REG - Macfarlane Group PLC - Annual Results 2023
29/02/2024 07:15
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RNS Number : 8744E Macfarlane Group PLC 29 February 2024
29 February 2024
MACFARLANE GROUP PLC
("MACFARLANE GROUP", "THE COMPANY", "THE GROUP")
ANNUAL RESULTS 2023
Group profit before tax ahead of previous year
FINANCIAL HIGHLIGHTS
2023 2022 Increase/
(Decrease)
£000 £000 %
Statutory measures
Revenue 280,714 290,431 (3%)
Gross profit 105,681 98,057 8%
Operating profit 22,068 21,496 3%
Profit before tax 20,280 19,934 2%
Profit for the year 14,974 15,637 (4%)
Interim and proposed final dividend (pence) 3.59p 3.42p 5%
Basic earnings per share (pence) 9.44p 9.89p (5%)
Alternative performance measures
Adjusted operating profit 27,637 25,073 10%
Adjusted profit before tax 25,849 23,511 10%
See notes to the financial information below for reconciliation of Alternative
Performance Measures (before charging amortisation and deferred contingent
consideration adjustments) to Statutory Measures.
· Group revenue reduced by 3% versus 2022 to £280.7m.
· Adjusted Group profit before tax grew 10% from £23.5m to £25.8m.
· Group profit before tax at £20.3m increased by 2% after charging
£1.5m for deferred contingent consideration related to the acquisition of
PackMann Gessellschaft fur Verpackungen und Dienstleistungen mbH ('PackMann'),
which delivered a stronger operating performance than previously anticipated.
· Basic and diluted earnings per share were 9.44p per share (2022:
9.89p per share) and 9.34p per share (2022: 9.78p per share) respectively
largely due the higher tax rate of 23.5% in 2023 (2022: 19.0%).
Packaging Distribution
· Packaging Distribution revenue decreased by 6% to £244.9m (2022:
£259.7m).
· Weak demand from customers in the UK and Ireland and sales price
deflation were partially offset by a stronger new business performance, good
sales momentum in Europe and the benefits of the acquisitions of PackMann in
May 2022 and Gottlieb Packaging Materials Limited ('Gottlieb') in April 2023,
which are both performing well.
· Gross margins increased to 35.7% (2022: 32.1%) reflecting effective
management of input price changes which has offset inflationary increases in
some operating costs.
· Adjusted operating profit increased by 6% to £21.0m (2022: £19.9m)
and operating profit decreased by 3% to £16.5m (2022: £17.1m), after
charging £1.5m for deferred contingent consideration adjustments.
Manufacturing Operations
· Manufacturing Operations delivered revenue growth of 16% to £35.8m
(2022: £30.8m).
· A.E. Sutton Limited ('Suttons'), acquired in February 2023, and
B&D 2010 Group Limited ('B&D Group'), acquired at the end of September
2023, made strong contributions offsetting the slower demand in certain
industrial markets.
· Adjusted operating profit increased by 27% to £6.6m (2022: £5.2m)
and operating profit increased by 26% to £5.6m (2022: £4.4m).
Group
· Net cash inflow from operating activities of £33.5m (2022: £18.0m)
reflects strong working capital management.
· Net bank funds were £0.5m on 31 December 2023, following a net cash
inflow of £4.0m in the year, even after £16.6m (2022: £11.9m) of investment
in acquisitions and capital expenditure.
· The Group is operating well within its bank facility of £35.0m and
relevant covenants which run until 31 December 2025.
· Pension Scheme surplus of £9.9m at 31 December 2023 (31 December
2022: £10.2m). Following conclusion of the 2023 triennial valuation nil
contributions are required from 1 January 2024 forward.
· Board proposes a final dividend of 2.65p per share (2022: 2.52p per
share) payable on 30 May 2024, taking the total dividend for 2023 to 3.59p per
share (2022: 3.42p per share) up 5% on 2022.
CHAIR'S STATEMENT
I am pleased to report that, against a backdrop of challenging market
conditions, Macfarlane Group PLC has once again demonstrated the resilience of
its business model and achieved another year of profit growth in 2023. In
addition, we have made good progress against our ESG objectives.
Trading
Group profit before tax in 2023 was ahead of the previous year. This profit
growth has been achieved through the completion of three high quality
acquisitions, effective management of input prices, good progress in Europe
and stronger new business momentum which has offset weak customer demand in
the UK and Ireland, sales price deflation and inflation in operating costs.
We funded £16.6m (2022: £11.9m) of acquisition and capital investment
activity through our existing bank facilities due to the Group's continued
strong operating cash flows. Net bank funds at 31 December 2023 were £0.5m.
The pension scheme remains in surplus and, following conclusion of the latest
triennial valuation, company contributions have been reduced to £nil.
This robust performance has been achieved through the continued commitment and
dedication of all our Macfarlane colleagues and I thank them for their
efforts.
Environment, Social and Governance ("ESG")
Our updated ESG Strategy focuses on: reducing the environmental impact of our
operations; guiding and supporting our customers to achieve their
sustainability objectives; caring for our colleagues; and investing in and
engaging with our communities.
In 2023, the Group made progress on our commitment to reducing the Group's
impact on the environment through: further electrification of our delivery
fleet; extending the use of renewable energy; increasing the support we offer
to our customers, including on sustainable packaging, through the opening of
our second Innovation Lab; and improving our portfolio of sustainable
packaging products.
Board Changes
Bob McLellan, Senior Independent Director, retired from the Board at the end
of December 2023 and the Board would like to thank Bob for his invaluable
contribution over the past 10 years. The recruitment process for a
Non-Executive Director has commenced and an announcement will be made in due
course when a suitable candidate has been appointed.
James Baird, Audit Committee Chair, has been appointed Senior Independent
Director.
Proposed Dividend
The Board proposes a final dividend of 2.65 pence per share, amounting to a
full year dividend of 3.59 pence per share (2022: 3.42 pence per share), an
increase of 5%. Subject to the approval of shareholders at the Annual General
Meeting on Tuesday 7 May 2024 the final dividend will be paid on Thursday 30
May 2024 to those shareholders on the register at Friday 10 May 2024 (ex
dividend date 9 May 2024).
Outlook
We expect the year ahead to remain challenging due to uncertainty over
customer demand. However, we are confident that we will continue to make
progress in 2024 through strong new business momentum, a well-developed
pipeline of potential acquisitions, the continued effective management of
input prices and operational efficiencies.
Further enquiries: Macfarlane Group Tel: 0141 333 9666
Aleen Gulvanessian Chair
Peter Atkinson Chief Executive
Ivor Gray Finance Director
Spreng Thomson
Callum Spreng Mob: 07803 970103
Legal Entity Identifier (LEI): 213800LVRYDERSJAAZ73
Notes to Editors:
· Macfarlane Group PLC has been listed on the Premium segment
of the Main Market of the London Stock Exchange (LSE: MACF) since 1973 with
over 70 years' experience in the UK packaging industry.
· Through its two divisions, Macfarlane Group services a broad
range of business customers, supplying them with high quality protective
packaging products which help customers reduce supply chain costs, improve
operational efficiencies and sustainability and enhance their brand
presentation. The divisions are:
o Packaging Distribution - Macfarlane Packaging Distribution is the
leading UK distributor of a comprehensive range of protective packaging
products; and
o Manufacturing Operations - Macfarlane Design and Manufacture is a UK
market leader in the design and production of protective packaging for high
value and fragile products.
· Headquartered in Glasgow, Scotland, Macfarlane Group employs
over 1,000 people at 39 sites, principally in the UK, as well as in Ireland,
Germany and the Netherlands.
· Macfarlane Group supplies more than 20,000 customers,
principally in the UK and Europe.
· In partnership with 1,700 suppliers, Macfarlane Group
distributes and manufactures 600,000+ lines supplying to a wide range of
sectors, including: retail e-commerce; consumer goods; food; logistics; mail
order; electronics; defence; medical; automotive; and aerospace.
BUSINESS REVIEW
Group
Group revenue reduced by 3% and we grew adjusted operating profit by 10% in
2023 with weak demand from customers in the UK and Ireland, sales price
deflation, and inflation in operating costs being offset by an improved new
business performance, effective management of changes in input prices, strong
organic growth in Europe, and the execution of three good quality
acquisitions. Operating profit grew by 3% after a charge of £1.5m for
deferred contingent consideration related to the acquisition of PackMann,
which delivered a stronger operating performance than previously anticipated.
The Group has also made progress against its ESG objectives details which will
be set out in the Annual Report and Accounts 2023.
Revenue Adjusted operating Operating Revenue Adjusted operating Operating
profit profit profit profit
Group performance
2023
2022
£000
£000
2023 2023 2022 2022
£000 £000 £000 £000
Segment
Packaging Distribution 244,938 21,044 16,511 259,651 19,868 17,094
Manufacturing Operations 35,776 6,593 5,557 30,780 5,205 4,402
Continuing operations 280,714 27,637 22,068 290,431 25,073 21,496
% of Revenue 9.8% 7.9% 8.6% 7.4%
See notes to the financial information below for reconciliation of Alternative
Performance Measures (before charging amortisation and deferred contingent
consideration adjustments) to Statutory Measures.
2024 Outlook
The Group's businesses all have strong market positions with low customer
concentration and differentiated product and service offerings, providing both
value and sustainability to our customers. We have a flexible business model,
and we effectively implement our strategic plan, which is reflected in
consistent profit and cash generation over a sustained period.
Our future performance continues to depend on our effectiveness in growing
revenue and managing input prices, increasing efficiencies, and bringing high
quality acquisitions into the Group. There will continue to be challenges in
2024. However, our strategy and business model have proved to be resilient and
despite these challenges we expect 2024 to be another year of growth for the
Group.
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 and
international distribution generalists who supply a range of products,
including protective packaging materials.
Macfarlane competes effectively on a local basis through its strong focus on
customer service, its breadth and depth of product offering and through the
recruitment and retention of high-quality staff with good local market
knowledge. On a national and international basis, Macfarlane has market focus,
expertise and a breadth of product and service knowledge, all of which enable
it to compete effectively against non-specialist packaging distributors.
Packaging Distribution benefits its customers by enabling them to ensure their
products are cost-effectively protected in transit and storage through the
supply of a comprehensive product range, single source stock and serve supply,
just-in-time delivery, tailored stock management programmes, electronic
trading and independent advice on both packaging materials and packing
processes. Through the 'Significant Six' sales approach we reduce our
customers' 'Total Cost of Packaging', improve their sustainability performance
and reduce their carbon footprint. This is achieved through supplying
effective packaging solutions, optimising warehousing and transportation,
reducing damages and returns, and improving packaging efficiency.
"Significant Six" represents the six key costs in a customers' packing process
being transport, warehousing, administration, damages and returns,
productivity and customer experience.
Packaging Distribution 2023 2022 2023
£000 £000 Change
Revenue 244,938 259,651 (6%)
Cost of sales 157,458 176,193 (11%)
Gross margin 87,480 83,458 5%
Operating expenses 66,436 63,590 4%
Adjusted operating profit 21,044 19,868 6%
Amortisation 2,983 2,774
Deferred contingent consideration 1,550 -
Operating profit 16,511 17,094 (3%)
See notes to the financial information below for reconciliation of Alternative
Performance Measures (before charging amortisation and deferred contingent
consideration adjustments) to Statutory Measures.
The main features of Packaging Distribution's performance in 2023 were:
· Decrease in revenue of 6% versus 2022 resulting from:
· Some weakness in demand from customers in the UK and Ireland due to the
cost-of-living impact;
· More normalised e-commerce revenue post-Covid;
· Sales price deflation as experienced across the industry;
· Strong organic growth in Europe through the 'Follow the Customer'
strategy; and
· Revenue growth from the acquisitions of PackMann in May 2022 and
Gottlieb in April 2023.
· New business increased by 24% versus 2022 with a positive impact from
the opening of the new Northern Innovation Lab.
· Effective management of input price changes has enabled us to improve
gross margins to 35.7% (2022: 32.1%).
· Operating costs increased by 4%, particularly reflecting inflation in
energy and labour costs and represented 27.1% of revenue (2022: 24.5%).
· Adjusted operating profit increased by 6% versus 2022 and as a
percentage of revenue has improved to 8.6% (2022: 7.7%).
· Operating profit has reduced by 3% due to a charge of £1.5m for
deferred contingent consideration related to the acquisition of PackMann,
which has delivered a stronger operating performance than previously
anticipated.
Future
Our plans for 2024 are focused on growing revenue and improving profitability
through the following actions:
· Accelerate new business momentum through effective use of our leading
sales tools and processes - "Packaging Optimiser" ', Significant Six and our
Innovation Labs.
· Accelerate the progress we have made in Europe through our "Follow the
Customer" programme and the PackMann acquisition.
· Execute our second major site consolidation in the East Midlands.
· Supplement organic growth through progressing further high-quality
acquisitions in the UK and Europe.
· Support our customers to reduce their carbon footprint through offering
more sustainable packaging solutions.
· Continue to effectively manage input price changes.
· Strengthen our key supplier relationships.
· Develop both sales and cost synergies through the relationship with our
Manufacturing Operations.
· Achieve benefits from our information technology investments in
Microsoft Dynamics, and Warehouse Management.
· Introduce improvements to our web-based solutions to provide customers
with more effective online access to our full range of products and services.
· Reduce operating costs through efficiency programmes in sales,
logistics and administration.
· Maintain our focus on working capital management to facilitate future
investment and manage effectively the ongoing bad debt risk within the current
economic environment.
Packaging Optimiser is a Macfarlane developed software tool that measures
the financial and carbon benefits of the Significant Six selling approach.
Manufacturing Operations comprises our Macfarlane Packaging Design and
Manufacture business, GWP, acquired in February 2021, Suttons acquired in
March 2023, and B&D Group acquired in September 2023.
Manufacturing Operations designs, manufactures, assembles, and distributes
bespoke protective packaging solutions for customers requiring cost-effective
methods of protecting high value products in storage and transit. The primary
raw materials are corrugate, timber and foam. The businesses operate from five
manufacturing sites, in Grantham, Westbury, Swindon, Salisbury and
Southampton, 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.
Manufacturing Operations 2023 2022 2023
£000 £000 Change
Revenue 40,929 35,045 17%
Inter-segment revenue 5,153 4,265 21%
External revenue 35,776 30,780 16%
Cost of sales 17,575 16,181 9%
Gross margin 18,201 14,599 25%
Operating expenses 11,608 9,394 24%
Adjusted operating profit 6,593 5,205 27%
Amortisation 1,051 803
Deferred contingent consideration (15) -
Operating profit 5,557 4,402 26%
See notes to the financial information below for reconciliation of Alternative
Performance Measures (before charging amortisation and deferred contingent
consideration adjustments) to Statutory Measures.
Good growth in adjusted operating profit of 27% and operating profit of 26% in
Manufacturing Operations has been achieved, despite slowing demand in certain
industrial sectors and sales price deflation as experienced across the
industry.
The main features of the performance of Manufacturing Operations in 2023 were:
· A strong contribution from the acquisitions of Suttons in February 2023
and B&D Group in September 2023.
· New business increased by 11% in 2023.
· Some weakness in demand from existing customers.
· Effective management of input pricing to offset increasing operating
expenses, particularly energy and labour.
· GWP developing as an in-house supplier to Macfarlane Packaging
Distribution.
Future
Priorities for Manufacturing Operations in 2024 are to:
· Increase momentum of new business growth in target sectors, e.g.
medical, aerospace and defence.
· Prioritise new sales activity in our higher added-value bespoke
composite pack product range.
· Work with our customers to effectively manage material price changes.
· Continue to strengthen the relationship with our Packaging Distribution
businesses to create both sales and cost synergies.
· Achieve both sales and cost synergies through closer working with the
recently acquired businesses - Suttons and B&D Group.
· Supplement organic growth through progressing further high-quality
acquisitions in the UK.
RISKS AND UNCERTAINTIES
The principal risks and uncertainties faced by the Group and the factors
mitigating these risks are detailed below. These risks are addressed within an
overall governance framework including clear and delegated authorities,
business performance monitoring and appropriate insurance cover for a wide
range of potential risks. There is a dependence on good quality local
management, which is supported by an investment in training and development
and ongoing performance evaluation.
Risks are identified and assessed through a range of "top down" and "bottom
up" analyses that are updated on a regular basis. This in turn provides the
basis for making informed risk-based decisions regarding the scope and focus
of assurance work, as described in the report of the Audit Committee in the
Annual Report 2023. In addition to scheduled updates from Finance, Health
& Safety, IT, Sales, Procurement and other business functions, the Board
and Audit Committee may seek assurance work in other areas from time to time,
either from internal sources or externally commissioned work.
We continue to evolve our risk management processes to ensure they are robust,
effective, and integrated within our decision-making processes. We have
included a brief description of how we assess that each risk level has
changed. For risks shown as [ç è] the risk level is broadly similar between
2022 and 2023. If the risk is shown as [é ê] the risk level has increased or
decreased respectively during 2023 and is being addressed accordingly through
mitigating actions by management.
We recognise the need to constantly review the risks and uncertainties faced
by the Group and ensure that any emerging risks are being identified and
actions being taken to mitigate. We have not added any new risks in 2023.
However, we recognise that Artificial Intelligence ("AI") is an emerging
technology that is likely to have an impact on the Group. At this stage we
view AI as an opportunity for the Group to improve the efficiency and
effectiveness of our operations. The Group is introducing AI, through its
Customer Relationship system, to identify patterns in customer needs which
will allow our customer service teams to respond more effectively with
packaging solutions that the customer needs when they are required. We will
keep AI under review to assess the likely risk and benefit to the Group going
forward.
