Renold plc (RNO) Earnings Call Transcript & Summary

Well, thank you. I think we've got most people joined us now, so thank you very much for joining us this afternoon. My name is Tim Metcalfe. I'm from IFC Advisory, Renold's Financial PR and Investor Relations Advisor. With me today, I've got Robert Purcell, the CEO of Renold and Jim Haughey, who is the Finance Director of Renold. Robert And Jim going to run you through the presentation that they been busy delivering to institutional investors this afternoon. Then at the end of the presentation, there will be opportunity for a question-and-answer session. Unfortunately, given the number of people who are with us, it's not possible to those people individually, ask them to unmute and put their questions to Robert and Jim but really would like questions. [Operator Instructions] And then if there's anything that comes to you after the presentation, please do not hesitate to contact me. Our details [ run over ] on the announcements renold@investor-focus.co.uk and [indiscernible] come back to you with the answers to any questions you've got. So without further ado, I'm going to hand it over to Robert to start the presentation. Robert?

Thank you very much, Tim. Good afternoon, everyone. Welcome to the presentation of the rental results for the 2022 financial year. We're not going to start the presentation this time with sort of generic background for Renold. We do have some slides on that if people want to ask questions, I'll get some more briefing on that at the end of the presentation. So I'm going to start with a quick summary. That's up on the screen. very good. At the half year results, I actually spoke about strange world that the pandemic have brought about. And now the Russian invasion in Ukraine have added another element complexity to the situation. We still have a world with inflation, supply chain, bottlenecks and long lead times. Whilst in some parts of the world, we may think that COVID is receding, but in many places, it has not got best which is variable. The global situation [indiscernible] indeed. However, despite everything I've just said and everything that is going in the world, Renold has delivered a strong full year performance. We executed well in a challenging and rapidly changing environment. The group's markets recovered strongly during the year as activity levels continue to rebound. Many of our businesses have produced record results. Demand is strong and has strengthened through the second half of the year. Group order intake during the year was GBP 224 million, an increase of 31.7% on a reported basis and 35.5% at constant exchange rates. Encouragingly, the second half order intake at GBP 207.9 million with 8.7% ahead of the underlying first half performance, excluding the one-off military order. The revenue in the period of GBP 195 million. That's up 18% as reported or 21% at constant exchange rates. The growth that we saw in the first half of the year continued into the second half. Indeed, momentum has continued into the first quarter of the new financial year. Group activity continued to ramp up over the second half of the period with turnover at constant currency at GBP 99.8 million, some 4.8% ahead of the first half. Final quarter revenue of GBP 52.9 million broke the psychologically important GBP 50 million barrier. Adjusted operating profit in the period was GBP 15.3 million, that's up 34% or GBP 3.9 million. Return on sales increased by 90 basis points to 7.8% despite the considerable and rapid cost increases, which we have to pass through to our customers. Adjusted EPS took a big step forward. That was up 87% to 4.3%. The small U.K. acquisition we announced last year has performed particularly well and will give us a payback of less than 2 years. In the U.S., despite of the market issues you are aware of, our cash erosion was strong with net debt falling to GBP 13.8 million, the lowest level for many years. We have demonstrated again how robust the platform we have. Net debt is at multiyear lows, and leverage is at just 0.6x EBITDA. Our major restructuring program is complete, and we're very well placed to build the business through acquisition and strategic capital investment. So that's a very high-level overview for everyone. So over to Jim who is going to take through some more detailed numbers before I talk about the other issues.

