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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
I can see that we've still got people joining, the number's ticking up. So if you can bear with us a little bit longer, and we've got quite a few people online this evening, which is really appreciated.
Okay. I see the numbers have slowed down, and it's now 5:31, so we'll get things started.
Good evening, and welcome to the Renold investor presentation. My name is Tim Metcalfe. I'm Managing Director of IFC Advisory, which is Renold's Financial PR and Investor Relations firm. With me this evening, I've got Robert Purcell, who is Renold's CEO; and Jim Haughey, who's Renold's CFO. Jim and Robert are going to be taking you through a presentation focused on the interim results which we released earlier this morning, following which we'll have a question-and-answer session.
Given the number of people we've got online this evening, unfortunately, it's not possible to go to people individually, ask them to unmute and put their questions directly to Rob and Jim. But we do really encourage questions and, I must thank in advance those people who've submitted questions to me, but further questions are welcome. [Operator Instructions] Okay. So without further ado, I'll hand over to Robert to take you through the presentation. Robert?
Thank you very much, Tim.
As Tim said, my name is Robert Purcell, I'm the Renold Chief Executive. Good evening to everyone. Welcome to the presentation of the Renold results for the first half of our financial year 2023, therefore, for the period ending the 30th of September 2022.
Going to start over the page, please, Tim. A brief summary from myself. So today, I'm very pleased to announce a robust first half performance. Renold has good momentum, and through a consistent application of the STEP2 strategy, is making excellent progress. In the last couple of presentations, I've spoken about the challenges that have been brought about by the pandemic and the Russian invasion of Ukraine. These issues are well known and largely unchanged, but the business has executed well in a challenging and rapidly changing environment.
In the first half, financial performance, it's been strong. Adjusted operating profit was up 33% at GBP 9.6 million. Adjusted EPS was up 42% at 2.7p. Our order book stood at GBP 99 million at the end of the period, that's up 8.5% over the last 6 months and 37% over the last 12 months. Half year revenue was GBP 116 million, that's up 22%. Order intake was GBP 121 million, so that continues to run ahead of sales and is up 18.9% on H1 last year.
Whilst net debt rose, it did so as we completed the acquisition of YUK in Spain with initial payment of EUR 20 million. We are delighted to be adding this business to the Renold portfolio. It is earnings enhancing from day 1. It gives us many opportunities to accelerate our growth and is currently trading ahead of expectations.
All aspects of our STEP2 strategy are moving forward, and we've made particularly good progress in the period on a number of key projects which have delivered good results and helped us offset inflation, whilst constantly expanding the benefits of our international manufacturing footprint.
So that's a very quick run-through summary from myself. I'm going to hand over to Jim now to go through the numbers in more detail, and I'll come back with some other comments after he's spoken. Thank you, Jim.
Okay. So here's the group financial summary, we start at the top.
Turnover was up GBP 21 million or 22%, following the continuation of the strong order intake seen at the end of the last financial year. At constant exchange rates, this is an increase of 14.3%. Adjusted operating profit increased strongly to GBP 9.6 million at 8.3% ROS. This represents an increase of 33% year-on-year or 20.8% at constant exchange rates. ROS rose by 80 basis points from 7.5% reported last financial year to 8.3% seen this year.
Adjusting items consist of GBP 0.6 million of acquisition costs relating to our new subsidiary YUK, and GBP 0.2 million of amortization of acquired intangibles. Adjusted EBITDA increased by 21% to GBP [ 50 ] million for the half.
Net debt increased by GBP 20.2 million as the group spent EUR 20 million on the acquisition of YUK and also increased the level of raw materials held as part of contingency planning for possible German energy shortages in H2. Net debt gearing, that's net debt-to-EBITDA, stood at 1.2x, an increase of 0.6x since year-end as the group invested in our new Spanish subsidiary. The group has sufficient headroom to execute on an identified pipeline of further bolt-on opportunities. Adjusted EPS at 2.7p increased by 42.1% compared to prior year.
The above numbers again illustrate the results of the strategy over the past few years, which has delivered a more flexible business with a lower cost base.
Moving on to the next slide. We can take -- dive into the divisions a little more. The Chain division's turnover increased by GBP 18.5 million or 24.2% to GBP 95.1 million. This represents a constant currency increase of 16.4%. Adjusted operating profit increased by 35.9% to GBP 12.5 million or 27.2% at constant exchange rates. ROS percent increased by 110 basis points to 13.1%.
The YUK acquisition is performing well, and in the 2-month period it's been with us, contributed GBP 2.2 million of sales and GBP 0.2 million of operating profit, good considering the traditionally slow August holiday period in Spain.
Last year's statutory operating profit was flattered by GBP 1.7 million of loan forgiveness from the U.S. Government Paycheck Protection Program, one of the U.S. government COVID relief programs.
