Renold Regulatory News (RNO)

Renold plc

("Renold" or the "Group")

Preliminary results for the year ended 31 March 2018

29 May 2018

Organic growth in revenue achieved against disruptive factors in Chain;

adjusted operating profits stable

Renold, a leading international supplier of industrial chains and related power transmission products, today announces its preliminary results for the year ended 31 March 2018, together with an update on the progress of the Group's Strategic Plan.

Financial highlights

· Organic growth in underlying revenue of 3.8%; benefiting from structural changes made over the last few years

· Adjusted operating profit of £14.2m (2017: £14.5m) impacted by slow recovery of raw material price increases and machine breakdowns; adjusted operating profit broadly stable despite these factors

· Second half adjusted operating profit improved to £8.2m (2017: £7.5m) as raw material costs were recovered and factory performance improved

· Return on sales of 7.4% (2017: 7.9%); adjusted EBITDA £21.5m (2017: £21.3m)

· Net debt of £24.3m; net debt to adjusted EBITDA of 1.1x (2017: 0.8x)

Trading and operational highlights

· Year on year growth in underlying order intake of 7.2% remains strong with order intake 5.4% ahead of revenue for the year

· Continued progress on restructuring with sub-scale manufacturing operations in New Zealand (Chain) and China (Torque Transmission) closed in the year

· Good progress on the programme to relocate our Chinese chain manufacturing facility, with the construction phase nearing completion

Robert Purcell, Chief Executive of Renold plc, said:

"Through a combination of strategic action and improving market conditions, we have delivered organic revenue growth for the first time in a number of years. Order intake continues to remain strong with order books meaningfully ahead year-on-year.

"During the year ended 31 March 2018, raw material costs increased significantly and we were too slow to respond, resulting in an ongoing lag in passing these increased costs on to customers. This, combined with factory disruption, impacted profitability in the first half. Action to pass increased costs to customers through sales price increases has been implemented and, with the factory disruption behind us, profitability increased in the second half of the year.

"For the year ahead, we expect growth to continue as improving macroeconomic conditions strengthen order intake. Those same macroeconomic conditions are resulting in inflationary pressures on raw material costs and labour rates, which have also been impacted by legislative changes in some territories. Despite this, we expect growth, recovery of material price increases and continued efficiencies to overcome cost pressures and deliver improved adjusted operating profit margins.

"Despite the challenges this year, we have delivered a third year of stable adjusted operating profits at levels above those delivered before we commenced the STEP 2020 strategic programme. We believe that this demonstrates the benefits being delivered by the programme. Having overcome these short-term challenges, we continue to believe that the STEP 2020 strategy is the correct approach to creating and maintaining a more robust, higher margin business."

ENQUIRIES:

ANALYSTS AND INVESTORS

A meeting for investors and analysts will be held on 29 May 2018 at 9.30 am at Instinctif, 65 Gresham Street, London, EC2V 7NQ. For those unable to attend, a conference call facility is available as follows:

NOTES FOR EDITORS

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

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

Chairman's Letter

"We remain focused on executing our STEP 2020 Strategic Plan, in order to deliver sustainable improvements in performance. We have delivered a third year of consistent annual adjusted operating profits in volatile market conditions."

Overview

During the year ended 31 March 2018, Renold has continued to make progress in the delivery of its strategic plan, with the benefits evident in a number of areas across the business. Organic growth has been achieved for the first time in a number of years as improving macroeconomic conditions combine with progress in developing the Group's commercial and sales operations. The financial benefit of this organic growth, however, has been absorbed this year by significant increases in raw material costs. Despite this, adjusted operating profit has been held stable at levels consistent with the previous two financial years, and after increased depreciation from our investment programme.

Our Markets

Market conditions improved through the year as industrial customers returned to growth following the challenging market conditions experienced during the years ended 31 March 2016 and 31 March 2017. European markets moved first during the latter part of the year ended 31 March 2017. The rate of growth in Europe slowed through the year and has been superseded by growth in the Americas, where Canada has been particularly strong, and by India and China. Australasia has lagged the cycle, but recent orders suggest an improving demand in heavy industry, such as the mining and quarrying sectors.

Trading Performance

Revenue grew by 4.5% in the year (3.8% excluding the impact of foreign exchange movements), demonstrating the benefits of the investment that has been made in strengthening the commercial functions across the world over the last few years.

Following a number of years of benign and slowly reducing raw material prices, the year to 31 March 2018 experienced significant increases over a short period of time, particularly for steel, the key raw material for the Group. Sales price increases have been implemented across all territories to recover the additional costs being incurred. However, continuing increases in raw material prices, and the time required for us to pass these on to customers, resulted in a dilution of operating margins.

Adjusted operating profit of £14.2m was broadly consistent with the £14.2m and £14.5m delivered in the financial years ended 31 March 2016 and 31 March 2017 respectively.

While this is disappointing, adjusted operating profits have remained stable despite the significant and rapid movement in raw material costs. This demonstrates that the strategic actions being delivered have improved the resilience of the underlying business and, as the impact of raw material price increases abates, we expect to see these improvements delivering increases in adjusted operating margins.

Step 2020 Strategic Plan

I am pleased to be able to report that we continue to make strong progress in delivering key projects in support of the Step 2020 Strategic Plan.

This time last year, I reported that we had commenced a programme to relocate our chain manufacturing facility in China from Hangzhou to a purpose-built factory in Jintan, near Changzhou in Jiangsu province. I am pleased to confirm that construction of the new facility is well advanced. The transfer of manufacturing operations is scheduled to take place over the coming months, with full production from the new facility projected to commence by the end of the financial year.

In addition to this major change project, we also completed the closure of sub-scale manufacturing facilities in China (Torque Transmission) and New Zealand (Chain) with both locations now focused on sales and distribution. In the latter part of the year, we also closed our sales office in Singapore, transferring all customers to our existing sales office in Kuala Lumpur, Malaysia, from where they can be served more effectively.

We continue with our programme to roll out our chosen business systems solutions, including the ERP system and associated scheduling and engineering systems.

A number of important health and safety initiatives have continued through the year and I am very pleased that we have again seen further improvements. For the first time, we have awarded the 'Excellence Award', the highest level of our Health and Safety Award Schemes. Sites in Westfield (US), Mulgrave (Australia) and Kuala Lumpur (Malaysia) were awarded the Excellence Award for their performance in the financial year. Many congratulations to all of the teams involved.

The third element of the STEP 2020 Strategic Plan addresses acquisitions and the Group's appetite to grow through selective acquisitions. We continue to be committed to this element of the strategy and, in preparation for future acquisitions, we exercised the accordion facility on the Group's Multi-Currency Revolving Credit Facility during the year. The increased facility creates additional headroom for opportunistic acquisitions as and when they arise.

