Macfarlane : publishes its Interim Results

Graeme Bissett, Chairman of Macfarlane Group PLC, today said: -

"Macfarlane Group has continued to perform well in the first half of 2017. Group sales of £89.8m, were 10% ahead of the comparable period in 2016 and profit before tax of £2.5m, was 27% higher than in 2016. The strong performance in the first six months of 2017, supplemented by the expected seasonal uplift from the e-commerce sector in the second half of the year gives the Board confidence that its full year expectations for 2017 will be achieved.

Packaging Distribution sales were 12% up on the first half of 2016, with 3% achieved from organic growth and the remainder from recent acquisitions, all of which are performing well. Gross margin in Packaging Distribution was similar to last year at 29.0%, (2016: 29.2%). Operating profit at £2.7m is £0.4m, 18% ahead of 2016.

Sales in our Manufacturing Operations are 1% below 2016 levels, principally due to our continuing programme of focusing on higher margin sales. Operating profit is £0.3m, 29% ahead of 2016.

After charging net interest of £0.4m, (2016: £0.5m), profit before tax grew to £2.5m (2016: £2.0m).

Net debt at 30 June 2017 was £14.6m, a £1.5m reduction from the level of £16.1m at 31 December 2016. The Group is operating well within its existing bank facility of £25.0m. Consistent with our normal pattern, Group trading is expected to be strongly cash generative in the second half of 2017.

The pension scheme deficit reduced to £13.4m at 30 June 2017 from £14.5m at 31 December 2016, mainly due to the payment of deficit reduction contributions during the six month period.

The Board is recommending an increase of 9.1% in the interim dividend to 0.60p per share to be paid on 12 October 2017 to shareholders on the register as at 22 September 2017. (2016: 0.55p per share)

Earlier this year I indicated to the Board, my intention to step down from the Chair by the end of 2017. Having been a member of the Board since 2004 and Chairman since 2012, I took the view that the time was right to make the change and to enable an orderly transition. The Nominations Committee's process to select a new Chairman is well advanced and the outcome will be announced in due course.

Our strategy is to deliver sustainable profit growth by focusing on added value products and services in our target market sectors, combined with the execution of value-enhancing acquisitions. Macfarlane Group's performance in the first half of 2017 reflects the successful implementation of our strategy and we are confident that the Group will continue to make further progress in the remainder of 2017."

Notes to Editors:

• Macfarlane Group PLC is listed on the London Stock Exchange (LSE: MACF) in the Industrials Sector

• The company is headquartered in Glasgow, Scotland and has more than 60 years' experience in the UK packaging industry

• Macfarlane Group's businesses are:

  • Macfarlane Packaging is the leading UK distributor of a comprehensive range of protective packaging products
  • Labels designs and prints high quality self-adhesive and resealable labels, principally for FMCG companies
  • Packaging Design and Manufacture designs and produces protective packaging for high value, fragile products

• Macfarlane Group employs 800 people at 29 sites, principally in the UK, but also in Ireland and Sweden

The company has 20,000+ customers in the UK, Europe and the USA providing 600,000+ lines to a wide range of industry sectors including: consumer goods; food manufacturing; logistics; internet retail; mail order; electronics; defence and aerospace

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

Macfarlane's Packaging Distribution business is the UK's leading specialist distributor of protective packaging materials. In a fragmented market, Macfarlane operates from 20 Regional Distribution Centres ("RDCs") supplying customers with a comprehensive range of protective packaging materials and services on a local, regional and national basis. Macfarlane benefits its customers by enabling them to ensure their products are cost-effectively protected in transit and storage by offering a comprehensive product range, single source supply, Just-In-Time delivery, tailored stock management programmes, electronic trading and independent advice on both packaging materials and packing processes.

The main features of our first half performance in 2017 were:

• Sales showed organic growth of 3% on 2016, reflecting the benefit of new business wins;

• Sales growth of 9% was achieved by the continuing contribution made by recent acquisitions;

• Sales to internet retailers accounted for 25% of business in H1 2017, slightly above 2016. We continue to retain, develop and win business in this key growth sector and our Innovation Lab in Milton Keynes has supported our sales growth in 2017;

• We are making good progress in the development of our National Account business with additional business from existing customers in H1 2017;

• The Third-party Logistics ("3PL") sector now represents 11% of our total business (2016 - 11%) as we continue to strengthen our partnerships with key 3PL operators;

• Gross margin at 29.0% (2016 - 29.2%) was marginally impacted by industry wide input price increases on paper-based products, which we are in the process of recovering from our customer base; and

• Overhead investment in the current year is primarily due to the impact of acquisitions; meanwhile the strong cost control ethos throughout the business remains.

  We expect sales to be weighted towards H2 2017 reflecting the growing proportion of internet retailers in our customer base. The key areas we shall focus on to support this are:

• Maintaining our focus on the growth potential for protective packaging in our key market segments - the e-commerce sector, National Accounts and 3PL operators;

• Building on the new business momentum created in H1 2017 to ensure that key business wins are effectively implemented to improve sales growth in H2 2017;

• Utilising the benefits of our membership of NovuPak, for UK based customers requiring our capabilities on a wider European basis;

• Improving our sourcing through stronger relationships with our existing supplier base;

• Fully implementing sales price recovery of paper-related input price increases;

• Rolling out the new products introduced to the business from recent acquisitions;

• Pursuing cost reduction opportunities through productivity improvements as well as in our property portfolio;

• Maintaining the focus on working capital management to reduce borrowing levels; and

• Supplementing organic growth through the identification and completion of further suitable high quality acquisition opportunities.

  Interim Results - Management Report (continued)

  Macfarlane's Manufacturing Operations comprise Labels and Packaging Design & Manufacture.

  2017	2016
  £000	£000
  Sales	13,553	13,650
  Cost of sales	8,650	7,983
  Gross margin	4,903	5,667
  Overheads	4,625	5,451
  Operating profit	278	216

  Our Labels business designs and prints self-adhesive labels for major FMCG customers in the UK and Europe and resealable labels for major customers in the UK, Europe and the USA. The business operates from production sites in Kilmarnock and Wicklow and a sales and design office in Sweden, which focuses on the development and growth of our resealable labels business, Reseal-it. More product sectors are adopting the re-sealable label format and this is a key strategic focus for the Labels management team.

  In H1 2017 sales at Macfarlane Labels were at similar levels to 2016 as we continued our focus on sales of resealable products to key customers. As a result gross margin improved versus 2016. Profit in the first half of 2017 was at a similar level to that achieved in 2016.

  We operate the Packaging Design & Manufacture business from two UK sites - Grantham and Westbury, where we design, manufacture and assemble custom-designed packaging solutions for customers requiring cost-effective methods of protecting high value products in storage and transit. We differentiate ourselves through our technical expertise, design capability, industry accreditations and national capability through the partnership with Macfarlane Packaging Distribution.

  Packaging Design & Manufacture sales reduced by 1% from last year's levels with demand weakness in particular market sectors, impacting certain of our customers. We reduced operating costs from the high levels seen in the second quarter of 2016, which resulted in profit in H1 2017 being above the same period in 2016.

  The priorities for the Manufacturing Operations in the second half of 2017 are to:

  • Accelerate the Reseal-it growth momentum through improved geographic penetration, extending the product range and introducing Reseal-it to new product sectors;

  • Increase self-adhesive label sales with key brands to create a more balanced customer portfolio;

  • Improve operational efficiency at our Grantham site;

  • Accelerate Packaging Design & Manufacture sales growth, particularly in key sectors e.g. Defence, Aerospace and Medical;

  • Prioritise sales activity on the higher added value bespoke composite pack product range; and

  • Continue to strengthen the relationship between our Packaging Design & Manufacture operations and our Packaging Distribution business to create both sales and cost synergies.

Macfarlane businesses all have strong market positions with differentiated product and service offerings. We have a flexible business model and a clear strategic plan incorporating a range of actions, which is being effectively implemented and is reflected in our consistent, profitable growth in recent years.

Our future performance is largely dependent on our own efforts to grow sales, increase efficiencies and bring high quality acquisitions into the Group. With a focus on the most attractive UK market sectors for our products and services, combined with our successful track record of growth and acquisitions, we expect the full year 2017 to be another successful year for Macfarlane Group.