Macfarlane Group (LSE:MACF) — Interim results for the six months ended 30 June 2025

0:00 Good morning, and welcome to the MACFARLANE GROUP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time by the q and a tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And then I'd like to hand you over to CEO, Pete Atkinson. Good morning, sir.

0:33 Thank you very much. Good morning, everybody, and welcome to today's review of MACFARLANE GROUP's first half results for 2025. I'm Peter Atkinson, the CEO, and I'm with my colleague, Iva Gray, who's our CFO. In terms of the agenda for today's meeting, I'll make some opening remarks in terms of an exec summary, and Iva will then take you through the key metrics for twenty twenty five first half. I'll cover off the two main divisions, the distribution and manufacturing division in terms of their individual performances, and then Ivor will take you through the pension scheme, capital allocation, and we'll finish up with some concluding remarks and take take questions. In terms of the introduction to the business for those who are maybe not familiar with MACFARLANE GROUP, we're a specialist business in the protective packaging market, and we supply customers across The UK and increasingly in Europe with a range of protective packaging products and solutions.

1:31 And we're here to protect their products to the supply chain to ensure the products are effectively packed, stored, transported. Key key benefit we bring is the working capital reduction administration burden. And, clearly, from a sustainability point of view, we're working to optimize and minimize the environment environmental packaging. We differentiate ourselves from the competition through the fact that we have now fully European coverage with local service. We've got a breadth of product and service offer, added value customer proposition, something called the significant six, which you may have heard of before, long standing supply partnerships going back for sort of fifty, sixty year fifty, sixty years. And our business is is is focused on protective packaging. We don't deal with any other materials, and we don't deal with any other product groups. We simply focus on protective packaging.

2:23 So let me summarize the first half results, and then I'll pass over to Ivor to take you through the detail. What we've seen in in the first six months is a pretty challenging period. Clearly, we delivered good sales growth, 13.1% ahead of the previous period, but that was based primarily on acquisition growth through the acquisition of Petrivy that we made in January and the benefit of Polyforms that we made in 2024. We've seen weak organic sales growth, and we've seen price deflation in in the first six months of the year. So the the sales growth was then offset by weaker margin, and there are three components to that. We've been slower in recovering input price changes.

3:16 We've seen quite a lot of competitive activity that has in, needed us to retain customers by reducing prices, and we're seeing customers in the current environment understandably focusing on short term price reduction rather than the medium term value that we can bring them. So that has impacted our margin in the first half of the year. The second component of the sales offset has been higher costs, And I think we're all familiar with the increased costs through National Insurance and minimum wage, which is impacting all businesses, and, obviously, we're not immune to that. So that's been a big feature of our first half cost increase. And the second key feature has been material increases in property costs, both rental and and rates costs.

4:04 The effect of the stronger sales but weaker margin and higher cost means that our profitability is down versus the previous period.

4:16 So what we're gonna talk about in the presentation is clearly, you know, what's gonna happen in the second half that's gonna recover that position, and there's a number of features that we'll we'll pick up, during the presentation. Firstly, in the second half of the year, we'll have the seasonal benefit, which is usual for the MACFARLANE based business, and it's particularly acute within the Petrievy business. They generate something like 70% of their profit in the second half of the year because of their bias towards the food and drink industry in Scotland. So that will be a a a give us positive momentum into the second half of the year. The new business that we've won in the first half of the year will flow through into the second half of the year. We we win it in the first six months, and then it really starts to expand in the sec six months. So we'll see a benefit from that. And then the the price increase program that we've initiated, again, will start to flow through in the second half of the year. And to be fair, in terms of both the the revenue line and the margin line in the early weeks of 2020, the second half twenty twenty five, we're seeing improvements in both those areas, which give us confidence for the remainder of the year. And then the final element of the second half recovery is is clearly, you know, we've got tight cost controls in place. We've made some people changes. Our headcount is lower first half versus second half, and we will see the benefits of those coming through. So in terms of our full year 2025 results, we expect them to be in line with the recent market update that we provided back in July.