Risk Description Mitigating Factors Change in Risk Level
Strategic changes in the market The Group has a well-diversified customer base, giving protection from changes No change ç è
in specific industry sectors, as well as a flexible business model with a
Failure to respond to strategic shifts in the market, including the impact of strong value proposition to meet the changing needs of customers. Group businesses have been impacted by inflation in operating costs and have
weaknesses in the economy as well as disruptive behaviour from competitors and
continued to experience volatility in input prices across all product
changing customer needs (e.g. changing customer priorities between online and The Group strives to maintain high service levels for customers ensuring that categories. These challenges are being managed effectively. The Group's
physical buying) could limit the Group's ability to continue to grow revenues. customer needs are met. The Group continues to invest in information improvement in adjusted operating profit margin demonstrates the effectiveness
technology, including its Customer Relationship Management and Warehouse of the management's ability to manage these market dynamics.
We monitor this through Net Promoter Score (see ESG Report in the Annual Management systems, while also enhancing its service offering and range of
Report 2023), an annual customer satisfaction survey (see ESG Report in the products. These tools are intended to strengthen our business model by During 2023 the Group has experienced weaker demand from customers across most
Annual Report 2023) and interaction with customers at our Innovation Labs. supporting customer service teams in managing the complex and changing needs industry sectors. This is offset by organic growth in Europe, improvement in
of customers and to respond to the increasingly competitive and dynamic new business performance, strong cost control and effective management of
operating environment. changes in input prices.
The Group maintains strong partnerships with key suppliers to ensure that a During 2024, the Group expects to continue realising the benefits of its
broad range of products is available to respond to customers' requirements, investments in information technology tools, particularly through the
including any changes in their environmental and sustainability priorities. continued roll-out and refinement of our Customer Relationship Management and
Maintaining close relationships with key suppliers in the protective packaging Warehouse Management systems.
market enables us to understand and evaluate key trends and adapt our business
model accordingly.
Risk Description Mitigating Factors Change in Risk Level
Impact of environmental changes Sustainability considerations are central to the organisation's value Increase é
proposition as a distributor, utilising our resource, expertise and business
The markets we operate in are changing, with: assets to support customers to use less packaging and more sustainable The Group recognises the increased significance of our environmental
alternatives through our Significant Six selling proposition obligations and has continued to make progress, including;
· customers increasingly aware of the environmental impact of their
packaging; A full-time Head of Sustainability joined us in January 2023. He chairs the · Extending the introduction of fully electric trucks to our fleet to 9 in
Environment, Social and Governance ("ESG") committee consisting of senior 2024 (2023: 5);
· increasing environmental regulatory requirements for packaging suppliers, managers from across the Group.
such as the Plastic Tax introduced from April 2022 and the introduction of the
· Investment in solar panels at sites with high energy use. Solar panels were
Extended Producer Responsibility ("EPR") requirements; The Group has committed to the development of a transition plan towards installed during 2023 at the Group's manufacturing site in Grantham with a
net-zero and, on an ongoing basis, reviews all relevant developments and target of installing solar panels at the Group's Swindon manufacturing site
· increasing likelihood of disruption to the operations of the Group through available technologies to support that transition. during 2024 subject to a viability study;
extreme weather events such as flooding, storm damage and water stress,
impacting the business directly and disrupting supply chains; A new sustainability strategy has been developed setting out the key · Opening our Northern Innovation lab to significantly expand capacity to
priorities for the Group that are most relevant to the business and which will support customers in meeting their sustainability requirements;
· investors looking to invest in companies that demonstrate strong be key to mitigating both the transition and physical risks in this area (see
environmental credentials; and ESG Report in the Annual Report 2023). · The Group's Head of Sustainability leading on the impact of environmental
regulatory change, focusing on preparing the business for compliance with the
· UK Government's commitment to net zero carbon emissions by 2050 and the The ESG committee oversees progress against this strategy and the associated UK's EPR regulations and the Group's capability to support customers;
profound changes this will drive across the economy. targets, addressing challenges proactively. The committee reports directly to
the Board. · Ongoing actions to support our customers to reduce their CO2 emissions,
If the Group is not proactive and transparent in how it is responding to this
including using our 'Packaging Optimiser' tool; and
agenda, this could lead to a loss of employees, customers and investors. Regular reviews of our sustainability strategy are carried out at Board level
Additionally, there is a transition risk, i.e. that we do not progress our to challenge performance against key milestones, as well as to ensure that · Undertaking Scope 3 mapping to baseline our entire carbon footprint and to
strategy at the right pace; or we take actions that prove to be incorrect as priorities are aligned with stakeholder objectives. This is overseen via Key develop reduction targets aligned to a net zero pathway.
technology advances. Performance Indicators and regular reporting from the Head of Sustainability
to the Executive on progress against our priorities. See the detailed ESG Report in the Annual Report 2023.
The key measure the Group monitors is Scope 1 and 2 CO2 emissions. The Group
is currently in the process of measuring its Scope 3 emissions and is aiming
to report those during 2024.
Risk Description Mitigating Factors Change in Risk Level
Raw material prices The Group works closely with its supplier and customer base to effectively No change ç è
manage the scale and timing of price changes and any resultant impact on
The Group's businesses are impacted by commodity-based raw material prices and profit. Our IT systems monitor and measure effectiveness in these changes. Input prices have continued to change throughout 2023 primarily due to
manufacturer energy costs, with profitability sensitive to input price changes
volatility in timber, paper and polymer prices and the impact of rising fuel
including currency fluctuations. Where possible, alternative supplier relationships are maintained to minimise and energy costs. The business has managed these challenges robustly and gross
supplier dependency. margins have improved throughout 2023, reflecting the effort of our teams to
The principal components are corrugated paper, polythene films, timber, and
mitigate these increases.
foam, with changes to paper and oil prices having a direct impact on the price We work with customers to redesign packs and reduce packing cost to mitigate
we pay to our suppliers. the impact of cost increases, including switching to alternative products to Pricing during 2023 stabilised and, in the case of paper, reduced markedly.
minimise the impact of the Plastic Tax introduced in April 2022. However, this remains uncertain due to the general economic landscape.
This risk is monitored through our procurement teams interacting with key
suppliers and management regularly reviewing the effectiveness of our price The Group has a well-established supplier relationship management process We continue to work on educating our customers about Total Cost Management as
change programmes by monitoring gross margins by customer. which is subject to periodic management review and internal audit. the method to add value/reduce costs.
Risk Description Mitigating Factors Change in Risk Level
Acquisitions The Group carefully reviews potential acquisition targets, ensuring that the No change ç è
focus is on high-quality businesses which complement the Group's existing
The Group's growth strategy has included a number of acquisitions in recent profile and provide good opportunities for growth. The Group has made 18 acquisitions since 2014, including three in 2023.
years. There is a risk that such acquisitions may not be available on
acceptable terms in the future. Having completed a number of acquisitions in recent years, the Group has The Group has a strong pipeline of potential protective packaging acquisition
well-established due diligence and integration processes and procedures, while opportunities in both the UK and Northern Europe.
It is possible that acquisitions will not be successful due to the loss of key only acquiring well-established quality businesses which will perform well in
people or customers following acquisition or acquired businesses not the Group. European acquisitions are inherently higher risk due to cultural differences,
performing at the level expected. This could potentially lead to impairment of
challenges in realising operational synergies and, in some cases, less depth
the carrying value of the related goodwill and other intangible assets. The Group's management information system enables effective monitoring of in local management expertise and support compared to previous UK-based
post-acquisition performance with earn-out mechanisms also mitigating risk in acquisitions. However, there are also important strategic opportunities for
Execution risks around the failure to successfully integrate acquisitions the post-acquisition period. the Group in terms of extending service coverage for existing and new
following conclusion of the earn-out period also exist.
customers as well as integration synergies.
Goodwill and other intangible assets are tested annually for impairment.
This is monitored through regular reporting of acquisition prospects and
post-acquisition performance by executive management, with reporting to the
Board.
Property The Group adopts a proactive approach to managing property costs and No change ç è
exposures.
The Group has a property portfolio comprising 1 owned site and 52 leased
Our property consolidation strategy has continued during 2023. There is no
sites. This multi-site portfolio gives rise to risks in relation to ongoing Where a site is non-operational the Group seeks to assign, sell or sub-lease outstanding work on finalising exit costs following the expiry of leases.
lease costs, dilapidations, and fluctuations in value. the building to mitigate the financial impact. There are known future exits from three existing operating sites. Provisions
have been established to cover the anticipated exit costs.
This risk is monitored on a regular basis and reported to the Board through If this is not possible, rental voids are provided on vacant properties taking
internal reporting and input from external advisors. into consideration the likely period of vacancy and incentives to re-let. The Group currently has no vacant or sub-let properties.
The Group engages with external property advisers to assess the level of
provisioning required for dilapidations and negotiate to minimise the final
costs.
