Interim Results 2007

Scapa Group plc, a global supplier of technical adhesive tapes, today announced its Interim Results for the six months ended 30 September 2007.

Highlights

• Good growth in all regions - underlying* sales up 6%

• Trading profit* of £4.8m - 70% up on an underlying basis; 26% up on last year's reported result

• Return on Sales of 5.6% - 60% up on an underlying basis

• Significant reduction in financing costs due to repayment of Group debt following strategic disposals in 2006/07
 
• New funding agreement with Trustees on UK pension funds deficit contributions – payments consistent with prior agreement (£3.4m p.a.)

• Pension deficit now £10.3m lower at £48.0m

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

"The ongoing improvement in trading performance reflects the combination of good revenue growth in all three regions together with the full year impact of cost reduction programmes put into place in the last two years.  The twin benefits of improving operating cash flows and a balanced outcome on pension contributions gives the business a robust platform on which to invest to further improve profitability. 

“Whilst the market conditions have softened somewhat in North America, and oil prices remain high, the Group’s operational performance is still expected to continue to improve on prior year due to internal business improvement initiatives in place.”

For further information:

Calvin O’Connor  Chief Executive  Tel: 0161 301 7430
Brian Tenner   Finance Director  Tel: 0161 301 7430
Mark Stirzaker  Company Secretary  Tel: 0161 301 7430

* Figures shown here and elsewhere as ‘underlying’ adjust for the impact of disposals and currency movements.  'Trading profit' is operating profit before exceptional costs.

A full copy of this announcement can be found at: Reports & Presentations

Report of the Directors

The first half of the year showed a continued improvement in the business despite the weaker US Dollar and continued upward pressure on raw material costs, particularly crude oil derivatives.  Turnover of £85.2m was £12.7m lower than the previous year.  However, after eliminating the impact of the prior year disposals (£14.9m) and adverse currency movements (£2.9m), underlying sales increased by £5.1m (6.4%).  This increase was due to growth in Europe (7%), North America (5%) and Asia (14%).  Approximately two-thirds of this growth was due to sales volumes, with the balance being sales price and mix. 

Operating profit before exceptional costs (trading profit) was £4.8m compared to £3.8m in the first half of last year.  On an underlying basis adjusting for disposals (£0.8m) and currency (£0.2m), trading profit showed a year-on-year increase of £2.0m (70%).  An exceptional charge of £0.3m was made in the period to cover the outstanding deferred consideration on the disposal in 2006 of our loss-making Irish business (this has now been put into liquidation by the buyer).  The prior year result included reorganisation costs of £0.5m and a credit to the asbestos litigation reserve of £0.5m (netting to exceptional costs of nil).  Financing charges of £0.9m (2006/07: £1.7m) in the current period were significantly improved following last year’s strategic disposals and the resulting repayment of Group debt.  Profit before tax was £3.6m (2006/07: £2.1m).  Profit after tax was £1.5m (2006/07: Nil) with earnings per share of 1.0p (2006/07: Nil pence).  As last year, no interim dividend is proposed.

Review of Operations

Europe
Sales in Europe of £48.4m showed an underlying increase of 7% against the first half of 2006/07 when adjusted for the impact of prior year business disposals and foreign exchange movements, with all market sectors outperforming the prior year.  Improvements in customer service continued throughout the period, with on-time delivery performance rising from an average of 89% in 2006/07 to 96% in September 2007.  Improving customer service has been a key underpin to revenue growth.  The trading profit of £2.0m (2006/07: £1.3m) reflects a fourfold improvement over the prior year when compared to the underlying profit which excludes business disposals (2006/07: £0.5m).  This significant improvement reflected the combination of higher turnover, operational gearing of our production facilities and full benefits from the previous major cost reduction programmes.  The turnaround in the performance of the UK business in the last two years, from a negative return on sales of 9.7% in 2005/06 to a positive return of 2.8% in the current period is particularly strong.  The return on sales for the European business as a whole was 4.1% (2006/07: 1.1%)

North America
North American sales of £32.8m (2006/07: £33.6m) were negatively impacted by the effects of the weakening Dollar, and on an underlying basis were 5% ahead of the prior year.  Trading profit of £3.9m for the region was in line with prior year despite the £0.2m impact of adverse foreign exchange movements.  Growth was seen in both the industrial and medical sectors, whilst market demand in the automotive and building and construction sectors was generally a little subdued.   The return on sales was maintained at its high historical level at 11.9% (2006/07: 11.5%).

Asia
Asia's sales, at £4.0m, were £0.3m higher than the 2006/07 half year despite the disposal of the Megolon compounding products in October 2006.  This represents growth of £0.5m (14%) when compared to the underlying result in the previous half year with strong sales into the electronics and regional infrastructure markets.  Trading profit increased to £0.3m (2006/07: £0.1m loss) largely due to sales growth but also reflecting the organisational and management changes put in place at this time last year.
 
 
Corporate
Corporate costs, at £1.4m, were slightly above the prior year due to the net impact of a number of one-off pension costs, such as additional adviser expenditure resulting from the negotiations for the new future funding agreements.  These costs were offset in part by a one-off pension curtailment credit resulting from the closure to future accrual of the last two open UK pension schemes.  These closures, coming at the end of the half year, are expected to benefit the current year results by £0.2m compared to the prior year.

Profit before tax and taxation charge
Following the repayment of the Group’s borrowings in the second half of last year (from the proceeds of business disposals) net interest income totalled £0.3m (2006/07: £0.6m charge).  Other finance charges (discount on litigation provision and IAS 19 finance cost) increased slightly to £1.2m (2006/07: £1.1m), giving a net finance charge of £0.9m (2006/07: £1.7m).  The resulting profit before tax was £3.6m (2006/07: £2.1m).
 
The tax charge of £2.1m reflects an improvement in the effective tax rate of the Group from 62% in 2006/07 (or 100% in the first half of 2006/07) to 54% in the current half year.  The charge includes underlying tax payable of £0.9m and deferred tax of £1.2m.  The improvement in effective tax rate is largely due to the combination of growth in UK operating profits (where tax losses are available and no deferred tax asset is recognised) and improvements to the Group’s internal capital/financing structure. 

The resulting earnings per share were 1.0p (nil pence in the first half of 2006/07).

Cash flow
Net cash generated from operating activities was £2.0m (2006/07: £1.6m). Trading working capital as at 30 September 2007 was higher than at 31 March 2007 as a result of the increased activity (sales) levels.  This resulted in a £0.4m trading working capital cash outflow (2006/07: £0.9m).  Spend against previously raised reorganisation provisions was £0.3m (2006/07: £0.4m) with additional deficit funding payments into the pension funds amounting to £2.3m (2006/07: £2.0m).  Asbestos litigation defence spend reduced to £0.3m (2006/07: £0.4m), due to lower legal activity during the period.  Capital investment of £0.7m (2006/07: £1.2m) in the first half of the year reflects a back end loaded expenditure profile and thus the current underspend of £0.5m is a timing difference that will reverse.  The overall net cash position of £12.5m (excluding the remaining Waycross deposit of $10m) was £1.3m better than 31 March 2007 (£11.2m).
 
Pensions
The IAS 19 pension deficit at 30 September 2007 was £48.0m (31 March 2007: £58.3m).  The majority of this £10.3m improvement reflects current market conditions, especially the trends in gilts (and hence discount rates) and equity performance.  During the period the Company made deficit payments to the various UK funds of £2.3m (2006/07: £2.0m).  The Company also completed its discussions with Trustees concerning the future funding of the UK defined benefits schemes.  The agreements reached were submitted to the Pensions Regulator during the period.  Significant highlights of the agreements are:-

i) closure of all funds to future benefit accrual (the two larger schemes from 1 October 2007, the smaller from 1 April 2007); and
ii) future deficit funding of £3.4m per year (consistent with the last three years plus RPI).

The Company continues to pay a S75 debt, triggered by the disposal of our Irish subsidiary, of £0.7m per year up to, and including, 2009/10.

Asbestos litigation
The Group 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 downward trend in the overall number of claims has continued from its peak of 34,000 in 2004 to just over 19,000 claims at 30 September 2007.

In June 2007 a jury in a trial in Middlesex County, New Jersey, returned a verdict in respect of claims of asbestos exposure brought by five former papermill workers, two of whom are deceased, against Scapa Dryers Inc.  The verdict was in favour of the defence in respect of two of the plaintiffs, and a verdict against in respect of the other plaintiffs amounting to US$823,050.  Counsel for Scapa have advised the Board that they believe significant and material error was committed by the court during the trial sufficient to provide grounds for appeal.  Accordingly, an appeal has been lodged with the New Jersey Court of Appeals.  The Company’s insurance cover counsel has advised that there is sufficient liability insurance to satisfy the judgement in full if it is not reversed on appeal.

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
Brian Tenner was appointed to the Board as Finance Director on 14 June 2007.  Keith Hopkins retired from the Board on 30 September 2007, having first been appointed in January 2002, becoming Chairman on 31 March 2002.  Keith successfully stewarded the Group through a very difficult period in its history and we wish him a long and healthy retirement.  James Wallace was appointed to the Board on 30 August 2007 and subsequently became Chairman on 30 September 2007.   The Company is currently in the process of strengthening the Board with the appointment of a further Non-Executive Director.
 
Prospects
The major turnaround in the Group’s fortunes is clearly demonstrated by the results of the last 18 months.  Momentum for change and growth continues in all of our businesses with improvement sought in every line of our profit and loss statement.  Market conditions remain firm in Europe and Asia but have softened in North America following the much publicised sub prime mortgage problems and high oil prices.  However, we expect the Group’s operational performance to continue to improve on prior year due to internal business development initiatives already in place.

A full copy of this announcement can be found at: Reports & Presentations