Just to stop on this slide. This is a picture of our new Mazak machine that we've purchased for our Cardiff facility, which will be used to fulfill our long-term military contracts. So that's just an example of some of the new capital investment that we've put in place in the year. Sorry, Tim, just carry on. Okay. So here's the numbers. So as Robert said before, the numbers show the rebound of the COVID-19 pandemic. Turnover is up GBP 29.9 million or 18.1%, following the continuation of the strong order intake seen in the first half of the year. Statutory operating profit increased strongly to GBP 16.2 million but that does include 2 nonrecurring items; an exceptional credit of GBP 1.7 million, which relates to the U.S. government payroll protection program, loan forgiveness, and there was a GBP 0.7 million charge, which were related to lease arrangements on the closed sites. So excluding those 2 nonrecurring items, adjusted operating profit was GBP 15.3 million, and that had a ROS of 7.8%. And that shows progression in the underlying loss of 90 basis points or from last year's 6.9%. Net debt at GBP 13.8 million. Again, it had a 25% reduction in the year. It's dropped by GBP 4.6 million, and that is the lowest level seen in Renold for over recent history. Our record go back 11 years. It's the lowest level we've got in the last 11 years. EPS at 4.3p. That's adjusted EPS. That increased 87% in the year. Basic earnings per share was up 135p to 4.7p, but that does include 0.4p for the exceptional credits that we talked about earlier. The above numbers illustrate the results of the strategy over the past few years, which has delivered a more flexible business with a lower cost base. So moving on to the divisions. So focusing on the Chain division. Turnover increased GBP 29.2 million, 22.5% to GBP 159.2 million. Operating profit, excluding the nonrecurring items, increased by 39% to GBP 18.9 million or 11.9% ROS, an increase of 140 basis points in the year. The Chain division is where our small acquisition, which we talked about earlier fall into. The small acquisition performed well. The turnover GBP 1 million was ahead of what we had expected. And those [Technical Difficulty] profit improvement is basically less than 2 years payback on the acquisition. In the TT division, a turnover was stable. And the TT is a later cycle, larger order business and what we expected is that business to pick up as we enter the new financial year. Last year's operating profit in TT is slightly flattened by the receipt of GBP 0.7 million of BBB credit from last financial year. So if you back that out, ROS in that division was 10.7%, and that compares favorably or compare nicely to the 10.1% we see this year. This year, it did include some extra legal costs relating to the long-term military contract, which we talked about, which still likely made up the rest of the difference. In head office, we've got the nonrecurring charge, which was split out on the slide. There is an increase in the variable elements of pay in head office, which is bonuses and share-based payments. In the underlying numbers, there's also the reversal of the cost savings we saw last year of the -- reductions in pay we saw with the COVID situation are reversed. Moving on, we have -- our next slide shows our profit bridge. So just to put this in context, let's talk about the sales bridge, which I know isn't on the slide but basically gives the context of this profit improvements. So turnover increased in the year by GBP 29.9 million. We believe the impacts of the volume and mix in that number is GBP 19.1 million. Price is GBP 14.3 million. We saw the acquisition which added about GBP 1 million to group turnover. And then we've had currency headwinds which have taken GBP 4.5 million of the group turnover. So putting those turnover when we see in context, we're moving to the profit bridge. Asset moved against us by GBP 0.6 million. Price, the benefit of recovering price increases ahead of inflation was like 1.4 million to the operating profit, and that's a profit drop-through of around about 10%. And what we are aiming to do is to try and maintain our return on sales as we pass through price increases by adding on that extra 10% more to make sure our ROS isn't adversely impacted. Price increases themselves average during the year around about 8%, but that's an average figure and at the start of the year relatively low, gathered momentum as we got to the end of the year. And the exit rates for price increases we expect to be around about the 15% with that full year impact we will see next year. The incremental volume, the sales impact was GBP 19.1 million. That dropped through at GBP 7.4 million in incremental operating profit, that's an incremental margin of 38.8%. As we mentioned, the small acquisition dropped in at GBP 400,000, which again on 38.1% margin, it's quite a good situation. Offsetting those increases, we have a group-wide incremental costs from variable elements we paid, that is basically the share-based payment charge and the bonus charge, which were both topped up during the year. Now those charges are essentially now at their max level. So there wouldn't be a further increase in those costs if we progress into the next financial year. Government Support, which we enjoyed during the COVID period of GBP 4 million, obviously disappears out of our profits this year. And so there is a downside impact to GBP 2.9 million. We did, as part of our strategic initiative, to put stock back into the locations where we needed it around the world, increased our stock levels. Now the recovery from that GBP 10 million increase in stock around about GBP 2.9 million. Now I don't expect that same profit recovery that comes from increasing that stock level to recur next year. So again, those last 3 boxes on the slide are things I wouldn't expect to see again next year to a great or lesser extent. The first 3, 4 items, obviously, will have an impact going forward. Moving on. We'll move on