Risk Description Mitigating Factors Change in Risk Level
Cyber-security The Group continually invests in its IT infrastructure to protect against No change ç è
cyber-security threats. This includes regular testing of IT Disaster Recovery
The increasing frequency and sophistication of cyber-attacks is a risk which Plans. Remote working practices are the norm, with the Group adopting hybrid
potentially threatens the confidentiality, integrity and availability of the
home/office flexibility for its employees. This is a feature within the
Group's data and IT systems. We engage the services of a cyber-security partner to perform regular Group's risk to cyber-security attacks.
penetration tests to assess potential vulnerabilities within our security
These attacks could also cause reputational damage and fines in the event of arrangements. The Group continues to invest in prevention/detection software and education
personal data being compromised.
programmes to mitigate the risks of cyber-security attacks.
This is complemented by a program of cyber-security awareness training to
This risk is monitored through an ongoing program of compliance and controls ensure that all staff are aware of the potential threats caused by deliberate The frequency and sophistication of cyber-attacks is anticipated to continue
auditing with input from external advisors. and unauthorised attempts to gain access to our systems and data. to evolve, and the Group is committed to continually investing in upgrading
its infrastructure to respond to the changing threats.
The Group continues to perform regular assessments of its cyber-security
resilience and make changes to our defences.
Financial liquidity, debt covenants and interest rates The Group's borrowing facility comprises a committed facility of £35m with No change ç è
Bank of Scotland PLC, which finances our trading requirements and supports
The Group needs access to funding to meet its trading obligations and to controlled expansion, providing a medium-term funding platform for growth. The The Group has proved to be strongly cash generative in 2023 and has operated
support organic growth and acquisitions. There is a risk that the Group may be facility runs until 31 December 2025. well within its existing bank facilities throughout the year.
unable to obtain funds and that such funds will only be available on
unfavourable terms. The Group regularly monitors net bank debt and forecast cash flows to ensure Interest rates payable by the Group have increased from 5.25% at 31 December
that it will be able to meet its financial obligations as they fall due. 2022 to 7.00% at 31 December 2023. Interest rates are expected to remain high
The Group's borrowing facility comprises a committed facility of up to £35m.
for some time. The increases in rates, which are in line with the market, do
This includes requirements to comply with specified covenants, with a breach Compliance with covenants is monitored on a monthly basis and sensitivity not increase the risk of the Group being unable to obtain funds and the Group
potentially resulting in Group borrowings being subject to more onerous analysis is applied to forecasts to assess the impact on covenant compliance. operates well within the specific covenant which requires the Group to
conditions. generate EBITDA on a rolling twelve-month basis greater than 3 times interest
cost.
Risk Description Mitigating Factors Change in Risk Level
Working capital Credit risk is controlled by applying rigour to the management of trade No change ç è
receivables by Head of Credit Control and the credit control team and is
The Group has a significant investment in working capital in the form of trade subject to additional scrutiny from the Group Finance Director and Group Bad debt write-offs in 2023 have increased from 2022, albeit still at a
receivables and inventories. There is a risk that this investment is not fully Financial Controller in line with the Group's credit risk process. relatively low level.
recovered.
All aged debts are assessed using the Expected Credit Loss model, and The Expected Credit Loss allowance reflects the low level of historic bad
This risk is monitored through detailed reporting to local and executive appropriate provisions are made. debts in the Group.
management, which is reviewed in summary form by the Board.
Customers in sectors likely be significantly impacted by the current economic Aged stock over 6 months old has decreased in 2023 primarily due to weaker
challenges, particularly those exposed to reduced consumer demand and demand across most of the sectors the Group serves. The Group is continually
significant increases in operating costs (e.g. energy, fuel etc) are closely working to reduce stock over 6 months and has adequate provisioning to cover
monitored and, where necessary, actions taken to reduce exposure to potential any potential stock obsolescence.
bad debts or stock write-offs.
The economic environment will remain challenging in 2024. Management will
Inventory levels and order patterns are regularly reviewed and risks arising continue to take all appropriate steps to mitigate this risk and limit the
from holding bespoke stocks are managed by obtaining order cover from need for additional provisions or write-offs.
customers.
Risk Description Mitigating Factors Change in Risk Level
Defined benefit pension scheme The scheme was closed to new members in 2002. Benefits for active members were Decrease ê
amended by freezing pensionable salaries at April 2009 levels.
The Group's defined benefit pension scheme is sensitive to a number of key
The IAS 19 valuation of the Group's defined benefit pension scheme as at 31
factors including volatility in equity and bond/gilt markets, the discount A Pension Increase Exchange option is available to offer flexibility to new December 2023 estimated the scheme surplus to be £9.9m, compared to a surplus
rates used to calculate the scheme's liabilities and mortality assumptions. pensioners in both the level of pension at retirement and the rate of future of £10.2m at 31 December 2022.
increases.
Small changes in these assumptions could cause significant movements in the
The triennial actuarial valuation at 1 May 2023 was completed in February
pension surplus. The investment profile is regularly reviewed to ensure continued matching of 2024. Due to the positive funding position of the scheme, there is no
investments with the scheme's liability profile. requirement for the Group to make further deficit repair contributions.
This risk is monitored through regular input from external pension advisors,
including six monthly IAS19 reviews and triennial actuarial valuations. The scheme invests in Liability Driven Investments ("LDI") which hedge the The Group is working with trustees to prepare the scheme for buy-out. This
scheme against movements in the discount rate and inflation. These are process is not expected to be completed during 2024.
leveraged instruments which require active investments and divestments to
maintain the level of leverage.
The scheme was closed to future accrual during 2022.
Risk Description Mitigating Factors Change in Risk Level
Uncertain economic environment A twice yearly viability assessment and sensitivity analyses is performed by No change ç è
management.
Given the range of prolonged geopolitical and economic uncertainties within
The UK economy has experienced challenging economic conditions during 2023 and
the UK and other markets, there is an ongoing risk this will adversely affect The Group's borrowing facility comprises a committed facility of £35m with there is no expectation that the current low growth environment will improve
our ability to deliver upon agreed strategic initiatives. We may also need to Bank of Scotland PLC, which finances our trading requirements and supports significantly in 2024.
adapt our business quickly in order to limit the impact upon the Group's controlled expansion, providing a medium-term funding platform for growth.
results, prospects and reputation.
As seen across many of the markets in which the Group operates, the Group has
The Group regularly monitors net bank debt and forecast cash flows to ensure experienced a reduction in demand for its products in 2023 and has responded
This risk is monitored through regular review of trading forecasts and market that it will be able to meet its financial obligations as they fall due. through control of operating costs, effective management of input prices and
conditions, considered at executive management and Board level.
accelerating new business performance. The Group is prepared to continue to
Compliance with covenants is monitored on a monthly basis and sensitivity manage its cost base should demand remain challenging in 2024.
analysis is applied to forecasts to assess the impact on covenant compliance.
The Group is experiencing rising operating costs particularly, energy, fuel
The Group has scope to curtail capital expenditure and acquisition investment and employee costs and increased interest rates. While the risk of further
to preserve cash, if required. inflation remains, the year on year impact has been reducing and the impact on
2024 is expected to reduce.
In the event of a significant reduction in customer demand the Group would
take rigorous actions to reduce operating costs and working capital To mitigate this risk, executive management monitors monthly revenue and cost
investment. performance and market trends closely and has action plans to respond to any
significant or prolonged trading pressures.
There are a number of other risks that we manage which are not considered key
risks. These are mitigated in ways common to all businesses and not specific
to Macfarlane Group.
Viability statement
The Board is required to formally assess that the Group has adequate resources
to continue in operational existence for the foreseeable future and as such
can continue to adopt the going concern basis of accounting. The Board is also
required to state that it has a reasonable expectation that the Group will
continue in operation and meet its longer-term liabilities as they fall due.
To support this statement, the Board is required to consider the Group's
current financial position, its strategy, the market outlook and its principal
risks. The Board's assessment of the principal risks facing the Group and how
these risks affect the Group's prospects are set out above. The review also
includes consideration of how these risks could prevent the Group from
achieving its strategic plan and the potential impact these risks could have
on the Group's business model, future performance, solvency, and liquidity
over the next three years (starting from 1 January 2024).
The Board considers the Group's viability as part of its ongoing programme to
manage risk. Each year the Board reviews the Group's strategic plan for the
forthcoming three-year period and challenges the Executive team on the plan's
risks. The plan reflects the Group's businesses, which have a broad spread of
customers across a range of different sectors with some longer-term contracts
in place. The assessment period of three years is consistent with the Board's
review of the Group strategy, including assumptions around future growth rates
for our business and acceptable levels of performance.
Financial modelling and scenarios
The Group's existing bank facilities comprise a £35m committed facility, an
increase of £5m during 2023, with Bank of Scotland PLC, which is available
until December 2025. The Group has performed well during 2023, despite the
ongoing challenging market conditions, which gives confidence in the strength
of the underlying business model. The Directors have also considered the
longer-term economic outlook for the UK. Given the current uncertainty of the
economic outlook we have modelled a 'severe but plausible downside' scenario
as described below. In forming conclusions, the Directors have also considered
potential mitigating actions that the Group could take to preserve liquidity
and ensure compliance with its financial covenants.
