Renold Regulatory News (RNO)

Renold plc

Interim results for the half year ended 30 September 2022

("Renold", the "Company" or, together with its subsidiaries, the "Group")

 Strong performance, strategic chain acquisition and significant increase in earnings

Renold (AIM: RNO), a leading international supplier of industrial chains and related power transmission products, announces its interim results for the six month period ended 30 September 2022.

Financial highlights

· Revenue up 22.0% (14.3% at constant exchange rates) to £116.3m driven by strong growth in Chain (2021: £95.3m)

· Adjusted operating profit up 33.3% (20.8% at constant exchange rates) to £9.6m (2021: £7.2m)

· Return on sales increased by 80bps, (50bps at constant exchange rates) to 8.3% (2021: 7.5%). Price increases offset input cost and supply chain challenges

· Net debt as at 30 September 2022 £34.0m (1.2x rolling 12 month EBITDA), higher primarily due to €20.0m initial cash consideration for the acquisition of Industrias YUK, S.A.

· Adjusted EPS up 42.1% to 2.7p (2021: 1.9p)

· IAS 19 pension deficit reduced by 29.6% to £61.3m (31 March 2022: £87.1m)

Business highlights

· Strong first half performance as markets continued to recover, despite cost inflation, economic uncertainty and global supply chain disruption

· Group order intake in the period £121.3m, up 18.9%, excluding prior year long term military contract (11.0% at constant exchange rates)

· Order book at 30 September 2022 £99.0m, continues at record high (30 September 2021: £72.1m)

· Acquisition of Industrias YUK, S.A. ("YUK") for €24m, increases the Group's access to the Iberian Chain and wider European CVC markets. The integration process is well progressed and the business is performing ahead of expectations

· Good progress on capital investment, productivity improvements and cost reduction programmes, accelerating the integration of Group-wide supply chain and increasing capabilities

1 See Note 12 for details of the prior period restatements.

2 See below for reconciliation of actual rate, constant exchange rate and adjusted figures.

3 See Note 11 for definitions of adjusted measures and the differences to statutory measures.

4 See Note 8 for a reconciliation of net debt which excludes lease liabilities.

Robert Purcell, Chief Executive of Renold plc, said:

"The strong trading momentum experienced in the second half of the last financial year has continued in the first half, with the Group continuing to successfully manage significant inflation and supply chain disruption, resulting in growing sales and record orders. Whilst we are mindful that global markets continue to be uncertain, with ongoing labour and energy cost inflation and supply chain challenges, the Group's trading momentum continues to be positive. The Group has record order books and the acquisition of YUK provides opportunities for synergies and further growth."

Reconciliation of reported, constant exchange rate and adjusted results

1 See Note 12 for details of the prior period restatements

Investor Presentation

The Company will conduct a live presentation and Q&A session for investors at 5:30 pm GMT today, 16 November 2022. 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_6WUx953NTUmetFUprlFHSA

There will be the opportunity for participants to ask questions at the end of the presentation. Questions can also be emailed to renold@investor-focus.co.uk ahead of the presentation.

ENQUIRIES:

Cautionary statement regarding forward-looking statements

Some of the information in this document may contain projections or other forward-looking statements regarding future events or the future financial performance of Renold plc and its subsidiaries. You can identify forward-looking statements by terms such as "expect", "believe", "anticipate", "estimate", "intend", "will", "could", "may" or "might", the negative of such terms or other similar expressions. Renold plc (the Company) wishes to caution you that these statements are only predictions and that actual events or results may differ materially. The Company does not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of the Group, including among others, general economic conditions, the competitive environment as well as many other risks specifically related to the Group and its operations. Past performance of the Group cannot be relied on as a guide to future performance.

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, distributors and end-users. 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 at: www.renold.com

Chief Executive's statement

The Group has continued to successfully manage a period of sustained cost inflation and supply chain disruption. Materials, energy, labour and transportation costs have all increased substantially, however, selling price increases have been implemented, and margins have been robust. The Group expects to experience further cost pressures through the second half of the year but we are confident that these will again be managed successfully.

