Renold plc

("Renold" or the "Group")

Interim results for the half year ended 30 September 2020

11 November 2020

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 2020 (the 'period').

Resilient performance…strong cash generation…significant net debt reduction

Financial highlights

Trading and operational highlights

Robert Purcell, Chief Executive of Renold plc, said:

"Whilst the market environment continues to be challenging, the strategic actions taken in recent years, augmented by the measures taken earlier this year in response to the Covid-19 pandemic, have resulted in a more resilient business that is better placed to overcome today's challenges.

Renold reacted quickly to the sharp decline in order intake arising from the pandemic and, as a result, delivered a robust operating margin and substantial reduction in net debt. I would like to thank all employees for their commitment and outstanding efforts in keeping our facilities open and serving our customers during this time.

The tight focus on cost and cash management in the first half has created a platform from which we can manage through short-term disruption. We are focused on ensuring Renold can respond strongly as markets recover."

Reconciliation of reported, constant exchange rate and adjusted 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, 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 on their website at: www.renold.com

Chief Executive's Statement

Renold delivered a resilient performance during the first half, despite the Group's markets being significantly impacted by the Covid-19 pandemic. Despite a significant reduction in revenue, the business produced an adjusted operating margin of 7.1% (2019: 7.8%) and achieved a significant reduction in net debt of £10.2m to £26.4m (31 March 2020: 36.6m).

Revenue for the period at £81.5m, supported for the first 3 months by the year end closing order book, was 17% lower than the prior year, reflecting the impact of shutdowns and lower levels of demand across a number of the Group's markets.

The effect of the pandemic has been more acute in order intake, which declined by 21% to £76m (2019: £96m). The earlier months of the period were impacted by customer destocking, especially in the OEM and distributor sectors, thereafter stabilising and, more recently, showing gradual improvement. Orders related to capital projects appear to have been the most severely affected while expenditure directed at ongoing maintenance has been impacted to a lesser degree. The trends exiting the period suggest that order intake should continue to improve slowly, albeit this is likely to be at levels below the prior year in the near term.

The Group benefited from the impact of the significant efforts undertaken in the current and previous years to lower the breakeven point and increase flexibility. In addition, tactical short-term cost saving measures, including tight control of operating costs, with significant reductions in discretionary expenditure and utilisation of Government-sponsored employment support schemes, limited the downside operational profit gearing.

Adjusted operating profit from continuing operations held up well at £5.8m (2019: £7.7m) with an adjusted operating profit margin of 7.1% (2019: 7.8%).

Business and Financial Review

¹ The divisional split for the period ended 30 September 2019 has been re-presented due to the split of one Chain business unit into two, of which one has been allocated to Torque Transmission.

Chain

The Chain division's revenue at constant exchange rates was down 17.7% (£13.4m) to £62.5m.

While the impact of the Covid-19 pandemic resulted in a 19% drop across traditional markets including Europe and North America, this was partially offset by growth of 12% in the smaller South East Asia region.

Significant progress continues to be made in improving performance of the new Chinese factory. Notable headcount reductions were achieved whilst productivity and customer service levels continue to improve.

The benefits of recent capital investments have been apparent, with improved capability, capacity and flexibility, enabling the impact of reduced volumes to be substantially mitigated by cost reductions. Improved flexibility in the work force also allowed labour costs to be more closely matched with demand. As a result, despite a significant revenue decline, adjusted operating profit margin at constant exchange rates was robust at 9.1% (2019: 10.7%).

Order intake at constant exchange rates declined by 24% to £57.6m, resulting in book to bill (ratio of orders to sales) for the first half of the year of 92% (2019: 99%).

Torque Transmission

Trading was more stable in the Torque Transmission division, although most of our individual business units saw considerable market softening as a result of the pandemic. Revenue at constant exchange rates fell by 11.6% to £19.0m. The revenue reduction includes £0.5m in scheduled lower deliveries on a significant multi-year contract, which is expected to return to prior period levels in the second half of the financial year.

While demand across the traditional markets, including the UK and North America, dropped by 17%, this was partially offset by growth of 69% in China.

Significant actions to improve the Gears business unit were undertaken in the last financial year. The annualised benefits of these pricing and cost saving measures showed clearly in the first six months' operating performance, with the unit delivering a £0.4m year on year improvement in adjusted operating profit despite a significant reduction in revenue.

Divisional adjusted operating profit, at constant exchange rates, of £2.5m was 8.7% higher than the prior year, resulting in an adjusted operating profit margin of 13.2% (2019: 10.7%).

Order intake from continuing operations at constant exchange rates of £18.4m reduced by 5% in the period. The book to bill ratio for the first half of the year was 97% (2019: 91%).

Restructuring Costs

Restructuring costs in the period were nil (2019: £0.9m), following the completion of all major such initiatives in the prior year.

Cash Flow and Net Debt

Cash generation in the first half was very strong, with net debt reducing by £10.2m from the position at 31 March 2020, to £26.4m.

Most of the £3.7m improvement in working capital was delivered in inventory (£4.9m) where measures were taken to improve the cash position in the short term. Specific and measured increases in inventory are planned in order to maintain customer service levels as demand returns. Receivables and payables moved broadly in line with activity levels in the period.