In the TT division, revenue increased by 11.7% or 4.9% at constant exchange rates as we saw an increase in activity in both the North American and Australian markets. Operating profit reduced by GBP 0.3 million due in main to 2 causes. First, a change in mix away from high-margin spare parts business to lower-margin OEM business, and a temporary drop in activity at the end of the former long-term military contract ahead of the commencement of the new contract. The business also incurred further legal costs associated with negotiation of a further large military contract.
Head office cost increased due to the impact of inflation, a drop in rental income on closed properties of GBP 0.3 million, increased operating charges as well as the costs associated with the acquisition of YUK.
Moving on to the next slide. This slide shows our profit bridge, which bridges the operating profit from last year's H1 which originally stood at GBP 7 million, but due to some accounting changes on the treatment of Software as a Service, it has increased to GBP 7.2 million.
The first step on the bridge is the FX impact, and that GBP 0.8 million comes from movements in exchange rates we used to translate results. The impact of price, volume and mix added a total of GBP 2 million to operating profit. Of this, approximately GBP 1.4 million related to the net impact of price increases once inflationary cost increases have been accounted for. This represents a drop-through of price to profit of approximately 13%. The remaining profit impact comes from the impact of both increased volumes and changes in product mix and churn, and represents a profit drop-through of circa 40%.
The next box is GBP 0.7 million of improvement, and that comes from efficiency improvements especially related to buying productivity and standardization of products, components and processes. That's illustrated in our STEP2 strategy. And that, as I said, increased operating profit by circa GBP 0.7 million.
The YUK acquisition in the 2 months of ownership contributed GBP 0.2 million to operating profit. The impact of profit-related increased labor and overhead recovery from inventory reduced year-on-year by GBP 0.4 million.
Other costs, they include the cost of legal claims and also charges for slow moving stock, and that increased by GBP 0.9 million in the year, and that takes us through to our GBP 9.6 million increase in profit.
Moving on to the next slide is our cash flow slide. At the top of the page, obviously, adjusted EBITDA was strong in the period, increasing to GBP 15 million from GBP 12.4 million seen last financial year, an increase of 21%. Working capital increased by GBP 7.6 million, included in which was a GBP 10.7 million increase in inventory, driven mostly by increased inventory as contingency planning against potential German and energy disruption, so that's a contingency. Increased stockholding for increased customer demand, but also material inflation and extended freight times. The increase was offset by tighter controls of payables and other working capital.
Going forward, we will see the continuing increased requirement for working capital as the impact of recent material and sales price inflation works its way through the business.
Net CapEx at GBP 2.2 million stayed below the levels seen in prior years. That was a bit of a disappointment to us. We have made efforts to increase CapEx, and those efforts continue to be hampered by the extension of supply chains. Strategic investments in production machinery and IT systems will gather pace during the second half year.
Pension cash costs increased in the period as the group commenced repayment of the initial tranche of GBP 0.6 million of the GBP 2.8 million of deferred pension scheme contributions arranged during the COVID-19 pandemic. The group also spent GBP 0.2 million in closing down the New Zealand pension scheme at the start of the year. U.K. cash contributions under the CAR increase by CPI inflation, but this is capped at 5%. Restructuring spend was 0 in both this year, this half year and the prior half year.
Interest costs increased both due to an increase in the base rate and due to the acquisition of YUK for GBP 20 million during the half year. Interest cash costs will continue to increase in the coming months and years due to the increase in both rates and the absolute amount of debt.
Moving on to the next slide. This slide shows our cash generation over the last 18 months, last 1.5 years. And what we've done on this slide is break it down into 3 boxes or 3 elements. The first one is the trading element, the cash that comes from our trading activities, our required spends and then further on into our discretionary spends.
Cash generated from trading activity represents GBP 33.1 million, with the GBP 40.8 million of EBITDA generated offset by the increased requirement for working capital stemming from increased trading activity. Required cash spends, which includes pension scheme contributions, tax and interest, et cetera, represents a further GBP 18.3 million of expenditure.
Drawing a line at that point, and if we haven't spent cash on the discretionary spend, net debt would have been GBP 3.6 million, a considerable reduction. However, we did decide to invest in the long-term future of the business, and we carried out a further GBP 30.4 million discretionary spends. That includes capital expenditure at GBP 7.3 million, acquisitions, that's the acquisition of YUK together with payments on the smaller Brooks acquisition we previously carried out of GBP 18.2 million, and we also took the opportunity to top up the shares in our EBT. And that brings us to our closing net debt position of GBP 34 million.