to cash flow. So cash flow. The first number on the page here is our EBITDA of GBP 24.7 million. That increased by GBP 3.4 million in the year or 16%. The next number is working capital. So despite the increase in volumes, we have managed to maintain our working capital at a relatively stable level. And that's, bear in mind, we had GBP 10 million increase in inventory. Now that improvement has primarily come from controlling our receivables, making sure that we've got the benefit of tight control there and also tight control of our working capital and payables. Moving down the page. Income taxes recovered to more normal levels. Last year during pandemic, we approached various tax authorities and recovered payments on accounts, which we thought were probably higher than they needed to be, given the new level of profitability. Pension cost. We again approached the pensions scheme trustees in the U.K. last year and got a payment holiday from the pension scheme. That GBP 2.8 million deferral is payable over a 5-year period. So this financial year, the one that's just gone, the pension contributions come back to the normal level. The repayment kicks in next year, so we should see the GBP 0.6 million increase in pension cash costs going forward because of that repayment of that pension holiday. Restructuring spend, as we've said before, the main heavy lift in restructuring initiative in the group have come to an end. So over a 2-year period, we've only spent GBP 0.2 million. Obviously, those spends in previous years were higher as we went through restructuring programs. Leasing increased by GBP 1 million during the year. Now as we said, we terminated some leased sites for close down essentially properties that cost us an addition GBP 1 million during the year. Now that won't recur next year. So I expect the lease cash costs to go back down to around the GBP 3.2 million level going forward. Financing costs return with the level of reduction in the net debt. And as you can see on the slide here, we spent GBP 0.5 million, which is the cash contribution in the year for our small acquisition. But total consideration was GBP 700,000, we paid up GBP 500,000, and the incremental profit we've got is around GBP 400,000. So, as I said, that small bolt-on acquisition in Manchester has been a good deal for us. We did take an opportunity during the year to top up the shares in the EBT, and share purchases by the EBT cost GBP 4.9 million in the year. So change in net debt over the year is a GBP 4.6 million reduction. Obviously, the purchase of the own shares will happen again to the same degree next year. So that means if you have that on, we've actually generated probably nearer the GBP 9.5 billion of cash on an underlying level. Moving on to the next slide. The next slide is take a step back and say, well, over the last 2 years, we've generated quite a large amount of cash, where did that cash come from and what have we done with it? So the EBITDA during that 2-year period is GBP 46 million. Added to that is our reduction in working capital, which we saw primarily last year, GBP 6.3 million. So that means that the trading operations have generated GBP 52.3 million over the last 2 years. There is some required spends, the thing that we have to pay out, and they include our pension costs, tax interest, et cetera. And the spend on those required amounts is GBP 15.9 million. Then we get into -- and that gives us, sorry, a GBP 36.4 million of cash, which was available for discretionary spends, borrowing reduction or strategic investments. So what did we spend our discretionary spend on? We spent GBP 8 million on CapEx during that 2-year period. Acquisitions, as I said before, cost GBP 0.5 million. We topped up the EBT at GBP 4.9 million and incurred restructuring cost of GBP 2 million. But what that did do is allow us to have GBP 22.8 million, which we've been applying so far to reducing our net borrowings. Now of course, that cash is available in facility and is available for other strategic investment acquisitions or whatever we choose to spend on going forward. Moving on to the next slide. The next slide covers earnings per share. The first chart is the adjusted earnings per share. We started last year at 2.3p. The increase in the operating results, the operating profit added 1.8p to earnings, and we had small increases of 0.2p for both the pension interest and the external interest charges. Offsetting that to a small degree was a 0.2 headwind with tax charges and basic where the underlying earnings as having the uppage 4.3p. The second chart looks at basic earnings per share over time. Obviously, we went through the pandemic, and last year was the tail end of the pandemic, where we earned 2p. The increase in basic earnings per share is up to 4.7p. But the idea of this slide is to try and highlight the fact that included in that number is 0.4p, which relates to our exceptional credits, which we talked about earlier, those exceptional nonrecurring loan [indiscernible] et cetera. So moving on, the next good thing I want to talk about is pensions. So pensions. The group's total IAS19R pension deficit is GBP 87.1 million. Last year's figure was GBP 102.4 million. So we've seen a reduction in pension liabilities of GBP 15.3 million during the year. Now the main driver of that reduction in pension liabilities is the discount rate, so bond yields. Essentially, our discount rate was 2% last year. That increased to 2.75% at the end of the last financial year. Offsetting that is inflationary headwinds. So CPI inflation last year was 2.7% of the assumption, 3.2% of the assumption this year-end. And now we need to bear in mind that our pension scheme, especially the U.K. scheme has caps on pension increases and those caps range between 3% and 5%. So average on overall about 4%. So the bad news because of inflationary impacts will cap out at 4%, and that is essentially built into our numbers as we go forward. Asset returns were strong at GBP 4 million. So that