Renold plc (LON:RNO), a leading international supplier of industrial chains and related power transmission products, has announced its audited results for the year ended 31 March 2023.
Financial highlights
| £m | 2023 | 2022 | Change | Change (constant currency)1 |
| Revenue | 247.1 | 195.2 | +26.6% | +18.8% |
| Adjusted operating profit2 | 24.2 | 15.3 | +58.2% | +46.4% |
| Return on sales2 | 9.8% | 7.8% | +200bps | +190bps |
| Adjusted profit before tax2 | 18.6 | 11.5 | +61.7% | |
| Net debt3 | 29.8 | 13.8 | ||
| Adjusted earnings per share2 | 6.5p | 4.3p | +51.2% | |
| Additional statutory measures | ||||
| Operating profit | 22.9 | 16.2 | +41.4% | |
| Profit before tax | 17.3 | 12.4 | +39.5% | |
| Basic earnings per share | 5.7p | 4.7p | +21.3% |
| • | Revenue up 26.6% to £247.1m (18.8% at constant exchange rates) (2022: £195.2m) |
| • | Adjusted operating profit of £24.2m (2022: £15.3m), up 58.2%; return on sales 9.8%, up 200bps |
| • | Reported operating profit up 41.4% to £22.9m (2022: £16.2m) |
| • | Net debt £29.8m, £16.0m increase in the year, facilitating successful YUK acquisition; ratio to adjusted EBITDA 0.8x (31 March 2022: 0.5x) |
| • | Adjusted EPS up 51.2% to 6.5p (2022: 4.3p); Basic EPS 5.7p (2022: 4.7p) |
Business highlights
| • | The Group delivered record results despite the difficult trading and macroeconomic backdrop, with the well-publicised inflation and global supply chain challenges |
| • | Order intake of £257.5m (2022: £223.9m), up 15.0% |
| • | Closing order book £99.5m, up 18.3% against 31 March 2022 |
| • | Significant £8.9m long-term military contract win, following a similar contract win of £11.0m in FY22 |
| • | Acquisition of Industrias YUK S.A. (“YUK”) in August 2022, for €24m, increases the Group’s access to the Iberian Chain and wider European Conveyor Chain markets. YUK is performing ahead of expectations |
| • | Successful capital investment; improving efficiency and capability of manufacturing locations |
1 See below for reconciliation of actual rate, constant exchange rate and adjusted figures
2 See Note 21 for definitions of adjusted measures and the differences to statutory measures
3 See Note 17 for a reconciliation of net debt which excludes lease liabilities
Robert Purcell, Chief Executive, commented:
“I am delighted with the Group’s robust performance during the last financial year which delivered record results and exceeded market expectations, reflecting the benefits of the strategic programmes implemented in recent years. Throughout the reported period, the business performance has been on an improving trend and our order books continue to be healthy though order patterns have been inconsistent in the early part of the new financial year. We recognise that there are still considerable economic challenges in many parts of the world; supply chain issues, although reducing in number and severity, are still prevalent and inflation and prices remain high, for both energy and materials. However, we have entered the new financial year with good momentum and confidence in the excellent fundamentals of the Renold business, although macroeconomic trends add a note of caution. Once again, Renold employees around the world have responded magnificently to the challenges we have faced and I thank them for their dedication and commitment to the Group and our customers.”
Meeting for analysts and institutional investors
A virtual meeting for institutional investors and analysts will be held today at 9.30am BST. If you wish to attend this meeting please contact renold@investor-focus.co.uk or call Tim Metcalfe of IFC Advisory Limited (020 3934 6632) before 8.45am to be provided with access details.
Retail investor presentation and Q&A session
Renold management will be hosting an online presentation and Q&A session at 5.30pm BST today, 12 July 2023. This session is open to all existing and prospective shareholders. Those who wish to attend should register via the following link and they will be provided with access details:
https://us02web.zoom.us/webinar/register/WN_eNb9SaJGRC-dlORaIZPwqg
Participants will have the opportunity to submit questions during the session, but questions are welcomed in advance and may be submitted to: renold@investor-focus.co.uk.
Reconciliation of reported and adjusted results
| Revenue | Operating profit | Earnings per share | ||||
| 2023£m | 2022£m | 2023£m | 2022£m | 2023pence | 2022pence | |
| Statutory reported | 247.1 | 195.2 | 22.9 | 16.2 | 5.7 | 4.7 |
| Amortisation of acquired intangible assets | – | – | 0.7 | 0.1 | 0.3 | 0.1 |
| Acquisition costs | – | – | 0.6 | – | 0.3 | – |
| Tax adjustments relating to prior year | – | – | – | – | 0.2 | – |
| US PPP loan forgiveness | – | – | – | (1.7) | – | (0.8) |
| New lease arrangements on sublet properties | – | – | – | 0.7 | – | 0.3 |
| Adjusted | 247.1 | 195.2 | 24.2 | 15.3 | 6.5 | 4.3 |
| Exchange impact | (15.3) | – | (1.8) | – | (0.9) | – |
| Adjusted at constant exchange rates | 231.8 | 195.2 | 22.4 | 15.3 | 5.6 | 4.3 |
Chair’s statement
I am pleased to report that 2022/23 was an excellent year for Renold in which we delivered a record financial performance and completed a significant strategic acquisition in Europe. I have also been impressed by the flexibility and adaptability of our people across the world, who have delivered an outstanding result despite the complexities resulting from the Russian invasion of Ukraine and challenging international supply chain and trading conditions.
Our turnover continued to grow strongly through the significant commercial and operational benefits delivered by the execution of our organic growth strategy, while the Group’s acquisition strategy bore fruit in the year, and it is pleasing to see that our new acquisition, Industrias YUK S.A. (“YUK”) performed ahead of our initial expectations.
Markets and trading performance
Over the year, Group revenue increased by 26.6% to £247.1m (2022: £195.2m), and adjusted operating profit improved by 58.2% to £24.2m (2022: £15.3m).
Return on sales improved by 200bps to 9.8% (2022: 7.8%), as the Group demonstrated its ability to successfully recover inflationary cost increases, whilst also benefiting from cost reduction and efficiency programmes, and the benefit of operational gearing.
Encouragingly, Group order intake at £257.5m was 15.0% ahead of the equivalent prior year period, and 16.8% ahead excluding the previously announced £8.9m long-term military contracts (2022: £11.0m), with YUK contributing £10.5m or 4.5% to the increase. The order book at 31 March 2023 of £99.5m was 18.3% ahead of the prior year figure.
Net debt increased during the period to £29.8m (31 March 2022: £13.8m) as the Group invested €20.0m to satisfy the initial cash consideration for the acquisition of YUK, whilst managing the impact of organic sales growth and inflation on working capital.
Strategic Developments
During the year, the Renold strategic change programmes across the Group once again delivered meaningful benefits, particularly in standardising and simplifying the business.
The completion of several major strategic restructuring initiatives, together with the relatively low level of net debt, puts the Group in a strong position to capitalise on accretive bolt-on acquisitions that augment our existing market position. This will allow us to accelerate growth in revenue, including for our existing products, adjacent sectors and by entry into under-represented applications and geographies. Most importantly, the Group will also benefit from significant production synergies by integrating acquired businesses.