Moving on to the next slide, our EPS slide. This illustrates the movement in EPS during the half year and half year. We started last year at 1.9p and that increased to this half year to 2.7p, which is an increase of 42.1% half-on-half. Focusing in on the movements, you see the adjusted operating profit increase, added 1.2p to the EPS. Financing charges relating to interest reduced EPS by 0.1p. These charges will increase in H2 as both the impact of base rate increases and the increase in absolute debt to fund the YUK acquisition are seen.
The increase in tax rate to approximately 26% reduces earnings by 0.3p. Going forward, the increasing trend for the group to generate taxable profits in higher tax rate countries, such as Germany, will put a downward pressure on earnings.
Moving on to pensions. The group's IAS19 deficit at GBP 61.3 million shows a reduction of GBP 25.6 million in the half year. It should be remembered that 2 years ago, at September 2020, the group pension deficit stood at GBP 115.6 million, some 89% higher, and that is a reduction over those 24 months of approximately GBP 55 million.
The U.K. pension deficit stood at GBP 41.2 million and has reduced by GBP 22.8 million during the year. The main driver of the reduction is the 270 basis point increase in discount rates seen during the half year to 5.45% for the U.K. scheme, slightly offset by 5 basis points reduction in the long-term inflation estimates.
Asset returns fell sharply during the period as the value of U.K. government [ guilds ] and equities fell. The group has a natural hedge mechanism in place as it invests in life annuities to cover high-value pension schemes or pension pots for individuals in the scheme while other hedging instruments such as LDI also reduced in value. Latest estimates of discount rates suggest a 55 basis points softening since the peak seen in September, which has an estimated impact on liabilities of around about GBP 7 million, and that's just liabilities. The hedge instruments will offset these movements both naturally and through the LDI.
The group has in place a long-term funding arrangement with the pension scheme, a CAR or a Central Asset Reserve, which seeks to repay the deficit over the next 15.5 years. Cash flow under the CAR provide a long-term predictable and sustainable funding to the scheme at around GBP 3.5 million per annum. This increases by CPI, but is capped out at a maximum of 5%, which is in line with the maximum increase in the pension benefits payable to the pensioners.
These cash flows are not included in the IAS19R scheme evaluation. The strong relationship the group has with the scheme and the alignment and objectives and ensuring the long-term viability of the group allowed agreement to be reached with the trustees to defer GBP 2.8 million of payments to the scheme during the pandemic, with repayment schedule between April '22, that's this financial year, to April '27. And that's the mark on this slide, marked in a light shade of pink.
The next triannual pension valuation commenced on 31st of March 2022. Talks are ongoing, but the initial actuarial estimates show a continued reduction in the schemes, technical provisions or deficit, and that is the level of deficit which is used to generate and set future contributions.
Cash contributions to overseas schemes are again predictable -- predicted to be stable at approximately GBP 1.5 million per annum. This year temporarily, it's inflated by the closure costs of the New Zealand pension scheme, and that shows a slight increase of GBP 0.2 million. In years going forward, obviously, that will fall away.
In summary, despite large swings in the IAS19R pension deficit, pension cash flows are manageable, predictable and sustainable over the longer term.
Now I'd like to hand over to Robert, who will give you more information on markets.
Thank you very much, Jim.
Right. I thought I would just start by giving a short commentary on what we're seeing in terms of the economic conditions around the world. So if you just flip on to the next page, please, Tim, thank you.
The environment in which we operate, as does everyone else, is still changing rapidly and it's full of substantial material issues. The speed of change is itself a challenge at times. There are still lockdowns. Although none of our major sites have been directly impacted, customers are still affected, and this in turn impacts us. Customers' supply chains also have problems, and they frequently create issues in our own planning systems. Cost inflation is everywhere and on everything. Supply chain constraints are reducing, but still very real. And with increasing market uncertainty, there is a constant need for us to be on our toes and be nimble.
Once again, though, Renold has demonstrated the strength of the business model by putting in a robust performance despite the challenging conditions. The graph on the top left of the slide is public data. As an index of energy prices, the graph does not make good reading. The global situation is very mixed, and in our experience, the big issue is in Europe and the U.K., where we've seen increases substantially above the levels shown. There will, however, be government help in our major European manufacturing locations with energy costs in the winter.
The top right-hand graph shows an index of container costs on the purple line and transit times on the blue line. Whilst this public data shows improvements in both, and we are seeing some improvement, it is far more marginal than is suggested here. Container availability and reliability is much better than it was, but ports around the world are still troublesome, and costs are still elevated.
The bottom left graph is the Renold steel purchase price index. This is based on our Chain business only. It can be distorted by mix factors from month to month, but the general trend you see here is accurate. Whilst we're seeing some slight improvements in Chinese steel prices, we are not yet seeing any meaningful improvement elsewhere. Indeed, we've just seen European prices rise again. We do think, however, the steel prices are starting to plateau, but we do not anticipate meaningful falls in the next 6 months.
