Renold : Final Results

Final Results

Released : 28/05/2019 07:00

RNS Number : 2219A

Renold PLC

28 May 2019

Renold plc

("Renold" or the "Group")

Preliminary results for the year ended 31 March 2019

28 May 2019

15% growth in adjusted operating profit;

strong organic growth delivered in the Chain division

Renold, a leading international supplier of industrial chains and related power transmission products, today announces its preliminary results for the year ended 31 March 2019, together with an update on the progress of the Group's Strategic Plan.

Financial highlights

	Year ended 31 March
	2019	2018
	£m	£m
Underlying[1]revenue	202.4	190.8
Adjusted[2]operating profit	16.4	14.2
Adjusted2 operating profit margin	8.1%	7.4%
Statutory operating profit	16.2	5.6
Basic earnings/(losses) per share	3.3p	(1.00p)
Adjusted earnings per share	4.9p	4.5p

• Organic growth in underlying revenue 6.1%; benefiting from strong growth in the Chain division
• Adjusted operating profit up by 15.5% to £16.4m (2018: £14.2m); the highest adjusted operating profit for more than 15 years
• Statutory operating profit increased to £16.2m (2018: £5.6m)
• Return on sales 8.1% (2018: 7.4%); adjusted EBITDA £24.1m (2018: £21.5m)
• Net debt £30.0m; net debt to adjusted EBITDA of 1.2x (2018: 1.1x), following a year of significant investment in the Chinese factory relocation

Trading and operational highlights

• Year on year growth in underlying order intake 5.5% (adjusted to remove the major, multi-year Couplings order won in 2018); order book at 31 March 2019 8.0% ahead of prior year
• Completed the relocation of the Chinese chain manufacturing facility
• Strong performance in the Chain division with underlying revenue growth 7.5%; return on sales 11.2% (2018: 9.6%)
• Stable revenue in the Torque Transmission division with continued growth in US markets
• Move to AIM in support of acquisition strategy on schedule following shareholder approval
• Group debt facilities amended and extended in the year; now committed until March 2024

Robert Purcell, Chief Executive of Renold plc, said:

"The Chain division has delivered encouraging organic growth as well as improved operational efficiency, increasing adjusted operating profit to record levels. The continued successful execution of the strategic plan has enabled margin improvement to be delivered in spite of labour cost inflation and the significant relocation of our Chinese factory, which will take time to ramp up to targeted output and productivity levels. We are mindful of these factors entering the new year, but remain confident that our strategic initiatives provide us with a clear pathway to further future progress.

"Whilst not immediately visible in the trading performance in the year to March 2019, the operational improvements in Torque Transmission, along with additional revenue from the Couplings long-term contract in the year ahead provide a platform for further organic growth and margin improvement.

"Our strategy has delivered strong results and is the optimum approach to creating and maintaining a higher quality, higher margin business. Robust order books provide the basis for continued improvement in the new financial year. We see significant opportunity to build on the platform established, both through ongoing organic growth initiatives and through an effective acquisition strategy, the execution of which will be simplified by the move to AIM. Delivering sustainable growth through these initiatives, when combined with the benefits of further operational efficiency, continues to support the expectation that mid-teens operating margins can be delivered over time."

ENQUIRIES:
Renold plc	0161 498 4500
Robert Purcell, Chief Executive
Ian Scapens, Group Finance Director
Peel Hunt LLP	020 7418 8900
Mike Bell
Ross Allister
Ed Allsopp
Instinctif Partners	020 7457 2020
Mark Garraway
Rosie Driscoll

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 (the Group). 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.

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:

Dial in: UK Dial-In:	0800 376 7922
Standard International Dial-In Number:	[phone]
Conference ID:	8498502

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

Overview

During the year ended 31 March 2019, Renold has continued to make progress in the delivery of its strategic plan. The Chain division has achieved significant performance improvement over the prior year, delivering the highest adjusted operating profit within the current strategic plan, and possibly ever. Performance in the Torque Transmission division was slightly behind the prior year level, reflecting a combination of expected lower long-term contract revenues and a short-term change in product mix affecting margin. The combined effect for the Group was the delivery of the highest adjusted operating profit in recent history, along with adjusted operating margins recovering towards the peak levels achieved in the years ended 31 March 2015 and 31 March 2016.

Our markets

Overall market conditions remained robust through the year. The exceptionally strong growth experienced in the US in the latter part of the prior year has stabilised to more sustainable levels. Revenue growth in the developing markets of China and India continue to out-perform growth rates in more developed markets. Strong order intake continued through the year, with orders for the full year ahead of revenue (book-to-bill of 102%).

Trading performance

Revenue grew by 5.6% in the year (6.1% on an underlying basis), reflecting the combined effects of targeted recovery of material price increases alongside organic volume growth.

