Renold plc well positioned with good momentum (LON:RNO)

Renold plc

Renold plc (LON:RNO) Chief Executive Officer Robert Purcell caught up with DirectorsTalk for an exclusive interview to discuss year-end results, significant revenue & profit growth, a record order book, STEP2 of the company strategy and being well positioned to deal with any challenges.

Q1: You’ve announced results for year-end this morning, and congratulations on what appears to be a strong set of results. Can you just talk us through the highlights?

A1: Renold has delivered a strong full year performance despite the economic background. The group’s markets recovered strongly during the year as activity levels continue to rebound and many of our businesses have actually produced record results. Demand is strong and strengthened through the second half of the year.

Group order intake during the year was £224 million, that’s an increase of 35.5% at constant exchange rates and revenue in the period was £195 million, that’s up 21% at constant exchange rates.

The growth that we reported in the first half of the year, that continued into the second half, indeed momentum has continued into the first quarter of the new financial year.

H2 turnover at constant currency was nearly £100 million, at £99.8 million, some 4.8% over the first half. Final quarter revenues at £52.9 million broke what for us is an important psychological barrier of £50 million pounds.

Adjusted operating profit in the period was £15.3 million, that’s up to 34%, £3.9 million and return on sales increase by 90 basis points to 7.8%, despite the considerable and rapid cost increases which we’ve had to pass through to our customers.

Our adjusted EPS took a big step forward, that’s up 87% to 4.3p in the year, despite all the market issues you’re aware of and our cash generation was strong with net debt falling to £13.8 million, the lowest level for many years.

Q2: Now, looking at it then in more detail, can you just run us through what’s behind this significant revenue and profit growth and how this performance compares to the company pre-pandemic?

A2: I’m going to give you some numbers, but if we consider the financial year ending March 31st, 2020, as the pre-pandemic year, so that’s two years ago, then I’ll give you some comparative numbers to that.

All our regions have seen sales growth over that period and in some cases like India and China, they’re considerably ahead. For the group, revenue is up 6.9% against two years ago, however, over the last 12 months, revenue is up 21.4% at £195 million.

Our revenue growth has been greater in chain than TT. TT is a later cycle business than chain and so this business will grow slightly later on in the cycle. TT order intake is good so they have the order book to sustain growth.

We had a small acquisition in the chain business and that’s worked very well for us and added £1 million to our chain revenues.

Clearly, we’ve benefited from the rebounding global markets and on top of this, we’ve pursued a proactive focused approach commercially, that’s to products and product families where we see particular opportunity and at the same time, we’ve ramped up product management activities.

Our sales have grown particularly strongly with our third party distribution and OEM customers though a number of OEMs have been held back by problems elsewhere in their supply chain.

We’ve done well in a number of focused product categories in diverse areas such as ethanol production and forestry, just as some examples.

Our profit growth has come from good cost controls, passing inflationary costs on things like steel, energy and transport through to customers and also seeing that we benefit from the extra volumes we’re generating. As I mentioned, our return on sales improved by 90 basis points to 7.8%.

Q3: It’s also great to see record order book for the company as well. What’s this down to and are there any specific areas where you are seeing strong demand?

A3: Clearly the £11 million military contract that our TT division announced earlier in this year has helped, but even if we exclude this, we’ve had a good year, an underlying order intake strengthened in the second half of the year.

The company has this great market position with a very diverse geographic customer and application sales and a mix, we therefore benefit from many opportunities in many places. However, there are some general themes, we had some good increases in agriculture and forestry, energy and food and drink, whilst general manufacturing and material handling customers have progressed particularly well.

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We believe that the move towards greater automation is a general trend that is positive for us. Many automation projects include our products, people don’t think of us as an automation company, but our products go into warehouses, particularly automated warehouses, robots and systems that go around robots, positioning systems, material handling, and production lines.

The move to nearshore, to shorten supply chains and produce domestically is driving reindustrialisation of Western markets which inherently have high labour costs and this is disproportionately driving greater automation.

We have a well spread geographic footprint, which gives us and our customers some relative security over our supply chain. This lets us win business in difficult geopolitical times, our premium low total cost of ownership products that perform well, use less energy, and are responsibly manufactured often within region are increasingly valued by customers, all of which drives the demand we’re seeing.

Q4: I see that you launched the next stage of the company’s strategy ‘STEP2’ in the statement. Can you just briefly outline for us what this is focused on and designed to achieve?

A4: STEP2 is an evolution of what came before and builds very much on the foundations that have been created over previous years. We believe the time is right to lay out the next stage in the company’s development.

STEP2 has three strategic elements: business improvement, organic growth and acquisitive growth. Whilst we’ve been working on our cost base for a long time, more is possible.

The business improvement element of the strategy underpins everything else. A key aspect of this section of the plan is standardisation, that’s of products, components, processes, and technologies. We have plans to make our costs lower, to increase flexibility, use our ever improving business systems or IT systems as most people will refer to them, and to substantially improve our service offering.

Organic growth is the next element that sits above business improvement in the strategy. Here, we’re pursuing premiumisation, superior products, sustainability, product development, and engineered lower tiers of products. We’ll be driving our service levels higher, we want to be a market leader in this respect.

We have a focused approach to developing new business at a product level, but also with applications and geographies. Most importantly we are, and will become even more so, proactive in terms of our commercial development. This is about pursuing the business we want, not just reacting to what the market brings us.

The cherry on the top of the step two strategy cake, however, is acquisitions. We have a good business that can develop nicely without acquisitions, but due to the sticky nature of our products, acquisitions will enhance our growth and opportunities. We have historically low levels of debt and a stable and experienced management team and therefore we’re actively managing a pipeline of chain acquisition opportunities.

Q5: Just looking forward, we’re obviously in very turbulent times, are there any areas that give you particular concern and do you think Renold is appropriately positioned to deal with any challenges?

A5: Whilst I think no business is immune to the difficult times we’re operating in, we have some of the best business fundamentals that I’ve ever seen.

We have an international footprint and no dependency on any geography customer, product, application, or market sector. We have an international supply chain and manufacturing footprint. We’re a leading premium supplier of high specification, sustainable industrial chain and torque transmission products that facilitate others to achieve complex operational needs, more reliably and with lower total cost of ownership, our products whilst critical are usually a small part of the total cost.

So, whilst we acknowledge that there could well be difficult times ahead, in fact, I’m sure there are with ongoing inflation and supply chain issues and my own particular main concern, European and German energy rationing, we believe we are as well positioned as we could be at this time.

Our net debt is low, we have strong order books, we’re investing and driving cost out so whilst we are cognisant of the many global concerns and we must definitely stay on our toes and work hard on issues as they occur. We have entered the new financial year with good momentum and we think we’re well placed or as well placed as we could be at this time.

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