Renold Regulatory News (RNO)

8 Mar 2007 12:20

Renold PLC08 March 2007 RENOLD plc PROFIT AND CASH ENHANCEMENT ('PACE') REVIEW Following the announcement on 7 February, Renold plc ('Renold') is pleased toannounce the results of phase one of the profit and cash enhancement ('PACE')review. The PACE review was undertaken recently following the successful completion ofthe sale of Renold's Automotive and Machine Tools Businesses. The Board, havingreviewed the Group's businesses and operations, has formulated the PACE plan asoutlined below. It is focused on Renold's Chain business, which is one of theglobal brand leaders in industrial chain manufacture. Implementation of the PACEplan has now begun with the following key objectives, to: • Improve profitability in line with world class peers • Improve operating cash generation by reduced inventory and working capital • Release cash through disposals of surplus property • Reduce shareholder exposure to exogenous risk and earnings volatility • Provide a platform for future sales and margin growth It is expected that implementation will result in an improvement in profits inline with the market's expectations for 2007/2008 and provide the prospect ofexceeding current estimates for 2008/2009. Profit Improvement Renold opened manufacturing sites in Poland and China during 2006 which presentconsiderable opportunities for manufacturing cost savings compared with itsEuropean and U.S. facilities. The plan calls for a rapid expansion of manufacturing in these low costcountries ('LCCs') by moving existing European production and capturing newsales opportunities in the rapidly growing Asian markets. This has now startedand it is planned that at least 40% of direct labour headcount will be locatedin LCCs by the end of 2008/2009 As mentioned in the interim results, the Group's return on capital employed hadimproved to 14%, which was below our expectations for this key measure. Giventhe full impact of these planned changes we expect ROCE to increase to more than20% with a steady improvement being experienced over the two year period. The planned changes in manufacturing footprint will also have the effect ofreducing annualised costs, compared to 2006/2007, by a total £5.8m; of these£2.4m (which will mostly impact gross margin) of these annualised savings willbe implemented in 2007/2008 and a further £3.4m in 2008/2009, with the fullimpact of the savings being seen in the following year 2009/2010. Whilst theBoard believe the full implementation of this phase of PACE will create theopportunities for new growth both organically and by acquisition, the Group ismaking cautious assumptions in relation to sales over the period of the planwhilst manufacturing changes are executed. Operational Cash Generation Aside from improving profitability, the Board is focused on reducing workingcapital and in particular inventory levels. Fundamental to this is a change inmanufacturing methodology to move to a demand (or 'pull') led system ofmanufacturing. New management structures are being put in place to develop ourplanning and skills in this area. Aside from these changes in methodology, wewill reduce inventory and distribution points in Europe with the creation of twomajor Distribution Centres. The combined effect of these changes will be toreduce inventory levels by £7m realising a cash benefit of £4m and an on-goingreduced working capital to sales ratio which is expected to be in line withpeers at 20% of sales. Non-operational Cash Generation and Restructuring Costs The reduction of warehouses, together with other PACE initiatives, will allowfor the disposal of surplus property. Including the previously announced Burtondisposal, for which a revised planning application has been submitted, this isexpected to produce proceeds of £10m at values ahead of balance sheet carryingvalues. Capital expenditure costs will be £8m; the vast majority of these willoccur during 2007/2008. An additional non-cash inventory write-off of £3m will be incurred as well ascash restructuring costs of £7m, spread evenly across the period. The net effectof this is that the total programme costs including one-off and specific capitalcosts of £15m will be internally funded from property sales and the cash fromworking capital reductions and other cash improvements. Reduced volatility by better risk management More active management of the pension deficit will bring the UK net pensiondeficit down to a targeted 15% of market capitalisation putting it in the midrange of comparable UK engineering businesses. The first steps to achievingimproved asset management are being taken in conjunction with the pensiontrustees and their advisors Equally we have begun to identify opportunities fora more progressive approach to liability management alongside our current £3m ofdeficit reduction cash contributions to achieve this target over the period. The Group has become more active in pursuing tax planning opportunities. Thisfirst phase has identified saving of c.3% in cash taxes and the second phase isbeing explored with our advisors. The recently announced new banking facilities will allow the Group unconstrainedforeign exchange hedging which is being rolled out to hedge against the Group'slong exposure to the US dollar and Euro. Similarly the recent decline in energy prices has provided an opportunity toreduce short-term exposure to energy costs by putting in place domestic supplycontracts at each major manufacturing facility. Steel price changes appear less volatile despite some recent increases, but theGroup is ready to respond rapidly to potential future movements. Commenting on the PACE Programme, Bob Davies, Chief Executive, said: "We anticipate the PACE initiatives will put our operating performance on a parwith our best international peers, creating a more profitable and less volatilebusiness with a cost platform well set for sales growth and further expansion inour Chain business." A shareholder presentation is available on the Company website www.renold.com. For further information please contact: Renold plcBob Davies, Chief Executive 0161 498 4500Peter Bream, Finance Director This information is provided by RNS The company news service from the London Stock Exchange