Having resolved the issues that depressed the Chain division's performance in the prior year, adjusted return on sales for the division improved significantly to 11.2% (2018: 9.6%). The Chain division's improved trading performance is after absorbing cost headwinds, particularly German wage costs as a result of union and legislative changes.

This is the highest adjusted operating profit delivered by the Chain division within the current strategic plan, and beyond this, in recent history. While the progress of the plan has been slower than originally envisaged, and greater cost headwinds have been encountered, I remain certain that our strategic actions are improving the underlying quality of the business and will further improve margins on a sustainable basis.

Torque Transmission's adjusted return on sales declined in the year to 10.6% (2018: 12.5%) as phasing of revenue on the multi-year couplings contract combined with growth in lower margin product areas to reduce divisional adjusted operating profit.

Adjusted operating profit of £16.4m (2018: £14.2m) represents the highest annual adjusted operating profit delivered under the current strategic

plan. Statutory operating profit was £16.2m (2018: £5.6m) .

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.

We have completed the construction of and relocation to our new purpose-built Chinese factory in Jintan, near Changzhou in Jiangsu province.

We continue with our programme to roll out our chosen suite of business systems solutions, including a standard ERP system and associated scheduling and engineering packages. Our manufacturing efficiency programmes are delivering increased efficiency with sales per employee improving by 3.7%.

Off-setting this positive progress, our health and safety statistics have been a disappointment in the year. Despite the improved health and safety environment and framework that has been introduced as a core element of the strategic plan, an increase in volume at our manufacturing sites has coincided with an increase in accidents and a deterioration in our health and safety KPIs. Health and safety is a core element of our strategic plan and we will redouble our efforts in this area to ensure that health and safety performance returns to the improving trend that we have experienced in preceding years.

The third element of the Step 2020 Strategic Plan addresses acquisitions and the Group's appetite to grow through selective acquisitions. In the November 2018 interim results, we highlighted that the Board was considering whether to move the Group's stock exchange listing to AIM. Following consideration by the Board, we concluded that such a move would improve the Group's ability to execute transactions, and in April we initiated the first steps of the programme to implement the move by calling a General Meeting and putting resolutions to shareholders for approval. At the General Meeting on 8 May 2019, these resolutions were duly passed with an overwhelming vote in support, and we remain on track with the timetable outlined in the Circular for the Company's shares to be admitted to trading on AIM on 6 June 2019.

We continue to be committed to the acquisition phase of the strategy and consider the move to AIM to be part of the preparations for ensuring we are correctly positioned to execute acquisitions as and when they arise.

The Board and people

As previously reported, Tim Cooper was appointed to the Board as a Non-Executive Director with effect from 14 November 2018 as part of a programme of orderly Board succession. It is intended that Tim will become Chairman of the Remuneration Committee after he has completed 12 months service. To facilitate a smooth handover period, Ian Griffith's term of office as a Non-Executive Director has been extended beyond the usual nine-year tenure until the conclusion of the 2020 AGM.

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 commitment and hard work during the year as we progress the Group's strategy. The contribution of each employee is valued and appreciated.

Debt facilities

In late March 2019, we completed an amendment and extension to our core banking facilities, including the Group's core £61.5m revolving credit facility. The revised facilities give access to longer-term financing which now expires in March 2024 and adds a £20.5m accordion facility, permitting an increase in debt if required, for example, in support of acquisitions.

The amendment and extension resulted in changes to the banking syndicate, which now includes HSBC, Allied Irish Bank (GB) and Citibank. We welcome the new lending partners who complement Renold's extensive geographic reach and can support our operations across the world.

Pensions

The Group's net retirement benefit obligations increased to £101.9m (2018: £97.4m), with the largest element of the increase relating to reducing discount rates and increasing inflation. This increase in the net deficit is despite actions that have been implemented in the year to realign certain future inflation measures to the consumer prices index rather than the retail prices index used historically.

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.

Future governance

Upon admission to AIM, the Company is required to adopt a governance code. The recent changes to the UK Corporate Governance Code introduce significant additional requirements that are not considered by the Board to be appropriate for a company of Renold's size and resources. Upon admission to AIM, the Company proposes to adopt the Corporate Governance Code published by the Quoted Companies Alliance. However, as outlined in the recent circular proposing the move to AIM, the Directors intend to operate the Company's reporting and governance in substantially the same manner as at present.

Dividend

The Board fully recognises the importance of dividends to shareholders. However, given the investment in the business in the year to March 2019, particularly in the new Chinese facility, and the resultant increase in net debt, the Board has decided not to recommend the payment of a dividend on ordinary shares for the year ended 31 March 2019. This approach will remain under active review for future periods.

