Macfarlane Group (LSE:MACF) — Full Year Results

0:00 Good morning, and welcome to the MACFARLANE GROUP PLC Full Year Results Investor Presentation. At this recorded meeting, investors will be in listen only mode. Questions are encouraged, could be submitted at 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, type your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Peter Axon, CEO. Good morning, sir.

0:31 Good morning, everybody, and thank you for joining us. We announced our results for 2023 last week, and our objective today is to talk you through the results and put some color behind the numbers. And I'm joined this morning by our group CFO,

0:50 In terms of the agenda for the presentation, I'll make some brief introductory remarks to sort of set the scene. Ivor will then talk you through the the key metrics. I will then come back on and talk you through the performance of the individual business units. I will touch on the pension scheme, and then we'll conclude and move to Q and A. In terms of the performance in 2023, as we exited 2022, we always knew 2023 was gonna be a difficult year. We could see that demand was gonna be weak, and we were also recognizing that cost inflation was gonna gonna come through the business. So our plan for 2023 was to work on a self help program that's going to offset the worst of cost inflation and and the worst of the weak demand. And what we've achieved in 2023 is good new business growth, good sales momentum in Europe, an improvement in gross margin through more effective sourcing.

1:47 We've accelerated our acquisition program with three acquisitions during the year, and we've also done a pretty effective job in controlling costs. So I think the profit growth we've achieved in 2023 reflects a good reaction to difficult and challenging market conditions and really reflects on the resilience of the MACFARLANE GROUP business model. And if you just as a reminder, really, you know, what is it about MACFARLANE that creates such resilience? There's really six key features. The first one is we've got a huge breadth of markets and customer serve. Our largest customer is is less than one and half percent of revenue. So we we we got natural hedges within our customer base, particularly during weak demand times like this. The second key feature on resilience is that all we do is is live and breathe protective packaging, and, you know, we we obviously specialize and focus on protective packaging, and and three sixty five days, twenty four hours a day, that's our business.

2:46 The third element is the value added proposition. We are doing far more than selling products and price. We're gen generally and genuinely selling an added value proposition. I think a number of you are aware of the Significant Six program and the packaging optimizer, which helps customers lower cost, particularly in this environment.

3:05 Critical to us, is our supplier base, and we've got a range of long established suppliers who've been operating with us, major protective packaging manufacturers who've been working with us for over twenty five years, and they they they help us with with our resilience. Throughout the business, as you know, we're a decentralized business with lots of different profit centers, lots of GMs managing their own p and l's, and that performance driven culture means a strong local profit ownership. So it's not just either an eye you have to worry about the p and l. And then finally, bottom right hand corner there, we've got a bespoke product and service range. 70% of what we sell in distribution is bespoke to the customer, and in our manufacturing business, every single thing that we sell to our customers is bespoke to them. And so again, it's not just chilling out any old box to any old customer. Bespoke is a key part of our of our business model.

3:59 So that's the Resilience story, and I'll hand over to Ivor now just to talk you through the key metrics, and then I'll come back and talk to you about the individual business performances. Thank you, Peter. Just going to cover off some of the KPIs for the year. As you can see up at the kind of top row in terms of the performance of the business, we had revenue decline of 3% in a year and that roughly splits between 5% positive contribution from acquisitions. We made three acquisitions in a year, Suttons and B and B within our manufacturing business, and Gottlieb within our distribution business. And, we had the full year benefit of the Pacman business that we acquired in 2022. So 5% contribution from those acquisitions, and we've seen a a decline in organic, side of the business by minus 8%.

4:47 And that's mainly volume driven, albeit we saw price deflation in the second half of the year. As you look at our kind of two key profit measures, adjusted profit before tax, adjusted operating profit, we've actually seen 10% growth in our profitability. And as as Peter described earlier, clearly, despite the fact we've seen weak demand in the in the revenue line, and we've seen inflation predominantly in employee costs and energy costs, we've offset that with some growth in our gross margins. And, clearly, we've had strong input from the acquisitions. So in terms of the operating profit, you know, we've had a 13% improvement in profitability contributed by the acquisitions, and we've had a slight decline of minus 3% on organic profitability. Just to to explain the kind of key adjustments that we make to get to our kind of statutory measures, amortization of intangibles, which were 4,000,000 in 2023 versus 3,600,000 in 2022, and we have adjustments for deferred consideration adjustments.

5:49 That was nil in 2022 and 1,500,000 in 2023. The the main reason for that was when we acquired the Pacman business in 2022, At that time, just given the performance of the business at the time we bought the business, we didn't anticipate that the business would actually hit its earn out targets. Pleasingly, the business has actually performed far better than we anticipated. And given the performance of the business, that that business will now hit hit its earn out targets, and we're actually now taking that 1,500,000 charge through the profit and loss account. So it's a kind of a cost kind of capital cost that we're having to take through the p and l. So that's the kind of two key adjustments we made between adjusted profit and statutory profit. In terms of the balance sheet, clearly, positive thing is that we're we're in the net funds at the end of the year, and that's that that cash inflow of 4,000,000 during the year, and I'll cover off some detail around the cash flow later.