Inflationary pressures are everywhere. It's not just container cost, steel and energy. It's everything. My own belief is that inflation is becoming embedded in the global economy. Material lead times can be extended at times, but are generally shortening slightly. Whilst labor availability may be easing a little in some territories, pay demands can still be unrealistic at times. COVID continues to impact our operations, but there have not been any direct lockdowns in any of our key sites.
On top of this, though, even when there aren't restrictions from the authorities, we have seen meaningful increases in absenteeism, which impact our output at certain times in various manufacturing facilities. Market pressures are showing no signs of receding. In Europe, due to the possible risk of energy rationing, we have put into place contingency plans, mainly lower energy working practices and inventory increases. The situation is still not clear, however, it now looks less likely that rationing will occur.
The Renold team have faced all these challenges and dealt with them very well, delivering increases in sales, orders and profits whilst completing a value-adding acquisition, demonstrating the extra management bandwidth that we have developed in recent times.
We turn over again, please, Tim. A few comments from me on the divisional sales performance.
The global chain performance on the left of the slide. The graph shows the rolling 12-month sales, that's the blue line. And orders, that's the purple line. Orders continue to outstrip sales. As Jim showed you earlier, chain revenues were up 24% and adjusted operating profit by 35%. All regions have traded well. Our commercial teams have been resolute on pricing and the recovery of cost inflation. We've implemented not just price increases, but also surcharges in areas such as energy and transport. We continue to pursue opportunities in various attractive product sectors as well as increasing our product development activities.
We are currently undergoing a major expansion of our testing capacity to facilitate faster and larger volumes of chain development. Our increasing ability to manufacture identical specification products in various geographical locations is a growing competitive advantage as is our geographic footprint, which offers customers greater security of supply as geopolitical events unwind.
Projects to take cost out of the chain business have been accelerating through the period as CapEx spend has started to pick up post COVID. There are many opportunities to drive cost out of this business whilst organically growing sales. The chain manufacturing plants are steadily improving productivity and efficiency as we continue to invest and pursue our process and product standardization strategy.
Service remains a key focus, and we are running a number of projects to improve this aspect of our offering. And one of these is to hold inventory closer to the customer to offer shortened lead times. On the back of Brexit, we increased inventory in the U.K. and have now introduced a warehouse in Nagpur in Central India, and will shortly open on the outskirts of Istanbul in Turkey.
The right-hand graph for TT shows the same data as for chain. Last year's large GBP 11 million military contract clearly stands out, but beyond this, orders could be seen to be growing at a good rate. Indeed, since June '21, order intake has exceeded sales.
TT has not had or has had a more difficult first half than Chain. It has been impacted more by supply chain issues and labor shortages, whilst our Couplings business has suffered as some customers have been directly or indirectly impacted by the Ukraine war, product mix changes and the timing and accounting for deliveries on the long-term military contract. The U.S. TT business has picked up progressively over the 6 months, but was impacted by retirements and difficulties in recruitment at the start of the period. Increasing machinery CapEx and an easing in labor markets has got us into a more satisfactory position.
Our U.K.-based Gears business has seen a steady increase in activity and demand, partly helped by sterling and also product development. The TT businesses in China and Australia continues to develop nicely, but transport lead times for Australia can be troublesome.
So if we turn over again, please, to Page 14. This slide is similar to ones I've shown in the past. The revenue and order growth by region on the top chart are combined TT and Chain numbers. They are external sales only or in external orders only. Everything is at constant exchange rates. The top line bar charts compared the current period against the prior year first half.
Compared to last year, the group revenue as a whole was up 14% at constant exchange rates whilst orders were up 11%, normalized for last year's military contract. There is a little more variation in performance between regions in this period than there has been of late. Europe continued to see orders run ahead of sales and sales continue to grow, but orders did not quite keep up with the exceptional prior H1 performance. Europe is the market that has softened most, but there are some timing and project considerations which distort the order trend.
Chinese sales continue to flourish, but have been hit by some customer lockdowns and the general Chinese economy, which is undoubtedly softer than it was. TT in China has been a big driver of the sales growth. We have many excellent commercial initiatives in China, and we expect to see the order trend pick up in this region in H2. All our other regions have seen sales and orders grow. The Americas is a standout performer, with good results in both the U.S. and Canada. These markets have been strong and our commercial activities have been paying dividends, especially our increasing push into the Canadian market with CVC Chains.
Australasia remains buoyant, and whilst all our businesses in the region have seen a strengthening market position, Australia itself has been a big driver. The Australian market continues to move towards domestically-produced product and the economy, especially in the natural resources sector remains strong.