5:44 So let me pause there and pass over to Ivor, who will talk you through the detail of the first half metrics, and then I'll actually put some color on the business by talking about the packaging distribution and the the manufacturing operations. Thank you, Peter, and good morning, everyone. I'll just take you through the kind of first half year key metrics. Up at the top line, you've got the revenue, which has increased by 13% and that has really split 14% benefit from the acquisitions. That was the acquisition of in January and, of this year and the acquisition of Polyforums in July last year and a small amount related to the acquisition of at the very beginning of last year. So 14% improvement due to acquisitions and we've had an organic decline of around 1% and most of that decline is related to price.

6:36 Volumes are relatively flat year on year. In terms of adjusted operating profit, we're down 22%, so we're down 2,700,000 versus this time last year, a reduction from 12,500,000 to 9,800,000. We have a positive contribution from the acquisitions that I mentioned earlier of 1.7% and an organic decline of 4.5% and that was primarily driven by a smaller amount related to the reduction in sales, a reduction in the gross margin from 39.7% to 37.8 which has made quite a large in-depth in terms of profitability and rising operating costs, as Peter described earlier, which has impacted the business. So overall, those those two elements, the reduction in gross margin and the increase in cost are the prime reason for the reduction in profitability with a small amount related to the reduction organic reduction in sales.

7:31 In terms of the balance sheet, we've had cash inflows of £13,300,000 in the first half of the year and I'll come on to describe that in a minute. So our bank debt net debt position at the end of December was £1,900,000 rising to £15,200,000 at the end of June. The operating cash flows remain strong, but clearly we've used those operating cash flows to fund acquisition, dividend and also the start of the share buyback program along with investment and capital expenditure in the business. Regards to the pension surplus, it's down slightly from the year end, 9,600,000 to 9,200,000. Clearly, the key message here is that the pension scheme is not drawing any cash from the group, and we're working in the short term towards a buy in possibly before the end of this year, at least within certainly within the next six to twelve months.

8:23 In terms of the dividend, we've held the dividend at 0.96 plus pence, that's the same as last year, and that gives us dividend cover of 2.4 times, and EPS is moving down in line with the reduction in profitability.

8:40 Moving on to the income statement. Peter will cover the the revenue line in a bit more detail. But as you can see, as I described earlier, two of the key features here is the reduction in gross margin from 39.7 to 37.8, and that's primarily driven by a reduction in margin within the distribution business. It's gone from 36 7.9 to 35.6, albeit we saw a reduction in the gross margin in the second half of the year, which the second half of the year last year, the gross margin distribution was 36.4. So a slight reduction in the first half of this year of 35.6. Pleased to say that margins have now stabilized as we start this the second half of this year, and there is a margin reduction in manufacturing of 44.3 to 41%.

9:26 That's primarily related to the mix impact of the Protivi business. The Protivi business does run at a lower gross margin than the rest of the manufacturing division, so if you strip out the Protivi impact the gross margin is in line with last year.

9:41 In terms of the cost base, we've got a 6,600,000 increase in the operating expenses, 5,100,000 of that is related to the acquisitions that we brought in and 2,000,000 of that I'm sorry, 700,000 of that is due to the incurrental labor costs, 1,300,000 related to incremental property costs, some of that related to the consolidation of the East Midlands operation, which will people people Peter will describe later, and we've got 500,000 reduction in other costs. The interest costs are a bit higher last year and that reflects the higher borrowing rates that we've had in the first half of this year compared to last year and also an increase in IFRS 60 interest related to the incremental property costs coming through on East Midlands business.

10:30 In terms of cash flows, really, the key message here is, our operating cash flows have stayed relatively robust, albeit 15% down in last year, but certainly lower than the reduction that we've seen in profitability, and that's because the working capital is still being managed well. We've had a capital inflow of 1,400,000 as a result of that, and we've used that 12,400,000 of cash inflows from operating activities to spend 15,100,000 on acquisitions, 13,900,000 of that relates to the Protivia acquisition and 1,200,000 of payment related to Gottlieb and Allpac. We've had 1,300,000 of capital expenditure. That's primarily related to the consolidation of these the properties in East Midlands and the racking out of the new facility, and 300,000 related to expansion of capacity or grants and manufacturing operation and some other capital expenditure we made within the manufacturing operation.

