Fenner PLC Regulatory News (FENR)

27 April 2011

Fenner PLC

2011 Half Year Results

Fenner PLC, a world leader in reinforced polymer technology, today announces its results for the half year ended 28 February 2011.

Highlights

·; Revenue increased by 35% to £332.5m

·; Improved margins; underlying operating profit1 increased by 71% to £36.7m

·; Underlying profit before taxation2 increased by 93% to £31.4m; profit before taxation increased by 120% to £26.6m

·; Underlying earnings per share2 increased by 70% to 10.9p

·; Interim dividend increased by 10% to 2.65p per share

·; Strong trading by both Conveyor Belting and Advanced Engineered Products

·; Group benefiting from recent investment programme and strength of end user markets

·; Outlook good for seasonally stronger second half

1Underlying operating profit is before amortisation of intangible assets acquired

2Underlying profit before taxation and underlying earnings per share are before amortisation of intangible assets acquired and notional interest on defined benefit post-retirement schemes and the unwinding of discount on provisions

Mark Abrahams, Chairman, commented:

"The Group has achieved a very strong performance in the six months to February 2011. Strong trading in both the Conveyor Belting and Advanced Engineered Products Divisions has generated sharp increases in profitability. The benefits of our investment programmes and the strength of our end user markets provide the basis for our maintained confidence.

"We are well positioned in our chosen markets with clear tactical and strategic plans and a healthy financial position.

"As we enter the second half, the performance is strong and we are enjoying good levels of order book visibility. This bodes well for the seasonally stronger second half of the financial year, in which we expect to make further progress and continue to deliver growth."

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INTERIM MANAGEMENT REPORT

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 on defined benefit post-retirement schemes and the unwinding of discount on provisions

The Group has achieved a very strong performance in the six months to February 2011. Underlying operating profit has increased by 71% to a record level of £36.7m. Strong trading in both the Conveyor Belting and Advanced Engineered Products Divisions has generated sharp increases in profitability. The benefits of our investment programmes and the strength of our end user markets provide the basis for our maintained confidence.

REVENUE AND PROFITS

Revenue for the period was £332.5m (2010 £246.3m) with strong demand across our major business segments. Consequently, half year revenue was significantly ahead of the previous comparable period, when the effects of the global economic downturn were still evident. Underlying operating profit increased to £36.7m (2010 £21.5m) as we also benefited from our recent organic investments to satisfy customer demand and service levels. The favourable effect on underlying operating profit of exchange rate translation amounted to £1.3m.

Operating profit increased to £32.4m (2010 £17.9m) after charging amortisation of intangible assets acquired of £4.3m (2010 £3.6m).

Net finance costs were £5.8m (2010 £5.8m) which included a non-cash notional charge of £0.5m (2010 £0.6m). Underlying profit before taxation was £31.4m (2010 £16.3m) and profit before taxation was £26.6m (2010 £12.1m).

Underlying earnings per share increased 70% to 10.9p per share (2010 6.4p) and basic earnings per share amounted to 9.2p per share (2010 4.8p).

CASH RESOURCES

Net cash generated from operating activities was £17.5m (2010 £24.4m). The cash flow for the first half included an increase in working capital of £12.3m, supporting sales growth of 35%, with improved efficiency ratios. After net capital expenditure of £5.9m (2010 £3.3m) which was below the depreciation charge of £9.4m (2010 £8.7m), free cash inflow was £11.6m (2010 £21.1m).

Acquisition payments amounted to £14.9m (2010 £9.3m) which principally related to the initial consideration of £13.7m for the Australian businesses: Belle Banne Victoria, Leading Edge Conveyor Solutions and associated interests. Other payments of £1.2m related to deferred and contingent consideration on prior year acquisitions.

After dividends paid of £4.7m (2010 £3.9m), finance leases of £1.4m (2010 £nil), other inflows of £0.1m (2010 £0.1m) and adverse exchange rate movements of £0.3m (2010 £11.8m), closing net debt was in line with our expectations at £120.0m (2010 £169.2m).

The net debt to EBITDA ratio, on a 12 month rolling basis, strengthened to 1.3 times (2010 2.7 times).

DIVIDENDS

Reflecting our maintained confidence in the business, a 10% increase in the interim dividend to 2.65p per share (2010 2.40p) is declared and will be paid on 5 September 2011 to shareholders on the register on 29 July 2011.

OPERATIONS

In our Conveyor Belting Division, revenue increased to £235.3m (2010 £176.7m) with robust demand levels from the coal mining sector and enhanced market share. Underlying operating profit advanced to £24.5m (2010 £16.4m).

In the Americas, we have seen increasingly efficient utilisation in our production facilities following the major investments in new plant and equipment. Through improved productivity and service levels, we have been able to satisfy increased demand levels from the mining sector, develop new markets and respond to the recovery in industrial markets.

Our businesses in Asia Pacific have performed well. Market share gains are being achieved, particularly in steel cord markets, as our new facility in Western Australia is now well established as world class. In November 2010, the Group acquired Belle Banne Victoria and Leading Edge Conveyor Solutions. These related businesses provide conveyor maintenance services and products to the mining and materials handling industries, furthering our already strong position in the Australian aftermarket. Early indications of performance are encouraging.

In Continental Europe, new export markets have been successfully developed. This has improved manufacturing throughput and productivity levels which had previously suffered from a greater exposure to industrial markets in the softer economic environment and downturn.

In the Advanced Engineered Products Division, revenue increased to £97.2m (2010 £69.6m) and underlying operating profit increased to £16.6m (2010 £9.2m). This represents a significant improvement in both volumes and profitability with margins restored to levels last experienced before the economic downturn. In aggregate, our businesses have benefited from both the US led economic recovery and an ability to be responsive to customers' demand patterns and service requirements. We have continued to identify opportunities for growth and develop further the strategic investment in our technical weaving business. We are starting to reap the rewards of this investment, particularly in the medical device market. The acquisition of Xeridiem Medical Devices (formerly MRI Manufacturing & Research), located in Arizona, USA, in July 2010, has strengthened our presence in this market. Since acquisition, the business has been successfully integrated and has recently been awarded theMedical Device and Diagnostic Industry's 2011 Medical Design Excellence Award in the General Surgery Equipment, Instruments and Supplies category.

The Fenner Advanced Sealing Technologies operations have performed extremely well, underpinned by strength in the oil and gas sector and strong demand for hydraulic seals from mining and off-road equipment. The businesses have continued to expand their range of products offered, using the most advanced materials and technology to meet our customers' requirements. During the second quarter, our hydraulic seals business in Detroit, USA, successfully relocated to a nearby facility which will enable further expansion and an optimisation of production flow.

BOARD

The directors of Fenner PLC were saddened to announce that David Campbell died suddenly in November 2010. David had been a non-executive director and Chairman of the Remuneration Committee since November 2005. In the interests of Board continuity, David Buttfield has agreed to stay on as Senior Independent Director for a further three years. Alan Wood has been appointed Chairman of the Remuneration Committee.

As notified in our 2010 Annual Report, Colin Cooke retired from the Board on 28 February 2011. He has been succeeded as non-executive Chairman by Mark Abrahams who was formerly the Chief Executive Officer. Nicholas Hobson has been appointed as Chief Executive Officer after having successfully held a number of senior executive management positions within Advanced Engineered Products and having served for over 20 years with the Group in total.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties affecting the Group remain those set out in the 2010 Annual Report. Those which are most likely to impact the performance of the Group in the remaining months of the financial year are as set out below.

Due to the global nature of the Group, a large proportion of its revenue is derived from overseas, of which a significant amount is generated in the USA and Australia. As a consequence, the Group could be affected by movements in exchange rates and changes in global and country specific economic or business conditions, particularly in those territories. As with all manufacturing industries, we are experiencing a period of commodity driven inflation which we will continue to manage.

Fenner did not suffer any material direct consequences from either the Australian floods or the Japanese earthquake and tsunami. The full consequences of events in Japan continue to evolve which may lead to some tightening of the industrial polymer markets and could result in supply constraints.

OUTLOOK

We are well positioned in our chosen markets with clear tactical and strategic plans and a healthy financial position.

As we enter the second half, the performance is strong and we are enjoying good levels of order book visibility. This bodes well for the seasonally stronger second half of the financial year, in which we expect to make further progress and continue to deliver growth.

Certain statements in this report are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. As these statements include risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

In this report, financial performance measures described as "underlying" are before amortisation of intangible assets acquired and, where applicable, notional interest on defined benefit post-retirement schemes and the unwinding of discount on provisions.

Consolidated income statement

for the half year ended 28 February 2011 (unaudited)

Consolidated statement of comprehensive income

for the half year ended 28 February 2011 (unaudited)

Consolidated balance sheet

at 28 February 2011 (unaudited)

Consolidated cash flow statement

for the half year ended 28 February 2011 (unaudited)

Consolidated statement of changes in equity

for the half year ended 28 February 2011 (unaudited)

Notes to the half yearly financial statements

1. Basis of preparation

These condensed half yearly financial statements for the half year ended 28 February 2011 have been prepared in accordance with the Disclosure and Transparency Rules ("DTR") of the Financial Services Authority ("FSA") and with IAS 34 'Interim Financial Reporting' as adopted by the European Union. They should be read in conjunction with the Group's financial statements for the year ended 31 August 2010.

The comparative financial information for the year ended 31 August 2010 does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. It has been extracted from the Group's financial statements for 2010 which have been filed with the Registrar of Companies. They contained an unqualified audit report and did not contain a statement under Section 498 of the Companies Act 2006.

2. Accounting policies

The accounting policies adopted are consistent with those applied in the preparation of the Group's financial statements for the year ended 31 August 2010 except for the following standards or interpretations to existing standards which have been adopted for the first time for the year ending 31 August 2011:

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

• Amendment to IFRS 2 'Share-based Payment'

• Amendment to IAS 32 'Financial instruments: Presentation'

• IFRIC 19 'Extinguishing Financial Liabilities with Equity Instruments'

None of these standards or interpretations has had a significant impact on the results or net assets of the Group.

3. Segment information

IFRS 8 'Operating Segments' requires segment information to be presented on the same basis as that used for internal management reporting.

For the purposes of managing the business, the Group is organised into two reportable segments: Conveyor Belting and Advanced Engineered Products.

Operating segments within these reportable segments have been aggregated where they have similar economic characteristics with similar products and services, production processes, methods of distribution and customer types.

The Chief Operating Decision Maker ("CODM") for the purpose of IFRS 8 is the Board of Directors. The financial position of the segments is reported to the CODM on a monthly basis and this information is used to assess the performance of the Group and to allocate resources on an appropriate basis.

Segment performance is reviewed down to the operating profit level. Financing costs and taxation are managed on a Group basis so these costs are not allocated to operating segments.

Transfer prices on inter-segment revenues are on an arm's length basis in a manner similar to transactions with third parties.

Segment results are analysed as follows:

Segment assets and liabilities are analysed as follows:

4. Taxation

The tax charge is calculated based on the estimated effective tax rate for the full year.

5. Dividends

The interim dividend for the year ended 31 August 2010 was paid on 6 September 2010. The final dividend for the year ended 31 August 2010 was approved by shareholders at the Annual General Meeting on 12 January 2011 and was paid on 7 March 2011. The interim dividend for the year ending 31 August 2011 is due for payment on 5 September 2011 and so has not been recognised as a liability at 28 February 2011. It will be paid to shareholders on the register on 29 July 2011.

6. Earnings per share 

Underlying earnings per share has been calculated on the basic weighted average number of shares in issue.

7. Property, plant and equipment

The increase in property, plant and equipment in the period of £0.4m comprises additions of £5.8m, acquisition of businesses of £4.8m less depreciation of £9.2m and exchange movements of £1.0m.

8. Intangible assets

The increase in intangible assets in the period of £16.5m principally comprises acquisition of businesses of £25.8m less amortisation of £4.5m and exchange movements of £5.0m.

9. 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 is 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 was on 31 March 2008.

The principal financial assumptions used for the Fenner Pension Scheme compared to the 2010 year end are as follows:

Retirement benefit obligations decreased by £24.5m in the period. This principally comprised £22.0m of actuarial gains, largely due to higher than expected investment returns on the Scheme's assets and an increase in corporate bond yields which has led to a higher discount rate being used to value the liabilities, and £4.0m of employer contributions less amounts charged to the income statement of £1.4m.

10. Provisions

Provisions comprise current provisions of £8.1m (2010 year end: £6.7m) and non-current provisions of £26.3m (2010 year end: £17.8m). The overall increase in the period of £9.9m principally comprises the redemption liability on acquisitions in the period of £12.4m and notional interest of £0.5m less payments of deferred consideration on prior year acquisitions of £1.2m, utilisation of provisions of £0.7m and exchange movements of £0.9m.

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

Net debt is analysed as follows:

12. Acquisitions

On 4 November 2010, the Group exchanged contracts to acquire 100% of the business and assets of Belle Banne (Victoria) Pty Limited ("BBV"), Leading Edge Conveyor Solutions Pty Limited ("LECS") and associated interests. These businesses, which are interlinked, 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 businesses, based on exchange rates at the date of completion, together with an amount of £0.3m for the holding in associated interests. The remaining share of the businesses 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, estimated at £1.6m, and other contingent performance related amounts. Total consideration is capped at £40.0m, based on exchange rates at the reporting date.

The businesses of 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 businesses 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.

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 & associates has been presented in aggregate because the acquisitions are linked.

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 value 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 £9.9m to Group revenue, £1.5m to Group operating profit before amortisation of intangible assets acquired and £1.2m to Group operating profit.

If the acquisitions had occurred on 1 September 2010, it is estimated that Group revenue would have been £337.5m, Group operating profit before amortisation of intangible assets acquired would have been £37.4m and Group operating profit would have been £33.0m. These amounts have been calculated by adjusting the results of the acquired businesses to reflect the effect of the Group's accounting policies as if they had been in effect from 1 September 2010.

13. Contingencies

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 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.

14. Related party transactions

Other than the remuneration of executive and non-executive directors and members of the Executive committee, there were no related party transactions during the period.

Responsibility statement

We confirm that to the best of our knowledge:

• the condensed half yearly financial statements contained in this document have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union;

• the Interim management report contained in this document includes a fair review of the information required by the FSA's directive DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

•  this document includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

The directors of Fenner PLC and their respective responsibilities are as listed in the Annual Report for 2010 except for Colin Cooke who resigned as non-executive Chairman on 28 February 2011, Mark Abrahams who resigned as Chief Executive Officer on 28 February 2011 and was appointed non-executive Chairman on 1 March 2011 and Nicholas Hobson who was appointed Chief Executive Officer on 1 March 2011.

By order of the Board

Mark Abrahams Richard Perry

Chairman Group Finance Director

27 April 2011 27 April 2011