Fenner PLC Regulatory News (FENR)

23 April 2014

Fenner PLC

2014 Half Year Results

Fenner PLC, a world leader in reinforced polymer technology, today announces its results for the half year ended 28 February 2014.

Highlights

1 Underlying operating profit is before amortisation of intangible assets acquired and exceptional items

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

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

4 Comparatives have been restated due to the adoption of IAS 19 (Revised) 'Employee Benefits'

· First half results, as anticipated and partly reflecting currency movements, below the comparable period last year

· Revenue of £359.8m (2013: £391.3m), representing a fall of 3% on a constant currency basis

· Underlying profit before taxation 2 of £29.6m (2013: £35.8m), representing a fall of 11% on a constant currency basis

· Dividend per share increased by 7% to 4.0p per share (2013: 3.75p)

· Engineered Conveyor Solutions ("ECS"): sentiment within the US coal mining industry has remained cautious but ECS performed well in Australia, South Africa and China

· Advanced Engineered Products ("AEP") delivered an encouraging performance, particularly the oil & gas facing businesses

Nicholas Hobson, Chief Executive Officer, commented:

"During the period, the Group continued to make important progress towards its strategic objectives, positioning the Group for further long-term growth in each of its two divisions.

"ECS is performing well in Australia, where it has entered the second half of the year with an improving order book. Like-for-like comparatives are expected to continue to improve as the year progresses.

"In the USA, ECS's revenue and order intake do not yet reflect favourable trends in the energy industry, such as rising natural gas prices and reductions in utility coal stockpiles, which are expected to lead to a recovery in coal production and in demand for ECS products and services.

"Further progress is anticipated in ECS's newer markets, which is expected to offset weak demand from customers in Russia, Ukraine and the UK.

"AEP is expected to continue to make progress towards stated strategic objectives which underpin future growth and continues to be an area of primary focus for acquisitions. As previously indicated, this year the seasonal weighting of revenues and operating profit towards the second half is expected to be slightly more accentuated than in recent years.

"On this basis, the Board's expectations for the outcome for the year as a whole remain substantially unchanged."

A live audio webcast of the analyst presentation, hosted by Nicholas Hobson, Chief Executive Officer and Richard Perry, Group Finance Director, can be accessed at 9.30 am today on the Group's website www.fenner.com.

For further information please contact:

Notes to editors:

Fenner PLC is a world leader in reinforced polymer technology, providing local engineered solutions for performance-critical applications. The Group operates through two divisions:

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.

Advanced Engineered Products. The AEP division uses advanced polymeric materials and technical expertise to provide high value-added solutions to customers' most challenging engineering problems and to identify and develop new opportunities. Customers are spread across a variety of end-user segments, including oil & gas and medical which account for some 40 per cent of divisional revenue, together with construction, transportation, automation and general industrial. AEP's trading names are recognised globally and include Hallite, CDI Energy Products, EGC Critical Components, AIP, Fenner Precision, Fenner Drives, James Dawson, Mandals, Secant Medical and Xeridiem.

Interim management report

During the period, the Group continued to make important progress towards its strategic objectives, positioning the Group for further long-term growth in each of its two divisions.

Whilst AEP achieved another period of revenue growth, overall Group results for the period were, as anticipated, below those for the first half of the previous year, reflecting continuing caution amongst the Group's US coal mining customers.

Revenue for the period was £359.8m (2013: £391.3m) and underlying profit before taxation was £29.6m (2013: £35.8m), representing decreases of 8% and 17% respectively.

With operations around the world, the Group is exposed to currency translation risk in respect of its income. A particular feature of the period was the strengthening of sterling against the Australian and US dollars, which are the two major currencies in which the Group's revenues are generated.

On a constant currency basis, revenue and underlying profit before taxation for the half year ended 28 February 2014 represented decreases of 3% and 11% compared with the half year ended 28 February 2013.

Underlying earnings per share were 10.4p (2013: 11.9p), a decrease of 13%.

Operations

Engineered Conveyor Solutions

ECS's trading results for the period were in line with management expectations and reflected contrasting trading conditions in the markets in which ECS operates.

In the USA, sentiment within the coal mining industry has remained cautious, reflecting subdued coal prices and mining companies' lower levels of profitability, which, together with corporate activity amongst mine owners, has led to increased deferral of maintenance work and de-stocking of belts by ECS's customers. Disruption to coal transport links arising from adverse weather also affected ECS's trading environment.

In Australia, ECS has benefitted from continued high levels of iron ore and coal extraction, with exports of both minerals reaching record levels and continuing on strong upward trends. These have been reflected in ECS's levels of activity and in the results for the first half of the year, and have further justified the significant investments which the Group has made in order to establish itself as the leading supplier of belting product and services in this region.

Elsewhere, ECS had strong performances in South Africa and China and continued to make progress in newer markets such as South America, West Africa and the Middle East. Revenue and orders from customers in Russia and Ukraine were weak, primarily due to depreciation of the Russian rouble and Ukrainian hryvnia.