The continuing review of capabilities across the Group has identified opportunities for the upgrade and development of existing manufacturing processes across our international footprint to create higher specification, higher performance products. This review will also facilitate standardisation across more product lines, which, in turn, will enable us to benefit more comprehensively from our geographic footprint and economies of scale. In addition, flexibility between manufacturing locations will aid increasing customer expectations for supply chain diversification for risk mitigation and a changing tariff environment, improving even further our value proposition.
Sustainability
During the year, the Group continued to develop a long-term sustainability strategy, including reduced energy consumption, raw material waste, packaging use and carbon dioxide emissions, whereby Renold is ensuring sustainability is one of its guiding principles. Renold is focussed on making a difference through real actions which, over a period of time, will deliver discernible benefits for the environment, our customers and the business. Our leader for sustainability is helping the Board to develop policies and strategies in this area, aimed at reducing the Group’s environmental impact and enhancing social development whilst also ensuring that the Company maintains its existing commitments to its communities and stakeholders. Renold is well positioned to contribute to a more sustainable future; our technical, product development and commercial teams are actively developing a more efficient and environmentally sustainable product offering which helps customers to reduce their carbon footprint by providing highly engineered chains that give longevity and life cycle benefits, or by being cleaner through reducing the need for product lubrication.
The Board
The Chair of the Board is primarily responsible for the composition of the Board and for ensuring high standards of governance. As Chair, I place great importance on the breadth of relevant experience, diversity and complementary skills amongst the Group’s Directors and management and on the continued development of the strategy for the Renold business. With this in mind, we welcomed Vicki Potter to the Board as a Non-Executive Director during the financial year. Vicki has broad operational and HR experience in multinational engineering and manufacturing companies. She is currently the Chief Human Resources Officer and Customer Services Director for Oxford Instruments plc; a global FTSE 250 technology and manufacturing business.
Going forward, the Board will continue to ensure that effective succession plans are in place.
Dividend
The Board fully recognises the importance of dividends as part of the overall value creation proposition for shareholders. However, the Board has carefully reviewed its capital allocation priorities, and believes that both organic and inorganic investment opportunities that are available to the Group will deliver higher levels of shareholder return over the medium term than the payment of dividends in the near term. The Board will continue to review this approach over the coming periods. As such, the Board is not recommending the payment of a dividend on the ordinary shares of the Company for the year ended 31 March 2023.
Summary
The Group has performed well in the face of significant economic and social turmoil and continuing inflationary pressures on materials, energy and labour that the war in Ukraine and the pandemic have caused. These pressures will undoubtedly remain in the new financial year. However, the strong financial performance for the year, combined with positive operating cash flow, has generated the freedom to exploit future organic and acquisition-related growth opportunities. I would like to thank all our employees around the world for their diligence and commitment, which have been key to delivering the strong results for the Group.
DAVID LANDLESS
CHAIR
12 July 2023
Chief Executive’s review
The strong momentum that the Group achieved in the previous financial year continued in financial year 2023, despite the economic headwinds experienced due in part to the Russian invasion of Ukraine, the subsequent impact on European energy prices and the tail-end pandemic-related economic issues.
In August 2022, the Group acquired YUK for €24m, which increases the Group’s access to the Iberian Chain and wider European Conveyor Chain markets. The business is performing ahead of the Board’s expectations at the time of the acquisition.
Group order intake during the year was £257.5m, an increase of 15.0% on a reported basis and 7.8% at constant exchange rates over the prior year. Encouragingly, the Group has now seen order intake grow for each of the last six sequential half year reporting periods. Excluding the recently announced £8.9m long-term military contract, and the £11.0m military contract announced in the prior year, order intake for the year increased by 16.8%, or 9.2% at constant exchange rates. YUK contributed £10.5m (or 4.5%) of Group order intake. The resultant year end order book of £99.5m gives the Group a strong foundation upon which to build in the new financial year (31 March 2022: £84.1m).
The growth in Group revenue to £247.1m was also encouraging, representing a year-on-year increase of 26.6% on a reported basis and 18.8% at constant exchange rates. Excluding the impact of the YUK acquisition, turnover increased by 21.2%, or 13.5% at constant exchange rates. Final quarter revenues at £70.0m were particularly strong and were £17.0m (32.1%) ahead of the comparable quarter last year, with North America especially delivering a particularly strong performance.
Group adjusted operating profit1 at £24.2m (2022: £15.3m) was 58.2% ahead of prior year on a reported basis, and 46.4% ahead on a constant currency basis. Profitability was particularly strong in the second half of the financial year, where the Group reported a return on sales of 11.2%. The incremental operating profit gearing2 was a creditable 17.1%, despite the impact of the widely reported economic headwinds, impacting raw material availability and inflation. The operating profit gearing was helped significantly by the swift action to pass on cost inflation. Statutory operating profit increased to £22.9m (2022: £16.2m).
The Group continued to benefit from the impact of the significant efforts undertaken in the year, and previous years, to lower the fixed cost base, increasing flexibility and operational leverage. The Group has successfully managed a period of significant supply chain disruption to materials and transportation, in terms of availability, lead times and increased input costs. Cost increases have been successfully recovered through selling price increases as well as cost reduction, simplification and standardisation programmes. We expect cost pressure on material, labour, energy and transportation to persist in the current financial year.
Renold continues to drive increased performance through specific projects aimed at better levels of operational efficiency and productivity, through automation, improved design and standardisation of products, better utilisation of machinery and people, including more flexible working practices, and leveraging the benefits of improved procurement strategies. The Group’s capital investments returned to more normal levels following a period of lower spend in the prior year as a result of the pandemic, and have concentrated on increased automation within all of our facilities. The Group’s operational capabilities are steadily improving as consistent levels of investment come to fruition, and we continue to develop our in-house technologies and investments, allowing us to produce higher specification and better performing chain that maintains our market leadership.
The strong focus on cash management remains a key priority for management. Closing net debt was £29.8m (31 March 2022: £13.8m), with the increase attributable to the £17.8m of initial acquisition cash consideration paid during the year for YUK. Excluding this acquisition consideration, the level of net debt reduced during the year by £1.8m and in the second half of the year by £4.2m. The resulting net debt to EBITDA ratio of 0.8x (2022: 0.5x) affords significant headroom against the Group’s banking covenants and, in turn, provides greater flexibility and funding capabilities to transact quickly on investment decisions, both organic and through acquisitions, to drive growth, efficiency and productivity.
Activity in the Chain division continues to be robust, with H2 external order intake showing a 17.4% improvement over the strong levels seen in H2 of the last financial year. Output has also continued to improve with H2 constant currency turnover increasing by 22.3% in comparison to the same period last year. In a similar vein the adjusted profitability of the Chain business in H2 has increased by 69.5% at constant rates, when again compared to the equivalent period in the last financial year, and return on sales for the year at 13.4% (2022: 11.9%) continues to show progress.