6:44 And that's against that bank facility of 35,000,000. So we've got plenty of firepower to be able to continue investing in the business and also do further acquisitions. In terms of the pension surplus, there's been a marginal movement in that in the year, 10,200,000 down to 9.9. I think the pleasing thing to report on the pensions, it's been well managed, and we're now in a position where, going forward, we've just completed the the recent the triennial valuation, which means that over the next triennial period, the next three years, there's not a requirement for the company to put further funds into the scheme. So the scheme is broadly self sufficient at the moment. If you if you remember, we've been putting 1,250,000 in per annum over the last three years, so that's certainly a 1,250,000 cash saving to the business over the next three year period.

7:32 In terms of the diluted EPS, that's down 5%. Two reasons for that. One, the 1,500,000 charge for deferred consideration I explained earlier, and also the fact that the tax rate has changed. Clearly, we're paying 19% corporation tax in 2022, and the blended corporation tax for 2023 was 23 and a half percent. If you kind of reverse those two factors out, we would have seen growth in EPS. And again, pleasing to report given the profit improvement in the business, we've actually managed to improve the dividend by 5%. So pleasing to be able to return more funds to shareholders.

8:14 Just moving on to some of the labor on the kind of income statement. Peter will cover the kind of revenue line in more detail when he discusses the the individual, businesses. But I just want to pick out clearly, you can see, quite a step forward in our gross margin, and that's both within the distribution business and the manufacturing business. So within the distribution business, we've improved our gross margins from just over 32% to just under 36%, during 2023, and on the manufacturing business, just under 42% to around 44 and a half percent. So both businesses have moved the gross margins forward. And then it's important to to describe that one of the reasons for that is clearly our operating expenses have been increasing. So if you look at the increase in our operating expenses of 5,100,000, 3,900,000 of that is the the impact of the acquisitions coming in, but 1,600,000 of that is increases in employee costs. I think if you remember this thing last year, we had a a wage inflation of around about 7% for employees through the year, and clear that has increased our operating expenses.

9:19 And the other factor is our utility costs have gone up from 1,900,000 to 1 1,200,000, sorry, to 1,900,000. So we're a quick step forward in terms of energy costs. So it's important to to look at that gross margin in the context of the the fact that we're we're trying to cover the inflationary impacts of our our, on our cost base. Again, you can see on the amortization, the deferred consideration impact, on the amortization costs, and that that really probably is the kind of key features I want to pull out on the the income statement. In terms of cash flow, it's very positive cash flows in the in the year. We we generated £4,000,000 of of cash. And as I said earlier, we're in net funds at end of the year. And clearly, you can see a big impact of that is the cash inflow from working capital.

10:06 About 2,000,000 of that working capital inflow is down to efficiency gains, So that's reducing our stock days, reducing our debtors days, and that has been good management by by the teams across the business. And 2,600,000 of that is due to kind of unwinding as volumes have decreased in the marketplace. We've actually pulled our working capital down in line with that. So a a positive cash inflow from working capital, and that's allowed us to invest in the business both from a CapEx point of view. We spent 2,100,000 in a year. I suppose the biggest single investment that we made is opening the innovation lab, and Peter will discuss that in a wee bit more detail in the North Of England, and that was, in a £1,200,000 investment. And, clearly, that that's really to drive our new business program forward.

10:53 And the acquisitions, 14,500,000 of acquisitions, 2,900,000 of that was paying earn outs for prior year acquisitions, and the balance was related to the three acquisitions I referred to earlier, Sutton, Gottlieb, and B and D. Just to get an indication of cash flows going forward, we anticipate earn out payments in the current year of about 3,600,000 related to prior acquisitions and a further 600,000 in May 2025.

11:23 The next slide really just covers capital allocation priorities. Clearly, the first priority of the group has is really focusing on driving the organic growth of the business and investing in capital expenditure, both essential capital expenditure. So those would be items like racking out warehouses, replacing machines within our manufacturing business, but also value adding CapEx. So we've we've in the current year, we we put solar panels into one of our manufacturing sites. And as I mentioned earlier, the the innovation lab in the North. So clearly, first priorities are are to invest in the business for organic growth. The second priority is earnings enhancing acquisitions. You can see certainly our track record over the last ten years. We've been doing two to three acquisitions per year. And, we made further acquisitions, in 2023.

12:14 And, they're all earnings enhancing, acquisitions. And and the third priority is continuing to pay a kind of sustainable and progressive dividend back to shareholders. We try and work the dividend cover of around about 2.5 to 2.6. And as I mentioned earlier, we've improved our dividend from 2022 to 2023 by 5%. And if we have surplus cash and, we have no short or medium term investment opportunities either in terms of investing in the business or, as I said earlier, earnings in handicapped positions, we would look to return money back to our shareholders through either share buybacks or enhanced dividends. Currently, we don't have the authority to buy back shares, but we'll be going to shareholders at the AGM in May, to seek authority for that buyback so that we've got that available now, Armory. And it's important to emphasize that, you know, we don't have any immediate plans to do any share buybacks because we believe we've got opportunities to invest in the business, but we believe we should have that as a as a an available option to us.

13:18 This slide again just shows the kind of progression over a period of time. Obviously, you can see the nudge down in EPS at 2023 as explained earlier. That's down to kind of changes in tax rate and the 1,500,000 charge we took for the deferred consideration adjustment. Again, pleasing to see that we've moved the the the overall profitability forward, and that's now fourteen years of consecutive improvement of profitability. And I think given the tough conditions we had last year, I think that's a a fairly respectable, performance. I'll now pass back to Peter who can discuss in detail a wee bit more about the the divisional performance between the the distribution business and manufacturing. Thank you, Iva. So as you're aware, we have two divisions within the business, all in protective packaging.

14:03 The main division is packaging distribution, where we're buying and selling protective packaging materials, and then we have a a very specialist design and manufacture division, which I'll talk about after this. So in terms of the performance of packaging distribution in '23, sales were down by around just under 6%, and that's a mixture of 9% base business decline, the majority of which was volume, and I'll touch on that in a moment. And then we benefited from acquisitions that that that improved revenue by 3.2%. The the good things in revenue that happened during the year are the acquisitions that we made historically and acquisition that we made in 2023. Gottlieb, both of those are performing really well and have performed very well. So good momentum in terms of the acquisitions.

14:52 We've got very good progress in our follow the customer program in Europe where we grew revenue by 20% versus the previous year. As you know, we're a sort of startup in Europe, so we're getting fast revenue growth there.

15:04 We've also improved our net promoter score, which is effectively our customer service measure from 50 to 60. Just for your information, the average for b to b to companies is 25, so we're we're way above the average, which is extremely encouraging. And then as I've touched on, during the year, we invested in our second innovation lab at our new RDC in Hayward up North Of Manchester, and that's beginning to benefit us in terms of new business growth in the North Of England. We've had nine months benefit in 2023. Clearly, we'll get a full year benefit in 2024. And clearly, as I ever touched on in his review of the group, one of the key standout numbers in terms of our 2023 performance in distribution was the improvement in gross margin,

15:48 and and that was primarily down to the fact that we did a far better job in sourcing from our suppliers through effective negotiation and also some supply switching during the year. If we flip to the next slide.

16:05 As you know, our businesses, we're buying products which are either linked to the paper index or the polymer index. In round numbers, paper about 70% of our business, polymer about 30% of our business. And as you can see, these these these lines are very volatile lines. They're global commodities, which sort of move around on an ongoing basis. But what we've seen over the last two years is obviously a steep incline in in terms of both commodities, but particularly paper up to really the end of twenty twenty two. And then what we've seen since then is is a is a decline. Typically, what we're doing is recovering these prices. If when prices are going up, we tend to slightly under recover. When prices are going down, we slightly over recover, and that that's just the the way the business works. But we've been able to demonstrate over a long period of time is a consistent gross margin performance. We're very effective at managing the transition between buying prices and selling prices.

17:03 I mentioned price volume, and and this is the the sort of the the pack distribution performance 2322. To be blunt, it's mainly volume that has impacted our our decline in 2023 versus 2022. A little bit of price, but not very much, but price became a factor in the second half of the year. So as we go into 2024, we're probably gonna see, price deflation being a little bit more of a factor in terms of our revenue line. And as you can see in the schedule, in relative terms,

17:34 you know, retail our ecommerce retail business, which about 20% revenue, is slightly weaker than our in our industrial business. Just moving on to the cost base. Again, I haven't talked about it in macro terms, but if you dial into the the details of packing distribution cost base, you see the major change we've we've had in the year in terms of the base business is is wage inflation in response to, obviously, you know, market pressures, and that's gone up quite significantly and and was 13.6% revenue. It's now 15% revenue. We've been able to flex transport costs effectively in line with demand, so that's encouraging. Utility costs still going up but beginning to actually actually soften as we we exit the year and IT costs broadly flat with the previous year.

18:25 And then the other key part of our cost increase during the year was obviously the cost we inherited from the acquisitions.

18:35 Acquisition, as you're all aware, is a key part of our strategy to complement organic growth. And what you have on the schedule is our recent history of acquisitions with the the most recent acquisition being being Gottweed, which we completed first quarter twenty twenty three. And as you can see, I won't go through the slide in all the detail, but you see we operate in the tight multiples. We only buy quality businesses, and, typically, what we're doing is buying privately owned businesses where you've got owners looking to retire. And and if you look across that list, that tends to be the the pattern that we're working working towards. And we've got a very strong pipeline of acquisitions both in distribution and manufacturing, which I'll touch on later. And we're very confident that we will be, you know, completing more acquisitions during this year.

19:23 If we look at our key priorities for the distribution business going forward, Again, I won't go through all the components of this slide, but bottom left hand corner, we recognize that in terms of our online capability, we've probably fallen behind there. And so we've got a major program on at the moment to actually, update and relaunch our website. Bottom right hand corner, as I'm facing the screen, we've got another property consolidation to take place in 2024, which is in the East Midlands where we're consolidating four sites into one in the Nottingham in the Nottingham area. And then we're also relocating our our NDC. We about 10% of our purchases are sourced from outside The UK, and we typically bring those into our NDC and then redistribute them for for cost benefit reasons.

20:14 But we're able to get out to the lease for our NDC and relocate it to one of our sites so that there's there's cost savings that will apply from that. The other key thing in the middle of that slide, the sourcing comment. Clearly, we've got very strong, long standing relationships with key suppliers, but also as our in house manufacturing division grows, we've got quite a big opportunity to do more in house sourcing for our manufacturing division. So you'll see that as a as a key feature of our business going forward in the next two to three years. Currently, we've got about 13% of our manufacturing revenue, which is sold to distribution. We're looking to get that up to around about 20 to 22% over the next over the next couple of years, and we've got plans which are being implemented as we speak to ensure that it's executed. That's basically keeping profit in house rather than giving giving it to external suppliers.

21:04 So those are probably and the only other thing is, you know, just to to to recount my comment on acquisitions of both in The UK and in Europe, We've got pipelines, good quality pipelines in in in both both geographies and, obviously, more news on that as the year unfolds. If we move on to our our manufacturing division, which is is a growing part of the group, you know, this last year, it was, you know, over 40,000,000. We're making good progress here, a mixture of organic growth and also acquisition growth. We made two acquisitions during the year, the acquisition of Suttons that Ivor touched on middle of the year, and then we also acquired a business called B and D towards the end of year final quarter.

21:50 Both those are performing really well. It's early days with B and D, but it started off really well, and Sutton's is a is a really strong business that's doing well. And I touched on the partnership with distribution. We see that as a big opportunity. And as I say, from 13%, we'd expect that percentage of revenue to get up to 20% plus going forward. We did see more of an overhead increase in this business partly down to the acquisitions, but also shown in employee costs. And and the manufacturing business, by the very nature of the of it, actually is a big consumer of energy. So hence, they've they've been been impacted by higher energy costs. But we expect those to ease, as I mentioned, going into 2425.

22:32 Again, just touching on the acquisitions. We've done three acquisitions in this space in the last couple of years. GWP was our first acquisition in '21, and since then, we've done Suttons and BND back in 2023. As I say, in this business, there is a good pipeline. Profile is not dissimilar in terms of types of businesses, privately owned specialist design and manufacturing businesses, you know, within a range of 10 to 20,000,000 in revenue. And as I say, we've got a good pipeline and, hopefully, good news on the acquisition front in this sector of our business as we move forward into as we move forward during 2024. And, again, a slide, over the page on the action plan. As you're aware, our targeted growth for new business is medical electronics, aerospace, and and more increasingly spaced with the acquisition of B and D. And and what we're doing here is we're providing unique packaging solutions for specific customer requirements of very valuable or very fragile, equipment or components, and, we've got a very successful track record in terms of customer retention. The customers in this business are extremely are extremely sticky.

23:44 We've got some integration opportunities, as we sort of, start working on the acquisitions. There's some integration opportunities that we will, execute during 2024, particularly around B and D, which will generate some some savings. And then I've talked about the in house supply opportunity with, the work to do, with packaging distribution. Just moving on from the individual business performances, just a slide on ESG. And and, again, I won't go through all the points on this slide, but we made good progress in terms of electric vehicles. In terms of our our own carbon footprint, our major issue is to do with the fact that we run 120 diesel vehicles, and we're starting a transition of moving towards electric vehicles.

24:33 We'll have nine by the end of this year. They are more expensive than the diesel vehicles to operate and to and to lease, but we are moving in that direction on the basis that similar to electric cars over time, the the pricing of these vehicles will, you know, equalize, and and they will become competitive with diesel vehicles. So good progress there. And as I mentioned, part of the role of the innovation labs is to work with our customers to help them

25:04 improve their sustainability through the way they use packaging and the types of packaging that that they buy. And the investment in the Northern Innovation Lab, probably half the visit we had during 2023. The people came in to talk about sustainability and how we could help them from a sustainability point of view. So the innovation labs are a key part of our selling proposition and will continue to be so. And then the final point on this page, as you know, there's lots of people rating companies, in this space, and we achieved a gold award under the EcoVadis sustainability rating during the year. So let me pause there, and I'll pass over to Ivor to cover the pension surplus, and then I'll make finalize with some concluding remarks.

25:50 Yeah. I mean, I think the key messages from the the pension point of view is it's been well managed. We remain in surplus. As I said earlier, the the most recent channel valuation means that over the next channel, there's no requirement for former company contributions so that from a cash point of view saves the company 1,250,000 per annum. We are, you know, working with trustees and advisers to to to have this scheme in in a position to be prepared for buyout. But, clearly, our initial goal and aim is to make sure the pension scheme is self sufficient from a cash point of view, and we're pretty much there. And, clearly, the buyer is something that's an option for us in the future depending on the kind of pricing in the marketplace, but certainly it's been well managed. And the only other thing you would notice is quite a change in the kind of asset allocation, and that really fundamentally that's to reduce volatility and increase liquidity.

