Macfarlane Grp. Regulatory News (MACF)

24 August 2023

MACFARLANE GROUP PLC

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

INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2023

RESILIENT H1 2023 PERFORMANCE - PROFIT EXPECTATIONS FOR THE FULL YEAR UNCHANGED

1 See note 2 for reconciliation of alternative performance measure, operating profit before amortisation, to operating profit.

Key highlights

· Revenue grew by 2% versus H1 2022 to £141.6m.

· Profit before tax at £10.0m increased by 13%.

· Basic and diluted earnings per share were 4.74p per share (H1 2022: 4.36p per share) and 4.70p per share (H1 2022: 4.31p per share) respectively.

· Profit in line with expectations for the full year.

Packaging Distribution

· Packaging Distribution grew revenue by £0.4m to £124.0m in H1 2023.

· A good contribution from the acquisitions of PackMann in May 2022 and Gottlieb in April 2023, combined with organic growth in Europe and new business wins, offset lower demand from customers in the UK and Ireland.

· Operating profit before amortisation increased by 6% to £9.4m (H1 2022: £8.9m) through effective management of input pricing which offset inflation in operating costs.

Manufacturing Operations

· Manufacturing Operations delivered strong revenue growth of 13% to £17.7m (H1 2022: £15.7m).

· A good contribution from Suttons, acquired in February 2023, offset the slower demand in certain industrial markets.

· Operating profit before amortisation increased 36% to £3.4m (H1 2022: £2.5m).

Group

· Effective management of working capital resulted in net cash inflow from operating activities of £20.3m (H1 2022: £6.5m).

· Net bank debt on 30 June 2023 was £3.3m - a cash inflow of £0.1m from 31 December 2022, after £11.4m of investment in acquisitions and £1.4m of capital expenditure. The Group is operating well within its bank facility of £35.0m, increased from £30.0m at 31 December 2022, which runs until 31 December 2025.

· Pension scheme surplus increased to £12.8m at 30 June 2023 (31 December 2022: £10.2m). The improvement is due to continued contributions from the Group and an increase in the discount rate, offset by lower investment returns in H1 2023.

· Interim dividend increased to 0.94p per share (H1 2022: 0.90p per share) - to be paid on 12 October 2023 to shareholders on the register as at 15 September 2023 (ex-dividend date 14 September 2023).

Aleen Gulvanessian, Chair of Macfarlane Group PLC, today said: -

Trading

"The Group has demonstrated resilience in the first half of 2023, against the backdrop of a slowdown in customer demand. We have executed two high quality acquisitions which are both performing well, we continue to make good progress in Europe and have positive new business momentum. The inflationary impact of operating cost increases has been offset by effective input price management. We opened our new Northern Innovation Lab in March 2023 which is already having early success in helping our customers reduce their total cost of packaging and carbon footprint."

Outlook

"Whilst we expect the second half of 2023 to remain challenging, our good progress in Europe, diverse customer base, strong new business momentum and effective management of pricing and costs mean that our profit expectations for the full year remain unchanged."

Legal Entity Identifier (LEI): 213800LVRYDERSJAAZ73

Notes to Editors:

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 a stock and serve supply model 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/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' and 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 customer's packing process being transport, warehousing, administration, damages and returns, productivity and customer experience.

The main features of Packaging Distribution performance in H1 2023 were:

· Some weakening of demand from customers in the UK and Ireland.

· Good organic growth in Europe through our "Follow the Customer" strategy.

· Revenue growth of £6.3m achieved from the acquisition of Gottlieb in April 2023 and PackMann in May 2022.

· New business in H1 2023 24% higher than H1 2022, with early success from our new Northern Innovation Lab.

· Effective management of input prices which has offset the impact of inflationary increases in operating costs, particularly energy and labour.

· Increase in operating profit before amortisation of 6%.

· Improvement in operating profit before amortisation as a percentage of revenue to 7.6% (H1 2022: 7.2%).

Interim Results - Management Report (continued)

The key areas we will focus on in H2 2023 are to:

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

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

· Continue to effectively manage input price changes.

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

· Introduce improvements to our web-based solutions to provide customers with access to our full range of products and services more easily.

· Accelerate the progress we have made in Europe through our "Follow the Customer" programme and PackMann, acquired in H1 2022.

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

· Plan our second major site consolidation in the East Midlands.

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

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

' 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 Packaging Design and Manufacture business as well as GWP, acquired in February 2021, and Suttons acquired in March 2023.

Manufacturing Operations designs, manufactures, assembles, and distributes bespoke packaging solutions for customers requiring cost-effective methods of protecting high value products in storage and transit. The primary raw materials are corrugate, timber and foam. The businesses operate from five manufacturing sites, in Grantham, Westbury, Swindon, Salisbury and Chatteris, supplying both directly to customers and through the national RDC network of the Packaging Distribution business.

Key market sectors are defence, aerospace, 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.

Good growth in operating profit of 34% has been achieved, despite slowing demand in certain industrial sectors, by:

· A strong contribution from the acquisition of Suttons in February 2023.

· Effective management of input pricing to offset increasing operating costs, particularly energy and labour.

Interim Results - Management Report (continued)

The priorities for Manufacturing Operations in the second half of 2023 are to:

· Increase momentum of new business growth in target sectors e.g. medical and defence.

· Prioritise new sales activity of 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.

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

Summary and Future Prospects

Macfarlane Group's businesses all have strong market positions with differentiated product and service offerings. We have a flexible business model and we effectively implement our strategic plan, which is reflected in consistent profit growth and cash generation over a sustained period.

Our future performance continues to depend on our effectiveness in growing sales and managing input prices, increasing efficiencies and bringing high quality acquisitions into the Group. There will continue to be challenges in 2023, with rising costs and weak demand. However, our strategy and business model have proved to be resilient and we expect to deliver further growth in 2023 and beyond.

Interim Results - Management Report (continued)

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 24 to 28 in our Annual Report and Accounts for 2022 (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:

· Due to a range of prolonged geopolitical and economic uncertainties within the UK and other markets, there is an increased risk that we are entering into a challenging trading environment. If this materialises, the length and depth of such an environment is unknown and may 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.

· 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. the move towards online retail) could limit the Group's ability to continue to grow revenues.

· Customers are increasingly focused on the environmental impacts of packaging, changing their buying behaviours in response to climate and sustainability concerns. Some investors are looking to invest in companies that demonstrate strong ESG credentials. There is increasing regulatory focus around reporting disclosures and new requirements, such as the Plastic Tax introduced from April 2022. This cost is recharged directly onto our customers. If the Group is not proactive and transparent in how it is responding to environmental changes, this could lead to a loss of employees, customers and investors.

· 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 continuous 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 (£5m increase from 31 December 2022). This includes requirements to comply with specified covenants, with a breach potentially resulting in Group borrowings being subject to more onerous conditions.

· The Group's defined benefit pension scheme is sensitive to a number of key factors including investment returns, 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/deficit.

Interim Results - Management Report (continued)

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 2023 were

A. Gulvanessian Chair

P.D. Atkinson Chief Executive

I. Gray Finance Director

R. McLellan Non-Executive Director/Senior Independent 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 24 August 2023 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 2023

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2023

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 (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2022

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2022

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT 30 JUNE 2023

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2023

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 2022 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 2022. There were no major changes from the adoption of new IFRS's in 2023.

Critical judgements and 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 period. Due to the nature of estimation, the actual outcomes may well differ from these estimates.

Critical judgements

The directors have assessed the impact of climate change and consider that this does not have a significant impact on these financial statements.

Property provisions of £2.3m have been recognised as at 30 June 2023 (31 December 2022: £3.3m), 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.

Key sources of estimation uncertainty

The key sources of estimation uncertainty that have a significant effect on the carrying amounts of assets and liabilities are discussed below:

· The determination of any defined benefit pension scheme asset or liability is based on assumptions determined with independent actuarial advice. The key assumptions used include discount rate and inflation rate assumptions, 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.

· The provision held against trade receivables considers an expected credit loss model and related estimates of recoverable amounts. Whilst every attempt is made to ensure that the provision held against doubtful trade receivables is as accurate as possible, there remains a risk that the provision may not match the level of debt which ultimately proves uncollectable.

MACFARLANE GROUP PLC

SIX MONTHS ENDED 30 JUNE 2023

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of preparation

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 24 August 2023. 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 operating profit before amortisation as a measure to assist in understanding the underlying performance of the Group and its businesses when compared to similar companies. Operating profit before amortisation is not defined under IFRS and, as a result, does not comply with Generally Accepted Accounting Practice ("GAAP") and is therefore known as an alternative performance measure. Accordingly, this measure, which is not designed to be a substitute for any of the IFRS measures of performance, may not be directly comparable with other companies' alternative performance measures. Operating profit before amortisation is defined as operating profit before customer relationships and brand values amortisation reconciled in the table below.

MACFARLANE GROUP PLC

SIX MONTHS ENDED 30 JUNE 2023

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

3. General information

Comparative figures for the year ended 31 December 2022 are extracted from Macfarlane Group's statutory accounts for 2022. The information for the year ended 31 December 2022 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor on 23 February 2023 was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

4. Segmental information

The Group's principal business segment is Packaging Distribution, comprising the distribution of packaging materials and supply of storage services in the UK, Ireland and Europe. Other operations for the design, manufacture and assembly of timber, corrugated and foam-based packaging materials in the UK comprise one segment headed Manufacturing Operations.