The Torque Transmission division is generally a longer lead time, later cycle business. External order intake continued to grow, with the H2 order intake some 44.7% higher than the equivalent prior year comparator. Excluding the impact of the long-term military contract of £8.9m announced in January 2023, underlying order intake improved by 14.2%. Similarly, turnover has improved, with sales in H2 30.3% up on the prior year equivalent figure, as the base load work that the military contracts provide is taken to turnover. The return on sales for the division was 11.1% (2022: 10.1%).
1 See Note 21 for definitions of adjusted measures and the differences to statutory measures
2 Operational gearing is defined as the year-on-year change in adjusted operating profit, divided by the year-on-year change in revenue.
Current operating environment
The volatile operating environment the Group has faced over recent years abated a little in financial year 2023. The effects of the Covid-19 pandemic, especially in the UK, Europe and the US, were less marked, only to be replaced with new economic uncertainties brought about by the war between Russia and Ukraine.
During the year Covid-related disruption to our Chinese facilities, located in the wider Shanghai region, delayed inventory shipments to other companies in the Group, and at times staff absenteeism in the facility approached 50% which has negatively impacted costs, productivity and service levels from the factory. At other facilities, and following government guidance, the enforcement of our Covid protocols and health measures to try to protect all our staff were relaxed.
Towards the end of the financial year, the impact of previously reported extended shipment times and increased freight costs throughout the world abated, allowing the Group to make inroads into clearing the overdue order backlog. Accordingly, the Group recorded a record turnover of some £70.0m in the final quarter of the financial year. The availability of trucks, drivers and container freight services has improved in both reliability and expense, but still remain far from pre-pandemic norms. The upward pressure on goods in transit inventory levels also abated, which together with utilisation of the buffer stocks built up in H1 ahead of potential German energy rationing, allowed the Group to achieve positive cash generation in H2 of £4.2m.
As reported in the previous financial year, whilst recognising the human tragedy unfolding during the war between Russia and Ukraine, ceasing trading with sanctioned regions has little direct impact on the Group; sales to Russia and Ukraine during FY22 were low at c.0.5% of Group turnover. The Group continued to support our agents and distributors in the non-sanctioned parts of Ukraine, but obviously maintained close scrutiny on the levels of credit risk to which the Group is exposed.
Chain performance review
Turnover grew markedly during the year, with total Chain turnover increasing 27.1% year-on-year to £202.4m; 19.3% at constant exchange rates. In August 2022 the Group acquired YUK and during the period of ownership YUK contributed turnover of £10.5m, representing 5.2% of Chain turnover at actual exchange rates and 5.4% at constant exchange rates. The final quarter of the year saw a further step-up in activity for the Chain division, with Q4 turnover some 23.5% higher than the prior year comparator at constant exchange rates, as the impact of extended shipment times abated and both the US and European businesses were able to clear order backlogs. The increased revenue resulted in return on sales improving by 150 basis points, to 13.4% (2022: 11.9%). The operational gearing1 on the increased activity at constant exchange rates was a creditable 21.8%, as the impact of increased prices, volumes and significant operational efficiency gains fell through to the bottom line. Adjusted operating profit was £27.2m (2022: £18.9m), £8.3m higher than the prior year level.
| 2023£m | 2022£m | |
| External revenue | 201.5 | 158.2 |
| Inter-segment revenue | 0.9 | 1.0 |
| Total revenue | 202.4 | 159.2 |
| Foreign exchange | (12.5) | – |
| Revenue at constant exchange rates | 189.9 | 159.2 |
| Operating profit | 26.5 | 20.5 |
| US PPP loan forgiveness | – | (1.7) |
| Amortisation of acquired intangibles | 0.7 | 0.1 |
| Adjusted operating profit | 27.2 | 18.9 |
| Foreign exchange | (1.6) | – |
| Adjusted operating profit at constant exchange rates | 25.6 | 18.9 |
1 Operational gearing is defined as the year-on-year change in adjusted operating profit, divided by the year-on-year change in revenue.
Order intake in the Chain division increased by 18.6% year on year, with activity in both the US (+35.8%) and Australasia (+16.2%) showing a marked increase, especially during the final quarter of the year. External order intake in Europe grew by a headline rate of 5.8%, however, this is flattered by the YUK acquisition. Excluding the impact of YUK, underlying order intake in Europe fell 8.0% year-on-year, as the economic disruption of the Ukraine / Russia conflict was felt through the broader European economy, whilst European distributors destocked. In China, despite the Covid-related disruption during the year, external order intake grew by 33.6%, albeit from a low base. Order intake in India fell year-on-year by 6.3%, following a poor year in the agricultural market, coupled with a very tough comparator period.
Closing order books for the division finished the year at £60.9m (2022: £53.9m), some 13% ahead of last year which positions the Group well for the current financial year.
Chain Europe, which is our largest Chain business, saw a sharp increase in external revenues, which increased 25.0% over the prior year. Excluding the impact of the YUK acquisition, underlying revenues increased by 9.2%. Book and ship sales were depressed in H1, but recovered through the second half of the year due to distributor restocking, with Q4 sales 28.6% above the same prior year period and 26.1% above the average of the first nine months of the year. Targeted sales activity in key sectors saw both our OEM and End User business develop strongly, growing 13.5% and 29.8% respectively, with particularly strong growth in the areas of materials handling increasing 22.4% and manufactured products up 15.3%. Revenue progressively strengthened from the outset of the year, a trend which continued throughout each subsequent quarter.
The increased activity, together with the benefit of cost reduction activities, both in the current year and in the prior year, and new commercial initiatives, resulted in a substantial increase in underlying adjusted constant currency operating profit. Plans are in place to expand the Renold Service Centre footprint through the opening of a location in Turkey, close to Istanbul. The introduction of this new stock-holding location, together with the utilisation of the newly acquired YUK warehouse, should allow reduced delivery times and increased customer service, and hence sales, throughout the southern European region.
In the Americas, activity again increased markedly. External order intake at £92.3m was a record high, exceeding the £68.0m record achieved in the previous financial year by 35.7%. Turnover at £85.5m was 35.8% higher than the prior year comparator, driven by both significant input cost recovery work and an increase in projects related to the marine, food machinery, theme parks and utilities sectors. Sales to OEM customers grew steadily, especially in the escalator and forklift truck market, while increased sales of transmission chain products sold through distributors steadily increased. New business opportunities, especially in the ethanol, grain handling and forestry markets, were enhanced by the introduction of new products. Production capabilities were continually enhanced with further investment in automated equipment and development projects, and a large infrastructure project is being undertaken to see that the Morristown facility is positioned to take advantage of future growth opportunities. Underlying constant currency operating profit increased to a new record high.
