Macfarlane Group (LSE:MACF) — Interim results

0:01 Good morning, and welcome to the MACFARLANE GROUP PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors are being in listen only mode. Questions are encouraged, can be submitted any time by the Q and A tab situated on the right hand corner of your screen. Just click Q and A, scroll to the bottom and press send. The company may not be in a position to answer every question received during the meeting itself. However, view all questions submitted today and with public responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Peter Atkinson, CEO. Good morning.

0:31 Thanks, Paul. Good morning, everybody. I'm Peter Atkinson. I'm here with my CFO today, Ivor Gray, and our objective is to talk you through our half year results for the first part of twenty twenty three. The agenda will cover off three key areas. We'll firstly give a little bit of introduction to MACFARLANE GROUP, then talk you through the results, and then finally turn over to q and a. So if I begin with a little background to MACFARLANE GROUP, as a number of you will know, MACFARLANE is a very well established business, founded about seventy five years ago and is on the stock market came on the stock market in the early seventies and has been a fully quoted company on the London stock market since that time. We're headquartered in Glasgow. Sales around about 300,000,000.

1:17 We've got about a thousand employees. As I'll talk later on, we're a very decentralized business. We like actually decentralizing and having profit ownership at a very local level. We operate primarily in The UK, growing in Ireland and increasingly and fast growing in, Europe with operations in The Netherlands and in Germany. Our customer base is biased towards The UK because of our history, but, obviously, we are fast growing in Europe. And our business mix is b to b, 75% industrial, and 25 retail, of which retail majority of that is ecommerce customers. If we look at the business, the business is a specialist in protective packaging materials, and we have two operating divisions. We are The UK market leader in the distribution of protective packaging materials for the uninitiated.

2:08 That's basically cardboard boxes, void fill to stop the contents of boxes rattling around, tape and stretch. And then we have a smaller specialist, design and manufacture business where we design and manufacture very high spec highly spec protective packaging for customers in the industrial, aerospace, automotive, MOD sectors, where they have very high value items that need, serious protection. If we talk about our performance history, as you can see on the on the slide, we've seen consistent profit and earnings per share growth over a sustainable period, and 50% of that growth is built around our acquisition program, and 50% of that is built around our organic growth.

2:55 How do we maintain our growth? And it's one of the key questions that's come up in the in the q and a's that we've been given. And there's really, really six key building blocks to our growth story going forward. Firstly, we've got a very strong leadership position in The UK market, and we continue to grow organically. We have a strong added value proposition that customers find really interesting and exciting, and it fully differentiates us from from competitors. So UK organic growth is a key part of our growth platform. Secondly, UK acquisitions. We've been acquiring in The UK over a long period of time, typically doing two acquisitions per year, and we've got a very strong pipeline of further growth opportunities in The UK market. We are very focused on input price management, ensuring that we can work with the right supplies to to to to drive gross margin performance improvement, and that's a key part of our growth strategy.

3:50 We are looking to streamline our property footprint. As I'll talk later on, we've just done our first site consolidation in North West, and we've got further site consolidations planned, which allows to be more competitive in terms of the way we manage our property portfolio. And then from a new move to Europe, we've currently got about a 1% share of the European market, so the growth opportunity there is significant. We've got a team operating at Venlo in Holland that's driving organic growth through a program called Follow the Customer, taking customers we know in The UK who've got European subsidiaries or they themselves are part of European group and using our UK relationship to open doors in Europe, and that's going very successfully at the moment. And then secondly, we are obviously very focused on acquiring in Europe. We did our first acquisition in Europe just over a year ago, a company called Pacman in Germany. Again, we've got a very strong pipeline of acquisitions going forward.

4:43 And then the final components of our growth strategy are continuing to invest in our people. Really makes a difference in terms of, in front of the customer. We've got very strong supplier relationships, and we're looking to build and continue to develop those, particularly as we move into Europe. And then finally, as a as a as a corporate business, we have a very strong ESG underpinning. So we're very confident in the medium term outlook. So let's move right on to talk about our first half twenty twenty three results. And and when we, put reported our results for 2022, we flagged that we could see that 2023, was gonna be a challenging year. Clearly, for general economic reasons, there was a softening of demand. We could quite clearly see that operating cost increases were gonna come through, particularly energy and particularly labor costs, and then obviously, with what's happening in the banking sector, rising interest costs.

5:37 So I think what you see in these results is a demonstration of a very resilient business model because the performance that we've achieved is all being built around self help programs because clearly, you know, we've not had any help from the economy at all. And the self help programs that delivered the the profit growth and the sales growth in the first six months are, a, we've accelerated our acquisition program, completed two acquisitions already, hopefully, one more to go. We've also grown our new business both in the distribution business and the design and manufacturing business, and distribution of the new business there is up 24%. We've got increasing momentum in Europe, a million pounds more revenue coming from Europe, so an exit rate this year in Europe of around about 10,000,000 from almost a standing start. And then we've been able to offset most of the operating cost increases, the labor increases, the energy increases I mentioned earlier on, by improved buying, working with our suppliers to get far better buying prices than we previously had.

6:34 So I think the the the results that you see demonstrate a really resilient business model. And and just over the page, this is how we see the resilience of our business model. We we serve across a whole range of different sectors. As I mentioned, 75 of our business is industrial, 25% is retail, and 25% of retail is ecommerce. But even within that ecommerce sector, we're doing health and beauty, we're doing electronics, we're doing food, we're doing clothing. So, again, natural hedges. And, again, in the industrial market, we're doing automotive. We're doing aerospace.

7:10 We're doing medical. We're doing diagnostics. So, again, spread across a whole range of different sectors with natural hedges. Our biggest individual customer is less than one and half percent of our revenue. So, again, that that gives us a nice spread. And while we would hate to lose any customer even if our major customer was lost, it would not be life threatening for business. We are a pure protective packaging business. The majority of our competitors, the major competitors we have in The UK, are multiproduct distributors. We think protective packaging, three sixty five days a year, twenty four hours a day. We're not distracted by any other product ranges, and we've built up a range of knowledge and expertise, which is which is no one can compete within the industry. The way we differentiate ourselves is through a very strong value added proposition. I'll touch on that later in the presentation, but that really distinguishes us from from our competitors and allows us to demonstrate real value for customers, not only in terms of products and price, but also in terms of organic value components that are driven by that that packaging choice.

8:12 Supply relationships, very, very important to us, and we're well aligned and have got supplier relationships that go back thirty, forty years, and they're a key part of our, of our resilience. We have a strong performance driven culture. I mentioned in my intro that we devolve profit responsibility to as low a level as we can get it. So it's not just Ivan and I who have sleepless nights about the p and l. We make sure it's right down into the the guts of the business. And then our sales teams are all driven by gross margin performance, not by revenue performance. So, again, there's not the vanity of sales. It's actually about driving bottom line performance. And and finally, you know, majority of what we do is bespoke for the customer. In our distribution business, 70% of what we do is bespoke for their requirements. And the design and manufacture business, a 100% of the things that we do are bespoke.

9:00 So we're not just selling any old, you know, piece of packaging. We're we're trying as much as possible to develop and design packaging that's personalized for the customer. So and I think that resilience is the thing that underpins our first half performance. So with that as a little bit of background, I'll pass over to Ivor just to talk you through some of the specifics with regards to numbers. Thanks, Mitur. Good morning, everyone. This slide will just cover some of the key financial metrics of the business in the first half twenty twenty three. So just to look in along the top there, our revenue and profit metrics, we grew the business by 2%, in the first half of the year, and that is a combination of 6% improvement related

9:43 to the acquisitions we did. If you remember, we did the acquisition of Sutton Packaging in March this year and Gottlieb Packaging in April this year, and that's added 6% into our sales line. And we've seen weakness in the organic growth, so we've seen organic growth go back minus 4%. And a kind of breakdown by division is distribution's been flat year on year, and the manufacturing businesses moved forward 13% clearly with the benefit of the the Sutton's acquisition, as well as some some, good organic, performance. In terms of the profitability, we've moved the profitability forward by 13%, and that splits down 6% improvement within distribution, 36% improvement in manufacturing.

10:28 Clearly, a strong input from the acquisitions, but we have seen some organic improvement in profitability. So despite the weakness in sales and we've seen some inflation in operating costs, the strength of our gross margin has flowed through to a strong bottom line. In terms of the returns and balance sheet, we've maintained a strong return on capital employed, 18%, similar to last year. Our bank debt has nudged down from 3,400,000 at the end of, 2022 now to £3,300,000 and I'll cover the cash flows a bit more detail in a minute. And it's pleasing again to see our pension surplus move in a positive direction from £10,200,000 at the end of December to £12,800,000 at the end of June this year. And in terms of our EPS, our EPS growth has been 9%, not as significant as the profit growth of 13%, and that's really because of the increase in tax rate this year in The UK from 19% last year to 25% from the April 1 this year. And again, we've managed to increase our dividend, reflecting the improvement in profitability of our business from 0.9p to 0.94p.

11:34 Just moving on to the results of the business. Just want to cover off a couple of points in this slide. Peter will cover off some of the kind of sales features, as he delves down into the kind of individual business performances. But you'll notice from this slide that the gross margins improved significantly year on year, and that's a 1.9% improvement within the distribution business and a 3.7% improvement in manufacturing. And that's really helped to offset some of the incremental costs we've seen on our overheads. So the overhead increment year on year is broken down primarily acquisition related, so 2,200,000 of incremental costs related to the fact that we acquired Pacman in June last year, so we only had it for one month last year. We've had it for six months this year, and as I mentioned earlier, the two acquisitions we did this year. But, also, we've had inflationary increments on our employee costs and energy costs. So this time last year, if you look at our energy costs, we spent £500,000 in the first half of last year. That's more than doubled to £1,000,000 the first half of this year. And we've also seen inflation in employee costs. The wage increase that we gave our staff at the beginning of the year, our lower paid staff were paid 8% rise, going down to three percent for the higher paid. It So was a blend of around six to 7%, and we've seen that flowing through our employee cost base. However, that's been offset partly by the fact that we've used a lot less temporary staff through the course of the first half of the year, reflecting the the lower volumes that we've seen in the business.

13:05 Just moving on to the cash flows. As I described earlier, we've actually improved the the the net debt position by a 100,000 in the first half of the year, and that's really down to a strong, inflow from the operations of the business. You'll notice the working capital part of the reason the working capital has been so strong in the first half of the year is good management of working capital, but also an unwinding of working capital as as we've seen lower volumes towards the the half year compared towards the full year last year. And you can see we spent quite a significant amount of money on acquisitions, and that 11,400,000 is broken down to 2,900,000 related to earn outs related to the GWP and Carter's acquisitions that we did two years ago. So they were on two year earn outs, and we've now made the final payouts.

13:55 Both provinces performing extremely well, and 8,500,000 is the initial payments that we made for the Suttles Suttons and Gottlieb acquisition earlier this year. Just for information, we have a further 2,500,000 outstanding on earn out for the Suttons acquisition, 1,250,000 from next year, and 1,250,000 in 2025. And we have 800,000 of air net opportunity in the Gottlieb acquisition, 250,000 next year, 550,000 in in two years' time. The capital expenditure, 1,300,000. The main capital expenditure we had this year was the opening of our Northern Innovation Lab. Peter will touch on that when he discusses the the packaging distribution business, but more than half of the the CapEx spend this year is on the opening and and and investment in the Northern Innovation Lab, which should give us some real benefits in terms of new business opportunities going forward.

14:49 So, a a positive, outlook, a positive, inflow of cash in the year despite the fact we've made significant investments in both acquisitions and and capital expenditure. So I'll pass back to Peter now to cover some of the detail around the individual business operations. Thanks, Ivan. So I'll talk first about the packaging distribution business, which is, you know, is our main business. And we talked about the the economic headwinds that we were facing, and we've been able to offset those headwinds by the benefit of the acquisitions, the Gottlieb acquisition this year and the Pacman acquisition just over twelve months ago.

15:25 In addition to that, we've done a really good job in accelerating our new business momentum. So our new business growth was 24% up on the same period a year ago. And we're also starting to benefit in terms of new business from our innovation lab, which I've touched on. So this is the second innovation lab that we have opened. This one is up in Hayward in the Northwest Of England, and it's really a place where we use it for customers to bring them in, to understand their business, to model their cost structure around packaging, and then send them away with a fully costed proposal and samples of products to allow them to evaluate and and and make decisions. So it's a key part of our new business growth platform, in 2023, has been the opening of the new innovation lab in the Northwest.

16:10 I mentioned about our gross margin performance, and because of the operating cost increases that we've been incurring, we work with our suppliers to actually negotiate better buying prices, and that's allowed us to more than offset, the increase in overhead costs. Two other things I just mentioned, net promoter score, I think most of you are familiar with. It's a sort of quite sophisticated customer service measure, customer loyalty measure, and you can see a dramatic improvement in net promoter score in in the period. The average for b two b companies is 25, so we're way above average. The top performers are, you know, in the in the, you know, seventies or eighties. So we're nudging some of the top performers, but I think it's it's demonstrating how effective the customers value what we do for them. And then the other numbers to sort of reference for you is our net margin, our our PBIT margin.

17:00 Currently 7.6%, up from 7.2%. I'm beginning to nudge the eight to 10%, which has always been our medium term target for the distribution business. If I just dig into the overhead costs in a little bit more detail, the key feature here is the employee cost, which I've just talked about, and we've been able to offset a big proportion of the inflationary wage increase that we gave by reducing our base of temp workers. And then at the same time, we've got utility cost increases. But both those major cost changes, we've been off to off able to offset by the improved gross margin through better supply negotiation. And on that point, in terms of the raw material pricing, what we've got here is a graph that shows you, the last couple of years in terms of how the two key raw material indices that decide what prices we buy at, how they've moved.

17:57 70% of our business is paper related, and 30% is polymer related. As you can see, we've seen a steep rise in both those, up to sort of middle of twenty twenty two, and then the prices have started to come down, partly market related, partly supply demand related. I think the key the important thing about this slide is that if you track these graphs back for probably ten years, the important measure is the stability of our gross margin. So whatever is happening with raw material prices upward or downward, we've got a a very demonstrable, effective track record of being able to translate raw material prices into selling prices to underpin a strong gross margin. Next slide just gives you I don't go through all the detail here. It's quite well populated, but just this is the agenda of the distribution business that we're working to.

18:49 Top right is important. We've got some new software programs we've introduced. Major one is around customer relationship management, and we're in the process of now beginning to see the benefits coming through from that. So that is, good news for us going forward in terms of our ability to engage more effectively with customers in terms of improved retention rates and improved product penetration rates. Bottom left hand corner, we're in the process of developing a new program to improve our online capability. In relative terms, we would argue our online

19:20 capability is not as strong as it should be. So, work going on there, investment plan for 2024 in terms of improving our online capability. And then bottom right hand corner, the the property footprint. As I mentioned, we've done our first site consolidation in Northwest, and we've got further site consolidations to go to actually streamline our property footprint consistent with our customer service metrics, but also to ensure that we are always in control and are able to sort of keep in keep our operating costs under control.

19:52 If I move on to design and manufacture, becoming an increasingly important part of the group, and is now sort of moving towards quite an important number in terms of 30% of the group profitability. Key thing to note here is a strong performance from the Sutton's acquisition that took place early on in the year. Very pleased with that

20:15 business acquisition. And then, again, we've got some really good new business momentum, some strong new business wins in h one twenty twenty three, which will help us in the end of 2023 and into 2024. I think most of you are aware that the design and manufacture business partners with the distribution business. They are a supplier too of specific products and specific solutions, and we're increasingly encouraging our distribution business, to use our design and manufacture facilities, as in house supplies to keep profitability in house, and we're making getting some good momentum in terms of that. And a similar action plan in terms of the agenda for the design and manufacture business going forward. Top right hand corner,

21:00 utilizing both GWP and Suttons for more in house supply opportunities. We have yet to evaluate the European opportunity for this business, sort of in the middle and the bottom bottom rank there, but we'll be doing some work going forward to see what opportunities there are to actually move this business into Europe, as part of our our underlying growth strategy. And then, as you know, we have done

21:23 couple of acquisitions in this space recently, and we see, further opportunities for acquisitions. We've got a good pipeline, and so hopefully more growth to come from our acquisition activity. I'm just moving over to acquisitions. I've got a slide in the pack just to give you a flavor of our acquisition history, typically doing two or three acquisitions per year. We have very strict acquisition criteria. We only target quality businesses. We're all too busy to spend our time fixing damaged businesses. We've got a strong pipeline in The UK, a strong pipeline in Europe. And the good thing is when we buy businesses and when we integrate businesses, typically around about half the the owner managers who thought they were planning to retire have decided to stay on with us, which is obviously, you know, an effective recommendation for the way we go go out about about buying and integrating the acquisitions that we make. So so more acquisitions to come, and and as I said, it's a key part of our growth strategy.

22:26 If I move quickly on to ESG, clearly, a a range of investors, this becomes an important part of their agenda, and we recognize that. The the key the key things that we've been focusing on are, firstly, reducing our own environmental footprint, the impact we're having on our operations have on the environment. And the major feature there is how do

22:50 we find a way of replacing 120 diesel trucks because they are the major carbon emissions that our business makes. So we've started off with a program a steady program introducing electric trucks. We've currently got five on the fleet. It's very early days, but certainly, the the feedback we're getting from both our staff, and and as importantly, our customers is very positive. So we will see how the technology develops, and and our objective at the end of the day is to find a way of replacing our our our diesel fleet of trucks. In terms of supporting our customers, I mentioned the Innovation Lab. The Innovation Lab becomes a fundamental tool in helping our customers and to help them, guide them, advise them, direct them on how they use packaging and how they use it, making sure they use the same old products, and they use as little of it as possible, but as much of it to ensure that the product that they are shipping is protected so they don't incur damage and all the c o two footprint increase that comes about damage and returns and so on and so forth. So we got an extremely good track record of working with our customers, and we would argue it's part of our key differentiation from our competitors as to how we work with our customers to support them in reducing their environmental footprint.

24:05 Clearly, I'll commend to our staff and the way we treat them from a health and safety point of view, from a training, development, communication point of view. You know, we would we've sort of been doing that, you know, even before ESG was invented. So we're very happy with the progress we're making, and we'll continue to drive forward in that area. And then finally, from a governance point of view, one of the key areas that we were concerned about was the diversity, particularly around the board, and we've now got a better balanced board with a more diverse board. So, again, making good progress in that area as well. So let me move back to Iva, and we'll talk through the the pension, and then I'll make some concluding remarks before we go into the q and a. Okay. This slide just gives you a wee bit more flavor for the movement in the the pension surplus.

24:51 As I said earlier, it's pleasing to see the surplus moved in a positive direction, and that's primarily driven by the fact that the discount rate has has increased from the end of last year from 4.8 to 5.3%, and that's reduced the liabilities. And that's matched by the movement in the liability driven investments. The liability driven investments are there to hedge any movements in inflation and bond yields, and that that's really doing the job that was made to do it. And we're getting the benefits of movements in the other assets, primarily equities, and also the fact that the company paid off over £600,000 into the scheme in the first half of this year first half of this year. So in terms of cash outflows going forward, the company's committed to paying a further 1,250,000 into the scheme between now, and April next year. We are going through the process of the a further final valuation now, which should complete for around about February next year, and I'd fully expect that the cash outflow from the company going forward will significantly reduce from its current levels.

25:55 This then just gives you a kind of breakdown of the assets, that are held in the the scheme. But what we will now be doing now, the the scheme is in surplus, and, really, the plan of action now is really to have the scheme self sufficient, going forward, and and looking at options for for buy in and buy out in the next kind of two to four years, we will gradually be moving that asset base away from the more volatile assets like equities to more stable assets like the multi asset credit fund we've got there. So you will see quite a movement in the assets as we go through the second half of the year, and that's really just to lock in the surplus we've got, and and be in a position that the pension scheme can be self sufficient. So you can see the right hand side in terms of the the pensioner base. It's a mature scheme.

26:45 We don't have any active members. The scheme is closed for, closed to future accrual last year,

26:50 and and and a majority of the the the scheme members are actually in pensioners at this stage. So, again, the scheme is well funded, in good shape, well be well managed, and really from a from an investor point of view, the important thing is the cash, withdrawal from the company is getting less going forward. Pass back to Peter just to give you a kind of summary of the presentation. Thanks, Ivan. So I guess the key takeaways from our our first half the half year results for 2023 are the challenger headwinds,

27:25 us sort of pivoting towards self help actions to offset those headwinds, and and really reflecting and demonstrating the resilience of our business model in terms of our sales performance and our and our profit performance, both both have grown. And in terms of the second half of the year, as part of the announcement with these results, we announced that our profit expectations for the full year were unchanged. The medium term outlook for the business is very strong. We're well funded. We've got healthy acquisition pipelines. We've got good organic growth momentum. So we feel that we're well set up for the remainder of this year and for the next three to five years. And and my final slide is just a sort of a refresh of the MACFARLANE business case. You know, we have simple, flexible, and resilient business model.

28:14 We've got two strongly focused operating companies, both of which sell a differentiated proposition to their target customers. Both businesses have good got good market position, strong players in both markets, but with significant growth potential. And, clearly, if you look at our high strike performance, we've got a track record of growth, and and and we've got a a plan for future growth. So thank you for your time this morning. We'll now move over to Q and A. Fantastic. Peter and Ivor, thank you very much indeed for the presentation. Ladies and gentlemen, do please continue to submit your questions using the Q and A tab just situated on the right hand corner of your screen. But just while the team take a few moments to review those questions submitted today, I'd like to remind you that recording of the presentation, with a copy of the slides and the published Q and A, can be accessed via your investor dashboard.

29:03 Peter, however, we have received a number of pre submitted questions from investors, I wanted to perhaps kick off the Q and A session with those, and we'll move on to any further ones we get live. One you have kind of covered off, but if there's any further to add, it reads as follows: Could you explain your growth plan, in particular, acquisition opportunities internationally?

29:20 Would you consider using higher debt leverage to achieve higher return on equity? Yes. Well, hopefully, in the presentation thanks for the question. Hopefully, in the presentation, we have described our growth plans. We have built up a strong pipeline in The UK, and we've been executing against that pipeline on a consistent basis. We've now got an equivalent pipeline in in Europe, and we're focusing on Scandinavia, Benelux countries, and Germany are our three target geographies. So we've got a similar strong pipeline there, and we're building up, doing the courtship with the acquisition targets.

29:58 And we are very, very positive about the opportunity to grow through acquisition both in The UK and in Europe. It's a key part of our strategy going forward in terms of our our growth our growth building blocks. I'll pass over to Ivor about the funding question. Yeah. I mean, as you know, we've got a 35,000,000 bike facility, and we're certainly not frightened to use that facility to do the right things. I mean, clearly, priorities in the business are to invest in the business for organic growth. We we clearly want to continue to pay a progressive dividend as the profits improve in the business. And, really, the third priority is really acquisitions. I mean, clearly, we've been successful with acquisitions over a a period of time, and we certainly want to continue that program going forward.

30:44 So, primarily, that's our focus. Clearly, if the business generates excess cash and we don't have those opportunities to invest, in acquisitions, then we clearly, we would look at other ways to return money back to shareholders.

30:58 And that's something that's always under consideration, by Peter, myself, and the and the rest of the board. Fantastic. Thank you very much indeed. I think this one's definitely for you, Peter. We all love Peter, so it'd be good to have some idea of how much longer he plans to stay in the job. Is there any succession plan in place? So, easy one to answer. I've got no plans to leave, and yes, the board is working on succession plans. Perfect. Thanks, Peter. You have touched on this again in the presentation. The question reads really as follows. The on the risk section, it says you have one freehold and 52 leased sites. This sounds like a rather inefficient use with a lot of small warehouses, presumably due to the various acquisitions you've made over the years. Would it be better to consolidate into fewer larger warehouses and automate processes instead

31:45 of operating out of numerous smaller warehouses? Yeah. I mean, as Peter described earlier, I mean, we've already started our site consolidation. We did one in the Northwest. The next one is planned for East Midlands. We were looking to consolidate, say, four sites into one larger site, near the East Midlands Airport. So the the plan going forward clearly is to move from some of the smaller sites to larger sites. Yeah. Right. I mean, part of the reason we've got lots of smaller sites is because of the acquisitions we've done over time. But probably, certainly, if you look at the number of lease sites we've got, we do have a number of leases where sites are very close together. So if you take our our our our site configuration over Hampton, for example, that's one operation. We've actually got four leases with sites that are very, close together and operate as one unit.

32:35 But yeah. No. And then the the the strategy for going forward is certainly to move move to larger, more efficient sites where it makes sense.

32:45 Clearly, the things we have to consider there is in the process of change. We have to absolutely minimize disruption to both employees, and customers, because otherwise, the benefits you get from the consolidation easily eaten up if you don't look after your customers and look after your employees in that transition. Yeah. Just to add to that, that that that's to me the the the key driver of our, property footprint is we need the property footprint to make sure that we can serve our customers effectively. In effect, our warehouses become our customer warehouses, so our proximity to customers is a key part of our of our DNA. So while, yes, we do recognize we have got opportunities for site consolidation, Unlikely in the near term, we'll move to a low single number digit sites number of sites. It'll be sites that are

33:39 there to support our customer base. Just a reminder, 90% of the orders we take today, we deliver tomorrow. So we've got very tight turnarounds, and that drives, in a way, the proximity to our to our customers' locations. That's fantastic. Thanks, Pete. Thanks, Oliver. Last one we've got here, a bit of a statementquestion. Could you please start reporting adjusted EPS stripping out amortization of acquired intangibles to give a true picture of your profitability and align with both your house brokers forecast and your peers? I mean, clearly, we'll take that into consideration. I mean, clearly, as a as a a business, we always want to give consistency of information to our investors year in, year out so that when they're looking back, they they can measure the business over a period of time.

34:25 You know, we do tend to try and avoid adjusted measures where possible. We do provide operating profit before amortization within our results, but that's the only alternative profit measure we use. But, clearly, we want to provide information to investors that are useful, So we will definitely take that under consideration. That's fantastic. That concludes the pre submitted questions. As you can see, we have had a number of questions throughout today's presentation. Thank you to all the investors for submitting those. Ivory, if I may perhaps just hand over to you, just click on that Q and A tab and start at the top and just where appropriate to, so read out the question or pass it to Peter and, give a response and I'll pick up from you at the end. So the first question we've got here is, you claim to be UK market leader, but what does that mean in terms of of market share?

35:12 So, I mean, it I'll answer that one. In terms of our market share today, in terms of what the the market that we operate within, which is the the defined market of protective packaging distribution, then we have SUCA somewhere between 2025%. If you look at the protective market as a whole, which is significantly larger when you bring in all the manufacturers into, then clearly our it's about six times less than that. But in terms of the pure market that we play in, the protective packaging distribution market, our market share is somewhere between 2025%. The second question I've got here is, can you give us some more detail on your acquisition criteria and about your post acquisition philosophy, please?

36:02 Yeah. Let me I'll pick that one up. So so what we do is we do a huge amount of desk research on acquisition targets. This is The UK and Europe. We build up knowledge from our supplier base, and we build up knowledge because particularly in The UK, a lot of the distributors that we are looking at and evaluating are also competitors, so we can get a judgment of how we're competing with them and how they're competing with us. And as I mentioned in my intro, we we only focus on quality of businesses, and quality to us is quality of returns, that they are added value distributors. They are doing more than product and price, and quality in terms of the culture, of how they operate and how they do business.

36:47 And, obviously, we pick up that because we know them as a as a competitor. So that's the the criteria we use. Alongside that, we look at some, you know, are where where are they located? Are they overlapping with us, or are they in areas that we're not very strong geographically? What is their product mix? Does their product mix overlap with us, or does it complement what we do? And then, also, then we look at their supplier base as well in terms of what are the opportunities in terms of supplier base overlap. So that that's all the the prework we do. We then engage, and we do all our acquisitions ourselves. So we we view it important that we, as the leaders in the business, we engage directly with potential sellers. So Ivan and I drive that program. And, you know, when we get to an an an agreed process and agreed program, we agree a value for the business.

37:43 And then, typically, we agree growth targets for the business as well, and we pay 70% of the agreed valuation upfront. And then the remaining 25, 30%, we pay on earn out basis over one or two years. Majority of the businesses we buy achieve the top end of their of their earn out, targets, which is which is obviously really good for them, and for us. In terms of, integration, we do soft integrations. So we start off looking at supplier synergies. We then start looking at back office synergies, and then we look at sales synergies, recognizing that for twelve, twenty four months, these these companies are in an earn out process. So we don't wanna do too much interference to, you know, avoid the risk of them potentially, you know, getting involved in that, you know, mess messing up their earn out. So soft integrations, careful integrations, key thing for us is keep the staff, keep the people.

38:44 Where there are big opportunities for cost savings, it tends integration cost savings, it tends to come where we can make property moves so we can move our business into the acquired company's property or the other way around. And and certainly, on some of the acquisitions, we're now able to do that. But, again, the priority is in doing that, make sure we keep the customers, make sure we keep the staff, make sure we keep the service. So I think, hopefully, that that covers off most of the, the points in that question. Thanks for the question. And just moving on to some questions on the market itself. Can you provide some color on your main customer sectors around market share and growth opportunities? And as the ecommerce sector stabilized, there is demand still following following the pandemic. Okay. I'll start with the second part of it.

39:30 We we're still seeing the ecommerce sector adjusting because, obviously, you know, during the COVID period, you know, we all had not much to do but press buttons on computers and buy stuff. Stores were closed, so so customers, you know, pivoted towards ecommerce. So the market is still going through some adjustment. So part of what we're seeing in in our first half year numbers is lower ecommerce revenue than previous, because of that spike that we saw during the COVID period. If we look at our ecommerce revenue pre COVID, we are 16% ahead. So in normalized terms, we're still growing. And if you look at the industry sectors, oh, sorry. If you look at ecommerce in terms of the total ecommerce industry, again, if you take out the spike, the I m IMRG stats show that the ecommerce industry, taking out the spike, the trend is continued growth, and and and there is expected to be continued growth going forward. So for MACFARLANE, ecommerce represents about 25% of our business, and and we see that, you know, about the right level in terms of the the blend and mix.

40:45 Within ecommerce, we've got no one dominant sector. As I say, we do a lot in the home furnishing sector. We do a lot in the electronics sector. We do a lot in the health and beauty sector. But within that 25%, there's no one sector that's more than 5% either. Yep. And in terms of the industrial markets, again, a a strong blend of sectors that we service, and it's part of our sort of sales strategy and our marketing strategy not to go get overweight of any one sector, so we've got these natural hedges. So the strong sectors for us in the industrial market, are aerospace, automotive, industrial consumables, electronics. And, again, you've not really got any one sector that's more than around about six or 7% of that industrial market either.

41:34 So, you know, back to that resilience story, the resilience we have is based on the fact that we're not overweight or overdependent on any one sector, either in industrial or in ecommerce. And and, yes, we still see ecommerce as a good place with growth credentials. Okay. Thanks, Peter. Just now one on gross margin. Can you expand on the drivers contributing to the gross margin improvement, and did you see this as sustainable? Good question. Two key points here, really. One is, we've got a very good as I mentioned in the presentation, we've got a very good track record of translating selling price selling price movements into it's our buying price movements into selling price movements, and that's been proven and tested over a long term period of time. So we're very happy with the model that we use to ensure that we can translate buying price into selling prices.

42:29 What we're seeing at the moment in terms of trends is obviously softer raw material prices. So you know, and we're benefiting from that in terms of our buying prices, and then we're working with our customers to ensure that we translate those buying prices into selling prices, but are able to sustain our cash gross margin and, at the same time, pay for the increased labor costs that we're incurring and the increased energy costs we're we're incurring. So from our point of view, we see the gross margin as sustainable. It always sort of nips around, you know, half a percent, 1%, but that mid 30 gross margin in distribution, early forties to high to the mid forties in, in manufacturing, we we see those as sustainable levels.

43:17 And relative to our competition, you know, they're not out of line with any of our major competitors in either of those sectors. Okay. Another one here just on the the market rating. Your stock market rating appears far too low, nine times PR next year Given track record and opportunities, is this unfair rating hindered you from making larger acquisitions? Sorry. Is that Yeah. Read it. So your stock market rating appears far too low. Has this unfair rating hindered you from making larger acquisitions? I mean, the stock market rating is the stock market rating. You know, we just continue to drive the performance of the business, and the stock market will judge accordingly. Has it impacted our ability to make larger acquisitions? No.

44:07 The acquisitions that we make, we we wanna make sure they're within our operating bandwidth, and I described the acquisition criteria previously. We're not afraid of making larger acquisitions, but it's just that the opportunities that we're working on at the moment and and have delivered, executed previously are in what we would call our sweet spot. And when you look at some of the larger companies, they fall out of our criteria in terms of maybe performance or culture or, you know, the some of the of the hard numbers and the soft things that we use for criteria. Here's one in the pension scheme. It's positive see a pension moving in moving in the right direction. Can you talk more about the medium term plan for the pension scheme? I I think I covered that off earlier. I think the the the short term is obviously to get the scheme to be self sufficient.

44:57 So it's not drawing on edge additional funds from the from the business. But, obviously, in the medium term, it's moving and investigating opportunities for buy in and buyout. And given the well funded position of the scheme at the moment, then we're certainly in a a good position to to investigate that properly. Another one here, just one on volumes. Are you concerned about volume trends? It looks like volumes are down mid single digit. How do you know you're not losing market share and that the volume will come back? Yeah. Good question. We don't see ourselves as as losing market share. We see the volume decline consistent with the the industry metrics that we have access to.

45:44 The very fact that we are new businesses 24% up versus the previous year demonstrates that we can need to continue to grow organically. And and as and as I mentioned earlier on, clearly, the acquisition program we've got will allow us to increase our growing our market share. So, good question, but, no, we don't see the, the volume decline being about market share. It's more to do with what we see happening in the broader market. By the way, do you expect the European business to have a similar EBIT margin than The UK business from 2024 onward, or is it a midterm target? What could this split between distribution manufacturing be in five to ten years, and should we expect most of the future acquisitions to be in the manufacturing segment?

46:33 Start with the last question first. So, no. We we we see, you know, our major business is packaging distribution, and so the balance of acquisitions will probably be slightly biased towards packaging distribution, more so than manufacturing. Do we see manufacturing acquisitions as a good opportunity? Yes. We do. Do we see the balance between distribution manufacturing, changing materially? I don't think we'll see it changing materially. You know, the balance at the moment is probably slightly overbalanced towards distribution, maybe we'd slightly nudge manufacturing up a little bit, but it's not gonna be a a material change. And which one did I miss? European margins. European margins. Yeah. The work we've done so far is is indicating that net margins in Europe from European distributors are not materially different from the margins that we're seeing in The UK.

47:31 So we don't see dynamics currently that would indicate that net margins in Europe should be materially different from those that we we see in The UK. One here related to the Gottlieb acquisition. Gottlieb appears to be a fairly generic patch and distributor about higher margins than the rest of MACFARLANE? Was the company able to learn things from Gottlieb that we're able to implement elsewhere to improve margins? Yeah. Good question. When you look at our business, in broad terms into distribution, we've got 60% of our business, which is in larger customers, our annual spend, a 100,000 plus. We've then got about 30% of our spend in in medium sized customers, so the 10,200, and then we've got, you know, about 10% of our business in in customers who spend less than 10,000.

48:27 The the benefit that we have in terms of margin mix is clearly, the larger customers, the margins there tend to be not as strong, while the the the smaller customers, the margin tends to be a little bit higher. And what we've got in a in a company like Gottlieb is a really good family owned local distributor operating in that local customer sector. So that's the reason why they're able to deliver the sorts of margins because they don't focus on the bigger, larger national customers. But, yes, there are things that we learn from all our acquisitions. And, certainly, the way GOPLANE go about working with customers and developing customers in that local sec in the local sector is certainly something we can benefit from. But but all the acquisitions that we make, GROUP PLC included, we we start with the principle of these are successful businesses.

49:18 They're doing well. What can they teach us, and and what can we use in their business into our business to improve our performance? Okay. With the current valuation of MACFARLANE shares only slightly above the price you tend to buy companies at, isn't there an argument for diverting funds from the dividend and acquisitions towards buyback. But I think I think we've covered that. I mean, primarily, our focus would be in developing the business both organically and through acquisition. You are correct in terms of the valuation at the moment. You know, excluding IFRS 16, we're probably up towards the high six compared to acquisitions we're doing between five and six. There is there is a difference, but not not significant.

50:07 So it's certainly something that we keep under consideration, but, clearly, our preference would be to invest in the business, both in terms of organic growth and acquisition and, obviously, use buybacks where we've got an excess cash position. But we do we do we do understand that investors more and more are looking at this, and it's certainly something we we're we're taking under consideration. Trying to see if there's yeah. How does the minus 4% organic growth breakdown between volume decline and price increase? The the majority of that is is volume. We're not yet we we we began to see as we exited h one, a degree of price inflation coming through.

50:59 But in in h in h one as presented, it's predominantly a volume effect more than a price effect. When on the returns, so, historically, we've generated about, I think it says, 40 return on invested capital over the past five years. Do you expect to generate these types of returns going forward? What are the drivers to generate these returns, and what are the outlook for these drivers? I mean, I suppose the the key driver is is a relatively capital light business. It doesn't require significant amounts of capital expenditure. The operating cash flows are very strong, and I don't see really going forward that changing much over the next few years. Clearly, we we have to continue to invest in the business, on the manufacturing side. If you think of our manufacturing side, it's it's a large degree of assembly work, with some automation.

51:57 So it's it's it's more capital intensive than distribution, but not maybe it's not a significantly capital intensive business. And, clearly, the distribution business is very capital like all of our properties and all of our vehicles, are leased, so it doesn't require significant amounts of of of capital expenditure. So I think the main things are are maintaining the the margins in the business, managing the working capital well, which which which I think we do a good job on. And, obviously, you know, it's it's relatively capital light, and I don't I don't see these factors changing significantly going forward. Let's see if I can go back and see.

52:42 There's one question. Is there a Forex issue? I'm not quite sure I understand that question, to be fair, but, we don't have a huge amount of foreign foreign exchange exposure. Most of our businesses operate overseas, operate within those geographies. So there's not a lot of crossover of currency, and there's certainly not a significant impact on our profitability in our sales line because of movements in forex. So, if I haven't answered that question well, please please obviously elaborate on the the concern that you may have in that particular area. A few on gross margin, which I think we've covered. Obviously, one refer referring to our new managing director of the distribution business.

53:31 Just simple question. Does that free up time for you, Peter? Yeah. It does. Yeah. He's taking a lot of my workload. No. It just strengthens our our leadership team. That that's the most important thing. And, you know, he is a real true professional in the market having worked at Sealair, for a long period of time, and more recently working with within the bundled protective packaging business. So he's known to us. I've been trying to bring him into the business for quite a long period of time now, and we finally got him on board. And and, certainly, we're very pleased to have him on board, and and he and he's, you know, his his contribution already has been has been important to us. So, yeah, it just strengthens the team to underpin and support our growth plans going forward.

54:20 Let's see if I've missed any kind of questions that we may be not covered. There's one here. So the the company doesn't give like for like sales figures in the results announcement. Is this not a key information gap for an acquisitive business? Do I understand that question? I think I think the question, Peter, is, you know, breaking down the the growth year on year between acquisition and the organic sales. Okay. And, we'd we'd probably give a lot more detail in our annual report, probably in our certainly in our a our interim report. If you go to the management's report side, we we do disclose the the growth impact of the Pac Man and Gottlieb acquisition and distribution.

55:15 But I I suppose just to be clear on that for everyone, if you look at the revenue on distribution, growth of 500,000, 6,300,000 of that was the Pacman and Gottlieb acquisition, which we set out in the management report and a 5,800,000 decline on the organic sites. That's roughly about 4.8%. And as Peter described, the impact in the first half of the year was was was primarily volume with a small amount of increment and price inflation. Again, going to manufacturing business, the manufacturing business was broadly flat year on year organically, and Sutton's contributed 2,500,000 of extra sales to the business. And and we had clearly, the acquisition was a key part of the profit growth, but we actually had growth organically of around 200,000 as well. So, again, I think as I explained earlier, we have had weakening sales. We have had inflation in in operating costs, but I think with the strength of the gross margin, we've made a some offset to that to allow us to grow the profitability organically around about 200,000.

56:23 So hope hopefully, that covers covers that question. Yeah. And I and I think the only thing I would add is it it's always a balance between making sure we give, investors enough information to to make decisions on, but also not to give too much information that is advantageous to our our competitors. So, you know, we we we recognize both those two things in trying to share information with our investor community. Just one maybe final question. We're just about running out of time. As executives directors, what do you each see as the key responsibilities of your respective roles? How do you meet those responsibilities? Wow. That's a big question. I I could take the rest of the day. Yeah. I mean I mean, at the end of the day, what, as an executive team, we all have individual sort of responsibilities, but the group is there to ensure we have the right strategy and agree that strategy with the board, then ensure that we've got the right, plans to execute against that strategy, make sure we've got the right measures in to measure us in terms of the execution of those plans.

57:36 And then underpinning all that is, you know, making sure we've got the right people in place with the right reward systems in place and the right career objectives in place. And and in reality, that's what we spend most of our time doing, aligning those strategic, executional, and operational plans and ensuring that we've got the right people properly motivated to to deliver to deliver on those plans. You want know, to add anything to that? Yeah. I mean, clearly, sustainability is important to us, going forward to make sure what we are doing is done in a sustainable way in terms of the products we offer our customers and the solutions we offer our customers and also taking control of the things that we can influence internally within our business. And and I suppose, clearly, my role is very much about the financial controls around the business and the governance around the business to ensure that the numbers are delivered on a sustainable way, and to make sure that, you know, there there's proper governance and controls around those numbers that we the investors see.

58:41 That's fantastic. Look, thank you guys for taking so many questions today. That's great. And of course, any further questions that do come through, the team will be able to review those. We're published responses where appropriate to do so on the Investor Me company platform. Peter, just before redirecting investors to provide you with their feedback, which I is particularly important to you and your team, if you do have any final closing comments. Yes. Thank you. Firstly, Ben, thank you for your support and thank you for your time today. Key themes that we've tried to share with you is firstly resilience. Secondly, that we're a a very focused business in terms of the markets that we support and serve, that we've got really good market positions, that we've got significant growth potential both organically and through acquisition.

59:29 And if you look at our history, we've demonstrated, you know, very good success. I know history is, you know, you can't be sure of history going forward, but we're very confident that if we execute our plans as we've previously done, we can continue to sustain the success and the growth and profitability of the MACFARLANE GROUP. That's fantastic. Peter, Ivor, thank you indeed for updating investors today. Now please ask investors not to close the session. You should be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete and that's greatly valued by the company. On behalf of the management team at MACFARLANE GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.