also contributed to the reduction in deficit. Incidentally, so the main impact is from our reduction in discount rates. Before we went on this road show, I [indiscernible] the actuary at the end of last month. And so as at 30th of June, what would you say the discount rate of the pension scheme would be going forward? Now he said to me, if we were to do this same valuation again at 30th of June, I would suggest a discount rate of 3.85%. Now that 3.85% is 110 basis points improvement in our discount rate. Now what does that mean in terms of pension deficit? Well, that would be a reduction of around about somewhere between GBP 20 million to GBP 26 million of pension scheme deficit going forward. So as of today, and all thing else being equal, if we value the pension deficit today, there would be a further GBP 26 million reduction in our pension liabilities. Okay. We need to bear in mind in our pension scheme world what really matters to the group is not really the deficit in my view anyway, if the deficit goes up with external factors, discount rates, bond yields, which are out of our control. What really matters to the group is the cash contributions that the scheme wants us to pay going forward. And as you can see from the chart, over the last 10 years, the level of those cash contributions to the scheme have averaged around about GBP 5.5 million. This GBP 3.5 million to the U.K. scheme, GBP 2 million were overseas schemes. Where we ended up this year with a pension holiday is the GBP 2.8 million of 2021 was deferred. That will be repaid going forward as GBP 600,000 going forward. But the base projected underlying cash contribution is still around that GBP 5.5 million. There is 1 or 2 other bits and pieces that we've done with the pension scheme this year. In April, this new financial year, we closed down the New Zealand team, there's 0.3 additional contributions to scheme. That scheme closed down this year, which will also go on to the cash contributions next year, but that's certainly a one-off in nature and won't recur. Okay. the triennial valuation, is due at the 31st of March '22, and the actuaries are working on that as we speak. We expect the outcome of that valuation to be available to us in the next month or two, so ahead of the September half year results. Now where we are in that valuation? The chart at the top, the dark blue bars on the top are our estimate of what the TP deficit, the technical provisions deficit is. So over the period of the last valuation, the valuation in '19 said we had a deficit of GBP 9 million, and that's what the regulator and the pension trustees says are pension deficit. If we did our estimate, which is the IAS19 less our CAR valuation, that would give us a deficit of around about GBP 14.9 million. Now what is not included in that GBP 6 million increase in deficit is the valuation of this pension holiday of GBP 2.8 million. So that needs to be netted off because those cash contributions don't get included in the CAR. So we estimate over the last 3 years that the pension has increased deficit, in the regulator's view it has probably got worse by about GBP 3 million. Now offsetting that going forward, we have an arrangement with the scheme, as I said once our operating profit increases above GBP 16 million, we will put extra contributions into the scheme of around about GBP 1 million a year. and that will take care of any TP deficit going forward. So we don't expect any surprises or shocks from pension. Overall, we've got long-term visibility of the cash flows. We believe the cash flows are predictable and manageable and certainly what the group is well able to cope with. Okay. Well, that winds up my part of the presentation. I'll hand over to Robert, and he'll give you some more operational insights.

Okay. Thank you very much, Jim. To start with, I thought I'd just give people some more background information. I'm doing that. I'm going to show you various bits of data, a little bit of our internal data. And indeed, some of it is from public sources. The graph on the top left here actually is a publicly available data as an index of energy prices, the graph does not make pleasant reading, as you can see. But in reality, the global situation is very mixed. And in our experience, the big issue is in Europe and the U.K., where we're seeing increases substantially above the level indicated here, and there are no signs of this letting up. Indeed, quite the opposite. The top right-hand graph is showing container costs on the purple line and the transit times on the blue line. While this public data shows improvement in both and we are seeing some improvement, it is far more marginal than is indicated here. Container availability and reliability is much better than it was, but ports around the world is still troublesome particularly in the U.S. The bottom-left graph is the Renold steel purchase index, which is based on our Chain business only as it is done like TT is sufficiently uniform to analyze. It can, however, be distorted by mix factors from month to month, but the general trend you see here we think is correct and of course, it is a global trend. From April 2021 to April '22, we've seen prices rise by circa 55%. There are regional variances, but the only one of significance is China where steel prices have lagged global increases in the second half of the year. Inflationary pressures are everywhere. It's not just container cost, steel and energy, it's everything. Increases are often large and frequently sudden. Lead times of materials can be extended, and supply chain are long and have absorbed considerable working capital, as Jim has outlined. Labor costs and labor availability are both troubling and show no sign of easing. Indeed, I am sure labor cost pressures will get worse. COVID continues to impact our operations, and there have been lockdown and operational restrictions in territories in which we operate. On top of this, even when there are restrictions from the authorities, we've seen meaningful increases in active season, which impact our output at certain times in various different facilities. Market pressure are showing no signs of receding with new issues building due to European energy availability. I'm sure the headwinds we're seeing today will be with us until at least the next spring. Whilst recognizing the human tragedy unfolding during the war between Russia and Ukraine, ceasing trading relationships with sanctioned regions have little direct impact on the group. Sales to Russian and Ukraine during financial year '22 were low at circa 0.5% of group turnover. The Renold team have faced all these challenges and throughout the year dealt with them very well, delivering increases in sales, orders and profits whilst reducing debt. So we flip over to page, please, Tim. A few comments on the divisional sales performance. The global chain performance is on the left of the slide. The graph shows the rolling 12-month sales. That's the blue line and orders as the purple line. Graph starts in April 2020 and therefore, covers the majority of the pandemic period. You can see orders lead sales downwards as the pandemic gains pace and then goes upward earlier. The order intake growth is outrunning sales and is now well above pre-pandemic levels. Q1 of the new financial year, we see momentum in orders continue. Both orders and sales are impacted by selling price rises. But of course, orders will see a bigger impact on sales within any given coming period. As Jim showed you earlier, Chain order intake in the year is up 26.1% at constant exchange rates, and adjusted operating profit up 43.6%. All our Chain businesses performed well, but Europe and Americas were particularly strong. Our commercial teams have been working almost continually on pricing measures due to cost inflation. We have and continue to also move forward on various attractive product sectors as well as increasing our product development activities. Our increasing ability to manufacture identical products in various geographic location is a growing competitive advantage as is our geographic footprint, which offers customers greater security in supply when geopolitical events unwind. Projects to take cost out of the Chain business has been accelerating through the period as CapEx has started to return to more normal levels. There are many opportunities to drive cost out of the business whilst organically growing sales. India and China have performed well despite India's lockdown in H1. Our Chinese facility has not been required to lock down since 2020 despite the localized problems seen around Shanghai but impacted our customers and transport systems. The new Chinese factory continues to improve its performance. In both businesses, we are investing heavily to enable them to manufacture products of higher specification, but also to the new cost. The right-hand graph of TT shows the same data as the chain, whereas you can see, it's a different shape. The large GBP 11 million military contract clearly stands out. But even since this, our businesses will continue to add orders at a good rate. [Technical Difficulty] both the chain and TT divisions finished the year with record order books. TT is a late cycle, indeed also a longer cycle business. So we believe we're yet to see the majority of the pickup, which is to come. TT in the U.S., like the other companies, the majority of the year in terms of orders, but this has now changed and order intake is better. Our U.S. mass transit markets have been particularly slow as you might expect. The obvious point that can be seen from the graph is that despite the good order intake, the TT sales has only moved up marginally. Some of this is the long-cycle nature of the business. However, TT has a more complex bill of materials and industrial chain with more purchased components and therefore, experienced greater issues. We've also had some localized issues with retirements and COVID absenteeism. We are investing CapEx in our TT businesses to automate and increase capacity and the supply chain, we will see a growing level of sales. If we turn over again, please. Tim? This slide is similar to slides I've shown in the past. The revenue and all the growth shown on the top line are for each region and combined numbers of our TT and Chain businesses and our external-only, everything is at constant exchange rates. The top line of the bar charts compare the current period against the previous year, which, of course, was the most severely hit pandemic period. You should remember that these numbers are year-on-year averages and are not exit rates. Compared to last year, the group revenue as a whole was up 21.4%, as orders were up 35.1%. All our regions, except India saw order growth materially ahead of revenue growth. India, you may recall had an exceptionally strong order intake in the second half of the prior year. And in absolute terms, India order intake in the year was satisfactory. Europe once again led the way of orders with growth of 49.2% and revenue up 26.6%. This was an across-the-board performance, which was helped by having our own manufacturing facilities within the European market. The U.S. market, like the recovery in Europe, as you can see, also bounced back strongly. Canada, which is within the Americas numbers performed well. But the Americas like Europe, there is some evidence that it will outperform this year. Both the U.S. and European revenue has been held back by supply chain issues to some extent. We struggled to ramp up volume as we would wish, and output levels continue to rise as we work through these issues. Australasian orders grew, and this is the continuation of the trends that we've seen for a couple of years. Revenue whilst flat has been badly constrained by international container transit times and availability. We've seen a much stronger performance in Australia and New Zealand than Southeast Asia. COVID and floods earlier in the year had caused particular issues, and there are signs that these [indiscernible] are starting to normalize. Our businesses in China and India have both progressed well. Indian steel supplies, which were particularly problematic in H1 have eased in H2, though prices have not. The second set of bar charts show the performance of the full year period against 2 years ago, so the year before the main pandemic. Even on this tougher comparative, all regions have seen orders ahead. And in some cases, like Europe, America and China considerably ahead. The group order intake was 26.5% above the pre-pandemic year. The chart in the right corner shows the split external revenue by percentage. You can see that the growth in the America and European business is particularly important to us as they are by some way, our largest markets. We move over on to Page 15, please. The sales split by customer type shown on the left chart also includes the percentage. This percentage is a measurement of growth in revenue for that customer type from the financial year 2020, so 2 years ago. As can be seen, distributors and OEMs have grown noticeably. OEM growth has slowed, however, since H1 because they are having considerable and broad-based supply chain issues. So limiting the amount of product they require for months in the short term. We believe that OEMs generally have very strong order books. Distributor sales have been strong. This is for a few reasons, but particularly as we have been working hard on making sure our distribution partners are well equipped to sell our products and understand the Renold premium sales proposition, but also because our competitors have struggled, particularly in some locations with keeping the market supplied as longer supply chains make an impact whereas customers stop their attention to where product is produced. Combination of tariffs and country origin labeling requirements are having a particular impact in the U.S. On the right, we show revenue split by market sector. The actual diversity of our end markets is far greater than this chart shows, but we try to group things together to make it meaningful in the presentation. All sectors are growing in absolute terms, except environment, which has had some non-repeating projects, mining and quarrying again, due to some non-repeating TT projects in the U.S., when unsurprisingly pandemic hit transportation is also down. We've had some good increases in agriculture and forestry, energy and food and drink whilst manufacturers, general manufacturing and material handling have progressed particularly well. We don't show applications on this slide, but the world is automating at a faster rate than has been seen for a very long time. The move to shorten supply chains, reshore, nearshore and produced domestically on top of the great resignation and general labor shortages is forcing a move to a greater automation. The move to reindustrialize high labor cost economies to make them less dependent on foreign supply is adding to the automation dynamic. Automation can take several forms but a great many of them involve our products. The growing long-term trends for great automation and the greater western economy capital expenditure is most definitely our friend. So if we turn to the next slide, I'm just going to say a few words about sustainability. A year ago, we started to lay out how we are tackling sustainability in Renold. This is a short update. However, before I talk about the details of what we're doing, I'd just like to say a few words about our approach to sustainability. We said this at the start, and we're staying true to it. Our ambition in this area is not just to keep up the rules and regulations, but also and most importantly, to actually drive change. We're focused on making a real difference. This is not a fast or easy route to take, but we started, and we're making good progress. Renold is taking 2 principal approaches, top-down and local. We're driving a few large projects where we believe that there is benefit in a group-wide approach in areas such as energy reduction or packaging and customer sustainability whilst also building a structure, which let our teams around the world initiate and build the projects to help their local businesses or communities. These local initiatives are often community based and take different forms, spanning things such as support to local food bank in Tennessee or putting women's toilets in a local school in India. We're particularly pleased with the work we've undertaken so far, and the projects are steadily progressing, increasing in number and getting to the point of delivering meaningful results. If we go over Page again, please, to Slide 17. This diagram explains our new strategic plan which has been very creatively called Step 2, following on from a Step 2020 strategic plan. This is an evolution of what came before and build on the foundations that have been created over the previous years. We believe the time is right to lay out what we see as the next stage in development of Renold. The key to Step 2 is in the title of the slide, but also the schematics showing that 2 of the 3 strategic elements are growth related. Step 2 is about growing the business. Text boxes at the top and the bottom of the slide explain what we are, what we offer, where we sit in this very attractive market and why our position within it is so good. These boxes lay out what I call the business fundamentals. And in my opinion, Renold has excellent fundamentals. I've been associated with some good businesses, and Renold's business fundamentals are as good as any I have seen. Our tasks going forward, having finished our restructuring work, is to build on these fundamentals and develop an enhancement to draw them out and use them to build the business that we all know Renold can be. The strategy is still underpinned by a business improvement element. There remains much we can do to cut cost, become more efficient and productive. We have opportunities to use our much improved business systems and the