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:
o Packaging Distribution is the leading UK distributor of a comprehensive range of protective packaging products;
o 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 Capital £000
Share Premium £000
Revaluation Reserve £000
Translation Reserve £000
Retained Earnings £000
Total £000
At 1 January 2020
39,453
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 Capital £000
Share Premium £000
Revaluation Reserve £000
Translation Reserve £000
Retained Earnings £000
Total £000
At 1 January 2019
39,387
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
Total transactions with shareholders
-
-
-
-
(2,590)
(2,590)
At 30 June 2019
39,387
12,975
70
276
9,685
62,393
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2020
Note
Share Capital £000
Share Premium £000
Revaluation Reserve £000
Translation Reserve £000
Retained Earnings £000
Total £000
At 1 January 2019
39,387
12,975
70
293
9,807
62,532
Comprehensive income
Profit for the year
-
-
-
-
9,731
9,731
Foreign currency translation differences
-
-
-
(62)
-
(62)
Remeasurement of pension scheme liability
10
-
-
-
-
537
537
Tax on remeasurement of pension scheme liability
11
-
-
-
-
(92)
(92)
Total comprehensive income
-
-
-
(62)
10,176
10,114
2
Transactions with shareholders
Dividends
6
-
-
-
-
(3,689)
(3,689)
Share-based payments
-
-
-
-
75
75
Issue of share capital
66
173
-
-
-
239
Total transactions with shareholders
66
173
-
-
(3,614)
(3,375)
At 31 December 2019
39,453
13,148
70
231
16,369
69,271
MACFARLANE GROUP PLC
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT 30 JUNE 2020
30 June 2020
30 June 2019
31 December 2019
Note
£000
£000
£000
Non-current assets
Goodwill and other intangible assets
61,857
60,795
62,663
Property, plant and equipment
9,248
9,221
9,621
Right of use assets
23,078
30,293
25,855
Trade and other receivables
35
56
35
Deferred tax assets
11
1,274
1,726
1,224
Total non-current assets
95,492
102,091
99,398
Current assets
Inventories
15,014
16,171
15,813
Trade and other receivables
44,641
48,867
52,044
Cash and cash equivalents
9
4,726
3,863
3,310
Total current assets
64,381
68,901
71,167
Total assets
3
159,873
170,992
170,565
Current liabilities
Trade and other payables
49,484
46,946
48,530
Current tax liabilities
756
860
1,084
Lease liabilities
5,384
6,249
6,321
Bank borrowings
9
5,542
18,811
15,984
Total current liabilities
61,166
72,866
71,919
Net current assets/(liabilities)
3,215
(3,965)
(752)
Non-current liabilities
Retirement benefit obligations
10
6,048
9,029
6,465
Deferred tax liabilities
11
3,256
3,119
3,242
Trade and other payables
22
24
22
Lease liabilities
17,779
23,561
19,646
Total non-current liabilities
27,105
35,733
29,375
Total liabilities
88,271
108,599
101,294
Net assets
3
71,602
62,393
69,271
Equity
Share capital
39,453
39,387
39,453
Share premium
13,148
12,975
13,148
Revaluation reserve
70
70
70
Translation reserve
298
276
231
Retained earnings
18,633
9,685
16,369
Total equity
71,602
62,393
69,271
MACFARLANE GROUP PLC
CONDENSED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
FOR THE SIX MONTHS ENDED 30 JUNE 2020
Six months to 30 June
Six months to 30 June
Year to 31 December
Note
2020 £000
2019 £000
2019 £000
Profit before tax
3,622
3,832
12,024
Adjustments for:
Amortisation of intangible assets
1,262
1,142
2,391
Depreciation of property, plant and equipment
4,121
4,242
7,816
Loss/(gain) on disposal of property, plant and equipment
32
(4)
5
Share-based payments
90
-
75
Finance costs
642
1,041
1,606
Operating cash flows before movements in working capital
9,769
10,253
23,917
Decrease in inventories
1,080
1,164
2,006
Decrease in receivables
7,609
3,003
1,178
Increase/(decrease) in payables
1,021
(2,726)
(947)
Pension contributions less current service costs
(1,512)
(1,670)
(2,994)
Cash generated from operations
17,967
10,024
23,160
Income taxes paid
(830)
(875)
(2,288)
Interest paid
(585)
(916)
(1,375)
Net cash inflow from operating activities
16,552
8,233
19,497
Investing activities
Acquisitions
8
(888)
(2,840)
(6,162)
Proceeds on disposal of property, plant and equipment
28
12
185
Purchases of property, plant and equipment
(627)
(1,295)
(2,648)
Net cash used in investing activities
(1,487)
(4,123)
(8,625)
Financing activities
Dividends paid
6
-
(2,600)
(3,689)
(Repayment)/drawdown of bank borrowings
(10,442)
1,042
(1,785)
Repayment of lease obligations
(3,207)
(3,300)
(6,699)
Net cash used in financing activities
(13,649)
(4,858)
(12,173)
Net increase/(decrease) in cash and cash equivalents
1,416
(748)
(1,301)
Cash and cash equivalents at beginning of period
3,310
4,611
4,611
Cash and cash equivalents at end of period
9
4,726
3,863
3,310
MACFARLANE GROUP PLC
SIX MONTHS ENDED 30 JUNE 2020
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of preparation
Macfarlane Group PLC is a public company listed on the London Stock Exchange, incorporated and domiciled in the United Kingdom and registered in Scotland.
The Group's annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. This condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union.
This condensed set of financial statements has been prepared applying the accounting policies that were applied in the preparation of the company's published consolidated financial statements for the year ended 31 December 2019. There were no major changes from the adoption of new IFRS's in 2020.
Judgements, assumptions and estimation uncertainties
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the period. Due to the nature of estimation, the actual outcomes may well differ from these estimates. No significant judgements have been made in the current or prior period. The key sources of estimation uncertainty that have a significant effect on the carrying amounts of assets and liabilities are discussed below:
The determination of any defined benefit pension scheme liability is based on assumptions determined with independent actuarial advice. The key assumptions used include discount rate, inflation rate and mortality assumptions, for which a sensitivity analysis is provided in note 10. The directors consider that those sensitivities represent reasonable sensitivities which could occur in the next financial period.
The provision held against trade receivables is based on applying an expected credit loss model and related estimates of recoverable amounts. Whilst every attempt is made to ensure that the provision held against doubtful trade receivables is as accurate as possible, there remains a risk that the provision may not match the level of debt, which ultimately proves uncollectable.
Business activities, risks and financing
The Group's business activities, together with the factors likely to affect its future development, performance and financial position are set out in the Interim Management Report on pages 1 to 7.
The Group's principal financial risks in the medium term relate to liquidity and credit risk. Liquidity risk is managed by ensuring that the Group's day-to-day working capital requirements are met by having access to committed banking facilities with suitable terms and conditions to accommodate the requirements of the Group's operations. Credit risk is managed by applying considerable rigour in managing the Group's trade receivables. Although the current economic climate indicates an increased level of risk, the Directors believe that the Group is adequately placed to manage its financial risks effectively.
The Group's banking arrangement with Lloyds Bank PLC comprises a committed facility of £30 million, expiring in June 2022, secured over part of Macfarlane Group's trade receivables and bearing interest at commercial rates. The facility has financial covenants for interest cover and trade receivables headroom.
The Directors have reviewed the Group's cash and revenue projections, which they believe are based on prudent market data and past experience taking account of reasonably possible changes in trading performance given current market and economic conditions including the impact of the ongoing Covid-19 pandemic. The Directors are of the opinion that these projections show that the Group should be able to operate within its current facilities and comply with its banking covenants.
In assessing the going concern basis, the Directors have considered the Group's business activities, the financial position of the Group and the Group's risks and uncertainties. The Directors have a reasonable expectation that, despite the current uncertain economic environment, the Company and the Group have adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report. For this reason this condensed set of financial statements has been prepared on the going concern basis.
Approval and review of condensed financial statements
These condensed financial statements were approved by the Board of Directors on 27 August 2020. As in previous years, the condensed set of financial statements for the half-year is unaudited.
2. General information
Comparative figures for the year ended 31 December 2019 are extracted from Macfarlane Group's statutory accounts for 2019. The information for the year ended 31 December 2019 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor on 27 February 2020 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.
3. Segmental information
The Group's principal business segment is Packaging Distribution, comprising the distribution of packaging materials and supply of storage services in the UK. Other operations for the manufacture and supply of self-adhesive and resealable labels to a variety of FMCG customers in the UK, Europe and USA and the design, manufacture and assembly of timber, corrugated and foam-based packaging materials in the UK comprise one segment headed Manufacturing Operations. None of the business segments within Manufacturing Operations represents more than 10% of Group revenue or profit.
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Group segment - total revenue
Packaging Distribution
91,496
93,053
196,706
Manufacturing Operations
16,379
17,390
34,016
Inter-segment revenue
(2,303)
(2,901)
(5,333)
Revenue
105,572
107,542
225,389
Trading results - continuing operations
Packaging Distribution
Revenue
91,496
93,053
196,706
Cost of sales
(62,013)
(65,103)
(135,525)
Gross profit
29,483
27,950
61,181
Net operating expenses
(25,450)
(23,487)
(48,775)
Operating profit
4,033
4,463
12,406
Manufacturing Operations
Revenue
16,379
17,390
34,016
Cost of sales
(11,043)
(12,099)
(23,064)
Gross profit
5,336
5,291
10,952
Net operating expenses
(5,105)
(4,881)
(9,728)
Operating profit
231
410
1,224
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Operating profit - continuing operations
Packaging Distribution
4,033
4,463
12,406
Manufacturing Operations
231
410
1,224
Operating profit
4,264
4,873
13,630
Finance costs (note 4)
(642)
(1,041)
(1,606)
Profit before tax
3,622
3,832
12,024
Tax (note 5)
(736)
(693)
(2,293)
Profit for the period
2,886
3,139
9,731
The Packaging Distribution business has historically benefited from additional demand in the final months of the year, resulting in revenue and profitability at higher levels in the second half of the year.
30 June 2020 £000
30 June 2019 £000
31 December 2019 £000
Total assets
Packaging Distribution
140,145
150,838
151,115
Manufacturing Operations
19,728
20,154
19,450
Total assets
159,873
170,992
170,565
Net assets
Packaging Distribution
63,235
54,276
60,607
Manufacturing Operations
8,367
8,117
8,664
Net assets
71,602
62,393
69,271
4. Finance costs
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Interest on bank borrowings
228
293
573
Interest on leases
357
623
802
Finance cost relating to defined benefit pension scheme (note 10)
57
125
231
Total finance costs
642
1,041
1,606
5. Tax
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Current tax
UK corporation tax
529
611
2,057
Foreign tax
32
68
104
Prior year adjustments
(58)
(64)
(53)
Total current tax
503
615
2,108
Deferred tax current year
(132)
78
185
Long-term corporation tax rate change
365
-
-
Total deferred tax (note 11)
233
78
185
Total tax
736
693
2,293
Tax for the six months ended 30 June 2020 has been charged at 19.00% (2019 - 19.00%) representing the best estimate of the effective tax charge for the full year.
6. Dividends
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Amounts recognised as distributions to equity holders in the period
Final dividend (Nil per share) (2018 1.65p per share)
-
2,600
2,600
Interim dividend (2019 0.69p per share)
-
-
1,089
Distributions in the period
-
2,600
3,689
An interim dividend of 0.70p per share, payable on 8 October 2020 was declared on 27 August 2020 and has therefore not been included as a liability in these condensed financial statements.
7. Earnings per share Earnings
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Profit for the period from continuing operations
2,886
3,139
9,731
Number of shares '000
30 June 2020
30 June 2019
31 December 2019
Weighted average number of shares in issue for the purposes of basic earnings per share
157,812
157,548
157,636
Effect of Long-Term Incentive Plan awards in issue
358
114
393
Weighted average number of shares in issue for the purposes of diluted earnings per share
158,170
157,662
158,029
Basic earnings per share
1.83p
1.99p
6.17p
Diluted earnings per share
1.82p
1.99p
6.16p
8. Acquisitions
On 6 January 2020, the Group's subsidiary, Macfarlane Group UK Limited ("MGUK") acquired the trade, selected assets and goodwill of the packaging distribution business of Armagrip for a cash consideration of £0.9m.
On 2 May 2019, MGUK acquired 100% of Ecopac (UK) Limited, for a maximum consideration of £3.9 million. £3.1 million was paid in cash on acquisition and the deferred consideration of £0.8 million will be paid in 2020, as trading targets have been met in an agreed 12 month period after acquisition. On 30 August 2019, Macfarlane Group PLC acquired 100% of Leyland Packaging Company (Lancs) Limited, for a maximum consideration estimated at £3.05 million. £2.00 million was paid in cash and shares to the value of £0.25m issued to the Vendors on acquisition. Deferred consideration of £0.8 million is payable in 2020, subject to certain trading targets being met in an agreed 12 month period after acquisition.
Contingent considerations are recognised as a liability in trade and other payables and are remeasured to fair value of £1.6 million at the balance sheet date based on a range of outcomes between £Nil and £1.8 million. Trading in the post-acquisition periods supports the remeasured value of £1.6m.
All three businesses are packaging distributors, accounted for in the Packaging Distribution segment. Goodwill arising is attributable to the anticipated future profitability of the distribution of the Group's product ranges in the UK and anticipated operating synergies from future combinations of activities with the existing Packaging Distribution network. Fair values assigned to net assets acquired and consideration paid and payable are set out below:-
Net assets acquired
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Other intangible assets
298
1,701
3,313
Property, plant and equipment
-
701
1,194
Inventories
206
395
879
Trade and other receivables
282
1,170
1,797
Cash and bank balances
-
211
249
Bank borrowings
-
-
(149)
Trade and other payables
-
(974)
(1,658)
Current tax liabilities
-
(91)
(235)
Lease liabilities
-
(539)
(979)
Deferred tax liabilities
(57)
(311)
(599)
Net assets acquired
729
2,263
3,812
Goodwill
159
1,588
3,093
Total consideration
888
3,851
6,905
Contingent consideration on acquisitions Current year
-
(800)
(1,600)
Prior years
-
-
1,207
Shares issued for non-cash consideration
-
-
(250)
Total cash consideration
888
3,051
6,262
Net cash outflow arising on acquisition
Cash consideration
(888)
(3,051)
(6,262)
Cash and bank borrowings acquired
-
211
100
Net cash outflow
(888)
(2,840)
(6,162)
9. Notes to the cash flow statement
Cash and cash equivalents £000
Bank borrowing £000
Lease liabilities £000
Total debt £000
Total debt
At 1 January 2019
4,611
(17,769)
(101)
(13,259)
Non-cash movements
IFRS 16 transition on 1 January 2019
-
-
(29,701)
(29,701)
New leases
-
-
(2,769)
(2,769)
Acquisitions
-
-
(539)
(539)
Cash movements
(748)
(1,042)
3,300
1,510
At 30 June 2019
3,863
(18,811)
(29,810)
(44,758)
Non-cash movements
Adjustments to IFRS 16 transition
-
-
1,738
1,738
New leases
-
-
(854)
(854)
Acquisitions
-
-
(440)
(440)
Cash movements
(553)
2,827
3,399
5,673
At 31 December 2019
3,310
(15,984)
(25,967)
(38,641)
Non-cash movements
New leases
-
-
(403)
(403)
Cash movements
1,416
10,442
3,207
15,065
At 30 June 2020
4,726
(5,542)
(23,163)
(23,979)
Total cash movements for 2019
(1,301)
1,785
6,699
7,183
Net bank debt
Net bank Debt £000
At 30 June 2020
4,726
(5,542)
(816)
At 31 December 2019
3,310
(15,984)
(12,674)
Cash and cash equivalents (which are presented as a single class of asset on the balance sheet) comprise cash at bank and other short-term highly liquid investments with maturity of three months or less.
10. Retirement benefit obligations
The figures below have been prepared by Aon Hewitt based on the results of the triennial actuarial valuation as at 1 May 2017, updated to 30 June 2020, 31 December 2019 and 30 June 2019. The scheme investments and the scheme's net liability position as calculated under IAS 19 are as follows:
Investment class
30 June 2020 £000
30 June 2019 £000
31 December 2019 £000
Equities
UK equity funds
7,520
7,330
8,913
Overseas equity funds
12,541
11,288
13,226
Multi-asset diversified growth funds
23,976
19,220
25,382
Bonds
Liability-driven Investment funds
32,694
33,601
27,688
Other investments
European loan fund
6,092
6,264
6,379
Secured property income fund
6,095
6,020
6,192
Cash
6,798
1,686
281
Fair value of Scheme investments
95,716
85,409
88,061
Present value of Scheme liabilities
(101,764)
(94,438)
(94,526)
Pension scheme deficit
(6,048)
(9,029)
(6,465)
These amounts were calculated using the following principal assumptions as required under IAS 19:
Assumptions
30 June 2020
30 June 2019
31 December 2019
Discount rate
1.50%
2.20%
2.00%
Rate of increase in pensionable salaries
0.00%
0.00%
0.00%
Rate of increase in pensions in payment
3% or 5% for fixed increases or 2.85% for LPI
3% or 5% for fixed increases or 3.10% for LPI
3% or 5% for fixed increases or 2.95% for LPI
PIE take up rate
45%
45%
45%
Inflation assumption (RPI)
2.90%
3.20%
3.00%
Inflation assumption (CPI)
2.20%
2.20%
2.10%
Life expectancy beyond normal retirement age of 65
Male
23.4 years
23.6 years
23.3 years
Female
25.5 years
25.7 years
25.5 years
Average uplift for GMP service
0.40%
0.40%
0.40%
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Movement in scheme deficit in the period
At start of period
(6,465)
(9,765)
(9,765)
Current service cost
(62)
(62)
(112)
Employer contributions
1,574
1,732
3,106
Net finance cost
(57)
(125)
(231)
Re-measurement of pension scheme liability in the period
(1,038)
(809)
537
At end of period
(6,048)
(9,029)
(6,465)
Sensitivity to key assumptions
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 deficit. 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:-
Assumptions
30 June 2020 £000
30 June 2019 £000
31 December 2019 £000
Discount rate movement of +0.4%
6,513
6,044
6,048
Inflation rate movement of +0.1%
(407)
(378)
(482)
Mortality movement of +0.1 year in age rating
305
283
284
Positive figures reflect a reduction in scheme liabilities and therefore a reduction in the scheme deficit.
