SCPA.L Regulatory News (SCPA)

20 November 2018

Scapa Group plc

Interim Results

Scapa Group plc (AIM: SCPA) today announces its results for the 6 months period ended 30 September 2018.

Group Financial Highlights:

• Revenue decreased 3.4% to £140.7m (2017: £145.6m); 1.2% reduction at constant fx

• Trading profit* increased 2.4% to £17.1m (2017: £16.7m); 6.2% constant fx

• Trading profit* margins further improved to 12.2% (2017: 11.5%)

• Adjusted earnings per share** remained constant at 8.3p (2017: 8.3p)

• Basic earnings per share of 4.3p (2017: 7.5p)

• Net debt of £5.2m (31 March 2018: £3.8m); excludes £31.4m paid on 1 October 2018 for acquisition of the Systagenix manufacturing facility

• Pension deficit reduced to £9.8m (31 March 2018: £21.0m)

Healthcare

• Revenue increased 0.2% to £57.8m (2017: £57.7m); 3.4% constant fx

• Trading margins at 14.2% (2017: 16.1%) in line with H2 FY18 margin

• Trading profit decreased 11.8% to £8.2m (2017: £9.3m); 8.9% reduction at constant fx, reflecting the incremental investment made to execute technology transfers

• Acquired in October 2018 the development and manufacturing assets of Systagenix from Acelity for £31.4m and entered an exclusive five-year development and supply agreement for Systagenix advanced wound care products to Acelity

• The three technology transfers completed in the last twelve months bring aggregate incremental annualised revenue exceeding £40m

• Announced the closure of the facility in Dunstable, UK

• BioMed, acquired in March 2018, has enhanced Healthcare's product portfolio and is performing in line with expectations

• Previously announced technology transfers and new programmes anticipated to start to benefit revenues in H2

Industrial

• Revenue decreased 5.7% to £82.9m (2017: £87.9m); 4.2% reduction at constant fx

• Trading profit grew 8.9% to £11.0m (2017: £10.1m); 12.2% constant fx

• Margins increased to 13.3% (2017: 11.5%), on target to reach 15%

• Announced the closure of the facility in Liverpool, New York

• Revenue in India increased by 30.0% in local currency driven by consumer and automotive markets

• Integration of Markel is nearly complete, with synergy benefits anticipated to start in H2

Commenting on the results Chief Executive, Heejae Chae said:

"The first half has delivered a solid trading performance and continued good progress in the transformation of Scapa from an industrial tape company to a group with two businesses that are global and market leaders. The Industrial business is one of the leading global tape companies with strong profit margins and cash flow. The Healthcare business is now a world leading strategic turn-key partner to major global healthcare companies.

The acquisition, by way of a technology transfer, of the R&D and manufacturing assets of Systagenix and the exclusive five-year development and supply agreement for Systagenix advanced wound care products to Acelity is a milestone in Scapa's development, completing our Healthcare journey from a roll stock supplier to a fully integrated healthcare company with extensive technologies and capabilities in the markets we serve. We have now completed three technology transfers in the last twelve months with an aggregate annualised revenue exceeding £40m. We believe that further opportunities to partner with our healthcare customers exist as the medical device sector undergoes disruption.

Whilst the macro environment remains challenging, we anticipate the profit for the year will be in line with expectations, excluding the impact of the Systagenix healthcare transaction. This transformative transaction is expected to be modestly earnings dilutive in the current year and materially accretive from FY20 onwards."

* Profit before tax, before net finance costs, amortisation of intangible assets, exceptional items and pension administration costs

** Adjusted earnings per share is calculated by dividing the trading profit less cash interest less tax on operating activities by the weighted average number of ordinary shares in issue during the year

For further information:

Group Results

Scapa has delivered a solid first half performance, driven by revenue growth in Healthcare (up 3.4% at constant currency) and continued margin improvement in Industrial. Group trading profit1 for the period increased 2.4% to £17.1m (2017: £16.7m), increasing the overall Group trading margins to 12.2% (2017: 11.5%). Group revenue for the period decreased 3.4% to £140.7m (2017: £145.6m), primarily reflecting adverse currency movements. Adjusting for the effects of exchange rates, revenue decreased 1.2% (2017: 1.6%) and trading profit increased 6.2% (2017: 21.9%).