Renold continues to focus efforts on driving and optimising performance through identified projects, some requiring capital investment, targeting better operational efficiency, improved design and standardisation of products, better asset utilisation, more flexible working practices, and leveraging improved procurement strategies.

The Group performed well in the first half, delivering an increase in revenues of 22.0% to £116.3m (2021: £95.3m). At constant exchange rates, revenues increased 14.3%. Order intake continues to run ahead of sales, totalling £121.3m for the period. Excluding the impact of the £11.0m long term military contract announced on 13 July 2021, this represents an increase of 18.9% over the prior year equivalent period, or 11.0% at constant exchange rates.

Order books as at 30 September 2022 of £99.0m again represent a record high for the Group, and are 37.3% higher than the prior year equivalent; 24.3% at constant exchange rates.

Adjusted operating profit increased to £9.6m (2021: £7.2m, excluding the impact of non-recurring items, notably the benefit of US PPP loan forgiveness of £1.7m and £0.2m of costs relating to closed sites) with return on sales of 8.3% (2021: 7.5%), driven by productivity enhancements and the benefit of increased volumes and pricing. Statutory operating profit increased to £8.8m (2021: £8.7m), with statutory operating profit margin for the period of 7.6% (2021: 9.1%).

Net debt increased during the period by £20.2m to 34.0m (31 March 2022: £13.8m) due to the acquisition of Industrias YUK, S.A. and an investment in inventory.

M&A

On 3 August 2022 the Group acquired Industrias YUK, S.A. ("YUK") based in Valencia, Spain, a manufacturer and distributor of high quality conveyor chain ("CVC") and ancillary products.

The acquisition will allow Renold to leverage YUK's strong CVC market position in Spain and Portugal to expand sales of the Group's existing range of premium European transmission chain ("TRC") products, and enable sales of YUK products throughout Renold's extensive European sales network. Opportunities exist for significant manufacturing synergies between YUK and Renold's current international operations.

During the period in which Renold has owned YUK, which includes the August holiday period, YUK has traded ahead of our initial expectations. Since acquisition YUK recorded sales of £2.2m, operating profit of £0.2m, and an initial return on sales of 9.1%.

The initial cash consideration was €20.0 million, with two deferred cash payments of €2.0 million each, payable 12 months and 24 months from the date of 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 M&A focussed on complementary, earnings enhancing acquisitions to supplement organic growth, whilst maintaining a conservative level of leverage.

Business and financial review

1 See Note 12 for details of the prior period restatements Chain

The Chain division's revenue at constant exchange rates increased by 16.4% (£12.6m) to £89.2m.

Revenue increased across all regions:

· Europe increased turnover 8.6% at constant currency rates. Demand was robust driven by strong OEM and end user activity. The integration of the YUK business is proceeding as planned with the Group already starting to substitute externally sourced products, sell increased CVC product throughout Europe, and increase TRC sales in Spain.

· The Americas increased constant currency revenues by 19.2%, driven by the need to recover costs through pricing, new aftermarket business in transmission chain and strong demand for capital equipment in the food processing, ethanol and mining industries.

· Australasian revenues increased by 27.6% at constant exchange rates, as the business continued to benefit from execution of its growth strategy, targeting the move in Australia to more domestically manufactured goods, continuing strong demand from the Australian mining sector and notable increases in activity in both Indonesia and Malaysia. A new machining centre was installed in the Melbourne factory and progress was made in the development of chains for the cement and coal industries. 

· India achieved first half constant currency revenue growth of 13.9% as activity levels recovered. An expansion of the domestic dealer network and an increase in the number of local warehouses is underway, to enhance geographic coverage and service.

· Revenue in China was up 15.4% (at constant exchange rates) as a result of higher demand from Europe and the USA. Significant progress continues to be made in enhancing the performance of the factory in Jintan. As a result of a programme of standardisation and improvement projects, including the commissioning of new equipment, the factory is increasingly able to manufacture higher specification products.

Divisional adjusted operating profit at constant exchange rates was £11.7m, £2.5m higher than the prior year. Return on sales increased by 110bps to 13.1% (2021: 12.0%).

Order intake at constant exchange rates increased by 12.4% to £93.7m, resulting in a book to bill (ratio of orders to sales) for the first half of the year of 105.0% (2021: 108.7%).

Torque Transmission

Divisional revenues at constant exchange rates of £21.5m were £0.9m higher than in the prior year. This was due to increased demand for couplings in Australia and further recovery in North America, along with increased activity in the Gears business.

However, timing of the long-term military contracts resulted in some temporary reduction in revenue. Additionally, a number of key customers with long term supply arrangements in Eastern Europe were impacted by the war in Ukraine.

Divisional operating profit at constant currency reduced by £0.4m to £1.4m due to the timing of the military contract, and a weaker product mix between higher margin spare parts and lower margin OEM business.

Momentum in this division is expected to improve in the second half of the year, underpinned by an increase of 27.1% in order intake compared to the prior year (at constant exchange rates), excluding the benefit of the latest military contract.

Cash flow and net debt

1 See Note 12 for details of the prior period restatements 2 Includes £0.1m deferred consideration in relation to the acquisition of the conveyor chain business of Brooks Ltd in the prior year and £0.6m of acquisition costs for Industrias YUK, S.A.

Net Debt increased during the period by £20.2m to £34.0m, largely due to the acquisition of Industrias YUK, S.A. for cash consideration of €20.0m in the period, along with associated costs of £0.6m.

Working capital increased during the period. Inflation has increased inventory value, though this was partly offset by a corresponding increase in creditors. In addition, stocks of raw materials and finished goods have been temporarily increased in Germany in case energy supplies are disrupted this winter. A focus on customer terms and collections has seen debtor days improve, which largely offsets the effect of increased selling prices on receivables.

Further inflationary pressures on materials, together with a continuation of extended shipment times in supplying product between operating sites, will result in the increased levels of inventory being maintained in the second half year. This coupled with higher input prices will result in modest further increases in working capital.

Net capital expenditure was £2.2m representing an increase over the prior half year, but remained below historic levels as delays in the shipment of capital equipment continue. Strategic investments in production capabilities, including improved heat treatment and a roll-out of a standardised IT system continued and are expected to gather pace during the second half of the year.

Corporation tax payments on account (£1.3m) were at normal levels.

Cash financing costs increased in the half year, due both to the additional borrowing resulting from the YUK acquisition, and the increase in interest rates over the period. Further increases in interest rates are expected within the second half of the year.

Pensions

The Group has a number of closed defined benefit pension schemes (accounted for in accordance with IAS 19 'Employee Benefits'). During the pandemic, the Group negotiated a £2.8m one-off deferment in contributions with the UK pension scheme trustees. Contributions have now returned to normal levels, but in addition, the first of five annual deferred payments of c.£0.6m was made.

As a result of arrangements agreed with the UK pension scheme trustees and approved by the Pension Regulator, pension cash costs are known and stable, though increasing by RPI capped at 5%.

The Group's IAS 19 deficit decreased from £100.3m at 30 September 2021 to £61.3m at 30 September 2022.

The yield on corporate bonds increased sharply during the period. Consequently the discount rates used for the UK scheme rose from 2.75% to 5.45%, and resulted in a net reduction in UK pension liabilities of £22.9m. The long term expectation for CPI inflation remained broadly stable at 3.20% (3.25% prior year). Asset returns fell sharply during the period as both the value of gilts and equities fell. 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 non-UK schemes reduced by £2.9m to £20.1m, due in the main to an increase in discount rates.

The net financing expense (a non-cash item) was £1.0m (2021: £0.9m).

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 dividend. The dividend policy will remain under review as margin and cash flow performance continues to develop.