A detailed financial model covering a three-year period is maintained and
regularly updated. This model enables sensitivity analysis, which includes
flexing the main assumptions, including future revenue growth, gross margins,
operating costs, finance costs and working capital management. The results of
flexing these assumptions, both individually and in aggregate, are used to
determine whether additional bank facilities will be required during the
three-year period and whether the Group will remain in compliance with the
covenants relating to the current facility. Whilst the current facilities are
committed until December 2025, we have assumed the Group will be able to
negotiate a new facility or extend the existing facility on terms similar to
those currently in place beyond this time.
We have modelled a range of scenarios, including a central case, a downside
scenario, a severe but plausible downside and a reverse stress test, over the
three-year horizon. The 'severe but plausible downside' scenario is
conservative in assuming, compared to the central case, revenue reductions of
10% and gross margin reductions at the rate of 2% in each of the three years,
with no reduction in costs. Even under this scenario, and before reflecting
any mitigating actions available to Group management, the Group forecasts
compliance with all financial covenants throughout the period and would not
require any additional sources of financing.
The Group has also modelled a reverse stress test scenario. This models the
decline in revenue that the Group would be able to absorb before breaching any
financial covenants. Such a scenario, and the sequence of events that could
lead to it, is considered to be remote, as it requires revenue reductions of
c.22% per annum between 2024 and 2026, compared to the central case, before
there is a breach in financial covenants in the period under review and is
calculated before reflecting any mitigating actions.
Even in the severe but plausible scenario, Macfarlane Group is forecast to
have sufficient liquidity to continue trading, comfortably meeting its
financial covenants and operating within the level of its facilities for the
foreseeable future. The reverse stress test modelling has shown that a c.26%
reduction in revenue in 2024 compared to 2023 could lead to a breach of
covenants in the period under review. However, in this scenario, management
would also be able to take significant mitigating actions to reduce its costs,
conserve cash and prevent a breach in financial covenants.
Conclusions
For this reason, the Board considers it appropriate for the Group to adopt the
going concern basis in preparing its financial statements.
The Board also has a reasonable expectation that the Group will continue in
operation and meet its longer-term liabilities as they fall due.
Cautionary Statement
The Chair's Statement and the Business Review set out above have been prepared
to provide additional information to members of the Company 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 Preliminary Announcement should be construed as a profit
forecast or an invitation to deal in the securities of the Group.
Responsibility Statement of the Directors
The responsibility statement below has been prepared in connection with the
Company's full annual report for the year ending 31 December 2023. Certain
parts of the full Annual Report are not included within this announcement.
The Directors of Macfarlane Group PLC are
A. Gulvanessian Chair
P.D. Atkinson Chief Executive
I. Gray Finance Director
J.W.F. Baird Non-Executive
Director and Senior Independent Director
L.D. Whyte Non-Executive Director
To the best of the knowledge of the Directors (whose names and functions are
set out above):
· The financial statements, prepared in accordance with International
Financial Reporting Standards, give a true and fair view of the assets,
liabilities, financial position and profit for the Company and the
undertakings included in the consolidation taken as a whole;
· The Strategic Report, incorporated into the Directors' Report in the
Annual Report, includes a fair review of the development and performance of
the business and the position of the Company and the undertakings included in
the consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face; and
· Pursuant to Disclosure and Transparency Rules, Chapter 4, the
directors consider that the Company's annual report and financial statements,
taken as a whole, are fair, balanced and understandable and provide
information necessary for the shareholders to assess the Company's and the
Group's position and performance, business model and strategy.
Peter
Atkinson
Ivor Gray
Chief Executive
Finance Director
29 February
2024
29 February 2024
Macfarlane Group PLC
Consolidated income statement
For the year ended 31 December 2023
Note
2023 2022
£000 £000
Continuing operations
Revenue 3 280,714 290,431
Cost of sales (175,033) (192,374)
Gross profit 105,681 98,057
Distribution costs (10,485) (10,736)
Administrative expenses (73,128) (65,825)
Operating profit 3 22,068 21,496
Finance costs 4 (1,788) (1,562)
Profit before tax 20,280 19,934
Tax 5 (5,306) (4,210)
Profit for the year from continuing operations 7 14,974 15,724
Discontinued operations
Loss from discontinued operations - (87)
Profit for the year 14,974 15,637
Earnings per share from continuing operations
Basic 7 9.44p 9.94p
Diluted 7 9.34p 9.84p
Earnings per share from continuing and discontinued operations
Basic 7 9.44p 9.89p
Diluted 7 9.34p 9.78p
Consolidated statement of comprehensive income
For the year ended 31 December 2023
2023 2022
Note £000 £000
Items that may be reclassified to profit or loss
Foreign currency translation differences - foreign operations (45) 45
Items that will not be reclassified to profit or loss
Remeasurement of pension scheme liability 10 (1,967) (82)
Tax recognised in other comprehensive income
Tax on remeasurement of pension scheme 11 492 21
liability
Other comprehensive expense for the year, net of tax (1,520) (16)
Profit for the year 14,974 15,637
Total comprehensive income for the year 13,454 15,621
Macfarlane Group PLC
Consolidated statement of changes in equity
For the year ended 31 December 2023
Share Share Revaluation Own Translation Retained Total
Capital Premium Reserve Shares Reserve Earnings £000
Note £000 £000 £000 £000 £000 £000
At 1 January 2022 39,453 13,148 70 - 171 42,052 94,894
Comprehensive income
Profit for the year - - - - - 15,637 15,637
Foreign currency translation differences
- - - - 45 - 45
Remeasurement of pension liability
10 - - - - - (82) (82)
Tax on remeasurement of pension liability
11 - - - - - 21 21
Total comprehensive income - - - - 45 15,576 15,621
Transactions with shareholders
Dividends 6 - - - - - (5,102) (5,102)
New shares issued 131 425 - (7) - (549) -
Credit for share-based payments - - - - - 607 607
Total transactions with shareholders 131 425 - (7) - (5,044) (4,495)
At 31 December 2022 39,584 13,573 70 (7) 216 52,584 106,020
Comprehensive income
Profit for the year - - - - - 14,974 14,974
Foreign currency translation differences
- - - - (45) - (45)
Remeasurement of pension liability
10 - - - - - (1,967) (1,967)
Tax on remeasurement of pension liability
11 - - - - - 492 492
Total comprehensive income - - - - (45) 13,499 13,454
Transactions with shareholders
Dividends 6 - - - - - (5,484) (5,484)
New shares issued 154 408 - (9) - (553) -
Credit for share-based payments - - - - - 586 586
Total transactions with shareholders 154 408 - (9) - (5,451) (4,898)
At 31 December 2023 39,738 13,981 70 (16) 171 60,632 114,576
Macfarlane Group PLC
Consolidated balance sheet at 31 December 2023
Note 2023 2022
£000 £000
Non-current assets
Goodwill and other intangible assets 87,495 75,685
Property, plant and equipment 9,210 7,863
Right of Use assets 35,001 33,938
Other receivables 35 38
Deferred tax assets 11 335 105
Retirement benefit obligations 10 9,921 10,199
Total non-current assets 141,997 127,828
Current assets
Inventories 17,523 22,608
Trade and other receivables 53,792 59,347
Current tax asset 225 675
Cash and cash equivalents 9 7,691 5,706
Total current assets 79,231 88,336
Total assets 3 221,228 216,164
Current liabilities
Trade and other payables 50,623 54,577
Provisions 401 1,769
Current tax liability 983 304
Lease liabilities 9 7,307 6,641
Bank borrowings 9 7,164 9,143
Total current liabilities 66,478 72,434
Net current assets 12,753 15,902
Non-current liabilities
Deferred tax liabilities 11 9,472 8,222
Deferred contingent consideration 504 -
Provisions 1,329 1,560
Lease liabilities 9 28,869 27,928
Total non-current liabilities 40,174 37,710
Total liabilities 3 106,652 110,144
Net assets 114,576 106,020
Equity
Share capital 12 39,738 39,584
Share premium 12 13,981 13,573
Revaluation reserve 70 70
Own shares (16) (7)
Translation reserve 171 216
Retained earnings 60,632 52,584
Total equity 3 114,576 106,020
Macfarlane Group PLC
Consolidated cash flow statement
For the year ended 31 December 2023
Note
2023 2022
£000 £000
Profit/(loss) before tax from:
Continued operations 20,280 19,934
Discontinued operations - (87)
Total Operations 20,280 19,847
Adjustments for:
Amortisation of intangible assets 4,034 3,577
Depreciation of property, plant and equipment and ROU assets 9,574 9,040
Deferred contingent consideration adjustment 1,535 -
(Profit)/Loss on disposal of property, plant and equipment (3) 71
Loss on disposal of subsidiaries - 87
Share-based payments 586 607
Finance costs 1,788 1,562
Operating cash flows before movements in working capital 37,794 34,791
Decrease in inventories 5,733 1,025
Decrease in receivables 7,453 285
Decrease in payables (7,021) (9,027)
Decrease in provisions (1,599) (249)
Adjustment for pension scheme funding (1,179) (1,838)
Cash generated by operations 41,181 24,987
Income taxes paid (5,374) (5,251)
Interest paid (2,298) (1,738)
Cash inflow from operating activities 33,509 17,998
Investing activities
Acquisitions, net of cash acquired 8 (14,466) (8,655)
Proceeds from sale of subsidiaries - 166
Proceeds on disposal of property, plant and equipment 90 181
Purchases of property, plant and equipment (2,175) (3,285)
Cash outflow from investing activities (16,551) (11,593)
Financing activities
Dividends paid 6 (5,484) (5,102)
Repayment on bank borrowing facility (2,323) (865)
Repayments of leases (7,510) (7,215)
Cash outflow from financing activities (15,317) (13,182)
Net increase/(decrease) in cash and cash equivalents 1,641 (6,777)
Cash and cash equivalents at beginning of year 5,346 12,123
Cash and cash equivalents at end of year 6,987 5,346
2023 2022
Reconciliation to consolidated cash flow statement £000 £000
Cash and cash equivalents per the consolidation balance sheet 9 7,691 5,706
Bank overdraft (704) (360)
Balances per consolidated cash flow statement 6,987 5,346
Bank overdrafts are included in cash and cash equivalents because they form an
integral part of the Group's cash management.
