of order intake following an improvement in global supply chains, with improvements to delivery times, allowing customers to reduce forward order placement as certainty of lead times increase. The order book at 30 September 2023 of £83.6m represents a constant currency decrease of 11.1% over the record high position at the end of the previous financial year.
The Group has continued to successfully manage a period of sustained cost inflation and changes to the supply chain, pursued efficiency gains and projects and passed on cost adjustments both up and down. The Group expects to experience further cost pressures through the second half of the year but the Board is confident that these will continue to be managed successfully.
Renold continues to focus efforts on driving and optimising performance through identified projects, some of which require capital investment, targeting better operational efficiency, improved design and standardisation of products, better asset utilisation, more flexible working practices, and leveraging improved procurement strategies.
Acquisitions
On 1 September 2023, the Group acquired the trading assets of Davidson, based in Melbourne, Australia, for a cash consideration of AU$6.0 million, enlarging the already established Australian Chain business by 26%. The Davidson acquisition demonstrates further strategic momentum, supplementing organic growth through high quality bolt-on acquisitions which can expand our geographic presence, grow our product offering and strengthen our market position in key end markets.
The Board is pleased with the performance of Davidson in the period since completion of the acquisition and remains excited by the opportunities beginning to emerge. Davidson has traded in line with the Board’s expectations made at the time of the acquisition.
There remains an active pipeline of acquisition opportunities which the Group continues to review as part of its growth strategy. The Board adopts a disciplined approach to its acquisition strategy, with investments focussed on complementary industrial chain businesses, to supplement organic growth. Acquisitions are expected to be earnings accretive whilst leverage is maintained at conservative levels.
Business and financial review
| Revenue | Adjusted operating profit | Return on sales | ||||
| Six month period | 2023/24£m | 2022/23£m | 2023/24 £m | 2022/23£m | 2023/24% | 2022/23% |
| Chain | 101.5 | 95.1 | 16.0 | 12.5 | 15.8 | 13.1 |
| Torque Transmission | 29.8 | 23.0 | 4.7 | 1.5 | 15.8 | 6.5 |
| Head office costs/Inter segment sales elimination | (2.6) | (1.8) | (5.4) | (4.4) | – | – |
| Total Adjusted at constant rates | 128.7 | 116.3 | 15.3 | 9.6 | 11.9 | 8.3 |
| Impact of foreign exchange | (3.4) | – | (0.3) | – | 0.1 | |
| Total Adjusted at actual rates | 125.3 | 116.3 | 15.0 | 9.6 | 12.0 | 8.3 |
| Adjusting items: | ||||||
| Assignment of lease of closed site | – | – | 2.2 | – | ||
| Amortisation of acquired intangible assets | – | – | (0.5) | (0.2) | ||
| Acquisition and reorganisation costs | – | – | (0.5) | (0.6) | ||
| Statutory | 125.3 | 116.3 | 16.2 | 8.8 | 12.9 | 7.6 |
Chain
The Chain division’s revenue at constant exchange rates increased by 6.7% to £101.5m, and stayed above the psychologically important £100m milestone.
| Chain Performance | ||||
| 2023/24£m | 2022/23£m | 2023/24 ROS % | 2022/23 ROS % | |
| External revenue | 98.4 | 94.7 | ||
| Inter-segment revenue | 0.5 | 0.4 | ||
| Total revenue | 98.9 | 95.1 | ||
| Foreign exchange | 2.6 | – | ||
| Revenue at constant exchange rates | 101.5 | 95.1 | ||
| Operating profit | 17.0 | 12.3 | 17.2 | 12.9 |
| Assignment of lease of closed site | (2.2) | – | ||
| Amortisation of acquired intangible assets | 0.5 | – | ||
| Acquisition and reorganisation costs | 0.5 | 0.2 | ||
| Adjusted operating profit | 15.8 | 12.5 | 16.0 | 13.1 |
| Foreign exchange | 0.2 | – | ||
| Adjusted operating profit at constant exchange rates | 16.0 | 12.5 | 15.8 | 13.1 |
Revenue increased across all regions:
| · | Europe increased external revenue by 7.6% at constant currency rates. Excluding the impact of the YUK acquisition external revenue fell by 5.8%, as the impact of the Ukraine war, and cost inflation, was felt through the broader European economy. The integration of the YUK business has proceeded as planned with £7.2m of additional external revenue recorded, as the Group saw the benefits of substituting externally sourced products, increasing conveyor chain (“CVC”) product sales (manufactured by YUK in Spain) throughout Europe, and increasing transmission chain (“TRC”) sales in Spain. |
| · | The Americas increased constant currency revenues by 6.9%, with sales of Engineering chain remaining buoyant, and demand for transmission chain and leaf chain (used in Forklift trucks) remaining strong. New opportunities with distributors and strong demand was seen from end users especially for capital equipment in the food processing, ethanol and mining industries. |
| · | Australasian revenues increased by 6.7% at constant exchange rates, as the business continued to benefit from execution of its growth strategy, sales increased by double digit growth rates in New Zealand, and Malaysia, with Thailand also growing strongly. Sales to Indonesia were adversely impacted by continued import restrictions imposed by the Indonesian government, whilst Australia also saw the impact of a slowdown in activity. |
| · | External revenues in India fell in the first half of the year as the impact of slow agricultural sales were experienced, and there was an increase in competition from other local manufacturers. Capacity was utilised in supporting Group sales, especially increased demand within the US market, for larger sized Engineering chain products. Additional investment to support productivity and capacity improvements in India, have recently been initiated, and activities aimed at the expansion of the domestic dealer network and an increase in the number of local warehouses is underway, to enhance geographic coverage and service. |
| · | External revenues in China were up 50.1% (at constant exchange rates) as efforts aimed at growing domestic Chinese sales continue to bear fruit, the sales increase going someway to offset the softening in demand seen as a result of slower intra group demand from Europe. The transfer of externally purchased product volumes from the YUK acquisition to the Jintan factory continued with an increase in sales seen to the YUK business during the period. Significant progress has once again been made in enhancing the performance of the factory in Jintan, through a programme of standardisation and improvement projects, including the commissioning of new equipment, so the factory is increasingly able to manufacture higher specification products. |
Divisional adjusted operating profit at constant exchange rates was £16.0m, £3.5m higher than the prior year. Return on sales increased by 270bps to 15.8% (2022: 13.1%).
