Half Year Results

25 April 2012

Fenner PLC

2012 Half Year Results

Fenner PLC, a world leader in reinforced polymer technology, today announces its results for the half year ended 29 February 2012.

Highlights

·; Revenue increased by 24% to £412.0m; organic revenue growth was 18%

·; Underlying operating profit1 increased by 52% to £55.7m

·; Underlying profit before taxation2 increased by 53% to £48.1m; profit before taxation increased by 57% to £41.7m

·; Underlying earnings per share2 increased by 57% to 17.1p

·; Interim dividend increased by 32% to 3.50p per share, reflecting the Board's confidence in the enhanced quality of the Group's earnings

·; Continued underlying margin growth, up 250bps to 13.5%

·; Strong trading by both Engineered Conveyor Solutions ("ECS") and Advanced Engineered Products ("AEP")

- ECS underlying operating profit1 increased by 62% to £39.8m on revenues up 25% to £295.0m

- AEP underlying operating profit1 increased by 23% to £20.5m on revenues up 20% to £117.0m

·; Growth drivers in core markets remain positive

·; Group confident of continued progress in the second half

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

Mark Abrahams, Chairman, commented:

"Trading was very strong in the first half as growth drivers in our core businesses remained positive, underpinned by continuing buoyant demand from mineral extraction and energy sectors.

"The fundamentals on which our strategy is based remain strong and the quality of our earnings continues to improve. Notwithstanding the influence of the current macro-economic environment on some of our markets, our order book remains healthy, we are trading in accordance with expectations and we remain confident in our ability to continue to make progress in the second half of the year."

-ends-

A video interview with Nicholas Hobson, Chief Executive and Richard Perry, Group Finance Director will be available from 7.00am on the Group's website www.fenner.com.

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

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

4 Return on sales is underlying operating profit divided by revenue.

5 Return on gross capital employed is underlying operating profit divided by gross capital employed. Underlying operating profit is calculated on a rolling 12 month basis. Gross capital employed is the average of the opening and closing non-current assets (excluding deferred tax), inventories, trade and other receivables and trade and other payables over the 12 month period.

Interim Management Report

The Group has delivered an outstanding performance in the six months to February 2012. Underlying operating profit reached a record level, increasing by 52% to £55.7m.

Operations

Trading was very strong as growth drivers in our core businesses remained positive, underpinned by continuing buoyant demand from mineral extraction and energy sectors. In both the Engineered Conveyor Solutions ("ECS") and Advanced Engineered Products ("AEP") Divisions, revenues and profits were significantly ahead of the comparable period and at record levels.

In the ECS Division, it was encouraging to see further progress towards our strategic objectives as the increase in invested capacity allowed the Group to improve both customer service levels and market share.

In the Americas, demand from the coal mining sector remained strong enabling a continued improvement in throughput and efficiencies from the new plant and equipment. In the second quarter, our integrated product and service offering was further strengthened by the acquisition of Allison Custom Fabrication. This business, which specialises in the design, engineering, machining and metal fabrication of customised material handling equipment, strengthens our position in the mining sector as a leading global provider of engineered conveyor solutions.

In Europe, export markets and a growing service network have been successfully developed and have compensated for the continuing softness in traditional bulk materials (construction) markets, arising from the wider economic environment. Additional installed capacity and a wider geographical service footprint enabled further progress in penetrating existing and new territories.

Our operations in Asia Pacific have progressed well with gains in market share achieved. Demand for our steel cord products in Australia grew as we expanded our portfolio and became increasingly established as a local supplier to the mining sectors. The prior year acquisitions of Belle Banne Victoria, Leading Edge Conveyor Solutions and Statewide Belting Service have integrated well and consolidate our engineered conveyor solutions business model.

In the AEP Division, the development of our niche performance critical products in growth markets, together with acquisitive growth, has enabled continued good progress.

The Fenner Advanced Sealing Technologies operations have performed extremely well. Strong demand from the oil and gas sector with high levels of aftermarket activity improved revenues, despite the mild winter and lower gas prices. Hydraulic seals demand benefitted from steady growth in the mining and agriculture equipment sectors; the latter experiencing some improvement in available credit. In September 2011, we acquired Transeals, an aftermarket operation serving the oil and gas and mining sectors on the Australian west coast; this operation dovetails with our existing operations in the east and its integration, which includes a reorganisation of logistics nationwide to better serve our customers, has progressed to plan.

Precision Polymers has experienced growth in its document handling and offshore grouting system seals products as markets reflect steady growth and project work in the renewable energy sector. Elsewhere, activity in general industrial markets was modestly ahead of last year.

In our Medical operations, the on-going investments at Secant increased resource and capacity to deliver growth in our textile components for medical devices whilst at Xeridiem, deferred development and project work resulted in softer demand for single use disposable devices.

Revenue and Profits

Revenue for the period increased by 24% to £412.0m (2011 £332.5m). Most of the increase was generated organically as revenue on a constant currency basis, excluding the year on year effect of acquisitions, grew by 18%.

Reported revenue increased in the ECS Division by 25% to £295.0m (2011 £235.3m) and in the AEP Division by 20% to £117.0m (2011 £97.2m).

Underlying operating profit increased by 52% to £55.7m (2011 £36.7m). At constant currencies, and excluding the year on year effect of acquisitions, the increase was 40%. Underlying operating profit advanced in the ECS Division by 62% to £39.8m (2011 £24.5m) and in the AEP Division by 23% to £20.5m (2011 £16.6m). The favourable effect on the Group's underlying operating profit of exchange rate translation amounted to £0.6m.

Operating profit increased to £50.2m (2011 £32.4m) after charging amortisation of intangible assets acquired of £5.5m (2011 £4.3m).

Net finance costs were £8.5m (2011 £5.8m) which included a non-cash notional charge of £0.9m (2011 £0.5m). The increase principally reflects the effect of the drawdown of long-term funding from the private placements at the end of the last financial year compared with the lower rates earned on amounts deposited, together with the exchange rate effect of retranslation, mainly in respect of the Australian dollar. Interest cover, on a 12 month rolling basis, was 8.2 times (2011 6.7 times).

Underlying profit before taxation was £48.1m (2011 £31.4m) and profit before taxation was £41.7m (2011 £26.6m). The average tax rate for the period was 28% (2011 31%).

Underlying earnings per share increased by 57% to 17.1p per share (2011 10.9p) and basic earnings per share amounted to 14.8p per share (2011 9.2p).

Cash Resources

Net cash generated from operating activities was £27.2m (2011 £17.5m). This included an increase in working capital of £20.6m, supporting the 24% revenue growth and improved customer service levels. Net capital expenditure of £14.5m (2011 £5.9m), which was 1.5 times the depreciation charge, reflected strategic investment to support planned growth. The resulting free cash inflow was £12.7m (2011 £11.6m).

Acquisition payments amounted to £27.8m (2011 £14.9m) which comprised current year acquisitions of £23.1m and prior year contingent and deferred amounts of £4.7m.

After total dividends paid of £6.3m (2011 £4.7m), finance leases and other outflows of £nil (2011 £1.3m) and adverse exchange rate movements of £3.6m (2011 £0.3m), closing net debt rose to £126.8m (2011 £120.0m).

The net debt to EBITDA ratio, on a 12 month rolling basis, improved to 1.0 times (2011 1.3 times).

Dividends

Reflecting our confidence in the enhanced quality of the Group's earnings, a 32% increase in the interim dividend to 3.50p per share (2011 2.65p) is declared and will be paid on 5 September 2012 to shareholders on the register on 27 July 2012. It is the intention of the Board to pursue a progressive dividend policy whilst maintaining an appropriate level of cover, with approximately one-third of the full year dividend paid as an interim dividend and the balance as a final dividend.

Board

In October 2011, we announced the appointment of Vanda Murray as a non-executive director which was effective from the conclusion of the January 2012 Annual General Meeting. Vanda became the Senior Independent Director and a member of the Audit, Remuneration and Nomination Committees, replacing David Buttfield who relinquished those positions but remains as a non-executive director.

Principal Risks and Uncertainties

The principal risks and uncertainties affecting the Group remain those set out in the 2011 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.

Outlook

Since 29 February 2012, the Group's businesses have traded in accordance with our expectations.

The fundamentals on which our strategy is based remain strong and the quality of our earnings continues to improve. Notwithstanding the influence of the current macro-economic environment on some of our markets, our order book remains healthy, we are trading in accordance with expectations and we remain confident in our ability to continue to make progress in the second half of the year.

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

Consolidated income statement

for the half year ended 29 February 2012 (unaudited)

Consolidated statement of comprehensive income

for the half year ended 29 February 2012 (unaudited)

Consolidated balance sheet

at 29 February 2012 (unaudited)

Consolidated cash flow statement

for the half year ended 29 February 2012 (unaudited)

Consolidated statement of changes in equity

for the half year ended 29 February 2012 (unaudited)

Notes to the half yearly financial statements

1. Basis of preparation

These condensed half yearly financial statements for the half year ended 29 February 2012 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 2011.

The comparative financial information for the year ended 31 August 2011 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 2011 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 25 April 2012.

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 2011 except for the following standards which have been adopted for the first time for the year ending 31 August 2012:

• IAS 24 (Revised) 'Related Party Disclosures'

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

• Amendment to IFRS 7 'Financial Instruments: Disclosures'

None of these standards 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: 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.

3. Segment information (continued)

Segment results are analysed as follows:

Segment assets and liabilities are analysed as follows:

4. Finance income

5. Finance costs

6. Taxation

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

7. Dividends

The interim dividend for the year ended 31 August 2011 was paid on 5 September 2011. The final dividend for the year ended 31 August 2011 was approved by shareholders at the Annual General Meeting on 11 January 2012 and was paid on 5 March 2012. The interim dividend for the year ending 31 August 2012 is due for payment on 5 September 2012 and so has not been recognised as a liability at 29 February 2012. It will be paid to shareholders on the register on 27 July 2012.

8. Earnings per share 

9. Property, plant and equipment

The increase in property, plant and equipment in the period of £7.5m principally comprises additions of £12.8m, acquisition of businesses of £1.8m and exchange movements of £2.7m less depreciation of £9.7m.

10. Intangible assets

The increase in intangible assets in the period of £27.7m comprises acquisition of businesses of £30.5m, additions of £1.8m and exchange movements of £2.9m less amortisation of £5.7m and impairment of goodwill of £1.8m.

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 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 2011.

The principal financial assumptions used for the Fenner Pension Scheme compared to the 2011 year end are as follows:

Retirement benefit obligations increased by £8.1m in the period. This principally comprises actuarial losses of £10.5m and service costs of £1.3m less employer contributions of £3.7m. The actuarial losses comprise £17.2m on the change of assumptions, principally due to a significant fall in corporate bond yields which led to a reduction in the discount rate, although this was partly offset by a £6.7m gain due to higher than expected investment returns on the Scheme's assets.

12. Provisions

Provisions comprise current provisions of £12.2m (2011 year end: £12.4m) and non-current provisions of £32.6m (2011 year end: £25.4m). The overall increase in the period of £7.0m principally comprises deferred consideration on acquisitions in the period of £11.3m, notional interest of £0.7m, new property provisions of £0.6m and exchange movements of £0.8m less payments of deferred consideration on prior year acquisitions of £4.7m and a reduction in deferred consideration payable on a previous acquisition of £1.7m.

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

Net debt is analysed as follows:

14. Acquisitions