Macfarlane Grp. Regulatory News (MACF)

25 August 2022

MACFARLANE GROUP PLC

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

INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2022

Expectations for the full year unchanged;

managing inflationary environment; slowdown in e-commerce; progress in Europe

1 In accordance with IFRS5, 2021 has been restated to reflect the result of the Labels division, sold on 31 December 2021, as a discontinued operation.

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

Key highlights

· Sales from continuing operations1 grew by 14% versus H1 2021 to £139.2m.

· Operating profit at £9.6m and profit before tax at £8.9m, both from continuing operations, increased by 4% and 3% respectively with revenue growth partly offset by increased costs.

· Basic and diluted earnings per share were 4.36p per share (H1 2021: 3.83p per share) and 4.31p per share (H1 2021: 3.79p per share) respectively.

Packaging Distribution

· Achieved sales growth of 11% to £123.5m (H1 2021: £111.0m), with recovery of input price increases and the benefits from the acquisitions of Carters Packaging in March 2021 and PackMann in May 2022 offsetting lower demand from e-commerce customers after the sector experienced a strong H1 last year due to Covid-19 restrictions.

· Gross margin at 32.3% (H1 2021: 32.7%) was marginally behind a very strong H1 2021 and reflects effective recovery of input price inflation.

· Operating profit before amortisation reduced by 2% to £8.9m (H1 2021: £9.1m) due to cost increases of 14%. The key areas of increased costs were inflationary pressures on labour and logistics, start-up costs for the company's new North-west of England distribution centre and strategic IT investments.

· The contribution from acquisitions was reduced by the expensing of acquisition-related costs of £0.2m in H1 2022.

Manufacturing Operations

· Delivered strong growth, with sales increasing 40% to £15.7m (H1 2021: £11.2m) and operating profit before amortisation increasing 44% to £2.5m (H1 2021: £1.7m). There was a continued strong performance from GWP, acquired in February 2021, and recovery in the aerospace sector benefited the Macfarlane Design and Manufacture business.

· The Group sold its Labels division in December 2021. Labels generated a loss before tax of £0.1m in H1 2022 (H1 2021: Loss £0.8m) after finalisation of the net asset position.

Group

· Net cash inflow from operating activities of £6.5m (H1 2021: £11.3m) reflected significantly higher 2021 employee incentive payments paid in H1 2022 compared to the same period last year.

· The Group cash position continues to be managed well, enabling capital investment and acquisitions to be funded through the committed bank debt facility.

· The Group has reinvested the proceeds from the sale of the Labels business into the acquisition of PackMann in Germany, strengthening the platform from which it will accelerate the growth of the protective packaging business in Northern Europe.

· Net bank debt on 30 June 2022 was £9.7m - a cash outflow of £12.1m from 31 December 2021, including £9.1m of net investment in acquisitions and disposals. The Group is operating well within its existing bank facility of £30.0m which runs until 31 December 2025.

· Pension scheme surplus increased to £8.8m at 30 June 2022 (31 December 2021: £8.3m). The improvement is due to continued contributions from the Group and an increase in the discount rate, offset by lower investment returns in H1 2022. An additional contribution of £0.7m was paid into the pension scheme in H1 2022 to satisfy the debt on exit of the Labels business.

· Interim dividend increased to 0.90p per share (H1 2021: 0.87p per share) - to be paid on 13 October 2022 to shareholders on the register as at 16 September 2022.

Stuart Paterson, Chairman of Macfarlane Group PLC, today said: -

"Trading

The Group has achieved a solid performance in the first half of 2022, especially when compared to a strong trading period in H1 2021. This has been achieved against the backdrop of a slowdown in spend from the e-commerce sector and significant inflationary pressure on operating costs. We have also made strategic IT investments and incurred start-up costs on our new North-west of England distribution centre. Our people have consistently demonstrated commitment and operating excellence as the business continues to grow and develop.

Outlook

We expect to experience a continuing challenging environment with inflationary pressure on our operating costs and slower demand from our e-commerce customers. Overall, the Group is confident that the effectiveness of our strategy, the diversity of the customers and sectors we serve, the quality of our people, and the resilience of our business model will ensure 2022 will be another year of growth for Macfarlane. Our expectations for the full year 2022 are unchanged.

Board change

As set out in the Annual Report 2021, after over nine years on the Board, I am standing down from the Board, effective 30 September 2022, and I am pleased to announce my successor as Chair will be Aleen Gulvanessian.

Aleen joined the Board in October 2021 as Chair of the Remuneration Committee and in a short time has made a significant contribution through her Corporate legal background and extensive commercial and governance experience. Aleen was selected after an extensive process involving a number of very capable external candidates. We expect to make an announcement on a new Chair of the Remuneration Committee shortly.

I wish Aleen, the Board and all of Macfarlane's employees continued success in the future and thank them for their excellent support during my tenure as Chairman and Non-executive Director of Macfarlane Group."

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 offer and through the recruitment and retention of high-quality staff with good local market knowledge. On a national basis, Macfarlane has market focus, expertise and a breadth of product and service knowledge, all of which enables 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.

The main features of our first half performance in 2022 were:

· Organic growth in the UK and Ireland of £8.6m has been achieved through recovery in some industrial sectors, particularly in aerospace, engineering and hospitality, and inflation in pricing, offset by a marked reduction in demand from e-commerce customers and customers buying packaging using our online shop, which benefited from the Covid-19 lockdowns in H1 2021.

· Our 'Follow the Customer' strategy in Northern Europe achieved £1.6m of incremental sales through the Group subsidiary in the Netherlands, with the business now generating profits.

· Sales growth of £2.4m was achieved from the acquisitions of Carters Packaging, Cornwall, in March 2021 and PackMann, Germany, in May 2022. The PackMann pre-acquisition costs of £0.2m were expensed in H1 2022.

· Effective management of significant input price increases across all product categories in H2 2021 and H1 2022 has minimised the impact on gross margins which have reduced marginally to 32.3% (H1 2021: 32.7%).

· The marginally lower operating profit in H1 2022 was primarily due to overheads being higher than the same period in 2021. This is attributable to the impact of inflation on staff and logistics costs, strategic IT investments and start-up costs for our new distribution centre in the North-west of England.

Interim Results - Management Report (continued)

The key areas we will focus on in H2 2022 are to:

· Prioritise engagement with potential new customers in sectors where we see future growth opportunities such as e-commerce retail, medical, scientific, and third-party logistics.

· Continue to effectively manage input price changes and supply chain challenges as they arise.

· Maximise the benefits from our new "Packaging Optimiser" which was launched to our sales teams to better demonstrate our ability to add value for customers through our "Significant Six" sales approach.

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

· Refine and extend our product range to ensure we continue to offer our customers sustainable packaging solutions that reduce their carbon footprint.

· Introduce improvements to our web-based solutions to allow customers 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 our recent acquisition of PackMann.

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

· Realise the benefits from our new distribution centre in the North-west of England.

· Maintain the 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.

Manufacturing Operations comprises our Packaging Design and Manufacture business and GWP, acquired in February 2021.

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 four manufacturing sites, in Grantham, Westbury, Swindon and Salisbury, 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.

1 In accordance with IFRS5, 2021 has been restated to reflect the result of the Labels division, sold on 31 December 2021, as a discontinued operation.

Interim Results - Management Report (continued)

Sales in H1 2022 increased by £4.5m compared to the equivalent period in 2021. This consisted of organic growth of 19.0% (£0.9m), due mainly to recovery in the aerospace (defence and commercial) sector, supplemented by £3.6m of incremental sales from the acquisition of GWP. This growth, combined with effective management of the gross margin and overhead costs reducing as a percentage of sales, has contributed to a significant improvement in operating profit in H1 2022 compared to H1 2021.

The priorities for Manufacturing Operations in the second half of 2022 are to:

· Focus the sales team on new business growth in target sectors e.g., medical and defence.

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

· Effectively manage material price changes to minimise the impact on gross margins.

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

· Commence the process of GWP working more closely with the Macfarlane Packaging Design and Manufacture and Packaging Distribution businesses.

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 effective implementation of a strategic plan, which is reflected in consistent profit growth and cash generation over a sustained period.

Our future performance is largely dependent on our own efforts to grow sales, increase efficiencies and bring high quality acquisitions into the Group. Whilst market conditions are challenging, our strategy and business model continue to prove to be resilient. We expect to deliver another year of profit growth in 2022.

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 20 to 23 in our Annual Report and Accounts for 2021 (available on our website at www.macfarlanegroup.com). These remain substantially 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., 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. Investors are looking to invest in companies that demonstrate strong Environmental, Social and Governance (ESG) credentials. There is increasing regulatory focus around reporting disclosures and new requirements, such as the Plastic Tax which was introduced from April 2022. 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 2 owned sites and 45 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 or that such funds will only be available on unfavourable terms. The Group's borrowing facility comprises a committed facility of up to £30m. 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; and

· 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. 

Response to Covid-19 pandemic ("Covid-19")

The Group continues to respond to Covid-19 with the focus being on the safety and wellbeing of our people, protecting our financial position and limiting the interruption of service to our customers. Covid-19 was not classified as a separate principal risk due to its pervasive effect across all the principal risks and uncertainties. These uncertainties will remain for some time and to date the Group has adapted well to the constantly changing conditions.

Response to Brexit

The new trading arrangement between the UK and the EU came into effect on 1 January 2021. Whilst there has been some disruption to the supply chain and an increased administration burden, the impact on the Group has not been significant - largely due to mitigation measures put in place. We continue to monitor the impact of ongoing negotiations over the Northern Ireland protocol and the full implementation of customs checks at ports which came into effect from January 2022.

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 2022 were

S.R. Paterson Chairman

P.D. Atkinson Chief Executive

I. Gray Finance Director

R. McLellan Non-Executive Director/Senior Independent Director

J.W.F. Baird Non-Executive Director

A. Gulvanessian 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 25 August 2022 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 2022

1 In accordance with IFRS5, 2021 has been restated to reflect the result of the Labels division, sold on 31 December 2021, as a discontinued operation.

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2022

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 (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2021

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2021

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT 30 JUNE 2022

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2022

1 In accordance with IFRS5, 2021 has been restated to reflect the result of the Labels division, sold on 31 December 2021, as a discontinued operation.

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 2021 were prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the United Kingdom. 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 2021. There were no major changes from the adoption of new IFRS's in 2022.

Judgements, assumptions and estimation uncertainties

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. With the exception of the impairment in historic goodwill in note 7, no significant judgements have been made in the current or prior period. 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, inflation rate and mortality assumptions, for which a sensitivity analysis is provided in note 12. The Directors consider that those sensitivities represent reasonable sensitivities which could occur in the next financial period.

The provision held against trade receivables is based on applying 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.

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 Lloyds Bank PLC comprises a committed facility of £30 million, expiring in December 2025, secured over part of Macfarlane Group's trade receivables and bearing interest at commercial rates. The facility has financial covenants for interest cover and trade receivables headroom.

MACFARLANE GROUP PLC

SIX MONTHS ENDED 30 JUNE 2022

NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of preparation

Business activities, risks and financing

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, despite the current uncertain economic environment, 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 25 August 2022. 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.