The Board and People

As previously reported, as part of a programme of orderly succession, John Allkins stepped down as Chairman of the Audit Committee and Senior Independent Director at the AGM in July 2017. David Landless has taken up the role of Chairman of the Audit Committee and Ian Griffiths has been appointed as Senior Independent Director. John will continue as a Non-Executive Director until his retirement from the Board at the 2018 AGM. I would like to extend my thanks to John for his valuable contributions during his tenure.

The Board continues to support the Executive team in reviewing and monitoring key activities under the STEP 2020 Strategic Plan. The Board remains closely involved in the oversight of the major project deliverables and all Board members have continued to give additional time and support on a wide range of issues during the year.

On behalf of the Board, I would like to thank all our employees for their continued hard work during the year as we progress the Group's strategy. The contribution of each employee is valued and appreciated.

Pensions

The Group's retirement benefit obligations decreased to £97.4m (2017: £102.0m), with the largest element of the decrease relating to contributions made to the schemes through the year.

The Group remains committed to progressively de-risking this position over time through a combination of agreed contributions to the schemes and specific de-risking projects as they become viable.

Dividend

The Board fully recognises the importance of dividends to shareholders. However, given the need to balance this with our planned capital investments, particularly in the new Chinese facility, the Board has decided not to recommend the payment of a dividend for the year ended 31 March 2018. We continue to make major investments in the Group's infrastructure and manufacturing plant and believe that this ongoing investment provides the optimal route to increasing shareholder value. This approach will remain under active review for future periods.

Summary

Market conditions improved through the year and combined with strengthened commercial teams to deliver organic growth for the first time in a number of years. While volatile raw material prices have had a disruptive effect during the year, we believe this to be a short term impact which will recover over time. The improved performance in the second half of the year is evidence that this recovery has commenced.

We have not allowed this year's challenges to stand in the way of delivery of the STEP 2020 Strategic Plan and continue to deliver significant business improvements. We are making good progress and continue to believe that mid-teens operating margins can be delivered, supported by volume increases.

Mark Harper

Chairman

29 May 2018

Chief Executive's Review

"We continue to progress our Strategic Plan. Organic growth is being delivered, benefiting from the structural changes made over the last few years, combining with improvements in the Group's core industrial markets. Adjusted operating margins have been impacted by significant raw material price increases during the year, and by the pace with which we have been able to pass these through to customers. Action continues to be taken on customer pricing to reflect continuing increases in raw material costs and we expect to see the benefit of these actions when raw material prices stabilise. We have not allowed these challenges to delay or obstruct our strategic progress and continue to take the actions required to deliver sustainable improvements in performance."

Overview

The investment we have made in our commercial teams is now starting to pay off and is being supported by improving market conditions in our end-user markets. Organic growth has been delivered for the year ended 31 March 2018, following two years of declines in underlying revenue. Underlying revenue increased by £7.0m to £191.6m and it is particularly pleasing to note that the revenue growth is spread across our divisions and our geographic territories.

The improving economic backdrop, amongst other factors, has resulted in significant price inflation for basic raw materials. For Renold, the most important raw material is steel and prices increased substantially over the year in all our geographic regions. The speed of change has been rapid and at a faster rate than we have passed on to customers through sales price increases. In the year ended 31 March 2018, raw material cost as a percentage of revenue has increased by 200bps, directly impacting upon the Group's adjusted operating profit margin which fell to 7.4% (2017: 7.9%).

In addition to the cost increases arising from increasing raw material prices, margins were also impacted by the effects of major machine breakdowns in the second quarter of the year at our facility in Einbeck, Germany. These breakdowns temporarily reduced manufacturing capacity, resulting in reduced availability of key lines. In order to mitigate the impact on key customers, the business incurred increased shipping costs as air-freight was used to reduce disruption to supply.

On a reported basis, adjusted operating profit decreased to £14.2m (2017: £14.5m). Adjusting for the impact of foreign exchange movements in the year, underlying adjusted operating profit reduced by £0.7m, with a £1.5m reduction for the first half of the year, offset by growth of £0.8m in the second half. The increase in adjusted operating profit from £6.0m in the first half of the year to £8.2m for the second half demonstrates progress against the factors impacting first half profitability.

Order intake improved in both the Chain and Torque Transmission divisions, with total orders 5.4% ahead of revenue for the year as a whole. Growth in Chain Europe has been slower, following a strong second half in the prior year. In other territories, order intake grew as market conditions improved.

STEP 2020 Strategic Plan - update on progress

Phase I - restructuring

· Manufacturing efficiency

In the latter part of the prior year, we merged our UK Couplings manufacturing operations to a single facility in Cardiff. The consolidated business has been operating from the single location from the start of the financial year and is a key element in the improved trading performance of Torque Transmission. Order intake remains strong, and the decision to focus manufacturing in one location, justifying investment in state-of-the-art production equipment, has been well received by key customers.

During the year, we closed the manufacturing activities of two small sub-scale operations: New Zealand in the Chain Division and China in the Torque Transmission Division. In both cases, the manufacturing operations did not have sufficient critical mass to be efficient as stand-alone units and the manufacturing has been absorbed into other sites around the world. In both instances, sales functions continue to operate in-country and act as the point of contact for Renold's products manufactured elsewhere in the world.

We previously set out our plans to relocate the Chinese chain manufacturing facility to a purpose-built facility near Changzhou in Jiangsu province. This is a significant factory move which will take around 18 months to two years to complete. During the year, we have been coordinating the factory build programme which is now well advanced. The project remains on plan, with the new facility expected to open during the second half of the year ending 31 March 2019.

· Business process efficiency

The most significant element of the programme to improve business process efficiency is the implementation of the Group's ERP system across all its sites. Progress continues and our Swiss Chain business unit was the latest to 'go-live'. This is the first of our European Chain business units to implement the system and a large proportion of the initial set-up relates to the European Chain business as a whole. As a result, we expect the roll out programme to accelerate as the programme progresses. Preparations for roll out to the Chain businesses in China and India are well progressed and they will both implement the system during 2018.

While the ERP system is the base platform for our business processes, there are a number of ancillary applications which interface with the ERP system, where we continue to make progress. Warehousing and scheduling are particular elements of Renold's operations that have historically been reliant on individual knowledge with limited standardised processes. We continue to roll out tools and systems to support operations in these areas and in the year have implemented both scheduling and warehousing solutions in Chain Americas and the scheduling solution in the Torque Transmission Gears business unit. In addition, we continue to make progress with our engineering systems, including our chain design software and our CAD/CAM systems, and in digitising our extensive library of chain designs and specifications.

While there is much that remains to be done to improve our business process efficiency and progress is slower than originally envisaged, I continue to believe that significant opportunity exists to remove cost and non-value adding processes in support of improving our operating profit margins.

Phase II - organic growth

· Growth activities

Over the last few years, Renold has been restructuring and strengthening the commercial and sales teams around the world. This has coincided with sluggish end-user markets; however, following an improving economic back-drop in our core industrial markets, the benefits of these changes is being demonstrated in organic growth across all Chain units and in certain Torque Transmission business units.

Underlying revenue growth accelerated through the year with 2.7% delivered for the first half, increasing to 4.9% for the second half as sales price increases combined with volume growth to deliver organic growth in underlying revenue of 3.8% for the year as a whole.

We continue to target non-traditional sectors where we believe Renold's products can provide a point of difference and where we can reduce our exposure to the cyclicality of core industrial markets. We are seeing progress from this approach in growth markets such as logistics and ports and anticipate further benefits in the future.

· Commercial positioning

Historically, Renold's customer service levels have not fully measured up to the world class engineering excellence of our products. In order to address this, we have implemented a business wide 'STEP 2 Service' programme which seeks to identify and address the specific underlying issues which result in inadequate levels of customer service. In addition, we are using the programme to shine a light on the cultural changes required at all levels of our businesses if we are to put customer service at the forefront of our business model. We remain in the early stages of this programme, but I believe that if we can match our engineering excellence with sector leading service, we will continue to differentiate ourselves and reinforce Renold's position in the market.

Phase III - acquisitions

Acquisitions remain a core component of our strategic plan. Acquisitions that can deliver growth or enhance margin, either through access to new markets and products or through consolidation of production facilities, have the opportunity to deliver value whilst reinforcing Renold's reputation as a leading global supplier of chain and torque transmission products. We are actively pursuing acquisition opportunities and, during the year, we recruited a Group Corporate Development Director to accelerate our progress in this area. By their nature, the timing of acquisitions is unpredictable and is dependent upon availability of suitable targets. We have clear acquisition criteria by which we will measure opportunities as they arise.

Chain performance review

Underlying revenue of £153.1m was £5.9m (4.0%) ahead of the prior year. Improving macroeconomic conditions have combined with a restructured and expanded commercial team to deliver organic revenue growth across all Chain regions. While regional performance has varied, the fact that improvement is present in all territories is reflective of a broad underlying improvement in end market conditions.

European revenue improved strongly during the second half of the prior year and growth has continued through the year ended 31 March 2018, with an underlying revenue increase of 1.8%. Revenue in the Americas finished 5.7% ahead of the prior year on an underlying basis, with improving demand in the US from major distributors and larger OEM accounts and strong demand from Canadian customers. This is a positive sign following challenging market conditions over the previous few years.

Underlying revenue in Australasia increased by 3.6%. Australia continued to see lower levels of maintenance spend from key mining customers and together with New Zealand, revenues were broadly flat for the year. The growth in Australasia was substantially delivered in South East Asia, where key palm oil markets recovered following weakness in prior years.

Domestic revenues in our developing market regions of China and India grew by 12.6% and 6.1% respectively.

Underlying order intake of £158.8m was up by £8.3m (5.5%) on the previous year. At a regional level, European underlying order intake increased by 1.0% following a strong second half of the prior year, and orders remain ahead of revenue for the year. In the Americas, order intake grew strongly with an increase of 11.7% reflecting an improvement in underlying market conditions and, critically, a recovery of major project work which has been absent until recently. Order intake in Australasia followed a similar trend to revenue and was marginally up by 0.5%. Order intake increased by 13.0% in China and 7.4% in India. Total orders for the year finished £5.7m (3.7%) ahead of sales.

Contribution margin, the margin after all variable production costs, fell by 150bps (as a percentage of revenue) as rapidly increasing material prices impacted on the cost of production, partially offset by direct labour efficiencies. The key raw material is steel, which we purchase in different forms and to different specifications around the world. Steel prices increased significantly during 2017, initially in Europe, but with other regions subsequently following the same trend. While the value and timing of increases varied across different territories and different grades of steel, we estimate the year-on-year increase in raw material costs to be around 10%.

Programmes to increase selling prices were implemented, but, due to the variety of customer arrangements and the lag as the order book translated into sales, there was a significant time delay in the new prices being delivered in revenue. Raw material prices have continued to increase in certain territories necessitating further rounds of sales price increases.

The pressure on operating margins created by increasing raw material costs was compounded by additional costs incurred due to machine breakdowns in Einbeck, Germany in the first half of the year. As factory output was reduced for a period of time, increased air-freight costs were incurred in order to expedite deliveries and minimise the impact on customers.

As a result of these disruptive factors, underlying adjusted operating profit finished at £14.7m compared to £17.1m last year, with an adjusted operating profit margin of 9.6% (2017: 11.4%).

Progress in mitigating the impact of raw material cost increases through the year is demonstrated by improvement in the adjusted operating profit margin from 8.0% in the first half of the year to 11.2% in the second half.

A return to organic growth is a positive sign and justifies the investment made in strengthening the commercial and sales teams across the Chain division. We have worked hard to pass on the raw material prices to our customers and good progress has been made. We expect to continue this work into the new financial year where the financial benefit will help to offset headwinds created by union and legislation driven labour rate inflation in Germany and the impact of the weakening US Dollar. In the longer term, we remain confident that the continued progress of the STEP 2020 Strategic Plan will deliver sustainable improvement in the division's operating margins.

Torque Transmission performance review

Underlying external revenue of £38.5m was £1.1m (2.9%) above the prior year primarily reflecting growth of the Couplings business unit.

The decision to consolidate the UK Couplings manufacturing operations was influenced by a number of factors, including the potential to improve manufacturing efficiency and to support investment that was difficult to justify in separate smaller locations. Following the successful execution of the consolidation to our Cardiff facility at the beginning of the year, the performance of the Couplings business unit has improved, combining operational efficiency with revenue growth. This revenue growth has been supported by key customers who have reacted well to the changes and the investment we have made in the business. In the period, UK Couplings won a major multi-year order from the marine industry, which has contributed to revenue growth in the year, but also enhances the order book for future years.

Progress in the other Torque Transmission business units has been slower. Our US business, which has specific strength in products for the steel and mass transit sectors, has been stable in the year as these markets remained subdued. It is too early to determine whether the introduction of US steel tariffs will stimulate US-based steel manufacturers to reinvest in their infrastructure which would create growth opportunities for Renold in this market.

A combination of growth in the Couplings business unit, combined with strong cost control in the other Torque Transmission business units has resulted in adjusted underlying operating profit increasing by £1.0m to £4.8m (2017: £3.8m).

Underlying order intake was £5.3m (14.1%) above the prior year, supported by the multi-year order won by UK Couplings. Even after removing the element of this contract that was not delivered in the year, order growth remained strong, increasing by £1.5m (4.0%) above the prior year.

We continue with our programme of product development, encompassing RBI Couplings, escalator drives and bespoke gearbox solutions for OEMs, amongst others. The timeline for introducing new products and for customers to adopt those new products in industrial markets is long, but we continue to believe that these actions will deliver growth for Torque Transmission over time.

The division has a strong portfolio of niche products and a reputation in the market for product performance and quality. Market conditions improved during the year for certain business units while remaining subdued for others. We have made progress in the year and have improved profitability, but are not yet seeing demand recover to historical levels. Continued focus on cost control has been a key element contributing to profit improvement for the division as a whole.

