22 August 2024

MACFARLANE GROUP PLC

("MACFARLANE GROUP", "THE COMPANY", "THE GROUP")

INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2024

Resilient performance in the period; trading broadly in line for the full year

Aleen Gulvanessian, Chair of Macfarlane Group PLC, commented on the interim results: "As outlined in our AGM trading update in May, the challenging market conditions experienced in the latter part of 2023 have continued in 2024.

The management team has responded effectively through an improvement in new business growth, the management of price deflation and actions to control operating costs.  In addition, the Group continues to execute its strategy, making two further high-quality acquisitions.

The strength of our balance sheet and the cash generative nature of our business underpins our ongoing investment in actions to grow sales both organically and through acquisition and increase the interim dividend.

Despite market headwinds, our operational and strategic performance is progressing, and the Group is well-positioned to benefit as the macroeconomic outlook improves."

1    See note 2 for reconciliation of Alternative Performance Measures (before charging amortisation and deferred contingent consideration adjustments) to Statutory Measures.

Key Financial Highlights

·   Group revenue reduced by 8% to £129.6m (H1 2023: £141.6m).

·   Group profit before tax reduced by 3% to £9.7m (H1 2023: £10.0m).

·   Group adjusted operating profit as a percentage of revenue improved to 9.7% (H1 2023: 9.1%).

·   Basic and diluted earnings per share were 4.55p per share (H1 2023: 4.74p per share) and 4.51p per share (H1 2023: 4.70p per share) respectively.

Packaging Distribution

·   Packaging Distribution revenue decreased by 11% to £110.9m (H1 2023: £124.0m)

·   Continued weak customer demand and price deflation have been partially offset by the benefit of the acquisitions of Gottlieb in April 2023 and Allpack Direct in March 2024.

·   Adjusted operating profit decreased by 1% to £9.3m (H1 2023: £9.4m) through effective management of input pricing and control of operating expenses.

Manufacturing Operations

·   Manufacturing Operations achieved revenue growth of 6% to £18.7m (H1 2023: £17.7m).

·   Contributions from B&D Group and Suttons, both acquired 2023, have been partially offset by price deflation.

·   Adjusted operating profit decreased 5% to £3.2m (H1 2023: £3.4m) due to higher operating expenses.

·   The acquisition of Polyformes completed in early July 2024 and will be earnings enhancing in H2 2024.

Group

·   Effective management of working capital resulted in net cash inflow from operating activities of £14.0m (H1 2023: £20.3m).

·   Net bank funds on 30 June 2024 of £0.8m - this reflects a cash inflow of £0.3m since 31 December 2023, after £3.6m of investment in acquisitions and £1.4m of capital expenditure.  The Group is operating well within its bank facility of £35.0m which runs until 31 December 2025.

·   The pension scheme surplus increased to £10.2m at 30 June 2024 (31 December 2023: £9.9m).  The improvement is due to an increase in the discount rate, offset by lower investment returns in H1 2024.

·   Interim dividend of 0.96p per share (H1 2023: 0.94p per share) - to be paid on 10 October 2024 to shareholders on the register as at 13 September 2024 (ex-dividend date 12 September 2024).

Outlook

The actions taken in H1 2024 and continuing through the remainder of the year should enable the performance of the Group to be broadly in line with market expectations for 2024.

Legal Entity Identifier (LEI):  213800LVRYDERSJAAZ73

Notes to Editors:

Interim Results - Management Report

Macfarlane Group's trading activities comprise Packaging Distribution and Manufacturing Operations.

Macfarlane's Packaging Distribution business is the UK's leading specialist distributor of protective packaging materials, with a growing presence in Europe. Macfarlane operates in the UK, Ireland, the Netherlands, and Germany from 27 Regional Distribution Centres ("RDCs") and three satellite sites, supplying industrial and retail customers with a comprehensive range of protective packaging materials on a local, regional, and national basis.

Competition in the packaging distribution market is from local and regional protective packaging specialist companies as well as national and international distribution generalists who supply a range of products, including protective packaging materials.

Macfarlane competes effectively on a local basis through its strong focus on customer service, its breadth and depth of product offering and through the recruitment and retention of high-quality staff with good local market knowledge. On a national and international basis, Macfarlane has market focus, expertise and a breadth of product and service knowledge, all of which enable it to compete effectively against non-specialist packaging distributors.

Packaging Distribution benefits its customers by enabling them to ensure their products are cost-effectively protected in transit and storage through the supply of a comprehensive product range, single source stock and serve supply, just-in-time delivery, tailored stock management programmes, electronic trading and independent advice on both packaging materials and packing processes. Through the 'Significant Six' sales approach we reduce our customers' 'Total Cost of Packaging', improve their sustainability performance and reduce their carbon footprint. This is achieved through supplying effective packaging solutions, optimising warehousing and transportation, reducing damages and returns, and improving packaging efficiency.

"Significant Six" represents the six key costs in a customers' packing process being transport, warehousing, administration, damages and returns, productivity and customer experience.

1.   See note 2 for reconciliation of Alternative Performance Measures (before charging amortisation and deferred contingent consideration adjustments) to Statutory Measures.

The main features of Packaging Distribution performance in H1 2024 were:

·   Weak demand and price deflation resulting in lower organic revenue than the same period in 2023.

·   Revenue growth from the acquisitions of Allpack Direct in March 2024 and Gottlieb in April 2023.

·   New business in H1 2024 10% higher than H1 2023, with continued success from our Innovation Labs and Significant Six programme.

·   Effective management of input prices and control of costs.

·   Marginal reduction in adjusted operating profit of 1%.

·   Improvement in adjusted operating profit as a percentage of revenue to 8.4% (H1 2023: 7.6%).

The key areas we will focus on in H2 2024 are to:

·   Accelerate new business momentum through effective use of our leading sales tools and processes - "Packaging Optimiser" ', Significant Six and our Innovation Labs.

·   Accelerate the progress we have made in Europe through our "Follow the Customer" programme and the PackMann acquisition.

·   Preparation for the second major site consolidation in the East Midlands.

·   Progress further high-quality acquisitions in the UK and Europe.

·   Support our customers to reduce their carbon footprint through offering more sustainable packaging solutions.

·   Continue to effectively manage input price changes.

·   Strengthen our key supplier relationships.

·   Develop both sales and cost synergies through the relationship with our Manufacturing Operations.

·   Achieve benefits from our information technology investments in Microsoft Dynamics, and Warehouse Management.

·   Relaunch our web-based solutions offer to provide customers with more effective online access to our full range of products and services.

·   Reduce operating costs through efficiency programmes in sales, logistics and administration.

·   Maintain our focus on working capital management to facilitate future investment and manage effectively the ongoing bad debt risk within the current economic environment.

'   Packaging Optimiser is a Macfarlane developed software tool that measures the financial and carbon benefits of the Significant Six selling approach.

Manufacturing Operations comprises our Macfarlane Packaging Design and Manufacture business, GWP acquired in February 2021, Suttons acquired in March 2023, B&D Group acquired in September 2023 and Polyformes acquired in July 2024.

Manufacturing Operations designs, manufactures, assembles, and distributes bespoke protective packaging solutions for customers requiring cost-effective methods of protecting high value products in storage and transit. The primary components we use are corrugate, timber, foam and specialist cases. The businesses operate from six manufacturing sites, in Grantham, Westbury, Swindon, Salisbury, Chatteris and Leighton Buzzard, and a sales/design office in Barnstaple supplying both directly to customers and through the national RDC network of the Packaging Distribution business.

Key market sectors are aerospace, space, medical equipment, electronics, automotive, e-commerce retail and household equipment. The markets we serve are highly fragmented, with a range of locally based competitors. We differentiate our market offering through technical expertise, design capability, industry accreditations and national coverage through the Packaging Distribution business.

1.   See note 2 for reconciliation of Alternative Performance Measures (before charging amortisation and deferred contingent consideration adjustments) to Statutory Measures.

Interim Results - Management Report (continued)

The main features of Manufacturing Operations performance in H1 2024 were:

·   Increase in revenue with growth from Suttons and B&D Group acquired in 2023 being offset by price deflation.

·   Effective management of input pricing, maintaining strong gross margins.

·   Higher operating expenses, due to the impact of the acquisitions.

·   Decrease in adjusted operating profit of 5%.

·   Reduction in adjusted operating profit as a percentage of revenue to 15.1% (H1 2023: 16.8%).

The priorities for Manufacturing Operations in the second half of 2024 are to:

·   Increase momentum of new business growth in target sectors, e.g. medical, aerospace and space.

·   Prioritise new sales activity in our higher added-value bespoke composite pack product range.

·   Work with our customers to effectively manage material price changes.

·   Continue to strengthen the relationship with our Packaging Distribution businesses to create both sales and cost synergies.

·   Achieve both sales and cost synergies through closer working with the recently acquired businesses - Suttons and B&D Group, acquired in 2023, and Polyformes, acquired in July 2024.

·   Supplement organic growth through progressing further high-quality acquisitions in the UK.

Summary and Future Prospects

The Group continues to invest in actions to grow sales both organically and through acquisition.  Despite the challenging market conditions our operational and strategic performance is progressing.  The Group is well positioned to benefit from improvements in the macroeconomic outlook.

Risks and Uncertainties

The Group operates a formal framework for the identification and evaluation of the major business risks faced by each business and determines an appropriate course of action to manage these risks.

The principal risks and uncertainties which could impact on the performance of the Group, together with the mitigating actions, were outlined on pages 26 to 30 in our Annual Report and Accounts for 2023 (available on our website at www.macfarlanegroup.com).  These remain the same for the remaining six months of the current financial year and are summarised below:

·   Failure to respond to strategic shifts in the market, including the impact of weaknesses in the economy as well as disruptive behaviour from competitors and changing customer needs (e.g. changing customer priorities between online and physical buying) could limit the Group's ability to continue to grow revenues.

·   The markets we operate in are changing, with: customers increasingly aware of the environmental impact of their packaging; increasing environmental regulatory requirements for packaging suppliers, such as the Plastic Tax introduced from April 2022 and the introduction of the Extended Producer Responsibility ("EPR") requirements; increasing likelihood of disruption to the operations of the Group through extreme weather events such as flooding, storm damage and water stress, impacting the business directly and disrupting supply chains; investors looking to invest in companies that demonstrate strong environmental credentials; and UK Government's commitment to net zero carbon emissions by 2050 and the profound changes this will drive across the economy.

·   The Group's businesses are impacted by commodity-based raw material prices and manufacturer energy costs, with profitability sensitive to input price changes including currency fluctuations. The principal components are corrugated paper, polythene films, timber, and foam, with changes to paper and oil prices having a direct impact on the price we pay to our suppliers.

·   The Group's growth strategy has included a number of acquisitions in recent years. There is a risk that such acquisitions may not be available on acceptable terms in the future. It is possible that acquisitions will not be successful due to the loss of key people or customers following acquisition or acquired businesses not performing at the level expected. This could potentially lead to impairment of the carrying value of the related goodwill and other intangible assets. Execution risks around the failure to successfully integrate acquisitions following conclusion of the earn-out period also exist.

·   The Group has a property portfolio comprising 1 owned site and 52 leased sites. This multi-site portfolio gives rise to risks in relation to ongoing lease costs, dilapidations, and fluctuations in value.

·   The increasing frequency and sophistication of cyber-attacks is a risk which potentially threatens the confidentiality, integrity and availability of the Group's data and IT systems. These attacks could also cause reputational damage and fines in the event of personal data being compromised.

·   The Group needs access to funding to meet its trading obligations and to support organic growth and acquisitions. There is a risk that the Group may be unable to obtain funds and that such funds will only be available on unfavourable terms. The Group's borrowing facility comprises a committed facility of up to £35m. This includes requirements to comply with specified covenants, with a breach potentially resulting in Group borrowings being subject to more onerous conditions.

·   The Group has a significant investment in working capital in the form of trade receivables and inventories. There is a risk that this investment is not fully recovered.

·   The Group's defined benefit pension scheme is sensitive to a number of key factors including volatility in equity and bond/gilt markets, the discount rates used to calculate the scheme's liabilities and mortality assumptions. Small changes in these assumptions could cause significant movements in the pension surplus.

·   Given the range of prolonged geopolitical and economic uncertainties within the UK and other markets, there is an ongoing risk this will adversely affect our ability to deliver upon agreed strategic initiatives. We may also need to adapt our business quickly in order to limit the impact upon the Group's results, prospects and reputation.

Cautionary Statement

This announcement has been prepared solely to provide additional information to shareholders to assess the Group's strategy and the potential for the strategy to succeed.  It should not be relied on by any other party or for any other purpose.

This report and the condensed financial statements contain certain forward-looking statements relating to operations, performance and financial status.  By their nature, such statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future.  There are a number of factors, including both economic and business risk factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements.  These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report.  Nothing in this Interim Results Statement should be construed as a profit forecast or an invitation to deal in the securities of the Group.

Responsibility Statement

The Directors of Macfarlane Group PLC during the first six months of 2024 were

A. Gulvanessian  Chair                              

P.D. Atkinson       Chief Executive         

I. Gray                     Finance Director       

J.W.F. Baird           Non-Executive Director                     

L.D. Whyte            Non-Executive Director

The Directors confirm that, to the best of their knowledge:-

(i)            the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting;

(ii)           the interim management report includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(iii)          the interim management report includes a fair review of the information required by DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Approved by the Board of Directors on 22 August 2024 and signed on its behalf by

…………………………..                            ………………………

Peter D. Atkinson                            Ivor Gray

Chief Executive                                                Finance Director

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2024

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2024

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2024

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2023

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2023

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT 30 JUNE 2024

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2024

1.         Basis of preparation

Macfarlane Group PLC is a public company listed on the London Stock Exchange, incorporated and domiciled in the United Kingdom and registered in Scotland.

The Group's annual financial statements for the year ended 31 December 2023 were prepared in accordance with United Kingdom adopted international accounting standards.  This condensed set of interim financial statements has been prepared in accordance with United Kingdom adopted International Financial Reporting Standard IAS 34 Interim Financial Reporting.

This condensed set of interim financial statements has been prepared applying the accounting policies that were applied in the preparation of the company's published consolidated financial statements for the year ended 31 December 2023.  There were no major changes from the adoption of new IFRS's in 2024.

Key sources of estimation uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the year. Due to the nature of estimation, the actual outcomes may well differ from these estimates. The directors have assessed the impact of climate change and consider that this does not have a significant impact on these financial statements. The key sources of estimation uncertainty that have a significant effect on the carrying amounts of assets and liabilities are discussed below:

Retirement benefit obligations

The determination of any defined benefit pension scheme liability is based on assumptions determined with independent actuarial advice. The key assumptions used include discount rate and inflation rate, for which a sensitivity analysis is provided in Note 11. The directors consider that those sensitivities represent reasonable sensitivities which could occur in the next financial period.

Valuation of deferred contingent consideration

The valuation of deferred contingent consideration at both acquisition date and the balance sheet date is measured at fair value. This involves the assessment of forecast future cash flows against earn-out targets agreed with the sellers of acquired businesses over a period of up to two years. This assessment is based on the directors' best estimate using the information available at the effective dates outlined above. However, there remains a risk that the actual payment differs from the amount assumed as consideration within the PPA accounting as detailed in note 9 and from the amount recorded as a liability at the balance sheet date. Deferred contingent considerations are recognised as a liability in trade and other payables and are remeasured to fair value of £2.5m at the balance sheet date, all due within one year, based on a range of outcomes between £Nil and £4.1m. Trading in the post-acquisition period supports the remeasured value of £2.5m.

Critical accounting judgements

Property provisions

Property provisions of £1.6m have been recognised as at 30 June 2024 (2023: £2.3m), representing the directors' best estimate of dilapidations on property leases. The directors have made the judgement that no provision is required for certain property leases where there is no intention to exit, having considered a number of factors including the extent of modifications to the property, the terms of the lease agreement, and the condition of the property.

No other significant critical judgements have been made in the current or prior year.

Business activities, risks and financing

The Group's business activities, together with the factors likely to affect its future development, performance and financial position, are set out in the Interim Management Report.

The Group's principal financial risks in the medium term relate to liquidity and credit risk.  Liquidity risk is managed by ensuring that the Group's day-to-day working capital requirements are met by having access to committed banking facilities with suitable terms and conditions to accommodate the requirements of the Group's operations.  Credit risk is managed by applying considerable rigour in managing the Group's trade receivables. Although the current economic climate indicates an increased level of risk, the Directors believe that the Group is adequately placed to manage its financial risks effectively.

The Group's banking arrangement with Bank of Scotland PLC comprises a committed facility of £35m, expiring in December 2025, secured over the assets of Macfarlane Group UK Limited, GWP Group Limited and GWP Holdings Limited subsidiaries of Macfarlane Group PLC and bearing interest at commercial rates.  The facility has financial covenants for interest cover and trade receivables headroom.

The Directors have reviewed the Group's cash and profit projections, which they believe are based on prudent market data and past experience taking account of reasonably possible changes in trading performance given current market and economic conditions. The Directors are of the opinion that these projections show that the Group should be able to operate within its current facilities and comply with its banking covenants.

In assessing the going concern basis, the Directors have considered the Group's business activities, the financial position of the Group and the Group's risks and uncertainties.  The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report.  For this reason, this condensed set of financial statements has been prepared on the going concern basis.

Approval and review of condensed financial statements

These condensed financial statements were approved by the Board of Directors on 22 August 2024.  As in previous years, the set of condensed financial statements for the half-year is unaudited.

2.         Alternative performance measure

In addition to the various performance measures defined under IFRS, the Group reports adjusted operating profit and adjusted profit before tax as measures to assist in understanding the underlying performance of the Group and its businesses when compared to similar companies. Adjusted operating profit and adjusted profit before tax are not defined under IFRS and, as a result, do not comply with Generally Accepted Accounting Practice ("GAAP") and are therefore known as APMs. Accordingly, these measures, which are not designed to be a substitute for any of the IFRS measures of performance, may not be directly comparable with other companies' APMs.

Adjusted operating profit is defined as operating profit before customer relationships and brand values amortisation, and deferred contingent consideration adjustments.

Adjusted profit before tax is defined as profit before tax, customer relationships and brand values amortisation, and deferred contingent consideration adjustments.