Half Yearly Report

RNS Number : 3692T

Renold PLC

19 November 2013

 



Renold plc

("Renold" or the "Group")

Interim results for the half year ended 30 September 2013 ('the period')

Renold, a leading international supplier of industrial chains and related power transmission products, which is undergoing a comprehensive business re-engineering programme, today announces a major improvement in performance in its interim results.

Financial Summary	Half year ended 30 September
	2013 £m		2012 (restated)[1] £m
Revenue	95.6		96.7
Adjusted[2] operating profit	5.1		3.6
Operating profit	3.7		3.5
Profit before tax	1.1		0.4
Net debt	22.0		24.6
Other information
Basic and diluted earnings per share	-		0.2p
Adjusted earnings per share	1.1p		0.8p

Strategic update

·      Three phase plan to re-engineer the business making significant progress;

·      Project commenced in October to reduce manufacturing capacity and deliver £3.2m annual gains when complete in Q1 of the 2014/15 financial year.

Operational Summary

·      Adjusted operating profit increased by 42% to £5.1m (2012: £3.6m);

·      Improved contribution margins fully offset 2% fall in underlying[3] revenue;

·      Major reduction of £1.5m delivered in net overheads;

·      Adjusted EPS ahead of prior year by 38% to 1.1p (2012: 0.8p);

·      Cash generated by operations of £4.8m compared to £1.2m in the prior period with EBITDA leverage[4] cut to 1.6x from 1.9x in prior year;

Robert Purcell, Chief Executive of Renold plc, said:

"We have made significant progress in the current turnaround phase of our plan with major reductions in overheads already delivering improved margins.  We have also established a clear road map to further material gains in the short term with the planned removal of excess capacity and the consequent further lowering in the Group's break-even point. We remain focussed on self-help measures to deliver continuous steady improvements in earnings over the medium term and to meet the cost of the required investment in the business."

19 November 2013

ENQUIRIES:

Renold plc	Tel: [phone]
Robert Purcell, Chief Executive
Brian Tenner, Group Finance Director
Arden Partners (Broker)	Tel: [phone]
Chris Hardie
College Hill (Public Relations)	Tel: [phone]
Mark Garraway Helen Tarbet

NOTES FOR EDITORS

Renold is a global leader in the manufacture of industrial chains and also manufactures a range of torque transmission products which are sold throughout the world to a broad range of original equipment manufacturers and distributors. The Company has a well deserved 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

At the time of the preliminary results for the prior year we set out an overview of a three phase plan to radically re-engineer the business and to resolve a number of weaknesses identified within some of the basic business processes.  The first phase of that plan was focussed very much on self help activities to lower our break-even point, improve our commercial positioning and take out excess capacity in the business and hence deliver a turnaround in performance and results.

We are pleased to report that we have already made significant progress with the turnaround plan during the period with a 42% increase in adjusted operating profit compared to the prior year. The improvement was the result of contribution margin gains offsetting lower revenues and a net reduction in overheads of £1.5m. We have also established some of the specific next steps that will be taken in the first phase of our turnaround plan. The gains in profitability have been made through self help and against a background of continuing, but moderating, falls in revenue.

Strategic Review - Update

In our preliminary results presentation for the prior year, we set out an objective to deliver steady continuous improvement in adjusted earnings per share.  This would be delivered by implementing a three phase plan based around 'Restructuring Activities' in Phase 1, 'Organic Growth' in Phase 2, and ultimately 'Structural Activities' in Phase 3. Phase 1 is based on self-help and we are aiming to deliver double digit adjusted operating margins even if sales growth is negligible.

Excess capacity had been identified in the Chain division at the end of the prior year.  Further analysis showed that this was largely in the Bredbury facility and also that there was a high cost base supporting that capacity.  We have now commenced the implementation of a very significant project for the Group, namely, the closure of the Bredbury facility.  The project to close Bredbury also aims to re-distribute the production of the existing product range to other Renold plants and thus enable us to continue to service all of our existing customers effectively. The aim is to complete the project during the first quarter of the 2014/15 financial year.

The project is expected to bring a number of significant benefits to the Group:

·      annual operating profit gains of approximately £3.2m;

·      enhanced our ability to concentrate future capital spend in a smaller number of facilities and hence gain greater returns on investment;

·      with fewer factories and a lower overhead burden we will also be able to be more selective in the quality of revenue we accept with a consequent benefit to margins; and

·      reduction in the level of working capital in the business as a result of concentrating production in a smaller number of key manufacturing plants.

Given the relative importance of these potential benefits, and the fact that four out of five Chain regions will be impacted by the change, the project is the primary focus for executive management during the next nine months through to completion.

Group Results

The Group experienced improving trading conditions in a number of key markets in the first half of 2013/14.  Order intake was 0.2% down in the period which compares to 4% and 12% down in the two preceding half year periods, reflecting an improving overall trend.

The 2% fall in underlying revenue in the period also compares favourably to 9% and 6% falls respectively in the two preceding half year periods.

Adjusted operating profit of £5.1m moved ahead strongly (2012: profit £3.6m) as the business focussed on self help measures driven by the assumed lack of external support from the market.  Improvements in contribution margins fully offset the impact of lower volumes and the impact of £2.0m of cost reductions made in the second half of the prior year flowed through to the current year and more than offset £0.5m of additional depreciation on the Group's ERP system. Exceptional costs of £1.0m were incurred during the period (2012: £0.5m gain) as the Group continues to restructure and streamline the business: £0.5m was in respect of senior management and other staff changes; £0.3m in respect of preliminary investigatory costs for the project to close the Bredbury facility and finally £0.2m were the final costs of the pensions merger project initiated in the prior year and completed during the first quarter of the current financial year.

The business also continued to improve its cash performance with net debt in the period reducing by £0.8m (£2.6m better than the prior year).  Cash generated by operations of £4.8m was significantly better than the £1.2m generated in the comparable period in the prior year. This was driven by a combination of improved adjusted operating profits (£1.5m), improved working capital management (£2.6m) and reductions in the net cash cost of pensions (£0.6m) partially offset by increased restructuring expenditure (£1.1m). The key performance indicator of working capital as a ratio of rolling 12 month revenue improved to an average level of 18.7% for the period (2012: 19.7% as adjusted for the impact of the year end impairment of stock).

Business Review

 

Renold Chain

In Renold Chain, underlying revenue decreased by 1% with underlying order intake 1% higher than the same period last year.  Europe and North America (which typically represent around 75% of external chain sales) both experienced low single digit growth rates in year on year underlying order intake. This compared to declines of 1% and 20% in Europe in the two preceding half year periods and in North America a 5% improvement and 6% decline in the same periods.

In contrast, Australasia, which typically represents just under 20% of external chain sales, saw order intake down 11% on the same period last year and revenue down 8%.  The weakness was concentrated in Australia itself where commodity industries have delayed a number of major capital projects and made general reductions in maintenance and replacement expenditure.

Despite the decline in revenue, adjusted operating profit of £4.3m was almost double the first half of the prior year (2012: £2.3m). Following the strategic review initiated in the second half of 2012/13, a number of projects were implemented to reduce costs and improve profitability. Many of these initiatives were focussed on the Chain division and the benefits have flowed through into the first half of the current year. The adjusted return on sales in Chain almost doubled compared to the first half of the prior year from 3.1% to 6.0%. The impact of the Bredbury closure will further improve the margins and operating results of the Chain division.

Torque Transmission

Torque Transmission saw a fall in underlying revenue in the period of 6% compared to the same period in the prior year. This follows on from the declining order intake in H2 of the prior year as a result of softer commodities sectors and the run-down of large mass transit contracts. Encouragingly order intake is only 2% down on the same period last year which compares to a fall of 12% in the immediately preceding half year.

Operating margins[5] remained constant at 12.4% despite the fall in revenue.  Margins were maintained through an improvement in the mix of business which saw lower volumes of weaker margin mass transit products and also a reduction in year on year overheads of approximately £0.5m from the cost saving initiatives that were implemented in the second half of the prior year.

Pensions

The Group is responsible for a number of defined benefit pension schemes which it accounts for in accordance with IAS 19 Employee benefits. Changes to IAS 19 have taken effect for 2013 reporting, with the prior year comparative figures being restated. For further details of the impact of these changes see Accounting Policies in Notes 2 and 8 to these Interim Condensed Consolidated Financial Statements.

The Group's retirement benefit obligations decreased from £69.5m (restated - £56.3m net of deferred tax) at 31 March 2013 to £65.3m (£54.5m net of deferred tax) at 30 September 2013. This mainly reflects the improving yield on UK corporate bonds which drives the discount rate used to value the liabilities (4.3% at 31 March 2013 to 4.5% at 30 September 2013). A pension surplus of £1.3m was liquidated and converted to cash in South Africa.

The aggregate expense of administering the pension schemes was £0.4m (2012: £0.6m) which is now included in operating costs but is excluded in arriving at adjusted operating profit. Exceptional pension merger and asset backed funding costs of £0.2m (2012: nil) were also incurred in the period to complete a project initiated in the second half of the prior year which has led to a £1.0m reduction in annualised cash costs in the UK with effect from the end of the first quarter of the current financial year. The net financing expense on pension scheme balances was £1.5m (2012: £1.4m as restated). It is similarly excluded when calculating adjusted EPS.

Agreement was reached at the end of the last financial year to merge the three UK schemes into the Renold Supplementary Pensions Scheme (subsequently renamed as the Renold Pension Scheme "RPS"). The merger was completed on 26 June 2013, with 1,307 members taking wind-up lump sums to the value of £10.4m and as a result a small settlement gain of £0.4m was recognised. The remaining assets of the Renold Group Pensions Scheme and J&S Retirement Benefit Plan were transferred into the RPS and full wind-up of those schemes was triggered on 27 June 2013.  An actuarial valuation of the RPS as at 5 April 2013 is now underway. The merged scheme had 3,699 members as at 30 September 2013 compared to 5,119 at the start of the year.

Dividend

The Board has recommended that no interim dividend be paid. The directors will consider future dividend policy in the light of results from the business going forward.

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 in the Annual Report for the year ended 31 March 2013, with one significant change noted below. These include macro-economic risks as well as various risks relating to Group treasury activities. In addition, key operational risks are raw material and other input cost prices and product liability claims. The on-going implementation of a Group wide ERP system is a further non-recurring risk that is currently under management.

The Group's resultshave particular exposure to movements in steel prices and the US Dollar/GB Pound/Euro exchange rates. Both risks are managed through diverse sourcing of supply and the forward hedging of net currency cash flows.  The valuation of retirement benefit obligations can be significantly impacted by changes to the market based yields on corporate bonds and inflation prospects. However, it should be noted that the cash flows to support the pension schemes are more stable and subject to long term funding plans which are reviewed every three years.

 

One additional specific risk that is under active management relates to the decision to close the Bredbury facility. A project is now underway to move or create manufacturing capability in a number of other Renold plants to allow the business to continue to service the full range of existing customers and products. The execution risk is being mitigated by the use of dedicated external professional project managers, the creation of safety stocks on key lines and a fully resourced internal management team. The project is due to complete in the first quarter of the next financial year by which time the associated risk should have passed.

Outlook

The macro-economic environment remains subdued and hence our attention remains focussed on internal self help measures. In particular, the project to close the Bredbury facility represents both a challenge and a significant opportunity for the business. The challenge is to successfully execute a complex project and this is being addressed with a very high level of management time and appropriate resources.

The opportunity is to make a significant step forward in re-engineering our business in terms of profitability, working capital management, returns on investment in future capital expenditure and enhanced customer service. While the execution risk of the Bredbury project in the second half of the year is a real one, the Board is confident of delivering a similar result to the first half.

Statement of directors' responsibilities

The directors confirm that to the best of their knowledge:

·      the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

·      the interim management report includes a fair review of the information required by:

(a)      DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of interim financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)      DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last annual report that could do so.

The directors of Renold plc are listed in the Annual Report for the year ended 31 March 2013. A list of current directors is maintained on the Group website at www.renold.com.

By order of the Board

 

 

Robert Purcell                                     Brian Tenner

Chief Executive                                       Finance Director

19 November 2013                                 19 November 2013

RENOLD PLC

Condensed Consolidated Income Statement

for the six months ended 30 September 2013 (restated)

			First half				Full year
	Note		2013/14 (unaudited) £m		2012/13 (unaudited) restated £m		2012/13 (audited) restated £m
Revenue	3		95.6		96.7		190.3
Operating costs			(90.9)		(93.7)		(184.4)
Operating profit before exceptional items[6]			4.7		3.0		5.9
Exceptional items	4		(1.0)		0.5		(12.3)
Operating profit/(loss)			3.7		3.5		(6.4)
Share of post-tax loss of jointly controlled entity			-		(0.1)		(0.1)
Financial costs			(1.1)		(1.4)		(2.7)
Net IAS 19 financing costs			(1.5)		(1.4)		(2.5)
Exceptional refinancing costs	4		-		(0.2)		(0.2)
Net financing costs	5		(2.6)		(3.0)		(5.4)
Profit/(loss) before tax			1.1		0.4		(11.9)
Taxation	6		(1.1)		-		0.1
Profit/(loss) for the period			-		0.4		(11.8)
Attributable to:
Owners of the parent			(0.1)		0.4		(11.9)
Non-controlling interests			0.1		-		0.1
			-		0.4		(11.8)
Earnings per share	7
Basic earnings/(loss) per share			-		0.2p		(5.3)p
Diluted earnings/(loss) per share			-		0.2p		(5.3)p
Adjusted earnings per share			1.1p		0.8p		1.4p
Diluted adjusted earnings per share			1.1p		0.8p		1.4p

RENOLD PLC

Condensed Consolidated Statement of Comprehensive Income

for the six months ended 30 September 2013 (restated)

	First half				Full year
	2013/14 (unaudited) £m		2012/13 (unaudited) restated £m		2012/13 (audited) restated £m
Profit/(loss) for the period (restated)	-		0.4		(11.8)
Other comprehensive income/(expense) Items that may be reclassified to profit or loss in subsequent periods:
Net gains/(losses) on cash flow hedges taken to equity	0.3		-		(0.2)
Foreign exchange translation differences	(3.5)		(0.7)		0.8
Foreign exchange differences on loans forming part of the net investment in foreign operations	(2.3)		(0.2)		1.0
	(5.5)		(0.9)		1.6
Items not to be reclassified to profit or loss in subsequent periods:
Remeasurement gains/(losses) on retirement benefit obligations	4.0		(5.1)		(14.4)
Tax on actuarial (gains)/losses on retirement benefit obligations	(2.5)		0.6		2.4
	1.5		(4.5)		(12.0)
Other comprehensive expense for the period, net of tax	(4.0)		(5.4)		(10.4)
Total comprehensive expense for the period, net of tax	(4.0)		(5.0)		(22.2)
Attributable to:
Owners of the parent	(4.0)		(5.0)		(22.3)
Non-controlling interests	-		-		0.1
Total comprehensive expense for the period	(4.0)		(5.0)		(22.2)

RENOLD PLC

Condensed Consolidated Statement of Financial Position

as at 30 September 2013 (restated)

	Note	30 September 2013 (unaudited) £m		30 September 2012 (unaudited) restated £m		31 March 2013 (audited) restated £m
Assets Non-current assets
Goodwill		20.3		22.1		21.8
Other intangible fixed assets		6.4		6.5		6.2
Property, plant and equipment		38.3		45.5		43.1
Investment property		1.4		1.9		1.4
Investment in associate undertaking		-		0.1		-
Other non-current assets		0.2		0.2		0.4
Deferred tax assets		18.1		18.7		21.4
		84.7		95.0		94.3
Current assets
Inventories		38.3		45.0		40.9
Trade and other receivables		29.7		34.3		32.8
Retirement benefit surplus	8	0.1		1.5		1.4
Cash and cash equivalents	12	9.2		7.5		9.8
		77.3		88.3		84.9
Non-current asset classified as held for sale	9	1.7		-		-
		79.0		88.3		84.9
Total assets		163.7		183.3		179.2
Liabilities
Current liabilities
Borrowings	12	(0.1)		(14.1)		(6.3)
Trade and other payables		(36.0)		(38.2)		(39.8)
Current tax		(1.5)		(1.2)		(1.4)
Derivative financial instruments		-		(0.1)		(0.2)
Provisions		(1.4)		(1.0)		(1.6)
		(39.0)		(54.6)		(49.3)
Net current assets		40.0		33.7		35.6
Non-current liabilities
Borrowings	12	(30.6)		(17.5)		(25.8)
Preference stock	12	(0.5)		(0.5)		(0.5)
Trade and other payables		(0.1)		(0.4)		(0.8)
Deferred tax liabilities		(0.6)		(0.6)		(0.6)
Retirement benefit obligations	8	(65.4)		(61.1)		(70.9)
Provisions		-		-		(0.3)
		(97.2)		(80.1)		(98.9)
Total liabilities		(136.2)		(134.7)		(148.2)
Net assets		27.5		48.6		31.0
Equity
Issued share capital	13	26.6		26.5		26.5
Share premium		29.9		29.6		29.6
Currency translation reserve		0.4		3.4		6.1
Other reserves		1.3		1.5		1.2
Retained earnings		(33.1)		(14.7)		(34.8)
Equity attributable to owners of the parent		25.1		46.3		28.6
Non-controlling interests		2.4		2.3		2.4
Total shareholders' equity		27.5		48.6		31.0

 

RENOLD PLC

Condensed Consolidated Statement of Cash Flows

for the six months ended 30 September 2013 (restated)

	First half				Full year
	2013/14 (unaudited) £m		2012/13 (unaudited) restated £m		2012/13 (audited) restated £m
Cash flows from operating activities (Note 10)
Cash generated by operations	4.8		1.2		8.9
Income taxes paid	(0.5)		(0.4)		(0.7)
Net cash flows from operating activities	4.3		0.8		8.2
Cash flows from investing activities
Purchase of property, plant and equipment	(2.3)		(1.5)		(3.1)
Purchase of intangible assets	(0.7)		(0.8)		(1.8)
Net cash flows from investing activities	(3.0)		(2.3)		(4.9)
Cash flows from financing activities
Proceeds from share issue	0.4		0.3		0.3
Financing costs paid	(1.0)		(1.4)		(2.8)
Proceeds from borrowings	6.0		9.4		43.1
Repayment of borrowings	(6.4)		(5.1)		(36.1)
Payment of finance lease obligations	-		-		(0.1)
Net cash flows from financing activities	(1.0)		3.2		4.4
Net increase in cash and cash equivalents	0.3		1.7		7.7
Net cash and cash equivalents at beginning of period	9.2		1.2		1.2
Effects of exchange rate changes	(0.4)		(0.1)		0.3
Net cash and cash equivalents at end of period	9.1		2.8		9.2
Cash and cash equivalents (Note 12)	9.2		7.5		9.8
Overdrafts (included in borrowings - Note 12)	(0.1)		(4.7)		(0.6)
Net cash and cash equivalents at end of period	9.1		2.8		9.2

RENOLD PLC

Condensed Consolidated Statement of Changes in Equity

for the six months ended 30 September 2013 (restated)

	Share capital £m	Share premium account £m	Retained earnings £m	Currency translation reserve £m	Other reserves £m	Attributable to equity holders of parent £m	Non-controlling interests £m	Total equity (restated) £m
Balance at  1 April 2012	26.4	29.4	(10.7)	4.3	1.5	50.9	2.3	53.2
(Loss)/profit for the year (restated)	-	-	(11.9)	-	-	(11.9)	0.1	(11.8)
Other comprehensive income (restated)	-	-	(12.0)	1.8	(0.2)	(10.4)	-	(10.4)
Total comprehensive income/(expense) for the year	-	-	(23.9)	1.8	(0.2)	(22.3)	0.1	(22.2)
Share-based payment credit	-	-	(0.3)	-	-	(0.3)	-	(0.3)
Exercise of share warrants:
-    release of share warrant reserve	-	-	0.1	-	(0.1)	-	-	-
-    proceeds from share issue	0.1	0.2	-	-	-	0.3	-	0.3
Balance at 31 March 2013	26.5	29.6	(34.8)	6.1	1.2	28.6	2.4	31.0
(Loss)/profit for the period	-	-	(0.1)	-	-	(0.1)	0.1	-
Other comprehensive income			1.5	(5.7)	0.3	(3.9)	(0.1)	(4.0)
Total comprehensive income/(expense) for the period	-	-	1.4	(5.7)	0.3	(4.0)	-	(4.0)
Share-based payment charge	-	-	0.1	-	-	0.1	-	0.1
Exercise of share warrants:
-    release of share warrant reserve	-	-	0.2	-	(0.2)	-	-	-
-    proceeds from share issue	0.1	0.3	-	-	-	0.4	-	0.4
Balance at 30 September 2013	26.6	29.9	(33.1)	0.4	1.3	25.1	2.4	27.5
Balance at 1 April 2012	26.4	29.4	(10.7)	4.3	1.5	50.9	2.3	53.2
Profit for the period (restated)	-	-	0.4	-	-	0.4	-	0.4
Other comprehensive income (restated)	-	-	(4.5)	(0.9)	-	(5.4)	-	(5.4)
Total comprehensive income/(expense) for the period	-	-	(4.1)	(0.9)	-	(5.0)	-	(5.0)
Proceeds from share issue	0.1	0.2	-	-	-	0.3	-	0.3
Share-based payment charge	-	-	0.1	-	-	0.1	-	0.1
Balance at 30 September 2012	26.5	29.6	(14.7)	3.4	1.5	46.3	2.3	48.6