Order intake at constant exchange rates decreased by 11.2% to £91.2m, resulting in a book to bill (ratio of orders to sales) for the first half of the year of 90.3% (2022: 105.0%).
Torque Transmission (“TT”)
| TT Performance | ||||
| 2023/24£m | 2022/23£m | 2023/24 ROS % | 2022/23 ROS % | |
| External revenue | 26.9 | 21.6 | ||
| Inter-segment revenue | 1.9 | 1.4 | ||
| Total revenue | 28.8 | 23.0 | ||
| Foreign exchange | 1.0 | – | ||
| Revenue at constant exchange rates | 29.8 | 23.0 | ||
| Operating profit (and adjusted operating profit) | 4.6 | 1.5 | 16.0 | 6.5 |
| Foreign exchange | 0.1 | – | ||
| Adjusted operating profit at constant exchange rates | 4.7 | 1.5 | 15.8 | 6.5 |
Divisional revenues at constant exchange rates of £29.8m were £6.8m (30%) higher than in the prior year, which continued the trend seen in the second half of the last financial year. This was due to increased demand for Military Couplings in the Cardiff business, and a further strengthening in demand in North America. Additionally, the division benefited from a significant increase in capacity primarily driven by capital investments in automated machines, and efficiency improvements driven by greater visibility following the implementation of M3.
As a result of the increased sales activity, selling price rises and improved operational output, as well as a normalisation in product mix, divisional operating profit at constant currency increased by £3.2m to £4.7m.
Return on sales increased in the period to 16.0% (2022: 6.5%). This is now beyond pre COVID pandemic level rates of return.
The closing order book for the division of £34.1m should ensure that momentum will continue into the second half of the year at similar rates, however, second half comparators are significantly stronger than those in H1.
Cash flow and net debt
| Half year to 30 September | 2023/24£m | 2022/23£m |
| Adjusted operating profit | 15.0 | 9.6 |
| Add back: Depreciation and amortisation | 4.9 | 4.9 |
| Share-based payments | 0.7 | 0.5 |
| Adjusted EBITDA | 20.6 | 15.0 |
| Movement in working capital | (1.4) | (7.6) |
| Net capital expenditure | (2.1) | (2.2) |
| Operating cash flow | 17.1 | 5.2 |
| Income taxes | (1.3) | (1.3) |
| Pensions cash costs | (6.0) | (3.1) |
| Repayment of principal under lease liabilities | (1.4) | (1.2) |
| Financing costs paid | (2.2) | (1.3) |
| Consideration paid for acquisitions1 | (4.9) | (17.8) |
| Other movements | 0.2 | (0.7) |
| Change in net debt | 1.5 | (20.2) |
| Closing net debt | (28.3) | (34.0) |
1 Includes £1.7m deferred consideration in relation to the acquisition of Industrias YUK S.A in the prior year and £0.2m of acquisition costs for Davidson Chain Pty.
Net Debt reduced from the prior financial year end by £1.5m in the period to £28.3m. Cash collections were strong, especially in North America, where receipts from significant orders shipped at the end of the last financial year were collected in the period. Offsetting this inflow, the Group paid £3.1m in cash consideration for the Davidson acquisition, and made the initial deferred payment of £1.7m for the YUK acquisition, along with associated acquisition and reorganisation costs of £0.5m.
Working capital increased during the period, with the Group increasing inventory levels especially in North America where demand continues to be strong, particularly in the Engineered chain segment.
Net capital expenditure of £2.1m remained broadly in line with prior years. Strategic investments in production capabilities, especially in our Chinese and Indian facilities continue apace, including expansion of press capabilities, improved heat treatment and continuing the roll-out of the group’s standard business systems.
Corporation tax payments on account of £1.3m were at similar levels to the first half of last year.
Interest cash costs increased relative to the first half of last year reflecting the increase in market interest rates over the intervening period.
