Half Yearly Report

22 April 2015

Fenner PLC

2015 Half Year Results

Fenner PLC, a world leader in reinforced polymer technology, today announces its results for the half year ended 28 February 2015.

Highlights

1 Underlying operating profit is before amortisation of intangible assets acquired and exceptional items. The exceptional items comprise £5.0m of restructuring costs and £15.2m of impairments of goodwill and intangible assets acquired2 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

· First half results in line with guidance

· Advanced Engineered Products ("AEP") achieved higher revenues, higher underlying operating profit and increased margin 

· Engineered Conveyor Solutions ("ECS") reported lower revenues and profits in challenging market conditions

· Group-wide emphasis on cost control and cash flow has resulted in overheads being reduced by £9m (annualised) and improved management of working capital

· Acquisition of Charter Medical in January has enhanced Fenner's presence in the medical industry

· Interim dividend unchanged at 4.0p per share

Nicholas Hobson, Chief Executive Officer, commented:

"The Group's results for the period reflect a good performance by the AEP division and a reduced result from the ECS division which faced challenging market conditions.

AEP's industrial, medical and other non-oil speciality polymer businesses, which account for some 70 per cent of AEP's revenue, are expected to continue to perform well. The financial results for the second half of the year will also benefit from the acquisition of Charter Medical.

The remainder of AEP is seeing an impact from lower levels of activity in the oil & gas industry as a result of sharply reduced oil and gas prices. Order intake started to decline in February; the timing and extent of the decline are within the range of our planning assumptions.

ECS expects to see a continuation of the difficult trading conditions across all of its regions.

In response to the trading conditions being faced, cash overheads across the Group have been reduced. The Group will continue to closely manage all aspects of its costs and cash flow.

Taking into account the management actions we are taking in response to the trading conditions, the Board's expectations for the outcome for the year remain substantially unchanged overall."

A live audio webcast of the analyst presentation, hosted by Nicholas Hobson, Chief Executive Officer, and John Pratt, 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:

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, medical,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, Charter Medical and Xeridiem.

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.Interim management report

The Group's results for the period reflect a good performance by the AEP division and a reduced result from the ECS division which faced challenging market conditions. For the first time, AEP contributed more than half of the Group's underlying operating profit.

Revenue for the period was £347.6m (2014: £359.8m) and underlying profit before taxation was £21.8m (2014: £29.6m). Underlying earnings per share was 7.8p (2014: 10.4p).

Considerable emphasis continues to be placed on the management of cash, variable costs and overheads. Improved working capital performance resulted in net cash from operating activities of £20.8m, substantially higher than the previous year (2014: £7.5m), despite a lower operating profit.

Exceptional items during the period totalled £20.2m and comprised £5.0m of restructuring costs and £15.2m of impairments of goodwill and intangible assets acquired.

Operations

Advanced Engineered Products

AEP achieved higher revenues, higher underlying operating profit and an increased margin compared with last year as a result of strong performances by most of its businesses.

AEP's industrial, medical and other non-oil speciality polymer businesses generated 70 per cent of AEP's revenue in the period. Strong contributions were made by Secant Medical, Fenner Drives and Fenner Precision which all reported growth in revenue, operating profit and margins.

There was a small initial contribution from Charter Medical, a developer and manufacturer of single-use products for the blood management, bioprocessing and cell therapy markets, which was acquired at the end of January 2015. The consolidation of Secant Medical's operations into new, purpose-built premises gained pace during the period and continuing progress is expected during the second half.

Revenue from the oil & gas industry, which accounted for the remaining 30 per cent of AEP's revenue, was generally strong despite significant falls in oil and gas prices during the period. Revenue and profits at CDI, AEP's largest business in the oil & gas industry, were well ahead of the previous year. However, as predicted, incoming order rates began to slow by the end of the period. Mandals' revenue declined as its oil and gas customers reduced purchases of lay-flat hoses used in hydraulic fracturing.

Engineered Conveyor Solutions

Against the backdrop of challenging market conditions, and as indicated in recent statements, ECS's trading results for the period were lower, although the reductions were mitigated by the stringent measures taken to manage costs.

ECS Americas continued to encounter weak market conditions in the USA as its coal mining customers faced falling natural gas prices, decreased coal exports and the impact of a relatively mild winter.

ECS APAC faced on-going pricing pressure in Australia whilst also experiencing reduced demand for belting products and services as its mining customers looked to reduce their operating costs further in response to continuing weakness in commodity prices. In China, ECS had a satisfactory performance albeit that the market remains intensely competitive.

In EMEA, the growth previously anticipated in newer markets such as West Africa was not achieved as the mining industry suffered from lower commodity prices and the outbreak of Ebola. Across Europe as a whole, demand for ECS products and services remained subdued. ECS in South Africa continued its recovery from the industrial action seen across the mining industry in the previous year.

Revenue and profit

Revenue for the period was £347.6m (2014: £359.8m) of which £135.8m (2014: £126.4m) was in the AEP division and £211.8m (2014: £233.4m) in the ECS division.

Underlying operating profit amounted to £28.7m (2014: £36.6m). Exchange rate movements in the period reduced underlying operating profit by £0.4m. Underlying operating profit in the AEP division was £19.4m (2014: £17.5m) and in the ECS division was £13.4m (2014: £23.6m).

Operating profit was £1.6m (2014: £25.4m) after charging amortisation of intangible assets acquired of £6.9m (2014: £7.6m) and exceptional items of £20.2m (2014: £3.6m). The exceptional items comprised £5.0m of restructuring costs (which arose in both AEP and ECS) and £15.2m of impairments of goodwill and intangible assets acquired relating to businesses in the oil & gas and mining industries.

Net finance costs were £6.7m (2014: £7.8m). EBITDA interest cover, on a 12 month rolling basis, was 6.8 times (2014: 8.6 times).

Underlying profit before taxation was £21.8m (2014: £29.6m). The taxation rate on underlying profit before taxation was 28% (2014: 28%). Loss before taxation was £5.1m (2014: £17.6m profit). The tax charge was £2.0m (2014: £2.0m) and arose principally as a result of exceptional goodwill impairments not giving rise to tax relief together with certain tax losses not being recognised for deferred tax.

Underlying earnings per share amounted to 7.8p (2014: 10.4p) and basic loss per share was 3.9p (2014: 7.5p earnings per share).

Balance sheet, cash flow and borrowings

The Group's balance sheet remains strong with net assets of £300.3m.

Net cash from operating activities was higher than last year at £20.8m (2014: £7.5m), despite the lower operating profit. The usual outflow of cash into working capital which takes place in the first half was reduced to £6.3m (2014: £25.2m) as a consequence of close management attention.

Capital expenditure was £18.6m (2014: £12.4m), of which AEP accounted for some 85% and ECS the remaining 15%. Principal expenditures during the period included the on-going project to consolidate Secant Medical in new premises and the acquisition of the freehold of the Mandals facility. During the period, proceeds from fixed asset disposals were £3.3m (2014: £0.4m).

After net interest paid of £7.0m (2014: £6.9m) and an increase in finance lease obligations of £0.3m (2014: £0.6m), free cash outflow amounted to £1.8m (2014: £12.0m outflow).

The funding of acquisitions and investments in the period amounted to £25.5m (2014: £5.8m), comprising the acquisition of Charter Medical for £19.9m and deferred payments on previous years' acquisitions of £5.6m.

Dividends of £7.8m (2014: £7.3m) were paid to Fenner shareholders and £1.5m (2014: £1.2m) to non-controlling interests.

Reflecting the above and £5.3m of adverse exchange rate movements, net debt at 28 February 2015 was £159.2m (28 February 2014: £134.7m).

The net debt to EBITDA ratio, measured on a rolling basis for the 12 months ended 28 February 2015, was 1.7 times (2014: 1.1 times).

Principal risks and uncertainties

The principal risks and uncertainties affecting the Group remain those set out in the 2014 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.

The Group will continue to be affected by the impact of low commodity prices on its customers and by those territories which have experienced declines in mineral extraction rates. The future rates of commodity extraction and the duration of low commodity prices are both uncertain.

The Group could be affected by corporate activity in North America or elsewhere, amongst its customers in the mining and oil & gas industries or amongst its principal competitors.

Outlook and dividend

AEP's industrial, medical and other non-oil speciality polymer businesses, which account for some 70 per cent of AEP's revenue, are expected to continue to perform well. The financial results for the second half of the year will also benefit from the acquisition of Charter Medical which took place towards the end of the first half of the year.

The remainder of AEP is seeing an impact from lower levels of activity in the oil & gas industry as a result of sharply reduced oil and gas prices. Order intake started to decline in February; the timing and extent of the decline are within the range of our planning assumptions.

ECS expects to see a continuation of the difficult trading conditions across all of its regions which is being taken into account in managing the division's cost base. In the USA, the outlook for coal prices and consumption appears to have weakened whilst in Australia, lower demand for belting products and services is expected to exacerbate the impact of continuing pricing pressure. In EMEA, any recovery in Europe is expected to be slow, and newer mining markets are expected to remain under pressure.

In response to the trading conditions being faced, cash overheads across the Group have been reduced by an annualised £9m with effect from the start of the second half of the year. The Group will continue to closely manage all aspects of its costs and cash flow and has recently announced that it will begin a process of consultation about a significant retrenchment at the ECS operation in the UK, which currently employs 127 people.

By the end of the financial year, the major capital expenditure projects in AEP are expected to be substantially complete. Going forwards, the Group can comfortably maintain capital expenditure below the level of the depreciation charge whilst still investing in the future growth of AEP.

Taking into account the management actions we are taking in response to the trading conditions, the Board's expectations for the outcome for the year remain substantially unchanged overall.

An unchanged interim dividend of 4.0p per share has been declared, which will be paid on 7 September 2015 to shareholders on the register on 31 July 2015.

Forward-looking statements

Certain statements contained in this Report, in particular the outlook 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 2015 (unaudited)

Consolidated statement of comprehensive income

for the half year ended 28 February 2015 (unaudited)

Consolidated balance sheet

at 28 February 2015 (unaudited)

Consolidated cash flow statement

for the half year ended 28 February 2015 (unaudited)

Consolidated statement of changes in equity

for the half year ended 28 February 2015 (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 2015 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 2014.

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 2014 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 2014 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 22 April 2015.

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 2014 except for new standards, amendments or interpretations which have been adopted for the first time for the year ending 31 August 2015. No new standards, amendments 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: 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 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:

3. Segment information continued

Segment assets and liabilities are analysed as follows:

4. Exceptional items

The impairment of goodwill and intangible assets acquired relates to Norwegian Seals, Australian Conveyor Engineering, Spliceline (Australia) and Northern Belting Specialists (Australia). 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 2014.

In 2014, the exceptional tax credit related to tax losses now recognised in Fenner Dunlop BV following agreement with the tax authorities in the Netherlands. The credit arose 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 £2.8m (2014: £3.7m) in respect of exceptional items (note 4), £1.3m (2014: £2.5m) in respect of amortisation of intangible assets acquired and £0.1m (2014: £0.2m) in respect of notional interest.

The underlying taxation charge was £6.2m (2014: £8.4m) and is calculated based on the estimated underlying effective tax rate for the full year of 28% (2014: 28%).

8. Dividends

The interim dividend for the year ended 31 August 2014 was paid on 8 September 2014. The final dividend for the year ended 31 August 2014 was approved by shareholders at the Annual General Meeting on 14 January 2015 and was paid on 9 March 2015. The interim dividend for the year ending 31 August 2015 is due for payment on 7 September 2015 and so has not been recognised as a liability at 28 February 2015. It will be paid to shareholders on the register on 31 July 2015.

9. Earnings per share

Underlying earnings per share measures have been presented to provide a more meaningful measure of the underlying performance of the Group.

10. Property, plant and equipment

The increase in property, plant and equipment in the period of £6.0m comprises additions of £17.7m and acquisitions of £1.3m, less depreciation of £11.0m, disposals of £0.3m and exchange movements of £1.7m.

11. Intangible assets

The reduction in intangible assets in the period of £5.0m comprises amortisation of £7.6m, impairments of £15.2m and exchange movements of £0.6m, less acquisitions of £17.1m and other additions of £1.3m.

12. 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 schemes are the Fenner Pension Scheme, based in the UK, and the Fenner Dunlop BV Scheme, based in the Netherlands. The Fenner Pension Scheme was closed to new entrants in 1997. The most recent triennial actuarial valuation for the Fenner Pension Scheme was on 31 March 2014. The most recent annual actuarial valuation for the Fenner Dunlop BV Scheme was on 30 June 2014.

The principal financial assumptions used for the schemes in the UK and the Netherlands, compared to the 2014 year end, are as follows: