Renold PLC - Half-year Report

Renold, a leading international supplier of industrial chains and related power transmission products, announces its interim results which reflect good progress in addressing the short-term issues encountered last year.

 

Financial highlights

 

·    Underlying[1] revenue grew by 6.3% in H1; with reported revenue up 4.5%

·   Underlying order intake up by 7.5% when adjusted to exclude the large multi-year UK Couplings order from prior year; unadjusted underlying order intake up 1.7%

·    Underlying adjusted2 operating profit growth of 36.7% to £8.2m; reported operating profit growth of 42.2% to £6.4m

·    Adjusted EBITDA of £11.9m; the highest H1 EBITDA delivered under the current strategic plan

·    Leverage ratio 1.3x net debt to adjusted EBITDA (1.2x at 30 September 2017)

Financial Summary

Half year ended

 

30 Sept

2018

£m

30 Sept

2017

£m

Reported interim results

 

 

Revenue

99.7

95.4

Operating profit

6.4

4.5

 

 

 

Underlying adjusted interim results[2]

 

 

Underlying revenue

99.7

93.8

Underlying adjusted operating profit

8.2

6.0

 

 

 

Profit before tax

4.1

2.4

 

 

 

Basic earnings per share

1.2p

0.8p

 

 

 

Adjusted earnings per share

2.6p

1.8p

 

Strategic plan progress

·   Successful pass through of raw material price increases reflecting commercial focus and differentiation of our products

·   Build programme completed for the new Chinese factory in Jintan, Jiangsu province

·   Commenced the phased transfer of the Chinese factory; warehousing and distribution move underway; manufacturing operations to follow in the coming months

·   Commenced trading in the new Chinese location on the Group's new standard ERP and ancillary systems

·   Further capital investment in enhanced manufacturing capability of £2.3m

·   The Board is considering whether moving the Group's stock exchange listing to AIM would provide it with the ability to execute transactions with greater efficiency and certainty

Robert Purcell, Chief Executive of Renold plc, said:

"I am pleased to report that we have made good progress in addressing the short-term issues encountered last year.  As a result, adjusted operating profit has improved significantly and adjusted EBITDA of £11.9m is the highest delivered in the first half of a year under the strategic plan.  The improvement is most pronounced in the Chain division, where we are seeing benefits from the many actions implemented.

"Our strategy is delivering a more robust, higher margin business and we look forward to continuing current momentum into the second half of the year."

 

Reconciliation of reported, underlying and adjusted results

 

Revenue

Operating Profit

 

H1 2018/19
£m

H2 2017/18
£m

H1 2017/18
£m

H1 2018/19
£m

H2 2017/18
£m

H1 2017/18
£m

Reported

99.7

96.2

95.4

6.4

1.1

4.5

Exchange impact

-

0.2

(1.6)

-

(0.1)

-

Underlying

99.7

96.4

93.8

6.4

1.0

4.5

Restructuring costs

-

-

-

1.0

4.1

0.6

Pension administration costs

-

-

-

0.3

0.5

0.4

Impairment of goodwill

-

-

-

-

2.1

-

Amortisation of acquired intangible assets

-

-

-

0.5

0.4

0.5

Underlying adjusted

99.7

96.4

93.8

8.2

8.1

6.0

 

Chief Executive's Statement

The first half was a strong improvement over the same period last year, with good progress being made in resolving last year's short-term issues.  The implementation of sales price increases, to counteract the impact of raw material cost inflation, has been the focus of our commercial teams through the second half of the prior year and into the current year.  The success of this programme reflects the differentiated nature of our products and their value to our customers.

Sales price increases have combined with organic volume growth to deliver an underlying revenue improvement of 6.3% compared to the first half of last year.

The issues arising from machine break-downs in the prior year have been resolved, and output from the key German facility has increased accordingly.  This has permitted improved inventories of core finished goods lines, thereby improving levels of customer service.

The step forward in the results of the Chain division has strengthened the overall performance of the Group which delivered an adjusted operating profit of £8.2m (2017: £6.0m), an increase of 36.7%.  Adjusted operating margin increased to 8.2% (2017: 6.4%).  EBITDA of £11.9m (2017: £9.5m) for the first half of the year is at the highest level in the first half of any year since the commencement of the strategic plan, and demonstrates the progress being made.

As expected, performance in the Torque Transmission division has been more stable, with the phasing of large project work offsetting the growth being delivered in North America.

Group Results

 

Underlying Revenue

Underlying Adjusted Operating Profit

Adjusted Operating

Margin

First half year

2018/19
£m

2017/18
£m

2018/19
£m

2017/18
£m

2018/19
%

2017/18
%

Chain

80.0

74.9

9.5

6.1

11.9

8.1

Torque Transmission

19.7

18.9

2.3

2.4

11.7

12.7

Head office costs

-

-

(3.6)

(2.5)

-

-

Total

99.7

93.8

8.2

6.0

8.2

6.4

 

Trading performance in the period improved as good progress on strategic actions combined with resolution of the short-term issues encountered in the previous year.  Underlying revenue grew 6.3% (£5.9m) in the period reflecting sales price increases and organic volume growth.  Reported revenue was up 4.5% (£4.3m), impacted by a small adverse movement in foreign exchange rates between half years.