Pensions
The Group has a number of closed defined benefit pension schemes (accounted for in accordance with IAS 19 ‘Employee Benefits’). During the Covid-19 pandemic, the Group negotiated a £2.8m one-off deferral of contributions with the UK pension scheme trustees. Contributions have now returned to normal levels, with the second of five annual deferred payments of c.£0.6m being made. Additionally, the Group had a longstanding agreement with the UK scheme to pay an additional £1.0m of annual cash contributions, to the extent that the Group’s adjusted operating profit exceeds £16.0m; the additional cash contributions commenced in the half year. The Group took the opportunity to bring forward £2.6m of contributions to the UK pension scheme from the second half of the year, in order to increase efficiency in the evolution of the investment portfolio. Excluding these amounts, underlying pension contributions reduced following the closure of the New Zealand pension scheme in FY23, and a reduction in administration costs. The cash contributions into the UK Scheme are known and stable, though increasing with RPI capped at 5%. In FY24 this cost is expected to be £5.3m. In addition there are administration and actuarial costs, including the PPF levy, which may vary. The cost of pensions in payment in Germany (there is no scheme or fund) are expected to be £1.2m in FY24. This amount will rise with inflation but the total will fall gradually over time.
The Group’s IAS 19 deficit decreased from £61.3m at 30 September 2022 to £52.7m at 30 September 2023.
| At 30 September 2023 | At 31 March 2023 | ||||||
| UK schemes | Overseasschemes | Total | UK schemes | Overseasschemes | Total | ||
| £m | £m | £m | £m | £m | £m | ||
| IAS 19 retirement benefit obligations | (36.6) | (16.1) | (52.7) | (44.2) | (18.0) | (62.2) | |
| Net deferred tax asset | 1.6 | 1.4 | 3.0 | 3.3 | 1.8 | 5.1 | |
| Retirement benefit obligations net of deferred tax asset | (35.0) | (14.7) | (49.7) | (40.9) | (16.2) | (57.1) | |
The yield on corporate bonds increased further during the period. Consequently the discount rates used for the UK scheme rose from 4.85% to 5.70%, and resulted in a net reduction in UK pension liabilities of £7.6m, and overseas pension liabilities of £1.9m. The long term expectation for CPI inflation remained broadly stable at 3.35% (3.30% at September 2022). Asset values were impacted as both the value of gilts and equities fell during the period. The scheme has insurance assets linked directly to the benefits of certain scheme members. As the liability to these members reduces, for example with an increase in discount rate, so does the value of the corresponding insurance asset.
Pension liabilities in overseas schemes reduced by £1.9m to £16.1m, again due in the main to an increase in discount rates.
The net pension financing expense (a non-cash item) was £1.4m (2022: £1.0m).
Borrowing Facilities
The Group refinanced its borrowing facilities in May 2023. The new facilities consist of a £85.0m multi-currency revolving credit facility and a £20.0m accordion option which will provide the Company access to additional funding in support of its acquisition programme. The principal facility term, being the Net Debt / Adjusted EBITDA covenant, was also improved from the previous level of 2.5 times Adjusted EBITDA to 3.0 times Adjusted EBITDA, with other key terms remaining unchanged.
Dividend
In line with recent policy based on enhancing Group performance through focussed investment in new equipment and earnings enhancing acquisitions the Board has decided not to declare an interim ordinary dividend. The dividend policy will remain under review as margin and cash flow performance continues to develop.
Summary
Sales in the first half remained strong. Margins rose markedly as better volumes, good cost management, complementary acquisitions and strong execution of productivity and efficiency programmes, aided by a consistent and coherent strategy all came together. The robust Renold business with a strengthening balance sheet and growing cash generation is positioned well for tackling whatever global economic headwinds may transpire in the upcoming period.
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 macro-economic uncertainty, and inflationary environment, together with the impact of the war in Ukraine alongside the continued improvement in the half year trading performance of the Group have been considered as part of the adoption of the going concern basis. The Group continues to closely monitor operating costs, and capital expenditure and other cash demands are being managed carefully.
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 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 Directors have reviewed the principal risks and uncertainties of the Group. The Directors consider that the principal risks and uncertainties of the Group published in the Annual Report for the year ended 31 March 2023 remain appropriate. The risks and associated mitigation processes can be found on pages 50-57 of the 2023 Annual Report, which is available at www.renold.com.
The risks referred to and which could have a material impact on the Group’s performance for the remainder of the current financial year relate to:
| · | Macroeconomic and geopolitical volatility, including continuing uncertainty over energy supply inflation and disruption, together with a weakening in the broader European economy; |
| · | Strategy execution; |
| · | Product liability; |
| · | Health and safety in the workplace; |
| · | Security and effective deployment and utilisation of IT systems; |
| · | Prolonged loss of a major manufacturing site; |
| · | People and change; |
| · | Liquidity, foreign exchange and banking arrangements; |
| · | Pension deficit; and |
| · | Legal, financial and regulatory compliance. |
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 2023. A list of current Directors is maintained on the Group website at www.renold.com.
By order of the Board
| Robert Purcell Chief Executive 15 November 2023 | Jim Haughey Group Finance Director 15 November 2023 |