Notes to the Interim Condensed Consolidated Financial Statements

1      Corporate information

The interim condensed consolidated financial statements for the six months to 30 September 2013 were approved by the Board on 19 November 2013. These statements have not been audited or reviewed by the Group's auditor pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information.

Renold plc is a limited liability company, incorporated and registered under the laws of England and Wales, whose shares are publicly traded.  The principal activities of the Company and its subsidiaries are described in Note 3 and the performance in the half year is set out in the Interim Management Report.

These interim condensed consolidated financial statements do not constitute statutory accounts of the Group within the meaning of Section 434 of the Companies Act 2006.  The statutory accounts for the year ended 31 March 2013 have been filed with the Registrar of Companies.  The auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

2      Accounting policies

        Basis of preparation

        The interim condensed consolidated financial statements for the six months ended 30 September 2013 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34 "Interim Financial Reporting" as adopted by the European Union. It does not include all the information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 March 2013.

        Except as described below, the accounting policies, presentation and methods of computation applied by the Group in these interim condensed consolidated financial statements are the same as those applied in the Group's latest audited annual consolidated financial statements for the year ended 31 March 2013.

Changes in accounting policy

The Group has adopted all applicable amendments to standards with an effective date from 1 April 2013. The Group has adopted amendments to IAS 19 Employee benefits, including consequential amendments to other standards, with a date of initial application of 1 January 2013, and restated the prior year's results accordingly.

The Group has changed its accounting policies with respect to the basis for accounting for financing income/expense on the value of the defined benefit pension schemes' assets/liabilities and with respect to the costs of administering the defined benefit pension schemes. The Group determines financing income/expense for the period by applying the discount rate used for valuing the schemes' liabilities to the value of the net pension asset/liability at the beginning of the year (taking into account any changes during the period as a result of contributions and benefit payments). Previously, the Group calculated financing income by applying the expected return on assets to the value of the schemes' assets at the beginning of the year and financing expense by applying the discount rate to the value of the schemes' liabilities at the beginning of the year (taking into account any changes during the period as a result of contributions and benefit payments).

Administration costs are included as operating costs except those relating to plan asset management which are recognised in other comprehensive income (as part of the difference between actual return and net interest income).

Additionally, the expense of administering the pension schemes is now charged separately to operating profit within the income statement. Previously it was accounted for as a reduction in the expected return on schemes' assets.

In the course of the process of determining the impact of implementing IAS 19R, the directors have also reconsidered the treatment required by IFRIC 14 which deals with refunds of pension surpluses. Under the scheme rules, any notional surplus arising on payment of the agreed contributions is fully recoverable and therefore the additional liability of £6.9m and increase in deferred tax asset of £4.5m that was recognised at 31 March 2013 has been reversed. The current contributions by the Group to the pension schemes include a £0.5m per annum allowance for administration costs which are now expensed through the profit and loss in accordance with IAS 19R.

For the period to 30 September 2012, the restatement has reduced operating profit for the period as previously reported by £0.6m, increased net financing costs by £1.1m, reduced tax by £0.4m and increased other comprehensive income by £1.3m.

For the year to 31 March 2013, the restatement has reduced operating profit for the period as previously reported by £1.3m, increased exceptional costs by £0.7m, increased net financing costs by £2.2m, reduced tax by £1.0m, reduced the pension deficit by £6.9m due to the reversal of the IFRIC 14 adjustment and decreased the deferred tax asset by £4.5m, with the result of increasing other comprehensive income by £5.6m. 

The Group has also adopted IFRS 7 "Disclosures Offsetting Financial Assets and Financial Liabilities", IFRS 13 "Fair value Measurement" both effective from 1 January 2013 and IAS 1R "Presentation of Financial Statements" in the period. Adoption of these standards did not have any material impact on financial performance or position of the Group.

Going concern

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

Significant accounting judgements, estimates and assumptions

The preparation of these interim condensed consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were of the same type as those applied to the annual consolidated financial statements for the year ended 31 March 2013, namely;

·      assumptions used to evaluate potential impairment of non-financial assets;

·      recognition of deferred tax assets; and

·      assumptions used in the valuation of retirement benefit obligations.

Financial risk management

The Group's financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements for the year ended 31 March 2013.

3      Segment information

The Group is organised into business units according to the nature of their products and services. Having considered the management reporting and organisational structure of the Group, the directors have concluded that Renold plc has two reportable operating segments as follows:

·      The Chain segment manufactures and sells power transmission and conveyor chain and also includes sales of Torque Transmission product through Chain National Sales Centres; and

·      The Torque Transmission segment manufactures and sells Torque Transmission products such as gearboxes and couplings used in power transmission.