11:31 You can see that we expect 200,000 in the first half of the year on the purchase of our own shares. That is part of the 4,000,000 buyback program that we announced in June. So primarily, you'll see around 2,500,000 outflows in the second half of the year related to that buyback program, but a very small amount of that related in the the first half of the year. And again, you can see the dividend there, 4,300,000. That's the final dividend payment that was made in June. So an outflow of $13,200,000 and an increase from $1,900,000 to $15,200,000 at the end of June. I'll hand back to Peter now to go through some detail around the operating performances within distribution and manufacturing.

12:19 Thanks, Heather. So let me begin by talking about the packaging distribution business that represents around about 75% of the group's revenue. As you can see from the the slide, sales like for like sales were broadly flat year on year. What we've seen is, as I've already indicated, we've seen price deflation and volume declines, and that's simply because our customers' customers are not buying as much packaging as they used to, so hence, they're not buying as much packaging from us. And that's more acute in the the retail space than it is in the industrial space. The split between retail and industrial within distribution is sort of seventy thirty, 70 being the industrial business. The new business performance in the first six months has been slightly weaker than the previous year.

13:08 What we're finding in this sort of period of uncertainty, which we're all, you know, very, very acutely aware of, is customers being slow to make decisions. So we know we've got a very strong pipeline of activity. We know we've got a number of customers that are very, very close to completing, and we'd expect our new business to accelerate quite materially in the second half of the year as as the new business, customers come on stream. Our gross margins, as I indicated at the in in the exact summary, have reduced versus the previous year, and that's primarily, increased input costs and our inability at this stage to fully recover, those input cost increases. Plus, we've had to do some competitive defenses of key customers, through some aggressive pricing competition from a small number of our competitors.

14:01 So that's caused us to reduce our margins on some of our major customers that were up for tender. But we're confident that the gross margin will will start to improve in the second half of the year, and the evidence of the early weeks of, the month of July and the early weeks of August, and and and, to be fair, moving to September as well, is that our margin is beginning to improve. The the operating cost increases, I'll talk about on the next page, are really the labor cost increases, national insurance, national minimum wage, property cost increases, and issues around East Midlands property consolidation. So I'll pick those up on the on the next page. The final metric just to comment on is on net promoter score. As you know, it's a key part of how we measure, how we are dealing with customers and how customers perceive us, and and the net promoter score has remained pretty solid at 61.

14:52 As you know, the average for b to b customers and Net Promoter Score is late twenties, early thirties, so we're way above average for b to b type clients who use Net Promoter Score as a measure of customer satisfaction. So just moving on to the raw material price graph. As you know, this is, you know, a series of ups and downs because we're operating global markets for polymer and paper, and what we're describing there is what we're seeing in the first half of the year is, you know, broadly input price increases and, hence, that gross margin pressure as we now work to recover those. Just the detail as I promised on the the cost program. So here's a breakdown of of where the cost increases have been. If you take employee costs, our headcount is down by around about 33 versus the previous period, so we we're we're operating with lower heads, But we've obviously had to take on board the impact of NI, the impact of extra temporary costs associated with East Midlands project, which I'll come back to.

15:57 We've also had some redundancy costs in the first half of the year as we've taken some some heads out, and there's also increased pension costs in there. The property cost increase that you see, which is the second big chunk of cost increase during the period, is is two things, really. It's partly increased rental costs on existing properties. As you know, most of our properties are leased, and we've had a number of rent reviews that have come around, and we've had a very aggressive rent increases from our our landlords and not really had much opportunity to to offset that in in any mature way. So that's impacted us by about £200,000 in the period. And then, obviously, you've got local authorities that are ramping rates up at the moment, so that's impacting us also. I've referred to it, and I've touched on it, is the East Midlands project. East Midlands project, has been something which has impacted the first half of the year.

