Fenner PLC Regulatory News (FENR)

27 April 2016

Fenner PLC

2016 Half Year Results

Fenner PLC, a world leader in reinforced polymer technology, today announces its results for the half year ended 29 February 2016.

Highlights

1 Underlying operating profit is before amortisation of intangible assets acquired and exceptional items2 Underlying profit before taxation and underlying earnings per share are before amortisation of intangible assets acquired, exceptional items and notional interest3 Underlying earnings per share is based on the basic weighted average number of shares in issue

4 Underlying measures have been presented to provide a more meaningful measure of the underlying performance of the business

5 Operating cash flow is underlying operating profit adjusted for depreciation and amortisation, capital expenditure (net of disposals) and movements in working capital

· First half results in line with AGM trading update

· Advanced Engineered Products ("AEP"): medical ahead of prior year, industrial broadly flat, oil & gas down

· Engineered Conveyor Solutions ("ECS"): continued difficult trading conditions across end markets offset by further cost control measures

· Refocusing and restructuring of ECS Americas remains on schedule

· Net debt of £155m

· Interim dividend rebased to 1.0p per share

Mark Abrahams, Executive Chairman, commented:

"The Group's results for the period were in line with management expectations and guidance given at the AGM. Across the Group, increased management effort has been committed to protecting and enhancing market shares and to positioning the Group for recovery and future growth.

"The difficult market conditions that have characterised the last four reporting periods continue although we have now reached a point where our refocusing, restructuring and cost saving programmes are substantially mitigating the ongoing volume challenges we are experiencing.

"Despite challenging market conditions, overall our expectations remain unchanged."

A live audio webcast of the analyst presentation, hosted by Mark Abrahams, Executive Chairman 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:

Fenner PLC 

Mark Abrahams, Executive Chairman today: 020 7067 0700 John Pratt, Group Finance Director thereafter: 01482 626501

Weber Shandwick FinancialNick Oborne 020 7067 0700

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. AEP comprise 11 businesses within three related product groups: Advanced Sealing Technologies; Precision Polymers and Solesis Medical Technologies. Customers are spread across a variety of end-user segments, including oil & gas, medical, construction, transportation and general industrial.

Engineered Conveyor Solutions. Through its ECS division, Fenner is a recognised leader in the global conveying industry. ECS has well established operations in Australia (where it is the clear market leader), Europe and the USA. In addition, ECS is developing positions in newer mining and industrial markets such as South America, Africa and the Middle East. The division trades under the 'Fenner Dunlop',' Fenner' and 'Dunlop' brand names, and offers a unique, comprehensive suite of products and services, which support the conveying needs of mining, power generation and bulk handling markets.

Interim management report

The Group's results for the period were in line with management expectations and guidance given at the AGM. Challenging conditions continue to exist in many of the Group's principal end markets.

Across the Group, increased management effort has been committed to protecting and enhancing market shares and to positioning the Group for recovery and future growth. Alongside this, considerable emphasis continues to be placed on the management of cash and costs. In North America, significant progress has been made in the refocusing of the ECS business.

Revenue for the period was £276.8m (2015: £347.6m) and underlying profit before taxation was £8.1m (2015: £21.8m). Underlying earnings per share was 2.9p (2015: 7.8p).

Operations

Advanced Engineered Products

As anticipated, AEP's results were lower than those of the same period last year, with revenue of £120.2m (2015: £137.9m at constant currencies) and underlying operating profit of £12.8m (2015: £20.4m at constant currencies). The reduction was primarily a result of the sharp slowdown in sales to the oil & gas industry which represented only 16 per cent (2015: 29 per cent) of Divisional turnover in the period.

Industrial, medical and non-oil businesses

AEP's industrial businesses achieved an underlying operating profit in line with the previous year on slightly lower revenue. Higher demand for construction equipment products was offset by destocking amongst end-users and distributors in the USA. Cost savings, including the closure of the Buffalo plant during the previous financial year, and other efficiency measures helped maintain margins.

Solesis Medical was well ahead of the previous year due to a strong contribution from Charter Medical (which was acquired in January 2015). The consolidation of Secant Medical into new, purpose-built premises remains on schedule and on budget with operations having already commenced in the new state-of-the-art facilities.

Oil & gas businesses

AEP's revenue from the oil & gas industry was significantly down compared with the strong performance in the first half of the previous financial year. Order intake and revenue have generally moved in line with industry indicators, most notably the North American rig count which, whilst showing some stability during the second half of 2015, has recently moved down further and now stands around 75 per cent below the peak reached in November 2014. However, the businesses continue to implement efficiency gains and cost reductions, including further cuts in headcount which, together with market share gains, have largely mitigated the latest reduction in activity levels.

The North Sea oil & gas industry, which is a relatively high cost producer, has been especially badly hit by lower energy prices. In response, CDI has commenced the relocation of part of its European manufacturing capacity to other global CDI locations.

Engineered Conveyor Solutions

ECS's trading results for the period were below those of the previous year as the mining industry globally continued to adjust to lower commodity prices and increased uncertainty over future levels of demand. Revenue for the period was £156.6m (2015: £205.3m at constant currencies) and underlying operating profit was £5.8m (2015: £13.0m at constant currencies).

ECS Northern Hemisphere (Americas and Europe)

In January, the Group announced the refocusing and restructuring of ECS Americas to reflect both the significantly changed dynamics in the US coal industry and opportunities in US industrial markets. This process, which included the closure of the majority of one of the two principal belt manufacturing facilities in North America as well as measures to improve the range of products and services offered to industrial customers, is well underway and continues in line with our plans. The planned headcount reductions in our belt manufacturing facilities were largely completed in the period. Our fabricated products business is now located on a single site following the closure of the Allison facility.

During the period, further marked falls in US coal production, combined with the financial difficulties of many customers as well as continued destocking, significantly reduced ECS's order intake from the US coal industry. Indeed, the increasingly strained financial position of a number of coal mining groups has led us to withdraw from certain customer relationships with ongoing, tight credit management remaining a key focus.

Revenue from industrial customers in North America has been more consistent as we increase our share of this segment of the market.

ECS's European operations have continued to experience generally subdued demand, with certain of its markets, such as Russia and Ukraine, remaining very weak. Despite this, the business has maintained acceptable margins due to both its market position and to an on-going focus on costs and efficiency including the rationalisation of the UK plant which took place during our previous financial year.

ECS Southern Hemisphere and Asia Pacific (Australia, South Africa and China)

ECS's results in Australia continued to reflect the pressure on mining groups' profitability from lower commodity prices with sentiment in the industry further weakened by concerns over the future growth of the Chinese economy.

However, ECS's local production facilities, which enable a shorter order lead-time, together with the economic benefit of the weakening Australian dollar, are enabling the business to maintain its leading position in the competitive belt replacement market. Pricing pressure remains but has been mitigated by lower raw material prices.

In South Africa, following the recent announcement by customers to close or sell coal mines, we continue to rationalise our business to align our manufacturing and service capabilities with expected levels of future demand.

Revenue and profit

The Group's revenue for the period was £276.8m (2015: £347.6m) and underlying operating profit amounted to £15.0m (2015: £28.7m). Unallocated corporate costs were reduced to £3.6m (2015: £4.1m).

The Group's operating loss was £15.6m (2015: £1.6m profit) after charging amortisation of intangible assets acquired of £5.5m (2015: £6.9m) and exceptional items of £25.1m (2015: £20.2m). Exceptional items during the period principally comprised £9.5m of restructuring costs, mainly related to ECS Americas, and £14.5m of impairments to goodwill and intangible assets acquired; further details are provided in note 4.

Net finance costs were £7.5m (2015: £6.7m). EBITDA interest cover, on a 12 month rolling basis, was 4.8 times (2015: 6.8 times).

Underlying profit before taxation was £8.1m (2015: £21.8m). The taxation rate on underlying profit before taxation was 25% (2015: 28%); the rate has reduced due to a greater utilisation of US tax losses arising in the period. Loss before taxation was £23.1m (2015: £5.1m). The overall tax credit was £4.6m (2015: £2.0m charge), reflecting a restricted tax credit on exceptional items due to the non-recognition of certain deferred tax assets based on current taxable profit forecasts.

Underlying earnings per share amounted to 2.9p (2015: 7.8p) and basic loss per share was 9.8p (2015: 3.9p).

Cash flow and borrowings

Operating cash flow was higher than the prior year at £19.1m (2015: £18.5m). The improved performance was achieved despite the lower operating profit. The usual seasonal outflow of cash into working capital was reversed, resulting in an inflow of £1.0m (2015: £6.3m outflow). Net capital expenditure in the period was, as previously indicated, much reduced at £8.8m (2015: £15.6m) with the principal expenditure relating to the on-going project to consolidate Secant Medical into its new premises.

With net interest payments unchanged at £7.0m and taxation payments reducing to £4.3m (2015: £7.9m), underlying free cash flow improved to £7.2m (2015: £2.0m). Dividend payments of £7.8m were made to Fenner shareholders and £0.6m to non-controlling interests. In addition, cash outflows of £5.1m for restructuring costs and £5.6m for deferred payments on previous years' acquisitions were made in the period. The strengthening of the US dollar in the period increased the sterling equivalent of the Group's dollar denominated debt which, net of the settlement of derivative instruments, resulted in an adverse currency movement of £5.1m. Net debt ended at £155.0m.

The Group's net debt to EBITDA ratio, measured on a rolling basis for the 12 months ended 29 February 2016, was 2.3 times (2015: 1.7 times).

Board of Directors

Alan Wood retired from the Board at the conclusion of the AGM in January, having served as a non-executive director since 2010 and has been succeeded by Geraint Anderson. We would like to extend our thanks to Alan for his valuable contribution to the Group over the last six years.

On 4 April 2016, we announced the appointment of Chris Surch as a non-executive director with effect from 1 May 2016; he will succeed John Sheldrick who is retiring having served on the Board since September 2010. Chris will take over as Chairman of the Audit Committee on appointment and will become a member of the other Committees of the Board.

Principal risks and uncertainties

The principal risks and uncertainties affecting the Group remain those set out in the 2015 Annual Report and those which are most likely to impact the performance of the Group in the remaining months of the financial year are outlined below.

The Group will continue to be affected by weakness in the global markets for key mined commodities (coal, iron ore and copper) and by lower oil prices. The US coal industry is continuing to undergo a process of structural change and there remains the possibility that further coal mining groups will enter insolvency proceedings. On-going concerns over growth in the Chinese economy will continue to impact the seaborne markets for iron ore, coal and copper which increases uncertainty over future rates of commodity extraction in Australia and elsewhere and over commodity prices generally. There continues to be surplus oil production capacity limiting any demand side improvements to the oil price. It remains unclear as to the magnitude and timing of any recovery.

Dividend

The interim dividend of 1.0p has been rebased to a level more appropriate to the Group's current, albeit cyclically depressed, earnings. From this base, it is the Board's intention to adopt a progressive dividend policy and to maintain a one-third/two-thirds split between the interim and final payments.

Outlook

The difficult market conditions that have characterised the last four reporting periods continue although we have now reached a point where our refocusing, restructuring and cost saving programmes are substantially mitigating the ongoing volume challenges we are experiencing. The financial condition of some mining customers remains a concern and is likely to cause further restructuring of these markets which we continue to approach with caution and prudent financial management.

The oil and gas markets also remain challenging with the rig count in North America now having fallen by around three-quarters from its peak. Notwithstanding these challenges, the combination of cost control and market share gains is expected to substantially mitigate the volume impact from the latest reduction.

The medical business remains strong. Whilst we are absorbing the effects of consolidating the Secant Medical business into new facilities, we are creating a strong platform to facilitate future growth.

The industrial businesses within AEP are now experiencing more stable order flows after a period of somewhat erratic volumes arising from customer destocking.

Despite challenging market conditions, overall our expectations remain unchanged.

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. Such risks, uncertainties and other factors include, among others, exchange rates, the commodity markets, general economic conditions and the business environment.

Consolidated income statement

for the half year ended 29 February 2016 (unaudited)

Consolidated statement of comprehensive income

for the half year ended 29 February 2016 (unaudited)

Consolidated balance sheet

at 29 February 2016 (unaudited)

Consolidated cash flow statement

for the half year ended 29 February 2016 (unaudited)

Consolidated statement of changes in equity

for the half year ended 29 February 2016 (unaudited)

Notes to the half yearly financial statements

1. Basis of preparation

The condensed half yearly financial statements for the half year ended 29 February 2016 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 2015.

The directors have a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future, and

for a period of at least 12 months from the date of the half year results. For this reason, the directors continue to adopt the going concern basis of accounting in preparing the half yearly financial statements. In forming this view, the directors have reviewed the Group's cash flow forecasts against the availability of financing, including an assessment of sensitivities to changes in market conditions.

The comparative financial information for the year ended 31 August 2015 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 2015 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 27 April 2016.

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 2015 except for new standards, amendments or interpretations which have been adopted for the first time for the year ending 31 August 2016. 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: