Macfarlane Group H2 2024 Earnings Call Transcript

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Provided by Quartr
March 4, 2025

Key Takeaways

  • Positive Sentiment: Profitability improved despite weak demand: 2024 revenue declined 4%, including an 8% organic decline, but adjusted profit before tax rose 3% and EPS increased 4%. Gross margin improved from 37.6% to 39% through purchasing efficiencies, product mix and cost control.
  • Positive Sentiment: Acquisition-led growth remains central to the strategy. The newly completed Pitreavie acquisition adds approximately £25 million of revenue, a roughly 10% operating margin, corrugated manufacturing capacity and exposure to Scotland’s food and drink sector, with further synergies expected.
  • Positive Sentiment: Management reported strong new-business momentum through its Innovation Labs and Packaging Optimiser tools, which help customers respond to environmental regulation. The company believes this offering can support market-share gains, particularly as Extended Producer Responsibility fees take effect.
  • Negative Sentiment: 2025 will continue to face significant headwinds: management does not expect material market improvement, while EPR regulation is expected to weigh on retail demand and employment-related cost increases are projected to add about £1.7 million to costs.
  • Positive Sentiment: The balance sheet remains strong, with year-end net debt of only £1.9 million and a £40 million revolving credit facility, expandable by a further £20 million. The board is also considering share buybacks given the weak share price, while maintaining its acquisition pipeline and a modest 2% dividend increase.
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Earnings Conference Call
Macfarlane Group H2 2024
00:00 / 00:00

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Operator

Good morning and welcome to the Macfarlane Group PLC final results investor presentation. Today's recorded meeting, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time via the Q&A tab featured at the right corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself, however, the company can review the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you to CEO, Peter Atkinson. Good morning to you, sir.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Thank you, Alexandra. Good morning. I'm Peter Atkinson. I'm here with my colleague, Ivor Gray, to talk you through our 2024 results. Firstly, thank you for joining us. The agenda for the session this morning is as follows. Following a brief exec summary, we'll then talk through the financials and the cash flows for the year. We'll then get into a bit more detail and give you color around the business performances. That's our packaging distribution and our manufacturing business. Ivor will then move to talk about the pension scheme update, and then we'll finish up with some conclusions and some summary remarks. The presentation that we're going to show you today will be on our website later this week for you to review in a bit more detail.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Before we talk about 2024, a quick reminder about the Macfarlane business for those of you who are new to us. We're a specialist protective packaging distributor and manufacturer. We have two divisions. We have a specialist division representing about 20% of our revenue that supports customers in the medical diagnostics, aerospace, automotive fields. We have a distribution division representing 80% of our revenue that supplies into the e-commerce sector and again, into industrial markets for predominantly B2B. The key benefits that we bring to customers is we are there to protect their products through the supply chain. We're there to ensure their products are effectively packed, stored, and also transported. We also are there to reduce their working capital and the administration involved in the sourcing and the storing and packaging.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Finally, as you will appreciate, we're there to help them with the environmental agenda in terms of making sure they're using the right sort of packaging in the right sort of volumes. How we differentiate ourselves from our competitors in the market. We're now in a business where we've got European coverage, but with local service. We've got a very broad and wide product and service offer. We're not just product and price. We're now a value player in terms of the services we provide to our customers. We've got very long-standing supplier partnerships going back 25, 30 years. We've got a degree of expertise and focus on protective packaging because we're a specialist in this particular field. So how did we perform in 2024?

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Our headline numbers show that our revenue was slightly down, 4% down versus 2023, but our profit is up, our PBT is up by around 3%. I think the market in 2024, as we flagged when we last briefed people, we always knew the market was going to be difficult, and we have seen very weak demand conditions, partly economy-driven, and partly down to the increasing environmental legislation, which is affecting anybody who is in the business of buying packaging. During this period, we also saw sales price inflation of around 3%. In a market with some quite strong headwinds, what we focused on was our self-help program, as we call it, which is maximizing new business using our Innovation Labs and our Packaging Optimiser tools. We have got a good story on new business, which we will talk about later on.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

We have improved our gross margin through far more effective purchasing activities with key suppliers. We have continued our acquisition program, and during the year we bought a business called Allpack Direct and a business in our manufacturing division called Polyformes. We will talk about it later on. We have had good cost control during the period, and we have also got a very strong balance sheet. Ivor will touch on this, but we also during the year renegotiated our banking facilities. As we exited 2024 and moved into 2025, we were pleased to be able to complete the acquisition of a company called Pitreavie. Let me just talk about Pitreavie. This is probably the latest piece of news in terms of the group. Pitreavie is a well-established business. It was established in 2005, so it is 20 years old. Good revenue in terms of GBP 25 million revenue.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

It is one of the largest acquisitions we have done in recent times and a strong operating margin around 10% of revenue. The operating activities of Pitreavie, they actually are a nice overlap with Macfarlane. They have a distribution business very similar to ours. They have a 3PL business very similar to ours, and they also have a specialist design and assembly business up in Aberdeen, servicing the oil and gas industry, very similar to ours. The one piece that they have got, which is slightly different, is they have got a corrugated manufacturing facility. We see that as a nice added value for our ability to service customers within the Scottish market.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

The transaction details I have put out on the slide there for you, and as you can see, it is consistent with our normal multiples from a transaction point of view of around that 5x-6x EBITDA pre-synergies, and the business is on a two-year earn-out program. How do we see the growth potential for Pitreavie? At Macfarlane, we are not particularly well embedded in the food and drink industry in Scotland, and it is probably one of the biggest industries in Scotland. Pitreavie will give us access to the food and drink sector, which is very positive. We also see the opportunity to use the corrugate facility in Pitreavie for in-house supply to our Scottish business and also to our business in the Northeast and potentially Northwest, so we can actually hold margin within the business rather than give it to external suppliers.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

We see significant cost synergy and sales synergy opportunities. From our point of view, a really good start to the year, a really good quality acquisition, and just continues the track record of identifying and executing high-quality acquisitions. Let me pause there and pass over to Ivor, who will take you through the 2024 financials in a bit more detail.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Thank you, Peter, and good morning, everyone. Just to give you a quick run-through of the financial metrics for 2024. For revenue and profit, we were down 4%, as Peter said earlier, and that is analyzed by a +4% from the acquisitions that we did in 2023 and 2024. So that is Gottlieb, Suttons, and B&D 2010 Group in 2023, and the more recent acquisitions in 2024, Allpack and Polyformes, and -8% organic decline. That broadly splits, and that is down to the reasons that Peter described earlier, weak demand within our customer base and some price deflation. So there is a mixture of price and volume within that -8%. That translates to an adjusted profit before tax of -3% year-on-year. Again, the acquisitions contributed a +5%, -6% from organic.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

We have managed to offset some of the weakness in the sales line through stronger gross margins and good control over the costs. So the impact on the organic profitability is slightly less than it was in sales. We have an increase in financing costs, which impacted profitability by -2%. Translating that to PBT, profit before tax, then with amortization and adjustments to deferred consideration, so acquisition-related costs, then our PBT actually moved forward by 3%. Moving on to the balance sheet. Again, very low net debt at the end of the year of GBP 1.9 million. That compared to us being in funds of GBP 500,000 at the end of 2023. So a net cash outflow of GBP 2.4 million a year, and that is after funding acquisitions, CapEx, and dividends through the year. As Peter mentioned, we used our refinance, the bank facility during 2024.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

We now have a GBP 40 million revolving credit facility which is committed for three years to November 2027, with the opportunity to extend that a further three years to November 2029. We actually have the opportunity to extend that facility by a further GBP 20 million. So it is an accordion facility over and above the GBP 40 million, and that facility is now split between Lloyds Bank and HSBC. As you notice to the right-hand side, our pension surplus moved slightly down. It was GBP 9.9 million last year, GBP 9.6 million. So again, positive that the pension scheme continues to be in significant surplus. It continues to be well-funded. The company is not putting any further cash contributions into the scheme. We are working towards buyouts over the next three years. Down to the bottom part, the EPS and dividend. EPS moved positively 4%.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Strong dividend cover of 2.7, which is consistent with our historic position, and a nudge forward in the dividend of +2%. Again, confidence in our business going forward. This slide just gives you a view of the historic profit before tax and basic earnings per share. Again, we are pleased to say that we have continued that progress that we have seen over the last 14 years. That is now 15 years of positive PBT growth. Again, another year of improvement on the earnings per share. Just coming off the income statement in a bit more detail. Peter Atkinson will discuss the revenue line in a bit more detail when he covers off the review of the distribution business and manufacturing business. But I am pleased to say that the gross margin has improved again this year from 37.6% to 39%.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

That is an improvement in the distribution business from 35.7% to 37.1%, and a slight reduction in manufacturing from 44.5% to 43.2%. It is again pleasing to see that we have managed the flow-through of input prices and managed that effectively. Albeit, a weak caveat that the margin as the rest of the year was slightly lower, so it peaked around about half one this year. We exited the margin at 38.3% as we exit the year. Albeit what we are seeing is the revenue line starting to strengthen as we went through the back end of the year. Again, we hope to see that improve as we go into 2025. Again, I picked up, we have managed the operating expenses pretty well given the sales decline. Just to give you an idea of the movements on the operating expenses.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