information they produce to make better decisions and faster decisions and to help identify opportunities both operational and commercial. We're particularly excited about driving our standardization work stream and also, the one focused on improving service levels. We wish to be a market leader in service, and we are not there yet. The 2 big elements of Step 2 are both growth oriented. This is no accident. We have opportunities to grow organically and through acquisition. We are, however, aware that with volatile global markets and a difficult macroeconomic backdrop, it is not the ideal time to be talking about growth. So the strategy is longer term, and we are looking through the volatile markets to what lies beyond, put in place the next long-term strategic phase. Organically, we can go through our focused product initiatives, both the development of better enhanced products, but also in driving volumes in our key products and ancillary products. Our approach is proactive, and we are actively pursuing the areas we are interested in. We're running a premiumization strategy, which is built around superior products, sustainability and engineered lower product tiers. The cherry on the top of the Step 2 strategy cake is acquisitions. We have a good business that can develop nicely without acquisitions, but due to the sticky nature of our products, acquisitions will help our growth and opportunities. I'm excited that we've got to this point in Renold's development. I'm delighted that we will see all the hard work that has gone before start to bear fruit as the business grows. So we flip over the page once again, a high level slide about acquisitions. With our low level of net debt and strong market position with an experienced and capable management team, we are well positioned to push the acquisitive phase of our strategy forward. I've outlined before the type of acquisition Renold would consider and how they would help. Acquisitions are focused on chain and will accelerate our growth, including organic growth and help us reach the scale which is needed to maximize the performance of the business, and in particular, reach our margin potential. Acquisitions potentially give us additional volumes to put through our factories, allowing us to develop synergies. You will notice on the chart on the right of the slide the large difference we have in sales by chain type by region. There is room for us to even this up, and acquisitions would be one way of achieving this. We have an active pipeline of opportunities, all of which are value enhancing. I would just like to remind everyone that we're not starting from scratch. And whilst the 2 acquisitions we have made in recent times are small, particularly so the one that we did 12 months ago, both have been extremely successful. Our acquisition opportunity pipeline is focusing predominantly on Europe and the U.S. We're looking for a deal, which I ideally would be GBP 15 million to GBP 20 million range that can be afforded to using debt only. But ideally, we would like to go forward at the rate of 1 deal a year. I would like to stress, however, that we will not be overly stressing our balance sheet. So we go on to Page 19, a few words in summary. Our 2022 financial year has been a very busy one. We have been wrestling with the global economy that have generated a record order book and growing order intake. Both Chain and TT order books are at record levels. Sales are growing despite the all the well-known supply chain constraints. We've won an GBP 11 million multiyear military contract in TT. Our operating profit margin has improved by 90 basis points to 7.8% despite the inflation and supply chain headwinds. Our cash generation was good with net debt falling to GBP 13.8 million. We continue to spend CapEx to deliver a better cost base and increase capabilities despite the difficulty at doing so in the current environment. The net debt is at multiyear low and on a stable experience management team in place, we are ready to make a meaningful acquisition and are actively managing the pipeline of opportunities. The Renold strategy continues to evolve with the launch of Step 2 with a particular emphasis on growth, both organic and acquisitive. We do realize the short-term economic environment is not particularly conducive to growth, but we're setting out our strategy for the long term, not the short term. I'm pleased with the group's robust performance through the pandemic, which reflected the benefits of the strategic foundations completed over prior years. Our employees around the world 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 this very difficult period. Throughout the reported period, business performance has been on an improving trend. Our order books have continued to grow in the early part of the new financial year. We are cognizant that there remain considerable COVID-19-related challenges in some parts of the world. Supply chain issues are still prevalent, and high inflation is everywhere. However, we have entered the new financial year with good momentum and a belief in the excellent fundamentals of the Renold business upon which we are steadily building. So thank you very much for your attention. That's probably taken us slightly longer than we would have wanted. Hopefully, that's been interesting. And over to you, Tim.

Well, thank you very much, Robert. Thank you very much, Jim. Thank you to those who typed in questions. And thank you, actually, to those who provided me with some questions in advance. If you do have anything that's coming out of the presentation, there is still time to type in the Q&A function. So please do that. But I'll now go through the various questions that I've been provided. The first one is on price increases. You mentioned that raw material costs can increase quite rapidly. How easy are you finding it to pass on these pricing increases to customers? And do you have many customers that are on, for example, fixed long-term contracts at a set price?

Well, dealing with last bit first, we have very few customers, if any, who are on a fixed long price contract. We've always avoided those things. We do have some longer-term contracts with some OEM customers, but we have always built in automatic mechanisms built around material price indexes to move prices forward. In terms of how hard it is. If we've been through a little bit of a cycle when prices started to go up and we started to go out to market with price rises, customers were somewhat surprised. Purchasing teams in most companies don't have to deal with much in way of price rises for many years. And therefore, there was a little bit of pushback in the early days. That got easier as everyone started to get inundated. It then has started to get harder again as people are now starting to sit there and see the scale of the task. It is possible, we are obviously doing it. We're doing it successfully at the moment. The key to it is to do it quickly enough to make sure you don't get behind. I'm sure we can get price increases through. It's just a case of making sure we don't get a time lag where we get hit by the cost increases, and we don't get the benefit of the price increases to the customer. At the end of the day, in some ways, it's a bit easier in this environment, if I'm honest. When you've got such large cost increases, you have no option, you have to push them through. It's not as if it's well, we don't do this. It's 0.25% of our margin or something. You're talking about some big numbers here. We have to get those price increases through. And ultimately, customers understand that, and they have to accept it as well.

Thank you. Obviously, a number of the questions I've had there on potential challenges that you might face in the coming months. One is on China. You have shown in the presentation some 5% of sales in China. But how dependent are you on Chinese manufacturing?

I think, again, there's a few things I would say there. China is part of our footprint, and we anticipate it will remain part of our footprint. The majority of what we make in China does get exported outside of China, albeit we do have a growing business within the Chinese market. One of the reasons why we have invested in China is China is the largest single industrial chain market in the world, and you can't compete in that market from outside in a meaningful way. So we believe we have got our manufacturing footprint in China for the Chinese domestic market. China in terms of steel prices is also one of the lowest cost steel markets in the world, materially lower than places like Europe and America. Steel is quite a large cost for us, and therefore, there are advantages to manufacturing in China and shipping around the world. However, we do -- we've got this wide geographic footprint. We have been going through the standardization process that I keep talking about. We are able to make identical products in multiple places now, and we continue to invest so we can do that. So if we do have issues in China due to lockdown, for instance, and we weren't affected by the reason Shanghai lockdown directly, albeit it made our lives a lot harder, and locked down some employees, but we can still want our factory, but we could not ship things easily, but we can move volumes from China to India, for instance. So we have, when China would locked down at the beginning of pandemic, we manufactured in India and shipped into Europe. And when India was locked down in the early part of this last financial year, we manufactured in China and moved product into India. So we do have some flexibility. It's not 100%, but it's pretty good compared to most people in the market, and we are investing in trying to make that better all the time. So I think we're as well positioned as we could be expected to be and as anyone is to be able to deal with the lockdowns in China going forward.

Excellent. And another question on geography, Germany in Europe. Obviously, a lot of talk at the moment about potential energy rationing in Germany. Is this a big concern for you, something that keeps you awake at night?

It's probably my biggest concern at the moment, if I'm honest. It's very difficult to know how concerned to be because we don't know exactly what form rationing, if it occurs, it's going to take and the form in which it happens has different impacts. We've actually been working on this for quite a few months. I know the market has become particularly alive to it in the last few weeks, but we've been working on this for 4 months. Our German sales are about 9% of turnover. Our production in Germany, though is our largest production single production site. And therefore, the impact on production if there's energy rationing is of interest to us. We've been doing a whole host of things to try and make sure that we have as much mitigation as possible. If we knew what was going to happen, then we could tell you more precisely any impacts may be. And in our models and our scenarios, it's everything from 0 through to something bigger. What we don't know, however, is not just what happens in Germany, what happens across Europe and potentially what happens across the world if the European economy is hit. What I can say, I think, with some uncertainty, is we've got a lot of very good plans in place. We've got a lot of contingency work going on. We can take a reasonable cut in gas supply without actually affecting our production at all for various reasons, which is good news for us. We just don't know how big that might be and how it might be administered. So for instance, we believe we could take a 12.5% cut in gas on an annual basis without impacting our output. If, however, the rationing, if it occurs, is you can't work on a Friday, and therefore, you're forced to take an actual production stoppage, then that is different, and that ends up with a different rate, I think it's quite difficult to know. So it is a concern. We just don't know what's involved. We think we are as well positioned as we can be. And frankly, as most people can be with our geographic footprint ability to manufacture outside Europe and ship it in, if necessary, finished products or components, and we've got a whole lot of contingencies in place in our own German facility to try and see what the impact there is as small as [ humanly ] possible too.