Scapa : Interim Results 2017

Interim Results 2017

21 November 2017

Scapa Group plc, a global supplier of bonding solutions and manufacturer of adhesive-based products for the Healthcare and Industrial markets, today announces its results for the period ended 30 September 2017.

Financial Highlights
- Revenue grew 7.5% to £145.6m (2016: £135.4m); 1.6% at constant exchange rates
- Trading profit* increased 31.5% to £16.7m (2016: £12.7m); 21.9% at constant exchange rates
- Trading profit* margins further improved to 11.5% (2016: 9.4%)
- Operating profit increased 71.6% to £16.3m (2016: £9.5m)
- Adjusted profit before tax** improved 33.1% to £16.1m (2016: £12.1m)
- Adjusted earnings per share*** increased 29.7% to 8.3p (2016: 6.4p)
- Basic earnings per share of 7.5p (2016: 4.5p)
- Net debt of £3.2m (March 2017: £16.1m) after paying US$10.2m (£7.6m) for the acquisition of Markel Industries

Operational Highlights

Healthcare highlights:-
- Revenue increased 7.9% to £57.7m; 2.1% at constant exchange rates
- Trading profit increased 22.4% to £9.3m; 16.3% at constant exchange rates
- Margins increased 1.9% to 16.1%
- EuroMed performing ahead of expectation
- Revenue impacted by a now resolved customer product issue
- Renewed three contracts with key OEMs
- Agreement of first asset/technology transfer from a wound care company

Industrial highlights:-
- Revenue increased 7.3% to £87.9m; 1.3% at constant exchange rates
- Trading profit increased 32.9% to £10.1m; 23.2% at constant exchange rates
- Margins increased 2.2% to 11.5%
- Sale of Swiss land and buildings completed, achieving sale proceeds of CHF17.1m (£13.6m)
- Korean production ceased in August 2017 as planned
- Acquired Markel Industries, a manufacturer of adhesive floor mats, in August 2017 for US$10.2m (£7.6m)

Commenting on the results Chief Executive, Heejae Chae said:
'Scapa has delivered a strong first half performance with growth in revenue, 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 achieving the improved full year expectations outlined in the Group's October trading update.'

* Operating profit before amortisation of intangible assets, exceptional items and pension administration costs
** Trading profit less interest payable on bank loans and overdrafts
*** 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:

Scapa Group plc
Heejae Chae - Chief Executive
Graham Hardcastle - Finance Director
Tel: 0161 301 7430

Numis Securities Limited (Nominated Adviser/Joint Broker)
Mark Lander, Richard Thomas
Tel: 0207 260 1000

Berenberg (Joint Broker)
Chris Bowman
Tel: 0203 207 7800

Weber Shandwick Financial PR
Nick Oborne
Tel: 0207 067 0000

For full press release and presentation see Reports and Presentations

GROUP RESULTS

Scapa again delivered growth in revenue, trading profit and margins, including the benefit from currency and a full year contribution from EuroMed, acquired in May 2016. Group revenue for the period increased 7.5% to £145.6m (2016: £135.4m). Trading profit(1)for the period increased 31.5% to £16.7m (2016: £12.7m), increasing the overall Group trading margin to 11.5% (2016: 9.4%). Adjusting for the effects of exchange rates, revenue increased 1.6% (2016: 3.7%) and trading profit increased 21.9% (2016: 12.4%).

Operating profit increased to £16.3m (2016: £9.5m) with adjusted profit before tax(2)increasing 33.1% to £16.1m (2016: £12.1m). Pre-tax profit, after exceptional items, increased to £15.4m (2016: £8.5m). Taxation charges for the period were £3.9m (2016: £1.8m), with the underlying effective tax rate(3)for the period at 21.1% (2016: 20.7%). The basic earnings per share was 7.5p (2016: 4.5p). When adjusted for exceptional items, pension administration costs, amortisation and non-cash interest, earnings per share was 8.3p (2016: 6.4p), an increase of 29.7%.

STRATEGIC PRIORITIES AND BUSINESS OBJECTIVES
The Group is organised into two distinct and separate businesses each with its own defined strategic goals and priorities:-

• Healthcare - to continue to be the Trusted Strategic Turn-Key partner for our customers leveraging the trend of outsourcing in the Healthcare industry;
• Industrial - to maximise the Return on Capital Employed (ROCE) through operational efficiencies and footprint consolidations.
The overall financial performance of the business has been impressive in H1, driven by strong margin improvement in both business units as a result of disciplined cost controls and successful completion of key projects.

The macro environment continues to be uncertain, with currency volatility, Brexit and other political considerations making this a more challenging time than usual. Despite this, the underlying business remains strong, with Scapa's geographic spread insulating us from some of these factors. We benefited from a weaker Sterling in H1 relative to the equivalent period last year but may see a small currency translation headwind in the second half.
Scapa's primary acquisition focus remains Healthcare, with successful acquisitions in recent years of Webtec, First Water and EuroMed. During the period the Group was able to complete its first Industrial acquisition for some time, acquiring Markel Industries for US$10.2m (£7.6m) on 8 August 2017. Markel makes multilayer adhesive footwear cleaning mats primarily for use in healthcare and electronics factories, and is an excellent fit with Scapa's current business in terms of manufacturing capability, procurement synergies and route to market.

MARKETS
Healthcare

The strategy of our Healthcare business is to continue to be the Trusted Strategic Turn-Key Partner of choice for the world 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 7.9% to £57.7m (2016: £53.5m); at constant exchange the growth in revenue was 2.1%. Healthcare trading profit including EuroMed increased 22.4% to £9.3m (2016: £7.6m); at constant exchange the profit increased 16.3%. The division delivered trading margin at 16.1% (2016: 14.2%), maintaining the strong exit rate we saw at the end of 2017. We expect the full year margin to be maintained at this level, with opportunities to increase margins over the medium term to 20% as the increased share of higher margin turn-key business and additional drives to improve efficiency take effect.

During the period we saw good growth in new product development revenues, as the pipeline of projects in development with our customers continues to grow. Organic growth in the period was impacted by the lack of significant new product launches, and a specific customer product issue that impacted revenues, which is now resolved. We saw good growth in Medical Devices, including sales of insulin delivery devices, and expect to see benefits in H2 from projects in pain management and negative pressure wound therapy.

Industrial

Our Industrial strategy to focus on maximising ROCE has enabled us to continue to deliver strong results in a volatile and uncertain market environment. Revenue grew 7.3% to £87.9m (2016: £81.9m). Trading profit for the period was £10.1m (2016: £7.6m), an increase of 32.9% over the prior period with the trading margin increasing to 11.5% (2016: 9.3%). After adjusting for the effect of exchange rates, revenue increased by 1.3% and profit 23.2%, reflecting the improvement in operational efficiency including the benefit of the Swiss closure and good cost control.

The closure of our Korean site, which we announced in May 2017, is progressing in line with plan. The site ceased production during August and the production lines are being transferred to Europe and the US. In addition, the Group was successful in selling the land and buildings related to the Swiss site for an amount of £13.6m generating sale proceeds above initial estimates.

The Group acquired Markel Industries on 8 August 2017 for US$10.2m (£7.6m) and the integration of the business is progressing well.

Exceptional items
As noted above, following the closure of the Rorschach site in Switzerland in 2016, the land and buildings were sold on 20 July 2017, resulting in an exceptional gain of £7.4m in the period. In addition, exceptional expenses of £3.2m were incurred relating to the closure costs for the Korean site, plus an additional £1.2m for the impairment of assets not being transferred as part of this closure. Further reorganisation expenses of £1.0m for restructuring at one of our UK-based manufacturing facilities were incurred, and acquisition related costs totalling £0.6m were also included in exceptional items in the period.

Balance sheet
Net assets at 30 September 2017 totalled £111.1m (31 March 2017: £100.4m). The increase arises from improved retained earnings of £11.5m and positive actuarial movements of £7.3m, offset by negative foreign exchange movements of £6.0m and share related items of £2.1m. The Group net debt balance was £3.2m (31 March 2017: £16.1m) reflecting the strong trading performance of the Group, including the consideration relating to the acquisition of Markel Industries and the income from the sale of the Swiss property, of which £11.4m is currently held as restricted within an escrow account and is expected for release by 31 March 2018.

Pensions
The pension deficit decreased to £22.0m (31 March 2017: £31.4m). This decrease in the deficit is partly owing to a change in the demographic assumptions underpinning the UK pension scheme, together with a modest improvement in the interest rate used to discount the long-term liabilities and the regular company contribution.

Cash resources
Net cash generated from operations was £14.0m (2016: £11.2m) which increases to £16.4m (2016: £13.4m) before exceptional items. Trading working capital decreased by £1.6m (2016: increase of £0.1m) following the reduction of the stock build associated with the Swiss site closure in the prior year. Capital expenditure in the period was £2.4m (2016: £4.6m) down from the prior year given the timing of the Swiss transfer. There was a further outflow of £7.3m for the acquisition of Markel Industries and related costs.

Pension payments in excess of operating charge were £2.3m (2016: £2.2m) and represent the deficit repair payments and contributions to scheme expenses. Tax and interest outflows were £2.8m (2016: £2.4m), with the increase being mainly tax associated with the improvement in results. After dividends of £3.0m (2016: £2.6m), closing net debt was £3.2m, less than 0.2x EBITDA(4)(31 March 2017: £16.1m net debt).

The Group completed a refinancing on 31 October 2017 with a 3 bank syndicate, providing access to a 5 year revolving £70m committed multi-currency facility, plus an additional £30m accordion facility, on improved terms.

Dividend
A final dividend for the year ended 31 March 2017 of 2.0p per share was paid on 18 August 2017 to all shareholders registered on 21 July 2017. 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 2017.

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 delivered a strong first half performance with growth in revenue, 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 achieving the improved full year expectations outlined in the Group's October trading update.

L C Pentz
Chairman
21 November 2017

(1) Operating profit before amortisation of intangible assets, exceptional items and pension administration costs
(2) Trading profit less interest payable on bank loans and overdrafts
(3) Adjusting operating profit and taxation for exceptional items, pension administration costs, amortisation and non-cash interest
(4) Net debt to EBITDA comprises net debt divided by trading profit before depreciation for the six months ended 30 September 2017

For full press release and presentation see Reports and Presentations