Net capital expenditure at £1.0m was tightly controlled and reduced by £3.6m compared to the prior period. The reduction in spend, down to maintenance levels, was possible due to prior year initiatives to invest in the production capabilities of our plants. Strategic investments in improved heat treatment facilities and the standardised IT system for the Group continue, but at a slower pace.

Corporation tax payments on account were reviewed across the Group with revised payment profiles leading to a recovery of £1.3m of prior year contributions.

Pensions

The Group has a number of defined benefit pension schemes (accounted for in accordance with IAS 19R 'Employee benefits'). During the period agreement was reached with the UK pension trustee to defer contributions (£2.8m) to the UK pension scheme. This delays agreed contributions, now payable between April 2022 and April 2027, but maintains the consistent cash requirements of the Group's schemes. Cash pension costs are sustainable, having remained consistent at approximately £5m for several years, and are expected to remain broadly stable over the longer term. The Group's retirement benefit obligations increased from £97.6m (£80.2m net of deferred tax) at 31 March 2020 to £115.6m (£94.7m net of deferred tax) at 30 September 2020.

Continuing declines in corporate bond yields, which determine discount rates, have increased the deficits in the key UK and German schemes. In the UK, discount rates falling to 1.55% (31 March 2020: 2.4%) and the CPI inflation assumption increasing to 2.2% (31 March 2020: 2.0%) has the effect of increasing the present value of future liabilities by £29.2m. Strong asset returns helped to mitigate the impact of change in the financial assumptions, with the net UK deficit increasing by £16.0m to £84.0m. 

Pension liabilities in non-UK schemes increased by £2.0m to £31.6m.

The net financing expense (a non-cash item) was £1.0m (2019: £1.1m).

Dividend

In light of the difficult trading environment and 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 continues to develop.

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 uncertainty as to the future impact on the Group of the Covid-19 pandemic, alongside the resilient half year trading performance of the Group, have been considered as part of the adoption of the going concern basis. All manufacturing facilities which had been closed due to national restrictions reopened prior to June 2020 and have remained open since. Across the Group, public health measures advised by governments are being followed, operating costs have been reduced, and capital expenditure and other cash demands are being managed effectively.

As part of its assessment, the Board has considered downside scenarios that reflect the current uncertainty in the global economy. The most severe scenario considered Group revenue being more than 20% below revenues for the year ended 31 March 2020, and more than 25% below revenues in the year ended 31 March 2019. The downside scenario is considered to be severe but plausible, although recent trading activity and the improvement in net debt at 30 September 2020 results in the downside scenario being considered much less likely than it was at the year end.

The results of these scenarios show that there is sufficient liquidity in the business for a period of at least 12 months from the date of approval of these interim financial statements. However, the most severe downside case indicates the potential for a covenant breach during the test period, indicating a material uncertainty related to events or conditions which may cast significant doubt over the Group's ability to continue as a going concern in the event that, following a covenant breach, lenders elected to trigger a repayment of outstanding debt. In such circumstances, and without further mitigating actions, the Group may be unable to realise assets and discharge liabilities in the normal course of business. The condensed consolidated interim financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.

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 amended 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 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 pages 32-36 of the 2019/20 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, especially with regard to the impact of the global Covid-19 pandemic. The sustained effect of uncertainty has the potential to reduce demand in end-markets for Renold's products. Renold benefits from its geographic, customer and sector diversity which helps to mitigate the impact of localised issues, but cannot fully mitigate the effects of widespread 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 quite stable and subject to long term funding plans which are reviewed every three years. The triennial valuation for the UK scheme has been agreed with no significant change required to the long term funding of the scheme. The next triennial valuation will have an effective date of 5 April 2022.

Summary

Renold reacted quickly to the sharp deterioration of the trading environment arising from the pandemic-related downturn. Most costs have been reduced in line with sales and, together with focused cash preservation actions and managed reductions in working capital, the Group has delivered a robust operating margin and a substantial reduction in net debt.

The trends exiting the period suggest that order intake should continue to improve slowly, albeit this is likely to be at levels below the prior year in the near term. The immediate outlook varies by both geography and sector, and is difficult to forecast, however, Renold benefits from its geographic, customer and sector diversity. The tight focus on cost and cash management in the first half has created a strong platform from which the Group can manage through short-term disruption, whilst retaining the ability to invest in support of our strategy as markets recover.

Responsibility statement

The Directors confirm that to the best of their knowledge:

The Directors of Renold plc are listed in the Annual Report for the year ended 31 March 2020. A list of current Directors is maintained on the Group website at www.renold.com.

By order of the Board

Condensed Consolidated Income Statement

for the six months ended 30 September 2020

¹Adjusted: 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 14 to the financial statements.

Condensed Consolidated Statement of Comprehensive Income

for the six months ended 30 September 2020

Condensed Consolidated Statement of Financial Position

as at 30 September 2020

¹The balance sheet at 30 September 2019 has been re-presented to reflect an adjustment of £0.2m between non-current lease liabilities and opening reserves on adoption of IFRS 16.

Condensed Consolidated Statement of Cash Flows

for the six months ended 30 September 2020