Operating profit for the period decreased to £10.5m (2017: £16.3m) and profit before tax decreased to £9.7m (2017: £15.4m). Taxation charges for the period were £3.1m (2017: £3.9m), with the underlying effective tax rate2 for the period at 23.0% (2017: 21.1%). The basic earnings per share was 4.3p (2017: 7.5p). When adjusted for exceptional items, pension administration costs, amortisation and non-cash interest, earnings per share was 8.3p (2017: 8.3p).

Exceptional items (note 4) in the period totalled £4.1m (2017: gain of £1.4m); £2.2m related to the expected closure of the Dunstable UK manufacturing site and £1.9m for acquisition related costs for the acquisition of Systagenix Wound Management Manufacturing Limited which completed on 1 October 2018.

The results include the impact of Markel Industries (acquired in August 2017) and BioMed Laboratories (acquired in March 2018).

Strategic Priorities and Business Objectives

Scapa is organised into two business units serving the Healthcare and Industrial markets, primarily in Europe and North America. Each business unit has a specific strategy that it follows:

· Healthcare continues to build its relationships with key market leading customers as the turn-key partner of choice, as it leverages its know-how in development and manufacturing processes together with materials expertise, in a market with favourable demographic and outsourcing trends. Healthcare remains Scapa's primary acquisition focus.

· Industrial has further opportunities to drive improved margins through consolidation and efficiency, and is also focused on growth in selected areas where it has a competitive advantage.

Markets

Healthcare

The strategy of our Healthcare business is to continue to be the trusted strategic turn-key partner of choice for the world's leading companies in advanced wound care, consumer wellness and medical devices.

Scapa has evolved from a roll stock supplier to a manufacturer of turn-key products with full capabilities all the way from design through manufacturing to distribution. The business expects to benefit from the continued outsourcing trend and the favourable demographics in healthcare.

Revenue grew 0.2% to £57.8m (2017: £57.7m); at constant exchange rates the growth in revenue improved to 3.4%. Healthcare trading profit decreased 11.8% to £8.2m (2017: £9.3m); at constant exchange the profit decreased 8.9% mainly due to lower volumes as a result of the continuing soft demand within the wound management market and some delays in new product roll-out as a result of delays in customer driven launches; shipments of these products have commenced since the period end.  The division delivered trading margin at 14.2% (2017: 16.1%). Scapa anticipates that the technology transfers and new programmes previously announced will start to benefit revenues during the second half of the year and that, as the proportion of turn-key business increases over the medium term, margins should improve to c.20%.

The acquisition in October 2018, by way of a technology transfer, of the R&D and manufacturing assets of Systagenix and the exclusive five-year development and supply agreement for Systagenix advanced wound care products to Acelity is a milestone in Scapa's development, completing our Healthcare journey from a roll stock supplier to a fully integrated healthcare company with extensive technologies and capabilities in the markets we serve. The acquisition positions Scapa as one of the leading B2B manufacturers of advanced wound care products in the world. The transaction is expected to be modestly earnings dilutive in the current year and materially accretive from FY20 onwards.

We have now completed three technology transfers in the last twelve months with an aggregate srevenue exceeding £40m. We believe that further opportunities to partner with our healthcare customers exist as the medical device sector undergoes disruption.

The integration of BioMed Laboratories, acquired in March 2018, has proceeded to plan. BioMed has enhanced Healthcare's offering beyond the adhesive value chain into formulations, liquids, powders and gels and enables us to address the ostomy segment of our customers as well as the OTC and health and beauty aisles of our consumer product customers. We expect this acquisition to be earnings enhancing in the current financial year.

Following a consultation process during September, the closure of the Dunstable UK manufacturing site was announced in October; the closure of the site will generate operational efficiencies through the consolidation of Healthcare's manufacturing footprint. Likewise, construction of our new facility in Knoxville, Tennessee, will complete by the end of the year, enabling us to integrate the site's three existing buildings into a single site of operation with significantly increased capacity.

Industrial

The strategy of our Industrial business to focus on maximising ROCE has enabled Scapa to continue to deliver strong results despite the volatile market environment. Revenue decreased 5.7% to £82.9m (2017: £87.9m), mainly the result of the new programme delays experienced by its customers. Trading profit for the period was £11.0m (2017: £10.1m), an increase of 8.9% over the prior period with the trading margin increasing to 13.3% (2017: 11.5%). After adjusting for the effect of exchange rates, revenue decreased by 4.2% and trading profit increased 12.2%, reflecting the improvement in operational efficiency as a result of our footprint consolidation.

Our small India operation continues to perform well, benefiting from the Chennai facility built last year. Revenues grew by 30.0% in local currency, primarily driven by consumer and automotive markets.

The integration of Markel Industries, acquired in August last year, is nearly complete and we anticipate that the synergy benefits will come through in the second half of the year. Following the exit from our Korean factory and rationalisation of our Asian cost base last year, we announced in October the closure of our manufacturing facility in Liverpool NY, reflecting continued delivery of our self-help agenda in Industrial.

Balance sheet

Net assets at 30 September 2018 increased by £19.5m to £138.4m (31 March 2018: £118.9m). Positive movements included profit after tax of £6.6m, actuarial movements of £9.0m, foreign exchange movements of £6.4m and tax items booked directly into reserves of £0.2m. Movements in equity that related to share issues, dividends and options reduced shareholders' funds by £2.7m. The Group net debt balance was £5.2m (31 March 2018: £3.8m) reflecting the strong trading cash generation.

Pensions

The pension deficit decreased to £9.8m (31 March 2018: £21.0m). This decrease in the deficit is partly owing to gains achieved in the UK scheme following the Triennial valuation from 1 April 2017 that was finalised within the period plus a modest improvement in the discount rate applied to the long-term liabilities together with the regular company contribution.

Cash resources

Net cash generated from operations was £13.1m (2017: £14.0m) which increases to £13.4m (2017: £16.4m) before exceptional items. Capital expenditure in the period was £4.5m (2017: £2.4m). Pension payments in excess of operating charge were £2.6m (2017: £2.3m) and represent the deficit repair payments and contributions to scheme expenses. Tax and interest outflows were £5.2m (2017: £2.8m), with the increase being mainly tax associated with the prior year sale of the Swiss property. After dividends of £3.7m (2017: £3.0m), closing net debt was £5.2m, less than 0.3x EBITDA3 (31 March 2018: £3.8m net debt). Since the period end the Group has paid the £31.4m cash consideration for the acquisition of Systagenix.

Dividend

A final dividend for the year ended 31 March 2018 of 2.4p per share was paid on 17 August 2018 to all shareholders registered on 20 July 2018. In line with last year, the Board does not propose an interim dividend but intends to maintain a progressive dividend policy.

Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. The Directors do not consider that these principal risks and uncertainties have changed since publication of the annual report for the year ended 31 March 2018.

Going concern

As stated in note 1 to these condensed financial statements, the Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing these condensed financial statements.

Summary and outlook

Scapa has again delivered a solid first half performance with growth in trading profit and margins. There are further significant opportunities for both business units to improve both sales and margin performance through rigorous execution of the strategy, in both the short and longer term. The Board remains confident of delivering its full year expectations and in the Company's ability to drive shareholder value.

L C Pentz

Chairman

20 November 2018

1 Profit before tax, before net finance costs, amortisation of intangible assets, exceptional items and pension administration costs

2 Adjusting operating profit and taxation for exceptional items, pension administration costs, amortisation and non-cash interest

3 Net debt to EBITDA comprises net debt divided by trading profit before depreciation for the six months ended 30 September 2018

CONSOLIDATED INCOME STATEMENT

For the half year ended 30 September 2018 (unaudited)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the half year ended 30 September 2018 (unaudited)

CONSOLIDATED BALANCE SHEET

As at 30 September 2018 (unaudited)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the half year ended 30 September 2018 (unaudited)

CONSOLIDATED CASH FLOW STATEMENT

For the half year ended 30 September 2018 (unaudited)

* Gain on disposal treated as exceptional item

NOTES

1. GENERAL INFORMATION

Scapa Group plc ('the Company') and its subsidiaries (together 'the Group') manufacture bonding products and adhesive components for applications in the healthcare and industrial markets. The Group has manufacturing plants around the world and sells mainly in countries within Europe, North America and Asia.

The Company is a limited liability company incorporated and domiciled in the UK. The address of its registered office is 997 Manchester Road, Ashton-under-Lyne, Greater Manchester OL7 0ED. The Company has its listing on the Alternative Investment Market.

The financial information for the period ended 30 September 2018 and similarly the period ended 30 September 2017 has been neither audited nor reviewed by the auditor. The financial information for the year ended 31 March 2018 has been based on information in the audited financial statements for that period.

The interim condensed financial statements for the period ended 30 September 2018 do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the year ended 31 March 2018 has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

Basis of preparation

The consolidated financial statements for Scapa Group plc are prepared in accordance with IFRSs as adopted by the European Union. AIM listed companies are not required to issue IAS 34 compliant interim reports. Scapa Group plc complies with the majority of IAS 34 but does not produce a number of disclosures that are not considered significant.

Accounting policies

As at 1 April 2018, the Group adopted IFRS 9 'Financial instruments' and IFRS 15 'Revenue from contracts with customers'. Apart from these standards, the same accounting policies, presentation and methods of computation are followed in the interim condensed financial statements as applied in the Group's latest annual audited financial statements.

No new or revised standards adopted in the current period have had a material impact on the Group's financial statements.

Critical accounting estimates, judgements and risks

The preparation of the interim condensed financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these interim condensed financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 March 2018.

A summary of the principal risks and uncertainties is below and a more detailed explanation and how the Group seeks to mitigate the risks can be found on pages 12 to 18 of the Annual Report, which is available at www.scapa.com.

Health and safety - failure to work safely could result in significant injury or loss of life, damage the reputation of the Group and incur regulator intervention or fines

Acquisitions - poor decision-making on acquisitions could adversely affect the Group's results, weakening shareholder value

Business strategy - development of the wrong strategy by the Board or the failure to implement its strategy effectively could negatively impact on the Group's long-term growth prospects

Global economic and political environment - political and economic uncertainty e.g. Brexit which affects market and financial stability could adversely affect the Group's performance

Financial and treasury - the Group has significant operations outside the UK and as such is exposed to movement in exchange rates

Pensions - retirement liabilities fluctuate with changes in life expectancy, inflation, asset performance and discount rate assumptions

Customers - the Group benefits from good commercial relationships with a number of key customers. Damage to these relationships could have a direct, detrimental effect on the Group's results

Raw material pricing - Group margin is susceptible to supplier price increases

Human resources - availability of sufficient, skilled resource may impact on our ability to achievesustainable growth

ICT systems and infrastructure - the Group is reliant on ICT systems in the effective planning and manufacture of product. Significant disruption can interrupt manufacturing and support process and potentially impact sales

Product quality - the Group is exposed to financial risk around product liability, customer returns and ultimately customer trust in Scapa as a supplier

Environment - failure to mitigate environmental impacts could damage the reputation of the Group and result in the financial loss associated with clean-up, fines and sanctions

Going concern

The Directors are satisfied that the Group's forecasts and projections show that the Group should be able to operate within its banking facilities and comply with its banking covenants. The Group is exposed to a number of significant risks and uncertainties, which could affect the Group's ability to meet its banking covenants. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the interim condensed financial statements.

2. SEGMENTAL REPORTING

The Group operates two standalone business units: Healthcare and Industrial, supported by a strategic Corporate function. All inter-segment transactions are made on an arm's length basis.

The Board rely primarily on turnover and trading profit to assess the performance of the Group and make decisions about resources to be allocated to each segment; assets and liabilities are looked at geographically. Trading profit is reconciled to operating profit on the face of the Income Statement.

The Board reviews the performance of the business using information presented at constant exchange rates. The prior year results have been restated at constant currency as shown on the following pages.

Segment results - 30 September 2018

The segment results for the half year ended 30 September 2018 are as follows:

The revenue analysis below is based on the location of the customer as follows:

The revenue based on the location of the selling company is as follows:

The segment results for the half year ended 30 September 2017 are as follows:

The Board reviews the performance of the business using information presented at constant exchange rates. The prior half year results have been restated using this year's exchange rates as follows:

Segment results - 31 March 2018

The segment results for the year ended 31 March 2018 are as follows:

The Board reviews the performance of the business using information presented at constant exchange rates. The prior year results have been restated using this year's exchange rates as follows:

3. Segment assets and liabilities

The Board does not review assets and liabilities by business unit but by geographical area as reporting entity balance sheets cannot be split accurately by business unit. The assets and liabilities at 30 September 2018 and capital expenditure for the period then ended can be analysed into geographical segments as follows:

* Non-current assets excluding deferred tax assets.

The assets and liabilities at 30 September 2017 and capital expenditure for the period then ended were as follows:

The assets and liabilities at 31 March 2018 and capital expenditure for the year then ended were as follows:

* Non-current assets excluding deferred tax assets.

Unallocated head office items relate to assets and liabilities incurred in the normal course of business for the Parent Company.

4. EXCEPTIONAL ITEMS

Exceptional operating income

The prior year exceptional operating income related to the closure of the Rorschach site in Switzerland in 2016. The land and buildings were sold on the 20 July 2017 for an amount of £13.3m, resulting in an exceptional gain for this disposal of £6.9m.

Exceptional operating expenses

The Dunstable manufacturing facility in the UK entered a formal closure consultation process following the initial closure announcement in September 2018 and the closure was confirmed in October 2018 following the consultation period. Whilst the closure had not been formalised at the balance sheet date of 30 September 2018, a provision for the potential closure of £2.2m was booked in line with the accounting standard requirement, albeit no formal agreement was reached until October 2018.

The Group has also incurred one-off acquisition costs of £1.9m during the first half of the year, related to the acquisition of Systagenix Wound Management Manufacturing Ltd which was announced in September 2018 and completed on 1 October 2018.

The prior year exceptional operating expenses included the exit of production in Korea which was announced on 23 May 2017. The costs of the closure and associated transfer costs amounted to £2.9m with an additional £1.8m for the impairment of assets that were not being transferred as part of the closure. £1.1m related to the reorganisation of a UK-based manufacturing site for employee-related severance costs. Acquisition costs directly related to the acquisition of Markel Industries and BioMed Laboratories LLC of £0.8m, with a further £0.2m of abortive acquisition costs also being charged where potential acquisitions did not progress to completion. 

5. KEY MANAGEMENT COMPENSATION AND DIRECTORS' REMUNERATION

Key management is considered by the Group to be the Executive Team, which comprises certain senior employees, as defined in the annual financial statements. The short-term employment benefits include wages and salaries, bonuses, social security contributions and non-monetary benefits.

6. RELATED PARTY TRANSACTIONS

The pension schemes are related parties to the Group. There were no contributions outstanding at the period end.

7. NET FINANCE COSTS

8. TAXATION

9. Earnings per share

Basic

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period.

Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all potentially dilutive ordinary shares. Diluted earnings per share has been calculated on share options in existence at 30 September 2018.

Adjusted 

Adjusted earnings per share is calculated by dividing the trading profit less cash interest less tax on operating activities by the weighted average number of ordinary shares in issue during the period.

10. DIVIDENDS

A final dividend for the year ended 31 March 2018 of 2.4p per share was approved by shareholders at the2018 AGM and was paid on 17 August 2018 to shareholders registered on 20 July 2018.

11. RETIREMENT BENEFIT SCHEMES

Defined benefit schemes

The defined benefit obligation as at 30 September 2018 has been updated for the results of the 1 April 2017 valuation which was signed off in June 2018 by the Scheme Actuaries, and it has also been adjusted for movements in contributions, financial and demographic assumptions over the period.

The defined benefit plan assets have been updated to reflect their market value at 30 September 2018. The change in the expected return on assets has been recognised as an actuarial gain or loss in the Statement of Comprehensive Income in accordance with the Group's accounting policy.

12. PROVISIONS

13. RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOW AND RECONCILIATION OF NET CASH

Analysis of cash and cash equivalents and borrowings

14. POST BALANCE SHEET EVENT

On 1 October 2018 the Group acquired the share capital of Systagenix Wound Management Manufacturing Limited from Acelity for £31.4m. This includes a 5 year exclusive development and supply agreement between Scapa and Acelity for the supply of Systagenix wound care products that are currently manufactured in the acquired Gargrave facility.

COMPANY INFORMATION

Key dates

Next year end (to be reported) 31 March 2019Next preliminary announcement 21 May 2019Next annual report due June 2019Next Annual General Meeting 23 July 2019Next interim results 19 November 2019

SHAREHOLDER INFORMATION

Shareholder enquiries should be directed to the Company's registrars, Link Asset Services, at their Customer Support Centre, details as follows:

By phone: UK - 0871 664 0300, from overseas call +44 (0) 871 664 0300 - calls cost 12p per minute plus your phone company's access charge. Calls outside the United Kingdom will be charged at the applicable international rate. The helpline is open between 09:00 to 17:30, Monday to Friday, excluding public holidays in England and Wales.

By email: enquiries@linkgroup.co.uk

By post: Link Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU.

Further information regarding the various services offered by Link Asset Services, including the Share Portal and Share Dealing Service, can be obtained from the above or directly from Link's website www.signalshares.com or www.linksharedeal.com