We added about GBP 2.9 million of additional cost through the acquisitions that have come in that I mentioned earlier. With about a GBP 3 million reduction in the core operating expenses, predominantly in labor and in utilities. I am pleased to say that we have improved the adjusted operating profit as a percentage of sales from 9.8% up to 10.1%. As I said, operating profit has improved over the year once you take into consideration the amortization and deferred consideration adjustments. Our financing costs have increased year on year, and that is predominantly through an increase of about half a million on our IFRS interest costs. That relates to a new lease that we took on in the year for our East Midlands business, which we are actually consolidating four operations into one.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

We have taken a long-term lease on a new facility in East Midlands, and Peter Atkinson will cover that off in a bit more detail when he talks to the distribution. About GBP 300,000 of that increase is related to unwinding of the discounting on deferred consideration. Just moving on to the cash flows. Again, a strong year in terms of the operating cash flows. I just want to pick out one or two items here. Clearly, from a working capital point of view, last year we had a very strong cash inflow from working capital.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

At this time last year, some of that was really related to difficulties we had in the supply chain at the back end of 2022, which meant we had quite a significant amount more invested in stock. We saw quite an unwinding of that through 2023 with lower volumes and also the unwinding of the stock. We have actually seen a much more stable position this year with a small absorption in working capital of GBP 1.4 million. Clearly, with that strong operating cash flow, we have been able to invest in acquisitions. We made two acquisitions a year, Polyformes and Allpack at the beginning of 2024.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

In the year of that GBP 12.1 million, GBP 9.1 million is the initial consideration that we paid for Allpack and Polyformes and a further GBP 3 million that we paid on earn-outs related to PackMann, Suttons, and Gottlieb, as all these businesses performed well within their earn-out period. In terms of CapEx, we spent GBP 2.9 million on CapEx. The main features of that was the fitting out of the new East Midlands operation, as I described earlier, GBP 1.4 million, and we invested in solar panels within our manufacturing site at GWP. So they were the kind of main investments we made within the capital expenditure.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Just touching on capital allocation, I know that is very important for all shareholders. Clearly, we set out our priorities in terms of investing in business, both from a working capital and a capital expenditure point of view, continue to support organic growth.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

We have been very successful with acquisitions. We have done now 21 acquisitions in the last 11 years, and they have been a big feature in terms of the growth of the business over that time. We continue to allocate capital to acquisitions. Our third priority is investment in dividends, and the final priority at the moment is where we have excess cash and unallocated capital. But above those priorities, we would look to share buybacks or enhanced dividends. I think we recognize that the share price has not been particularly strong over a consistent period now, and it is certainly something we are reviewing is whether actually we should be allocating some capital towards share buybacks so that that works in combination with our acquisitions.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

That is something that currently we consistently look at the board and consider, given where the share price is at the moment, whether allocating some capital to share buybacks would make sense. But currently, certainly we have allocated historically our capital towards acquisitions as opposed to share buybacks, but it is something the board keeps under review at all times. I will pass back to Peter now to discuss the packaging distribution business and manufacturing operations in a bit more detail.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Thanks, Ivor. As you all know, I think the group is made up of two divisions, our packing distribution division and our design and manufacture division. I will firstly talk about the packaging distribution division. The division represents about 83% of our group revenues. It is obviously a significant part of our activity. What we are doing here is a classic distribution business where we are sourcing products from the major manufacturers of protective packaging and then providing a just-in-time added value service for our customers. Our customer base here is 20% e-commerce retailers and 80% general industrial.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

In the year, as we have already touched on, we have seen weak demand, so we have seen a slight revenue decline in the period, and that is 5% volume and 3% price from an organic point of view, offset by the acquisition of Allpack in 2024 and the flow through of the Gottlieb acquisition we made in 2023. Despite the weakness in the underlying revenue line, we have seen good progress in new business. Our Packaging Optimiser tool, our Innovation Labs are really helping customers manage the EPR legislation, which we will talk about later on, which is one of the headwinds the industry is facing. So we are making really good progress on new business. We have also done a good job in moving our gross margin forward again through better sourcing and better product mix.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

As you can see, in terms of net profit, we have pushed our net profit up from GBP 8.6 million to GBP 8.8 million. We use Net Promoter Score as a measure of customer satisfaction, and it is encouraging to see our Net Promoter Score has increased again in 2024 versus 2023. Just to give you some context for that, the average for B2B business on Net Promoter Score is around about 35. The next chart shows the revenue bridge, and we have probably covered off most of the points here. But in the year, what you have got effectively is a 5% volume decline, the weakness of the economy, and the beginnings of packaging legislation starting to find ways of encouraging people to actually reduce the amount of packaging they use, 3% price deflation, and then the benefits of acquisitions, which represents about 1.6 of the revenue change.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

If we move on to material prices, obviously, a fundamental feature of our business, our ability to translate changing material prices into selling prices. Inherently, we have seen during 2024 weak prices and hence the sales price deflation. But as we exited the year, we started to see price inflation coming into the business. So we expect 2025 certainly to be in an environment where there is more likely to be price inflation than price deflation in terms of our selling prices. If we just touch on costs, the next schedule, pretty detailed, but just pull out a few key features for you. Our total operating costs in 2024 were lower than 2023, and that is despite the increase in costs that we have been out through the acquisitions and the dual property costs that Ivor has mentioned. We managed to offset those by lower labor costs.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

I think in tight market conditions with numerous headwinds that we have talked about, we have done a pretty effective job in managing our operating expenses. Acquisitions, as you know, is a key part of our growth strategy. On the next page, you can see a brief history of the acquisition program that we have been implementing. We are averaging two acquisitions per annum. As you know, we do consistent multiples of 5x-6x EBITDA, and that is reflected in the chart. Also within the chart, you can see our first acquisition in Europe, PackMann, that we did around three years ago. From our point of view, we are making good progress in acquisitions. We have got a strong acquisition pipeline, both in the U.K. and in Europe, and we will touch on those later on when I conclude.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

In terms of the go-forward priorities for distribution, again, a busy chart, but let me pull out a few things for you. We are very confident in the benefit of the added value program that we bring to our customers using the Innovation Labs and the Significant Six. We have also introduced a world-class sales program to really step up the quality of our salespeople during 2024. We see those will benefit us materially in 2025. You are seeing partly in 2024 with our new business figures, and we expect to grow new business even faster in 2025. In terms of sourcing across the top layer there, we mentioned with Pitreavie, we have got the opportunity to improve margins by doing more in-house sourcing, and we will see that as part of our program during 2025.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

In terms of bottom left, we have talked about this for, I think, the last six months, the fact that we recognize our online capability is not where it needs to be. In the past two weeks, we have relaunched our website with a new online offering and a new trading platform, and the early feedback on that is very positive and very encouraging. In terms of Europe has made good progress in 2024, both the whole customer program, both the PackMann business, and also our business in Ireland, and we expect that progress to continue in 2025. We are working also in Europe on acquisitions at the moment, and are very hopeful that we will build another acquisition in the near future to complement the PackMann acquisition. I just mentioned the East Midlands property consolidation.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

We are working on further opportunities to reduce the property portfolio as leases come up, and we will keep you updated on how those are progressing, and we will have completed the East Midlands consolidation by around April, May of this year. Let me turn to the manufacturing division, which represents about 17% of group sales and about 25% of group profits. This is where we are designing and assembling a highly engineered packaging solution, particularly for the medical, aerospace, and defense markets. Everything we do here is bespoke. A customer comes to us with a particular piece of kit or component, and then our engineers and our designers together with their engineers and their designers, create a unique piece of packaging to protect that product component, whatever it might be, in its journey through the supply chain. A good performance from the business in 2024.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

We benefited from the Polyformes acquisition, which is a big part of the revenue increase, and there has been some slow organic revenue growth during the period as well, offset slightly by the MOD spending slowdown during the year, which obviously is likely to pick up as we know what is happening in the world at the moment. The partnership with distribution continues to work well. Currently, distribution is a key customer of our manufacturing division, and it represents about 12% of the manufacturing division sales. The operating profit margins remain strong. You can see a different profile here to distribution business, high gross margins and high net margins, which reflects the value that we bring to customers in terms of the design and the engineering content of the products that we supply.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

If you look at the acquisition profile for MDM, recently we have done three acquisitions, and Pitreavie also adds to this division as well. We again operate consistent 5x-6x multiples. We have now marked it. It is very difficult to define this market and analyze it, but we probably would estimate now that we are probably the leader in the U.K. in this specialist niche of the U.K. protective packaging market. Looking at the key priorities for the design and manufacture business, again, a busy slide. In-house supply on the top level, we have talked about that, and we continue to strengthen the in-house supply. It is currently around about 12%, which is shown on the slide. We believe we can get that up to 20% as the two divisions work more closely together.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Having made the acquisitions, we are now working on integrating the various components of the acquisitions. The [audio distortion] business we bought about two years ago, we have now actually integrated that into our Westfield operation, but there are further integration opportunities we are going to work on during the period. We have also got a pipeline of additional acquisitions in this space as well, particularly from a U.K. point of view. We are getting a little bit of feedback from customers about how they would like us to extend the reach of this business into Europe. So we are doing work this year to evaluate whether we can do a whole of customer type program as we have done with our distribution division to give this business greater scope to access European clients.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

