Half Year Results

24 April 2013

Fenner PLC

2013 Half Year Results

Fenner PLC, a world leader in reinforced polymer technology, today announces its results for the half year ended 28 February 2013.

Highlights

• Robust performance in a challenging operating environment and against record comparable results last year

• Revenue of £391.3m (2012: £412.0m); underlying profit before taxation1 of £35.8m (2012: £48.1m)

• Dividend per share increased by 7% to 3.75p per share (2012: 3.50p), reflecting confidence in the Group's earnings prospects

• Improving order levels in Engineered Conveyor Solutions in North America; pressures continue in Australia; strong trading elsewhere

• Advanced Engineered Products saw good progress in new applications and emerging markets and strong performance by acquired businesses; activity levels continue to improve after quieter start to year following customer destocking

• Acquisitions during the period performing well and ahead of expectations

• Confident of a return to growth in our 2013/2014 financial year

1 Underlying profit before taxation is before amortisation of intangible assets acquired and notional interest.

Mark Abrahams, Chairman, commented:

"Fenner has delivered robust half year results in a challenging operating environment. While, as anticipated, results are below the comparable record performance last year, the first half saw further progress towards our strategic objectives and encouraging evidence of improvement in most of our markets.

"We remain mindful of the continuing global economic uncertainty and ongoing pressures in our Australian business. We expect that our accelerating trading momentum elsewhere in the business will result in a heavier than normal performance weighting this year towards the second half and we are confident of a return to growth in our 2013/2014 financial year."

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An audio webcast with Nicholas Hobson, Chief Executive Officer and Richard Perry, Group Finance Director and analyst presentation will be available from 3pm today on the Group's website www.fenner.com.

For further information please contact:

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.

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 and derivative financial assets), inventories, trade and other receivables and trade and other payables over the 12 month period.

Interim management report

Fenner has delivered robust half year results in a challenging operating environment. While, as anticipated, results are below the comparable record performance last year, the first half saw further progress towards our strategic objectives and encouraging evidence of improvement in most of our markets.

Operations

The trading environment in both the Engineered Conveyor Solutions ("ECS") and Advanced Engineered Products ("AEP") divisions provided challenges given world economic and country specific headwinds faced by our core businesses.

Following the uncharacteristically low demand levels reported in the second half of calendar year 2012, our ECS business in North America has seen improving order levels, which will be converted into growing revenues in our second half and beyond. This recovery reflects, inter alia, strengthening natural gas prices and reducing gas stock levels, as our US market returns to more normal business dynamics.

In Australia, our business experienced strong trading during the first quarter followed by a more challenging environment as a result of lower iron ore and coal prices. Although the former are recovering from their lows of 2012, volume and margin pressures will continue in the second half as a result of the normal lag effect. However, we are encouraged by signs that our ECS strategy is increasingly recognised as bringing value to our customers.

In November 2012, Australian Conveyor Engineering was acquired. This operation specialises in the design, manufacture, installation and maintenance of conveying equipment for mining. The operation has performed well in the short time since completion.

Elsewhere in the ECS division, trading has been strong and excellent progress has been achieved in expanding our product offering and strategic development of our presence in the emerging markets of Latin America and Africa.

Our AEP division experienced a quiet start to the year, following some channel de-stocking. The impact on the division's results was largely offset by the progress made in new applications and emerging markets and the performance of acquired businesses. Signs of a recovery were evident in the latter months of the second quarter and activity levels are continuing to improve.

In September 2012, the AEP division acquired three businesses. American Industrial Plastics complements our existing capabilities and provides specialist expertise in precision machining of polymers.

Norwegian Seals expands our presence in oil and gas to the subsea sector. Mandals, which produces lay-flat hoses, provides high value added solutions to customers' needs in fluid handling markets such as unconventional oil and gas development.

The acquired businesses are performing well and their contribution to the Group's results in the initial months of ownership has been ahead of our expectations.

Revenue and profits

Revenue for the period was £391.3m (2012: £412.0m). On a constant currency basis and excluding the effect of businesses acquired during the period, revenue reduced by 10%.

Reported revenue in the ECS division was £265.7m (2012: £295.0m) and in the AEP division was £125.6m (2012: £117.0m).

Underlying operating profit amounted to £43.3m (2012: £55.7m). At constant currencies and excluding acquisitions, the reduction was 30%.

Underlying operating profit in the ECS division amounted to £28.6m (2012: £39.8m) and in the AEP division was £19.1m (2012: £20.5m). The adverse effect on the Group's underlying operating profit of exchange rate translation amounted to £1.0m.

Operating profit amounted to £35.5m (2012: £50.2m) after charging amortisation of intangible assets acquired of £7.8m (2012: £5.5m).

Net finance costs were £8.6m (2012: £8.5m) which included a non-cash notional charge of £1.1m (2012: £0.9m). EBITDA interest cover, on a 12 month rolling basis, remained high on a multiple of 8.6 times (2012: 9.8 times).

Underlying profit before taxation was £35.8m (2012: £48.1m) and profit before taxation was £26.9m (2012: £41.7m). The average tax rate for the period was 28% (2012: 28%).

Underlying earnings per share amounted to 11.9p (2012: 17.1p) and basic earnings per share was 8.8p (2012: 14.8p).

Cash resources

Net cash generated from operating activities was £24.0m (2012: £31.3m) after absorbing an increase in working capital of £14.6m due to seasonality. Net capital expenditure of £13.2m (2012: £14.5m), which was 1.2 times the depreciation charge, reflected our strategic investment plan to support future growth. Free cash inflow amounted to £3.7m (2012: £12.7m).

The funding of acquisitions of £61.3m (2012: £27.8m) comprised current year acquisition cash payments of £52.1m and acquired borrowings of £3.6m together with contingent and deferred payments on prior year acquisitions of £5.6m.

After total dividends paid of £8.4m (2012: £6.3m), new finance leases of £0.9m (2012: £nil) and adverse exchange rate movements of £6.9m (2012: £3.6m), closing net debt rose to £171.5m (2012: £126.8m).

The net debt to EBITDA ratio, on a 12 month rolling basis, remained strong, at 1.3 times (2012: 1.0 times), despite the spend in the half year relating to acquisitions.

Dividends

Reflecting our confidence in the Group's earnings prospects, a 7% increase in the interim dividend to 3.75p per share (2012: 3.5p) is declared and will be paid on 6 September 2013 to shareholders on the register on 2 August 2013.

Board

David Buttfield retired from the Board at the Annual General Meeting in January 2013 after serving 10 years. We thank David for his excellent contribution.

Outlook

We remain mindful of the continuing global economic uncertainty and ongoing pressures in our Australian business. We expect that our accelerating trading momentum elsewhere in the business will result in a heavier than normal performance weighting this year towards the second half and we are confident of a return to growth in our 2013/2014 financial year.

Principal risks and uncertainties

The principal risks and uncertainties affecting the Group remain those set out in the 2012 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.

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

Consolidated income statement

for the half year ended 28 February 2013 (unaudited)

Consolidated statement of comprehensive income

for the half year ended 28 February 2013 (unaudited)

Consolidated balance sheet

at 28 February 2013 (unaudited)

Consolidated cash flow statement

for the half year ended 28 February 2013 (unaudited)

Consolidated statement of changes in equity

for the half year ended 28 February 2013 (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 2013 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 2012.

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 2012 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 2012 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 24 April 2013.

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 2012 except for the following standards which have been adopted for the first time for the year ending 31 August 2013:

• Amendment to IAS 1 'Presentation of Financial Statements'

• Amendment to IAS 12 'Income taxes'

Neither 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.

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 2012 was paid on 5 September 2012. The final dividend for the year ended 31 August 2012 was approved by shareholders at the Annual General Meeting on 16 January 2013 and was paid on 4 March 2013. The interim dividend for the year ending 31 August 2013 is due for payment on 6 September 2013 and so has not been recognised as a liability at 28 February 2013. It will be paid to shareholders on the register on 2 August 2013.

8. Earnings per share 

9. Property, plant and equipment

The increase in property, plant and equipment in the period of £18.0m comprises additions of £13.3m, acquisition of businesses of £5.9m and exchange movements of £9.7m less depreciation of £10.7m and disposals of £0.2m.

10. Intangible assets

The increase in intangible assets in the period of £71.0m comprises acquisition of businesses of £67.3m, additions of £0.9m and exchange movements of £11.1m less amortisation of £8.3m.

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. This defined benefit plan is closed to new members. 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 2012 year end are as follows:

The decrease in retirement benefit obligations in the period of £13.7m comprises actuarial gains of £11.9m and employer contributions of £3.7m less service costs of £1.0m and exchange movements of £0.9m. The actuarial gains comprise £12.7m due to higher than expected investment returns on the Scheme's assets, partially offset by a £0.8m loss on change of assumptions.

12. Provisions

Provisions comprise current provisions of £10.2m (2012 year end: £9.4m) and non-current provisions of £41.3m (2012 year end: £28.8m). The overall increase in the period of £13.3m comprises deferred consideration on acquisitions in the period of £16.1m, notional interest of £1.1m and exchange movements of £2.0m less payments of deferred consideration on prior year acquisitions of £5.6m and utilisation of other provisions of £0.3m.

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