While growth has returned, revenue remains some way behind the levels experienced in more buoyant market conditions three to five years ago. As market conditions improve over the medium term, the division will be better placed to maximise returns.

Macroeconomic landscape and Brexit

There are a number of well-publicised macroeconomic risks on the horizon. We continue to deliver our strategy, cognisant of the risks, but similarly very aware that the impact of these risks is uncertain and should not delay our plans.

In Europe, the Brexit process creates uncertainty for Renold and for our customers. However, with only 7.8% of our Group revenues generated in the UK and with the majority of export sales from our UK Torque Transmission plants to non-European destinations, we do not believe that we are overly exposed to risk in this area.

In the US, which represents 31% of our revenue, the recently introduced import tariffs have the potential to disrupt the markets in which we operate. The initial programme of tariffs does not directly impact our finished products, but does cover a number of our raw materials, which we largely source from US-based suppliers. While it is too early to determine the impact of these changes, or whether the scope of the tariff arrangements will be further extended, our operating model currently includes US-manufactured product combined with imports of products from other global Renold manufacturing locations. As a result, we have flexibility to adjust our manufacturing strategy and adapt our approach if required in response to longer term changes in the competitive environment.

Outlook

Through a combination of strategic action and improving market conditions, we have delivered organic revenue growth for the first time in a number of years. Order intake continues to remain strong with order books meaningfully ahead year-on-year.

During the year ended 31 March 2018, raw material costs increased significantly and we were too slow to respond, resulting in an ongoing lag in passing these increased costs on to customers. This, combined with factory disruption, impacted profitability in the first half. Action to pass increased costs to customers through sales price increases has been implemented and, with the factory disruption behind us, profitability increased in the second half of the year.

For the year ahead, we expect growth to continue as improving macroeconomic conditions strengthen order intake. Those same macroeconomic conditions are resulting in inflationary pressures on raw material costs and labour rates, which have also been impacted by legislative changes in some territories. Despite this, we expect growth, recovery of material price increases and continued efficiencies to overcome cost pressures and deliver improved adjusted operating profit margins.

Despite the challenges this year, we have delivered a third year of stable adjusted operating profits at levels above those delivered before we commenced the STEP 2020 strategic programme. We believe that this demonstrates the benefits being delivered by the programme. Having overcome these short-term challenges, we continue to believe that the STEP 2020 strategy is the correct approach to creating and maintaining a more robust, higher margin business.

Robert Purcell

Chief Executive

29 May 2018

Finance Director's Review

"A difficult year has delivered broadly stable adjusted operating profits following improved performance during the second half of the year. As planned, we continue to invest through capital investment and restructuring."

Overview

Organic growth in revenue has been delivered, building on investment in the commercial teams and improving market conditions. Machine breakdowns and unrecovered raw material price increases impacted profitability of the Chain division in the year, most significantly in the first half. The actions delivered have mitigated the impact of these disruptive factors in the second half of the year, resulting in improved adjusted operating margins.

Growing order books are being generated by strong order intake, which if sustained, will support underlying organic growth into the new financial year. However, the weakening of the US Dollar against Sterling in the latter part of the year will moderate the impact of this growth in reported results in the next financial year.

Orders and revenue

Order intake in the Chain division was higher than revenue with the underlying ratio of orders to revenue (book to bill) being 103.7% in the year (2017: 102.2%). All Chain regions, with the exception of Australasia, had book to bill ratios greater than 100% for the year. Underlying order intake demonstrated good progress in the year with growth in the second half of 4.7% over the second half of the prior year (2017: 12.0%). This compared to growth of 5.2% for the first half (2017: 4.9%), and together resulted in growth for the full year of 5.5%.

Underlying orders in the Torque Transmission division grew strongly, by 14.1% (2017: 7.0% decline), benefiting from the win of a major multi-year order for UK Couplings to provide large HiTec couplings for marine applications. Excluding the element of this order which extends beyond 31 March 2018, underlying order intake remains strong, increasing by 4.0%. The book to bill ratio for the division was 112.0% (2017: 100.8%).

Group revenue for the year increased by £8.2m (4.5%) to £191.6m. Underlying revenue demonstrated a similar trend increasing by £7.0m (3.8%), with underlying growth of 2.7% for the first half accelerating to 4.9% for the second half which benefited from greater progress in passing sales price increases on to customers.

On a divisional basis, the Chain division saw underlying revenue increase by 4.0% and Torque Transmission by 2.9%.

Operating profit

The Group generated £6.0m of adjusted operating profit in the first half (2017: £7.0m) and £8.2m in the second half (2017: £7.5m), corresponding to a full year result of £14.2m (2017: £14.5m).

At the half-year, we reported underlying adjusted operating profit down by £1.0m compared to the first half of the prior year, impacted by the combined effects of machine break-downs in Germany and increased raw material costs across the Group, most significantly in the Chain Division. Adjusted operating profit of £8.2m in the second half represents underlying growth of 36.7% over the first half and demonstrates significant progress against the disruptive factors which impacted trading in the first half of the year.

Underlying adjusted operating margins fell during the year to 7.4% (2017: 7.9%). However, this reflects a disappointing first half margin of 6.3%, increasing to 8.5% for the second half.

The volatility of the margin over the year is largely driven by the Chain division where a disappointing adjusted operating margin for the first half of the year of 8.0% improved to 11.2% for the second half of the year as progress was made to mitigate the raw material price and factory disruption factors influencing the first half of the year.

Performance of the Torque Transmission division was more stable with a first half adjusted operating profit margin of 12.6% compared with 12.4% for the second half of the year.

Foreign exchange rates

Foreign exchange rates have remained volatile during the year reflecting an appreciation of Sterling against a number of currencies. The most significant movement for Renold has been the 12% weakening of the US Dollar against Sterling. Due to the phasing of movements over the current and prior years, the impact on the weighted average exchange rate used to translate US Dollar trading results reflects a 2% weakening of the US Dollar based on a rate of 1.33 for the year ended 31 March 2018 (2017: 1.31).

The Sterling to Euro rate has remained more stable than in the prior year, with the Euro 3% stronger at 31 March 2018 when compared to 31 March 2017. Again, due to the timing of the Brexit-vote related deterioration of Sterling in the prior year, the weighted average exchange rate used to translate Euro trading results reflects a 5% average strengthening of the Euro based on a rate of 1.13 for the year ended 31 March 2018 (2017: 1.19).

The effect of these two opposing movements is that the natural hedge provided by the Group's diverse operating territories and currencies reduced the impact of individual foreign exchange movements on the Group's trading results for the year.

If the year end exchange rates had applied throughout the year, there would be an estimated decrease of £5.8m to revenue and £0.3m to operating profit, principally as a result of the significant movement in the US Dollar rate towards the end of the year.