As we come to the close of the presentation, I will ask Ivor to just touch on our ESG program in 2024 and the pension deficit. Then I will conclude with some remarks, and we will pick up your questions.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Thanks, Peter. I mean, there's a lot of information on this slide, but really that just kind of covers the progress we're making across our environmental, social, and governance objectives. Just picking out a few key points in terms of our own carbon footprint. We continue the progress in terms of electrification of our vehicle fleet. We now have nine vehicles that are now operating that are fully electric. As I mentioned earlier in terms of talking of the CapEx expenditure, we invested in solar panels at our manufacturing site in GWP, and that's certainly helping the business both commercially because it's reducing our cost in terms of utilities, but environmentally, because ultimately we were using less of the grid in terms of the requirements. Overall, we've had a 32% reduction in our carbon emissions since our baseline year. We completed our Scope 3 mapping.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

We recognize that one of the biggest impacts we have on the environment is the supply base that we use. Clearly, now that we've mapped our Scope 3 emissions, we'll now be working actively with our suppliers and continuing to support them with their programs to try and reduce their carbon emissions going forward. In terms of supporting our customers, clearly a big part of what we do through our value proposition is actually to look at how we use packaging and to minimize the impact packaging has on the environment. So we had 250 customers through our Innovation Labs this year. Again, part of that is looking commercially at how we can improve the value that packaging brings to the organization, but also to reduce that environmental impact and reduce their carbon emissions.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

We also ran 19 education workshops on sustainability, headed up by David Patton, who's our Head of Sustainability in the group. These were well-received and well-attended by customers through the year. Clearly, we see a big part of, and we'll come onto this in the next slide, that clearly there's a lot of environmental regulation starting to come through both in the U.K. and EU. We see a big part of what we do is educating and supporting customers to manage through that regulation. Big regulation coming in in 2024 is Extended Producer Responsibility, and the fees on that start to take effect in October this year. In terms of our own people and the impact we have on the community, again, health and safety is a huge part of what we do. I'm pleased to say we continue to make progress on that.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

We continue to invest in the training of our workforce. Again, we continue to encourage our teams to use the opportunity to volunteer in the community. We have 410 hours of volunteering with our charity partners across the U.K. Again, an important thing is we can demonstrate to our customers that we're making progress. So EcoVadis is a very, very important kind of assessment of our business that's done, and we're currently in the top 10% of businesses globally in terms of EcoVadis, which is an assessment of Macfarlane from an environmental perspective and doing business the right way. So that's very important to our customers, particularly some of our multinational customers in Europe. Pleased to say that we actually were awarded Cyber Essentials.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Again, that demonstrates our commitment to invest in the cyber protection of the business, which is becoming an increasing risk for not just our business, but all businesses. In terms of moving on, we just wanted to give this slide, not so much to go through in detail, but just to give you a sense of the kind of regulations already impacting the packaging industry, but all the regulation is pending. I think safe to say, we have managed effectively and managed with our customers and supporting our customers through the Plastic Packaging Tax that came in two years ago. When you look at EPR that is going to come in this year, we are actively working with our customers to try and minimize the impact that it has and also impact the impact it has on their business.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

So we see ourself as being a key part of not just minimizing the impact it has on the business, the Macfarlane Group as a whole, but also supporting our customers through that regulation. You can see both in the EU and the U.K., there is a significant amount of regulation coming through over the next five years. Just moving on to the pension scheme. I touched on it earlier, nothing more to report other than the scheme continues to be well managed. The assets and the liabilities are well hedged, so movements in the liabilities are hedged in terms of asset base.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

As of last year, the company is no longer making any cash contributions into the scheme because of its funding position, and we are working with the trustees and advisors towards a position where we can get the scheme to buy in, so buy out over the next two years. I did mention the Virgin Media case as a potential issue when we discussed the interim results. After doing some internal review and taking some legal advice on that, at this stage, certainly the issue seems to be less than we originally envisaged, and we do not believe there is any further action to be required at this stage. So I will pass over to Peter now to do some kind of final conclusions.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Thanks, Ivor. So just some concluding remarks, and then we are going to answer the questions that are coming through. For 2024, there were some quite strong headwinds impacting the business. So I think the performance in the year, despite weaker sales to grow our profitability, was a solid result. Also we made good strategic progress during the period. I think as we look out to 2025, we are not expecting any material market improvement. We have got the challenge of EPR legislation that Ivor has touched on, which will have an effect on demand in that 20% of our business, which is retail. Also we have got the impact of labor cost increases from the National Insurance led in the minimum wage. The value of that cost of that in 2025 is going to be about GBP 1.7 million.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

So, we recognize there are headwinds in 2025 as well as there have been in 2024. However, we have got really good business momentum, and we see that already continuing as we open up in 2025. We are very, very confident in our added value proposition. We have re-emphasized a number of signs, and we believe that will be a fundamental benefit to help customers through the EPR challenge, and will win market share as a result of that.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

We have also launched a new trading website, which has helped us in the small customer end of our business, and we have also made a number of key new hires to strengthen the team, a new MD for Europe and some significantly experienced and successful salespeople have joined us at the back end of the year. We have got a well-developed acquisition pipeline and a good program of identifying and executing acquisitions.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

We have already done Pitreavie as our first acquisition in 2025, and we would expect to do at least one, if not two more acquisitions during the year. As Ivor touched on, we remain with a strong balance sheet and a really good bank facility, which has been strengthened as well. So we are well set for another year of progress in 2025. So I will close off there, and then we will come back to your questions.

Operator

Perfect. Peter, Ivor, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions, and you can do so just by using the Q&A tab that is situated on the top right corner of your screen. Just while the company take a few moments for the questions that have been submitted today, I would like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed by your investor dashboard. As you can see, we have received a number of questions about today's presentation, and Peter, Ivor, if I could just hand back to you to read out those questions, that would be great, and I will pick up from you at the end.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Yeah, thanks very much. What I have got through the questions, I am trying to kind of summarize some questions together since there is clearly some questions here that have come through from a few participants where I am trying to kind of capture. If I do not read out one for one questions, please, hopefully, I do cover them off over the next 10, 15 minutes. Clearly, one of the big things that seems to be going through, Peter, is this increasing pressure towards doing share buybacks rather than doing acquisitions. I think that is reflective of the fact that we have the current share prices at the moment and the multiple is trading at relative to the acquisitions we do. I think clearly I touched on that earlier. Is there anything you would like to add on that?

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Yeah, no, it's a really good point, and we take it very seriously. As Ivor touched on earlier on, about a year ago, we did a review with the majority of our major shareholders to evaluate where they were positioned on the share buyback argument. The balance of opinion at that stage was that our capital allocation strategy was correct, and they were happy to support us with the capital allocation that we had, and we should only do share backs if we had actually excess cash. We have been using excess cash, obviously, to invest in acquisitions, core acquisitions to grow the business. I think that the share price has obviously not performed as we would like it to have done. The argument for share buyback becomes a bit stronger.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

What we are doing as part of this round of investor meetings is, again, taking the temperature of investors, and then we will make a decision about how we proceed with share buybacks following the input we get from investors on this round. I think you are probably aware at the AGM, we did all the paperwork to get the authority to do share buybacks. So we have done the administration that allows us to do it. We just want to do a final test of investor sentiment, and then we will make some decisions. I think in the ideal world, what we want to do is get a nice balance between continuing to grow through acquisition with the quality acquisitions that we have got in the pipeline, and that pipeline has only strengthened in the early weeks of 2025.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

But at the same time, we recognize the value of share buybacks in terms of earnings per share, et cetera. So, yeah, it is fully on our agenda.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Just one of the questions similar to that was the kind of synergies that we expect to get from acquisitions. Peter, clearly because we are allocating capital to acquisitions, when we disclose the numbers, we talk about the solid earnings of the business. If you could maybe just touch on the types of synergies that we anticipate from the acquisitions.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Yeah. As you know, we price the acquisitions, our track record is about 5x-6x EBITDA pre synergies. Typically, the synergies that we get from buying distribution, buying both distribution and manufacturing businesses, we tend to be able to improve gross margin by about 1% or 2% through purchasing synergies. If there is an opportunity to co-locate the business without losing any customers or staff by relocating too far, then we obviously get property synergies. In some of the acquisitions, we've been able to get small back-office synergies through IT and finance. The small well-run private business systems tend to have significant back-office expense, but there is a small amount of synergy there.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

I think what the likes of Pitreavie brings to us is those synergies together with this ability to use their corrugated manufacturing facility to provide in-house supply to a number of our distribution sites in Scotland and North of England. That's a relatively new synergy opportunity. We benefited from that with GWP Group, and that's the synergy benefit of obviously a margin that we would give to an external supplier. We keep that margin in-house. The synergies aren't built into our pricing, but there are, as I say, quite a number of areas where we drive and we've got a successful track record of executing those synergies.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Just a comment, and just finally the last question on capital allocation is we've had a disciplined capital allocation strategy previously. I suppose one of the questions was, is that something we expect to continue going forward? I suppose the straight answer to that, Yes. We have had a disciplined approach to capital allocation. Peter Atkinson has mentioned that share buybacks is something we consider on an ongoing basis, and it's something we'll review as part of this round with shareholders. But there's certainly no plans to change the discipline that we've applied to capital allocation historically going forward.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Just to add to that, I think we're characterized as a very conservative management team. Clearly, we've got a successful track record of allocating capital for acquisition. In 2024, we did two. We probably turned down about 24. While we are acquiring businesses to grow both operationally and strategically, we're not just buying acquisitions for the sake of buying acquisitions. We're only focusing on good quality businesses that we think will add to the overall Macfarlane proposition.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Moving on more to the operational side of the business. A couple of things that have been clear over the last couple of years is the improvements that we have made in our gross margin. One of the questions is that a new high, or do you see a reversion back to the norms that we maybe saw back in 2018, 2019, 2020? I suppose as an add-on, the organic growth has been weaker, but gross margin has been stronger in that period. Do you see this coming through the trough of that as you see 2025, any signs of recovery as we go into 2025?