26:43 And, again, that makes sure that we're in a good place if we want to to to sell the scheme to the insurance company at some point in the future, the scheme is in a position that we can do that. So I'll pass back to Peter just for some kind of concluding remarks. Thanks, Ivan. So just some sort of key conclusions. I think the the description of 2023 from our point of view is that, you know, we the business has demonstrated, you know, high level resilience. We always knew the year the year was gonna be difficult from a demand point of view, and and so it's, so it's flowed that way. And so the actions that we've taken around new business, around Europe, around accelerating our acquisition program, the investment of the iLab to support our

27:26 new business, and the control of operating costs in terms of offsetting inflation by price input management, I've I've I've really all been very effective in delivering another year of profit growth for the group. As I mentioned earlier on, we've made good progress against our ESG objectives. And as we look towards 2024, we've obviously got an early sighter with our numbers for January and February, and the shape of 2024 looks very much like it was in 2023. The year has started with demand, but margin is strong, costs are uncontrolled. We've got momentum from acquisitions that we did in previous period. And as I said, we're very well developed in terms of acquisitions

28:05 for the first half of twenty twenty four. And as I've flagged, we our balance sheet is in good shape. We've got good cash generation. So the plans we've got both for in house investment and for external investment in terms of acquisitions is well resourced in terms of our of our funding capability. So, thank you for, listening to us. I'll pass back to Paul, if I may, and then we'll pick up some of the questions. Super. Peter, Ivor, thanks again for that presentation. As Peter said, ladies and gentlemen, please do continue to submit your questions just using the q and a tab situated on the right hand corner of your screen. We just want the team to 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.

28:51 As you can see, we've received a number of questions throughout today's presentation. Thank you to all the investors who have submitted those. Ivan, if I may just hand back to you to click on that Q and A tab and where appropriate, if I can ask you just to read out the question and give your response address to Pete and I'll pick up from you both at the end. Okay. Thanks thanks very much for your for your questions. We'll try and answer as as many as we can in the time we've got. So, Pete, are they one of the questions we've got is any kind of trends that you see in customer demand by sector that, you know, worth pulling out? Yeah. An interesting question. I think the one of the trends that we're seeing as as part of a a mix of activity is clearly in the commerce field.

29:36 As I mentioned in my presentation, e commerce represents about 20% of our revenue, an important part of our business. E commerce was extremely strong during COVID because, you know, we didn't have very much to do during COVID, so we all spent our time buying stuff online. What's happened during 2023 is almost something too, to be fair. Obviously, as, we came out of COVID, we started to return to ice rink. So e commerce has dropped off from a very, very, very, very high peak. And I think what we're seeing is a sort of a a re stabilization of the ecommerce opportunity for us, and we expect ecommerce growth to get to start to recover, probably second half of twenty twenty four and moving into 2025.

30:22 So that that's sort of one thing we're seeing. I mentioned sustainability. All customers in all sectors, sustainability is becoming a more important feature of the debate we're having with them. And we are, you know, brought in a new head of sustainability, and and a big part of his time is working on improving the footprint, sustainability footprint of the group. And the other 50% of his time he spends working with customers and helping them with their their sustainability footprint. So we're pretty well resourced and focused to help our customers to achieve their sustainability objectives.

30:59 And other than that, I think just, you know, the the underlying weakness in the economy and uncertainty, when we talk to customers at the moment, they're all sort of just hold holding fire on making any big decisions pending a little bit more certainty coming into the political environment and into the economic environment. We've we've had a couple of questions really. Clearly, we've always been weak. We've got a couple of questions on how we drive new business. One around how does the investment in the new EyeLab drive new business, and another one really is just how do you find new customers? K. So if you take the question first, I mentioned in my, you know, what is it that makes us resilient.

31:51 I mentioned that we provide added value to customers, and the iLab experience is is there to give our customers the opportunity to help us understand how they source packaging and how they use packaging. And we have something called the significant six

32:11 to persuade customers to stop thinking about products and price and think about the things that are impacted, the costs that are impacted in their business by the way they use packaging. So, you know, to give you a prime example, you know, you can buy the cheapest boxes you want, but if that increases your damage rate, then it's a false economy because all you're doing is having to then manage lots of returns and lots of unhappy customers and and and and the cost of all that is far beyond the price of, you know, buying a cheaper box. So the significant six is all about helping customers understand their damage rate and and minimizing it, to understand how they pack their products because a big part of using packaging is the cost of putting the stuff into the boxes.

33:04 And if we can find ways of designing packaging that makes it easier for them to fill the packs, we can lower their cost in the area of the area of operations. And, again, you know, labor saving is a bigger benefit to them than simply, you know, a few pence off the price of box. And and similar programs around transportation, around warehousing, around branding, and around single sourcing. And those are what we call the significant six, and we use the innovation lab to showcase those benefits to the customers, to model their business, and demonstrate to them what savings we can make in all of or a couple of those six areas for them. And all the cost savings we describe to them, we can also back that up with carbon footprint savings as well. So the customer having gone through the innovation lab experience goes away with a program and a proposal from MACFARLANE, which demonstrates not only cost savings, but also carbon savings.

34:03 In terms of the how we identify new business opportunities, we have a central marketing team, and they work with a whole bunch of external organizations to identify key opportunities in the various sectors that we focus on. And we also look at the sectors that we're most successful in and then identify through back office research the the types of other customers that operate in those sectors and target them and target them. I mean, I think you're all aware that, you know, the packaging distribution market for protective packaging is about 1,000,000,000 in The UK. That supply by manufacturers is 5,000,000,000 plus.

34:48 So we are very focused on that billion pound market, which is serviced by distributors, and we know it very well, and we know the customers in it very well. And the customers within protective packaging, they tend to, if they've got very simple product requirements and, lots of storage space and don't wanna use lots of different forms of packaging, then, you know, quite rightly, they will buy directly from manufacturer. The customers that we target, those customers who 've got complex packaging needs because they've got a complex product range, they don't have space to store packaging, and they need the expertise that we can we can bring to them in terms of our packaging knowledge, both the paper based products and pollen based products. So it's a well it's a well oiled machine, and as you can see from our new business performance in 2023, 20% ahead of 2022, we've got some good momentum.

35:40 I mean, couple of questions on the gross profit. Clearly, gross profit or gross margins have have risen during 2023. So a couple of questions on how sustainable that is going forward. Should we do that? I'll do that. I think I'm gonna do that one. So as I've described, you know, when we're talking to customers about how we price, it's a function of, you know, the products that we're buying and also the service that we're providing. So, yes, our gross margin has improved. And and how have we done that? We've done that through effectively better sourcing, as I mentioned in the presentation. We've worked harder with our existing suppliers to negotiate better deals from them. And then we've also done some bringing new suppliers into our supplier base who have been more competitive from our existing suppliers. And then we've also used our in house manufacturing operations to provide a supply source as well.

36:42 So those are the things that allowed us to improve our input prices. And are they sustainable? I mean, certainly, as we look at the outlook for 2024, early performance is saying yes. And I think, as Ivor said, the argument for customers is, you know, if you look at our gross margin, it's improving, but our net margin is only margin improving. So in reality, what you are paying for is the price of products and also the price of services. So we would see going forward, we're not gonna see another 3% improvement in in 2024 or 2025, but I think stability around where we are with high 30 gross margins, I think, from our point of we believe that's sustainable. Yes.

37:31 Okay. Couple on acquisitions, which I'll pick up here. I think there's one asking about the report pro reported profit for acquired businesses. Is this EBIT, or does it exclude goodwill amortization and transaction costs? I think just putting context, the number of when I was talking about the number, the adjusted, profit improvement year on year, I think, of about 13% growth, and that equates to about 3,300,000 for 2023. That is before amortization, and transaction cost. I suppose to put in context, the increase in amortization costs in 2023 was 400,000, and the transaction costs related to the acquisition to be completed in the year was 200,000.

38:19 So, hopefully, that could have put some context to to the numbers. But in answer to your question, we we the numbers we quote, certainly in the RNSs on acquisitions are before goodwill amortization and and transaction costs, and certainly the adjusted profits before amortization and and transaction costs. So, hopefully, that puts that in context. Another question was, obviously, with the increase in interest rates to 7%, you know, does that make you think, I suppose, about continue to do acquisitions? I suppose from our perspective, I think interest rates, you know, though although they're elevated from where they've been, they're still at a relatively low level historically. It certainly makes us think about pricing. So we do we do tend to try and keep within a range of five to six.

39:10 I suppose more of the recent acquisitions have been more towards the five, and it tends to be the kind of initial consideration we pay slightly less than five. And then through the earn out period, if if the business proves itself, we're prepared to go up to five, possibly five and a half times, but probably more to the lower end of that range to accommodate the fact that we've got kind of higher transactional cost through through interest. There was another question that was asked around the kind of pension scheme. What do we need to do to get pension scheme ready for buyout? I suppose there's quite a lot of administrative work to get the scheme. I mean, ultimately, any insurance company wants to buy the scheme. They want to know exactly what they're buying. And I suppose with a lot of defined benefit schemes, they've made a lot of adjustments to schemes over the years.

39:57 So you have to have that extremely well documented, and you have to understand exactly the implications of each of those changes to every individual pensioner. And, of course, more recently, obviously, with the the GMP kind of equalization challenge. And, clearly, again, we need to understand what that means for every single pensioner before an insurance people buy that out. So I think a lot of the schemes are in better shape now, and a lot of schemes are now competing for the same resource to do those calculations. So part of the issue is getting resource to do it, and clearly part of the issue is the time it takes to do that. So we are realistically looking at a period of something like eighteen months to two years potentially to be in a position for an insurance company to buy out. But it's mostly, as I said, administrative work in the background to get the the scheme ready for ready for a buyout.

40:50 But I suppose the key message for us is in that intervening period, the scheme itself is self sufficient and not requiring extra cash injection from from the company. I suppose passing back to Peter, a couple other questions on acquisitions. Does the current environment make it better a better environment for acquisitions at the moment? And I suppose by European perspective, is the focus on Germany, Are we looking elsewhere? So if I take the second one first. In terms of geography, as you know, the first acquisition we made in Europe was Pacman, which is not not far away from Frankfurt. Our profile of the targets that we are working with at the moment, it's Scandinavia, and Germany. So it's that sort of spine of Europe. We're not currently working in France, Spain, Italy, or Portugal. So as I say, Scandinavia, Benelux in Germany is where our acquisition program is targeted from a European perspective.

41:51 If we look at the environment for acquisitions, yeah, I mean, if you just take the the first two months of this year, we probably had about 10 companies approach us for to ask us if we're interested in in pursuing them as an acquisition target. So we we we think there's a number of things going on. One is people are bringing forward their retirement dates. So the the local and regional privately owned businesses, a lot of the ones that we talk to, they see the increased regulation coming down the pipe, be it on environment or health and safety and the administrative work that's required and and, you know, their inability to focus on the day to day as much as they used to do. So that's motivating people to look at exit.

42:44 And secondly, they're seeing the strength of the big the bigger guys like us. So why not take the opportunity now while these guys are obviously looking to consolidate the market? And then thirdly, on a sort of a political note, I think certainly in terms of The UK, you've got a number of people who are saying, well, you know, I I probably prefer to sell my business under the the current tax regime than under a potential future tax regime. So so, yeah, the environment is as strong as it's ever been in terms of the acquisition opportunities. And I say that's why we're so confident about our acquisition program being delivered in 2024. And just on the kind of acquisition theme, my questions come through around the the the potential merger of Mondi and DS Smith and whether that would have an impact on the on the group. Yeah. It's interesting interesting development. Obviously, you've got Smurfit doing things in The States, and then you've got Mondi returning to the corrugate industry because they used to be in the corrugate industry in The UK.

43:42 I think the Smurfit thing probably not an impact on us because that's a US type thing, so we don't expect to see any any impact there. I think in terms of DS Smith Mondi, I I'd be surprised if there's an impact there. I mean, we've got a very, very good relationship with Smiths. They're a key supplier to us. We've been with them for a long time. Our business is developing nicely, So we'd like to see there would be benefits coming about through the potential merger. And, you know, the other comment to make is that if you look at our number of corrugate suppliers we have, we have about 90. And I think, Michael, I might correct me on this, I think DS Smith represents about 7% of our corrugate purchases. So even if the worst thing happened, which I I don't imagine will, then we've always got the ability to source from from other suppliers. So so the answer is we're not assuming it's gonna be a major impact on our business.

44:37 And does it affect impact the kind of the pricing in the marketplace for the acquisitions that we do, Peter? I would be surprised if it did, to be fair. As you know, we work on pretty tight multiples five to six times and we have been able to execute high quality acquisitions on those multiples for quite a period of time. I think the sort of mega scale mergers of, you know, significant global organizations, that to me is a a different ballpark altogether. So I may be proved wrong, but I'll be surprised if it has a material impact. And I suppose that the you know, going back a few years, obviously, with Brexit, has that had an impact on on the business? To be honest, not not noticeable.

45:25 I I can't argue that if you look at our numbers or our performance, may maybe in terms of employees in our manufacturing business, We we've maybe had some struggles with with some of some of our employees because we have quite a lot of European workers operating in our facilities. So that's probably the only tangible thing I can think of. Other than that, no, it's not really not really been an issue that's impacted the data that this other than that recruitment issue and resource issue in our manufacturing businesses. And a question on the environment, you know, what's the benefit of switching from diesel to electric? Electric trucks. So maybe I'll pick this one up. I mean, I suppose purely in commercial terms is not a benefit really. It's a, you know, it's a cost to the business.

46:13 I mean, yeah, an individual, you know, a truck will be about £30,000 per annum more expensive than a diesel truck at the moment. But I suppose our view is, look, it's important that we're making an impact on our carbon footprint, and we see that as, like, in a critical objective for the group, And we've got targets out till 2030. I think we believe that electric trucks currently at the moment are probably the best alternative from an environmental perspective. And, clearly, from an investment perspective, what we're hoping clearly is the demand picks up for electric trucks. Clearly, the price point comes down to something. It's more commercially viable. However, we're not we're not, although electric trucks is the best option that's available for us at the moment, it's not certainly the only option that's been explored by the the manufacturers.

47:07 So we're certainly flexible in terms of our fleet. We have about a 120 vehicles. Currently, electric trucks by the end of this year will make up around 10 of those vehicles, and it just gives us the opportunity to really try them out to see if they work for us, to assess their capabilities from an operational perspective. And, clearly, if that's the right way to go and the commercials are more sensible going forward, we'll continue that program. If other options come available, then we are still flexible within our fleet to be able to take advantage of those other options, whether that is hydrogen, whether it's a combination of fuels. But I think we've got enough flexibility in our fleet to be able to adjust. I think as a group, we feel as if we have to start making some progress on what is our biggest kind of contribution to the carbon footprint, which is our our our vehicles.