Our Indian region continues to develop. And as I said earlier, we've opened a new distribution center in Nagpur in Central India to help improve service and give customers across a larger part of India shorter lead times. India is an interesting and developing market which we have very high hopes for.
I would draw your attention to the pie chart in the bottom right corner. We're a geographically diverse business and have an exposure to many international markets. The U.K. is approximately 7.5% of external sales. So whilst we clearly want the U.K. market to flourish, it is not one of the main engines of the business. Our exposure to growth markets such as India, China and Southeast Asia give us good opportunities to develop further in the near future.
Turning over to Page 15. The sales split by customer type, shown on the left chart, also includes a percentage. This percentage is a measurement of the growth in revenue for that customer type, comparing H1 in the prior financial year to the period we're presenting. So this is the percentage increase in absolute sales to that customer type.
All customer types grew in absolute terms. Our OEM customers outperformed all others, which is a reversal of the trend we saw in the last year. OEMs have strong order books but have struggled to manufacture due to supply chain issues. That situation is slowly improving, and volumes are gradually rising.
Distributor sales have risen 10% but we've seen some destocking in the latter parts of the period, particularly in Europe. We wait to see if that continues beyond the year-end, which is commonly the calendar year. End users who were surprisingly weak post-COVID bounced back.
On the right, we show revenue split by market sector. The diversity of our end markets is far greater than this chart suggests, but we've tried to group things together to make it meaningful in the presentation. All end market sectors have grown in absolute terms year-on-year. Manufactured products and material handling have seen the fastest growth, but I'm particularly pleased to see the continued growth in energy and also in the food and drink sector.
We don't show applications on this slide, but the world is automating at a particularly fast pace. The move to shorten supply chains and have suppliers in stable countries is a growing trend, and one that we expect to continue for many years. The need to automate to hold down costs in Western economies and to cope with labor shortages all plays to Renold's strengths. We're a sustainable, ethical producer of products that are used very widely across many sectors, manufacturing and service sectors, and we have a wide geographic supply capability. Many of our products are used broadly in automation, and so the global trend is certainly good for us.
Turning to Page 16, just to have a look at our strategy. Our STEP2 strategy is unchanged. Whilst there is much work to do and lots of opportunities to develop the business in many ways, the core central element of STEP2 is growth. The text boxes at the top and the bottom of the slide explain what we are, what we offer, where we sit in this attractive market and why our position within it is so good. These boxes lay out what I call the business fundamentals, and Renold has excellent fundamentals. Our task going forward, having finished our restructuring work, is to build on these fundamentals to develop and enhance them, to draw them out and then to use them.
The strategy is still underpinned by a business improvement element. There is much we can do to cut costs, become more efficient and productive. We have opportunities to use our much improved business systems and the information they produce to make better decisions faster and to help identify opportunities, both operational and commercial.
We're particularly excited about our standardization work stream, which is delivering real results, and also the one focused on improving service levels. We wish to be a market leader in service, and we're not there yet. The 2 big elements of STEP2 are both growth-oriented. We have opportunities to grow organically and through acquisition. We are aware that with volatile global markets and difficult macroeconomic backdrop, it's not the ideal time to be talking about growth. But the strategy is longer term, and we're looking through the volatile markets to what lies beyond to put in place the next strategic phase.
Organically, we can grow through our focused product initiatives, developing better and enhanced products, but also by driving volumes in our key products and our ancillary products. Our approach is proactive, and we are actively pursuing the areas we're interested in. We're running with a strategy which is built around superior products, sustainability and engineered lower product tiers.
We have a good business that can develop nicely without acquisitions. But due to the sticky nature of our products, acquisitions will enhance our growth and opportunities. Acquisitions are a core part of our STEP2 strategy, and this leads me on very nicely to the next slide, Slide 17.
Though net debt rose in the period due to the acquisition of YUK, it still stood at just 1.2x EBITDA at the end of the period. When this is combined with our strong market position and experienced and capable management team, we're well positioned to drive the acquisitive phase of our strategy forward.
I was very pleased in August to announce the acquisition of YUK in Spain. This is an excellent business with an excellent management and workforce, since the acquisition has traded well and is ahead of our expectations. Whilst I've spoken in the past about various types of acquisitions that we might consider, YUK is a deal which incorporates 2 of these concepts. It enhances our position in the Iberian market, where we've traditionally been underrepresented. And at the same time, it brings into the group a European CVC manufacturing facility which will enable our European sales force to sell a much wider range of products that has traditionally been the case. At the same time, you can offer a wider range of transmission chain products, including our premium solution chains to their customers. On top of this, we're able to in-source into our international factories product previously bought from third parties by YUK.
This is a very nice acquisition for us, and we see it as a good example of how acquisitions can bring hard synergy savings, and at the same time, accelerate range growth, product development and sales opportunities while strengthening our geographic position.
We have an active pipeline of opportunities, all of which are value-enhancing. We're looking at deals that are ideally similar in size to YUK, though we have options across a range of deal sizes which can bring a mixture of opportunities to Renold. One thing, however, is very clear, and that is that we will not overstress our balance sheet.
So we go over to the next page, Page 18, a few closing words from me. The momentum we had last year is carried on in the first half of this financial year, as I said, and we've wrestled successfully with the global economy. I make no apologies for saying again that we've produced some robust financial results. Adjusted operating profit up 33%, adjusted EPS up 42%. Record order book, GBP 99 million, up 8.5% over the last 6 months. Revenue of GBP 116 million, up 22%. Order intake running ahead of sales, GBP 121 million. Adjusted return on sales of 8.3%, that's up 80 basis points. Net debt is GBP 33.9 million, but as I said a few minutes ago, that is still only 1.2x EBITDA. We have capacity and capability to cautiously continue with our acquisition strategy.
Whilst we're mindful that global markets continue to be uncertain with ongoing labor and energy cost inflation and supply chain disruption, the group's trading momentum continues to be positive. The group has record order books, and the acquisition of YUK provides opportunities for synergies and further growth.
So thank you very much for your attention. And back to you, Tim.
All right. Well, thank you very much, Robert, and thank you very much, Jim, for the presentation.
Thank you for those who've submitted questions in advance again, and thank you for those who've been typing away while Robert and Jim have been presenting. [Operator Instructions]. Quite a lot of these are for you, Jim, on the financial side, but 1 or 2 for you as well, Robert.
The first one is really an operation stroke financial question, and that's the question we're asked. The return on sales for the -- to the Torque Transmission division. Do you anticipate that this could align with the sort of return on sales you're seeing in Chain in the long term? Or is it inherently a lower-margin business?
No, we would anticipate that the margin in TT can be very similar to the Chain margin, possibly even a bit higher over time. Different types of products, but there's every possibility as we grow that business and invest in it that we can get the same sort of margins as we get in the Chain business.
Okay.
Moving on to acquisitions, you obviously said that acquisitions are a core part of the future strategy. You've talked about a healthy pipeline. Are there any particular gaps or geographic areas that you're looking to fill? Or is it more opportunistic depending on what's available?
It's a combination of those 2 things. We go out to speak to companies and see if they would be willing to sell their business based on the analysis of the maybe geographic gaps or product gaps, or opportunities that we see. So the starting point is a structured point -- a structured view of the world.
Of course, you can't predict how owners of businesses will answer you when you go and speak to them, so that's where it becomes slightly less predictable. And you obviously, you have to run with the opportunities that are presented to you at that point. So we start in a very structured way, very methodical way. But ultimately, it's down to who is wanting to sell and who isn't, and who would sell at a sensible price. So it is a combination.
There are markets where we would like to add mass, there are product areas where we're weak or weaker than we should be, and the YUK is a great example of that. We were underrepresented in the Iberian market. We're underrepresented in conveyor chain in Europe. We've got some very good conveyor chain businesses elsewhere in the world but underrepresented in Europe. So you can paint those pictures and you can fill those gaps in. I don't think, in recent times, we've shown that to people in any of these presentations, but we may have done beforehand. We certainly do it internally. We look at where we are underrepresented. And in a lot of sort of Asian markets, we are generally underrepresented. And in some of our more mature markets, we have a particular bias to one type of product or another. So we do have opportunities there.
So a bit of a ramble, but hopefully, that's told people what they need to know.
And in terms of funding, you mentioned current net debt levels, roughly 1.2x EBITDA. Is there a level -- a maximum level that you would be comfortable going up to? Or indeed, is there a covenant that you're coming up against?
Well, I'll jump in on that one.
Historically, our leverage covenants with our banks have been 2.5x EBITDA. We are currently actively renegotiating our banking covenants at the moment, and we've had great support from our banks. And over the COVID period, we negotiated an increase in EBITDA leverage up to 3.5x. We're back down at 2.5x. As we go into this refinancing phase, our banks have said that they are very comfortable with us extending our leverage up to 3x EBITDA.
Now the Board does place constraints on where do we think that should go to, and so the Board has sort of said that we should operate within one full turn of EBITDA below the borrowing covenants that we've agreed with our banks. So that would say if we did have our new arrangements at 3x, we would be operating at a max somewhere about 2x EBITDA level. Now if there was an acquisition which brought us slightly over that for a 12-month period, say, before we got back underneath it, we would be comfortable to be in that situation. But long term, the Board has sort of said we need to be in that one full turn of EBITDA below net -- below our leverage covenants.