Restructuring costs

Various restructuring costs were incurred in the year as part of STEP 2020. Redundancy and restructuring costs of £0.8m were incurred across a number of the restructuring activities completed in the year. These included the closure of sub-scale manufacturing operations in New Zealand (Chain) and China (Torque Transmission), the closure of the Singapore office and final costs relating to the transfer of HiTec Couplings to Cardiff. The completion of the HiTec transfer enabled the sale in May 2017 of the Halifax facility for net proceeds of £0.5m, generating a gain on disposal of £0.2m, which has also been treated as restructuring income.

The largest individual element of the restructuring costs, which totals £3.9m, relates to the multi-year project to transfer the Chinese Chain manufacturing facility to a purpose-built facility in Jintan, near Changzhou. Of this value, £0.8m relates to costs incurred in the year, with the remaining £3.1m being a provision against closure costs and other costs associated with the transfer to be paid over the next twelve months.

Other adjusting items

Other adjusting items include legacy pension scheme administration costs of £0.9m (2017: £0.7m) and amortisation of acquired intangible assets of £0.9m (2016: £1.1m).

In addition, as a result of lower profitability from our Chain Americas site and an increase in the post-tax discount rate used to discount future cash flows, the annual impairment review has identified a requirement to impair the goodwill relating to the acquisition by £2.1m. The goodwill relates to the acquisition of Jeffrey Chain which was completed in 2000.

Financing costs

External net interest costs in the year were £1.7m (2017: £1.7m). The annual charge includes £0.3m (2017: £0.2m charge) in respect of amortisation of the residual refinancing costs paid in 2012, 2015 and 2017 (relating to the exercise of the accordion). Financing costs also include £0.1m of unwinding discounts on onerous lease provisions established for the Bredbury factory site.

The net IAS 19R finance charge (which is a non-cash item) is £2.4m (2017: £2.5m). In the current year, the actual return on assets was £0.9m higher than the return used in the interest calculation as specified in IAS 19R due primarily to stronger equity markets.

Result before tax

Profit before tax was £1.4m (2017: £6.7m). Adjusted profit before tax, which excludes restructuring costs, IAS 19R financing costs, amortisation of acquired intangible assets and legacy pension scheme costs, was £12.5m (2017: £12.8m).

Taxation

The current year tax charge of £3.6m (2017: £1.9m) is made up of a current tax charge of £1.1m (2017: £2.9m) and a deferred tax charge of £2.5m (2017: credit of £1.0m). The charge in the year is heavily impacted by US tax reform which has reduced the tax rate applied to the US deferred tax assets and combined with a one-off deferred tax charge relating to restrictions on interest deductibility. The total effect of US tax reform in the year is a deferred tax charge of £2.4m.

The Group cash tax paid increased to £3.8m (2017: £1.0m). The difference between tax charges and cash tax paid is due to the utilisation of tax losses and other tax assets in various parts of the Group. The last of our historical tax losses in Germany were utilised in the year ended 31 March 2017. The effect of this was to increase the current tax charge in the prior year, which became payable in the year ended 31 March 2018 and combined with a move to payments on account in this territory.

Group results for the financial period

A loss of £2.2m was incurred for the financial year ended 31 March 2018 (2017: profit of £4.8m). The basic and diluted adjusted earnings per share were both 4.5p (2017: earnings both 4.6p).

Basic loss per share of 1.0p compares with earnings per share of 2.1p for the year ended 31 March 2017.

Balance sheet

Net assets at 31 March 2018 were £1.1m (2017: £7.8m). The fall was driven by a number of one-off factors including the provision for costs of the China factory move, the impairment of goodwill relating to the Jeffrey Chain acquisition in the US and the impact of US tax reform.

Net assets continue to be impacted by the net pension deficit which reduced to £97.4m (2017: £102.0m) as contributions to the scheme combined with small increases in discount rates. The net liability for pension benefit obligations was £81.7m (2017: £84.8m) after allowing for a net deferred tax asset of £15.7m (2017: £17.2m). Overseas schemes now account for £27.8m (28.5%) of the net pension deficits and £25.1m of this is in respect of the German scheme which is not required to be funded.

Cash flow and borrowings

Cash generated from operations was £6.1m (2017: £7.4m). Gross capital expenditure was up in the year at £10.1m (2017: £9.6m). This is lower than expected and partially reflects capital expenditure for the new Chinese factory now expected to be incurred in the year ending 31 March 2019. Consequently, capital expenditure in the new financial year is expected to increase in support of the new factory in China, the continued reinvestment of plant and equipment and the ongoing implementation of new IT systems.

The absolute level of working capital was £2.6m higher than in the prior year, reflecting increased raw material costs being absorbed into inventory and a lower level of capital creditors at 31 March 2018. The net effect of these changes is that our working capital KPI (average working capital as a ratio of rolling 12 month sales) remained stable at 21%.

Group net borrowings at 31 March 2018 of £24.3m were £6.9m higher than the opening position of £17.4m comprising cash and cash equivalents of £13.9m (2017: £16.4m) and borrowings of £38.2m (2017: £33.8m). The increase in net debt reflects the cash restructuring costs and increased tax payments made in the year in addition to the £1.2m final payment of deferred consideration for the Tooth Chain acquisition.

Debt facility and capital structure

The Group's core banking facilities were increased in the year through the exercise of the accordion facility. Following the increase, the Group's committed Multi-Currency Revolving Credit Facility (MCRF) totalled £61.5m and borrowing under the facility at 31 March 2018 was £38.5m. The facility matures in May 2020.

The Group continues to operate comfortably within covenant limits. The net debt/adjusted EBITDA ratio as at 31 March 2018 is 1.12 times (covenant requirement: up to 2.5 times; 2017: 0.82 times), based on the reported figures for the period as adjusted for the banking agreement. The adjusted EBITDA/interest cover as at 31 March 2018 is 12.0 times (covenant requirement: greater than 4.0 times; 2017: 12.1 times), again on a banking basis.

At 31 March 2018, the Group had unused credit facilities totalling £23.0m and cash balances of £13.9m. Total Group credit facilities amounted to £63.5m, all of which were committed.

Treasury and financial instruments

The Group's treasury policy, approved by the Board, is to manage its funding requirements and treasury risks without undertaking any speculative risks. Treasury and financing matters are assessed further in the section on Principal Risks and Uncertainties.

To manage foreign currency exchange risk on the translation of net investments, certain US Dollar denominated borrowings taken out in the UK to finance US acquisitions are designated as a hedge of the net investment in US subsidiaries. At 31 March 2018 this hedge was fully effective. The carrying value of these borrowings at 31 March 2018 was £6.2m (2017: £6.9m).

At 31 March 2018, the Group had 1% (2017: 1%) of its gross debt at fixed interest rates. Cash deposits are placed short-term with banks where security and liquidity are the primary objectives. The Group has no significant concentrations of credit risk with sales made to a wide spread of customers, industries and geographies. Policies are in place to ensure that credit risk on individual customers is kept to a minimum.

Pension assets and liabilities

The Group has a mix of UK (84% of gross liabilities) and overseas (16%) defined benefit pension obligations as shown below.

The Group's retirement benefit obligations decreased from £102.0m (£84.4m net of deferred tax) at 31 March 2017 to £97.4m (£81.7m net of deferred tax) at 31 March 2018. The largest element of the decrease relates to the UK scheme where the deficit decreased from £72.0m to £69.6m. The decrease in the deficit of the overseas schemes of £2.2m arises from an underlying reduction in the deficit of £2.4m, offset by a £0.2m increase arising from foreign exchange movements in the year.

· UK funded scheme

The reduction in the UK scheme deficit of £2.4m reflects a number of offsetting factors. Decreases in the liability arise from contributions to the scheme of £2.9m and £3.0m arising from the increase in the discount rate applied. Offsetting increases in the deficit arise from the shortfall in asset returns to offset the discount unwind of the liabilities (net effect of £1.3m), changes to commutation factors and the removal of the Pension Increase Exchange Option, which together increase liabilities by £2.2m. The impact of changes in the mortality assumptions are broadly neutral.

There was an increase in the benefits paid by the scheme during the year, which totalled £12.5m (2017: £9.8m). This largely reflects an increase in transfers out of the scheme arising from the introduction of greater 'pension freedoms' in the UK.

· Overseas funded schemes

The overseas funded schemes comprise a number of smaller schemes around the world. Deficits on these schemes reduced in the year by £1.1m, benefiting from a £0.5m reduction in net liability due to the movement in foreign exchange rates. In local currencies, the schemes benefited from contributions to the scheme combining with greater levels of asset return in order to reduce the net deficit.

· Overseas unfunded schemes

This category largely relates to unfunded German schemes. The local currency deficit decreased by £1.6m as £1.3m of contributions paid combined with smaller benefits from actuarial remeasurements. A strengthening of the Euro against Sterling resulted in an increase in the deficit of £0.6m.

The aggregate expense of administering the pension schemes was £0.9m (2017: £0.7m) and is included in operating costs but is excluded in arriving at adjusted operating profit.

The latest triennial actuarial valuation of the UK Scheme, with an effective date of 5 April 2016, was agreed in May 2017. This process concluded that contributions to the UK Scheme should continue unchanged with no additional contributions in excess of contributions from the previously agreed asset backed funding structure. The next triennial valuation date will be 5 April 2019.

Total cash costs for UK deficit repair payments were £2.9m (2017: £3.2m). For overseas pension schemes, the Company contributions in the period were £1.7m (2017: £2.1m).

Ian Scapens

Group Finance Director

29 May 2018

Principal risks and uncertainties

Risk is inherent in our business activities. We take steps at both a Group and subsidiary level to understand and evaluate potential risks and uncertainties which could have a material impact on our performance in order to mitigate them. Accordingly, a risk aware environment is promoted and encouraged throughout the Group. Details of the principal risks and uncertainties are summarised below and set out in more detail in the Annual Report.

Responsibility statement of the Directors on the annual report and financial statements

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 31 March 2018. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

· the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole;

· the strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

· the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEfor the year ended 31 March 2018

All results are from continuing operations.

1. Adjusted for the after tax effects of pension administration costs, restructuring costs, changes in the provision discounts, IAS 19R financing costs, impairment of goodwill and amortisation of acquired intangible assets.

CONSOLIDATED BALANCE SHEETas at 31 March 2018

Approved by the Board on 29 May 2018 and signed on its behalf by:

Robert Purcell Ian Scapens

Chief Executive Finance Director

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the year ended 31 March 2018

CONSOLIDATED STATEMENT OF CASH FLOWSfor the year ended 31 March 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of preparation

The preliminary statement was approved by the Board on 29 May 2018. The preliminary statement does not represent the full consolidated financial statements of Renold plc and its subsidiaries which will be delivered to the Registrar of Companies following the Annual General Meeting. The audited consolidated financial statements of Renold plc for the year ended 31 March 2018 have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in June 2018.

The preliminary statement has been prepared on a consistent basis using the accounting policies set out in the Renold plc annual report for the year ended 31 March 2017. The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2017 or 2018, but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the company's Annual General Meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006.

Changes in accounting policies and disclosures

The Group has adopted all applicable amendments to standards with an effective date from 1 April 2017. Adoption of these standards did not have any material impact on financial performance or position of the Group.

Going Concern

The 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 Directors have assessed the future funding requirements of the Group and the Company and compared them to the level of available borrowing facilities. The assessment included a detailed review of financial and cash flow forecasts, financial instruments and hedging arrangements for at least the twelve month period from the date of signing the Annual Report and Accounts. The Directors consider a range of potential scenarios within the key markets the Group serves and how these might impact on the Group's cash flow, facility headroom and banking covenants. The Directors also considered what mitigating actions the Group could take to limit any adverse consequences. The Group's forecasts and projections, taking account of reasonably possible scenarios show that the Group should be able to operate within the level of its borrowing facilities and covenants.

Having undertaken this work, the Directors are of the opinion that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the consolidated financial statements.

2. Segmental information

For management purposes, the Group is organised into two operating segments according to the nature of their products and services and these are considered by the Directors to be the reportable operating segments of Renold plc as shown below:

· The Chain segment manufactures and sells power transmission and conveyor chain and also includes sales of torque transmission products through Chain National Sales Companies (NSCs); and

· The Torque Transmission segment manufactures and sells torque transmission products such as gearboxes and couplings.

No operating segments have been aggregated to form the above reportable segments.

The Chief Operating Decision Maker (CODM) for the purposes of IFRS 8: 'Operating Segments' is considered to be the Board of Directors of Renold plc. Management monitor the results of the separate reportable operating segments based on operating profit and loss which is measured consistently with operating profit and loss in the consolidated financial statements. The same segmental basis applies to decisions about resource allocation. Disclosure has not been included in respect of the operating assets of each segment as they are not reported to the CODM on a regular basis. However, Group net financing costs, retirement benefit obligations and income taxes are managed on a Group basis and therefore are not allocated to operating segments. Transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.

2. Segmental information (continued)

The Group uses a variety of alternative performance measures, which are non-IFRS, to assess the performance of its operations. The Group considers these performance measures to provide useful historical financial information to help investors evaluate the underlying performance of the business by adjusting for volatility created by one-off items and non-trading performance related costs such as amortisation and legacy pensions costs.

The two consistently applied performance measures which are disclosed within this annual report and accounts include adjusted results and underlying results.

Adjusted results exclude the impact of restructuring costs, pension financing charges, pension administration costs, impairment of goodwill and the amortisation of acquired intangible assets and the tax thereon. A reconciliation of these results is shown on the face of the consolidated statement of comprehensive income and in the tables opposite. Adjusted profit of £14.2m is derived from the statutory profit of £5.6m.

Underlying results are retranslated to current year exchange rates and therefore only prior year comparatives would be deemed an alternative performance measure. A reconciliation is provided below.

1. Inter-segment revenues are eliminated on consolidation.

2. Included in Chain external sales is £4.9m (2017: £4.7m) of Torque Transmission product sold through the Chain NSCs, usually in countries where Torque Transmission does not have its own presence.

3. The measure of segment assets reviewed by the CODM is total working capital, defined as inventories and trade and other receivables, less trade and other payables. Working capital is also measured as a ratio of rolling annual sales.

4. Capital expenditure consists of additions to property, plant and equipment and intangible assets.

2. Segmental information (continued)

Geographical analysis of external sales by destination, non-current asset location and average employee numbers

The UK is the home country of the parent company, Renold plc. The principal operating territories, the proportions of Group external revenue generated in each (customer location), external revenues, non-current assets (asset location) and average employee numbers in each are as follows:

All revenue relates to the sale of goods and services. No individual customer, or group of customers, represents more than 10% of Group revenue (2017: None). Non-current assets consist of goodwill, other intangible assets, property, plant and equipment and investment property. Other non-current assets and deferred tax assets are not included above.

3. Adjusting items

Various restructuring costs were incurred in the year as part of the STEP 2020 Strategic Plan. A restructuring cost of £3.9m was incurred in the year as we continued a multi-year project to transfer the China Chain manufacturing facility from leased premises in Hangzhou to a purpose-built facility near Changzhou in Jiangsu province. The cost includes £0.8m of costs incurred in the year in addition to £3.1m as a provision for future costs associated with the closure and relocation.

Also in the year, final redundancy and restructuring costs of £0.3m were incurred transferring the HiTec Couplings business, located in Halifax, to our existing Couplings facility in Cardiff. On May 2017, the Halifax property was sold resulting in a gain on disposal of £0.2m. The increased manufacturing capability at the Cardiff site permitted the closure of the China Couplings facility with manufacturing moving to Cardiff and South Africa. This incurred further redundancy and restructuring costs of £0.3m in the year. Both projects are now completed.

A further £0.4m was incurred in relation to other projects including restructuring the European distribution and sales operations, the cessation of manufacturing operations in New Zealand, and in relation for the closure of our Singapore site.

3. Adjusting items and exceptional items (continued)

Prior year restructuring costs included £0.3m of final transitional services relating to the acquisition of the Renold Tooth Chain business, £0.6m of costs relating to relocation of the European distribution and sales operations and £2.5m of costs incurred on the transfer of the HiTec Couplings business. As noted above, this enabled the closure of the China Couplings facility and a provision of £0.6m was made against future closure costs.

Also in the prior year, other restructuring costs totalling £0.6m were incurred in preparation for the China Chain relocation, the relocation of the Malaysian manufacturing facility into larger premises and other STEP 2020 restructuring programmes.

In March 2017, the Mulgrave manufacturing facility in Australia was sold realising net proceeds of £9.3m resulting in a gain on disposal, net of associated costs, of £2.9m.

4. Net financing costs

5. Taxation

Factors affecting the Group tax charge for the year

The US Government has enacted substantial tax reforms during the year. The impact on our US operations is to reduce the value of deferred tax assets and liabilities in relation to the reduced tax rate, and to increase the restrictions on interest deductibility which has led to the derecognition of the related deferred tax asset given the current capital structure of our US operations. Accordingly, the US deferred tax balances have been reduced by £2.4m.

The Group's tax charge in future years will be affected by the profit mix, effective tax rates in the different countries where the Group operates and utilisation of tax losses. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries in accordance with IAS 12.39.

5. Taxation (continued)

The actual tax on the Group's profit before tax differs from the theoretical amount using the UK corporation tax rate as follows:

Effective tax rate

The effective tax rate of 225% (2017: 28%) is higher than the UK tax rate of 19% (2017: 20%) due to the following factors:

· US tax reform causing the de-recognition of deferred tax assets in respect of interest deduction restrictions and the devaluing of the net US deferred tax asset due to the change in tax rate;

· Losses in jurisdictions where, due to uncertain future profitability, deferred tax assets are not recognised;

· Permanent differences including items that are disallowed from a tax perspective such as entertaining and certain employee costs;

· Prior year adjustments arising as tax submissions are finalised and agreed in specific jurisdictions; and

· Differences in overseas tax rates, typically being higher than the rates in the UK.

Tax payments

Cash tax paid in the year of £3.8m (2017: £1.0m) is higher than the current tax charge as payments on account have commenced in Germany following the utilisation of tax losses there.

6. Earnings per share

Earnings per share (EPS) is calculated by reference to the earnings for the year and the weighted average number of shares in issue during the year as follows:

Inclusion of the dilutive securities, comprising 4,367,312 (2017: 3,293,000) additional shares due to share options in the calculation of basic and adjusted EPS does not change the amounts shown above (2017: 2.1p and 4.6p respectively).

The adjusted EPS numbers have been provided in order to give a useful indication of underlying performance by the exclusion of adjusting items. Due to the existence of unrecognised deferred tax assets, there was no associated tax credit on some of the adjusting items and in these instances adjusting items are added back in full.

7. Dividends

No ordinary dividend payments were paid or proposed in either the current or prior year.

8. Goodwill

The Group performed its annual impairment test of goodwill at 31 March 2018 which compares the current book value to the recoverable amount from the continued use or sale of the related business.

At 31 March 2018, before impairment testing, goodwill and associated assets of $30.2m was held in relation to Jeffrey Chain. Recent performance has been below historical levels and, consequently, a more detailed impairment review has been performed. Whilst there is no expectation that there should be a long-term deterioration in the future prospects of Jeffrey Chain, the Group has applied a sensitivity to the speed of recovery of Jeffrey Chain, decreasing the cash generation in the early years, but assuming greater growth in order to recover the business back to the same historic level by the end of the forecast period. Jeffrey Chain has therefore been reduced to its recoverable amount of $27.5m through recognition of an impairment loss against goodwill of $2.7m.

No impairment charge has been recognised in the period for any other CGUs.

The recoverable amount of each Cash Generating Unit (CGU) has been determined on a value in use basis. Value in use is calculated as the net present value of cash flows derived from detailed financial plans for the next two financial years as approved by the Board. Cash flows beyond this are extrapolated using the long-term country growth rates disclosed below:

Key assumptions used in the value in use calculations:

Sales volumes, selling prices and cost changes

The Group prepares cash flow forecasts based on the latest management estimates for the next two financial years. The expected sales prices and volumes reflect management's experience of how sales will develop at this point of the economic cycle. The expected profit margin reflects management's experience of each CGU's profitability at the forecast level of sales and incorporates the impact of any restructuring that took place during the year ended 31 March 2018.

Cash flows beyond the period of projections are extrapolated using long-term growth rates published by the Organisation for Economic Co-operation and Development for the territory in which the CGU is based. The discount rates applied to the cash flows of each of the CGUs are based on the risk free rate for long-term bonds issued by the government in the respective market. This is then adjusted to reflect both the increased risk of investing in equities and the systematic risk of the specific CGU (using an average of the betas of comparable companies).

8. Goodwill (continued)

Management believe that, other than for Jeffrey Chain, no reasonably possible change in any of the key assumptions would cause the recoverable amount of any CGU to fall below the relevant carrying value.

Sensitivity analysis for Jeffrey Chain impairment review

The carrying value of the goodwill in respect of Jeffrey Chain is most sensitive to the discount rate used in the calculation of the recoverable amount and the value of the free cash flow in the year used for calculation of the terminal value perpetuity. A 1% increase in the discount rate used would result in an additional impairment of $2.7m. A $0.5m reduction in the value of the free cash flow in the year used for calculation of the terminal value perpetuity would result in an additional impairment of $3.2m.

9. Intangible assets

The acquisition of the Tooth Chain business in January 2016 brought significant benefit to the Group in terms of new customers, relationships and technical 'know-how'. These benefits have been valued under IFRS 3 using estimates of useful lives and discounted cash flows of expected income. The values are being amortised as follows:

Customer orderbook

Customer orderbook is amortised when the orderbook at the date of acquisition has been fulfilled. This is now fully amortised.

Customer lists and technical know-how

Customer lists and technical know-how is being amortised over five years as the benefits are likely to crystallise over a longer period.

No brand names were acquired as part of the acquisition.

10. Property, plant and equipment

Future capital expenditure

At 31 March 2018 capital expenditure contracted for but not provided for in these accounts amounted to £2.7m (2017: £2.6m).

Asset held for sale

In the prior year the former HiTec Couplings manufacturing site located in Halifax, UK was classified as an asset held for sale (Note 11).

11. Asset Held for Sale

During the year, the HiTec Couplings' Halifax site was sold for net proceeds of £0.5m realising a gain of £0.2m.

12. Inventories

Inventories pledged as security for liabilities amounted to £33.0m (2017: £32.8m).

13. Trade and other receivables

1. Financial assets carried at amortised cost.

The Group has no significant concentration of credit risk but does have a concentration of translational and transactional foreign exchange risk in both US Dollars and Euros. However, the Group hedges against these risks.

Trade receivables are non-interest bearing and are generally on 30-90 days terms. As at 31 March, the ageing analysis of trade receivables is as follows:

14. Cash and cash equivalents

15. Borrowings

All financial liabilities above are carried at amortised cost.

Core banking facilities

On 13 May 2015 the Group renewed its banking facilities with its existing banking partners, Svenska Handelsbanken AB and Lloyds Bank plc. This facility replicated the previous £41m Multi-Currency Revolving Facility and introduced a £20m accordion feature. During the year, the accordion was exercised with HSBC joining the facility, increasing the facility size to £61.5m. The facility matures in May 2020 and is fully committed and available until maturity.

15. Borrowings (continued)

At the year end the undrawn core banking facility was £23.0m (2017: £5.3m). The Group pays interest at LIBOR plus a variable margin in respect of this facility. The average rate of interest paid in the year was LIBOR plus 1.94% for the Sterling denominated facility and LIBOR plus 1.84% for the Euro and US Dollar denominated facility (2017: LIBOR plus 1.91% for the Sterling denominated facility and LIBOR plus 1.82% for the Euro and US Dollar denominated facility). This facility has two primary financial covenants which are tested on a six monthly basis. The first is net debt as a ratio of rolling annual EBITDA with a maximum ratio of 2.5 times. The second is interest cover with a minimum ratio of 4.0 times (rolling annual EBITDA divided by net financial interest cost). The Group also benefits from a number of overseas facilities totalling £2.0m (2017: £2.2m) with availability at year end of £1.8m.

Secured borrowings

Included in Group borrowings are secured borrowings of £36.1m (2017: £32.3m). Security is provided by fixed and floating charges over assets (including certain property, plant and equipment and inventory) primarily in the UK, USA, France, Germany and Australia. Certain group companies have provided cross-guarantees in respect of these borrowings.

Finance leases

The Group has no obligations under finance leases.

Preference Stock

At 31 March 2018, there were 580,482 units of Preference Stock in issue (2017: 580,482).

All payments of dividends on the Preference Stock have been paid on the due dates. The Preference Stock has the following rights:

i. a fixed cumulative preferential dividend at the rate of 6% per annum payable half yearly on 1 January and 1 July in each year;

ii. rank both with regard to dividend (including any arrears on the commencement of a winding up) and return of capital in priority to all other stock or shares in the Company, but with no further right to participate in profits or assets;

iii. no right to attend or vote, either in person or by proxy, at any general meeting of the Company or to have notice of any such meeting, unless the dividend on the Preference Stock is in arrears for six calendar months; and

iv. no redemption entitlement and no fixed repayment date.

There is no significant difference between the carrying value of financial liabilities and their equivalent fair value.

16. Trade and other payables

1. Financial assets carried at amortised cost.

Trade payables are non-interest bearing and are normally settled within 60 day terms. The Group does have a concentration of translational foreign exchange risk in both US Dollars and Euros. However, the Group hedges against this risk.

17. Provisions

Business restructuring

At 31 March 2017, a provision was held against costs associated with the planned closure of the Chinese Torque Transmission facility and costs associated with the final stages of the relocation of the UK HiTec Couplings operations to our existing Cardiff site.

At 31 March 2018, a provision of £3.1m has been made against future costs to be incurred as part of the closure and relocation of our Chinese Chain manufacturing facility. See Note 3 on adjusting items for more details.

Restructuring provisions are expected to be utilised within 12 months.

Onerous lease

This provision relates to onerous lease costs in respect of the lease of the Bredbury plant in the UK and the Mulgrave facility in Australia. The Bredbury lease expires in May 2030. In August 2016, it was agreed to sublet a significant part of the property for a five year term for an annual rent of £0.6m. £0.2m of the provision was utilised in the year (2017: £0.9m) leaving a provision of £3.0m in respect of this lease (2017: £3.2m).

In addition, as part of the sale agreement of the Mulgrave facility in Australia completed in March 2017, it was agreed that the business could remain in the property for a maximum of three additional years for an annual rent of £0.5m. This lease was deemed to be onerous and as a result a provision was established in relation to the total lease cost of £1.6m. Costs of £0.5m were incurred in the year along with exchange £0.1m, resulting in a provision at 31 March 2018 of £1.0m.

Contingent consideration

Renold (Hangzhou) Co Limited, China

A provision of £0.7m (2017: £0.8m) was established for the purchase of the outstanding 10% of the equity following the acquisition of 90% of the equity interest in Renold (Hangzhou) Co Limited in the period ended 31 March 2008. This payment is expected to be settled as part of the programme to relocate the Chinese Chain manufacturing facility within 12 months.

Renold Tooth Chain, Germany

A provision of £1.1m was established on the acquisition of the Tooth Chain business in January 2016 against the expected future value of contingent consideration. The contingent consideration was paid in the year ended 31 March 2018 following achievement of the sales targets.

18. Additional cash flow information

Reconciliation of operating profit to net cash flows from operations:

Reconciliation of net change in cash and cash equivalents to movement in net debt:

19. Post balance sheet events

There were no significant post balance sheet events to report.