48:02 And just to add to that, it is interesting because we've had some customers who has as we've introduced electric vehicles into the fleet, have asked for their deliveries to only be made on electric vehicles. So, you know, it is something that customers recognize and that it's it's the right thing to do. So it's been a positive for some of our key customer relationships to have electric vehicles in the fleet. But I suppose a couple of quick questions on some of the investments we've been making. You know, is it can we quantify the the impact in sales growth of the Norman Innovation Lab at this point? Yeah. Good question. We targeted in 2023 to add £750,000 worth of incremental revenue through the Innovation Lab, and we slightly underachieved.

48:54 We got to about 700, I think. So in terms of new business revenue, we we, you know, got very close to where we expected to be. Innovation Lab is also about customer retention, and there have been at least four customers where we've been in contractual renew renew situations with them, and we've used the Innovation Lab as one of the parts of the sort of the reselling process to reconfirm. And, you know, I I would say it was just Innovation Lab, but Innovation Lab was instrumental in us actually renewing those contracts. And then the third aspect, again, difficult to value, unfortunately, is that we've run a number of sustainability days at Innovation Lab where we just put an open invite out to, you know, any and all customers, be they existing or new, to come and talk with us about sustainability, and they have been very, very highly supported.

49:48 And while I can't say today that generated some new income for us, I do know there were quite a lot of interesting opportunities that came about through that, which hopefully we will execute in 2024. And any kind of profitability impact from the NDC move and the consolidation in East Midlands? Yeah. So two moves this year, as I mentioned. One is the East Midlands consolidation, and one is the NDC move. When you, you know, get back to taking out all the one off costs, etcetera, because overlapping costs, etcetera, the the move in the East Midlands will benefit us by around about 300,000, bottom line, and the the move of the NDC will benefit us at around about a £100,000. So together, about £400,000 bottom line benefit once you've taken out the one off cost of of making the transition.

50:39 And I suppose going back to organic growth, is there any kind of evidence out there, data out there that kind of shows where organic growth is going in the industry as a whole? I mean, I won't quote their numbers, but if you look at Smiths, Smurfit, if you look at Sealed Air, if you look at Bunzall, you know, all people operating in our space, you know, and all all quoted companies, they're all talking about, you know, high single digit, if not high medium double digit revenue decline '23 on '22. So, you know, clearly, you know, we're disappointed that our sales line isn't stronger. But I think when you look across the industry, it just reflects how the industry is at the moment in terms of the economic environment that we're in. You know, it's difficult. Customers aren't buying as much as they used to buy or as we hope they'll buy because of the the economic activity, the low levels of economic activity.

51:45 So hence, that's why we are focusing on things that we can influence, which is new business, which is acquisitions, which is gross margin, which we talked about. And the the final question we've got here is really is the current pension sort of costs adequate to support a buyer in your view? I suppose as I described earlier, obviously, there's quite a bit of work to be done to prepare the scheme for buyer. So irrespective of where we are in the marketplace, then that that still has to be done. I suppose buyout really depends on the supply and demand in the marketplace at the time we're ready to ready to go or or choose to go. Certainly, the surplus that we have on the balance sheet from an accounting perspective doesn't represent the pricing that someone would pay to buy out the scheme or or that point they would return to us if we bought out the scheme.

52:34 I mean, the indications we've had is is to buy out the scheme at the moment would be broadly breakeven from the group. But, of course, that was really totally dependent on the demand and availability of supply. So, you know, if lots of schemes are going to the market at the same time and there's not enough availability of capacity from insurance companies, then the pricing, you know, will be not attractive to us, and flip wise the other way. But I I suppose from our perspective, what we've got is we're in a good position that we've got the scheme to position where it's broadly self sufficient so that we can actually be in a position where we can pick and choose the time that we want to go to the marketplace.

53:21 And, you know, we you know, if the price point's right, then we will choose to go. And if it's not right, then we can choose to continue as we are. Fantastic. I'll step in there guys. Thank you very much. You've asked every single question that we've had through and of course any further questions that do come through, the team will be able to review those. Perhaps before redirecting investors to provide you with their feedback, and it's particularly important to you and the team, Peter, if I can just ask you for a few closing comments, please. Yes. Thank you. So so firstly, very much appreciate your support this morning. Thanks for your time this morning as well, and most importantly, thanks for your really good questions. I guess the key messages that we just want to reconfirm is that 2023 performance was resilient in difficult market conditions.

54:10 We don't expect those market conditions to improve in 2024. So, you know, our time will be spent on accelerating our acquisition program, getting more momentum into new business, growing in Europe from both an organic point of view and building on the acquisitions that we already got there, and obviously ensuring that we can maintain the strong gross margin and also, and and ensure that we can cover our our costs effectively as well and strong cost control. So we expect 2024 to be a challenging year, but we can see it being another year of progress from MACFARLANE. So thank you. Thank you. Fantastic. Peter, have thank you indeed for updating investors today. Can I please ask investors not to close this session? It should be automatically redirected to provide your feedback in order that the management can better understand your views and expectations.

54:56 This will only take a few moments to complete and is 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.