Now what does that mean in terms of acquisitions out there at the moment? Well, we've got 1.2x net debt at the moment. As we have the full year impact of the YUK acquisition, that will add a little bit more to our EBIT debt, EBITDA, and so that should start the drop downwards. So that sort of means that over the next sort of 12-month period, I think we've got a full turn of EBITDA available to us that we could invest in acquisitions. That GBP 30 million, I don't know, will be probably a mixture of 2x of acquisitions.
Two years ago, we did the Brooks type acquisition, which was a fold in of an existing business, and that comes at a quite a nice return. Brooks paid back in 2 years, and I'm sure the future acquisitions we do won't be quite as nice as that. But we are sort of aiming for those fold in type acquisitions as well as the more strategic type acquisitions that the YUK type of acquisition is, which gives us access to a broader geographic market or into an individual product area. So both of those options are available to us.
And we've got a pipeline in which we are currently looking at, which will allow us to go down both those routes in a not too far distant future.
Excellent. And related to another question on debt. The question recognizes that the size of the debt is not actually that large, and Renold is a relatively modest-sized company. But is there anything that you can do to hedge against interest rate increases, or indeed, do any fixed interest borrowing?
Well, for a company our size, it's harder than you might imagine. You can get interest rate swaps and other bits and pieces, but the price of those tends to be quite prohibitive. So at the moment, we've sort of got a floating level of debt. The idea, obviously, is to keep an eye on the level of borrowings, to keep it quite tightly under control. And as long as the borrowings doesn't get too out of kilter, that shouldn't really be a problem for us going forward.
But there are options. We do explore them regularly, but of course, we do have to weigh the cost of those type of instruments against the benefits that we get from them.
Sure. No, I completely understand.
Other question on dividend policy. Is the payment of dividends something the Board is considering? Or is it more focused on growth at the current stage?
I mean, we obviously consider our dividend policy very regularly. To date, we have taken the view that we believe shareholders will get a better return from us investing the money in the company than paying a dividend. That is kept under constant review. We'll look at the circumstances and see what's happening, but that is the state of play at this moment in time.
And that leads me neatly on to the question somebody's just typed in. They note that the company was cash flow negative for the half year. Is that, excluding the acquisition, is that expected to continue to be the case? Are you continuing to invest more than the cash you're generating?
Well, I'll take that one.
When we put the numbers up, we did mention that we did see some German energy type issues in the first half of the year. And we took a decision to invest in steel, in raw materials, in part process components in the German businesses, especially just in case there was disruptions in supply chain caused by the potential German energy issues that the war in Ukraine has come through, has brought about.
We will -- at the moment, we see those potential dark clouds dissipating on the horizon. They -- we don't think the impact will be as sharp, and so we are at the moment in the process of taking out those raw materials and those part process components we've built specifically to hedge against German energy disruption. So there will be a reduction in those types of about EUR 3 million, I think they are, of inventory going forward.
Now the working capital type requirement does go up though. We're in an inflationary environment. You see steel prices increasing, energy prices increasing, labor rates increasing. That does mean that inventory working capital does go up in value. You may not have any physical more tons in the warehouse, those tons do cost more. And so there is a broad outflow of working capital that should go up in line with the inflationary environment business.
Offsetting that, there's always ways to manage working capital better. We've made inroads into looking at the percentage of overdue debts when we're making progress there. And there's also the benefits of the higher payables as the -- you buy that steel, it costs you more. You do have a higher payables level in the balance sheet at the end of the year.
So yes, there is a requirement for working capital because of the increase in trade and some of the other requirements. But broadly, the level we've seen at half year will reduce as we take out those stocks relating to the cushion that we built up for potential German energy coming out by the end of the year.
I guess I'd just add to that.
In general, we would expect and we aim to be cash generative each year. So that is our objective, is to generate some cash every year.
Understood.
I think the final one on the list of typed ones for you, Jim, is on foreign exchange impact. Obviously, none of us can predict where ForEx rates are going to go, but are there any concerns that you've got on impact if rates remain at current levels for, certainly, the rest of this financial year?
Well, what we've actually built into our broker forecast, the forecast that we've got with Peel Hunt and FinnCap, is that we saw a softening in the U.S. dollar in the first half of the year. We've put a forecast together which says that, that softening will sort of dissipate and it will -- the dollar will go back the other way in the second half of the year. So if exchange rates and the dollar rate stayed where it was at half year, we would probably benefit more than what we've got currently in our forecasts.
Just as a broad indication, a $0.01 movement in the U.S. dollar is about, on average for the whole year, about GBP 70,000 worth of profit. And it's a very similar, slightly lower value than the euro. So again, it's about GBP 60,000 for each euro cent movement as well. So our forecast that we've got out there do actually envisage the movement in the dollar reversing as we get to the end of the year.
