Preliminary Results 2010

Scapa Group plc, a global supplier of technical adhesive tapes, today announced its Preliminary Results for the year ended 31 March 2010.

Financial Highlights
• Return to trading profit and cash generation in H2
• Significant turnaround in H2 underlying trading profit* to £2.6m from a loss of £6.4m (H2-2009)
• Net cash balance of £4.8m after funding £5.7m of exceptional cash flows

Other Highlights
• Pension deficit down to £38.6m (£27.7m after tax) with annual cash outflows reduced by £1.2m for the next three years
• Major restructuring programme delivering annual cost savings of over £11.0m
• Under IAS 37, provision made for potential asbestos indemnity exposures - fully covered by robust insurance assets
• Senior management strengthened to support global market structure

Commenting on the results, Chief Executive Heejae Chae said:

"We returned to trading profitability and cash generation in the second half of the year.  The Group’s second half profit alone is a £9.0m turnaround from the same period last year.  We completed our cost cutting programme ahead of plan with annualised savings realised at over £11.0m.  Close management of working capital combined with action on the cost base has maintained a strong net cash position. 

“Revenue has increased sequentially for two consecutive halves although full year sales remain below the prior year on an underlying basis.  The recovery in sales volumes is continuing in the first two periods of the new financial year and North America, which had previously lagged behind, is beginning to show signs of growth. 

“The Board recently approved a three-year strategy to focus on our key markets: Medical, Industrial, Electronics, Consumer and Transport.  We have restructured our management around the key markets and new skills and capabilities have been added to the team.  The business outlook in most of our markets is becoming firmer.”

For further information:

Scapa Group plc Heejae Chae - Chief Executive  Tel: 0161 301 7430
Scapa Group plc Brian Tenner - Finance Director  Tel: 0161 301 7430
Arden Partners Chris Hardie     Tel: 0207 614 5917

* Figures shown here and elsewhere as 'underlying' adjust for the impact of disposals and are adjusted to current year foreign currency rates.  ‘Trading profit/(loss)’’ is operating profit/(loss) before exceptional items.

For full Press Release and Presentation - see Reports and Presentations

 
Chairman’s Statement

It has been a year of significant change as we progress towards our vision of being a world class, inspired, market driven team, focused on optimising customer and shareholder value through responsible, agile delivery of specialist tape solutions.

In the next stage of the journey we are re-shaping our business around key markets and core manufacturing competencies.

Business performance
Like so many businesses, Scapa has been affected by the global economic downturn and we took swift action to mitigate its potential effects. During the first half of 2009/10 we continued our focus on cost control, cash and working capital. The closure of our Automotive facility in France with a transfer of much of the production to other Group sites was a significant milestone in the global cost reduction programme. Swift action on our cost base, coupled with our new focus on key markets, has positioned us well to take advantage of recovering volumes.

Revenue for the year was £176.7m, an increase of £2.7m, which reflected favourable currency movements of £12.3m. On an underlying basis, sales decreased by £9.6m (5%) with second half growth of £8.4m partly offsetting the first half fall of £18.0m.

Our European operations, which represent almost 60% of our business by revenue, recovered well in the second half. North American progress has been slower but is beginning to show signs of improvement. In Asia revenue growth was moderate at first but gathered momentum in the second half, finishing the year 20% ahead of the prior year.

Trading profit for the year as a whole stood at £1.6m (2009: trading loss of £1.0m). The second half profit of £2.6m compares very well with the second half trading loss in the prior period of £5.8m.  In Europe, the recovery in volumes in the second half led to trading profits of £2.6m (2009: £3.9m loss) which more than offset first half losses of £1.0m (2009: £3.1m profit).  Profit margins in North America were squeezed throughout the year by lower production volumes. However, trading profit still improved by £0.6m to £2.1m (2009: £1.5m) as a result of cost reduction measures. In Asia, trading profit was flat at £0.9m due to adverse foreign currency rates and thinner margins on volume growth. In February we appointed a new Asian Managing Director and we anticipate further strong focus on value added technical products in the electronics and infrastructure sectors in that region.

The business’s cash performance was monitored very closely during the last twelve months and although the effects of the economic downturn could not be eliminated, strong cash management has left the Group with positive net cash after borrowings of £4.8m (2009: £6.8m). This is after funding £5.7m (2009: £2.5m) in exceptional costs and one-off restructuring projects.

As last year, the Group maintains a cash deposit of US$10m which is restricted until December 2011 and which is then available to fund asbestos litigation defence costs for product liability claims.

Pensions
The total pre-tax pension deficit of all Group defined benefit retirement plans now stands at £38.6m (2009: £49.3m), a decrease of £10.7m from the prior year end. This deficit is lower than in previous years and I would remind shareholders that all the UK defined benefit schemes with total deficits of £32.9m (2009: £42.8m) are closed to new members and accrual of future service benefits. On a post-tax basis the Group deficit is lower still at £27.7m (2009: £35.3m).

We concluded the latest Triennial Review with the Trustees of the three UK pension schemes as at 1 April 2009. Pension cash flows in the next three years will be £1.2m per annum lower than the last three, with £0.5m of potential additional contributions linked to Group cash flow performance. Further work continues to crystallise or pay down liabilities and ongoing administrative costs.

Asbestos litigation
This year the Group carried out an actuarial assessment of potential lifetime product liability claims for a product that included a third party supplied component containing asbestos. Asbestos ceased to be used in our product in 1979 and the business and assets used in making these particular products was disposed of in 1999. The Group has now recognised the actuarial calculated liability and offsetting insurance asset in the Group Balance Sheet. This change in accounting treatment follows the first ever payment in full of a claim by Scapa’s insurance carriers of one judgement of US$0.9m (to three plaintiffs in the Baylor case).

The total number of outstanding claims is now 13,029 (2009: 14,234) of which approximately 12,000 are dormant. Our robust stance and resolve to defend against all claims continues. We do not believe that there will be any financial impact of the claims on the Group other than the continuing costs of defending against those claims for which a provision already exists. Our product liability insurance cover significantly exceeds the assessed lifetime costs of claims.

Taxation
The Group’s tax position has been put on a more robust footing in the last three years and now, as expected, the Group pays little or no cash tax as losses are utilised.

Dividends
No dividend has been declared in the current economic circumstances. The recommendation of dividends will stay under review and as Group profit and cash recover, we will consider the scope for making an appropriate distribution to shareholders, being mindful of the Group’s other obligations.

The Board
During the year there have been a number of changes to the Executive members of the Board. Calvin O’Connor retired at 31 December 2009 having been succeeded by Heejae Chae as Chief Executive. We would like to thank Calvin for his contribution and the manner in which he has handled the succession process. Steve Lennon has retired as Chief Operating Officer at 31 March 2010 and under the new structure will not be directly replaced. We wish Steve and Calvin a long and happy retirement.

Since the end of the year, Brian Tenner has given the Company notice under his contract of employment expiring on 24 May 2011.  Recruitment of a successor as Finance Director is under way and Brian will assist to ensure a smooth transition.

Our staff
We continue to make a number of changes to our senior management teams as we restructure the business around a market focus. We believe that the new structure and team members match the skills and capabilities needed for the next phase of Scapa’s development. We are ensuring that we have the most appropriate team to deliver our Vision and Strategy. It is recognised that the unstinting efforts of the whole team of 1,260 people have enabled Scapa to become a stronger and more focused business and we thank them for their support and efforts.

Outlook
The business set out to return to profit, cash generation and revenue growth in the second half and this has been achieved. Scapa is emerging from the challenging economic environment as a stronger and more capable business that will be able to grow profitably and withstand any further economic downturn. We start 2010/11 as a new phase in Scapa’s development. We have restructured our business to focus on key markets. Our European and Asian businesses are recovering well and North America is showing early signs of improvement. Cash, profit and growth, in that order, are the key deliverables for the new year.

Business Review

Strategy
Our strategy is to focus on high growth and high margin markets where Scapa has strong competitive positions.  The key markets are: Medical, Industrial, Electronics, Consumer and Transport.

We will leverage our extensive technical knowledge and global footprint to increase our share of business with existing Scapa customers, many of whom are market leaders. Our goal is to service all the tape needs of our customers by working in partnership from design and development to supply chain fulfilment.

During the past year, as we emerged from the recession, we have:

• focused on reducing our cost basis to drive profitability and cash generation;
• reorganised the business around a focus on the key markets; and
• strengthened the management team across the organisation.

We are working today to put in place the processes and systems to establish a solid platform that will enable us to deliver our strategy and shareholder value. We have also put in place new leadership teams and management structures to support our focus on our key markets.

 
Medical
Scapa Medical is a fully integrated, worldwide supplier of customised medical adhesive tapes, component materials and converted products for the medical device, wound care, hospital, transdermal and consumer industries. Our expertise and technical innovations are recognised by our world class customers such as Johnson & Johnson, Smith & Nephew, Covidien and Roche. Our strategy in Medical is to grow further business with our existing customers by providing a total solution for their tape requirements. Beyond strictly technical needs, we will service the supply chain and manufacturing requirements that are becoming increasingly global and complex. We will invest in areas that allow us to add further value and become an integrated partner to our customers.

Industrial
Industrial is the biggest segment of our business and represents a wide range of markets and applications, including solar, construction, foam fabrication, military, printing and graphics, cable wrapping and pipeline. Our product range covers a larger portfolio of product types than virtually any other manufacturer, meeting the requirements for many specialised applications. Given such diversity, we work with our channel partners and distributors to service the large market. Our strategy in Industrial is to leverage our brand and unique product portfolio to satisfy customer specifications, further gaining market share. We will partner with our distributors to efficiently and effectively cover the broad market.

Electronics
The technical tape requirements for the Electronics sector are increasingly demanding, driven by the innovation cycles of the market and global requirements of the customers. Scapa’s product portfolio and global footprint make us an ideal partner to service this sector. Our current engagement with global leaders in mobile phones and flat panel displays will enable us to keep pace with the fast changing market requirements. Our strategy is to engage early on future product developments through local presence and support the commercialisation through our global footprint. Most of the customers and supply chain are based in Asia. We have therefore strengthened the management team and enhanced our R&D and manufacturing competence in Asia to put ourselves in the optimum position to serve those customers.

Consumer
Under the brand, Barnier®, Scapa Consumer is the European leader in adhesive tapes for the professional building materials market as well as DIY applications. We sell through Europe’s leading specialist retailers such as Saint Gobain Distribution Batiment, Wolseley, Screwfix and Eurobaustoffe, as well as an extensive network of small retailers in Europe. We service the customers through highly sophisticated logistics from our distribution centre based in France to ensure first class service and prompt delivery.

We also sell a broad range of wraps and protection products for the ice hockey market. For more than twenty years, Scapa’s Renfrew® brand has become synonymous with tape for hockey players worldwide. We are the official tape for 27 teams in the National Hockey League in North America as well as for Team Canada and Team USA. Our products are sold through major sporting outlets in North America including WalMart, Costco and Canadian Tire.

Our strategy is to leverage our brands to broaden our product offering through our existing distribution channels. We currently service a small portion of the sports tape sold by our customers. We have the product portfolio and expertise to service the full range of the tape category. Our strategy is to focus on better category and portfolio management to expand our market share.

Transport
Scapa Transport is a world leader in the design and manufacture of speciality adhesive films and tapes for automotive production. We are engaged with the OEMs such as PSA and Volkswagen and their supply chain partners. Market product ranges utilize technically innovative materials and high performance adhesive systems to ensure full compliance with the stringent OEM specifications that drive this business and the key global customer requirements. Our strategy is to optimise our operation and supply chain to maximise our profit potential in this demanding market.

Operations
To support Scapa’s growth in our defined markets, we have reorganised our manufacturing operations into a global integrated function. The initial focus of this new integrated team is to drive unit cost reductions by improving our operational effectiveness and purchasing management and, also, to focus upon cash generation through more effective working capital management. The team will also focus on ensuring that the operations are capable of scalability to support future growth.

Organisation
We have reorganised the business to focus on key markets. The newly created Global Business Units (GBUs) will drive the strategy and resource requirements for each market. The GBUs will be supported by our global sales and marketing teams and the nine manufacturing sites around the world. We believe this market focus will enable us best to understand the need of the markets
and service our customers best.

The success of any strategy depends on the people in the organisation. We have committed significant resources to develop proper management and leadership talent internally. In addition, we have recruited talented enthusiastic people from outside Scapa and the tape industry to complement the dedicated 1,260 employees of Scapa worldwide.

2009/10 Performance

Overview

Sales in 2009/10 grew by £2.7m. The second half was 10% up on the prior period and was in sharp contrast to the first half when sales were 6% down. Underlying sales reflect adverse currency impacts of £12.3m and therefore fell by £9.6m (5.1%). The underlying performance in the first and second halves were a fall of 17% and a rise of 10% respectively. The underlying fall in revenue arose as the impact of the economic downturn continued in Europe and North America throughout the first half. Underlying revenues in Asia grew by 20% year-on-year. The trading profit in the current year of £1.6m is best considered in the context of a £5.8m loss in the second half of last year and a full prior year loss of £1.0m. This represents a significant turnaround and was fundamentally driven by annualised cost reductions of over £11.0m, aided by some volume recovery in Europe in the second half.

Europe
The start of the year saw a continuation of the weak economic activity of the prior year. Underlying revenues and trading profits in the first half were down by £10.9m (18%) and £4.6m respectively. The second half of the year saw the start of a recovery with like-for-like revenue growing double digit in each of the last five months of the year. Second half underlying revenues were ahead £6.6m (14%), reducing the fall in full year underlying revenues to £4.3m (4%). The increased volume in the second half, coupled with the full benefit of cost-cutting measures, gave rise to a trading profit of £2.6m and a full year trading profit of £1.6m.

Market sector growth rates varied throughout the year. Automotive sales recovered well in the second half and closed the year only 2% behind, with 47% growth in the second half. Industrial Assembly was down 5% on the full year but again saw better growth of 14% in the second half. These two sectors represent approximately 57% of our European business. Medical grew 8% year-on-year. Construction and Cable sectors saw continuing weakness although both appear close to bottoming out.

Cost control measures started last year continued through 2009/10. The Bellegarde site in France that had been particularly severely hit by the collapse in the Automotive sector was closed in July 2009. A significant proportion of the remaining production was relocated to sister facilities in France, Italy and Switzerland.

We are now bringing additional focus to high quality revenue growth in key market sectors. We expect 2010/11 to be a year of solid improvement in profit and cash generation in Europe.

North America
The trading environment and revenue profile in North America was similar to Europe in the first half (18% underlying fall). The second half saw a leveling off in sales volumes (a 1% underlying fall) compared to the 14% recovery in Europe. Whilst revenue ended the year down by 11% on an underlying basis in North America, trading profit rose by £0.4m to £2.1m (2009: £1.7m), again as a result of cost-cutting measures in the prior year. The Canadian Dollar once again strengthened significantly by 20% towards parity with the US Dollar reducing the value of trade between the two countries. From a market perspective, Industrial as a whole saw a fall of 12% on an underlying basis with the subsectors of Printing and Graphics and Construction being the hardest hit with falls of 15% and 42% respectively. Medical was down 8% due to lower sales in consumer wound care with a switch away from branded products.

In March 2010 we announced the closure of our small silicon based coating facility in Carlstadt, New Jersey, USA. The facility had been loss-making for a year with no recovery in sight. It is hoped to retain a significant proportion of the site’s revenue through production transfers to Windsor, Connecticut and Rorschach, Switzerland. The Carlstadt closure and focus on our key markets should consolidate current performance levels and build a foundation to recapture lost volumes at more attractive margins.

 
Asia
Our business in Asia continues to grow with year-on-year underlying revenues up by £2.1m (20%). The Asian economies saw a strong return to growth in the second half of this year with Scapa achieving underlying growth of 44% compared to zero growth in the first half. Much of this growth came in low margin
cloth business that supported overheads and helped offset £0.1m of adverse foreign exchange movements. Trading profit was therefore flat at £0.9m.

A new managing director for our Asian business has been appointed with a strong background and focus on the electronics industry, a key source of future growth for Scapa.

Corporate
Corporate costs rose by £0.4m to £3.0m (2009: £2.6m) due to recruiting new senior positions within the Corporate office and having two Chief Executive Officers in payment for four months of the year. The Corporate team continued the clean-up of the Group’s complex statutory structure and a further nine legal entities have been simplified in preparation for liquidation to reduce the ongoing costs of the Group’s historical structure.

Exceptional items
The closure of our facility in Carlstadt, New Jersey, will lead to the loss of 35 jobs. This project has been recorded as an exceptional item in the year ended 31 March 2010 with cash closure costs of £0.3m and non-cash asset impairments and provisions of £1.4m. It excludes any potential receipts arising from disposal of the site itself. The project has a payback of six months in cost savings and the release of working capital. The other exceptional costs include the remainder of the closure costs for the Bellegarde facility and the cost of restructuring the senior management team around our market focus. The above exceptional charges led to an exceptional tax credit of £1.0m with respect to deferred taxation.

Finance costs
Net finance costs increased by £1.3m due to a change in net interest payable of £0.5m, which includes new finance leases, and an increased pension financing charge (£0.8m). The IAS 19 finance charge rose so significantly due to the fall in asset values in the previous year. All else being equal, this charge should fall by around £1.5m next year with the recovery in asset values and lower discount rate as at 31 March 2010 (5.7% compared to 6.4%).

Taxation
The current year tax credit of £2.4m (2009: £20.2 credit) includes £Nil of current tax (2009: £1.5m credit) and £2.4m of deferred tax credit (2009: £18.7m credit). The credit is made up of a normal credit of £1.4m and an exceptional credit of £1.0m. The large prior year exceptional credit was due to the one-off recognition of deferred tax assets in the UK (accumulated losses, accelerated capital allowances and future pension deficit contributions). The Group has further unrecognised overseas deferred tax assets of £2.4m (2009: £2.7m) in respect of accumulated losses.

Cash flow
The Group began the year with net cash after borrowings of £6.8m. During the year the Group utilised £1.9m of cash with an unfavourable translation difference of £0.1m, resulting in year end net cash of £4.8m. This is a creditable result given that it is after £5.8m (2009: £6.3m) of defined benefit pension payments and exceptional cash flows of £5.7m (2009: £2.5m), whilst maintaining a reduced capital expenditure programme of £2.2m (2009: £8.9m). Effective management of working capital led to cash generation of £4.0m (2009: £10.0m). The reorganisational exceptional cash outflows of £4.6m were primarily in respect of the Bellegarde closure. Other exceptional cash flows during the year of £1.1m were in respect of provisions raised in prior years for asbestos litigation and environmental clean-up costs.

The Group will continue to closely manage capital expenditure in the coming year to address the cash constraints necessitated by the economic crisis. Next year’s expenditure is anticipated to be an increase of around £1.0m on the current year, contingent on attractive investment opportunities.

Pensions
The IAS 19 pensions deficit has decreased by £10.7m to £38.6m (2009: £49.3m) and now stands at its lowest point in eight years. The three UK defined benefit schemes, which are closed to future accrual, represent the largest portion of the deficit and that balance now stands at £32.9m (2009: £42.8m). The net movement in the UK deficits was the result of increases in asset values (£18.9m) outweighing the growth in total liabilities (£9.0m), the latter being the result of a decrease in the discount rate from 6.4% to 5.7%.

 
During the year two of the UK schemes reopened for early retirement. As a result, an additional £1.8m was paid in lump sum retirement benefits. This effectively extinguishes this liability permanently and also reduces the risk on benefits that have moved from deferred to pensions in payment. These costs were met by the funds themselves.

The Company concluded the negotiations with the Trustees of all three UK defined benefit pension schemes with respect to contributions for the coming three years. Affordability and a strong sponsoring employer were the key shared objectives and as a result annual recurring contributions for the three years from 1 April 2010 will be reduced by £0.5m per annum. During the three-year period this annual shortfall can be made good if cash flow targets are outperformed with any benefit being shared between the Company (67%) and the pension funds (33%), with the funds’ share limited to the cumulative shortfall. At the end of the three-year period contributions revert to their original level and any remaining cumulative deferred contributions are made good. The net impact of the agreement, combined with the completion of the s.75 payments (£0.7m for each of the last three years relating to a disposal in 2007) will be to reduce future cash pension costs each year by up to £1.2m.

As noted above, the Group continues to recognise the deferred tax asset (£10.9m) in respect of future pension deficit reduction payments which gain tax relief at the time of payment (as opposed to accrual). The pension deficit, net of deferred tax, is therefore £27.7m which includes a provision for future administration and PPF Levy costs of £6.6m.

Asbestos litigation
In February 2010 our insurers paid in full US$0.9m in respect of the Baylor judgement which had been under appeal since June 2007 and was finally decided in favour of the three plaintiffs by the New Jersey Supreme Court in December 2009. This is the first time that a payment has been made on behalf of any Scapa company in respect of any alleged personal injury resulting from exposure to products manufactured in the years up to 1979. Following this payment by our insurers, the Group has undertaken an actuarial and legal review of the probabilistic outcome of all current and future potential claims against Scapa. In parallel, a similar review has been carried out of the Group’s product liability insurance.

As a result, the Group has recognised a liability and an equal and opposite insurance asset of £20.3m. In addition, provisions of £7.5m (2009: £8.5m) remain to pay the Group’s share of future litigation costs. We have not changed our view that Scapa’s products have not been the cause of any alleged personal injury and we therefore continue to adopt the same robust stance with respect to all of the remaining personal injury claims in the USA arising from businesses sold in 1999. During the year 1,223 more plaintiff claims were dismissed and the total now stands at 13,029, a reduction of almost 21,000 since the peak of around 34,000 in 2004. A detailed review of the remaining claims has been carried out. Because Scapa has a record of every paper mill in the USA that bought a Scapa dryer felt, the date of purchase and number of products shipped, and the fact that only very specific employees in the paper mills would have handled or worked near Scapa products, it has been possible to compare various items of claimant data to workplace records and Scapa’s data noted above. This suggests that fewer than 1,000 or so of the current claimants may actually have encountered Scapa products.

Unlike other companies’ products, the general population had no exposure to Scapa’s products and therefore the population at risk is both very small and very well defined.

The Group continues to maintain a restricted deposit of US$10.0m (the ‘Waycross deposit’) in respect of the 1999 sale agreement with J M Voith AG. The deposit is restricted until 31 December 2011 at which point it will become available to fund Scapa’s share of ongoing defence costs.

Shareholder funds
The combined result of the loss after tax for the year of £2.8m and the unfavourable currency impact on overseas asset values of £0.7m, offset by the actuarial gain net of deferred tax (£6.1m) and other items (£0.4m), is a £3.0m increase in shareholder funds to £65.3m (2009: £62.3m).

Performance summary
Scapa’s revenues are growing again and trading profitability has been restored. At the same time, the UK pensions deficit and cash drain is becoming more manageable whilst the shadow of asbestos is crystallising into a much less significant challenge. Good progress in trading results, pensions and asbestos are three solid foundations on which to build a growing and sustainable business.

For full Press Release and Presentation - see Reports and Presentations