16:49 We were due to complete the project at the end of May. It's actually run through to the end of August, It's quite a complicated project moving four sites into one, closing four four sites and moving them into one. And the delay in the project has caused us to actually incur additional rent because we've been renting the existing properties and the new property and additional operating costs, which can have to add extra labor as we manage through the transition. The good news is that project is now completed. We're out of the four sites, all the businesses in the in the new site, and we won't see a recurrence of that that incremental cost in the second half of the year. Next page just is a refresh, a reminder really of our acquisition program.

17:35 While we haven't specifically acquired in, 2025 in the distribution business, as you know, we bought the Petrieve business, which is part distribution and and part manufacturing. We've classified it within our manufacturing division. We've got a very strong pipeline of acquisition opportunities both in The UK and in Europe.

17:54 And while it's unlikely we'll do any more acquisitions in 2025, we would expect to be back on the acquisition trail in 2026. And then, next page is just a a really a summary of the key things that we are focused on. I won't even try and go through all of them, but probably worthwhile just touching on sourcing. We're increasingly finding ways to utilize our in house manufacturing for in house supply opportunities, and certainly, acquisition of Patrevia has given us a big opportunity to use their manufacturing capability for some of our RBCs to buy from an internal supplier rather from an external supplier, and, obviously, we we we keep the margin internalized rather than give it away to an external supplier. Bottom left hand corner, we launched our new website around about six months ago.

18:44 Good progress. It's early days. We've got some interesting momentum there, which is positive, and we expect that to becoming an increasingly important part of the way we transact with customers going forward. I mentioned acquisitions. And then just in terms of Europe, you know, Europe, as you know, is a key part of our development of the other group's business to give ourselves an opportunity to access different and larger markets using our existing customers to help us through their relationships with their subsidiaries or their head offices. And we continue to make good progress both in the follow the customer program and also from the first acquisition that we've made down in down in Frankfurt with the the Pacman business.

19:29 And, again, we've got further acquisitions that we're working on that we would hope to bring to fruition, probably not next year, but certainly moving into 2027. And then just finally on property, we've done the East Midlands consolidation. Prior to that, we did the consolidation in the Northwest. And recognizing the the property footprint we've got and the increased rental costs that we're seeing, we're looking now to accelerate our property rationalization program. So more of that to come as we go into '26 and 2027. Moving on to our manufacturing division, which now represents sort of close to 25% of group's revenue and has been an important area for us investing in certainly in terms of acquisitions recently. They had a pretty solid first half of the year. The the revenue growth was primarily through the acquisition of Petrivi and then also part benefits of the acquisition of Polyforms that we made in 2024, and there was some small organic growth.

20:31 The partnership with distribution, as you know, this is it it's not a standalone business as such because it does partner strongly with distribution, and that partnership continues to strengthen as we're able to offer customers a broader range of services and and and a wider product offer. And as you're aware, everything we do in this business is bespoke. So, you know, it it it these customers coming to us with particular requirements and then then us designing with their engineers bespoke solutions to protect their typically very high value or fragile items through their journey through the supply chain. Margins have have have have weakened slightly here, but that's primarily a mix issue. As we've added Petrivi into this business, Petrivi has a generally a lower gross margin than the the the base manufacturing business. So the margin reduction is a mix issue, not a not a pricing or or or margin issue related to transactional activity.