Robert, one for you. You mentioned standardization. A question asked, could you, particularly a little bit more, on what you mean by standardization? And is this to make things easier or is it to drive profitability? What do you mean by standardization?
Well, the simple answer is to do both those things. What we're talking about is internal standardization. Historically, Renold has had factories, chain factories, in particular, that have made slightly different products. Similar but slightly different. And what we're looking to do and what we are doing and have done is make our products uniform, if you like, rather than standard. Uniform across the world, and to have uniform specifications of performance. That enables us to then move production from site to site, gives us some more flexibility. It also drives cost out of the business as well and that you drive back sizes up. You can use, let's say, Chinese components in India or Indian components in China, as an example.
We got some benefits through COVID. I mean, we continue to drive this. There's more for us to do, but we got benefits in COVID, for instance, or the pandemic. In the early days when China was shut down, we made products in India. Instead, when India was shut down, then we made products in China. It gives us options, it gives our customers options as well. Customers like the idea that they have more than one site or one country, one region to buy product from. In the world we live in, people are nervous about relying just on China or just on India, just on Europe, I suppose.
So it's about giving customers optionality. It's about us having options. It's about taking cost out. It's about being more consistent, improving service on the back of this as well. So we're rationalizing the brands we operate around the world. It's about making our business simpler, making it lower cost and giving the customer advantages all at the same time. So it's a big thing, and it makes a big difference. We've done well in the last few years in terms of this journey. We've done particularly well in the last 6 months. We've got further to go, but it's a very important project for us.
Hopefully, that makes sense.
Makes sense to me, hopefully to the questioner. But it does neatly bring me on to another question, which I've had on localization and whether the increased trend for localization of supply chains is an option for Renold. Is it something that you benefit from, or is it a concern? And the supplementary question was if people are looking for localized supply and you standardize things, does that mean you can ship, say, part finished product from China and finish it in Europe to overcome European product?
Yes, yes.
The answer to that last question is yes as long as we are within the regulations on value and value add. But the answer to that last question is yes. It's not something we do, but in theory, you could.
Localization or deglobalization, whatever you want to call it, I think it's a very real thing. Companies, particularly large OEMs, are definitely looking at their supply chain. They're definitely looking to buy more locally than they have done in the past. We have a number of projects ongoing with customers outside of the Atlantic, where customers are specifying the product has to be in region. So for someone who's looking to manufacture in the U.K., that's in Europe, in the broader Europe. In the U.S., it tends to be in the U.S.
So we are seeing that. It started and it's happening. Today, some of that is driven by governments. Some of that is just large corporations who are looking and saying, we've got to derisk our supply chains.
I think we would view that as a benefit to us for a few reasons. One is, unlike most chain manufacturers, we've kept regional manufacturing sites. And therefore, we are able to react to customers' requirements in this sense. I think it's also true that companies are increasingly recognizing that if they're going to manufacture in western economies, more -- where labor is more expensive, they have to automate far more than they've done before. And automation generally is beneficial to us because most types of automation will include chain in one way or another. Chain is used very widely for moving and positioning products. So we think that's good news.
Our product is a high specification, high-quality product. Very reliable, low maintenance. That is the type of thing that people want if they're running Western standard facilities. It plays to our strengths. So all in all, we think this process is good for us, and we think it's a trend that started. We think it's going on for years, and we think we will stand to benefit from it.
I guess I'd just add one other thing to it, people are very -- well, 2 things. People are very concerned about geopolitical risks, particularly in sort of China, Taiwan type issues. And a lot of chain comes out of China and Taiwan in the world, and people are paying attention to that. The other is that -- the tariff environment. President Trump started this ball rolling, but the tariff environment is not as stable as it used to be. China -- tariffs on Chinese chains into the America at 25%. Currently, there's no sign that's going to change. That makes people start to look at their supply chains and where they're buying from and what the alternatives are. So a company like us that can offer India as an alternative where the tariffs are 0 into the U.S., that's really quite interesting to people.
So there's lots of things happening. There's a definite move. I think we are going to see manufacturing returning to Western economies, in my opinion, and I think that is good news to us, for us.
Excellent. Well, we like good news. And as we come up to the hour and the end of the questions, that's probably a good place to finish. But obviously, an exciting point for Renold, exciting times in -- interesting times for us globally.
So I'd like to thank Jim, Robert, very much for the presentation. But most of all, everybody who's joined us this evening. If you have got any further questions, as always, contact details for me and the team at IFC are on the bottom of the announcement, renold@investor-focus.co.uk, and we'll endeavor to answer any questions you've got.
So thank you very much, everybody, and enjoy the rest of your evenings.
Thank you, everybody. Bye-bye.
Bye-bye.