Summary

Demand in the first half was strong, showing a good recovery as the worst effects of the pandemic receded. Whilst this performance is expected to continue, supported by the record order book at the period end, the widely reported challenging global market and supply chain conditions are continuing, with significant inflationary trends being experienced, particularly with respect to materials, transport and energy costs. The Group is working to mitigate these headwinds as far as possible and it enjoys significant geographic, customer and sector diversity. With the Group benefiting from the strategic initiatives previously implemented, we are well placed for the future, with a robust business that is well positioned for the coming 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, together with the impact of the war in Ukraine and the ongoing impact of Covid-19, 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, transport delays, 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 2022 remain appropriate. The risks and associated mitigation processes can be found on pages 48-55 of the 2022 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 potential energy supply disruption in Germany;

· Strategy execution;

· Corporate transactions / business development;

· 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; andLegal, 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 2022. A list of current Directors is maintained on the Group website at www.renold.com.

By order of the Board

Robert Purcell Jim Haughey

Chief Executive Group Finance Director

16 November 2022 16 November 2022

Condensed consolidated income statement

for the six months ended 30 September 2022

1 Adjusted: In addition to statutory reporting, the Group reports certain financial metrics on an adjusted basis. Definitions of adjusted measures and information about the differences to statutory metrics are provided in Note 11 to the financial statements.

2 See Note 12 for details of the prior period restatements.

All results are from continuing operations

Condensed consolidated statement of comprehensive income

for the six months ended 30 September 2022

1 See Note 12 for details of the prior period restatements.

Condensed consolidated balance sheet

as at 30 September 2022

1 See Note 12 for details of the prior period restatements.

Condensed consolidated statement of changes in equity

for the six months ended 30 September 2022

1 See Note 12 for details of the prior period restatements.

Included in retained earnings is £2.4m (31 March 2022: £1.9m) relating to a share option reserve.

The other reserves are stated after deducting £4.9m (31 March 2022: £4.9m) relating to shares held in the Renold plc Employee Benefit Trust. The Renold Employee Benefit Trust holds Renold plc shares and satisfies awards made under various employee incentive schemes.

At 30 September 2022 the Renold Employee Benefit Trust held 18,422,509 (31 March 2022: 18,422,509) ordinary shares of 5p each and, following recommendations by the employer, are provisionally allocated to satisfy awards under employee incentive schemes. At 30 September 2022 the market value of these shares was £4.2m (31 March 2022: £3.7m).

Condensed consolidated statement of cash flows

for the six months ended 30 September 2022

Notes to the interim condensed consolidated financial statements

1. Corporate information

The interim condensed consolidated financial statements for the six months ended 30 September 2022 were approved by the Board on 16 November 2022. These statements have not been audited or reviewed by the Group's auditor pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information.

Renold plc is a limited liability company, incorporated and registered under the laws of England and Wales, whose shares are publicly traded. The principal activities of the Company and its subsidiaries are described in Note 3.

These interim condensed consolidated financial statements do not constitute statutory accounts of the Group within the meaning of Section 434 of the Companies Act 2006. The statutory accounts for the year ended 31 March 2022 have been filed with the Registrar of Companies. The auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

2. Accounting policies

Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 September 2022 have been prepared in accordance with the UK adopted International Accounting Standard 34, 'Interim financial reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the UK's Financial Conduct Authority (FCA).

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended 31 March 2022, which were prepared in accordance with UK-adopted international accounting standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under these standards.

The accounting policies, presentation and methods of computation applied by the Group in these interim condensed consolidated financial statements are the same as those applied in the Group's latest audited annual consolidated financial statements for the year ended 31 March 2022, except as noted below.

The excess of the consideration transferred, the amount of any non-controlling interest and the acquisition date fair value of any previously held equity interest in the acquired entity as compared with the Group's share of the identifiable net assets are recognised as goodwill. Where the Group's share of identifiable net assets acquired exceeds the total consideration transferred, a gain from a bargain purchase is recognised immediately in the income statement after the fair values initially determined have been reassessed.

