Scapa : Preliminary Results 2018

Preliminary Results 2018

22 May 2018

Scapa Group plc
Preliminary Results

Scapa Group plc (AIM: SCPA) today announces its Preliminary Results for the year ended 31 March 2018.

Financial Highlights:

• Revenue grew 4.3% to £291.5m (2017: £279.6m); 3.1% constant fx
• Trading profit* increased 18.2% to £34.5m (2017: £29.2m); 17.3% constant fx
• Trading profit* margins further improved to 11.8% (2017: 10.4%)
• Adjusted earnings per share** increased 23.0% to 18.2p (2017: 14.8p)
• Basic earnings per share of 15.4p (2017: 11.6p)
• Net debt of £3.8m (2017: £16.1m) after paying US$18.6m (£13.3m) for the acquisition of BioMed Laboratories LLC and US$10.2m (£7.6m) for the acquisition of Markel Industries
• Final dividend increased 20.0% to 2.4p (2017: 2.0p)
• Pension deficit reduced to £21.0m (2017: £31.4m)

Operational Highlights:

Healthcare
• Revenue increased 3.8% to £112.8m (2017: £108.7m); 4.3% constant fx
• Trading profit grew 4.8% to £17.4m (2017: £16.6m); 5.5% constant fx
• Full year margins at 15.4% (2017: 15.3%)
• Acquisition of BioMed on 23 March 2018 expanding capabilities beyond adhesives value chain into liquids, powders and gels
• Two technology transfers signed and expected to benefit revenues in H2 FY19
• Commenced construction of new facility to consolidate operations and expand capacity in Tennessee, US

Industrial
• Revenue increased 4.6% to £178.7m (2017: £170.9m); 2.4% constant fx
• Trading profit grew 26.4% to £22.5m (2017: £17.8m); 24.3% constant fx
• Margins increased to 12.6% (2017: 10.4%), on journey to 15% target
• Markel acquisition completed and integration into existing Scapa facility progressing well
• Swiss facility closure delivering savings and property successfully sold for £13.3m
• Korean factory closed and Asia infrastructure rationalised
• New factory in India opened to serve auto and local construction market

Commenting on the results Chief Executive, Heejae Chae said:

'The year has been successful both financially and strategically. We completed two acquisitions, one in Healthcare and one in Industrial, which are strategically significant. We also signed two technology transfers that validate our Healthcare strategy. We continue to drive growth and margin improvement across both Healthcare and Industrial and there are considerable opportunities in both businesses. We are confident about the future outlook of the Group'.

* 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:

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

Numis Securities Limited (Nominated Adviser/Joint Broker)
Mark Lander, Richard Thomas Tel: 020 7260 1000

Berenberg (Joint Broker)
Chris Bowman Tel: 020 3207 7800

Weber Shandwick Financial PR
Nick Oborne Tel: 0207 067 0000

For full press release and presentation see Reports and Presentations

CHAIRMAN'S LETTER

Dear Shareholder
My first full year as Chairman has seen continued progress for Scapa, with good performance in both business units. Healthcare continues to challenge the status quo of the healthcare markets we serve by expanding our position as the turn-key partner of choice to our market leading global customers. The acquisition of BioMed Laboratories LLC ('BioMed') expanded our capability beyond the adhesive value chain into formulations of liquids, powders and gels. As our customers review the strategic rationale of their integrated structure, our position is to provide an alternative to their strategy. Industrial is overcoming the internal challenges, which has resulted in its margin expanding from loss-making towards mid-teens. Through our self-help journey, we have developed significant competence in operational excellence to optimise the return on assets. We recognise that the pressure sensitive materials market in which Industrial competes is extremely fragmented and inefficient. We want to challenge the dynamics of sufficiency in the market. We made our first Industrial business unit acquisition in Markel Industries ('Markel') which provides our first opportunity to validate our self-help strategy externally. Whilst we are faced with many challenges, there is still much to do to achieve the full potential of the business, and I remain confident of the Group's ability to continue to deliver.

Great progress and potential
The healthcare sectors in which we participate are undergoing significant change. The status quo of the integrated model of our healthcare customers is being challenged by the changing market dynamics. We are seeing increasing evidence of our customers in wound care, consumer and medical devices evaluating their strategy and operating models. In the near term, we have benefited from their need to outsource products to reduce their costs and accelerate time to market. We have built a healthy project pipeline that should continue to support our organic growth. Furthermore, we are seeing our involvement moving further up in the product lifecycle including development and innovation. Today, 80% of our pipeline is turn-key solution with Scapa's proprietary technology or manufacturing know-how. The latest opportunity that we are participating in is what we have termed 'technology transfers'. Our customers are beginning to outsource not just manufacturing volume but also their assets and technology for Scapa to subsume. During the year, we have signed two technology transfers, one with a wound care company and the other with a global consumer product company. As part of the technology transfer, we have also entered into an innovation agreement to develop the next generation of product range which ensures that we can continue to drive product pipeline and innovation. We expect the revenue from the two transfers will benefit the second half of fiscal year 2019.

We continue to invest in the Healthcare business to further strengthen our strategic partnership with customers such as Johnson & Johnson and Convatec by broadening our capabilities. During the year, we acquired BioMed which expanded our expertise beyond the adhesive value chain into formulations of liquids, powders and gels. The products are complementary to Scapa's existing wound care and ostomy management portfolio and will expand our OTC and health and beauty ranges within the Consumer Wellness segment. We have also started construction of a new facility in Knoxville, Tennessee, which will allow us to consolidate our current business there onto one site as well as provide significant additional capacity for expansion.

Industrial continues to deliver on the self-help agenda as it improves margin performance and return on capital employed. Last year we outlined our target to achieve 15% margins and over the medium-term return to a GDP+ level of revenue growth - this goal remains realistic. During the year we exited our Korean factory and rationalised our Asian cost base. We believe that the investment required would outweigh the scale and relative opportunity of our Asian business.

As we continue to optimise our portfolio, we are confident that we will begin to drive growth in Industrial. We will focus on niche markets with competitive advantage such as Cable and India. Strategically, we also see an opportunity to leverage the operational excellence capabilities that we have gained in our self-help journey. There are many companies that can benefit from our drive to efficiency and asset utilisation. During the year, we acquired Markel, a manufacturer of adhesive floor mats, based in the US. Beyond the complementary product range, there are significant operational synergies as we consolidate its operations into Scapa's footprint which will deliver savings in FY19. We believe that there are other similar opportunities in the market where we can apply the skills that we have built over the course of our journey.

Financial performance and dividend
I am pleased to report that 2017/18 was another strong year for Scapa, with improvements in sales, trading profits and margins. Group revenue increased 4.3% to £291.5m (2017: £279.6m) and trading profit increased 18.2% to £34.5m (2017: £29.2m). On a constant currency basis, revenue and trading profit grew 3.1% and 17.3% respectively, with the currency gains seen in H1 offset by headwinds in H2. Group trading profit margins increased to 11.8% from 10.4%. Profit before tax increased by 32.1% to £28.8m (2017: £21.8m). Adjusted earnings per share increased 23.0% to 18.2p (2017: 14.8p) and basic earnings per share was 15.4p (2017: 11.6p).

This year has seen a further strengthening of the Balance Sheet, including continued actions to manage the legacy pension scheme deficit. The Group ended the year with net debt of £3.8m (2017: £16.1m), after the acquisition of Markel in August 2017 for US$10.2m (£7.6m) and BioMed in March 2018 for an initial cash consideration of US$18.6m (£13.3m), which were offset by the sale of our property in Rorschach, Switzerland in July 2017 for £13.3m. The business continues to focus on cash flow and working capital management. The Group refinanced its revolving credit facility in October 2017, with a new committed £70m facility with £30m accordion, on improved terms.

Given the continuing progress and improved performance, the Board is proposing to increase the final and full year dividend by 20% to 2.4p (2017: 2.0p). Subject to the approval of shareholders at the forthcoming Annual General Meeting the dividend will be paid on 17 August 2018 to shareholders on the register on 20 July 2018. The ex-dividend date is 19 July 2018.

Governance and the Board
As the Group continues to grow both organically and through acquisition, the Board recognises that a strong governance framework and good internal controls, supported by common values and culture, are critically important. The Board added two new Non-Executive Directors during the year, Pierre Guyot, former CEO of Mölnlycke Health Care AB, and Brendan McAtamney, CEO of UDG Healthcare plc, who both bring extensive experience of the healthcare market to Scapa, in addition to their broad business experience. Richard Perry will retire at the AGM after 13 years' service, and I would like to thank him for his contribution to Scapa's journey.

The Board remains focused on ensuring its own effectiveness and that of the governance processes throughout the Group. An internal review of Board effectiveness was conducted in 2018.

People
Since becoming Chairman, I have visited many of our sites and had the opportunity to meet people across the organisation. It is evident that Scapa's recent success is a result of the skill and dedication of our employees who have accepted the challenge to make the business better. On behalf of the Board, I would like to thank all the employees for their hard work and dedication.

On 10 April 2018, we unfortunately experienced a fatality at our Dunstable site, which has profoundly shocked and saddened us. We are assisting the Health & Safety Executive (HSE) to fully investigate the incident. As a Board, the health, safety and welfare of our people are paramount and we are fully committed to resolving this issue and striving to make sure it never happens again.

Outlook
2017/18 was another year of good progress for Scapa. We remain focused on delivering our targets for Healthcare and Industrial. We believe that both businesses are well placed strategically to address the challenges that face the markets we serve. Healthcare will challenge the status quo of our customers as they shift their strategy and operating model. Industrial will challenge the expectations of our customers and market based on sufficiency. I remain confident of Scapa's ability to deliver increased returns to our shareholders.

L C Pentz
Chairman 

CHIEF EXECUTIVE'S STRATEGIC REVIEW

Overview
The year has been successful both financially and strategically. We continue to improve on our record performance in both Healthcare and Industrial. Group trading profit grew 18.2% and margins increased again to 11.8%. We completed two acquisitions that further validate our strategy to take the Group beyond the current opportunities and potentials. The acquisition of Markel Industries ('Markel') was our first acquisition within the Industrial business unit. Markel allows us to apply the operational excellence capabilities, that we accumulated through our self-help journey, externally to the fragmented and inefficient pressure sensitive materials market. The Healthcare acquisition of BioMed Laboratories LLC ('BioMed') is equally significant as it is our first acquisition beyond the adhesive value chain into formulations of liquids, powders and gels. The opportunities in healthcare are leveraging our portfolio of leading global healthcare companies such as Johnson & Johnson and Convatec to gain a greater share of their available spend. We have also signed two technology transfers where we are subsuming our customers' assets and technologies. The technology transfers are tangible evidence that the integrated operational model of our Healthcare customers are in transition. We believe that the dislocation of the traditional model provides Scapa with significant opportunities. We recognise that whilst the potential for both businesses is significant, we need to overcome equally significant challenges.
The healthcare industry, including the sectors we serve, is going through a significant structural change. Every part of healthcare is under tremendous pressure to do more with less. As the population grows and funding reduces, the healthcare sector is looking for new ways of doing business. We recognised that trend six years ago and decided to focus on outsourcing which has served us well. Equally we recognised the importance of incorporating proprietary technology and know-how into our products, and built a healthy project pipeline that is 80% turn-key with Scapa technology and manufacturing know-how. We are now seeing further evolution of our customers' strategy - evaluating their integrated model and defining their core competence. Based on our position as the trusted strategic partner of choice, we are offering a solution that is gaining acceptance and consideration.

During the year, we have signed two technology transfers; one with a wound care company and the other with a global consumer product company. In each case, we are subsuming our customers' assets and technology to become the exclusive provider of the products. As part of the technology transfer, we have also entered into an innovation agreement to develop the next generation of product ranges which ensures that we can continue to drive product pipeline and innovation along with a long-term supply agreement. We are in numerous discussions with other customers who are evaluating potential transactions. The strategic benefits of technology transfers to Scapa are numerous. Beyond the financial benefits that these arrangements offer, we become an integrated part of our customers' value chain; we participate at the earliest stage of product development with our technology; we acquire technologies and assets which are already commercialised; and we accelerate our evolution to a fully-fledged healthcare company.

We will continue to add to our platform to further strengthen our position as the strategic partner of choice. We continue to acquire capabilities that can service wider opportunities with our customers. The acquisition of BioMed, based in Dallas, Texas, expands our capabilities beyond the adhesive based value chain into formulations of liquids, powders and gels. BioMed will enable 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 are also investing to reinforce our existing platform to drive efficiency and margin improvement. We have commenced construction of a purpose built facility in Knoxville, Tennessee to consolidate the three buildings that we have outgrown and to provide capacity for further growth. We are also investing in people as we bring on multiple projects which require validation and integration. Our main challenge in Healthcare is to overcome the status quo and conservatism of our customers.

Industrial's self-help strategy continues to deliver improvement in margin and return on capital employed. The trading profit increased 26.4% improving our margin to 12.6%, closer to the medium-term target of 15%. Equally, as we optimise our portfolio, we believe that we can return to growth in line with the market. We see opportunities in niche markets where we have competitive advantage. In India, we have established a growing business leveraging our automotive customers that are shifting their supply chain to India and are looking for localised suppliers. We are benefiting from the robust local economy driving the construction business. We have built a new facility in Chennai, India to support the business which has nearly doubled in the last year. We also saw close to double-digit growth in the Cable segment. We believe that the positive momentum will be maintained based on major infrastructure projects that are due to come on line. Verizon's upgrade of its fibre network to 5G in the US is expected to start in 2018. Also, two major projects in Europe are expected to start shortly with a completion target of 2022. Viking Link, connecting the UK to Denmark, will be the world's longest submarine power cable link at 460 miles. In addition, Germany's decision to phase out nuclear power by 2022 will necessitate construction of a renewable energy infrastructure running across the north to the south of the country. Scapa is well positioned with all the cable providers that will participate in these projects.

During the year, we completed our Industrial business unit's first acquisition, Markel Industries, a US manufacturer of adhesive floor mats. Beyond the complementary product range and channel synergy, it provides an opportunity to leverage our operational excellence skills outside our footprint. Our experience in consolidating volume across our facilities is being applied to consolidate Markel production onto Scapa's footprint, generating significant operational synergy. The pressure sensitive materials market is highly fragmented and inefficient and we believe that there are other similar opportunities that we can consider. The pressure sensitive market is also very mature and stagnant. Both customers and competitors have accepted the current situation as sufficient. We believe our challenge is to exceed expectation and deliver beyond what is deemed adequate.

The fatal incident that occurred at the Dunstable site in April 2018 has been deeply felt by the Board and employees throughout the organisation. We strive to deliver the highest standards of health, safety and welfare of our employees and this commitment remains a key priority of the Board.

Our performance in 2017/18
Good performance from both Healthcare and Industrial business units has helped Scapa to deliver record results once again in 2017/18. Group revenue increased 4.3% to £291.5m, or 3.1% on a constant currency basis.

Healthcare revenue increased 3.8% to £112.8m or 4.3% at constant currency. Sales performance was positive in H2 with constant currency growth of 6.8%. EuroMed, in its first full year under Scapa's ownership, performed strongly. We saw good growth in Medical Devices, helped by the US launch of next generation insulin delivery devices. Wound Care's performance reflected the industry's overall slower rate of growth. Consumer products, helped by the launch of a health and beauty product, was positive. The specific customer product issue that impacted revenues in H1 has been resolved and the run rate has returned to its normal level. The pipeline of opportunities, including technology transfers, continues to build. Our challenge is the rate of conversion into revenue. Our revenue stream is dependent on product launches that are at times inconsistent and on our customers' launch strategies and priorities.

Healthcare trading profits increased 4.8% to £17.4m, or 5.5% at constant currency, with margins improving to 15.4% for the year. In H2 we invested in additional resources in anticipation of technology transfers which will require project management and validation of products and assets. The investment will enable us to accelerate the onboarding of the technology transfers which will start during the second half of FY19. Longer term, we see opportunities to improve Healthcare margins further, through both growth and efficiency. We have commenced construction of a new factory in Knoxville, Tennessee. Production is expected to commence towards the end of this calendar year, and will bring significant cost benefits.

In March 2018, we completed the acquisition of BioMed which is Scapa's first acquisition outside the adhesives based value chain, and offers complementary products to our existing Wound Care and Consumer Healthcare products. Scapa's ability to invest in capital and systems will allow BioMed to exploit opportunities that may previously have been challenging for them as a small privately held company.

Industrial revenue increased 4.6% to £178.7m, or 2.4% at constant currency. Cable continued to do well with close to double-digit growth driven by major project initiatives in the US and Europe. Consumer products were up, helped by a strong performance from our Indian business into the growing local DIY market. We saw a decline in Automotive despite a strong performance in Europe and the Rest of the World as we exited low margin North American business. Construction was affected by the poor weather in Q1 of this calendar year, which delayed building in continental Europe and parts of North America.

Industrial trading profits increased by 26.4% to £22.5m, 24.3% growth at constant currency, and trading margins increased to 12.6% from 10.4%. The improvement in profit was driven by; full year benefit from the closure of Rorschach; improvement in cost to serve and efficiencies; and initial benefit from the Asian reorganisation. The margin increase was achieved despite an unfavourable impact from input costs, offsetting some of the benefit seen in the previous year. Markel made a small contribution to profit of £0.1m after incurring £0.5m of restructuring costs following the announcement that we are consolidating the two sites into an existing Scapa site. Industrial margins have further room for improvement, and will be helped by benefits from Markel and the Asian restructuring next year. The target of mid-teens margins in the medium-term continues to look realistic.

Group trading profit increased to £34.5m, a growth of 18.2% or 17.3% at constant exchange rates, and margins increased again to 11.8%. Currency was favourable in H1 resulting in a benefit of approximately £1m, but headwinds in H2 resulted in a small £0.2m reduction for the year. The business continued to generate strong cash flows and managed the Balance Sheet well. At the end of the year net debt was £3.8m, after payment for the two acquisitions and completion of the sale of the Swiss property.

Strategic progress during the year
At the start of the last financial year we identified a series of key goals and priorities for the year.

• Healthcare - Continue delivering profitable growth organically and through acquisitions; we will continue to strengthen our value chain and deepen our strategic engagement with our global customers, and convert the increased project pipeline to revenue; continue to shift further into turn-key solutions with Scapa's IP and innovation - Revenue growth in the year was 3.8%, helped by 6.8% constant currency growth in H2; Scapa's value chain expanded into liquids, powders and gels through the acquisition of BioMed, which allows us to expand our offering to customers; engagement with customers enhanced through completion of two technology transfers, in wound care and consumer products; continued progress on project pipeline with 80% of the products with Scapa's technology and know-how.

• Industrial - Further drive ROCE through optimisation of the asset base; we will continue to focus on efficiency improvement and cost control, and focus on key markets where we can gain market share; we will continue the path to industry average margins - Savings from the Swiss closure continue to be delivered, and the land and buildings were sold for £13.3m, in excess of the original estimates; Korea factory closed and China footprint reduced, delivering cost savings of £1m pa as we focus on the core business. Certain assets are being moved to other sites where they will be better utilised; acquired Markel, a manufacturer of adhesive floor mats, which is currently integrating into a nearby Scapa site, driving cost benefits; margins increased in the year from 10.4% to 12.6%.

• Acquisitions - Make further acquisitions to complement the current business or deliver a new strategic platform - two acquisitions completed in the year, one for each business unit; BioMed adds to the capabilities of Healthcare, broadening our offering beyond adhesives into liquids, powders and gels. This will enable us to address a greater portion of our customers' spend; Markel is the first acquisition for our Industrial business unit and builds on the operational excellence capabilities we have developed; we continue to evaluate larger more strategic opportunities.

• Financial - Continue to improve the Group's pension and tax positions, and review the Company's banking facilities - Pension position improved with deficit now at £21.0m. The Company is now in a joint working group with the Trustee as we look to move the UK scheme off the Balance Sheet over the medium-term; the tax rate showed another improvement, though this time helped by a one-off benefit from the change to US tax rates; the banking facility was renewed for five years - £70m with a £30m accordion - on improved terms.

• Culture - Continue to focus on talent development and succession planning to ensure that we have the right people embedded within our core values to further drive the growth of the business - We continue to focus on succession planning. 'The Scapa Way' and our Guiding Principles continue to be reinforced throughout the Group; the organisation has been strengthened with the addition of a Group President who has joined Scapa from ITW, and a VP of Global Operations for Healthcare who joined from Integer, a large medical device manufacturer.

2018/19 strategic goals and priorities
In 2018/19 the challenge for the business is to continue to build on the success of recent years, whilst accelerating the pace of progress. The theme of this report is around how Scapa accepts this challenge. This will require considerable changes in the business which I have broken into three areas:

Challenge the Status Quo
In Healthcare, we see an opportunity as our customers re-evaluate what their core competence is, leading to a shift in the market towards outsourcing, and where Scapa is in the best position to capitalise. This will give further opportunities for technology transfers in addition to the more traditional organic growth and acquisitions. Healthcare expanded beyond the adhesives based value chain with the acquisition of BioMed, and will continue to identify other opportunities particularly where we can address other parts of our customers' portfolios and requirements. We will also continue to improve our Healthcare margin towards the stated medium-term target of 20%.
Challenge Sufficiency
Industrial has performed well in recent years with its strategy to improve margins and ROCE, and there is further efficiency to extract through that route. The acquisition of Markel provides an opportunity to deliver operational synergy leveraging our operational excellence capabilities. We will also focus on growth in niche areas where we feel we have a competitive advantage. We believe we can grow by exceeding our customers' expectations through improved market and customer knowledge and a differentiated delivery model. We will continue to improve our Industrial margin towards the 15% target.

Challenge Ourselves
As we continue to grow, we need to invest in the development of our employees. The Scapa Way, based on our Ten Guiding Principles, provides a great foundation. We will focus on the greater engagement of our people using the tools we have developed. We will continue to bring in external talent with aligned entrepreneurial mindsets to push us further in our journey. We will also focus on succession planning, leveraging the internal capabilities that we are developing.

Outlook
We have accomplished many things during the year. We acquired two businesses that are both strategically significant to the Group. We signed two technology transfers that validate our Healthcare strategy. We continue to drive growth and margin improvement across both Healthcare and Industrial and there are considerable opportunities in both businesses. Likewise, we also face challenges that we need to overcome; status quo in Healthcare; sufficiency in Industrial; and ourselves to push forward to achieve our goals. We are confident about the future of the business and accept these challenges.

BUSINESS REVIEW: HEALTHCARE
Scapa Healthcare continues to lead as a trusted strategic outsource partner of choice, providing turn-key solutions into three target markets: Advanced Wound Care, Consumer Wellness and Medical Device.

Through innovation, expertise and alignment of our core values, we support leading healthcare companies through their growth challenges by developing and manufacturing innovative skin friendly solutions. Our deep understanding of our customers and the healthcare markets we serve enabled us to deliver another successful year of profitable growth. We've continued to invest in the business and find innovative solutions to strengthen our position as our customers' preferred outsource partner.

Market trends and overview
Global healthcare organisations and leading consumer brands continue to face pressure to deliver high quality products more efficiently. Traditionally, companies would invest heavily in differentiating technologies and manufacturing infrastructure while attempting to lower their cost of manufacturing. The healthcare environment and market demands for innovation have pressured healthcare organisations to focus more heavily on their core competencies and leverage a strategic outsource partner with scale and unique abilities. Responding to this market shift, Scapa Healthcare is well positioned as a trusted strategic outsource partner.

Globally, healthcare companies remain committed to strengthening their branding, marketing and distribution channels while utilising outsource partners as a more efficient means of innovating and manufacturing their products. Demand for strong outsource partners has grown significantly over the last decade as brand leaders seek to improve their supply chain efficiency, shorten development times and bring differentiating products to market faster. Outsource partners are not only tasked with delivering a complete turn-key product, but also with delivering innovation, design, development and regulatory expertise. Through collaboration, brand owners are able to enhance their competitive position in the marketplace.

The demand from leading brands for innovation to streamline their development process has increased substantially over the last few years. Scapa Healthcare's innovation strategy seeks to build a robust pipeline of research and development programmes, as well as new customer development projects. Through its strategic development and acquisition strategy, Scapa Healthcare has positioned itself for growth as an innovative partner to existing and emerging healthcare companies around the world. In addition to sales of products, Scapa receives a small percentage of its revenue through the sale of development services.

Building on last year's success, the 2016 acquisition of EuroMed continues to deliver strong profitable growth. Leveraging hydrocolloid technology, new product launches have enriched business opportunities with global advanced wound care, ostomy and consumer wellness customers. The development of new formulations met increased market demands for sensitive skin adhesives.

This year, Scapa made two acquisitions; BioMed Laboratories LLC ('BioMed') and Markel Industries ('Markel'). The acquisition of BioMed based in Dallas, Texas, was Scapa Healthcare's first adjacent platform. BioMed, a leading business-to-business developer and manufacturer of topical skin care solutions, expanded Scapa Healthcare's offering beyond adhesive-based solutions. Scapa can now offer customers complementary topical solutions such as tubed hydrogel, wound cleansers and moisturisers to pair with our skin friendly adhesive applications. Whilst Markel is primarily an Industrial acquisition, some sales are to Scapa Healthcare OEM customers.

Ongoing development work to meet market demands for sensitive skin applications led to the introduction of two new low trauma adhesive platforms. Scapa Soft-Pro® Low Trauma Hydrocolloid was introduced in February. The technology, with similar properties and applications as silicone gel, is considered a suitable adhesive alternative and safe for gamma sterilisation. The Scapa Soft-Pro® Silicone Gel range expanded with the introduction of a new ultra-flexible formulation. Both technologies allow us to better meet increased market demands for repositionable, sensitive skin applications safe for use on neonatal to geriatric users. We can now offer a more comprehensive range of adhesives for use in the advanced wound care and device fixation markets.

This year also saw the introduction of a market-ready line of absorbent, non-adherent hydrogel wound contact layers for advanced wounds and burns. Scapa Soft-Pro® Hydrogel Wound Contact Layer offering provides customers with a proven technology in a market-ready dressing. This format allows customers to quickly brand and introduce the product to market.

Strategy and business model
Scapa Healthcare will continue to focus on being a strategic outsource partner of choice for current and future industry leaders in Advanced Wound Care, Consumer Wellness and Medical Device.

Our strategy is to become our customers' de-facto product development and manufacturing arm. We will remain a business-to-business partner that supports customers in design, development and manufacturing of new medical devices and products into the healthcare markets we serve. Our team of dedicated experts and full turn-key capabilities provide finished, packaged and sterile products which enable us to rapidly take a product from concept to market faster than many of our partners can do internally. Our ability to innovate and quickly introduce products allows us to offer partners a sustainable competitive advantage in the marketplace. This establishes long-term partnerships, supported by multi-year contracts that provide visible and secure streams of income for the business.

Our technology transfer strategy further strengthens our partnerships as we seek to acquire technologies or assets from customers to enable them to more efficiently focus on their core business. This strategy secures an exclusive agreement with customers with the intent of revitalising product lines through innovation and operational optimisation. Our strong manufacturing know-how of similar products allows us to efficiently manufacture and simplify their supply chain.

To enhance our plan, we will continue to establish a strong platform for growth with long-term contract renewals and increased strategic engagement with our customers. We actively aim to expand our technology and product portfolio, sales channels, manufacturing capabilities and capacity and quality systems to remain a value-add partner to our customers and increase our share of the customers' total spend. In order to do so, we must focus on the full supply chain and complete product processes from design and raw material selection, through converting and packaging, to sterilisation and logistics. We strive to be our customers' strategic outsource partner of choice.

Delivering high quality products is at the heart of everything we do; it is the foundation of trust with our customers. We have dedicated global healthcare quality teams at each site, and all product development and production processes are subject to rigorous quality control measures.

This year we have made significant investments in capacity and the organisation to deliver on our Healthcare growth strategy and house equipment acquired from technology transfers. In March, we broke ground on a new built-for-purpose medical manufacturing facility in Knoxville, Tennessee. The new facility will integrate the site's three existing buildings into a single site of operation and significantly increase capacity with a 152,000 square foot building. The new facility is set for completion in November 2018 with relocation of equipment commencing thereafter.

In order to deliver in the ever-changing healthcare market, we will continue to expand and strengthen our current capabilities and monitor any gaps in our value chain. We will invest through targeted acquisitions to support our growth strategy and deliver more value.

BUSINESS REVIEW: INDUSTRIAL
The Industrial business unit strategy to improve return on assets while focusing on servicing our customers in our key sectors of Cable, Automotive, Construction and Specialty is working.

Our focused commercial strategy of optimising our product portfolio via direct strategic engagement with global OEMs, and gaining market share with our large global retail partners, continues to gain momentum. We continue to leverage our unique capabilities, strong manufacturing knowledge and trusted brand quality with our distribution partners. In conjunction with our commercial strategy, the self-help measures utilised to optimise our footprint and reshape the cost to serve our customer base, have accelerated margin and improved ROCE.

In addition, the Industrial business unit's first acquisition, Markel Industries, allows us to benefit from the ability to transfer the volumes to our current manufacturing footprint. Our focus in these areas has allowed us to deliver improvements in trading profit and margin, and we see further revenue growth in specific areas against a volatile macro environment.

Market trends and overview
Our Engineered Products business, where we provide bespoke solutions in our key sectors of Cable and Automotive, continues to deliver. Our commercial and technical partnerships with strategic customers allow us to offer tailored adhesive solutions to satisfy unique and specific challenges, increasing our pipeline of future growth opportunities. Our global network of manufacturing, sales and distribution facilities, coupled with the reach of our trusted partners, allows us to cost effectively meet customers' expectations.

Our Cable segment products offer integrated solutions for semi-conductive power transmission needs, deep water submarine cables and protective impermeable coverage for fibre-optic and copper communication lines. We are rapidly expanding our portfolio to include fire-resistant products, to meet the increasing demands in building regulations, off gassing and our pioneering UL listed halogen-free products. Our year-on-year success across all key performance areas is attributed to our strategic collaboration with major European subsea and high-voltage cable manufacturers, and our technical expertise offered in our solutions for unique fibre-optic protection with partners in North America. We expect this to be sustained as further investment takes place in 5G and infrastructure such as wind farms.

The Automotive segment focuses on both internal and external protection of cars. Internal protection includes products for wire harnesses, seat sensors and seat heaters. Externally, we specialise in products that protect the paint and the bumper via our Covergard™ products plus emblem mounting. Our core products are used in protection wraps for shipping and wire harnesses. Growth in the European markets continues, while in North America we continue to improve margins and focus on building our new business pipeline with higher margin products with major suppliers for new platforms. As automotive manufacturers expand vehicle capabilities to include connection to multiple devices; systems for autonomous driving; larger battery banks for electrical driving; and multiple safety features, together with reduction in weight and enhanced environmental considerations, we see increased opportunities for our products. Our global network allows us to provide local presence to meet the 'just-in-time' production demands from the automotive OEMs and their suppliers.

Our Commercial Products business serves the Construction and Specialty markets with application-specific and consumable solutions. Our two brands, Barnier® and Renfrew Pro™ Hockey Tape, are well recognised market leaders in the construction and specialty sectors respectively. Barnier® is a 100-year-old brand in the construction market in France with sizeable market share, which we are expanding beyond tapes to include gloves, wipes and other products. Barnier® continues to be the trusted brand used by construction professionals in France and throughout Europe. Renfrew Pro™ Hockey Tape is the dominant brand with a large market share in the global hockey tape industry. To further drive brand awareness, we continue to increase our online media campaigns and have seen significant results in engagement across all social media platforms with our 'Feel the Game™' campaign. We also continue our journey as the brand of choice with National Hockey League (NHL) teams and players, and are proud to be the only hockey tapes manufacturer to be an Officially Licensed Product of the NHL.

The Construction sector of the business offers our largest product portfolio and continues as the main driver for our Commercial Products business. The extensive range is used by contractors, professionals and do-it-yourself enthusiasts who have access to our products through multiple direct or indirect channels with our trusted retailers and distributors. The seasonal nature of construction with a short demand cycle, which is highly dependent on macro trends, means we continue to focus our efforts on driving revenue in the spring and summer months. Our continued focus on our Polyflex™ brand in Europe and North America means we have seen it grow at near double-digit rates for the eighth consecutive year.

In our Specialty sector, we continue to maximise growth opportunities by enhancing our capability to adapt existing bonding and laminating technologies to new applications for industry leaders across the aerospace, technical packaging, white goods, protection and military markets.

Strategy and business model
Our strategy is to continue improving ROCE through a business model where we continually review our asset base, manufacturing network, cost-to-serve and margin improvement programmes. Our diverse portfolio covering both Engineered Products and Commercial Products within and across the Industrial segments, with our broad technical toolbox of chemistries, materials and global supply access, makes Scapa Industrial a major player in the global pressure sensitive adhesive market. Our development platform allows us to reach across multiple markets and leverages existing products, materials and manufacturing knowledge into the hands of new and existing customers.
2017/18 performance
Once again, the Industrial business unit's performance exceeds trading profit and margin growth expectations. Our continued emphasis on improving our return on capital employed, gross margins, cost controls and footprint consolidation, while engaging with our strategic partner base, has lifted our performance. The business benefitted from the weakening of Sterling, the organic revenue growth of 2.4% being almost entirely due to currency. Revenue at constant currency is flat, after the loss of business which we chose not to continue following the closure of our Korean facilities and sales office consolidation in China. Similar to last year, trading profit is where we made the most impressive increase of 26.4%, and 23.8% organic at constant currency. Margins improved for the eighth year in a row to 12.6% as the business continued to improve its operational efficiency and supply chain.
Outlook
Whilst 2017/18 saw an increase in margins to 12.6%, we remain confident that there is further scope to improve the business through continued execution of the ROCE strategy and driving better asset utilisation. Further margin improvement will come from the full year impact of our acquisition of Markel, plus the full year benefit from the closure of our two locations in Korea and the re-shaping in China, coupled with other opportunities. Our macro environment in some sectors is GDP dependent, but we remain focused on driving towards our goals by continuing to build on current strategic relationships for growth and focusing on our core technologies at our core sites. We are continually building the pipeline of new business with our strategic business partners as we continue to improve engagement with them. We expect to continue to see improvements as we target industry average margins of around 15%. We will do this through relentless focus on improving trading profit via our commercial strategy, along with self-help programmes to improve margins, and review of our manufacturing network while reducing our cost to serve in specific regions.

FINANCE DIRECTOR'S REVIEW
The overall financial performance of the business has been impressive, with good profit and margin improvement and a strong Balance Sheet maintained after the completion of two acquisitions in the year, one within each of Healthcare and Industrial. The dividend has again been increased by 20%, supported by our confidence in the sustainability of this growth, and the continued excellent cash generation.

Revenue and profits
Group revenue increased by 4.3% to £291.5m (2017: £279.6m), 3.1% on a constant currency basis. Healthcare revenue was £112.8m (2017: £108.7m), an increase of 3.8%, or 4.3% on a constant currency basis with the currency gains made in H1 largely eliminated by the impact of the weakening US$ in H2. Constant currency revenue growth in Healthcare in H2 was 6.8%. Industrial revenue was £178.7m (2017: £170.9m), an increase of 4.6% (aided by the translation effect of a strong Euro), or 2.4% on a constant currency basis.

Trading profit for the Group increased by 18.2% to £34.5m (2017: £29.2m) or 17.3% on a constant currency basis. This resulted in a trading profit margin improvement of 140 basis points to 11.8% (2017: 10.4%). Healthcare contributed £17.4m (2017: £16.6m), a growth of 4.8% or 5.5% on a constant currency basis, with margins up slightly at 15.4% (2017: 15.3%). The Industrial trading profit was £22.5m (2017: £17.8m) showing strong growth of 26.4% or 24.3% on a constant currency basis, resulting in a trading margin of 12.6% (2017: 10.4%), a good step towards our medium-term aim of 15% for the Industrial business.

Trading profit is stated before; exceptional items which resulted in a gain of £0.1m in the period (2017: expense of £1.0m); pension administration costs of £0.6m (2017: £0.7m); and amortisation of intangible assets £3.3m (2017: £3.7m). The Board believes that the adjusted presentation assists shareholders in better understanding the underlying performance of the business and is adopted on a consistent basis for each set of half year and full year results.

Profit before tax
The Group operating profit before tax was £28.8m (2017: £21.8m), an improvement of 32.1% within the year.

Currency
Currency translation had an overall beneficial impact on both sales and profit during the 2018 reporting period, boosting both sales and trading profit growth by about 1%. In the second half, there was a currency headwind in the Healthcare business impacting both sales (8%) and profits (5.3%) as Sterling strengthened against the US Dollar. Across the year as a whole, the Group benefitted from the strengthening of the Euro, averaging €1.14 (2017: €1.20).

Exceptional items
Following the closure of the Swiss site in 2016, the land and buildings were sold on 20 July 2017 for an amount of £13.3m, resulting in exceptional income of £6.9m (2017: £0.3m) following all costs associated with the sale.

Exceptional costs of £6.8m (2017: £1.3m) were recorded during the year and the charge was made up of the following items:

• Site closure and associated asset impairment costs of £4.7m for closure of our Korean facility and reduction in our China/Hong Kong footprint. On 23 May 2017, we announced plans to exit the production facility in Korea and transfer the technology, plant and machinery to other sites within the Group
• Exceptional reorganisation costs of £1.1m for a UK based manufacturing facility for employee-related severance costs
• Acquisition costs totalling £0.8m for the successful acquisition of Markel Industries ('Markel') and BioMed Laboratories LLC ('BioMed')
• Abortive acquisition costs of £0.2m were also recorded as an exceptional expense in the year for projects that had progressed as far as external due diligence but did not complete

In order to provide a clearer understanding of the performance of the Group, the above items, both income and expenses, have been separated out from trading results.

Segmental performance
In line with prior year reporting, we continue to manage separately the Group's Healthcare and Industrial activities, and our segmental reporting reflects this. Corporate costs, at £5.4m (2017: £5.2m) which include the costs associated with the Board, governance and listed company costs, are reported separately to Healthcare and Industrial.

Alternative performance measures
We use a number of alternative performance measures to assist in presenting information in this statement in an easily analysable and comprehensible form. We use such measures consistently at the half year and full year and reconcile them as appropriate, and they are used by management in evaluating performance. The measures used in this statement include:

• Constant currency revenue and trading profit: this reflects prior year results translated at the current year's average exchange rate
• Trading profit: this is profit before exceptional items, pension administration costs and amortisation of intangibles and allows the impact of restructuring and reorganisation activities and acquisition costs to be identified separately. These items are excluded as they are seen as significant non-trading items and are treated consistently with prior years
• Net debt: comprises cash and cash equivalents net of current borrowings, obligations under finance leases and unamortised debt issue costs
• Trading margin: this is trading profit divided by sales
• Organic underlying sales: this excludes the impact of acquisitions within the reporting period
• Adjusted Earnings per Share: this is earnings per share using the Trading profit after tax and is reconciled in note 10 of the accounts

Group refinancing and net finance costs
The Group's revolving credit facility was due to expire in June 2018. During the year the Group secured replacement banking facilities from a revised banking syndicate and entered into a new revolving credit facility (RCF) on 31 October 2017.

The previous £60m multi-currency RCF has been increased to a five-year £70m facility with a maturity of October 2022.Features of the replacement facilities include:

• a multi-currency £70m RCF of which £20.8m was drawn at 31 March 2018 providing the Group with a significant committed funding headroom
• a 50bps reduction in non-utilisation fee and a 40bps reduction in margin
• less complexity in key operational covenants
• a £30m uncommitted accordion feature to provide further capacity for potential future acquisitions to support the strategy of the Group

Net finance costs were £1.9m (2017: £2.0m). Net cash interest remained constant at £1.2m (2017: £1.2m). Non-cash interest reduced to £0.7m (2017: £0.8m) and relates to the Group legacy defined benefit pension plans.

Tax rate
The Group's tax charge was £5.3m (2017: £4.2m) and includes a £5.4m charge (2017: £5.6m) on trading activities and a £0.1m credit (2017: £1.4m credit) on exceptional items.

The Group's effective tax rate is a blend of the different national rates from the operating subsidiaries in the various countries in which we operate, applied to locally generated profits. Our tax arrangements are driven by commercial transactions, managed in a responsible manner based on compliance, transparency and co-operation with tax authorities. Tax planning remains conservative with no use of hybrid entities or tax havens.

We report an adjusted effective tax rate to give the best indication of the Group's tax commitments. This tax rate is calculated on trading activities after the deduction of cash interest. The rate in the current year is 16.2% (2017: 20.0%). The passing of the Tax Cuts and Jobs Act in the USA in December 2017 resulted in a £2.4m net one-off gain, as the Group's US deferred tax liabilities were revalued as a result of the reduction in the US Federal corporate income tax rate. Accordingly, the Group's tax rate is significantly lower, at 16.2% (2017: 20.0%). Although the other national rates applied to local profits are generally higher than the UK standard rate, the Group also benefits from unrecognised tax losses in the UK along with sensible and compliant tax planning.

The Group's cash tax payment in the year was £2.8m (2017: £2.8m) or 8.1% of trading profit. Cash tax remains below the effective tax rate in 2018, as the Group was able to use brought forward losses. As the Group continues to increase its profitability, we expect to see from 2019 onwards cash tax payments becoming more in line with the effective tax rate as brought forward losses in certain non-UK jurisdictions are used up.

Acquisition activity
A high level of acquisition activity was maintained throughout the year with a large number of companies evaluated, resulting in the successful completion of two acquisitions.

On 8 August 2017, the Group acquired the US based company, Markel, a manufacturer of multi-layer adhesive footwear cleaning mats, for US$10.2m (£7.6m). This is our Industrial business unit's first acquisition, and the integration of the company into the existing Scapa footprint is progressing well. Reorganisation costs of US$0.7m (£0.5m) were charged against trading profits in the period relating to the consolidation.

On 23 March 2018, the Group also acquired the share capital of BioMed, based in Dallas, Texas, for an initial cash consideration of US$18.6m (£13.3m) with a further cash consideration of up to US$13m payable to the shareholders depending on performance in calendar years 2018 and 2019. BioMed is a leading developer and manufacturer of gels, creams, lotions and liquids for the wound care and consumer wellness markets, and supports the Group's strategy to expand its offering of turn-key solutions for our Healthcare customers beyond the adhesives value chain.

Earnings per share
Adjusted earnings per share improved by 23.0% to 18.2p (2017: 14.8p) and basic earnings per share was 15.4p (2017: 11.6p), an increase of 32.8%.

Cash management
Delivering good cash generation is core to Scapa's strategy - it is always part of the regular monthly routine but there was a particular focus this year due to 31 March falling on Easter Saturday, which we were concerned could affect cash collections. Net debt closed at £3.8m (2017: £16.1m) - a stronger than expected performance, after payment for the acquisitions of Markel and BioMed as outlined above, offset by the receipt from the sale of the Swiss property for £13.3m.

This strong cash generation funded net capital expenditure of £6.4m (2017: £8.3m), net cash interest paid of £1.3m (2017: £1.2m), income tax paid of £2.8m (2017: £2.8m), pension contribution payments of £4.4m (2017: £4.6m) and a dividend payment of £3.0m (2017: £2.6m).

The ratio of net debt to EBITDA was 0.09 times, giving significant headroom against our improved facility covenant of 3 times. The Group continues to operate well within its banking covenants, with significant headroom under each ratio at year end.

Dividends and capital allocation
The Board is recommending a 20.0% (2017: 14.3%) increase in the full year, final dividend of 2.4p (2017: 2.0p). This increased dividend balances both the strong cash performance in the period and our underlying confidence in our business, whilst maintaining Balance Sheet capacity to support the future growth of the Group. Dividend cover, the ratio of adjusted earnings per share to dividend per share, is 7.6 times (2017: 7.4 times). Subject to shareholder approval at the Annual General Meeting, the final dividend will be paid on 17 August 2018 to shareholders on the register on 20 July 2018.

Our objective is to maximise long-term shareholder returns through both organic growth and growth through acquisitions. We continue to adopt a cash allocation policy that allows for continuing investment in capital projects that support growth and health and safety, regular returns to shareholders from our free cash flow, and acquisitions to supplement our existing portfolio of business whilst maintaining an efficient Balance Sheet appropriate to the Company's investment requirements.

Post-retirement benefits
The Group has no open defined benefit schemes and the majority of the post-retirement benefit schemes for employees are defined contribution. The Group's Balance Sheet carries pension deficits that relate to schemes that have been closed for many years, and some very small overseas leaving indemnities that are classed as defined benefit.

The Company has recently set up a joint working group with the UK Pension Scheme Trustee to select joint advisers as we have reached a stage where the Group's goal to move the UK scheme to a full buy-out position is becoming more achievable. We continue to manage the cost and volatility of the legacy pension deficits and we continue to see good take-up of the Flexible Retirement Options (FRO) that are now embedded into the UK scheme.

The triennial valuation date for the UK pension scheme was 31 March 2017. The valuation is nearing completion and we have agreed with the Scheme Trustee that no changes will be required to the contributions arrangement beyond those agreed through the 2012 Central Asset Reserve (CAR) structure, which were £3.9m (2017: £3.9m) in the year.

During the year, the fair value of the UK scheme liabilities fell by £14.0m largely due to changes in demographic assumptions, whilst the fair value of the UK scheme assets also fell by £4.2m as a result of the benefits paid to members net of Company contributions and return on asset investments. This resulted in an overall significant decrease of £9.8m in the IAS 19 scheme deficit to £14.0m (2017: £23.8m).

The scheme's investment strategy includes a portfolio of assets that are matched to the duration of the member liabilities. This strategy hedges the deficit from changes in bond yields that affect the discount rate and is reflected in the asset and liability movements in the current year.

Overseas cash contributions were £0.7m (2017: £0.9m); these contributions relate to leavers and not to a deficit repair schedule of payments. Pension administration expenses of £0.6m (2017: £0.7m) in relation to the pension schemes are reported through operating profit under IAS 19.

The overall Group pension deficit for all schemes totalled £21.0m (2017: £31.4m) at the end of March 2018.

Scapa has other pension projects in the pipeline and will continue to execute projects that provide a good balance of member and Company benefits whilst looking to de-risk the scheme further as we move forward with our joint working group with the UK Pension Scheme Trustee.

Shareholders' funds
Shareholders' funds increased by £18.5m to £118.9m. Profit after tax increased to £23.5m (2017: £17.6m). The pension gain in the period was £6.6m (2017: £6.9m loss). Movements in equity that related to share issues, dividends and options reduced shareholders' funds by £1.1m (2017: £0.7m decrease). Currency movements on overseas asset values were unfavourable in the period at £9.8m (2017: £12.7m favourable). Tax items booked directly into reserves were £0.7m (2017: £Nil).

Brexit
As a global business with over 90% of the Group's activities outside of the UK, Scapa has limited exposure to Brexit. The main impact felt so far has been on the translation of overseas results from the recent unpredictability of Sterling, particularly against the US Dollar. The Group has continued to review the implications of the result of the UK referendum to leave the EU on our business model and whilst Brexit has introduced a level of uncertainty into how our European business will operate in the future, we are experienced in dealing with the challenges associated with trading across borders that do not benefit from the Single Market and are confident we will be able to adapt to any new requirements during the transition period. Potential increased levels of bureaucracy may incur additional compliance costs but we do not believe that these will be material to the Group.

The Board will continue to assess the implications of the changes as they emerge, in particular relating to customs and duties.

Risk management and the year aheadRisk is managed closely and is spread across our businesses and managed to individual materiality. We have a Code of Conduct, which is adopted internationally and reflects our ethical approach to business. The Board has considered all of the above factors in its review of going concern and has been able to conclude the review satisfactorily.

For full press release and presentation see Reports and Presentations