Interim Results

Scapa Group plc, a global supplier of technical tapes today announced its Interim Results for the six months ended 30 September 2006.

Highlights

• Underlying sales up 5% due to growth in Europe following operational improvement initiatives
• Trading profit* of £3.8m - 35% up on last year's result
• Further stage of major cost reduction programme now put in place - cost £1.3m with annual savings of £1.5m
• Sale of Megolon compounding business for £16.75m successfully completed on 13 October 2006. Profit of approximately £9.5m to be credited to second half accounts
• New legal cost apportionment agreement on asbestos litigation saving £0.5m of cash in the full year.  Over 12,500 claims (40% of total) dismissed since March 2006

Commenting on the results, Chief Executive Calvin O'Connor said:

"The ongoing improvement in trading performance, despite weaker market conditions in North America, reflects the major benefits arising from the cost reduction programmes put into place last year.  The cash performance continues to strengthen, with Group borrowings eliminated in mid-October following the successful completion of the Megolon disposal.  In addition, significant progress has been made on our asbestos litigation legacy issue.  Major work is currently underway to address our pension deficits."

For further information:

* Figures shown here and elsewhere as 'trading profit' in the Interim Results relate to operating profit before exceptional costs

Report of the Directors

The first half of the year showed a continued recovery in the business despite weaker market conditions in North America.  Sales turnover of £97.9m was 4% (5% on an underlying basis) up on the prior year due to strong growth in Europe.  Operating profit before exceptional costs (trading profit) was £3.8m compared to £2.8m in the first half of last year with the weakness in the US$ in the period costing £0.1m.  Reorganisation costs in the first half amounted to £0.5m (2005/06 £1.6m) and were offset by a credit on the asbestos litigation reserve of £0.5m (2005/06 nil) to give net exceptional costs of nil, leaving operating profit unchanged at £3.8m (2005/06 £1.2m).  The profit before tax was £2.1m (2005/06 £0.1m loss).  Profit after tax was £nil (2005/06 £2.5m loss) and as last year there is no interim dividend.

Portfolio

As outlined in our preliminary results, one of the key thrusts of our strategy is to reduce the spread of our business by selling peripheral operations.  On 19 June 2006 we completed the disposal of our small loss-making Irish distribution business for £1.0m, including £0.4m of deferred consideration.  The loss on disposal after transaction costs was £0.1m.  Following shareholder approval on 23 August 2006, we completed the sale of our Megolon compounding business for £16.75m on 13 October 2006.  The profit on the disposal of Megolon after transaction costs amounted to approximately £9.5m and will be accounted for in the second half results.

Review of Operations

North America

North American sales of £33.6m (£32.8m) were a little ahead of the prior year. Trading profit of £3.9m was £0.4m behind 2005/06, due primarily to flat sales volume and slightly lower margins.

Overall market demand was a little subdued with sales mix unfavourable due to lower medical sales in comparison to last year's strong first half.  Sales price increases made over the last 12 months partly offset the significant increases in raw material, energy and carriage costs with average margins easing a little. Operational cost control remained tight throughout the period.

Europe

Sales in Europe increased by 6% (7% on an underlying basis for our tapes business) to £60.6m compared to the first half of 2005/06, primarily due to higher sales into the printing and graphics, construction, cable and automotive markets. This gain reflected the significant improvements in customer service made over the last 18 months.  The trading profit for the region increased by £1.2m to £1.3m primarily due to lower costs arising from the previous year's major cost reduction programme.  Targeted selling price increases coupled with improved purchasing helped to partly offset the increases seen in raw material and energy costs. 

The third phase of the major cost reduction programme was commenced with an exceptional cost of £0.5m incurred to the half year. 

Asia

Asia's sales were 8% down on last year at £3.7m.  The trading loss in the period of £0.1m (2005/06 £0.1m profit) was disappointing with the strength of the Korean Won continuing to hamper profitability in the region.  Actions to improve business performance have recently been put into place and we look forward to significant improvement in the second half.

Corporate

Relentless cost reduction remains the key focus with ongoing elimination of support roles and rationalisation of work within our European operations which contributed towards a reduction in costs of £0.5m in comparison to the prior year. During the first half we terminated currency swaps that had historically been used to partially hedge the Balance Sheet at a one-off loss of £0.1m.  The recent move to AIM gave rise to an exceptional cost of £0.1m in the first half.  The lease on the former Blackburn HQ was assigned in the period giving rise to a credit of £0.2m to exceptional costs.  Following the period end we concluded the sale of several residual properties for £0.5m which will give rise to an exceptional profit on disposal of £0.5m in the second half (2005/06 first half £0.1m).

Profit before tax and taxation charge

Net bank interest of £0.6m was £0.2m up on prior year due to substantial rate increases over the last 12 months.  Other finance charges (discount on litigation provision and IAS 19 finance cost) increased to £1.1m (2005/06 £0.9m) due to the increased size of the pension deficit. The profit before tax was £2.1m (2005/06 £0.1m loss).

The tax charge of £2.1m included underlying taxation payable of £0.8m and deferred tax of £1.3m.  No benefit has been recognised for potential future tax credits in loss-making jurisdictions (primarily the UK).

The earnings per share were nil pence (1.7 pence loss in the first half of 2005/06).

Cash flow

Net cash inflow from operating activities (before exceptional costs) was £4.2m (2005/06 £2.6m). Trading working capital as at 30 September 2006 was higher than at 31 March 2006 for normal seasonal reasons.  This resulted in a £0.9m trading working capital cash outflow (2005/06 £1.6m).  Reorganisation spend was £0.4m (2005/06 £1.8m) with additional deficit funding payments into the pension funds amounting to £2.0m (2005/06 £1.4m).  Asbestos litigation defence spend reduced substantially to £0.4m (2005/06 £0.9m), due to lower legal activity together with the new legal cost apportionment agreement made with our insurance carriers during the period.  Capital investment in the first half was again tightly controlled at £1.2m (2005/06 £0.7m).  In June 2006, £0.6m was received from the sale of our Irish subsidiary which helped to give a net cash inflow for the period, after exchange movements, of £1.0m.  Overall net debt (excluding the remaining Waycross deposit of $10m) was thus £0.6m lower than at 31 March 2006, at £12.6m.

Pensions

The IAS 19 pension deficit as at 30 September 2006 was £62.2m (31 March 2006 £63.4m).  A revaluation of the UK pension schemes at 1 April 2006 was recently completed.  Discussions are currently in progress with the pension Trustees over ways to reduce the deficit, including future funding commitments by the Company.  It is the Company's intention to close the schemes to future accrual from 1 April 2007, with employee consultation now commenced on this proposal.   The sale of our Irish subsidiary in June triggered a Section 75 debt which will be funded progressively, using in part the £0.9m net disposal proceeds as these are received.

Asbestos litigation

The Company continues to be involved in a number of cases in the USA arising from the alleged exposure of papermill workers to asbestos in a product which was manufactured by a business sold to J M Voith AG in 1999.  The overall number of cases peaked in 2004 at 34,000 and has since trended downwards.  Over 12,500 plaintiffs' claims were dismissed by the District Court for the Eastern District of Pennsylvania in the period, with the total number of claims at 30 September 2006 now down to 20,000.

During the first half, discussions were undertaken with our insurance carriers over the apportionment of legal defence costs.  Agreement was reached for the three years commencing 1 April 2006 that our share of litigation costs would be reduced from approximately 50% to 25%.  This change gave rise to a reduction in the litigation reserve resulting in a credit of £0.5m to exceptional costs.

In the USA no Scapa Group company, nor any of our insurance carriers, has admitted liability to date, nor made any payment to any plaintiff.  Accordingly, our insurance cover remains intact and the Board will continue to defend vigorously the outstanding claims.

The Board

Michael Baughan and Sarkis Kalyandjian retired from the Board after the Annual General Meeting on 25 July 2006.  We wish them a long and healthy retirement.  Colin White resigned as a director on 29 November 2006.  We would like to thank him for his service over the last five years and wish him well for the future.  An announcement about his successor will be made in due course.

Prospects

Currently trading conditions for the second half show a modest improvement, with market demand in North America strengthening a little.  The upward pressures on certain raw material prices are mitigating somewhat following the recent falls in the price of crude oil.  As indicated in our Shareholder Circular, the sale of our Megolon business will give rise to a reduction in trading profits but resulting lower interest charges will offset most of the impact on profit before tax.  The third phase of the overall cost reduction programme has now been enlarged from that announced at the time of the Preliminary Results, with a projected full cost in the year of £1.3m (was £1.0m) and resulting annual savings of £1.5m (was £1.2m).  It is expected that the strong focus on major cost reduction will ensure that business performance continues to improve.

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