The significant action we have taken in recent periods to reduce costs and increase operational flexibility in the USA and across our ECS businesses has done much to preserve their profitability in the recent challenging and unprecedented market environments and, as is already being seen in Australia, positions them well to benefit as conditions improve.

Advanced Engineered Products

AEP's performance during the period was encouraging. Whilst this was especially true of those businesses which serve the oil & gas industry, such as CDI, EGC and Mandals, other AEP businesses, including Hallite, Secant, Dawson and Fenner Drives, also performed well.

Despite revenue deferrals previously indicated, AEP achieved continued revenue growth and enjoyed stable gross margin. Also as previously indicated, AEP's rate of strategic investment in human capital and innovation has been increased. This expenditure underpins AEP's ability to continue the strong organic growth achieved in recent years. It includes research into applications for advanced polymeric materials in the oil & gas and medical industries and the recruitment of additional leadership talent in the AEP businesses serving the oil & gas industry.

Revenue and profit

Revenue for the period was £359.8m (2013: £391.3m). On a constant currency basis, revenue reduced by 3%.

Reported revenue was £233.4m (2013: £265.7m) in the ECS division and £126.4m (2013: £125.6m) in the AEP division.

Underlying operating profit amounted to £36.6m (2013: £43.3m). The adverse effect on the Group's underlying operating profit of exchange rate translation amounted to £2.7m. At constant currencies, the reduction in underlying operating profit was 10%.

Underlying operating profit amounted to £23.6m (2013: £28.6m) in the ECS division and £17.5m (2013: £19.1m) in the AEP division.

Operating profit was £25.4m (2013: £35.5m) after charging amortisation of intangible assets acquired of £7.6m (2013: £7.8m) and exceptional items of £3.6m (2013: £nil). The exceptional items arose from an impairment review of acquired intangible assets and the release of contingent deferred consideration on certain acquisitions.

Translation at average current currency exchange rates would have reduced the Group's underlying operating profit for the half year ended 28 February 2013 by £2.7m (6%) to £40.6m. On the same basis, the Group's underlying operating profit for the year ended 31 August 2013 would have reduced by £8.7m (9%) to £92.8m.

Net finance costs were £7.8m (2013 restated: £9.4m), which included non-cash notional charges of £0.8m (2013 restated: £1.9m). EBITDA interest cover, on a 12 month rolling basis, was 8.6 times (2013: 8.6 times).

Underlying profit before taxation was £29.6m (2013: £35.8m). The taxation rate on underlying profit before taxation was 28% (2013: 29%).

Profit before taxation was £17.6m (2013 restated: £26.1m). The taxation rate on profit before taxation was 11% (2013: 28%), reflecting an exceptional tax credit recognised during the period in respect of a business restructuring undertaken in previous years.

Underlying earnings per share amounted to 10.4p (2013: 11.9p) and basic earnings per share were 7.5p (2013 restated: 8.5p).

Cash resources

As at 28 February 2014, net debt was £134.7m (2013: £171.5m), a reduction of £36.8m.

The Group's balance sheet remains strong. The net debt to EBITDA ratio, on a 12 month rolling basis, was 1.1 times (2013: 1.3 times).

Operating cash flow before movement in working capital was £45.8m (2013: £52.7m). The absorption of cash into working capital amounted to £25.2m (2013: £14.6m), reflecting seasonality and investment in stock.

Net capital expenditure of £12.0m (2013: £13.2m) was 1.1 times the depreciation charge. The Group continues to expect its net capital expenditure to exceed depreciation for the year as a whole, although at a level below previous expectations mainly due to timing issues.

After taxation paid of £13.1m (2013: £14.1m), finance leases of £0.6m (2013: £0.9m) and net interest paid of £6.9m (2013: £7.1m), free cash outflow amounted to £12.0m (2013: £2.8m inflow).

The funding of acquisitions and investments amounted to £5.8m (2013: £61.3) of which £5.3m related to contingent and deferred payments on previous years' acquisitions.

Dividends of £7.3m (2013: £6.8m) were paid to Fenner shareholders and £1.2m (2013: £1.6m) paid to non-controlling interests. Net exchange rate movements reduced debt by £12.7m (2013: £6.9m increase).

Principal risks and uncertainties

The principal risks and uncertainties affecting the Group remain those set out in the 2013 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 changes in global and country specific economic or business conditions and movements in exchange rates, particularly in those territories.

The Group could be affected by corporate activity in North America or elsewhere, amongst its customers in the mining industry or its principal competitors.

Outlook and dividend

ECS is performing well in Australia, where it has entered the second half of the year with an improving order book. Like-for-like comparatives are expected to continue to improve as the year progresses.

In the USA, ECS's revenue and order intake do not yet reflect favourable trends in the energy industry, such as rising natural gas prices and reductions in utility coal stockpiles, which are expected to lead to a recovery in coal production and in demand for ECS products and services.

Further progress is anticipated in ECS's newer markets, which is expected to offset weak demand from customers in Russia, Ukraine and the UK.

AEP is expected to continue to make progress towards stated strategic objectives which underpin future growth and continues to be an area of primary focus for acquisitions. As previously indicated, this year the seasonal weighting of revenues and operating profit towards the second half is expected to be slightly more accentuated than in recent years.

On this basis, the Board's expectations for the outcome for the year as a whole remain substantially unchanged.

Reflecting this confidence in the Group's prospects, an interim dividend of 4.0p per share (2013: 3.75p) has been declared, which represents an increase of 7%. The dividend will be paid on 8 September 2014 to shareholders on the register on 1 August 2014.

Forward-looking statements

Certain statements contained in this Report, in particular the Outlook and dividend statement, 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.

Consolidated income statement

for the half year ended 28 February 2014 (unaudited)

Consolidated statement of comprehensive income

for the half year ended 28 February 2014 (unaudited)

Consolidated balance sheet

at 28 February 2014 (unaudited)

Consolidated cash flow statement

for the half year ended 28 February 2014 (unaudited)

Consolidated statement of changes in equity

for the half year ended 28 February 2014 (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 2014 have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union and the Disclosure and Transparency Rules of the Financial Services Authority. They should be read in conjunction with the Group's financial statements for the year ended 31 August 2013.

The directors consider 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 half yearly financial statements. In forming this view, the directors have reviewed the Group's cash flow projections against availability of financing.

The comparative financial information for the year ended 31 August 2013 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 2013 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.

These condensed half yearly financial statements were approved by the Board of Directors on 23 April 2014.

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 2013 except for the following new standards which have been adopted for the first time for the year ending 31 August 2014:

IAS 19 (Revised) 'Employee Benefits'

The principal impact of this standard is to replace the interest cost on defined benefit post-retirement scheme obligations and the expected return on scheme assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit post-retirement scheme deficit. In addition, administrative costs are now recognised in the income statement when the services are performed.

Comparative information for the half year ended 28 February 2013 and year ended 31 August 2013 has been restated in the Consolidated income statement, Consolidated statement of comprehensive income, Consolidated balance sheet, Consolidated cash flow statement, Consolidated statement of changes in equity and related notes. The impact of this standard is to reduce profit before taxation by £0.8m for the half year ended 28 February 2013 and by £1.5m for the year ended 31 August 2013 and to increase net assets by £1.2m at both 28 February 2013 and 31 August 2013.

IFRS 13 'Fair Value Measurement'

This standard provides guidance on fair value measurement and disclosure. The application of this standard has not materially impacted the fair value measurements of the Group. Additional disclosures required under IAS 34 in respect of fair value measurement are given in note 16.

No other new standards or interpretations have had a significant impact on the Group's reported results or financial position.

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: Engineered Conveyor Solutionsand 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. Exceptional items

The impairment of intangible assets relates to Australian Conveyor Engineering, Allison, Fenner Precision (Buffalo) and Xeridiem. The impairment reviews were triggered by a reduction in the projected cash flows in these cash generating units. The methodology for impairment testing was consistent with that adopted in the year ended 31 August 2013.

The release of contingent deferred consideration on acquisitions relates to a reduction in the estimated amounts payable in respect of the acquisitions of Australian Conveyor Engineering and American Industrial Plastics.

Impairment of intangible assets of £3.9m was charged to operating profit before amortisation of intangible assets acquired in the year ended 31 August 2013; this charge was not classified as an exceptional item since it was not considered to be material given its size in the context of overall operating profit.

The exceptional tax credit relates to tax losses now recognised in Fenner Dunlop BV following recent agreement with the tax authorities in the Netherlands. The credit arises from the liquidation of German and Belgian subsidiaries, the businesses of which were closed following the Group's acquisition of the conveyor belting businesses of Unipoly SA in 2001.

5. Finance income

6. Finance costs

7. Taxation

The taxation charge includes a credit of £3.7m (2013: £nil) in respect of exceptional items (note 4), £2.5m (2013: £2.6m) in respect of amortisation of intangible assets acquired and £0.2m (2013: £0.5m) in respect of notional interest.

The underlying taxation charge was £8.4m (2013: £10.4m) and is calculated based on the estimated underlying effective tax rate for the full year of 28% (2013: 29%).

8. Dividends

The interim dividend for the year ended 31 August 2013 was paid on 6 September 2013. The final dividend for the year ended 31 August 2013 was approved by shareholders at the Annual General Meeting on 15 January 2014 and was paid on 7 March 2014. The interim dividend for the year ending 31 August 2014 is due for payment on 8 September 2014 and so has not been recognised as a liability at 28 February 2014. It will be paid to shareholders on the register on 1 August 2014.

9. Earnings per share