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

If I take the organic growth one first, we talked about the organic growth number in 2024 of about 8%, organic decline, sorry, 8%. The trend of that was as we exited the year, the second half of the year, that was down to just over 3%. In the early trading weeks of 2025, our like for likes are sort of on a par with 2024. We do feel that in terms of organic, we are probably past the worst. That doesn't mean to say the economic conditions are getting any better, but I think we are just doing a better job in managing them. Certainly, that new business momentum we are getting is fairly offsetting some of the weakness in demand that we have been experiencing over the last couple of years. Organic trends, I think, are moving into a more favorable cycle as we sit here today.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

In terms of gross margin improvement, as you know, fundamental to a distribution business is actually managing the difference between your buying prices and your selling prices. We have a heavily focused program to ensure that whatever the movements in raw material prices, we recover those through from customers. We have done that consistently over a long period of time. If you look at our gross margin back for the last 10, 15 years, it varies within 1%-1.5%, depending on the cycle of raw material pricing inputs. I think the big change occurred in gross margin during the COVID period. There was a step up in gross margin during that period for basically Macfarlane and all companies, lots of technical companies operating in this business because there was a demand-supply imbalance and also you saw significant corrugate price inflation.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

As we came out of COVID with those higher gross margins, we were able to retain those margins because we were able to persuade customers that while our gross margin is slightly higher, we have obviously got all the operating cost pressures, if you remember, of energy, of labor cost increases, of transport cost increases. Recognizing we are a relatively low net margin business, I think where the gross margin is at the moment, don't expect it to improve dramatically in the way it has done over the past three or four years. But certainly, we have got to a level now which we feel is the right norm for this business relative to the added value we bring to customers.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Why don't I pick up here. In terms of manufacturing versus distribution, I think the question was how does return on invested capital compare between the two businesses? In fairness, Matt, they are actually broadly similar, albeit manufacturing has got higher investment in fixed assets or fixed capital. The distribution business gives a higher investment in working capital. So when you actually compare the two, actually our return on invested capital, they're actually broadly similar. As a continuation of that question, the question was, is the distribution effectively subsidizing the manufacturing business? To really answer that question is we very much operate the manufacturing and distribution business separately. Both businesses have to stand on their own two feet. Both of these business have to justify the investments they make. While we encourage the businesses to work together, we don't force that position.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Clearly there's a degree of encouragement, but certainly there's no subsidization and there's no forcing of the distribution business to buy from the manufacturing business, and there's no requirement for the business, the manufacturing business, to sell into distribution. I think because over the years, because we've encouraged that the distribution buys from the manufacturing business, the types of products they are best at producing, and the distribution business is still allowed to trade effectively between suppliers in the marketplace. Hopefully that answers that question.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Can I just add to that?

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Yeah.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Yeah. I mean, just for those who are relatively new to the Macfarlane story, we call it the manufacturing division. In reality, it's design and assembly. So we're not trying to compete with Smurfit Kappa, the big corrugated manufacturers. This is a business that's doing bespoke packaging, low volume, high value, very sophisticated packs, using timber, using foam, using corrugate to actually provide the ultimate in product protection for these very high value and fragile items. In terms of the returns piece, the subsidization piece, I would answer that really well. I mentioned that manufacturing is around about 17% of our revenue, so it's about 25% of our profitability. So in reality, relative to each GBP of revenue we get from it's actually contributing more in terms of profit than the distribution business relative to its sales difference.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

It is an important part of the group, and we spoke about the word manufacturing. It is protective packaging for high-end, high-value, very fragile items. It is a protective packaging business.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

In terms of our exposure to the defense market and manufacturing, can you describe that, Peter?

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Yeah. It is not a high degree of exposure, to be fair. Across the whole of the group, both distribution and manufacturing, we have got business there, which is probably less than 3% of our revenue. That is one of the attractions of our business in general, is the fact that we are broadly spread across a whole range of sectors. I did mention that we suffered a bit in 2024 because our MOD contracts got put on hold as the new government came into place and so on and so forth. That has actually kicked in big time as we started 2025. Obviously, with what is happening in the world, we expect to be a beneficiary of that. But it is not a material part of the group. It is an important part of the group, but it is not material.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

In terms of European expansion, one of the questions was the margin profile between distribution businesses, particularly, for example, Germany versus the U.K. market. I think you answered that, probably answered that question really. But if you look at the kind of net margins that businesses make in Germany, U.K. is broadly similar, and the structure of the market is quite similar as well. You have a number of larger players similar to ourselves and a number of other larger competitors in the U.K. If you go to the German market, for example, again, there is a number of larger players. There is no dominant player, but there is a number of larger players. Again, the market starts to fragment quite quickly down into local and regional players. In terms of the scale of the market in Germany is bigger.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

It is double the size of the U.K. in terms of passion distribution. In terms of the structure of the market and margins, the net margin profile is broadly similar. The final question I think we have today is on the, one of the questions is on retail businesses. Clearly, in the short term, that has been quite weak over the last two years, both on the problem and the general marketplace. Are we seeing any kind of signs of packaging volumes recover in that market?