Order intake in the period grew by 1.7% on an underlying basis.  The prior period order intake includes a large multi-year UK Couplings order, and excluding this order from the prior period comparator, adjusted underlying order intake increased by 7.5%.  The book to bill ratio for the period was 103% (that is, order intake in the period was 3% higher than revenue) which suggests revenue in the second half should continue to see some improvement.

As a result of the improved revenue performance, the resolution of the prior year issues and the many other projects underway, underlying adjusted operating profit increased by 36.7% to £8.2m (2017: £6.0m).

Chain

Revenue in the Chain division improved, with underlying revenue up 6.8% (£5.1m) to £80.0m.

The focus in the second half of the prior year on adjusting sales prices to recover increased raw material costs continued into the first half of the current year.  Raw material prices have been more stable during the current year, although increases continue in some markets as a reaction to macro-economic factors such as increased tariffs.

Manufacturing output at our Einbeck, Germany chain facility has improved significantly following the disruption experienced in the first half of the prior year.  Freight costs have returned to normal levels and inventories of standard finished goods lines have improved supporting more consistent levels of customer service.

In the period, regional performance was mixed.  Underlying revenue increases in Europe were largely driven by sales price increases, with underlying volumes broadly stable.  Volume growth was more significant in our North American business as strong order intake in the latter part of the prior year converted into revenue.  Our businesses in developing economies continue to deliver growth, whilst our Australasian business experienced slight declines, particularly from South East Asian markets, although order intake has improved more recently.

Underlying adjusted operating profit increased significantly to £9.5m (2017: £6.1m) benefiting from organic revenue growth, the recovery of higher raw material costs through sales price increases, no repeat of the factory disruption in the prior year and good project execution.  This profit improvement is despite headwinds created by union and legislation driven labour rate inflation in Germany highlighted in the preliminary results announcement for the year ended 31 March 2018.

Underlying order intake improved against the first half of the prior year, growing at 5.5% and was broadly flat when compared to the strong order intake experienced in the second half of the prior year.  The Chain division book to bill for the first half of the year was 101%.

Torque Transmission

As expected, trading was more stable in the Torque Transmission division.  The phasing of the large multi-year Couplings order delivered a material contribution to revenue in the year to 31 March 2018, but the current year will be a comparatively quiet period for the project.  Offsetting this revenue gap is strong growth in the North American Torque Transmission business unit which continues to deliver good levels of order intake.  Underlying revenue for Torque Transmission as a whole increased by 4.2% to £19.7m from £18.9m in the prior year.

The change in revenue mix has resulted in slightly lower adjusted operating profit of £2.3m for the first half of the year, with an adjusted operating margin of 11.7%.

Underlying order intake reduced by 10.0%, as the major multi-year order for UK Couplings artificially increased the prior period order intake.  Removing the effect of this unusually large order, adjusted underlying order intake increased by 14.9%, with growth in North America being particularly strong and growth in Gears also showing some positive signs.  The book to bill ratio for the first half of the year of 114% positions the division for further revenue growth in the second half of the year.

Restructuring costs

The major change programme being delivered during the period is the relocation of the Chinese chain factory.  A provision of £3.1m was created during the year ended 31 March 2018 for certain costs of the move.  Further costs relating to the relocation of £0.8m have been charged in the period and these comprise the majority of the £1.0m restructuring costs incurred in the period.

 Cash of £3.4m was generated by operations before legacy pension costs.  Net debt in the period since 31 March 2018 increased by £6.7m to £31.0m.

Working capital increased by £5.8m in the period.  Receivables and payables increased by a net £1.4m, principally reflecting the stronger trading through the second quarter of the year.  The larger element of working capital increase is inventory, which is £4.4m higher.  Holdings of finished goods have been deliberately increased following the output issues encountered last year and this is improving levels of customer service.  In addition, increased output, particularly in the Chain division, is leading to higher levels of work in progress.  Raw material holdings are a further contributor to the inventory increase, particularly in India and China, as lead times have increased.

Capital expenditure of £5.8m included investment in the new Chinese factory, in addition to other purchases of plant and equipment.

Net debt of £31.0m at 30 September 2018 represents a net debt to adjusted EBITDA leverage ratio of 1.3x (1.2x at 30 September 2017).

 Dividend

In light of the continuing investment in capital and revenue expenditure to improve the performance of the business, the Board has decided not to declare an interim dividend.  The dividend policy will remain under review as margin and cash flow performance continue to develop.

Outlook

A strong improvement in performance of the Chain division has resulted in improved profitability for the Group in the first half of the year and a recovery in adjusted operating profit margins.

 The Group is well diversified and order intake has remained stable in the face of an uncertain macro-economic backdrop and order books remain robust.  As a result of continued momentum from the first half of the year, the Group is currently on track to deliver a result for the full year slightly ahead of the Board's previous expectations.