       No operating segments have been aggregated to form the above reportable segments. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment.

The segment results for the period ended 30 September 2013 were as follows:

Period ended 30 September 2013	Chain £m		Torque Transmission £m		Head office costs and eliminations £m		Consolidated £m
Revenue
External revenue	72.2		23.4		-		95.6
Inter-segment	0.1		2.7		(2.8)		-
Total revenue	72.3		26.1		(2.8)		95.6
Adjusted operating profit/(loss)	4.3		2.9		(2.1)		5.1
Pension administration costs	-		-		(0.4)		(0.4)
Exceptional items	(0.4)		(0.3)		(0.3)		(1.0)
Segment operating profit/(loss)	3.9		2.6		(2.8)		3.7
Net financing costs							(2.6)
Profit before tax							1.1
Other disclosures
Inventories	29.2		9.5		(0.4)		38.3
Working capital	21.2		10.5		0.2		31.9
Capital expenditure	1.7		0.3		1.0		3.0
Depreciation and amortisation	2.1		0.7		-		2.8

The segment results for the period ended 30 September 2012 were as follows:

Period ended 30 September 2012 (restated)	Chain £m		Torque Transmission £m		Head office costs and eliminations £m		Consolidated £m
Revenue
External revenue	71.6		25.1		-		96.7
Inter-segment	0.1		2.6		(2.7)		-
Total revenue	71.7		27.7		(2.7)		96.7
Adjusted operating profit/(loss)	2.2		3.1		(1.7)		3.6
Pension administration costs	-		-		(0.6)		(0.6)
Exceptional items	(0.5)		1.0		-		0.5
Segment operating profit/(loss)	1.7		4.1		(2.3)		3.5
Share of post-tax loss of jointly controlled entity							(0.1)
Net financing costs							(3.0)
Profit before tax							0.4
Other disclosures
Inventories	35.2		9.8		-		45.0
Working capital	26.3		9.8		4.6		40.7
Capital expenditure	1.1		0.4		0.8		2.3
Depreciation and amortisation	1.7		0.5		0.1		2.3

The Board also reviews the performance of the business using information presented at consistent exchange rates. The prior year results have been restated using this year's exchange rates as follows:

Period ended 30 September 2012 (restated)	Chain £m		Torque Transmission £m		Head office costs and eliminations £m		Consolidated £m
Revenue
External revenue	71.6		25.1		-		96.7
Foreign exchange	1.3		(0.1)		-		1.2
Underlying external sales	72.9		25.0		-		97.9
Adjusted operating profit/(loss)	2.2		3.1		(1.7)		3.6
Foreign exchange	0.1		-		-		0.1
Underlying adjusted operating profit/(loss)	2.3		3.1		(1.7)		3.7

The segment results for the year ended 31 March 2013 were as follows:

Year ended 31 March 2013 (restated)	Chain £m		Torque Transmission £m		Head office costs and eliminations £m		Consolidated £m
Revenue
External revenue	141.9		48.4		-		190.3
Inter-segment	0.8		4.6		(5.4)		-
Total revenue	142.7		53.0		(5.4)		190.3
Adjusted operating profit/(loss)	6.9		5.3		(5.0)		7.2
Pension administration costs	-		-		(1.3)		(1.3)
Exceptional items	(9.5)		0.7		(3.5)		(12.3)
Segment operating (loss)/profit	(2.6)		6.0		(9.8)		(6.4)
Share of post-tax loss of jointly controlled entity							(0.1)
Net financing costs							(5.4)
Loss before tax							(11.9)
Other disclosures
Inventories	30.4		10.2		0.3		40.9
Working capital	18.5		8.6		6.0		33.1
Capital expenditure	2.3		0.8		1.8		4.9
Depreciation and amortisation	3.2		1.0		0.4		4.6

The Board also reviews the performance of the business using information presented at consistent exchange rates. The prior year results have been restated using this year's exchange rates as follows:

Year ended 31 March 2013 (restated)	Chain £m		Torque Transmission £m		Head office costs and eliminations £m		Consolidated £m
Revenue
External sales	141.9		48.4		-		190.3
Foreign exchange	1.8		(0.1)		-		1.7
Underlying external sales	143.7		48.3		-		192.0
Adjusted operating profit/(loss)	6.9		5.3		(5.0)		7.2
Foreign exchange	0.2		0.1		-		0.3
Underlying adjusted operating profit/(loss)	7.1		5.4		(5.0)		7.5

4      Exceptional items

	First half				Full year
	2013/14 £m		2012/13 £m		2012/13 restated £m
Included in operating costs:
Chain business model review:
- impairment of goodwill	-		-		1.5
- impairment of intangible assets	-		-		1.1
- impairment of tangible fixed assets	-		-		3.7
- impairment of inventory and production tooling	-		-		2.8
- provision for onerous licence costs	-		-		0.3
Impairment of investment in jointly controlled entity	-		-		0.1
Impairment of investment property	-		-		0.5
Reorganisation and redundancy costs	0.8		0.5		2.6
Pension merger and asset backed funding costs	0.2		-		0.7
Insurance proceeds	-		(1.0)		(1.0)
	1.0		(0.5)		12.3

Included in net financing costs:
Costs associated with refinancing	-		0.2		0.2
	-		0.2		0.2

Net exceptional costs/(income)

1.0

(0.3)

12.5

The redundancy and restructuring costs incurred in the period relate to preliminary costs incurred following the decision to close the Bredbury facility of £0.3m, and a further £0.5m incurred in relation to severance costs for members of the senior management team and other staff.

The exceptional pension merger and asset backed funding costs of £0.2m in the period relate to costs incurred to complete the funding plan and merger of the UK pension schemes initiated in the prior year. This project created a reduction in annual administrative costs of £0.5m p.a. with an additional reduction of £0.5m p.a. in UK pension funding.

Details of the exceptional impairment costs as a result of the Chain business model review as reported in the full year 2012/13 can be found in the Group's annual consolidated financial statements for the year ended 31 March 2013 .

5      Net financing costs

	First half				Full year
	2013/14 £m		2012/13 restated £m		2012/13 restated £m
Financing costs:
Interest payable on bank loans and overdrafts	1.0		1.3		2.6
Amortised financing costs	0.1		0.1		0.1
Exceptional refinancing charges	-		0.2		0.2
Total financing costs	1.1		1.6		2.9
IAS 19 financing costs	1.5		1.4		2.5
Net financing costs	2.6		3.0		5.4

6      Taxation

	First half				Full year
	2013/14 £m		2012/13 restated £m		2012/13 restated £m
Current tax:
- UK	-		-		-
- Overseas	0.6		0.2		0.7
	0.6		0.2		0.7
Deferred tax:
- UK	0.3		(0.1)		(0.6)
- Overseas	0.2		(0.1)		(0.2)
	0.5		(0.2)		(0.8)
Income tax expense/(credit)	1.1		-		(0.1)

The UK Finance Bill 2013 proposed reductions in the main rate of UK corporation tax from 23% to 20%, reducing the rate to 21% from 1 April 2014 and then 20% from 1 April 2015. As at 30 September 2013, these reductions have been enacted and their effect has been incorporated into the closing deferred tax balances in the company's financial statements.

This has resulted in a £0.4m deferred tax charge to the income statement and a £1.3m deferred tax charge to other comprehensive income, due to the reduction in the value of the deferred tax assets recognised in the UK.

The Group's tax charge in future years will be affected by the profit mix, effective tax rates in the different countries where the Group operates and utilisation of tax losses. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries.

7    Earnings/(loss) per share

Basic earnings per share is calculated by dividing the profit/(loss) for the period by the weighted average number of shares in issue during the period.  Diluted earnings per share takes into account the dilutive effect of the options and awards outstanding under the Group's employee share schemes. The calculation of earnings per share is based on the following data:

	First half				Full year
	2013/14 Pence per share		2012/13 restated Pence per share		2012/13 restated Pence per share
Basic EPS	-		0.2		(5.3)
Diluted EPS	-		0.2		(5.3)
Adjusted EPS	1.1		0.8		1.4
Diluted adjusted EPS	1.1		0.8		1.4
	£m		£m		£m
Profit/(loss) for calculation of adjusted EPS
Profit/(loss) for the financial period	-		0.4		(11.8)
Adjusted for exceptional items, after tax[7]:
- Exceptional items in operating costs	1.0		(0.5)		11.9
- Exceptional refinancing costs	-		0.2		0.2
- Pension administration costs included in operating costs	0.4		0.6		1.1
- Net pension financing costs	1.1		1.0		1.7
Profit for the calculation of adjusted EPS	2.5		1.7		3.1
	Thousands		Thousands		Thousands
Weighted average number of ordinary shares
For calculating basic earnings per share	221,350		220,636		220,939
Effect of dilutive securities:
- employee share options	3,249		1,092		30
- warrants over shares	417		614		434
For calculating diluted earnings per share	225,016		222,342		221,403

8      Retirement benefit obligations

        The Group's retirement benefit obligations are summarised as follows:

	At 30 September 2013 £m		At 30 September 2012 £m		At 31 March 2013 restated £m
Funded plan obligations	(198.6)		(199.5)		(217.5)
Funded plan assets	157.2		161.6		171.7
Net funded plan obligations	(41.4)		(37.9)		(45.8)
Unfunded obligations	(23.9)		(21.7)		(23.7)
Total retirement benefit obligations	(65.3)		(59.6)		(69.5)

        Analysed as follows:

Current assets
Retirement benefit surplus	0.1		1.5		1.4
Non-current liabilities
Retirement benefit obligations	(65.4)		(61.1)		(70.9)
Net retirement benefit obligation	(65.3)		(59.6)		(69.5)
Net deferred tax asset	10.8		11.5		13.2
Retirement benefit obligation net of deferred tax	(54.5)		(48.1)		(56.3)

The decrease in the Group's liability from £69.5m at 31 March 2013 to £65.3m at 30 September 2013 primarily reflects the improvement in yields on corporate bonds which in turn have led to higher discount rates being applied to the future pension liabilities. In the UK (which represents 84% of the total liabilities), the discount rate has risen by 0.2% from 4.3% at 31 March 2013 to 4.5% at 30 September 2013. Furthermore, in the UK, the assumed rate of inflation (CPI) at 30 September 2013 was 2.1% (31 March 2013: 2.2%). The retirement benefit surplus is all in South Africa and the majority was liquidated and returned to the Group in cash in the period.

9      Asset held for sale

	At 30 September 2013 £m		At 30 September 2012 £m		At 31 March 2013 £m
Property	1.7		-		-

The asset held for sale is the former chain manufacturing facility located in Seclin, France. Since the transfer of manufacturing in 2011/12, part of the facility has been used as a distribution and sales office.

The property was being actively marketed as at 30 September 2013. The Group is in active discussions to sell the whole property and lease back the part used in the current distribution and sales operations (representing approximately 35% of the total facility).

10    Cash generated by operations (restated)

	First half				Full year
	2013/14 £m		2012/13 £m		2012/13 £m
Operating profit/(loss)	3.7		3.5		(6.4)
Depreciation and amortisation	2.8		2.3		4.6
Impairment of goodwill	-		-		1.5
Impairment of intangible assets	-		-		1.1
Impairment of tangible fixed assets	-		-		3.7
Impairment of inventories	-		-		2.8
Impairment of investment in jointly controlled entity	-		-		0.1
Impairment of investment property	-		-		0.5
Proceeds from plant and equipment disposals	-		-		0.4
Equity share plans	0.1		0.1		(0.3)
Decrease/(increase) in inventories	0.1		(0.3)		2.8
Decrease/(increase) in receivables	1.5		(1.5)		1.3
(Decrease)/increase in payables	(1.6)		(0.8)		0.1
(Decrease)/increase in provisions	(0.5)		(0.4)		0.4
Movement on pension plans	(1.1)		(1.7)		(3.8)
Movement on derivative financial instruments	(0.2)		-		0.1
Cash generated by operations	4.8		1.2		8.9

11    Reconciliation of the movement in cash and cash equivalents to movement in net debt

		First half							Full year
		2013/14 £m					2012/13 £m		2012/13 £m
	Increase in cash and cash equivalents		0.3			1.7			7.7
	Change in net debt resulting from cash flows		0.4			(4.3)			(7.0)
	Other non-cash movement		(0.1)			0.7			-
	Foreign currency translation differences		0.2			0.2			(0.6)
	Change in net debt during the period		0.8			(1.7)			0.1
	Net debt at start of period		(22.8)			(22.9)			(22.9)
	Net debt at end of period		(22.0)			(24.6)			(22.8)

12    Net Debt

	At 30 September 2013 £m		At 30 September 2012 £m		At 31 March 2013 £m
Cash and cash equivalents	9.2		7.5		9.8
Borrowings:
Bank overdrafts	(0.1)		(4.7)		(0.6)
Bank loans - current	-		(9.3)		(5.7)
Obligations under finance leases - current	-		(0.1)		-
Sub-total - current borrowings	(0.1)		(14.1)		(6.3)
Bank loans - non-current	(30.6)		(17.5)		(25.8)
Preference stock	(0.5)		(0.5)		(0.5)
Net debt	(22.0)		(24.6)		(22.8)

13    Called-up share capital

	At 30 September 2013 £m		At 30 September 2012 £m		At 31 March 2013 £m
Ordinary shares of 5p each	11.2		11.1		11.1
Deferred shares of 20p each	15.4		15.4		15.4
	26.6		26.5		26.5

At 30 September 2013, the issued ordinary share capital comprised 223,064,703 ordinary shares of 5p each (31 March 2013 - 221,064,453) and 77,064,703 deferred shares of 20p each (31 March 2013 - 77,064,703).

In August 2013, the Company issued 2,000,250 fully paid ordinary 5p shares pursuant to the exercise of warrants by Royal Bank of Scotland at a price of 21.06p. The warrants had a seven year term commencing from 13 August 2009 during which they could be exercised at any time and were granted as part of the re-financing agreed with the Group's banks at that time. There are no outstanding warrants as at 30 September 2013.

14    Post balance sheet events

On 27 August 2013, the Group announced that it had initiated a formal consultation process with employee representatives to consult on a proposal to close the Bredbury UK Chain site. The consultation period concluded on 21 October 2013 and the decision was taken to transfer the majority of manufacturing activity to other Renold production facilities.

It is estimated that the project to transfer the manufacturing activity will complete in the first quarter of the 2014/15 financial year with the majority of spend in the second half of the current financial year. The total anticipated exceptional redundancy and restructuring costs are approximately £4.0m.  In addition, a provision may be required for an onerous operating lease on the Bredbury facility which has a committed and unexpired lease term of approximately 16 years. The current annual rent payment is £0.7m.  A separate project work stream is examining options to mitigate this potential liability.

Incremental capital costs of £1.2m are anticipated in addition to existing capital spend budgets.  Upon completion of the project, the anticipated future annualised net operating profit improvement is approximately £3.2m.

---

[1] Restated throughout to reflect amendments to IAS 19 Employee benefits which took effect on 1 January 2013.

[2] Throughout these interim results "adjusted" means after eliminating the effects of exceptional items, IAS 19 pensions charges (which include financing charges and scheme administration costs included in operating charges), and any associated tax thereon.

[3] "Underlying" means after eliminating the effects of foreign exchange translation.

[4] Calculated as net debt divided by rolling 12 month adjusted earnings before interest, tax, depreciation and amortisation.

[5] Operating profit before exceptional items divided by external revenue

[6] Includes pension administration costs which are excluded in arriving at adjusted operating profit.

[7] The adjusted earnings per share numbers have been provided in order to give a useful indication of underlying performance by the exclusion of exceptional items, the IAS19 financing and pension administration charges and any tax thereon.

 

END

 

 

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