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Yeah. Our retail exposure is predominantly e-commerce retail, and not across all the sectors, across some very specific sectors of e-commerce retail. From our point of view, it is just beginning to normalize. We had this huge spike during COVID where we all, certainly in my household, we had nothing better to do than press buttons on computers and buy stuff online. There were huge uplifts in protective packaging sold to e-commerce retailers as they closed their stores and pivoted to online activity. You then, as you came out of COVID, you saw a return back to the high street and an overbalance the other way.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

I think as we have exited 2024 and started 2025, we are just beginning to see some signs that the commerce marketplace, from our point of view, is beginning to sort of nudge in a more positive direction following the spike of COVID and then the sort of steep decline following COVID. Clearly, part of the challenge for e-commerce businesses is going to be the new legislation, the EPR legislation. That will be a headwind for some of those businesses. As we have already said, we are very well positioned to help them through the EPR legislation with our Innovation Labs and Packaging Optimiser. Certainly in the early back end of 2024 and early 2025, our Innovation Labs were absolutely full of people wanting to work with us to help them manage through the legislation and optimize their packaging and avoid the taxation impact.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Yes, retail, e-commerce retail from our point of view, beginning to sort of get back to something like normality. Challenge of EPR, but we are getting really good feedback from customers as to how we can help them through that, and we believe that will give us an opportunity to win market share in that particular segment.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Just a couple of follow-up questions if I can, Peter. Do you think we're gaining market share? I suppose another one to that, who are our major competitors in the U.K.?

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Yeah. This market is not analyzed in any detail by any third party. It's really a judgment call based on the knowledge and broadly what we think we believe our competitors are doing. I think in broad terms, we would probably argue that in the major corporate customers, we're winning market share because our Significant Six proposition, our Innovation Labs, that's where we really bring value to customers, and they're looking for added value beyond just the products and price of the packaging they're buying. So winning market share there. Probably the negative there is in the smaller customer segment, which represents about 10% of our revenue. We've probably not been as effective in that segment, and that's partly why we relaunched our website because we recognized that we're underperforming in terms of our website proposition.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

We hope to start improving in the local customer sector. There's a segment of core customers which sort of fit between the two, and in that segment, we probably see ourselves as flat.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

With major competitors?

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Major competitors. Our analysis of the market shows Macfarlane as the U.K. market leader. We've then got a range of significant high-quality competitors in terms of Antalis, in terms of Rajapack, in terms of Kite Packaging. Then quite quickly, you move into a range of good local and regional privately owned businesses who aren't operating nationally, but operating locally and regionally, and that's the piece for our acquisition program. In terms of Europe, again, you've got some very strong country-based businesses, particularly in Germany, Netherlands, and Scandinavia, privately owned businesses. Then you've got RAJA, who are very strong in France and Hispanic countries. Then you've got Antalis who are very strong in Germany and Northern Europe. So those would be the two major players that we're competing with from a European perspective in terms of corporates.

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

But again, some very strong independent family-owned businesses that we're competing with as well. Also they are the lead stock for our acquisition progress.

Ivor Gray
Ivor Gray
Group Finance Director at Macfarlane Group

Okay. I think that's it.

Operator

Perfect. Peter, Ivor, thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today, and we will publish the responses out on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which I know is particularly important to you both, Peter, can I just ask you for a few closing comments?

Peter Atkinson
Peter Atkinson
Chief Executive at Macfarlane Group

Yes. Thank you. Just to reiterate, a pretty solid performance in 2024 against quite difficult challenging market conditions. We don't expect the market conditions to improve in 2025, but we've got a good program with good momentum in terms of new business, good momentum in terms of margin, good control of costs, and we've got a strong acquisition pipeline. We certainly would expect 2025 to be another year of good operational and strategic progress for the group.

Operator

Peter, Ivor, thank you once again for updating investors today. Can I please ask investors mark the close of the session. As you know, you will be automatically redirected to provide your feedback and help the management team can better understand your views and expectations. This will only take a few moments to complete. This information will be greatly valued by the company. On behalf of the management team of Macfarlane Group PLC, we'd like to thank you for attending today's presentation and good morning to you all.

Executives
    • Peter Atkinson
      Peter Atkinson
      Chief Executive
    • Ivor Gray
      Ivor Gray
      Group Finance Director
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