Six months to 30 June 2020 £000
Six months to 30 June 2019 £000
Year to 31 December 2019 £000
Movement in fair value of Scheme investments
Scheme investments at start of period
88,061
75,827
75,827
Interest income
879
1,062
2,109
Return on scheme assets (exc. amount shown in interest income)
7,021
8,525
11,154
Contributions from sponsoring companies
1,574
1,732
3,106
Contribution from scheme members
34
36
70
Benefits paid
(1,853)
(1,773)
(4,205)
Scheme investments at end of period
95,716
85,409
88,061
Movement in present value of Scheme liabilities
Scheme liabilities at start of period
(94,526)
(85,592)
(85,592)
Normal service costs
(62)
(62)
(112)
Interest cost
(936)
(1,187)
(2,340)
Contribution from scheme members
(34)
(36)
(70)
Actuarial loss due to the changes in financial and experience
(8,059)
(9,334)
(11,495)
Actuarial gain due to change in demographic assumptions
-
-
878
Benefits paid
1,853
1,773
4,205
Scheme liabilities at end of period
(101,764)
(94,438)
(94,526)
Investments
The Trustees review the scheme investments regularly and consult with the Company regarding any changes. In the first half of 2020, surplus cash generated from the Liability-driven investment funds was held in cash funds at 30 June 2020, pending investment into the existing Multi-asset diversified growth funds in the second half of 2020.
Funding
Following the completion of the triennial actuarial valuation at 1 May 2017, Macfarlane Group PLC is paying deficit reduction contributions with a deficit recovery period of 7 years. Contributions in 2020, inclusive of service costs and interest of £0.24 million, are expected to be £3.15 million.
The triennial actuarial valuation at 1 May 2020 has commenced and is likely to conclude in the first quarter of 2021.
11. Deferred tax
Tax losses less accelerated capital allowances £000
Other intangible assets £000
Retirement Benefit Obligations £000
Total £000
At 1 January 2019
(8)
(2,794)
1,660
(1,142)
Acquisitions
(22)
(289)
-
(311)
(Charged)/credited in income statement
Current period
(10)
193
(261)
(78)
Credited in other comprehensive income
-
-
138
138
At 30 June 2019
(40)
(2,890)
1,537
(1,393)
Acquisitions
(15)
(273)
-
(288)
(Charged)/credited in income statement
Current period
(111)
212
(208)
(107)
Charged in other comprehensive income
-
-
(230)
(230)
At 1 January 2020
(166)
(2,951)
1,099
(2,018)
Acquisitions
-
(57)
-
(57)
Credited/(charged) in income statement
Current period
150
(107)
(276)
(233)
Credited in other comprehensive income
-
-
326
326
At 30 June 2020
(16)
(3,115)
1,149
(1,982)
Deferred tax assets
125
-
1,149
1,274
Deferred tax liabilities
(141)
(3,115)
-
(3,256)
At 30 June 2020
(16)
(3,115)
1,149
(1,982)
12. Related party transactions
Related party transactions for 2019 are disclosed in note 28 of the 2019 Annual Report. The directors are satisfied that other than the changes in the Retirement Benefit Obligations disclosed in note 10 above, there have been no changes which could have a material effect on the financial position of the Group in the first six months of the financial year.
Transactions between the Company and its subsidiaries 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 2020 will be disclosed in the Group's 2020 Annual Report. Peter Atkinson and John Love hold option awards over 330,123 and 163,525 ordinary shares respectively under the Macfarlane Group PLC Long Term Incentive Plan awarded in 2019.
There are no other related party transactions during the six month period which require disclosure.
13. Post balance sheet events
There are no post balance sheet events requiring disclosure.
14. Interim Report
The interim report will be posted to shareholders on 11 September 2020. Copies will be available from the registered office, 3 Park Gardens, Glasgow G3 7YE and available on the Company's website, www.macfarlanegroup.com, from that date.
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