RNS
Macfarlane Group PLC

Macfarlane Group PLC - Half-year Report

RNS Number : 2554X
Macfarlane Group PLC
27 August 2020
 

 

 

 

27 August 2020

 

MACFARLANE GROUP'S INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2020

Financial Highlights

2020

2019

Year on Year Change

 

 

 

 

Group turnover £000

105,572

107,542

(1.8)%

Profit before tax £000

3,622

3,832

(5.5)%

Interim dividend

0.70p

0.69p

1.4%

Basic earnings per share

1.83p

1.99p

(8.0)%

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Stuart Paterson, Chairman of Macfarlane Group PLC ("Macfarlane Group" or "the Group"), today said: -

 

"Macfarlane Group has achieved a resilient performance in the first half of 2020 despite the challenging market conditions due to the impact of Covid-19.  The Board recognises this achievement is a testament to the exceptional contribution of our employees and wishes to take this opportunity to publicly thank the whole Macfarlane team for their hard work and commitment.  All our sites have remained open and trading throughout, albeit adjusted to service reduced demand, with social distancing and hygiene measures in place to protect the health, safety and well-being of our staff and our customers.  In addition, the majority of our office-based staff have been working successfully from home in accordance with our home working protocols.

Macfarlane Group sales decreased by 1.8% to £105.6m in the first half of 2020 (2019: £107.5m). Despite the impact of Covid-19 in the second quarter, our sales performance has been robust with the first half sales reduction versus the prior year comprising a 1.6% increase in sales in Q1 followed by a 5.2% fall in Q2. Profit before tax in the first half, at £3.6m, was 5.5% lower than in 2019 (2019: £3.8m) this excludes any benefit received from government support programmes as these have now been repaid.  Incremental costs of £0.2m were incurred in the first half of the year as a direct consequence of Covid-19.

Packaging Distribution sales decreased by 1.7% in the first half of 2020 compared with 2019.  Sales increased by 3.0% in Q1 and decreased by 6.3% in Q2 compared to the equivalent periods in 2019.  Sales revenue was impacted by weaker demand from the automotive and high street retail sectors, although this was partially offset by underlying strength in the e-commerce, household and medical sectors.  First half sales also benefited from the 2019 acquisitions as well as the January 2020 acquisition of the packaging trade and assets of Armagrip Limited, ("Armagrip").  First half operating profit in Packaging Distribution of £4.0m was £0.4m below the equivalent period in 2019.

Sales in our Manufacturing Operations were 5.8% below 2019, with Q1 sales decreasing by 8.7% and Q2 sales falling by 2.9%.  Strong demand from the food, medical and household essentials sectors in the Labels business, particularly in the second quarter, was more than offset by weaker demand from the aerospace and automotive sectors in the Packaging Design and Manufacture business.  First half operating profit of £0.2m in our Manufacturing Operations was £0.2m below that achieved in 2019.

Group interest costs have decreased by £0.4m due to lower levels of bank debt and finance leases and a lower pension deficit in the first half of 2020 compared to the same period in 2019.

Net bank debt at 30 June 2020 was £0.8m, £11.9m below its 31 December 2019 level of £12.7m.  The improved cash position has been achieved through active management of working capital and reductions in the cost base.  The net debt of £0.8m has benefited by £5.4m from the various government support and deferral programmes, all of which we have repaid since 30 June 2020.  The Group is operating well within its existing bank facility of £30.0m.  We expect to pay an estimated £0.8m in deferred consideration, in the second half of 2020, relating to the acquisition of Ecopac in 2019.

The pension scheme deficit reduced to £6.0m at 30 June 2020 from £6.5m at 31 December 2019, mainly due to our continued payment of deficit reduction contributions during the six month period.  The reduction in the discount rate in the first six months was largely offset by strong investment returns, justifying the focus on liability-driven investments to match the scheme's liability profile.

There are still significant uncertainties and concerns over future economic conditions.  However, the Board is confident that, given the resilience of the business in the second quarter, the expected seasonal uplift in the final quarter and actions being taken to reduce operating costs, the Group will continue to progress in the second half of 2020.  The Board's current expectation for the full year in 2020 is largely dependent on: no further prolonged national or regional lockdowns; no abnormal bad debt exposure; and no significant reduction in consumer demand in the final quarter of the year, traditionally our busiest trading period.

As a key measure to conserve cash, the Board took the decision not to propose the 2019 final dividend of 1.76p per share, detailed in the preliminary announcement.  The Board recognises the importance of recommencing the payment of dividends to our shareholders as soon as possible.  Given the stronger than anticipated profit performance and cash position, the Board is recommending an interim dividend of 0.70p per share to be paid on 8 October 2020 to shareholders on the register as at 11 September 2020 (2019: 0.69p per share).

Despite the impact of Covid-19, our strategy remains the delivery of 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 2020 demonstrates the robust nature of our strategy and business model and we are confident that the Group is strongly positioned to effectively manage the challenges it will face in the remainder of 2020 and well placed to benefit when the UK economy begins to recover."

 

Further enquiries:

Macfarlane Group

Tel: 0141 333 9666

 

Stuart Paterson                 Chairman

 

 

Peter Atkinson                  Chief Executive

 

 

John Love                           Finance Director

 

 

Spreng Thomson

 

 

Callum Spreng

Mob: 07803 970103

Legal Entity Identifier (LEI):  213800LVRYDERSJAAZ73

 

 

 

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 70 years' experience in the UK packaging industry.  Macfarlane Group's businesses are:

Packaging Distribution is the leading UK distributor of a comprehensive range of protective packaging products;

Manufacturing Operations which includes Labels who design and print high quality self-adhesive and resealable labels, principally for FMCG companies, and Packaging Design and Manufacture who design and produce protective packaging for high value, fragile products.

·      Macfarlane Group employs over 900 people at 31 sites, principally in the UK, but also in Ireland and Sweden.

·      The company has 15,000+ 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.

 

 
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.  Macfarlane operates a stock and serve supply model from 25 Regional Distribution Centres ("RDCs") and three satellite sites, supplying industrial and retail customers with a comprehensive range of protective packaging materials and services 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.  In a fragmented market, 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 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 supports 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.

 

2020

2019

 

£000

£000

Sales

91,496

93,053

Cost of sales

62,013

65,103

 

 

 

Gross margin

29,483

27,950

Overheads

25,450

23,487

 

 

 

Operating profit

4,033

4,463

 

 

 

The main features of our first half performance in 2020 were:

l Despite the challenges of Covid-19, existing business has remained resilient with weaker demand from customers in the automotive and high street retail sectors being offset by strong demand in the e-commerce and medical sectors;

l New business growth was subdued due to limited engagement with new prospects through the Covid-19 challenges, nevertheless there were some important new business wins in the period;

l Increasing numbers of customers switching to buying online either through our www.macfarlanepackaging.com shop or using our new Simplicit-e electronic trading platform;

l Positive impact from acquiring quality packaging distribution businesses in 2019 and 2020;

l An improved gross margin at 32.2% (2019: 30.0%) achieved through effective management of input price changes on paper-based products in the second half of 2019 flowing through into the first half of 2020;

l Progress in our "Follow the Customer" programme in Europe; and

l Overhead increases, primarily due to the impact of acquisitions (£1.0m), an increase in bad debt provisioning (£0.5m) and incremental Covid-19 related costs.

We expect sales to once again be weighted towards H2 reflecting the busiest trading period for internet retail customers, which will be a key contributor to our results in H2 2020.  The key areas we will focus on in the second half are:

l Prioritise engagement with potential new customers in stable and growing sectors such as e-commerce, medical and third party logistics;

l Invest in new technology to allow our sales teams to demonstrate our ability to add value for customers through ongoing implementation of our "Significant Six" sales approach to optimise their "Total Cost of Packaging" in both face-to-face and virtual environments;

l Accelerate implementation of our web-based solutions to allow customers access to our full range of products and services;

l Continue the good progress we have made in our "Follow the Customer" programme in Europe;

l Reduce operating costs through efficiency programmes in sales, logistics and administration;

l Maintain the focus on working capital management to facilitate future investment and manage effectively the bad debt risk which has increased in the current economic environment; and

l Supplement organic growth through progressing further suitable quality acquisitions.

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

 

2020

2019

 

£000

£000

Sales

16,379

17,390

Cost of sales

11,043

12,099

 

 

 

Gross margin

5,336

5,291

Overheads

5,105

4,881

 

 

 

Operating profit

231

410

 

 

 

The principal activity of the Packaging Design and Manufacture business is the design, manufacture and assembly of custom-designed packaging solutions for customers requiring cost-effective methods of protecting high value products in storage and transit.  The business operates from sites in Grantham and Westbury, supplying both directly to customers and also through Packaging Distribution's RDC network.

Key market sectors are defence, aerospace, medical equipment, electronics and automotive.  The markets in which we operate 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 Macfarlane Packaging Distribution.

Packaging Design & Manufacture sales in H1 2020 decreased by 19.0% from the equivalent period in 2019 due to significantly weaker demand in the aerospace and automotive sectors.  As a result of the lower sales profit in H1 2020 is below the same period in 2019 and actions are in progress to realign the cost base.

Our Labels business designs and prints self-adhesive labels for major fast-moving consumer goods ("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.  The Labels business has a high level of dependence on a small number of major customers.  We have worked closely with these key customers over a long period to ensure high levels of service and to introduce product and service development initiatives to maintain competitive differentiation.

In H1 2020, sales at Macfarlane Labels were 6.7% higher than in 2019, mainly due to an increase in demand from existing customers in the food, household essentials and hygiene sectors.  Overhead costs have increased due to higher transportation costs servicing overseas customers.  Profit in H1 2020 is ahead of the same period in 2019.

The priorities for the Manufacturing Operations in the second half of 2020 are to:

l Reduce the operating costs of the Design and Manufacture business in line with lower sales;

l Focus the Design & Manufacture sales team on growth sectors like Medical and Defence;

l Prioritise new sales activity on our higher added value bespoke composite pack product range;

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

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

l Secure efficiency benefits from the installation of additional printing capacity in our Kilmarnock site in July 2020 to improve gross margins.

 

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 a clear strategic plan, being effectively implemented, which is reflected in consistent, profit and cash generation over a sustainable 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 we have experienced significant challenges from the Covid-19 pandemic and there are still uncertainties ahead, our strategy and business model have proved resilient and robust.  We expect to deliver a solid sales and profit performance in 2020 and are well positioned to benefit as the economy recovers.

 
Risks and Uncertainties

The principal risks and uncertainties, which could impact on the performance of the Group, were outlined on pages 18 and 19 in our Annual Report and Accounts for 2019 (available on our website at www.macfarlanegroup.com) together with the mitigating actions.  These remain substantially the same for the remaining six months of the current financial year and are summarised below with the impact of the recent Covid-19 pandemic set out immediately underneath the table of risks:

l The Group's businesses are impacted by commodity-based raw material prices and manufacturer energy costs, with profitability sensitive to supplier price changes including currency fluctuations.  The Group works closely with its supplier and customer base to manage effectively the scale and timing of these price changes and any resultant impact on profit;

l Given the multi-site nature of its business the Group has an extensive property portfolio comprising 3 owned sites and 36 leased sites, 3 of which are sub-let.  The portfolio can give rise to risks in relation to ongoing lease costs, dilapidations and fluctuations in value.  The Group adopts a proactive approach to managing property costs and exposures;

l The Group has a significant investment in working capital in trade receivables and inventories.  There is a risk that this investment is not fully recovered.  Rigour is applied to the management of trade receivables and inventories throughout the Group to mitigate these risks;

l The Group needs continued access to funding to meet its trading obligations and to support organic growth and acquisitions.  Although the current facility is only partly utilised, 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 £30 million with Lloyds Bank PLC, available until June 2022, which finances our trading requirements and supports controlled expansion, providing a medium-term funding platform for growth;

l The Group's defined benefit pension scheme is sensitive to a number of key factors; investment returns, discount rates used to calculate the scheme's liabilities and mortality assumptions.  Small changes in these assumptions could cause significant movements in the pension deficit.  The Group has sought to manage the volatility of the pension scheme deficit caused by these factors by undertaking exercises to reduce liabilities, more effectively match the investment profile with the liability profile and making contributions to reduce the deficit;

l In Packaging Distribution, the business model reflects a decentralised approach with a high dependency on effective local decision-making.  There is a risk that local decisions may not always meet overall corporate objectives. This is closely monitored using the Group's management information system, with regular reviews of performance for all locations; and

l The Group's growth strategy includes acquisitions as a key component.  There are risks that the availability of acquisitions may reduce, or that acquisitions may not perform as expected either immediately after acquisition or on subsequent integration.  Having made twelve acquisitions since 2014, the Group has well-established due diligence and integration processes and procedures and seeks to acquire quality businesses which will perform well in the Group.

Macfarlane Group has carried out scenario planning for the continuing effects of the Covid-19 pandemic considering impacts on sales, profitability, cash flow, bad debt risk and the health, safety and well-being of its employees.  These scenarios also assumed no further acquisition activity.  This is constantly under review and based on our experience to date we are confident the Group is robust enough to operate safely, profitably and within its borrowing facilities under all reasonable scenarios.

Macfarlane Group has also carried out an impact analysis and evaluated the potential short to medium-term implications of a no-deal Brexit including reversion to World Trade Organisation tariffs.  Where practical, we have put in place contingency measures to try to mitigate any immediate effects on our supply chain and these measures are being reviewed at regular intervals. 

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.

 

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 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 2020 were

S.R. Paterson                     Chairman

P.D. Atkinson                     Chief Executive

J. Love                                 Finance Director

R. McLellan                        Non-Executive Director/Senior Independent Director

J.W.F. Baird                         Non-Executive Director

A.M. Dunstan                    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 27 August 2020 and signed on its behalf by

 

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

Peter D. Atkinson                             John Love

Chief Executive                                 Finance Director

 

 

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2020

 

 

 

 

 

 

 

 

 

 

Six

months to

30 June

2020

£000

 

Six

months to

30 June

2019

£000

 

Year

to 31

December

2019

£000

 

Note

 

 

 

 

 

Continuing operations

 

 

 

 

 

 

Revenue

3

105,572

 

107,542

 

225,389

Cost of sales

 

(70,753)

 

(74,301)

 

(153,256)

 

 

 

 

 

 

 

Gross profit

 

34,819

 

33,241

 

72,133

Distribution costs

 

(4,171)

 

(4,204)

 

(8,441)

Administrative expenses

 

(26,384)

 

(24,164)

 

(50,062)

 

 

 

 

 

 

 

Operating profit

3

4,264

 

4,873

 

13,630

Finance costs

4

(642)

 

(1,041)

 

(1,606)

 

 

 

 

 

 

 

Profit before tax

 

3,622

 

3,832

 

12,024

Tax

5

(736)

 

(693)

 

(2,293)

 

 

 

 

 

 

 

Profit for the period

3

2,886

 

3,139

 

9,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

7

 

 

 

 

 

  Basic

 

1.83p

 

1.99p

 

6.17p

 

 

 

 

 

 

 

  Diluted

 

1.82p

 

1.99p

 

6.16p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2020

 

 

 

 

 

 

 

 

 

 

 

 

Six

months to

30 June

2020

£000

 

Six

months to

30 June

2019

£000

 

Year

to 31

December

2019

£000

Items that may be reclassified to profit or loss

Note

 

 

 

 

 

Foreign currency translation differences

 

67

 

(17)

 

(62)

Items that will not be reclassified to profit or loss

 

 

 

 

 

 

Remeasurement of pension scheme liability

10

(1,038)

 

(809)

 

537

Tax recognised in other comprehensive income

 

 

 

 

 

 

Tax on remeasurement of pension scheme liability

11

197

 

138

 

(92)

Long-term corporation tax rate change on deferred tax

 

11

 

129

 

 

-

 

 

-

 

 

 

 

 

 

 

Other comprehensive (expense)/income for the period, net of tax

 

 

(645)

 

 

(688)

 

 

383

Profit for the period

 

2,886

 

3,139

 

9,731

 

 

 

 

 

 

 

Total comprehensive income for the period

 

2,241

 

2,451

 

10,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2020

 

 

 

 

Note

Share

Premium

£000

Revaluation

Reserve

£000

Translation

Reserve

£000

Retained

Earnings

£000

 

Total

£000

 

 

 

 

 

 

 

At 1 January 2020

 

13,148

70

231

16,369

69,271

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

Profit for the period

 

-

-

-

 

2,886

2,886

Foreign currency translation differences

 

 

-

 

-

 

-

 

67

 

-

 

67

Remeasurement of pension scheme liability

 

10

 

-

 

-

 

-

 

-

 

(1,038)

 

(1,038)

Tax on remeasurement of pension scheme liability

 

11

 

-

 

-

 

-

 

-

 

197

 

197

Long-term corporation tax rate change on deferred tax

 

11

 

-

 

-

 

-

 

-

 

129

 

129

 

 

 

 

 

 

 

 

Total comprehensive income

-

-

-

67

2,174

2,241

 

 

 

 

 

 

 

 

Transactions with shareholders

 

 

 

 

 

 

 

Share-based payments

 

-

-

-

-

90

90

 

 

 

 

 

 

 

 

Total transactions with shareholders

-

-

-

-

90

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 30 June 2020

 

39,453

13,148

70

298

18,633

71,602

 

 

 

 

 

 

 

 

 

MACFARLANE GROUP PLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED 30 JUNE 2019

 

 

 

 

Note

Share

Premium

£000

Revaluation

Reserve

£000

Translation

Reserve

£000

Retained

Earnings

£000

 

Total

£000

 

 

 

 

 

 

 

At 1 January 2019

 

12,975

70

293

9,807

62,532

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

Profit for the period

 

-

-

-

-

3,139

3,139

Foreign currency translation differences

 

 

-

 

-

 

-

 

(17)

 

-

 

(17)

Remeasurement of pension scheme liability

 

10

 

-

 

-

 

-

 

-

 

(809)

 

(809)

Tax on remeasurement of pension scheme liability

 

11

 

-

 

-

 

-

 

-

 

138

 

138

 

 

 

 

 

 

 

 

Total comprehensive income

-

-

-

(17)

2,468

2,451

 

 

 

 

 

 

 

 

Transactions with shareholders

 

 

 

 

 

 

 

Dividends

6

-

-

-

-

(2,600)

(2,600)

Share-based payments

 

-

-

-

-

10

10