Macfarlane Group PLC
Notes to the financial information
For the year ended 31 December 2023
1. General information
The financial information set out herein does not constitute the Company's
statutory accounts as defined in Section 435 of the Companies Act 2006 and has
been extracted from the full statutory accounts for the years ended 31
December 2023 and 2022.
The financial statements for 2023 were approved by the Board of Directors on
29 February 2024. The auditor's report on the statutory financial statements
for the year ended 31 December 2023 was unqualified pursuant to Section 498 of
the Companies Act 2006 and did not contain a statement under sub-section 498
(2) or (3) of that Act.
The financial information for 2022 is derived from the statutory accounts for
2022 which have been delivered to the registrar of companies. The auditor has
reported on the 2022 accounts; their report 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.
2. Basis of preparation
The Group's business activities, together with the factors likely to affect
its future development, performance and financial position are set out above.
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. The Directors
believe that the Group is adequately placed to manage its financial risks
effectively, despite any economic uncertainty.
The Group's has a committed borrowing facility of £35m with Bank of Scotland
PLC in place until December 2025. The facility bears interest at normal
commercial rates and carries standard financial covenants in relation to
interest cover and levels of headroom over certain trade receivables of the
Group.
The Directors are of the opinion that the Group's cash forecasts and revenue
projections, which they believe are based on appropriate market data and past
experience taking account of reasonably possible changes in trading
performance given current market and economic conditions, show that the Group
should be able to operate within the current facility and comply with its
banking covenants. The Directors have modelled a range of scenarios, including
a central case, a downside scenario, a severe but plausible downside and a
reverse stress test, over the three-year horizon, as set out in the Viability
statement on set out above.
After making enquiries, the directors have a reasonable expectation that the
Company and the Group have adequate resources to continue in operational
existence for at least the next twelve months. For this reason, they continue
to adopt the going concern basis in preparing the financial statements for the
year ended 31 December 2023.
Key sources of estimation uncertainty
The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported for assets and liabilities as
at the balance sheet date and the amounts reported for revenues and expenses
during the year. Due to the nature of estimation, the actual outcomes may well
differ from these estimates. The directors have assessed the impact of climate
change and consider that this does not have a significant impact on these
financial statements. The key sources of estimation uncertainty that have a
significant effect on the carrying amounts of assets and liabilities in the
next twelve months are discussed below:
Retirement benefit obligations
The determination of any defined benefit pension scheme liability is based on
assumptions determined with independent actuarial advice. The key assumptions
used include discount rate and inflation rate, for which a sensitivity
analysis is provided in Note 10. The directors consider that those
sensitivities represent reasonable sensitivities which could occur in the next
financial year.
Valuation of deferred contingent consideration
The valuation of deferred contingent consideration at both acquisition date
and the balance sheet date is measured at fair value. This involves the
assessment of forecast future cash flows against earn-out targets agreed with
the sellers of acquired businesses over a period of up to two years. This
assessment is based on the directors' best estimate using the information
available at the effective dates outlined above. However, there remains a risk
that the actual payment differs from the amount assumed as consideration
within the PPA accounting as detailed in note 8 and from the amount recorded
as a liability at the balance sheet date. Deferred contingent considerations
are recognised as a liability in trade and other payables and are remeasured
to fair value of £4.0m at the balance sheet date, of which £0.5m is due in
more than one year, based on a range of outcomes between £Nil and £5.4m.
Trading in the post-acquisition period supports the remeasured value of
£4.0m.
Critical accounting judgements
Property provisions
Property provisions of £1.7m have been recognised as at 31 December 2023
(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.
Alternative performance measures
In measuring the financial performance and position, the financial measures
used in certain limited cases include those which have been derived from the
reported results in order to eliminate factors which due to their unusual
nature and size distort year-on-year comparisons to a material extent and/or
provide useful information to stakeholders. Where such items arise, the
directors will classify such items as separately disclosed and provide details
of these items to enable users of the accounts to understand the impact on the
financial statements.
To the extent that a measurement under Generally Accepted Accounting
Principles ("GAAP") is adjusted for a separately disclosed item, this is
referred to as an Alternative Performance Measure ("APM"). We believe that the
APMs defined below, and the comparable GAAP measurement, provides a useful
basis for measuring the financial performance and position.
In addition to the various performance measures defined under IFRS, the Group
reports adjusted operating profit and adjusted profit before tax as measures
to assist in understanding the underlying performance of the Group and its
businesses when compared to similar companies. Adjusted operating profit and
adjusted profit before tax are not defined under IFRS and, as a result, do not
comply with Generally Accepted Accounting Practice ("GAAP") and are therefore
known as APMs. Accordingly, these measures, which are not designed to be a
substitute for any of the IFRS measures of performance, may not be directly
comparable with other companies' APMs.
Adjusted operating profit is defined as operating profit before customer
relationships and brand values amortisation and deferred contingent
consideration adjustments.
Adjusted profit before tax is defined as profit before tax, customer
relationships and brand values amortisation, and deferred contingent
consideration adjustments.
Alternative performance measures Customer relationship/ brand values amortisation Deferred contingent consideration adjustments Statutory measures
£000 £000 £000 £000
Year to 31 December 2023
Adjusted operating profit 27,637 (4,034) (1,535) 22,068 Operating profit
Adjusted profit before tax 25,849 (4,034) (1,535) 20,280 Profit before tax
Year to 31 December 2022
Adjusted operating profit 25,073 (3,577) - 21,496 Operating profit
Adjusted profit before tax 23,511 (3,577) - 19,934 Profit before tax
Net bank funds/(debt) also represents an APM as defined and reconciled to the
statutory measure in note 9.
3. Segmental information
The Group's principal business segment is Packaging Distribution, comprising
the distribution of packaging materials and supply of storage and warehousing
services in the UK. This comprises 87% of Group revenue and 75% of Group
operating profit. The Group's Manufacturing Operations segment comprises the
design, manufacture and assembly of timber, corrugated and foam-based
packaging materials in the UK. This comprises 13% of Group revenue and 25% of
Group operating profit.
2023 2022
£000 £000
Group segment -Revenue
Packaging Distribution 244,938 259,651
Manufacturing Operations 40,929 35,045
Inter-segment revenue Manufacturing Operations (5,153) (4,265)
External revenue 280,714 290,431
Packaging Distribution 21,044 19,868
Manufacturing Operations 6,593 5,205
Adjusted operating profit 27,637 25,073
Packaging Distribution 16,511 17,094
Manufacturing Operations 5,557 4,402
Operating profit 22,068 21,496
Finance costs (1,788) (1,562)
Profit before tax 20,280 19,934
Tax (5,306) (4,210)
Profit for the year 14,974 15,724
Profit for the year 14,974 15,637
Assets Liabilities Net assets
£000 £000 £000
Group segments
Packaging Distribution 176,740 (94,757) 81,983
Manufacturing Operations 44,488 (11,895) 32,593
Net assets 2023 221,228 (106,652) 114,576
Assets Liabilities Net assets
£000 £000 £000
Packaging Distribution 188,866 (102,937) 85,929
Manufacturing Operations 27,298 (7,207) 20,091
Net assets 2022 216,164 (110,144) 106,020
2023 2022
£000 £000
Packaging Distribution
Revenue 244,938 259,651
Cost of sales (157,458) (176,193)
Gross profit 87,480 83,458
Net operating expenses (66,436) (63,590)
Adjusted operating profit 21,044 19,868
Amortisation and deferred contingent consideration adjustments (4,533) (2,774)
Operating Profit 16,511 17,094
Manufacturing Operations
2023 2022
£000 £000
Revenue 35,776 30,780
Cost of sales (17,575) (16,181)
Gross profit 18,201 14,599
Net operating expenses (11,608) (9,394)
Adjusted operating profit 6,593 5,205
Amortisation and deferred contingent consideration adjustments (1,036) (803)
Operating profit 5,557 4,402
4. Finance costs
2023 2022
£000 £000
Interest on bank borrowings 878 616
Interest on leases 1,420 1,122
Net interest income on retirement benefit obligation (see note 10) (510) (176)
Total finance costs 1,788 1,562
5. Tax 2023 2022
£000 £000
Current tax
United Kingdom corporation tax at 23.5% (2022: 19.0%) 5,615 3,680
Foreign tax 460 253
Adjustments in respect of prior-years (38) (21)
Total current tax 6,037 3,912
Deferred tax
Current year (731) 207
Adjustments in respect of prior-years - 91
Total deferred tax (see note 11) (731) 298
Total tax charge 5,306 4,210
The standard rate of tax based on the UK average rate
of corporation tax is 23.5% (2022: 19%). The increase in 2023 is due to the
corporation tax rate increasing from 19% to 25% effective from 1 April 2023.
Taxation for other jurisdictions is calculated at the rates prevailing in
these jurisdictions.
The actual tax charge for the current and previous year
varies from the standard rate of tax on the results in the consolidated income
statement for the reasons set out in the following reconciliation:
2023 2022
£000 £000
Profit before tax from continuing operations 20,280 19,934
Loss before tax from discontinued operations - (87)
Profit before tax from total operations 20,280 19,847
Tax on profit at 23.5% (2022: 19.0%) 4,766 3,771
Factors affecting tax charge for the year:-
Difference in rate for deferred tax (25%) on pensions 25 120
Non-deductible expenses 487 189
Difference on overseas tax rates 66 60
Changes in estimates related to prior years (38) 70
Tax charge for the year 5,306 4,210
Tax attributable to continuing operations 5,306 4,210
Tax attributable to discontinued operations - -
Tax charge for the year 5,306 4,210
Effective rate of tax for the year 26.2% 21.2%
6. Dividends 2023 2022
£000 £000
Amounts recognised as distributions to equity holders
in the year:
Final dividend for the year ended 31 December 2022 of 2.52 per
share (2021 - 2.33p per share)
3,990 3,677
Interim dividend for the year ended 31 December 2023 of 0.94p per
share (2022 - 0.90p per share)
1,494 1,425
5,484 5,102
A proposed dividend of 2.65p per share will be paid on 30 May 2024 to those
shareholders on the register at 10 May 2024 (ex dividend date 9 May 2024).
This is subject to approval by shareholders at the Annual General Meeting on 7
May 2024 and therefore has not been included as a liability in these financial
statements.
7. Earnings per share
The calculation of the basic and diluted earnings per
share is based on the following data:
2023 2022
£000 £000
Earnings for the purposes of earnings per share
Profit for the year from continuing operations 14,974 15,724
Loss from discontinued operations - (87)
Profit for the year from continuing and discontinued operations 14,974 15,637
Number of shares in issue for the purposes of calculating basic and diluted 2023 2022
earnings per share
No. of No. of
shares '000 shares '000
Weighted average number of shares in issue for the
purposes of basic earnings per share
Weighted average number of shares in issue 158,542 158,162
Effect of Long-Term Incentive Plan awards in issue 1,788 1,661
Weighted average number of shares in issue for the purposes of calculating
diluted earnings per share
160,330 159,823
Basic Earnings per share from continuing operations 9.44p 9.94p
Diluted Earnings per share from continuing operations 9.34p 9.84p
Basic Earnings per share from discontinued operations -p (0.06)p
Diluted Earnings per share from discontinued operations -p (0.05)p
Basic Earnings per share from continuing and discontinued operations 9.44p 9.89p
Diluted Earnings per share from continuing and discontinued operations 9.34p 9.78p
8. Acquisitions
On 3 March 2023, Macfarlane Group UK Limited ("MGUK") acquired 100% of A.E.
Sutton Limited, for a total potential consideration of £13.7m and inherited
net cash/bank balances of £5.3m. Full potential contingent consideration of
£2.5m is payable in the second quarters of 2024 and 2025, subject to certain
trading targets being met in the two twelve-month periods ending on 29
February 2024 and 28 February 2025 respectively.
On 28 April 2023, MGUK acquired 100% of A & G Holdings Limited, the parent
company of Gottlieb Packaging Materials Limited, for a total potential
consideration of £4.3m and inherited net cash/bank balances of £0.9m. Full
potential contingent consideration of £0.8m is payable in the second quarters
of 2024 and 2025, subject to certain trading targets being met in the two
twelve-month periods ending on 30 April 2024 and 2025 respectively.
On 29 September 2023, MGUK acquired 100% of B&D 2010 Group Limited
("B&D"), for a total potential consideration of £5.4m and inherited net
cash/bank balances of £1.8m. Full potential contingent consideration of
£0.55m is payable in the third quarter of 2024, subject to certain trading
targets being met in the twelve-month period ending on 30 September 2024.
£2.1m was paid in 2023 to the sellers of GWP Holdings Limited, acquired in
2021, as the profit target was met for the twelve-month period ending 28
February 2023. £0.8m was held back subject to conclusion of an outstanding
warranty claim.
£0.8m was paid in 2023 to the sellers of Carters (Cornwall) Limited, acquired
in 2021, as the profit target was met for the twelve-month period ending 31
March 2023.
Contingent considerations are recognised as a liability in trade and other
payables and are remeasured to fair value of £4.0m at the balance sheet date,
of which £0.5m is due in more than one year, based on a range of outcomes
between £Nil and £5.4m. Trading in the post-acquisition period supports the
remeasured value of £4.0m. The £4.0m relates to the acquisitions of PackMann
(£1.5m), Suttons (£1.3m), Gottlieb (£0.7m) and B&D Group (£0.5m).
The impact of the acquisitions of Suttons, Gottlieb and B&D on 2023
results and if the acquisitions had been completed on the first day of 2023
are set out below:
From date of acquisition If completed 1 January 2023
Revenue Profit Revenue Profit
£000 £000 £000 £000
Suttons 6,065 1,594 7,278 1,912
Gottlieb 3,323 589 4,984 883
B&D 750 150 3,000 600
Fair values assigned to net assets acquired and consideration paid and payable
are set out below:
Prior Year 2023
Suttons Gottlieb B&D Acquisitions Total
£000 £000 £000 £000 £000
Net assets acquired
Other intangible assets 4,061 2,028 2,388 - 8,477
Tangible assets (inc. Right of Use assets) 2,078 163 314 - 2,555
Inventories 203 371 74 - 648
Trade and other receivables 740 782 373 - 1,895
Cash and bank balances 5,255 939 1,781 - 7,975
Trade and other payables (814) (1,002) (566) - (2,382)
Current tax liabilities (260) (101) (108) - (469)
Lease liabilities (note 9) (1,375) (146) (280) - (1,801)
Deferred tax liabilities (note 11) (1,135) (511) (597) - (2,243)
Net assets acquired 8,753 2,523 3,379 - 14,655
Goodwill arising on acquisition 3,698 1,657 2,012 - 7,367
Total consideration 12,451 4,180 5,391 - 22,022
Contingent consideration on acquisitions
Current year (1,265) (717) (514) - (2,496)
Prior years - - - 2,915 2,915
Total cash consideration 11,186 3,463 4,877 2,915 22,441
Net cash outflow arising on acquisitions
Cash consideration (11,186) (3,463) (4,877) (2,915) (22,441)
Cash and bank balances acquired 5,255 939 1,781 - 7,975
Net cash outflow - acquisitions (5,931) (2,524) (3,096) (2,915) (14,466)
9. Analysis of changes in net debt
Cash &cash Bank Lease Total
equivalents borrowing liabilities debt
£000 £000 £000 £000
At 1 January 2023 5,706 (9,143) (34,569) (38,006)
Cash movements 1,985 1,979 7,510 11,474
Non-cash movements
New leases - - (3,021) (3,021)
Acquisitions - - (1,801) (1,801)
Disposal - - 227 227
Lease modifications - - (4,562) (4,562)
Exchange movements - - 40 40
At 31 December 2023 7,691 (7,164) (36,176) (35,649)
Due within one year 7,691 (7,164) (7,307) (6,780)
Due after more than one year - - (28,869) (28,869)
At 31 December 2023 7,691 (7,164) (36,176) (35,649)
Net bank funds 2023 7,691 (7,164) 527
Net bank debt 2022 5,706 (9,143) (3,437)
Cash and cash equivalents (which are presented as a single class of asset on
the face of the balance sheet) comprise cash at bank and other short-term
highly liquid investments with maturity of three months or less.
10. Pension scheme
Macfarlane Group PLC sponsors a defined benefit pension scheme for former UK
employees - the Macfarlane Group PLC Pension & Life Assurance Scheme
(1974) ("the Scheme"). One of the trading subsidiaries, Macfarlane Group UK
Limited is also a sponsoring employer of the Scheme. The Scheme is currently
in surplus and disclosure of the respective proportions of the Group surplus
are included and disclosed in the financial statements of each of the two
participating employers.
The Scheme is an HMRC registered pension scheme, administered by a Board of
Trustees composed of employer-nominated representatives and member-nominated
Trustees which is legally separate from the Group. The Scheme's investments
are held separately from those of the Group in managed funds under the
supervision of the Trustees. The Trustees are required by law to act in the
interest of all classes of beneficiary in the Scheme and are responsible for
investment policy and the administration of benefits. Macfarlane Group PLC,
based on legal opinion provided, has an unconditional right to a refund of
surplus assets assuming the full settlement of plan liabilities in the event
of a wind up of the Scheme. Furthermore, in the ordinary course of business
the trustees have no rights to unilaterally wind up the Scheme, or otherwise
augment the benefits due to members of the Scheme. Based on these rights, any
net surplus in the Scheme is recognised in full.
The Scheme provides qualifying employees with an annual pension of 1/60 of
pensionable salary for each completed years' service on attainment of a normal
retirement age of 65. Pensionable salaries were frozen for the remaining
active members at the levels current at 30 April 2009 with the change taking
effect from 30 April 2010. As a result no further salary inflation applies for
active members who elected to remain in the Scheme. Active members' benefits
also include life assurance cover, with the payment of these benefits at the
discretion of the Trustees of the Scheme. The Scheme was closed to new
entrants during 2002. The Scheme was closed to future accrual on 30 November
2022 with the 3 remaining active members transferring to the Group's defined
contribution pension scheme.
On leaving active service a deferred member's pension is revalued from the
time of withdrawal until the pension is drawn. Revaluation in deferment is
statutory and since 2010 has been revalued on the Consumer Price Index ("CPI")
measure of inflation. Revaluation of pensions in payment is a blend of fixed
increases and inflationary increases depending on the relevant periods of
accrual of benefit. For pensions in payment, the inflationary increase is
currently based on the Retail Price Index ("RPI") measure of inflation or
based on Limited Price Indexation ("LPI") for certain defined periods of
service.
During 2012, Macfarlane Group PLC agreed with the Board of Trustees to amend
benefits for pensioner, deferred and active members in the Scheme by offering
a Pension Increase Exchange ("PIE") option to pensioner members and a PIE
option to all other members at retirement after 1 May 2012.
In June 2023, the UK High Court issued a ruling in the case of Virgin Media
Limited v NTL Pension Trustees II Limited and others relating to the validity
of certain historical pension changes. This case may have implications for
other defined benefit schemes in the UK, although is subject to possible
appeal in 2024. At the balance sheet, it was unknown if, or to what extent,
this ruling will impact the Scheme and therefore no adjustment has been made
in accounting for the pension surplus. The Company will monitor the case
alongside the Trustees of the Scheme.
Balance sheet disclosures
The Scheme's qualified actuary from Aon carries out triennial valuations using
the Projected Unit Credit Method to determine the level of deficit/surplus.
For the most recent triennial valuation at 1 May 2023, the results of this
valuation showed that the market value of the relevant investments of the
Scheme was £71,900,000 and represented 109% of the actuarial value of
benefits that had accrued to members.
The investment classes held by the Scheme and the Scheme surplus, based on the
results of the actuarial valuation as at 1 May 2023, updated to the year-end
are as shown below:
2023 2022
£000 £000
Investment class
Equities - 20,287
Multi-asset diversified funds 10,198 12,674
Liability-driven investment funds 32,052 23,352
Multi-asset credit funds 9,824 -
Securitised credit funds 13,047 -
Secured property income fund - 5,670
European loan fund - 6,546
Other (cash and similar assets) 7,402 1,957
Fair value of Scheme investments 72,523 70,486
Present value of Scheme liabilities (62,602) (60,287)
Scheme surplus 9,921 10,199
The Trustees review the investments of the Scheme on a regular basis and
consult with the Company regarding any proposed changes to the investment
profile. Liability-Driven Investment Funds are intended to provide a match of
100% against the impact of movements in inflation on pension liabilities and
against the impact of movements in interest-rates on pension liabilities.
During 2023 adjustments were made between investments to maintain the overall
allocations in line with the Trustees' strategic asset allocation.
The ability to realise the Scheme's investments at, or close to, fair value
was considered when setting the investment strategy. 100% (2022: 83%) of the
Scheme's investments can be realised at fair value on a daily or weekly basis.
The remaining investments have monthly or quarterly liquidity. However, whilst
the regular income from these helps to meet the Scheme's cash flow needs, they
are not expected to be realised at short notice from a strategic perspective.
The present value of the Scheme liabilities is derived from cash flow
projections and the expected return of the assets over a long period and is
thus inherently uncertain.
The Scheme's liabilities were calculated on the following bases as required
under IAS 19:
Assumptions 2023 2022
Discount rate 4.50% 4.80%
Rate of increase in salaries 0.00% 0.00%
Inflation assumption (RPI) 3.20% 3.40%
Inflation assumption (CPI) 2.70% 2.80%
Life expectancy beyond normal retirement age of 65
Male currently aged 55 (years) 22.3 22.6
Female currently aged 55 (years) 24.0 24.2
Male currently aged 65 (years) 21.8 22.0
Female currently aged 65 (years) 23.3 23.4
2023 2022
Movement in scheme surplus £000 £000
At 1 January 10,199 8,267
Current service costs - (42)
Administration costs incurred (71) -
Past service cost (curtailed due to closure of scheme/disposal of business)
- (111)
Employer contributions 1,250 1,991
Net finance income (see note 4) 510 176
Remeasurement of pension scheme liability (1,967) (82)
At 31 December 9,921 10,199
Funding
UK pension legislation requires that pension schemes are funded prudently.
Following the triennial actuarial valuation of the Scheme at 1 May 2023, the
Company agreed with the Pension Scheme Trustees, that no contributions were
required. The next triennial actuarial valuation is due at 1 May 2026.
Sensitivity to key assumptions
The key assumptions used for IAS 19 are discount rate, inflation and
mortality. If different assumptions were used, then this could have a material
effect on the results disclosed. Assuming all other assumptions are held
static then a movement in the following key assumptions would affect the level
of the deficit as shown below:
2023 2022
Assumptions £000 £000
Discount rate movement of +3.0% 22,531 14,101
Inflation rate movement of +0.25% (599) (375)
Mortality movement of +0.1 year in age rating 141 88
Positive figures reflect a reduction in the Scheme liabilities and therefore a
reduction in the Scheme deficit or increase in the Scheme surplus. The
sensitivity information has been prepared using the same method as adopted
when adjusting the results of the latest funding valuation to the balance
sheet date and is consistent with the approach adopted in previous years.
The sensitivities shown reflect average movements in the assumptions in the
last three years. All information assumes that the average duration of Scheme
liabilities is twelve years.
11. Deferred tax 2023 2022
£000 £000
At 1 January (8,117) (7,453)
Transfer to Corporation Tax -
Acquisitions (note 8) (2,243) (387)
Credited/(Charged) in income statement (see note 5) 731 (298)
Credited in other comprehensive income
Remeasurement of pension scheme 492 21
liability
At 31 December (9,137) (8,117)
Deferred tax assets
On accelerated capital allowances/timing differences 335 94
Corporation tax losses - 11
Disclosed as deferred tax assets 335 105
Deferred tax liabilities
On accelerated capital allowances/timing differences (1,072) (908)
On retirement benefit obligations (2,481) (2,551)
On other intangible assets (5,919) (4,763)
Disclosed as deferred tax liabilities (9,472) (8,222)
At 31 December (9,137) (8,117)
12. Share capital 2023 2022
£000 £000
Allotted, issued and fully paid:
At 1 January 39,584 39,453
New shares issued 154 131
At 31 December 39,738 39,584
Share premium
At 1 January 13,573 13,148
New shares issued 408 425
At 31 December 13,981 13,573
The Company has one class of ordinary shares of 25p each, which carry no right
to fixed income. Each ordinary share carries one vote in any General Meeting
of the Company.
On 30 August 2023, the Company issued 615,000 ordinary shares of 25p at a
value of 91.40p to settle 2020 share awards under the Company's 2016
Performance Share Plan.
13. Related party transactions
Transactions between the Company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed.
Details of individual and collective remuneration of the Company's Directors
and dividends received by the Directors for calendar year 2023 will be
disclosed in the Group's 2023 Annual Report and Accounts.
The directors are satisfied that there are no other related party transactions
occurring during the year which require disclosure.
14. Post balance sheet events
There are no post balance sheet events to be
disclosed.
15. Posting to shareholders and Annual General Meeting
The Annual Report and Accounts will be sent to shareholders on Friday 5 April
2024 and will be available to members of the public at the Company's
Registered Office from Friday 26 April 2024.
The Annual General Meeting will take place at 12 noon on Tuesday 7 May 2024.
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