New and revised accounting standards adopted by the Group 

During the period, the International Accounting Standards Board and International Financial Reporting Interpretations Committee have issued the following standards, amendments and interpretations, which are considered relevant to the Group. Their adoption has not had any significant impact on the amounts or disclosures reported in these financial statements.

· Amendments to IAS 16 (Property, Plant and Equipment - Proceeds before Intended Use) 

· Annual Improvements to IFRS 2018-2020

· Conceptual Framework (Amendments to References to the Conceptual Framework in IFRS Standards)

· Amendments to IAS 37 (Onerous contracts - Cost of fulfilling a contract)

New and revised accounting standards and interpretations which were in issue but were not yet effective and have not been adopted early by the Group

The IASB published a number of amendments to IFRSs, new standards and interpretations which are not yet effective, and of which some have been endorsed for use in the EU. An impact assessment has been performed for each of these, with no significant financial impact being identified for the consolidated financial statements of the Group and the separate financial statements of Renold plc. The amendments, new standards and interpretations will be adopted in accordance with their effective dates.

· Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' (Amendments to IFRS 4)

· Amendments to IAS 1 (Classification of Liabilities as Current or Non-Current)

· IFRS 17 'Insurance Contracts'

· Amendments to IAS 1 and IFRS Practice Statement 2 (Disclosure of accounting policies) 

· Amendments to IAS 12 (Deferred Tax related to Assets and Liabilities arising from a single transaction)

· Amendments to IAS 8 (Definition of Accounting Estimates)

· Lease Liability in a Sale and Leaseback (Amendments to IFRS 16)

Significant accounting judgements, estimates and assumptions

In the course of preparing these interim condensed consolidated financial statements, no judgements have been made in the process of applying the Group's accounting policies that have had a significant effect on the amounts recognised in the financial statements, other than those involving estimation uncertainty. The key sources of estimation uncertainty are those which applied in the annual consolidated financial statements for the year ended 31 March 2022, namely:

· Taxation

· Retirement benefit obligations

· Right-of-use assets

· Inventory valuation

· Impairment of non-financial assets

Financial risk management

The Group's financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements for the year ended 31 March 2022.

3. 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.

The segment results for the period ended 30 September 2022 were as follows:

1 The head office operating loss includes non-recurring costs of £0.6m relating to the acquisition of the YUK business.

2 Chain operating profit includes costs of £0.2m relating to amortisation of acquired intangibles.

The segment results for the period ended 30 September 2021 were as follows:

1 See Note 12 for details of the prior period restatements.

In addition to statutory reporting, the Group reports certain financial metrics on an adjusted basis (alternative performance measures, APMs). Definitions of adjusted measures, and information about the differences to statutory metrics are provided in Note 11 to the interim condensed consolidated financial statements. Constant exchange rate results are current period results retranslated using prior year exchange rates. A reconciliation is provided below and in Note 11.

The segment results for the year ended 31 March 2022 were as follows:

4. Net financing costs

5. Taxation

1 See Note 12 for details of the prior period restatements.

Factors affecting current and future tax charges

The decrease in the current tax charge for the period is attributable to the recognition of a receivable for the carry back of tax losses against prior year taxable profits.

The UK tax rate change from 19% to 25% was substantively enacted in the prior year, resulting in a credit to the income statement on remeasurement of the opening deferred tax asset balance in the prior period.

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.

6. Earnings per share

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

1 See Note 12 for details of the prior period restatements.

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

7. Retirement benefit obligations

The Group's retirement benefit obligations are summarised as follows:

Analysed as follows:

1 See Note 12 for details of the prior period restatements.

The decrease in the Group's net pre-tax deficit from £87.1m at 31 March 2022 to £61.3m at 30 September 2022 primarily reflects changes in the underlying assumptions, such as the discount rate, plus employer contributions made in the period.

8. Additional cash flow information

Reconciliation of operating profit to net cash flows from operations: