Half-year Report

25 April 2018

Fenner PLC, a world leader in reinforced polymer technology, today announces its results for its half year ended 28 February 2018.

Highlights

Mark Abrahams, Chief Executive Officer, commented:

"In line with the Board's expectations at the time of the Annual General Meeting in January, the results for the six months ended 28 February 2018 show significant progress on all principal measures against the same period last year.

Since 11 January 2018, trading has continued the improving trend reflected in the AGM statement."

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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:

Advanced Engineered Products ("AEP") is a group of related growth businesses that use advanced polymeric materials and technical expertise to provide high value-added solutions to global business customers; its principal product areas are sealing systems; belts, hoses and elastomeric solutions; and medical.

Engineered Conveyor Solutions ("ECS") is an established leader in the supply of industry-leading heavyweight conveyor belting and related services to mining and industrial markets. ECS is a global business with particular strengths in Australia, Europe and North America.

On 19 March 2018, Fenner and Compagnie Generale des Etablissements Michelin SCA ("Michelin") announced the terms of a recommended cash acquisition by which Fenner will be acquired by Michelin. The terms of the acquisition value Fenner's existing share capital at £1.2 billion. Subject to approval by Fenner shareholders at meetings to be held on 16 May 2018 and subject to the other conditions of the acquisition being satisfied or waived, it is anticipated that the acquisition will take effect on 31 May 2018.

Forward looking statements

Certain statements contained in this report 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, exchange rates, the commodity markets, general economic conditions and the business environment.

Interim management report for the period from 1 September 2017 to 28 February 2018

Group overview

In line with the Board's expectations at the time of the Annual General Meeting in January, the results for the six months ended 28 February 2018 ("1H18") show significant progress on all principal measures against the same period last year ("1H17"). All business areas continue to perform well with some notable market share gains. Trading environments are showing more widespread signs of improvements, although there remains some caution amongst customers. 

Revenue for the period was £354.1m (1H17: £307.4m), an increase of 15%. Underlying operating profit was £37.0m (1H17: £24.0m), an increase of 54%. Underlying profit before taxation was £32.4m (1H17: £16.5m), an increase of 96%. Profit before taxation was £28.5m (1H17: £13.8m).

Underlying earnings per share was 12.0p (1H17: 6.3p), an increase of 90%. Basic earnings per share was 8.3p (1H17: 5.3p).

Underlying operating margin improved further to 10.4% (1H17: 7.6% at constant currencies), an increase of 2.8 percentage points, as the Group benefitted from revenue growth combined with the on-going focus on operational efficiency.

The Group's cash generation remained strong, with free cash flow amounting to £25.2m (1H17: £23.9m). Net borrowings at 28 February 2018 were £75.0m compared with £101.5m at 31 August 2017, a reduction of £26.5m.

Fenner published trading statements on 15 November 2017 and on 11 January 2018, being the day of the Company's AGM; both of these statements referred, inter alia, to improving growth prospects across the Group. Since 11 January 2018, trading has continued the improving trend reflected in the AGM statement.

Proposed acquisition of Fenner PLC by Michelin

On 19 March 2018, Fenner and Compagnie Generale des Etablissements Michelin SCA ("Michelin") announced the terms of a recommended cash acquisition by which Fenner will be acquired by Michelin. The terms of the acquisition value each Fenner share at 610 pence and Fenner's total share capital at £1.2 billion.

The Board of Fenner believes that the acquisition of Fenner by Michelin represents an opportunity for Fenner shareholders to crystallise in cash the value of their holdings on attractive terms; the Board also believes that the combination with Michelin provides Fenner with a number of strategic benefits including the global scale and purchasing expertise of Michelin and access to Michelin's polymer capabilities.

Subject, inter alia, to the requisite resolutions being passed by Fenner shareholders at shareholder meetings to be held on 16 May 2018, the acquisition is expected to take effect on 31 May 2018.

Divisional review

Advanced Engineered Products

As anticipated, AEP's results for the period showed considerable progress over 1H17 in terms of revenue, underlying operating profit and margin. The results were assisted by a number of customers bringing forward orders into the first half of the year.

As set out in the table below, AEP's revenue was £156.1m (1H17: £129.8m at constant currencies), an increase of 20%. Underlying operating profit was £26.2m (1H17: £16.7m at constant currencies), an increase of 57%, and underlying operating margin was 16.8% (1H17: 12.9%), an increase of 3.9 percentage points. Operating profit was £23.2m (1H17: £18.5m).

* restated to reflect the transfer of Mandals from Precision Polymers to Advanced Sealing Technologies

Advanced Sealing Technologies

Advanced Sealing Technologies generated higher underlying operating profit and operating margin on increased revenue of £82.6m (1H17: £64.9m at constant currencies), an increase of 27%. There was a particularly strong performance by CDI as market share gains combined with improvements in market conditions in the US oil & gas industry. Hallite and EGC continued to perform well, with results ahead of those achieved in 1H17. Mandals benefitted from recent measures taken to improve operational efficiencies and from increased order intake.

Precision Polymers

Precision Polymers' revenue increased to £45.5m (1H17: £42.0m at constant currencies). This represents an increase of 8% which is ahead of estimates of market growth and indicates further gains in market share.

Revolution Drives, which was acquired towards the end of the 2017 financial year, continues to perform well and represents an important addition to the Group's capabilities in urethane timing belts. 

Solesis Medical

Revenue for the period was £28.0m (1H17: £22.9m at constant currencies), an increase of 22%. Underlying operating profit and operating margin were both well ahead of the previous year.

Secant Group had a very strong performance as new products entered commercialisation and certain customer orders were accelerated. Demand for Secant's technical textiles for non-medical applications was strong.

Charter Medical generated revenue in line with expectations.

Engineered Conveyor Solutions

ECS achieved higher revenue and profitability as a result of the steps taken to re-organise and re-position the business and some easing of conditions in the mining industry. 

As set out in the table below, ECS's revenue was £198.0m (1H17: £164.3m at constant currencies), an increase of 21%. Underlying operating profit was higher at £16.2m (1H17: £9.9m at constant currencies), an increase of 64%. Underlying operating margin further recovered to 8.2% (1H17: 6.0%), an increase of 2.2 percentage points. Operating profit was £15.6m (1H17: £9.7m).

Northern Hemisphere

As planned, ECS North America achieved a much improved result, with continued progress in increasing sales across the industrial sector and sales to coal miners benefitting from the recovery in the sector. The newly introduced Patriot X belt, aimed at light and medium industrial applications, is being well received by customers and distributors. 

In Europe, ECS's financial performance showed some improvement with volumes of belt sales now having started to recover.

Southern Hemisphere

In Australia, sentiment in the mining industry has generally improved and ECS has made gains in market shares; however, the higher volumes of belt sales have been weighted towards lower margin products. Service revenue has also increased as levels of activity across the mining industry have picked up.

The new long-term supply agreement between ECS South Africa and Bearing Man Group (Pty) Ltd became effective in February 2018; through this, ECS anticipates the development of new sales opportunities in sub-Saharan Africa.

ECS China achieved an improved result although trading conditions remain challenging.

Financial report

Revenue and profit

Group revenue for the period was £354.1m (1H17: £307.4m or £294.1m at constant currencies). Underlying operating profit was £37.0m (1H17: £24.0m or £22.3m at constant currencies).

Interest for the period (excluding notional interest) was £4.6m (1H17: £7.5m).

Underlying profit before taxation was £32.4m (1H17: £16.5m). Profit before taxation was £28.5m (1H17: £13.8m).

There was an exceptional tax charge of £4.4m arising from the writing down of the carrying value of US deferred tax assets following the reduction in the US federal tax rate effective from 1 January 2018. There were no other exceptional items during the period (1H17: pre-tax exceptional profit of £2.6m and exceptional tax credit of £0.3m).

The taxation rate on underlying profit before taxation was 28% (1H17: 22%) based on the estimated underlying effective tax rate for the full year.

Underlying earnings per share amounted to 12.0p (1H17: 6.3p). Basic earnings per share was 8.3p (1H17: 5.3p).

Cash flow and borrowings

Free cash flow was £25.2m (1H17: £23.9m), reflecting the higher underlying profit before taxation offset by a small net investment in working capital, increased tax payments and higher capital expenditure.

As at 28 February 2018, net borrowings amounted to £75.0m, compared with £101.5m as at 31 August 2017, a reduction over the period of £26.5m (of which £5.3m was due to exchange movements). The Group's net borrowings have almost halved over the period since 28 February 2017 when they amounted to £144.7m.

Board of Directors

Mark Abrahams will step down from the Board as Chief Executive Officer upon completion of the acquisition of Fenner by Michelin, assuming the transaction receives the necessary approvals. Mark joined the Board in October 1990 and, having served as Chief Financial Officer, Chief Executive Officer and Chairman, is retiring after 27 years of service to the Company.

Brett Simpson was announced as the Chief Executive Officer Designate on 20 December 2017.

Vanda Murray (non-executive Chairman) and the Company's other non-executive directors will also leave the Board upon completion of the acquisition by Michelin.

Corporate transaction

On 2 March 2018, the Group acquired the assets and business of National Bearings Company, a small specialist manufacturer of custom engineered polymer and metal bearings which are supplied to a number of leading multinational industrial customers. The business, which is located in the USA, forms part of Precision Polymers US within the AEP division.

Dividend

The Board has declared an increased interim dividend of 2.1p per share (1H17: 1.4p). The interim dividend will be paid on 18 May 2018 to shareholders on the register on 4 May 2018.

Consolidated income statement

for the half year ended 28 February 2018 (unaudited)

Consolidated statement of comprehensive income

for the half year ended 28 February 2018 (unaudited)

Consolidated balance sheet

at 28 February 2018 (unaudited)

Consolidated cash flow statement

for the half year ended 28 February 2018 (unaudited)

Consolidated statement of changes in equity

for the half year ended 28 February 2018 (unaudited)

Notes to the half yearly financial statements

1. Basis of preparation

The condensed half yearly financial statements for the half year ended 28 February 2018 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 2017.

After making enquiries, the directors have formed a judgement that there is a reasonable expectation the Group has adequate resources to continue in operational existence for the foreseeable future and for a period of at least 12 months from the date of this report. Accordingly, the Board has assessed that the going concern basis of accounting is appropriate in preparing the financial statements. In forming this view, the directors have reviewed the Group's cash flow forecasts against availability of financing, including an assessment of sensitivities to changes in market conditions.

The accounting policies adopted are consistent with those applied in the preparation of the Group's financial statements for the year ended 31 August 2017. There are no new standards, amendments or interpretations adopted by the Group and effective for the first time for the year ending 31 August 2018 that have a material impact on the Group.

The comparative financial information for the year ended 31 August 2017 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 the year ended 31 August 2017 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.

The condensed half yearly financial statements were approved by the Board of Directors on 25 April 2018.

2. Alternative performance measures

The results of the Group include measures presented on an "underlying" basis, which excludes exceptional items, amortisation of intangible assets acquired and notional interest, as applicable. In addition, certain financial performance measures that are not defined under IFRS

("non-GAAP measures") are presented.

The underlying and non-GAAP measures are presented in order to provide a more meaningful measure of the underlying financial performance of the business, allowing users of financial statements to compare these measures with the Group's peers, as well as being more consistent with the way that financial information is measured internally by management and presented to the Board.

Reconciliations of these amounts from the most directly comparable measures recognised under IFRS are detailed below.

Revenue: constant currencies *

* 2017 amounts stated at constant currencies are reported amounts retranslated at 2018 exchange rates.

** restated to reflect the transfer of Mandals from Precision Polymers to Advanced Sealing Technologies on 1 September 2017.

Underlying operating profit: constant currencies *

* 2017 amounts stated at constant currencies are reported amounts retranslated at 2018 exchange rates.

Underlying operating profit

Underlying operating margin

Underlying operating margin is underlying operating profit at constant currencies divided by revenue at constant currencies.

Underlying profit before taxation

Underlying earnings per share

A reconciliation is provided in note 9.

Free cash flow

Net debt

A reconciliation is provided in note 14.

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: Advanced Engineered Products and Engineered Conveyor Solutions.

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, customer types and regulatory environments.

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 determined 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: