Renold plc

("Renold" or the "Group")

Interim results for the half year ended 30 September 2019

13 November 2019

Renold, a leading international supplier of industrial chains and related power transmission products, today announces its unaudited interim results for the half year ended 30 September 2019 (the 'period').

Financial highlights

1 See Note 14 for details of the restatement

2 See overleaf for reconciliation of reported, underlying and adjusted figures

·      Underlying revenue from continuing operations down 2.6% to £98.2m; reported revenue from continuing operations unchanged

·      Underlying adjusted operating profit from continuing operations £7.7m (2018: £7.5m); adjusted operating margin 7.8% (2018: 7.4%) reflecting further progress in delivery of strategic initiatives

·      Net debt £34.2m (31 March 2019: £30.3m); net debt to adjusted EBITDA 1.4x (unchanged from prior year)

·      Adjusted EPS of 1.5p (2018: 1.6p) after deduction of pension administration costs and IAS 19R finance costs

Trading and operational highlights

·      The impact of tougher market conditions on revenue is being offset by improved efficiency from capital investment and operational improvement

·      The new factory in China continues to make progress with improvements in efficiency and reduced headcount and should see accelerating performance in the second half

·      Disposal of the loss-making, non-strategic South African Torque Transmission business unit to management for nominal consideration, securing future routes to market for product manufactured elsewhere in the Group

·      Completed a £1.7m share buy-back of the 25% joint venture partner's share of the Indian chain business in November, which becomes a wholly owned subsidiary operating in a growing market with significant potential

Robert Purcell, Chief Executive of Renold plc, said:

"A more challenging economic backdrop impacted on revenue and order intake in the first half of the year. Despite this, ongoing actions to improve the business have sustained profits and improved margins. In addition, we have seen further strategic evolution in the Group's manufacturing footprint with the exit from the non-core South African Torque Transmission business, the purchase of the minority stake in the Indian Chain business and the ongoing successful ramp-up of the Chinese facility.

Assuming no further deterioration in trading conditions, these measures will continue to deliver benefits in the second half and beyond, providing resilience through uncertain markets. As market conditions improve and we return to revenue growth, the operational platform being established will enable us to make further progress in growing margins and returns."

Reconciliation of reported, underlying and adjusted results

¹ See Note 14 for details of the restatement

² Reported revenue and operating profit for H1 2019/20 are presented on a continuing basis with no adjustment required for discontinued operations. Revenue and adjusted operating losses for discontinued operations in H1 2019/20 of £0.8m and £0.3m loss respectively are already deducted in arriving at reported results

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 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

Chief Executive's Statement

Following a relatively stable first quarter of the year, conditions in a number of international industrial markets weakened during the second quarter, resulting in a decline of underlying revenue from continuing operations for the six-month period of 2.6% versus the same period in the prior year. The decline in revenue most significantly reflects a deterioration in demand from distributors and OEMs in the Group's key European and US industrial chain markets during the late summer period.

Demand for Torque Transmission products was more stable, with stronger US markets more than offsetting weaker demand in other markets.

The ongoing focus on operational efficiency is helping to mitigate the impact of a weakening market environment and has been sufficient to offset the operating profit impact of reduced revenues in the first half of the year. Further cost and efficiency benefits are expected in the second half which will combine with improved efficiency in the new Chinese factory, the removal of losses from the South African business unit and improved performance of the Gears business unit.

Business and Financial Review

¹ See Note 14 for details of the restatement

Trading performance in the period was mixed. A slowing market for industrial products impacted upon certain business units, particularly in the Chain division. However, some business units continue to deliver growth, including Australasia and India in the Chain Division and our North American Torque Transmission business unit. These pockets of growth have benefitted from an enhanced commercial focus, seeking out sectors of the market where Renold is under-represented, but where Renold's industry leading product capabilities can deliver value to customers over the product's life.

Underlying revenue from continuing operations declined by 2.6% (£2.6m) in the period. Reported revenue from continuing operations was unchanged, benefiting from foreign exchange as the US dollar strengthened.

The effect of the slowing market has been more keenly felt in order intake, which on an underlying, continuing basis declined by 8.1% to £95.7m (2018: £104.1m). While this decline is against a strong prior year comparator, the order intake levels indicate a continuation of subdued revenues into the second half.

As outlined below, there are a number of accounting changes that affect adjusted operating profit, including adoption of IFRS 16 'Leases' (increases adjusted operating profit by £0.3m in period ended 30 September 2019; no change in adjusted profit before tax), restatement of prior period results for the historical misstatement at the Gears business unit (reduction of adjusted operating profit by £0.6m in period ended 30 September 2018) and re-presentation of adjusting items to no longer adjust for ongoing pension costs (reduces adjusted operating profit in the periods ended 30 September 2018 and 2019 by £0.3m and £0.4m respectively). Details of these accounting changes are included in Notes 2, 14 and 15.

After applying these accounting changes, underlying adjusted operating profit from continuing operations increased to £7.7m (2018: £7.5m) with an adjusted operating profit margin of 7.8% (2018: 7.4%).

Chain

Chain division underlying revenue from continuing operations was down 4.4% (£3.6m) to £78.5m.

Geographic market dynamics have been volatile over the period. A slow start to the year across European markets continued into the second quarter. US markets experienced a stronger first quarter weakening into the second quarter and with limited benefits realised from seasonal agricultural markets, particularly for sugar cane in Mexico.

Sales through distributors across Europe and the US account for the largest element of revenue decline with destocking evident in a number of areas, in addition to the underlying softness in customer demand.

In order to mitigate the impact of slowing revenues in these key geographic regions, our operational management teams have been focused on delivering efficiency benefits from recent investments and through cost actions. This has included headcount reductions in a number of sites, along with production efficiencies which have contributed to reduced material costs.

Progress continues to be made in improving performance in the new Chinese factory. As previously indicated, start-up inefficiencies acted as a drag on margins, particularly in the first quarter of the year. While good progress has been made, opportunity exists to further reduce headcount and improve output and service levels which underpin confidence in an improving contribution through the second half.

Underlying adjusted operating profit from continuing Chain division operations declined to £8.4m (2018: £9.7m) with the impact of reduced volumes partially mitigated by cost reductions. As a result, underlying adjusted operating profit margin from continuing operations fell from the record 11.8% delivered in the first half of the prior year to 10.7%.

Underlying order intake from continuing operations reflects similar trends to revenue and declined by 5.9%. The Chain division book to bill for the first half of the year was 99% (2018: 101%).

Earlier in November 2019, we completed a share buy-back from the former 25% joint venture partner of our Indian chain business unit. The £1.7m share buy-back was funded by cash resources held by the Indian business which is now a wholly owned subsidiary of the Group.

With the weaker macro-economic backdrop expected to continue into the second half of the year, there will be an ongoing focus on delivering improved operational efficiency, including the annualisation of changes already effected and removal of the margin drag from the new Chinese factory experienced in the first half of the year.

Torque Transmission

Trading was more stable in the Torque Transmission division, although the performance of the individual business units differed considerably. Underlying revenue from continuing operations for the division grew by 5.3% to £19.7m, with the strongest performance being delivered in the US markets, where revenue was supported by strong order books brought forward from the prior year. Revenue in the Gears business unit remained largely stable, but a revenue decline was experienced in Couplings.

Sales of industrial couplings, mainly into maintenance markets, remained robust but revenue decline was experienced in the HiTec product category, where end customers are more exposed to market cycles. The major multi-year order only delivered limited revenue in the first half as order phasing delivers the larger element during the second half.

Identification of the historical overstatement of profit in the Gears unit resulted in an in-depth review of the business. Restructuring of the team and a reassessment of margin by product has allowed progress to be made in recovering profitability and regaining stability following the disruption, further benefit of which should be seen as the year progresses.

As part of the focus on optimising returns, and as a result of the continued challenges faced in the South African market, the Group disposed of the non-strategic South African Torque Transmission business unit to its management team in late September for nominal consideration. This business unit, which generated revenue of £0.8m and an adjusted operating loss of £0.3m in the period, would have required significant capital investment and management input to make meaningful progress. The disposal to local management provides a continuing channel to market for products sourced from elsewhere in the Group. The trading results for South Africa have been treated as discontinued operations as outlined in Note 15.

Divisional underlying adjusted operating profit from continuing operations of £2.1m was 23.5% higher than the prior year, benefiting from the US growth, resulting in an adjusted operating profit margin of 10.7% (2018: 9.1%).

Underlying order intake from continuing operations of £17.9m reduced by 16.4% in the period against a particularly strong order intake period in the prior year. The book to bill ratio for the first half of the year was 91%.

Further progress is expected in the Gears business unit in the second half of the year following the remedial actions taken, which along with the sale of the loss making South African business and improved revenues from the large multi-year Couplings contract in the second half of the year, will help to off-set the impact of the reduced order book.

Impact of adoption of IFRS 16 'Leases'

In the period ended 30 September 2019, the Group has applied IFRS 16 'Leases' for the first time. Adoption of this new accounting standard has increased adjusted operating profit by £0.3m. An offsetting increase in finance costs of £0.3m resulted in no net impact on adjusted profit before tax. Further detail of the impact of adoption of IFRS 16 'Leases' is outlined in Note 2.

Restructuring costs

Restructuring costs of £1.5m, disclosed as a loss from discontinued operations, relate to the disposal of the South African Torque Transmission business unit and comprise asset write downs (£1.1m), cash costs (£0.1m) and operating losses in the period (£0.3m).

Restructuring costs of £0.9m, shown as adjusting items in calculating adjusted operating profit, arise principally from headcount reductions and the costs associated with investigating the historical overstatement of profit in the Gears business unit.

Prior period restatement

The misstatement of historical results in the Gears business unit was identified earlier in the financial year and the Annual Report for the year to 31 March 2019 was revised to correct for these issues. Previously reported results for the six months ended 30 September 2018 overstated net assets by £2.1m and adjusted operating profit by £0.6m and have been corrected by a prior period restatement, which is detailed in Note 14. No restatement for the results for the year ended 31 March 2019 is required as revised results were included in the Annual Report.

Re-presentation of results

As outlined at the time of the preliminary results for 31 March 2019, we have reconsidered the treatment of costs associated with legacy pension schemes across the Group. In previous years, pension administration costs and IAS 19R finance charges have been treated as adjusting items as they are not indicative of the underlying performance of the ongoing business. Renold's treatment of these items has differed from comparable companies and in order to assist users of the financial statements, these legacy pension costs will no longer be treated as adjusting items.

Thus, no adjustment has been made for these pension costs in these interim results and adjusted profit measures for the six months ended 30 September 2018 and the year ended 31 March 2019 have been restated to be comparable. A reconciliation is provided in Note 14. The impact of this change is to reduce adjusted profit after tax by £1.7m in each of the periods ending 30 September 2018 and 2019 with a corresponding reduction in adjusted EPS of 0.75p in each period.

Cash Flow and Net Debt

¹ See Note 14 for details of the restatement

Cash of £5.7m was generated from operations before legacy pension costs. In line with normal seasonal trends the Group saw an overall cash outflow in the first half with net debt increasing by £3.9m to £34.2m.

The adoption of IFRS 16 'Leases' results in changes to the presentation of the cash flow, increasing adjusted EBITDA by £1.5m (mainly through increased depreciation) and reducing onerous lease costs by £0.4m reflected in reduced restructuring costs. The cash costs of the leases are included in the cash flow as repayments of principal under lease liabilities of £1.6m and £0.3m of lease related financing costs included within net financing costs.

Working capital increased by £4.4m. Most of the increase is in Chain inventory (£3.9m) and is aimed at improvements in customer service. Receivables and payables together increased £0.5m.

Capital expenditure of £4.6m largely related to plant and machinery and continues to include the cost of rolling out the Group's standardised IT systems.

Net debt of £34.2m at 30 September 2019 represents a net debt to adjusted EBITDA leverage ratio of 1.4x (1.4x at 31 March 2019).

Pensions

The Group has a number of defined benefit pension schemes (accounted for in accordance with IAS 19 'Employee benefits'). The Group's retirement benefit obligations increased from £101.9m (£85.3m net of deferred tax) at 31 March 2019 to £111.5m (£93.4m net of deferred tax) at 30 September 2019.

Continuing declines in discount rates have increased the deficits in the key UK and German schemes. In the UK, discount rates falling to 1.8% (30 March 2019: 2.4%) has the effect of increasing the value of future liabilities by £18.5m. Strong asset returns and a continuation of mortality experience being greater than the expected levels helped to mitigate the impact of discount rates with the total UK deficit increasing by £5.9m to £78.5m.

The continued decline in discount rates also impacts upon the non-UK schemes where the deficit, including unfavourable foreign exchange and other movements, increased by £3.7m to £33.0m.

The net financing expense (a non-cash item) was £1.1m (2018: £1.2m).

Dividend

In light of the continuing investment in equipment 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.

Going concern

The directors have a reasonable expectation that the business has adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial information.

Risks and uncertainties

The principal risks and uncertainties affecting the business activities of the Group, as well as the risk mitigating controls put in place, remain those detailed on page 32 of the 2018/19 Annual Report and Accounts. These include macro-economic and political uncertainty risks as well as various risks relating to Group treasury activities. Key operational risks are raw material prices and other input cost prices.

During the period, risks relating to macro-economic factors and political uncertainty have continued. The sustained effect of uncertainty has the potential to reduce demand in end-markets for Renold's products. The diverse global customer base and the spread of manufacturing locations can help to mitigate the impact of localised issues, but cannot mitigate the effects of wide-spread reductions in demand.

The valuation of retirement benefit obligations can be significantly impacted by changes to the yields on corporate bonds and inflation prospects. The schemes' investment strategies provide a partial hedge against these risks, and other de-risking strategies are employed where sensible. However, it should be noted that the actual cash flows to support the pension scheme are more stable and subject to long term funding plans which are reviewed every three years. A triennial valuation for the UK scheme is currently underway with an effective date of 5 April 2019.

Outlook

A more challenging economic backdrop has impacted order intake in the first half of the year. While we continue to create opportunities in sectors of the market where Renold is under-represented and where Renold's products can generate value for customers, this has not been sufficient to counter-act the reduction in demand in our traditional markets and this trend is expected to continue into the second half of the year.

However, a continuing focus on efficiency and effectiveness resulting from ongoing strategic initiatives and investments has mitigated the impact on adjusted operating profits of reduced revenues in the first half of the year. These benefits are expected to continue and combine with improved efficiency at the new Chinese factory during the second half of the year. As a result, and assuming no significant further deterioration in trading conditions, the Group remains on track to deliver an overall result for the full year in line with the Board's expectations with a broadly consistent weighting between the first and second halves of the year.

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 2019. A list of current directors is maintained on the Group website at www.renold.com.

By order of the Board