Renold plc – 8 March 2007
Following the announcement on 7 February, Renold plc (‘Renold’) is pleased to announce the results of phase one of the profit and cash enhancement (‘PACE’) review.
The PACE review was undertaken recently following the successful completion of the sale of Renold’s Automotive and Machine Tools Businesses. The Board, having reviewed the Group’s businesses and operations, has formulated the PACE plan as outlined below. It is focused on Renold’s Chain business, which is one of the global brand leaders in industrial chain manufacture. Implementation of the PACE plan has now begun with the following key objectives, to:
- Improve profitability in line with world class peers
- Improve operating cash generation by reduced inventory and working capital
- Release cash through disposals of surplus property
- Reduce shareholder exposure to exogenous risk and earnings volatility
- Provide a platform for future sales and margin growth
It is expected that implementation will result in an improvement in profits in line with the market’s expectations for 2007/2008 and provide the prospect of exceeding current estimates for 2008/2009.
Renold opened manufacturing sites in Poland and China during 2006 which present considerable opportunities for manufacturing cost savings compared with its European and U.S. facilities.
The plan calls for a rapid expansion of manufacturing in these low cost countries (‘LCCs’) by moving existing European production and capturing new sales opportunities in the rapidly growing Asian markets. This has now started and it is planned that at least 40% of direct labour headcount will be located in LCCs by the end of 2008/2009
As mentioned in the interim results, the Group’s return on capital employed had improved to 14%, which was below our expectations for this key measure. Given the full impact of these planned changes we expect ROCE to increase to more than 20% with a steady improvement being experienced over the two year period.
The planned changes in manufacturing footprint will also have the effect of reducing annualised costs, compared to 2006/2007, by a total £5.8m; of these £2.4m (which will mostly impact gross margin) of these annualised savings will be implemented in 2007/2008 and a further £3.4m in 2008/2009, with the full impact of the savings being seen in the following year 2009/2010. Whilst the Board believe the full implementation of this phase of PACE will create the opportunities for new growth both organically and by acquisition, the Group is making cautious assumptions in relation to sales over the period of the plan whilst manufacturing changes are executed.
Operational Cash Generation
Aside from improving profitability, the Board is focused on reducing working capital and in particular inventory levels. Fundamental to this is a change in manufacturing methodology to move to a demand (or ‘pull’) led system of manufacturing. New management structures are being put in place to develop our planning and skills in this area. Aside from these changes in methodology, we will reduce inventory and distribution points in Europe with the creation of two major Distribution Centres. The combined effect of these changes will be to reduce inventory levels by £7m realising a cash benefit of £4m and an on-going reduced working capital to sales ratio which is expected to be in line with peers at 20% of sales.
Non-operational Cash Generation and Restructuring Costs
The reduction of warehouses, together with other PACE initiatives, will allow for the disposal of surplus property. Including the previously announced Burton disposal, for which a revised planning application has been submitted, this is expected to produce proceeds of £10m at values ahead of balance sheet carrying values. Capital expenditure costs will be £8m; the vast majority of these will occur during 2007/2008.
An additional non-cash inventory write-off of £3m will be incurred as well as cash restructuring costs of £7m, spread evenly across the period. The net effect of this is that the total programme costs including one-off and specific capital costs of £15m will be internally funded from property sales and the cash from working capital reductions and other cash improvements.
Reduced volatility by better risk management
More active management of the pension deficit will bring the UK net pension deficit down to a targeted 15% of market capitalisation putting it in the mid range of comparable UK engineering businesses. The first steps to achieving improved asset management are being taken in conjunction with the pension trustees and their advisors Equally we have begun to identify opportunities for a more progressive approach to liability management alongside our current £3m of deficit reduction cash contributions to achieve this target over the period.
The Group has become more active in pursuing tax planning opportunities. This first phase has identified saving of c.3% in cash taxes and the second phase is being explored with our advisors.
The recently announced new banking facilities will allow the Group unconstrained foreign exchange hedging which is being rolled out to hedge against the Group’s long exposure to the US dollar and Euro.
Similarly the recent decline in energy prices has provided an opportunity to reduce short-term exposure to energy costs by putting in place domestic supply contracts at each major manufacturing facility.
Steel price changes appear less volatile despite some recent increases, but the Group is ready to respond rapidly to potential future movements.
Commenting on the PACE Programme, Bob Davies, Chief Executive, said:
"We anticipate the PACE initiatives will put our operating performance on a par with our best international peers, creating a more profitable and less volatile business with a cost platform well set for sales growth and further expansion in our Chain business."