In Australasia we continued to deliver revenue growth with the region being less impacted than our other markets by the commercial impacts of the pandemic and recorded revenue growth of 20.8%. Australia itself had a good year with revenue up 19.6%, with continued improvement seen in a number of sectors including mining and sugar. The recent trend of customers increasingly buying more domestically produced goods appears to be continuing, even though ongoing supply chain disruption to imported products appears to be reducing. Customers are increasingly seeing the benefits of our product-enhancing engineering capabilities that deliver real value through better performance and longer chain life. We continue to invest in the production capabilities of our Melbourne factory, with the recent purchase of further CNC equipment. Sales in New Zealand continued to grow strongly during the year, showing a 10.4% increase. Malaysia and Indonesia reversed the decline seen in the last financial year, recording growth rates of 35.3% and 24.5% respectively. Thailand was the only country in the region which recorded a decline in activity, showing a reduction in excess of 10%. We are continuing to expand our sales into more industries in South East Asia, with an initial assessment of commercial potential in Vietnam being undertaken.
Revenue in India grew by 13.1% during the year, helped in part by the opening of the first of a series of regional distribution warehouses in Nagpur to offer our customers and distributors much better and quicker supply. Plans are in place for a further three regional distribution centres to help give significantly improved delivery times to all parts of India over the coming years. Investment plans for the Indian operation include the introduction of state-of-the-art technology used elsewhere in the Group for the manufacture of many component types and assembly. Plans are also taking major steps forward for the introduction of the Group ERP platform, M3, which is expected to provide significant operational benefits within the current year.
Revenues in China grew by 7.9% during the year, driven primarily by a significant 12.9% improvement in domestic Chinese demand. Growth in intra-group demand from Europe and the US also increased significantly in the first half of the financial year, but slowed in the latter part of the year as intra-group order patterns were adjusted to take into account the improving delivery times to Western markets. Activities to correct stock holding patterns in our European and US warehouses, and the Covid-related disruption in the Chinese factory also subdued activity in the second half of the year. Efforts and investments to continue to improve the quality and specification of products manufactured in China bore fruit during the year, as product quality in the Chinese factory improved sufficiently to allow the transfer of the manufacture of several mid-tier Renold standard products and components to China. Manufacture of premium and high specification products will continue in our US and European facilities. During the year, our Chinese team initiated a project to upgrade certain component manufacturing processes to use state-of-the-art technology, while making significant investment in automated assembly lines to facilitate high volume sales growth in both domestic and overseas markets.
The Chain division continues to develop and evolve through investment in equipment, processes, training and development of our people, engineering and sales, and this provides us with an excellent base from which to build benefits derived from the many opportunities in this market.
Torque Transmission performance review
Divisional revenues of £48.8m were £8.4m higher than in the prior year (+20.8%) due to a recovery in demand in our North American markets. Our North American manufacturing and distribution business, based in Westfield NY, saw turnover grow by 35.8% year-on-year. In January 2023, the Group announced it had secured an £8.9m long-term agreement to supply large Hi-Tec couplings for the initial phase of a military contract for the Royal Australian Navy, an agreement which followed a similar military contract to supply the second phase of a contract for the Royal Navy in FY22. Progress on both these contracts was recorded during the year, and contributed to a 7.1% increase in the Renold couplings business.
Divisional adjusted operating profit at constant exchange rates increased by 24.4% to £5.1m in the year. Return on sales for the division was 11.1% (2022: 10.1%), an increase of 100bps during the year.
Momentum in this division, which has a later trading cycle and generally larger orders than our Chain business, continues to be positive and improving.
| 2023£m | 2022£m | |
| External revenue | 45.6 | 37.0 |
| Inter-segment revenue | 3.2 | 3.4 |
| Total revenue | 48.8 | 40.4 |
| Foreign exchange | (2.8) | – |
| Revenue at constant exchange rates | 46.0 | 40.4 |
| Operating profit (and adjusted operating profit) | 5.4 | 4.1 |
| Foreign exchange | (0.3) | – |
| Adjusted operating profit at constant exchange rates | 5.1 | 4.1 |
Order intake for the year increased 2.1% to £53.3m (2022: £52.1m), a reduction of 3.2% at constant exchange rates. Excluding the impact of the £8.9m long-term military contract, and £11.0m military contract announced in FY22, order intake increased by 7.8% or 1.1% at constant exchange rates.
The North American business unit benefitted from a significant increase in demand for gears and couplings supplied intra group from the UK, but also experienced a significant uptick in demand for own manufactured gear spindles and shakers, both in the US domestic market and internationally. Demand for gear couplings to the US mass transit market also strengthened significantly. Demand for group-supplied products in both the Chinese and Australian distribution and service centres also grew by 44.6% and 32.5% respectively, as supply chain issues encountered in the last financial year were resolved.
The Couplings business delivered a 6.7% increase in turnover year-on-year. As expected, turnover in the marine business, which manages the long-term military contracts, increased year-on-year by £0.8m, as work commenced on the second phase of the UK military contract, as well as the initial phase of the Australian military contract. Product mix improved markedly in the second half of the year as the lower margin initial phase of the contract was completed, and the higher margin phase of the work commenced. Product development in the couplings division continued with new designs for couplings that expand the performance envelope of current products whilst adding new features and benefits, while sales of the RBI rubber in compression product continued apace.
The Gears business made good progress in order intake, turnover and margin despite facing significant material and energy cost increases. Notable product developments during the year include new products aimed at the escalator market, especially relating to metro systems, and a number of specialist niche products aimed at the water treatment market. Demand from OEM customers, particularly for larger projects in the US and UK which are our key geographic markets, remained strong during the year.
The broad strength of the Torque Transmission division sales and margin performance reflects the later cycle nature of the division in comparison to Chain.
Sustainability
Renold intensified its focus on Group projects during the year and significant efforts were made to collate energy and carbon-related statistics from throughout the Group to gain a proper base line from which to measure progress in both energy and carbon reduction projects. A full inventory of the Group’s energy intensive fleet of heat treatment facilities was undertaken, and the Group’s technical and operational management have started to formulate a strategy, working with the Group’s equipment suppliers, to reduce the environmental footprint of our heat treatment processes as the age of equipment approaches the point where replacement is required. This exercise has already had initial success as our German facilities adopted more energy-efficient working practices during the year, which allowed the number of furnaces continually operating at the plant to be reduced by 25%.
The Group Sustainability Committee drove a packaging project which is aimed at producing new standard transmission chain packaging designs which are made from recycled material and are themselves fully recyclable. All adhesives, inks and labels used in these new designs, which will be common across the world, are also recyclable. The new designs have been produced in such a way that they have significantly reduced the amount of packaging lines that individual plants are required to keep in stock.
At a regional level, our businesses across the world have been asked to develop their own sustainability project roadmaps, seeking to ensure that our efforts are relevant to the highly diverse regions within which we operate. We will continue to build on the considerable momentum we have gained, delivering ever more local successes.
Finally, our technical, product development and commercial teams are actively developing a more efficient and environmentally sustainable product offering for our customers, whether that be in terms of product life and replacement cycle, or through being cleaner by reducing the need for product lubrication. More information on our progress and plans can be found in the Sustainability section of the Annual Report.
Strategic Plan – STEP2 progress
Having created a stronger operational platform for the Group, and with the significant strengthening of our financial position, we have increased our focus on how we can accelerate performance through value-enhancing acquisitions which will allow us to benefit from both increased geographical and product coverage, but also leverage synergies from increasing the throughput of our existing facilities. As a result, we have developed a pipeline of acquisition opportunities which we believe have the ability to meet our financial and operational criteria. Such acquisitions will allow us to expand our product and service offering as well as our customer base, further expand our already diverse product portfolio into adjacent market sectors, and allow us to capitalise on our ability to provide customers with high specification products that deliver real benefits for their own business performance.
The Board is observing disciplined criteria when executing the new acquisition strategy, ensuring that potential targets will enhance the Group’s wider strategy and earnings. Additionally, the Board is mindful of retaining a conservative capital structure, especially in light of the current economic backdrop, and will ensure that the long-term net debt to EBITDA ratio is maintained at an acceptable level.
During the year, Renold took the first significant step in the acquisitive growth phase of our strategy. In August 2022, Renold acquired the business of YUK, a Valencia-based manufacturer and distributor of high quality conveyor chain (“CVC”) and ancillary products. The acquisition not only provides the Group with high quality European-based CVC manufacturing capability, but also substantially increases the Group’s access to the Iberian market where historically we have been under represented. The acquisition will allow Renold to leverage YUK’s strong CVC market position in Spain and Portugal to expand sales of the Group’s existing range of premium European transmission chain (“TRC”) products, and enable sales of YUK products throughout Renold’s extensive European sales network beyond Iberia.
Organic growth and business improvement is a fundamental driver in the Group strategy moving forward. Renold is consistently enhancing its operational capabilities through upgrading equipment and processes across the world. Capital expenditure was £8.4m in the period, a considerable increase on the prior year and we expect it to rise again in the new year. We have made good progress in difficult circumstances, as supply chain issues have affected our equipment suppliers as much as ourselves.
We have a clear vision of where our Chinese factory fits into our global supply chain and our expectations for growth in the Chinese market itself. External order intake in China grew by 33.6% year on year, while external sales revenue increased by 12.9%. We are constantly upgrading capabilities in the facility and we will be offering higher specification Chinese-made product into the domestic market as well as across the world.
In our Indian business, efforts continue to fully integrate the business into the Group supply chain. Investments in production capabilities, including new press equipment equivalent to the equipment available in our US and European factories, is providing improvements in product quality and uniformity. India offers a very attractive market in its own right and an interesting and effective alternative to our Chinese chain manufacturing site. India provides the Group with an alternative supply base as customers’ supply chains flex, driven by an increasing level of concern about international trade tariffs and the concentration of supply from a single region.
These projects highlight the intention in our capital allocation decisions for the Group. With the large infrastructure projects complete, capital allocation decisions are now less frequently limited purely by a site’s domestic requirements but are focused on customer service, upgrading product specification capabilities and optimising profitability for the Group. For the Chain division especially, this allows us to access economies of scale and offer a truly global service with increasing relevance to large OEM customers. Renold is increasingly an integrated international supplier and less a series of regional businesses.
The strategic progress made by the Group over recent years has been significant. Investments in both our production capabilities and our IT environment have resulted in significant benefits, with:
| • | Improvements in productivity and operational efficiency as evidenced by growing sales per employee; |
| • | Greater insight into the performance and opportunities in the business due to better and more complete data; |
| • | Improvements in the specification and quality of products we are able to make across our multiple manufacturing sites; and |
| • | Greater flexibility in the cost base as we start to reduce the correlation between revenue and direct labour. |
With the ongoing recovery of our markets, the financial benefits of these improvements will increasingly come to the fore. Renold is well positioned to capitalise on these developments in the years ahead.
Macroeconomic landscape and business positioning
The underlying fundamentals of the Group and the markets we serve provide confidence that Renold is well placed to continue to develop and deliver sustainable profitable growth. Many of these intrinsic qualities have remained consistent over many years but we are now proactively building on these fundamentals. They include:
| • | Valued and recognised brand with well-respected engineering expertise |
| The Renold brand has been built up over our 150-year history and is trusted by customers to deliver exceptional products due to our world-class engineering and product knowledge. | |
| • | Global market position and unique geographical manufacturing capability |
| The global market position of Renold has existed for many years, but following significant strategic investments in the Chain division the geographic manufacturing footprint and capabilities we have are unique, permitting us to service customer demand with increasing levels of flexibility – a critical factor in a rapidly changing market environment. | |
| • | Relatively low cost, but business critical products |
| Chain and Torque Transmission products are fundamental elements of the systems into which they are incorporated. Our products are often a small proportion of the cost of the entire system, but critical to its operation. | |
| • | Broad base of customers and end-user markets |
| Renold products are used in an extremely diverse range of end applications, sectors, markets and geographies, resulting in a huge spread of customers and industries served. Markets and applications will change and vary in the ever-altering environment we operate in but, with its wide spread of products, geographies, applications and customers, Renold is well positioned. | |
| • | High specification products delivering environmental benefits for our customers |
| Renold products have always been high specification premium products which deliver exceptional benefits to customers. Whether through greater efficiency leading to lower power usage, longer life providing lower lifetime usage of materials and energy in their manufacture and logistics, or lower lubrication requirements, Renold products are well placed for an increasingly environmentally aware marketplace. Our products are capable of helping our customers meet their sustainability objectives whilst saving them money. |
Outlook
I am pleased with the Group’s strong performance over the year, which reflects the benefits of the strategic developments completed over prior years and the hard work that all our employees across the world have contributed during a most difficult period. Our employees have responded excellently to the challenges we have faced, and I thank them for their dedication and commitment to the Group and our customers during these extraordinary times.
Throughout the reported period the business performance has been on an improving trend and finished particularly strongly as supply chains eased in the last quarter. We expect the current financial year to be no less challenging, but we remain vigilant in the environment within which we operate; however, we started the new financial year from a positive position with good momentum and confidence in the capabilities and fundamentals of the Renold business and the markets we serve.
ROBERT PURCELL
CHIEF EXECUTIVE
12 July 2023
Finance Director’s review
Renold delivered a record performance during the year, with Group revenue increasing by 26.6% to £247.1m. The business produced an adjusted operating margin of 9.8% (2022: 7.8%) and, following the acquisition of YUK in August 2022 for initial cash consideration of €20.0m, achieved a significant reduction in net debt of £4.2m during the second half to end the year to £29.8m (31 March 2022: £13.8m).
ORDERS, REVENUE AND OPERATING PROFIT
| 2023 | 2022 | |||||
| Reconciliation of reported to adjusted results | Order intake | Revenue | Operating profit | Order intake | Revenue | Operating profit |
| £m | £m | £m | £m | £m | £m | |
| Reported | 257.5 | 247.1 | 22.9 | 223.9 | 195.2 | 16.2 |
| US PPP loan forgiveness | – | – | – | – | – | (1.7) |
| New lease arrangements on sublet properties | – | – | – | – | – | 0.7 |
| Amortisation of acquired intangible assets | – | – | 0.7 | – | – | 0.1 |
| Acquisition costs | – | – | 0.6 | – | – | – |
| Adjusted | 257.5 | 247.1 | 24.2 | 223.9 | 195.2 | 15.3 |
| Impact of foreign exchange | (16.1) | (15.3) | (1.8) | – | – | – |
| Adjusted at constant exchange rates | 241.4 | 231.8 | 22.4 | 223.9 | 195.2 | 15.3 |
Group order intake for the year increased by 15.0% to £257.5m (2022: £223.9m), or 7.8% at constant exchange rates, and included an £8.9m long-term military contract win, following a similar contract win of £11.0m in FY22.
Group revenue increased by £51.9m (26.6%) to £247.1m, or £36.6m (18.8%) at constant exchange rates. Activity steadily increased throughout the year as manufacturing facilities ramped up production in response to the increased order intake levels. The activity in quarter four was some 32% higher than prior year as the Group’s US operations shipped some significant orders which repeat on a four-year cycle, and better lead times on the supply of Group product from China resulted in a reduction in overdue order backlog. Both divisions saw an increase in turnover, with the Chain division recording an increase at constant exchange rates of 19.3%, while the Torque Transmission division, which is a larger order and longer cycle business, increased by 13.9%.
The Group generated an adjusted operating profit for the year of £24.2m (2022: £15.3m), excluding the impact of adjusting items as detailed below. Reported operating profit for the year was £22.9m (2022: £16.2m). Operating profit margin, calculated on a statutory basis, was 9.3% (2022: 8.3%) and return on sales increased by 200 bps during the year to 9.8% (2022: 7.8%).
ADJUSTING ITEMS
Adjusting items for the year ended 31 March 2023 comprise acquisition-related intangible asset amortisation of £0.7m (2022: £0.1m), acquisition costs of £0.6m (2022: nil) and re-evaluation of prior year tax positions across the Group of £0.4m (2022: nil). Prior year adjusting items, which have not been repeated in the current year, include a £1.7m gain from the forgiveness of US Covid-related loans and a £0.7m charge from new lease arrangements at previously closed sites, including adjustments relating to the sublease of the closed Bredbury facility and the termination of a lease at a site in Rainham, Essex.
FOREIGN EXCHANGE RATES
The majority of Renold’s business is denominated in US Dollars and Euro’s. The impact of the strengthening of these currencies against Sterling was to benefit Group revenues, profits and net assets in FY23 when translated back into Sterling in the consolidated financial statements.
Foreign exchange rates have remained volatile, with a 3% weakening of Sterling against the Euro and 6% weakening of Sterling against the US Dollar between March 2022 and March 2023.
Phasing of movements over the current and prior year mean the weighted average exchange rate used to translate the Euro and US Dollar varies to the movement in the closing rates. The weighted average exchange rates were 1.20 for the US Dollar and 1.15 for the Euro for the year ended 31 March 2023 (2022: 1.36 and 1.17 respectively).
| FX rates (% of Group sales) | 31 Mar 22FX rate | 31 Mar 23FX rate | 31 Mar 23Var % | 2022 AverageFX rate | 2023 AverageFX rate | 2023Var % |
| GBP/Euro (30%) | 1.18 | 1.14 | -3% | 1.17 | 1.15 | -2% |
| GBP/US$ (37%) | 1.32 | 1.24 | -6% | 1.36 | 1.20 | -12% |
| GBP/C$ (5%) | 1.64 | 1.67 | 2% | 1.71 | 1.60 | -6% |
| GBP/A$ (5%) | 1.75 | 1.85 | 6% | 1.84 | 1.77 | -4% |
If the year-end exchange rates had applied throughout the year, there would be an estimated increase of £3.4m to revenue and £0.4m to operating profit.
FINANCE COSTS
Total finance costs in the year were £5.6m (2022: £3.8m).
Total loan finance costs include external interest on bank loans and overdrafts of £2.3m (2022: £1.1m), amortisation of arrangement fees and costs of refinancing and the transition of banking arrangements from LIBOR to SONIA during FY22, of £0.3m (2022: £0.3m), and £0.7m (2022: £0.5m) of interest expense on lease liabilities.
The increase in interest payable on external bank loans and overdrafts was driven by the acquisition of YUK for €24.0m during August 2023 (cash of €20.0m paid in the year), together with the impact of successive increases in the UK base rate during the second half of the financial year.
The net IAS 19 finance charge, which is a non-cash item, was £2.1m (2022: £1.8m).
Finance costs also include £0.2m (2022: £0.1m), resulting from the unwind of discounts on the deferred build costs of the Chinese factory.
During May 2023, the Group announced that it had reached agreement with its banking syndicate for the extension of its core banking facilities that were due to mature in March 2024, initially for a three-year term to May 2026 but with an option to extend the term for a further two years. The new £85.0m multi-currency revolving credit facility is increased from the previous level of £61.5m. There is an additional £20.0m accordion option which will allow the Company to access additional funding, subject to further bank/credit approval, in support of its acquisition programme; a key part of the Group’s STEP2 strategy. Within the principal facility term the net debt/EBITDA covenant is improved from the previous level of 2.5x EBITDA to 3.0x EBITDA, with other key terms remaining unchanged.
PROFIT BEFORE TAX
Profit before tax was £17.3m (2022: £12.4m).
TAXATION
The total tax charge in the year of £5.5m (2022: £2.2m) is made up of a current tax charge of £4.2m (2022: £2.0m) and a deferred tax charge of £1.3m (2022: £0.2m). The increase in the current tax charge is attributable to an increase in Group profit generated in higher tax jurisdictions together with various adjustments to build the Group provision held for uncertain tax matters which reflects a best estimate of amounts to be paid in future tax years. For further details see Note 4.
The increase in the deferred tax charge is primarily attributable to accelerated tax loss utilisation and tax depreciation in excess of book in overseas jurisdictions.
During the year we have re-evaluated various tax positions across the Group for transfer pricing and deferred tax, relating to earlier years, and details of which can be found in Note 4.
The effective tax rate for the year was 32% (2022: 18%), with the increase attributable to the items set out above, coupled with the impact of non-recurring items which reduce profit but are non-taxable items. Excluding the non-recurring items, the effective tax rate on adjusted earnings was 27% (2022: 19%).
EARNINGS PER SHARE
Profit after tax of £11.8m was achieved for the financial year ended 31 March 2023 (2022: £10.2m). Adjusted earnings per share were 6.5p (2022: 4.3p), which excludes one-off items in the year noted above. Basic earnings per share were 5.7p compared to 4.7p for the year ended 31 March 2022.
| 2023 | 2022 | |
| £m | £m | |
| Adjusted profit after taxation | 13.5 | 9.3 |
| Effect of adjusting items, after tax: | ||
| – US PPP loan forgiveness | – | 1.7 |
| – New lease arrangements on sublet properties | – | (0.7) |
| – Amortisation of acquired intangible assets | (0.7) | (0.1) |
| – Acquisition costs | (0.6) | – |
| – Tax adjustments relating to prior year | (0.4) | – |
| Profit after taxation | 11.8 | 10.2 |
| Basic adjusted earnings per share | 6.5p | 4.3p |
| Basic earnings per share | 5.7p | 4.7p |
BALANCE SHEET
Net assets at 31 March 2023 were £39.1m (31 March 2022: £7.0m). A net profit of £11.8m was delivered for the year which, together with the impact of the favourable valuation of the Group’s pension liabilities and the retranslation of overseas operations, resulted in an increase in net assets of £32.1m.
The pension deficit, on an IAS 19 basis, decreased to £62.2m (31 March 2022: £87.1m). The net liability for pension benefit obligations was £57.1m (2022: £76.1m) after allowing for a net deferred tax asset of £5.1m (31 March 2022: £11.0m), largely reflecting the significantly increased yields on corporate bonds during the year which are used to discount future pension liabilities to present values. At the last triennial pension valuation, at 31 March 2022, the technical provisions deficit of the UK scheme, which is how the trustees and regulator evaluate the scheme, was only £5.9m; an improvement between triennial valuations of £3.2m. This compares to the IAS 19 deficit for the UK pension fund at the date of the triennial valuation of £64.1m. The difference primarily represents the valuation of the capital asset reserve (CAR), currently £44.0m, being the discounted value of guaranteed future cash contributions to the scheme for a fixed period of 25 years commencing in 2013.
Overseas schemes now account for £18.0m (28.9%) of the IAS 19 pension deficits and £17.7m of this is in respect of the German scheme, which is unfunded, with payments made as pensions fall due.
During the prior year, and as part of its long-term financial planning, the Company reorganised its balance sheet and reserves through the cancellation of the entire amount of its share premium account and capital redemption reserve. The share premium account and capital redemption reserve are non-distributable reserves and, accordingly, the purposes for which they can be used are restricted. The reduction of capital creates sufficient distributable reserves to provide the Board with greater flexibility with regard to how it manages its capital resources. An order of the High Court confirming the capital reduction became effective on 27 May 2021, increasing distributable reserves by £45.5m in FY22.
CASH FLOW AND NET DEBT
| FY23 | FY22 | ||
| £m | £m | ||
| Adjusted operating profit | 24.2 | 15.3 | |
| Add back depreciation and amortisation | 10.4 | 9.4 | |
| Add back loss on disposal of property, plant and equipment | 0.3 | – | |
| Add back share-based payments | 1.3 | 1.1 | |
| Adjusted EBITDA1 | 36.2 | 25.8 | |
| Movement in working capital | (10.5) | (0.2) | |
| Net capital expenditure | (8.4) | (5.1) | |
| Operating cash flow1 | 17.3 | 20.5 | |
| Income taxes | (2.7) | (1.7) | |
| Pensions cash costs | (5.8) | (4.8) | |
| Repayment of principal under lease liabilities | (2.9) | (4.2) | |
| Finance costs paid | (3.3) | (1.8) | |
| Consideration paid for acquisition | (18.0) | (0.5) | |
| Own shares purchased | – | (4.9) | |
| US PPP loan forgiveness | – | 1.7 | |
| Other movements | (0.6) | 0.3 | |
| Change in net debt | (16.0) | 4.6 | |
| Closing net debt1 | 29.8 | 13.8 | |
| 1 Adjusted EBITDA and operating cash flow are alternative performance measures as defined in Note 21. | |||
In the financial year the Group invested £18.0m in acquisitions, primarily YUK. When the acquisition consideration is excluded, the Group generated £2.0m of net cash during the year, of which a reduction of £4.2m occurred in the second half of the financial year. Closing net debt is £29.8m (31 March 2022: £13.8m). Net debt at 31 March 2023 comprised cash and cash equivalents of £19.3m (31 March 2022: £10.5m) and borrowings of £49.1m (31 March 2022: £24.3m).
Within the balance sheet working capital movement, inventory levels increased by £4.5m (2022: £9.5m). The increase was attributable to the Group replenishing stock levels to ensure increased levels of customer service despite supply chain difficulties. Receivables also increased by £2.8m (2022: £4.5m), in line with the increased level of turnover. Careful overall working capital management mitigated these increases.
Net capital expenditure of £8.4m (2022: £5.1m) was increased during the financial year, as the Group’s strategic investment programmes gathered pace. The Group sees investments in support of our strategy, aimed at improving heat treatment facilities, broadening manufacturing capabilities, and product assembly automation, especially in our Indian and Chinese facilities, gathering pace in the coming year. Additionally, the installation of the standardised Group IT system continued as planned.
In August 2022 the Group acquired the entire share capital of YUK, a conveyor chain manufacturer based in Valencia, Spain. The total consideration was €24.0m, of which €4.0m is deferred and to be paid in two tranches of €2.0m each, payable 12 and 24 months following completion of the acquisition. Professional fees associated with the acquisition amounted to £0.6m. During the prior financial year, the Group acquired the conveyor chain business of Brooks Ltd, based in Manchester, UK, for a total consideration of £0.7m, of which £0.5m was paid during FY22, and the remaining £0.2m paid in the financial year.
Pension deficit recovery plan cash costs of £5.8m were higher than the prior year equivalent of £4.8m. The increase in contributions is a result of the agreement reached with the UK Pension Trustee in April 2020, whereby £2.8m of FY21 contributions due to be paid to the UK scheme were deferred in light of the potential impact of the Covid-19 pandemic. The deferred contributions are being repaid over the five-year period which commenced on 1 April 2022. In addition, the Group took the opportunity to close the Renold New Zealand pension scheme during the year, which resulted in a one-off pension payment of £0.3m. Going forward, the Group had previously agreed to increase pension contributions to the UK pension scheme by £1.0m per annum once Group adjusted operating profit exceeded £16.0m; additional contributions to the UK pension scheme commenced from 1 April 2023.
Corporation tax cash paid was £2.7m (2022: £1.7m), and was paid in accordance with normal payment on account rules in the countries where the Group has operations.
Net cash flow from operating activities, shown in a statutory format, was £16.7m (2022: £19.3m).
DEBT FACILITY AND CAPITAL STRUCTURE
During May 2023, the Group announced that it had reached agreement with its banking syndicate for the extension of its core banking facilities that were due to mature in March 2024 initially for a three-year term, to May 2026, with an option to extend the term for a further two years. The new, £85.0m multi-currency revolving credit facility will be increased from the previous level of £61.5m. Additionally, there is a £20.0m accordion option which will allow the Company to access additional funding in support of its acquisition programme as part of the Group’s STEP2 strategy. The principal facility term, the net debt/EBITDA covenant, will be improved from the previous level of 2.5 times EBITDA to 3.0 times EBITDA, with other key terms remaining unchanged.
At 31 March 2023, the Group had unused credit facilities totalling £17.3m (31 March 2022: £40.1m) and cash balances of £19.3m (31 March 2022: £10.5m). Total Group credit facilities amounted to £65.9m (31 March 2022: £64.2m), all of which were committed. In May 2023, following the increase in facilities under the new banking arrangements, total committed facilities were £89.7m.
The Group has operated well within agreed covenant levels throughout the year ended 31 March 2023 and expects to continue to operate comfortably within covenant limits going forward.
The net debt/adjusted EBITDA ratio as at 31 March 2023 was 0.9x (31 March 2022: 0.6x), calculated in accordance with the old banking agreement. The adjusted EBITDA/interest cover as at 31 March 2023 was 13.7x (2022: 19.6x), again calculated in accordance with the banking agreement.
GOING CONCERN
The 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.
Further information in relation to the Group’s business activities, together with the factors likely to affect its future development, performance and financial position, liquidity, cash balances and borrowing facilities is set out in the Chair’s statement, the Chief Executive’s review, the Finance Director’s review and in the section on principal risks and uncertainties. Additional details of the Group’s cash balances and borrowings and facility are included in Notes 13, 14 and 17.
The key covenants attached to the Group’s multi-currency revolving credit facility at year end relate to leverage, net debt to EBITDA, maximum 2.5x, and, following agreement of new borrowing covenants by the Group in May 2023, net debt to EBITDA, maximum 3.0x, and interest cover (minimum 4.0x). The Group regularly monitors its financial position to ensure that it remains within the terms of its banking covenants, and has remained within those covenants for the whole of the financial year.
Given the current level of macroeconomic uncertainty stemming from inflation, global supply chain difficulties and geopolitical risks, and being also mindful of the risks discussed in the section on principal risks and uncertainties, the Group has performed financial modelling of future cash flows. The Board has reviewed the cash flow forecasts which cover a period of 12 months from the approval of the 2023 Annual Report, and which reflect forecast changes in revenue across the Group’s business units. A reverse stress test has been performed on the forecasts to determine the extent of a downturn which would result in a breach of covenants. Revenue would have to reduce by approximately 28% over the period under review for the Group to be likely to breach the leverage covenant under the terms of its borrowing facility. The reverse stress test does not take into account further mitigating actions which the Group would implement in the event of a severe and extended revenue decline, such as reducing discretionary spend and capital expenditure. This assessment indicates that the Group can operate within the level of its current increased facilities, as set out above, without the need to obtain any new facilities for a period of not less than 12 months from the date of this report.
Following this assessment, the Board of Directors are satisfied that the Group has sufficient resources to continue in operation for a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in relation to this conclusion and preparing the consolidated financial statements. There are no key sensitivities identified in relation to this conclusion.
TREASURY AND FINANCIAL INSTRUMENTS
The Group’s treasury policy, approved by the Board, is to manage its funding requirements and treasury risks without taking any speculative risks. Treasury and financing matters are assessed further in the section on principal risks and uncertainties.
To manage foreign currency exchange impact on the translation of net investments, certain US Dollar denominated borrowings taken out in the UK to finance US acquisitions are designated as a hedge of the net investment in US subsidiaries. At 31 March 2023 this hedge was fully effective. The carrying value of these borrowings at 31 March 2023 was £7.3m (31 March 2022: £6.8m).
At 31 March 2023, the Group had £0.5m (31 March 2022: £0.5m) of its gross debt at fixed interest rates. Cash deposits are placed short-term with banks where security and liquidity are the primary objectives. The Group has no significant concentrations of credit risk, with sales made to a wide spread of customers, industries and geographies. Policies are in place to ensure that credit risk on individual customers is kept to a minimum.
PENSION ASSETS AND LIABILITIES
The Group has a mix of UK (83% of gross liabilities) and overseas (17% of gross liabilities) defined benefit pension obligations as shown below.
| 2023 | 2022 | |||||
| Assets£m | Liabilities£m | Deficit£m | Assets£m | Liabilities£m | Deficit£m | |
| UK scheme | 101.6 | (145.8) | (44.2) | 134.4 | (198.5) | (64.1) |
| Overseas schemes | 12.9 | (30.9) | (18.0) | 15.4 | (38.4) | (23.0) |
| 114.5 | (176.7) | (62.2) | 149.8 | (236.9) | (87.1) | |
| Deferred tax asset | 5.1 | 11.0 | ||||
| Net deficit | (57.1) | (76.1) | ||||
The Group’s retirement benefit obligations decreased from £87.1m (£76.1m net of deferred tax) at 31 March 2022 to £62.2m (£57.1m net of deferred tax) at 31 March 2023. The largest element of the decrease relates to the UK scheme where the deficit decreased from £64.1m to £44.2m primarily due to an increase in AA corporate bond yields, which reduces the present value of gross liabilities under IAS 19. This was partially offset by the impact of an increase in the UK inflation assumption. For the purposes of determining scheme pension payments, inflation is capped for the UK and the US schemes. The deficit of the overseas schemes decreased by £5.0m to £18.0m, reflecting increases in European interest rates, and changes in assumptions for discount and inflation rates. All defined benefit schemes, with the exception of one scheme for blue-collar workers in the US, are closed for future accrual.
UK FUNDED SCHEME
The deficit of the UK scheme decreased in the year to £44.2m (31 March 2022: £64.1m), reflecting a number of changes in assumptions and factors.
The decrease in gross liabilities of £52.7m arose primarily from a combination of an increase in the rate used to discount the scheme’s liabilities (discount rate of 4.85% compared with 2.75% in the prior year) and a reduction in the long-term inflation assumption (CPI of 2.85% compared with 3.25% in the prior year). Partially offsetting the reduction in liabilities was a £32.8m decrease in the value of the scheme’s assets, which was primarily due to a reduction in value of the Scheme’s investment in LDI.
The latest triennial actuarial valuation of the UK scheme, with an effective date of 5 April 2022, was agreed in April 2023 and identified a deficit of £5.9m; this compares favourably to the £9.1m deficit recorded at 5 April 2019. This is significantly lower than the IAS 19 deficit, largely as the actuarial valuation places a value on the Group’s guaranteed future cash payments to the scheme under the central asset reserve structure established in June 2013. The Group had previously agreed to increase pension contributions to the UK pension scheme by £1.0m per annum, once Group adjusted operating profits exceeded £16.0m, additional contributions to the UK pension scheme commenced from 1 April 2023. It is expected that the actuarial valuation deficit of £5.9m can be recovered from these additional cash contributions, together with asset outperformance, above the prudent levels assumed in the valuation, over the remaining life of the scheme.
Contributions in the year ended 31 March 2023 were £4.1m (2022: £3.4m). The increase in contributions compared to the prior year follows the agreement reached with the Trustee in April 2020 such that £2.8m of the prior year contributions due to the UK scheme were deferred in light of the potential impact of the Covid-19 pandemic. The deferred contributions are being repaid over the five-year period which commenced on 1 April 2022. The underlying level of contributions to the UK scheme increases annually by RPI plus 1.5% (capped at 5%).
The next triennial valuation date will be as at 5 April 2025.
OVERSEAS SCHEMES
The largest element of the overseas schemes is the German unfunded scheme, with a total liability and deficit of £17.7m (31 March 2022: £22.4m). Other overseas funded schemes comprise a number of smaller arrangements around the world, with a combined deficit of £0.3m (31 March 2022: £0.6m). The combined deficits of all the overseas schemes decreased by £5.0m. During April 2022, the Board’s decision to close the New Zealand defined benefit pension scheme was enacted by the scheme trustees.
For overseas pension schemes, the contributions in the year were £1.7m (2022: £1.4m).
JIM HAUGHEY
GROUP FINANCE DIRECTOR, RENOLD PLC
12 July 2023
