Fenner PLC Regulatory News (FENR)

09 November 2011

Fenner PLC

2011 Preliminary Results

Fenner PLC, a world leader in reinforced polymer technology, today announces preliminary results for the year ended 31 August 2011.

HIGHLIGHTS

·; Record financial performance

- Revenue up 30% to £718.3m

- Continued margin improvement

- Underlying operating profit1 up 60% to £91.4m; operating profit up 67% to £82.5m

- Profit before tax up 87% to £69.6m

- Underlying earnings per share2 up 57% to 28.1p; basic earnings per share up 68% to 24.6p

- Strong free cash flow of £53.7m

·; Recommended 11% increase in dividend for the year to 8.0p

·; Good trading performance across the Group

- Strong organic growth, benefiting from strong demand in all markets and investments made in recent years

- Engineered Conveyor Solutions increased operating profit by 54% to £55.6m on revenues up 31% to £510.7m

- Advanced Engineered Products increased operating profit by 79% to £34.8m on revenues up 27% to £207.6m

·; Three acquisitions during the year broadened market reach and increased exposure to aftermarkets

Mark Abrahams, Chairman, commented:

"I am delighted to report on a successful year of trading and a record financial performance. Our robust business strategy, with customer focused operations, has enabled strong organic growth across the Group. This has been complemented by three acquisitions during the year and a further acquisition shortly after the year end.

"The new year has begun with our businesses performing well. While we note the uncertainty over the global economic outlook, trading in our core businesses remains in line with our expectations. Given the fundamental drivers of end user markets and our ability to respond to the external environment, the prospects for the Group remain good."

1. Underlying operating profit is before amortisation of intangible assets acquired

2. Underlying earnings per share is before amortisation of intangible assets acquired and notional interest and based on the basic weighted average number of shares in issue

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FINANCIAL HIGHLIGHTS

1 Underlying operating profit is before amortisation of intangible assets acquired

2 Underlying profit before taxation and underlying earnings per share are before amortisation of intangible assets acquired and notional interest

3 Underlying earnings per share is based on the basic weighted average number of shares in issue

CHAIRMAN'S STATEMENT

Financial highlights

Revenue increased by 30% to £718.3m with strong demand levels from our core business segments. From this, we were able to deliver a record underlying operating profit with an increase of 60% to £91.4m. Operating profit increased by 67% to £82.5m.

Underlying earnings per share increased by 57% to 28.1p and basic earnings per share increased by 68% to 24.6p.

Free cash flow generated amounted to £53.7m, sufficient to fund the acquisition programme yet still reduce debt. Our closing net debt was £101.8m (2010 £110.4m) after funding acquisitions of £31.1m.

The Board is recommending an increase in the final dividend to 5.35p per share which gives a total dividend for the year of 8.0p per share (2010 7.2p).

During the year, US$200m of private placement loan notes were secured with maturities of 10 and 12 years at an average coupon of 5.3%. These notes have allowed us to expand our funding sources and extend our debt maturity profile.

Overview

Our business strategy focuses on providing a range of performance critical products and services from strategic locations where the business drivers offer resilience and profitable growth opportunities. The performance delivered in the year reflects the continuing buoyancy in energy and mineral extraction sectors and our ability to respond to customers' increasingly sophisticated needs.

Positive market conditions with sustainable fundamentals have facilitated a strong trading performance in the Engineered Conveyor Solutions Division (formerly referred to as the Conveyor Belting Division). In November 2010, we acquired the related operations; Belle Banne Victoria and Leading Edge Conveyor Solutions. This was followed by the acquisition of Statewide Belting Service in July 2011. These Australian acquisitions will broaden our reach and reinforce our position as the leading provider of engineered conveyor solutions to the mining and resource markets.

The Advanced Engineered Products Division has made excellent progress with high demand for our niche, performance critical products. To balance our exposure to original equipment products in our seals operations, we have continued to develop our product offering into the more resilient aftermarket sectors. In April 2011, we acquired Multiseals in Singapore which provides access to the expanding Asian aftermarket for oil and gas products. In September 2011, after the year end, Transeals in Australia was acquired. This provides an aftermarket presence in the buoyant mining and oil and gas segments of Western Australia.

People

On behalf of the Board, I would like to thank all Fenner's employees for their hard work and dedication over the last year.

Special recognition goes to Richard Perry, the Group Finance Director, who was named FTSE 250 Finance Director of the Year in May 2011.

Colin Cooke, who had been the Chairman for 17 years, retired from the Board on 28 February 2011. The Board is very grateful to him for his guidance and counsel over this period in which the Group has changed much and grown substantially. After consultation with major shareholders and investor groups, I succeeded Colin as Chairman.

Nicholas Hobson was appointed as my successor as Chief Executive Officer on 1 March 2011. Nick, who has been with the Group for over 20 years, is an engineer by background and has successfully overseen the growth and strong performance of the Advanced Engineered Products Division.

The directors were saddened to announce the sudden death of David Campbell in November 2010. David had been a non-executive director and Chairman of the Remuneration Committee since November 2005. Alan Wood was subsequently appointed Chairman of the Remuneration Committee.

In October 2011, we were pleased to announce the forthcoming appointment of Vanda Murray as non-executive director with effect from the conclusion of the January 2012 Annual General Meeting. Vanda will become the Senior Independent Director, replacing David Buttfield who will remain as a non-executive director.

Governance

The Board believes in upholding high standards of corporate governance and has embraced the principles embodied in the new UK Corporate Governance Code.

As Chairman, I carried out a Board evaluation during the year and was in turn assessed by the independent non-executive directors. Following that exercise, it is our belief that the quality, skills and breadth of experience of the Board means that we have a robust and eminently capable Board. The composition and independence of the Board will be enhanced by the appointment of Vanda Murray.

Governance standards will be maintained and continue to be a focus and responsibility of the Board.

Outlook

The new year has begun with our businesses performing well. While we note the uncertainty over the global economic outlook, trading in our core businesses remains in line with our expectations. Given the fundamental drivers of end user markets and our ability to respond to the external environment, the prospects for the Group remain good.

Mark Abrahams

Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Introduction

Since assuming the role of Chief Executive Officer on 1 March 2011, I have visited and familiarised myself with those parts of the Group which were outside my previous direct responsibilities, instituted a process to set a strategic vision for the future and met customers, investors and other stakeholders in the business. I have been continually impressed by the quality and dedication of Fenner employees worldwide. I therefore see it as essential to secure continuity of our unique culture and to ensure that safe, effective and profitable business practices developed in one part of the Group are shared amongst all those operations to which they are applicable.

Performance

Our investment in the development of our conveyor belting business has established a global division which is unparalleled in both geographical coverage and the scope of value added products. It is befitting that as our strategic milestones are achieved, our business is characterised by a brand which defines how we fulfil our customers' requirements. Consequently, the conveyor belting business has been rebranded as Fenner Dunlop Engineered Conveyor Solutions.

During the year, demand from the mining sectors has been sufficiently strong to leverage our operating base, allowing more efficient utilisation of our organic investments. A continued recovery was experienced in many bulk handling segments which added plant throughput although the construction sector remains depressed in North America and Europe.

The Advanced Engineered Products Division has made excellent progress. There has been high demand for our niche, performance critical products. Increased market penetration and expansion of both our geographical spread and breadth of products offered, together with a general improvement in market conditions, have provided a favourable trading environment. Within this Division, our seals operations have enjoyed strong demand from the hydraulic and oil and gas sectors. The drivers for our precision polymer operations remain favourable and our medical operations are flourishing following recent investments. Growth in the development and manufacture of implantable biomedical textile components for medical devices is encouraging.

Customer satisfaction is of importance to all operating units, who ensure they are meeting customer expectations in each market. Experienced sales teams maintain close contact with customers, providing feedback on expectations and performance. These qualitative indicators are complemented by quantitative measurements including customer surveys and "on time in full" performance.

As a diversified group, Fenner uses a wide range of materials, from thousands of tonnes of rubber compound to a few hundred grammes of biomaterials. We work closely with selected suppliers to ensure that our customers benefit from the latest technical developments in materials and processes. The majority of these relationships are in the normal course of business, ensuring quality, continuity of supply and reasonable commercial terms. Where appropriate, and usually relating to technical developments, relationships are formally documented. During the year under review, many Fenner operations had to manage significant material price increases, short-term volatility, shortages and allocations. Constant vigilance, close cooperation with established suppliers and active development of new sources ensured, and continues to ensure, continuity of supply.

Strategy

During the year, the Executive Committee, with the support of the Board, has begun a process to develop a vision for Fenner for the next 10 years and, building on our success to date, demonstrate how we will drive long-term value for our customers, employees and shareholders.

Ahead of completing this review, our strategy continues to be to increase market share and target new value added product areas. We will concentrate on growing those businesses where we already demonstrate leadership through our skills in applications, design, materials technology and dedication to customer service as well as making carefully planned acquisitions. This common aim, across a wide range of industrial markets, gives Fenner a solid basis for long-term growth, stability and investor value creation. Fenner is proud to be a world class global manufacturer and service provider with a strong commitment to health and safety, operating in key territories in established and emerging markets.

The Fenner Group consists of two Divisions: the Engineered Conveyor Solutions ("ECS") Division and the Advanced Engineered Products ("AEP") Division. Both ECS and AEP provide high quality, comprehensive, whole life value products for their customers and both have strong brands and a strong reputation in their chosen markets. These characteristics are considered to have been the key to the success of the Group over its long history.

Engineered Conveyor Solutions

The ECS Division, trading under the Fenner Dunlop, Fenner and Dunlop brand names, is a recognised leader in the global conveying market.

The Division offers a unique, comprehensive suite of products and services which serve the conveying needs of mining, power generation and bulk handling markets. The suite of products and services, which includes heavyweight ply, solid woven and steel cord conveyor belting and the design, installation, monitoring and maintenance of conveyor systems and components, is tailored to suit each customer's individual needs. Commercial arrangements vary from a purely transactional relationship to a full strategic partnership to reduce both conveyor downtime and total cost of ownership.

The demand for ECS goods and services is primarily driven by coal extraction, handling and consumption followed by iron ore and other mineral extraction. Energy coal prices continued to rise for the first quarter of the financial year and they have remained at over $120/tonne. At these prices, the main driver of demand for ECS products and services is the volume of coal consumed. The amount of coal mined has continued to grow steadily in support of growth in global electricity demand. This growth is predicted by the International Energy Agency to continue for at least the next decade.

The ECS Division experienced positive trading conditions throughout the year under review with the exception of those parts of the business which serve the construction markets. The focus of 2011 was to improve manufacturing efficiencies and exploit the capabilities of the new plant and machinery, ramping up production to meet improved demand. This resulted in a 31% increase in revenue, led by our operations in the southern hemisphere and by growth in sales of steel cord conveyor belting.

After some stability in the first half of the financial year, all ECS operations experienced rapidly rising raw material prices and some suppliers resorted to allocating volumes. Given the magnitude of the increases, we, in common with competitors, passed these additional costs on to our customers.

The Australian operations continued their growth year on year. Coal and iron ore remain the main trading exports for the country and the biggest drivers for the trading performance of our Australian ECS operations. The forecast for both of these commodities remains positive. The Queensland floods adversely impacted demand for our rubber ply product in the second half although this was more than compensated for by strong results elsewhere. 2011 saw the first full year of production from our Kwinana facility and contracts were signed with major mining groups in Western Australia. In accordance with our original plan, we are in the process of purchasing a second press for this facility which will double capacity, allowing us to continue to meet expected demand growth.

We have continued to round-out the ECS offering in North America and Australia through geographic expansion, increased breadth of products and services and increased focus on conveyor diagnostics. Belle Banne Victoria, Leading Edge Conveyor Solutions and Statewide Belting Service were all acquired during the year and quickly began to contribute to the ECS model in Australia. Product teams have been established in Australia and the USA to identify and promote product lines which are suitable for branch based selling and which complement the ECS model. Conveyor diagnostic product systems are becoming increasingly important in supporting both the ECS model and the sale of premium products. Systems are now installed in the UK, South America, North America, Africa and Australia.

Responding to strong demand from both the coal and bulk handling (industrial) markets, Fenner Dunlop Americas built on the solid improvements in the previous financial year to deliver record results. Revenue growth was supported by improved operating efficiency arising from recent major capital investments.

Market sentiment continues to be strong in the US mining segment. The underground coal mining market is steady and coal prices remain high, underpinning mining sales performance. Consolidation of the US coal industry strengthens customers' purchasing power and increases focus on suppliers' overall safety, quality and service performance. The bulk handling segment has softened in the last three months with distributor inventories appearing to be at appropriate levels. Demand in certain segments such as aggregates remains depressed with many customers currently more focused on a "first cost" approach than on total cost of ownership. Prospects in Canadian, Mexican and South American markets remain positive. Steel cord belting is in strong demand and delivery lead times have been, and remain, extended.

The US service operations are primarily focused on coal mining and coal production which continues at a reasonably high level of output. We remain optimistic about the market demand for services although competition is expected to increase. The mining industry is facing a skills shortage and therefore the recruitment, training and retention of skilled technicians is an increasing challenge. Diversification into new territories and market segments is underway and will reduce the dependency on the coal mining industry. Our Chilean operation serves the copper mining industry in the Antofagasta region and saw positive growth in the year. A new branch was opened in Santiago.

European markets served by Dunlop Conveyor Belting, based in Drachten in the Netherlands, returned to pre-recession levels except for the construction industry which remains weak. Export markets in French Africa, South America and the Middle East continue to be strong, with political instability in some of these markets providing opportunities as well as risks. Dunlop Conveyor Belting now has five service outlets across Europe and one in North Africa which not only generate local service revenue but also support customers locally enhancing market share.

Most of the solid woven operations have performed well this year, largely due to high demand from both coal and potash producers which appears to be sustainable. Significant raw material price increases required robust pricing action with our customers. The solid woven operation based in the UK continued to penetrate the markets in the former Soviet Union and benefited from robust demand from the Canadian potash market whilst maintaining market share in Western Europe. Domestic demand in India recovered slightly but competition remains intense, particularly for low tensile belting; however, we are seeing interest in our high tensile PVC products in coal mines, which have traditionally only taken low tensile belting. Our operation in China saw destocking by its largest customer but the remaining business experienced growth, recognising the benefits from our technically superior product. South Africa has suffered from national strikes which caused us to lose 17 days of production. Uncertainty over mining mineral rights and calls for nationalisation continues to delay new projects which in turn limits our opportunities in steel cord belt in the short term. Despite these difficulties, revenue increased in South Africa.

Advanced Engineered Products

Operations within AEP provide high value added solutions to their customers' needs using advanced polymeric materials, expertise in application design, effective manufacturing design skills and timely delivery. Expansion into further mission critical applications is a key part of the AEP strategy as this supports the high added value, niche nature of the product range across the AEP operations and provides added protection against the full effects of economic volatility.

The AEP Division is divided into five product group operations which are managed on a global basis. These operations are detailed below.

·; Fenner Advanced Sealing Technologies comprises performance critical hydraulic seals for the global fluid power industry, trading as Hallite, and bespoke sealing products for process applications including oil and gas, electronics, pumps, valves, compressors and aerospace applications, trading as CDI/EGC;

·; Solesis Medical Technologies, focused on North America, comprises Secant Medical, a leading developer and manufacturer of custom-engineered biomedical textile structures for implantable medical devices, Xeridiem, which develops and manufactures single use disposable devices (usually silicone based) and Prodesco, which provides a wide range of sophisticated industrial fabrics;

·; Fenner Precision is a leading manufacturer and supplier of performance critical polymer components to the office automation industry;

·; Fenner Drives designs, manufactures and sells an extensive range of bespoke solutions for mechanical power transmission and motion transfer applications; and

·; James Dawson manufactures silicone and EPDM speciality hoses for the diesel engine, truck, bus and off-road equipment OEM market.

Fenner Advanced Sealing Technologies

Fenner Advanced Sealing Technologies ("FAST") manufactures performance critical seals for mobile hydraulic equipment, mining and oil and gas extraction and exploration equipment. FAST also produces high reliability seals and other performance critical products for pump, valve and compressor applications and continues to diversify into similar applications in the medical, semiconductor processing and aerospace markets. It has global operations with production plants in the UK, Germany, USA, China and, since April 2011, Singapore and sales branches located in France, Italy, Australia, Canada and Brazil. In the year under review, demand was strong across all the markets in which FAST operates, generated by the global recovery, wider geographical coverage and increased market share. In recent years, a series of initiatives has begun to increase our share of the aftermarket including the installation of CNC machines in all of the sales branches to enable custom seals to be produced quickly. In 2011, a series of new initiatives was put in place; these include mobile engineers to help customers select the right seals, salesmen to sell oil and gas products direct to the oilfields and new products for the oilfields including blowout preventer blocks.

An aftermarket distributor, Transeals, located in Perth, Australia, was acquired shortly after the year end. Transeals will be integrated into Hallite Australia to create an operation focused on the aftermarket in the dynamic Western Australian mining and oil and gas industries. Investment is also being made in a new IT system for the operation which will enable aftermarket customers to be served effectively and provide a platform for internet trading. FAST continues to expand its global presence, maintaining its reputation for high quality products and selectively broadening its product range to satisfy new market opportunities and further improve its performance.

Solesis Medical Technologies

There are two operations in AEP which focus on the medical market. Fenner continues to invest for growth in this market and it is therefore considered appropriate to assign a brand umbrella to these activities. The brand "Solesis Medical Technologies" is being used to describe the medical activities of the AEP Division.

Both Secant Medical and Xeridiem serve the medical device market using the same business model. Customers who have identified an unmet clinical need contract with either company to design a component or product to meet that need. Both operations are structured to make a profit on those development activities while retaining manufacturing rights should the customer's product be commercialised. Between them, the operations are active in cardiology, urology, orthopaedics, gastroenterology, gynaecology, neurology plus general and bariatric surgery. Both operations are focused on North America.

Secant Medical, based in Perkasie, Pennsylvania, manufactures textile components for permanently implanted medical devices. Xeridiem, based in Tucson, Arizona, manufactures complete, single use disposable devices that spend some time inside the human body. Xeridiem is a recipient of the 2011 Gold Medical Design Excellence Award. This international award was for a novel chest tube, the PleuraFlow Active, which minimises chest tube clogging during heart and lung surgery.

Western populations continue to age and gain weight; these are both predictors of future medical device consumption for the next several years. For the longer term, additional emphasis will need to be placed on developing countries. US legislation has had, and will continue to have, an impact on the medical device market. Until now, a device only had to demonstrate that it provided better healthcare outcomes than others on the market; in the coming era of comparative effectiveness research (CER), new devices will have to demonstrate both efficacy and cost effectiveness. The recession has dramatically reduced the amount of venture funding available to start-up medical device companies. This has had the unexpected benefit of significantly increasing the quality of the projects being worked on as only the best receive funding.

Fenner Precision

With one sales group and three manufacturing plants: Manheim and Buffalo in the USA and Lincoln in the UK, as well as a presence in Shanghai in China, Fenner Precision focuses on the self service, ATM, consumer and commercial printing and specialist engineering (particularly energy) markets throughout the world. With a brand promise of "Designed to fit your needs - exactly!", Fenner Precision offers bespoke belts, stretch bands, tyres and rollers for office equipment and paper handling and, in addition, composite mouldings in a wide range of materials and sizes for specialist engineering applications, for example, in the offshore oil industry. Fenner Precision made good progress in the year under review, albeit recovery in its markets has been slow, indicating that it continues to grow market share and is successfully introducing new products.

Fenner Drives

Despite quite contrary markets, the year has seen Fenner Drives move from recovery to real growth. With a range of innovative products, including Nu-T-Link belts, PowerMax idlers and pulleys and B-LOC and Trantorque keyless bushes, Fenner Drives core purpose is to "Solve customers' high cost problems with high value solutions". E-commerce is an increasingly important sales channel. Streamlined Business To Business transactions are in place with our major distributors and investment continues to enhance our internet offering to the entire customer base. The historic focus on North America presents growth opportunities across the rest of the world, particularly Europe and the Middle East, where we focus on specific applications like HVAC (Heating, Ventilation and Air Conditioning). Through investment in staff and equipment, we continue to improve product development which should deliver growth at a higher rate than the underlying market.

James Dawson

The resurgence in demand in the James Dawson hose operations reported last year continued throughout 2011 despite wide variations in both geographical and market segments. Supply chain restocking came to an end early in the year and current volumes reflect end-user demand. Stationary power generation equipment performed strongly followed by off-road/construction equipment and heavy trucks. James Dawson responded to the increase in demand by continuing to focus on streamlining production and improving capability and efficiencies before increasing employee numbers. Our technical expertise in reinforced silicone and EPDM remain a key competitive advantage with new products being developed to address stricter emissions standards for diesel engines.

Climate change

While responding to climate change represents a continuing challenge to all operations, it presents a number of growth opportunities for AEP. Fenner Drives continues its development of a niche business to improve the energy efficiency of commercial buildings and reduce the carbon footprint of the owners and operators; it has continued to grow, with this development being rolled out across the global sales network. As well as its growing market for solutions for the installation of offshore wind turbines, Fenner Precision continues to use its materials and applications knowledge, particularly for offshore applications, to develop innovative products in the alternative energy market. In addition to working with diesel engines, James Dawson has critical products which enhance the safety and reliability of the electrical systems in wind turbines. CDI seals are used extensively in shale and "tight" gas extraction which substantially increases the availability of methane, often seen as the lowest impact fossil fuel. Development projects are underway for a number of other renewable energy programmes, including wave energy.

Outlook

We continue to expect that the recovery in the global economy, and the Western economies in particular, will be both inconsistent and slow. However, the underlying drivers which are most significant for Fenner remain strong. Global demand for energy, particularly electricity, is only marginally affected by general economic weakness and with growth in the emerging economies driven by electrification, these will remain heavily reliant on coal for the foreseeable future. Per capita consumption of other commodities is currently also low in China and India and the expected growth in demand cannot be met without a continuing expansion of extractive industries in which both ECS and FAST are active. Within our medical operations, ageing populations in developed economies and increased healthcare expectations in BRIC countries will ensure long-term growth for Xeridiem and Secant Medical.

We look forward with optimism as we start the new year with our operations performing well and building on the success of 2011. We have a highly motivated team of people in place, strong positions in attractive markets and well invested infrastructure; while we note the growing uncertainty over the macro economic outlook, trading and demand levels are in line with our expectations. We remain positive about Fenner's prospects for 2012.

Forward-looking statements

Certain statements contained in this document, including those under the captions "Introduction", "Performance" and "Outlook", constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause the actual results, performance or achievements of Fenner, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such statements. Such risks, uncertainties and other factors include, among others: growth in the energy markets, general economic conditions and the business environment.

Nicholas Hobson

Chief Executive Officer

GROUP FINANCE DIRECTOR'S REVIEW

Revenue and operating profit

Group revenue increased by 30% to £718.3m (2010 £552.5m). The effect of acquisitions completed in the year contributed £27.6m and the favourable translation effect of exchange rate movements amounted to £6.0m, the largest component relating to the stronger Australian dollar.

In the ECS Division, revenue increased by 31% to £510.7m (2010 £389.5m) with demand from mining markets remaining strong.

In the AEP Division, revenue increased by 27% to £207.6m (2010 £163.0m) due to increased market penetration and the general improvement in industrial market conditions.

Underlying operating profit increased by 60% to £91.4m (2010 £57.0m), a record performance. The effect of acquisition activity contributed £4.9m and the favourable translation effect of exchange rate movements amounted to £1.2m. Divisional profits contributed were £61.1m (2010 £40.5m) from the ECS Division and £38.2m (2010 £22.6m) from the AEP Division.

Amortisation of intangible assets acquired increased to £8.9m (2010 £7.7m) principally due to acquisition activity.

Group operating profit increased by 67% to £82.5m (2010 £49.3m).

Net finance costs

Finance costs, net of finance income, increased by £0.8m to £12.9m. This comprised net interest payable of £11.2m (2010 £10.7m) and notional interest of £1.7m (2010 £1.4m).

The increase in net interest payable principally arose from the additional cost associated with the drawdown of long-term funding from the new private placement compared with lower short-term rates earned on amounts deposited.

The majority of the Group's borrowing costs are at fixed interest rates, principally arising from the US dollar private placements and related cross-currency swaps.

Notional interest related to defined benefit post-retirement schemes and the unwinding of discount on provisions, principally arising from deferred payments on acquisitions.

Taxation

The tax rate for the year was 29% (2010 29%) whilst the underlying rate was 30% (2010 30%).

Although a large proportion of Group profits are earned in the USA where marginal tax rates are in excess of 35%, this was offset by lower rates elsewhere in the world, particularly in the UK, the Netherlands and Canada. The tax rate also benefited from the utilisation of losses not previously recognised as deferred tax assets.

Earnings per share and dividends

Underlying earnings per share was 28.1p (2010 17.9p) and basic earnings per share was 24.6p (2010 14.6p).

The interim dividend of 2.65p per share (2010 2.4p) was paid on 5 September 2011. The Board is recommending a final dividend of 5.35p per share (2010 4.8p) to make a total dividend for the year of 8.0p per share (2010 7.2p).

Acquisitions

The Group completed three acquisitions during the year and one acquisition after the year end.

In November 2010, the acquisition of the business and assets of Belle Banne (Victoria) Pty Limited, Leading Edge Conveyor Solutions Pty Limited and an associated interest was completed. These operations, which are related, are based in Australia. An initial cash consideration of £13.7m was paid to acquire 50.01% of the principal operations and a holding in associated interests. The remaining share will be acquired within six years for £13.4m plus contingent performance related amounts estimated at £5.4m. Total consideration is capped at £39.7m.

In April 2011, 100% of the share capital of Multiseals Pte Limited, a privately owned company based in Singapore, was acquired. The initial consideration was £4.2m in cash and £1.8m from the issue of 480,367 shares in Fenner PLC with deferred amounts payable of £0.7m.

In July 2011, 100% of the share capital of Statewide Belting Service Pty Limited, a privately owned company based in Australia, was acquired. The initial cash consideration was £7.7m with deferred amounts payable of £3.7m.

Further acquisition disclosures are given in note 16.

In September 2011, after the year end, the Group completed the acquisition of 100% of the share capital of Transeals Pty Limited, a privately owned company based in Australia. The cash consideration was £8.1m.

All amounts above are based on exchange rates at the dates of completion.

Cash flow and net debt

Operating cash flow before movement in working capital increased to £105.8m (2010 £69.9m). Working capital increased by £11.2m (2010 decreased by £12.6m), supporting sales growth, with improved efficiency ratios. Net interest paid was £11.2m (2010 £10.7m) and taxation paid increased to £14.8m (2010 £5.0m), on higher profits. This resulted in net cash generated from operating activities of £68.6m (2010 £66.8m).

Capital expenditure increased to £15.6m (2010 £10.5m) but was less than the depreciation charge of £18.4m (2010 £18.1m). After disposing of property, plant and equipment of £0.7m (2010 £0.1m), the resulting free cash inflow was £53.7m (2010 £56.4m).

The net cash outflow on acquisition and disposal activity was £29.7m (2010 £16.6m). After dividends paid of £14.6m (2010 £11.6m), finance leases of £1.3m (2010 £nil) and favourable exchange rate movements of £0.5m (2010 £8.4m adverse), closing net debt reduced by £8.6m to £101.8m (2010 £110.4m).

Gross debt amounted to £206.1m (2010 £155.2m) whilst cash and cash equivalents were £104.3m (2010 £44.8m).

Financing

The Group is financed principally by a mix of equity, retained earnings, US dollar private placement loan notes and committed bank facilities. The principal loan facilities are raised centrally whilst operating companies supplement this funding with local overdraft and working capital facilities.

During the year, the Group announced a placing of US dollar private placement loan notes. This consisted of US$200m Senior Guaranteed Loan Notes with maturities of 10 and 12 years at an average coupon of 5.3%, which were drawn down in June and August 2011. This placing further expands our funding sources and extends our debt maturity profile. The proceeds of the loan notes were used to repay existing debt with the balance placed on deposit.

Together with our existing private placements, the Group now has the following profile of US dollar private placement loan notes:

The Group's total committed loan facilities at 31 August 2011, including the US dollar private placements, were £353.9m. Within this, the Group's committed bank facilities were £168.0m (2010 £165.2m). £145.0m of facilities with UK banks expire in June 2012 whilst the Group's Australian operations have committed bank facilities of AUD$35.0m (£23.0m) which expire in May 2013. At 31 August 2011, £146.6m (2010 £86.9m) of these facilities were not drawn down whilst uncommitted facilities were in excess of £30.0m.

The principal financial covenants relating to the committed loan facilities are the ratio of net debt to EBITDA and interest cover. Net debt must be less than 3.5 times adjusted EBITDA. Underlying operating profit must be at least 2 times the net interest charge and/or adjusted EBITDA must be at least 3 times the net interest charge. For compliance with loan covenants, reported EBITDA is adjusted for, inter alia, acquisitions and non-cash items, which improves the reported ratios.

At 31 August 2011, the Group comfortably complied with its loan covenants.

Net debt to reported EBITDA was 0.9 times (2010 1.5 times). Interest cover was 8.2 times (2010 5.3 times) for underlying operating profit and 9.9 times (2010 7.0 times) for reported EBITDA.

The Group remains well placed to fund and support its operations with continuing access to medium and long-term debt finance, cash resources and, where necessary, shorter-term facilities. This funding is available from a wide range of sources, with the US dollar private placement issued in the year significantly lengthening the maturity profile of the Group's debt.

Financial risk management

In the normal course of business, the Group is exposed to certain financial risks, principally foreign exchange risk, interest rate risk, liquidity risk and credit risk. These risks are managed by the central treasury function in conjunction with the operating units, in accordance with risk management policies that are designed to minimise the potential adverse effects of these risks on financial performance. The policies are reviewed and approved by the Board.

The exposures are managed through the use of borrowings, derivatives and credit management procedures. The use of derivatives is undertaken only where the underlying interest or currency risk arises from the Group's operations or sources of finance. No speculative trading in derivatives is permitted.

The Group has entered into cross-currency swaps linked to the US dollar private placement cash flows. In 2007, $27.2m was swapped into €20.0m at a fixed rate of 5.05%, maturing in 2017. In 2011, $44.7m was swapped into AUD$45.0m at a fixed rate of 8.43%, maturing in 2023. These swaps provide hedges against the Group's net investments in the euro and Australian dollars, at fixed interest rates, and mirror the private placement cash flows. The Group has also used the proceeds of the private placements to repay floating rate bank borrowings whilst cross-currency swaps were used to maintain net investment hedges. These swaps have been accounted for as hedges in accordance with IAS 39 'Financial Instruments: Recognition and Measurement' with the charge or credit recognised directly in other comprehensive income in equity.

In the normal course of business, derivatives have been used to hedge future non-functional currency cash flows arising from trading transactions relating to the sale and purchase of goods and services. The Group has chosen not to hedge account for such transactions under the requirements of IAS 39, recognising that cash flows through to the maturity of the derivative are unaffected. In compliance with IAS 39, all financial instruments have been measured at their fair value as at the balance sheet date. A charge or credit to the income statement has been recognised for the loss or gain on these instruments. In addition, in accordance with IAS 21 'The Effects of Changes in Foreign Exchange Rates', all foreign currency monetary items have been retranslated at the closing rate, with changes in value charged or credited to the income statement.

Return on gross capital employed

The return on gross capital employed has increased to 20% (2010 13%) principally due to the improvement in underlying operating profit.

Post-retirement benefits

The Group operates a number of defined benefit post-retirement schemes for qualifying employees in operations around the world.

The principal scheme is the Fenner Pension Scheme which is based in the UK. The latest formal actuarial valuation of the scheme is being carried out as at 31 March 2011. The provisional results of this valuation have been updated to 31 August 2011 by a qualified actuary.

The total defined benefit post-retirement liability, as calculated by the schemes' actuaries in accordance with IAS 19 'Employee Benefits' and recorded on the balance sheet at 31 August 2011, reduced to £31.7m (2010 £45.5m). Of this amount, the Fenner Pension Scheme represents £24.9m (2010 £37.3m) and the overseas schemes totalled £6.8m (2010 £8.2m). During the year, the fair value of assets of the schemes increased by £11.8m (2010 £11.6m), principally due to an increase in the value of the schemes' equity investments. The present value of recognised obligations reduced by £2.0m (2010 increased by £15.0m), principally as a result of an increase in AA corporate bond yields used to discount obligations which was offset in part by an allowance for future improvements in longevity.

Accounting policies

The Group financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

Going concern

After making enquiries, the directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing the financial statements. In forming this view, the directors have reviewed the Group's budget and cash flow forecasts against availability of financing, including an assessment of sensitivities to changes in market conditions.

Richard Perry

Group Finance Director

DEFINITION OF KEY PERFORMANCE INDICATORS

Coal prices, production and demand

As published by IHS Global Limited, the McCloskey Report is the coal industry's recognised market analysis and trade journal. These bi-weekly prices reflect the delivered to port price of coal from two major coal exporting markets.

World coal production, defined as commercial solid fuels only, i.e. bituminous coal and anthracite (hard coal) and lignite and brown (sub-bituminous), is taken from the BP Statistical Review of World Energy June 2011.

Coal production and demand are presented as million tonnes of raw coal extracted. The International Energy Agency uses an energy adjusted measure; Mtce, which has been converted at 1 Mtce = 1.4515 million tonnes of raw coal.

Underlying operating profit

This is operating profit stated before amortisation of intangible assets acquired.

Underlying earnings per share

This is a measure of performance and growth. It is calculated by dividing the underlying profit for the year by the basic weighted average number of shares in issue and ranking for dividend. Underlying profit for the year is profit for the year stated before amortisation of intangible assets acquired and notional interest on defined benefit post-retirement schemes and the unwinding of discount on provisions.

Interest cover

This measure provides an indication of whether the Group's profit is sufficient to cover its interest obligations. It is calculated by dividing the underlying operating profit by net interest payable on bank overdrafts and loans, other loans and bank deposits.

Net debt to EBITDA

This is a measure of the Group's ability to service its debt obligations. It is calculated by dividing net debt (defined as short and long-term borrowings less cash and cash equivalents) by the profit for the year after adding back net finance costs, taxation, depreciation, amortisation and exceptional items.

Return on gross capital employed

This is a measure of performance relative to amounts invested. It is calculated by dividing underlying operating profit by gross capital employed. Gross capital employed is defined as the average of the opening and closing non-current assets (excluding deferred tax), inventories, trade and other receivables and trade and other payables.

Consolidated income statement

for the year ended 31 August 2011

Consolidated statement of comprehensive income

for the year ended 31 August 2011

Consolidated balance sheet

at 31 August 2011

The financial statements were approved by the Board of Directors on 9 November 2011 and signed on its behalf by:

M S Abrahams R J Perry

Chairman Group Finance Director

Consolidated cash flow statement

for the year ended 31 August 2011

Consolidated statement of changes in equity

for the year ended 31 August 2011

Notes

1. Basis of preparation

The preliminary results for the year ended 31 August 2011 were approved by the Board of Directors on 9 November 2011. They are abridged from the Group's audited financial statements and do not constitute the statutory accounts of the Company within the meaning of section 434 of the Companies Act 2006. The auditors, PricewaterhouseCoopers LLP, have reported on the Group financial statements for each of the years ending 31 August 2011 and 31 August 2010 and given unqualified opinions, which did not include a statement under Section 498 of the Companies Act 2006. The Group financial statements for 2010 have been delivered to the Registrar of Companies and the Group financial statements for 2011 will be filed with the Registrar of Companies in due course.

The Group financial statements from which these results have been extracted have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and with IFRIC interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. They are prepared on the historical cost basis, as modified by financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

2. Accounting policies

The accounting policies adopted are consistent with those for 2010, except for the following standards or interpretations to existing standards that have been adopted for the first time during the year:

• Amendment to IAS 32 'Financial Instruments: Presentation'

• Amendments to IFRS 1 'First-time Adoption of International Financial Reporting Standards'

• Amendment to IFRS 2 'Share-based Payment'

• IFRIC 19 'Extinguishing Financial Liabilities with Equity Instruments'

None of these standards or interpretations has had a significant impact of the Group's reported results or financial position.

3. Segment information

4. Operating profit

Operating profit has been arrived at after charging/(crediting):

5. Net finance costs

6. Taxation

7. Dividends

The interim dividend for the year ended 31 August 2011 was paid on 5 September 2011. The proposed final dividend for the year ended 31 August 2011 is subject to approval by shareholders at the AGM. Consequently, neither have been recognised as liabilities at 31 August 2011. If approved, the final dividend will be paid on 5 March 2012 to shareholders on the register on 3 February 2012.

8. Earnings per share

Underlying earnings per share measures have been presented to provide a clearer understanding of the underlying performance of the Group.

9. Property, plant and equipment

The increase in property, plant and equipment in the year of £5.1m comprises additions of £14.7m, acquisition of businesses of £7.2m and exchange movements of £3.1m less depreciation of £18.0m, impairment charges of £1.0m and disposals of £0.9m.

10. Intangible assets

The increase in intangible assets in the year of £32.1m comprises goodwill and intangible assets acquired on the acquisition of businesses of £43.2m and other additions of £0.9m less amortisation of £9.3m and exchange movements of £2.7m.

11. Post-retirement benefits

The Group operates a number of defined benefit post-retirement schemes for qualifying employees in operations around the world. The assets of the schemes are held in separate trustee-administered funds. The cost of the schemes are assessed in accordance with the advice of independent qualified actuaries using the projected unit method.

The principal scheme is the Fenner Pension Scheme which is based in the UK. The most recent triennial valuation of the Fenner Pension Scheme, whilst yet to be formally completed, was carried out as at 31 March 2011. The actuarial valuations for all schemes were updated as at 31 August 2011 by independent qualified actuaries.

Retirement benefit obligations decreased by £13.8m in the year. This comprises an increase in the fair value of assets of the schemes of £11.8m, principally due to an increase in the value of the schemes' equity investments and a decrease in the present value of recognised obligations of £2.0m, principally as a result of an increase in AA corporate bond yields used to discount obligations which was offset in part by an allowance for future improvements in longevity.

12. Provisions

Provisions comprise current provisions of £12.4m (2010: £6.7m) and non-current provisions of £25.4m (2010: £17.8m). The overall increase in the year of £13.3m comprises net movements in deferred amounts due on current year and prior year acquisitions of £1.0m, the redemption liability associated with acquisitions in the year of £12.5m, the unwinding of discount on current year and prior year acquisitions of £1.3m and new provisions of £0.2m less utilisation of provisions and £1.4m and exchange movements of £0.3m.

13. Reconciliation of net cash flow to movement in net debt

Net debt comprises cash and cash equivalents of £104.3m (2010: £44.8m), current borrowings of £16.8m (2010: £25.4m) and non-current borrowings of £189.3m (2010: £129.8m).

14. Contingent liabilities

In the normal course of business the Group has given guarantees and counter indemnities in respect of commercial transactions.

The Group is involved as defendant in a small number of potential and actual litigation cases in connection with its business, primarily in North America. The directors believe that the likelihood of a material liability arising from these cases is remote.

15. Related party transactions

Other than the remuneration of the Group's executive and non-executive directors and members of the Executive Committee, there were no related party transactions during the year.

16. Acquisitions

The Group acquired the business and assets of Belle Banne (Victoria) Pty Limited ("BBV") and Leading Edge Conveyor Solutions Pty Limited ("LECS") on 9 November 2010, with an associated interest acquired on 30 November 2010. These operations, which are related, are based in Australia and provide conveyor maintenance services and products to the mining industry and materials handling industries. The acquisition will increase the domestic presence of the Fenner Dunlop operations in Australia and enable it to extend its provision of conveyor engineering, conveyor related products and other value added services to the mining and industrial markets throughout Australasia.

An initial cash consideration of £13.4m was paid to acquire 50.01% of the principal operations, together with an amount of £0.3m for the holding in an associated interest. The remaining share will be acquired within six years for £13.4m plus a contingent amount in respect of the acquisition of a non-controlling interest in LECS and other contingent performance related amounts estimated at £5.4m. Total consideration is capped at £39.7m. All amounts stated are based on exchange rates at the date of completion.

BBV and LECS have been accounted for as subsidiaries. The Group has elected to measure non-controlling interests using the fair value method. Non-controlling interests represents the fair value of the remaining 49.99% interest in the acquired operations at the date of acquisition.

A put and call option exists in relation to the purchase of the remaining interest. Accordingly, a liability for redemption of this option has been recognised in provisions and a corresponding entry made in shareholders' equity.

On 28 April 2011, the Group acquired 100% of the share capital of Multiseals Pte Limited ("Multiseals"), a privately owned company based in Singapore. Multiseals manufactures and distributes seals to the oil and gas industry in the Asia Pacific region. This strategic acquisition will allow the FAST operation to exploit the expanding Asian aftermarket for its oil and gas products. The initial cash consideration was £4.2m with an additional £1.8m satisfied by the issue of 480,367 shares in Fenner PLC and deferred amounts of £0.7m, based on exchange rates at the date of completion.

On 1 July 2011, the Group acquired 100% of the share capital of Statewide Belting Service Pty Limited ("Statewide"), a privately owned company based in Tasmania. Statewide specialises in the provision of belting products, accessories and installation services to the mining and manufacturing industries. The acquisition represents a further strategic piece of the Fenner Dunlop Australia service network and will broaden the reach of the operation's value added service model. The initial cash consideration was £7.7m with deferred amounts of £3.7m, based on exchange rates at the date of completion.

Goodwill arising on acquisition principally represents the workforce and anticipated synergies gained through the acquisitions. Goodwill is not deductible for tax purposes.

Details of the provisional aggregate assets and liabilities acquired, based on exchange rates at the date of completion, are given below.

The information above in relation to BBV / LECS and associate has been presented in aggregate because the acquisitions are related. Other acquisitions have been presented in aggregate because the individual acquisitions are not material.

Provisional fair values of assets and liabilities represent the best estimate of the fair values at the date of acquisition. As permitted by IFRS 3 (Revised) 'Business Combinations', these provisional amounts can be amended for a period up to 12 months following acquisition if subsequent information becomes available which changes the estimate of fair values at the date acquisition.

Adjustments have been made to the valuation of both intangible assets acquired and contingent and deferred consideration payable on prior year acquisitions within 12 months of the acquisition date, with an equal and opposite adjustment to goodwill. The comparative financial information has not been re-stated by way of a prior year adjustment as the amounts are not considered to be material.

From the respective dates of acquisition, BBV / LECS contributed £25.2m to Group revenue, £4.3m to Group operating profit before amortisation of intangible assets acquired and £3.5m to Group operating profit, whilst other acquisitions contributed £2.4m to Group revenue, £0.6m to Group operating profit before amortisation of intangible assets acquired and £0.4m to Group operating profit.

If the acquisitions had occurred on 1 September 2010, it is estimated that Group revenue would have been £730.5m, Group operating profit before amortisation of intangible assets acquired would have been £94.5m and Group operating profit would have been £84.9m. These amounts have been calculated by adjusting the results of the acquired operations to reflect the effect of the Group's accounting policies as if they had been in effect from 1 September 2010.

17. Post balance sheet events

On 1 September 2011, the Group completed the acquisition of the entire share capital of Transeals Pty Limited ("Transeals"), a privately owned company based in Perth, Australia. Transeals manufactures and distributes seals used in hydraulic equipment, currently serving the western parts of Australia. This strategic acquisition allows the Hallite operation in Australia, which is mainly east coast based, to develop its aftermarket presence in the buoyant mining and oil and gas markets of Western Australia. The cash consideration was £8.1m.

Details of the provisional aggregate assets and liabilities acquired are given below.

Provisional fair values of assets and liabilities represent the best estimate of the fair values at the date of acquisition. As permitted by IFRS 3 (Revised) 'Business Combinations', these provisional amounts can be amended for a period up to 12 months following acquisition if subsequent information becomes available which changes the estimate of fair values at the date acquisition.

Consolidated income statement - half year analysis

for the year ended 31 August 2011