Summary

A great deal has been accomplished this year, with the Group's financing facilities extended, the move to AIM well progressed, and at the same time, delivering record adjusted operating margins in the Chain division and the highest adjusted operating profit for the Group in recent history.

There still remains a great deal of work yet to be done, but we believe the actions delivered this year provide the platform to progress the strategic plan further.

Mark Harper

CHAIRMAN

28 May 2019

Chief Executive's Review

Overview

I am pleased to be able to report a performance in the year that has delivered revenue growth combined with improved margins, two of our key strategic objectives. The result is the delivery of the highest adjusted operating profit in recent history and the recovery of adjusted operating margins towards the peak level delivered in the year ended 31 March 2015.

We have been working diligently on improving performance for a number of years as part of the strategic plan. This has involved major restructuring projects such as factory moves and closures, but has also been focused on attention to detail in manufacturing processes and commercial capabilities. Our ability to demonstrate the benefits of these actions in financial results has been limited over the last few years by wider market issues. However, as revenue growth has been achieved, the benefit of the actions implemented has become visible and is reflected in the improvement in adjusted operating profit margins.

Margin improvement in the year to 31 March 2019 has been focused in the Chain division where underlying adjusted operating profit margins increased to 11.2% (2018: 9.6%). These margins have been delivered despite a number of headwinds, including the impact of German wage inflation following union and legislative change and a temporary reduction in profitability of our Chinese Chain operations as we delivered the major factory move. This margin improvement, along with further capacity for improvement in a number of areas, demonstrates the potential for further increases in margin as we continue with our strategic initiatives.

Performance of the Torque Transmission division has been more challenging and the operating profit margin achieved in the year is a disappointment. However, this performance masks a number of underlying improvements, particularly in the US and in continued strength of order intake, which give me confidence that performance should improve in the coming year.

Group revenue grew by 6.1% to £202.4m on an underlying basis, returning towards previous peak levels. Adjusted operating profit increased to £16.4m (2018: £14.2m) which is a record adjusted operating profit delivered in recent history.

Group order intake remained robust through the year, with total orders growing by 5.5% on an underlying basis, and adjusted to remove the impact of the major, multi-year contract won by Couplings in the prior year. The Group's closing order book at 31 March 2019 is 8.0% ahead of the prior year on an underlying basis.

Step 2020 Strategic Plan - update on progress

PHASE I - Business Improvement

Manufacturing efficiency

As noted above, we have been working diligently on improving production efficiency as part of the strategic plan. As growth has delivered a recovery in revenue to levels previously experienced in the year ended 31 March 2015, the benefits of the strategic actions are becoming visible. For the Chain division, particular improvement is apparent in the margins being achieved in Chain Americas and in India, with both being able to support the growing volumes with limited additional resources as improvement programmes delivered cost efficiencies and increased productivity. Chain Europe has also been able to support growth with limited additional resources; however, the impact of German labour cost inflation has constrained margin improvement.

A further temporary constraint on margin improvement was experienced, as anticipated, due to the reduced production output of Chain China as we transferred to the new factory. We previously outlined our programme to relocate the Chinese chain manufacturing facility to a purpose-built facility near Changzhou in Jiangsu province. This significant factory move was completed in the latter part of the year, following two years of planning and construction. This new facility is now fully operational and was delivered on time and ahead of the deadline of 31 March 2019. The trading performance of this business unit was impacted in the final quarter of the year as the entire operation was relocated and a substantially new workforce went through a 'learning curve'.

In order to deliver manufacturing efficiencies, one area of focus during the year was on planning and scheduling systems across the Group. As volumes increased in certain business units, the capacity of their legacy processes to effectively support this growth was proved to be inadequate. As a result, we have accelerated the roll-out of scheduling systems and processes in some areas, supporting improved service.

Over the last five years, we have invested in a number of capital projects aimed at improving existing facilities and adding new manufacturing capabilities and technologies. These initiatives have improved reliability and efficiency, allowing us to reduce costs, while at the same time enhance product quality and service levels. There remains significant scope for further investment in projects with attractive financial returns and we will continue to invest in a disciplined manner, ahead of depreciation, to deliver these.

On a more disappointing note, based on our KPIs, health and safety performance deteriorated in the year. The health and safety programmes which have been implemented as a core part of the strategic plan remain appropriate and provide the framework to ensure improved performance. As the sites become busier, we will continue to refine and develop our processes and procedures defined by the health and safety framework to ensure that our performance in this area is on an improving trend.

Business process efficiency

The most significant element of the programme to improve business process efficiency is the implementation of the Group's ERP and associated business systems across all its sites. Progress continues and the new Chinese factory and sales office are now operating on the new systems. The

preparation of the roll-out to India is well progressed, but was ultimately delayed as we elected to reduce the risk exposure of changing systems in both China and India at the same time. India is expected to go live on the new systems early in the new financial year.

This time last year, I outlined the launch of our Step 2 Service programme which is focused on improving customer service. Customer service has been a long-standing achilles heel for Renold, and the programme is delivering initial improvements. However, there remains more to do to deliver exceptional service to customers at all times, and our management teams around the Group are assessing all aspects of their business processes to identify and improve processes that can enhance customer service.

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 provided a platform for growth, which, in the year ended 31 March 2019, comprised a combination of pricing and volume growth. Following the step-change increases in raw material prices experienced in the year ended 31 March 2018, sales price increases were implemented, providing benefit in the second half of the year to 31 March 2018 and in the year ended 31 March 2019. Volume-driven organic growth has been particularly strong in the US markets, across both Chain and Torque Transmission divisions.

Underlying revenue growth was sustained throughout the year with 6.4% delivered for the first half, and 5.7% for the second half, resulting in underlying growth for the year of 6.1%.

Renold's brand recognition and engineering capability are key differentiators in the market and enable us to focus on premium performance segments and applications with complex and challenging requirements. As such, we continue to target non-traditional sectors where we believe Renold's products can provide a differentiated offering and where we can reduce our exposure to the cyclicality of core industrial markets. We are seeing continued progress from this approach in growth markets such as logistics and ports and anticipate further benefits in the future.

Commercial positioning

We have been working towards product standardisation for some time. This programme has further future potential, and in the year to 31 March 2019, we delivered measurable success from the programme. As part of the relocation of the Chinese factory, our Indian facility provided identical specification chain to that normally manufactured in China. This capability ensured continued supply during the factory move, preventing any customer service issues, but also providing an element of de-risking to the factory transfer. This is part of an ongoing programme to increase manufacturing flexibility at our sites, and to ensure that we provide a consistent Renold specification and Renold quality, independently of where the product is made.

I referred to our Step 2 Service programme earlier under the manufacturing efficiency heading. Ultimately, Step 2 Service is focused on ensuring that our customer service is befitting of Renold's premium position in the market. As we use this programme to diagnose process issues and improve customer experience, we are focusing on ensuring that we get the basics right. This is drawing together root causes from a number of business areas, and driving a culture change across the organisation. Solutions are often simple, but require a consistent approach from all areas of the business to deliver improvement.

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, have the potential to deliver value while reinforcing Renold's reputation as a leading global supplier of chain and torque transmission products.

The organic initiatives implemented in respect of the first two phases of the strategic plan have created a stronger platform from which to pursue acquisitions. Our improved commercial structures and processes have given us greater insight and clarity as to the most strategically attractive opportunities for consolidation in our established markets and expansion into complimentary markets and product areas. Furthermore, we are confident our operational platform, following the restructuring and efficiency investments made, will enable us to integrate acquired businesses effectively and realise the financial and strategic synergy potential these would bring.

The objective of moving Renold's stock exchange listing to AIM is to ensure we have the flexibility to execute transactions more quickly, more cost effectively and with greater certainty.

We are pursuing acquisition opportunities although, 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
	2019	2018
	£m	£m
Revenue	163.9	153.1
Foreign exchange	-	(0.7)
Underlying revenue	163.9	152.4
Adjusted operating profit	18.4	14.7
Foreign exchange	-	(0.1)
Underlying adjusted operating profit	18.4	14.6
Statutory operating profit	15.3	7.8

The Chain division delivered strong performance in the year as organic growth was delivered alongside operational improvements. The raw material cost increases experienced in the prior year have been passed on successfully and have combined with organic volume growth and improved operational effectiveness to enhance performance. As a result, the division delivered the highest adjusted operating profit in recent history. This performance is in spite of certain cost headwinds, most notably labour costs in Germany following legislative and union-driven changes.

Underlying revenue of £163.9m was £11.5m (7.5%) ahead of the prior year. Stronger macroeconomic conditions and sales price increases have combined with an enhanced commercial team and improved levels of customer service to deliver organic revenue growth across all Chain regions. While regional performance has varied, growth for the division as a whole increased through the year with underlying revenue growth of 8.0% in the second half of the year compared with 7.1% for the first half.

European revenue growth accelerated through the year with underlying growth of 3.1% in the first half of the year, increasing to 7.7% in the second half. The acceleration resulted from price increases in the first half of the year being supplemented in the second half with volume growth. Underlying revenue growth for the year was 5.4%.

In the Americas, the improving demand experienced in the latter part of the prior year continued during the year ended 31 March 2019, with an underlying revenue increase of 11.3%. This level of growth reflects not only improvements in the underlying US market, but also Renold's improved ability to access this market demand through increased product and sector focus.

In Australasia, underlying revenue growth for the year as a whole was marginal. However, this reflects an underlying revenue decline in the first