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Renold issues profit warning amid breakdowns and cost increases

By Josh White

Date: Thursday 12 Oct 2017

LONDON (ShareCast) - (ShareCast News) - Industrial chain and power transmission supplier Renold issued a period-end trading update on Thursday, covering the six months to 30 September ahead of announcing its interim results on 14 November.
The FTSE SmallCap stock said trading in the period was "mixed".

Its torque transmission division performed in-line with expectations, while the chain division delivered organic growth, although its profitability was affected by machine breakdowns at its Einbeck facility and by sustained increases in raw material costs.

As a result, the company's board said it now expected adjusted operating profit for the group for the year to 31 March 2018 to be "slightly below" the lower end of the current range of analyst forecasts.

Group revenue in the period grew by 8.0%, Renold said, and on an underlying basis by 2.7% compared to the first half of the prior year.

Order intake in the period grew by 9.9% on an underlying basis, or 6.1% excluding the element of the large UK Couplings order which extended beyond the current financial year.

The torque transmission division delivered growth in underlying revenue of 6.3%, the board said, adding that including the major project win for UK Couplings, underlying order intake increased by 27.4%.

The chain division reportedly delivered "strong" year-on-year underlying revenue growth of 8.2% in the first quarter of the financial year, Renold explained.

"However, in the second quarter, major machine breakdowns at our Einbeck, Germany facility reduced availability of key product lines," the board said.

"This resulted in increased shipping and maintenance costs to mitigate the impact on key customers in Europe and the US and led to a second quarter revenue decline of 4.5% and underlying revenue growth of 1.8% for the period."

As it noted in the AGM statement in July, the group - particularly the chain division - experienced sustained increases in raw material costs, notably in respect of steel.

Sales price increases had now been implemented to pass on those costs, and were visible in the order book.

Margins in the period were impacted by the lag between raw material increases being incurred and sales price rises working through the order book, Renold said, and as a result of that and the costs of machine breakdowns, adjusted operating margin for the chain division for the first half was expected to be around 8%.

Underlying order intake for the chain division improved to 9.0% in the second quarter, resulting in an overall growth for the period of 5.3%.

Performance in the division was expected to improve in the second half, with the issues at Einbeck now resolved and price increases in the order book feeding into revenues.

Renold said the torque transmission division remained on track to perform in line with the board's expectations.

"It has been a frustrating first half for the chain division," said chief executive Robert Purcell.

"Organic growth opportunities, particularly in Europe, have been converted but have failed to deliver the expected improvements in profitability due to issues at Einbeck and the rise in raw material prices.

"Management actions to address these issues are expected to benefit the second half of the year."

Purcell said the torque transmission division continued to make progress in line with expectations.

"The consolidation of our Halifax and Cardiff plants into a single UK Couplings business unit is starting to deliver the planned benefits, with more opportunity for improvement in the future."