21:27 And our operating expenses are well under control. While we've got increase in, obviously, a nine and and and national minimum wage here, We may manage to do some offsetting of that in terms of productivity improvements. Moving over the page and just a reminder, I mentioned this has been a sort of fruitful area for us in terms of acquisitions. We've made, you know, about four acquisitions in the last two years, Sutton's B and D Group, Polyforms more recently, and Petrivi very recently. Petrivi is doing well for us. Patrivi, I think if you remember from when we

22:03 made the announcement, is like a mini MACFARLANE in many ways. It's got a box making facility up in Scotland. It's got a distribution in business in Scotland. Got a design and manufacturing business based up in Aberdeen serving the oil and gas industry, and then it's got a temperature controlled packaging business. And we're now working to create synergies within Petrivi that benefit the group, particularly from an in house sourcing, which I touched on, and also we're in the process of combining our distribution businesses. And, again, we've got more acquisition activity planned. We've got two more acquisitions we'd like to do within this business in the near term. So moving over in terms of the action plan, again, I won't go go through everything. We've touched on in house supply, and that's progressing really well with both Petralee and with GWP.

22:49 Bottom left hand corner integration, we have now effectively closed the B and D site in Southampton. That's been integrated into our our Westbury business, and we've got further integration programs in place for the next next twelve, eighteen months. Acquisitions, I've talked about. And as I say, there's two more acquisitions we'd like to do in this space to just strengthen our UK proposition. And then going forward, although it's not on the schedule, you know, we're reviewing internally because we've got some pressure from certain customers to extend the reach of this business into Europe. We do some export work at the moment out of this division, but we've certain customers who are asking us to actually colocate with them, and we're working on on plans to actually evaluate that and see whether that's a fruitful fruitful journey for this particular business.

23:38 So I'll pause there and turn to either to talk you through sustainability, which is obviously a key issue at the moment both in terms of our in house sustainability objectives and also the the external pressures around government legislation and also take you through the pension scheme and the capital allocation. Yeah. Thank you, Peter. Yes. In terms of sustainability agenda, a lot of information in this slide. I think off to the left hand side, you can see we continue to make good progress in terms of the the impact that

24:09 the filing that's having in environment, whether that's through the electrification of our truck fleet, putting solar panels in various sites that we have, managing our carbon reductions, our our carbon impact down that we're managing in the business and also working with our suppliers on the broader impact that we're having in the environment through scope three emissions. In terms of customers, clearly, continue to support our customers through our innovation labs. And and one of the key features that's coming through this year, which we'll cover off in the next slide, is the introduction of extended producer responsibility costs, which are gonna impact primarily our customers. So we are working very heavily with our customers to minimize the carbon footprint that they have, but also to help them through the challenges of introducing the the new kind of packaging regulations, the first fees, which are due to come in in October this year. And you can see we're also continuing to make good progress in our Net Promoter Score, which is a kind of external validation of the kind of services that we're bringing to our customers.

25:10 Across the right hand side, you know, we continue to progress the accreditations, and that kinda gives us some validation that we're doing the right things and we're moving in the right direction. Some of these are quite important to our customers, and some of these are important to to our investors. So overall, we're making pretty good progress on our sustainability agenda. And I've come on to discuss really some of the regulations that are coming in that are impacting the business. Really, the ones that are impacting the business at the moment are the ones in the left hand side, and the one that's probably particularly prevalent is the extended producer responsibility. So this is effectively a charge that's coming in on all packaging that is ending up in household waste. So if from a MACFARLANE perspective, it effectively impacts roundabout 20% of our customers,

25:59 and it's broadly customers that are involved in ecommerce retail. And we are working with our customers. Effectively, any packaging that we provide to those customers that they are then shipping to their customers, then they they will have to pay a charge on that packaging depending whether it's paper or plastic or any other kind of substrate. So we are working with our customers to educate them on the impacts of that packaging, supporting them through in terms of what impact that's gonna have in terms of their costs, and engaging with them to try and mitigate the impact of that packaging, whether it's moving to something that's more recyclable or whether it's reducing the the actual amount of packaging they're actually using. So we do that through our innovation lab, and we do that through our significant six progress.

26:47 There's clearly some evolution of that coming through next year in phase two, which is called modulated fees, and that's effectively saying that the fees will start to increase for the packaging that's not considered environmentally friendly and stay the same or decrease for the packaging is considered more environmentally friendly. So it's like an evolution of the EPR that's coming in this year. So, again, we we see ourselves as being well positioned to be to be able to support our customers to try and mitigate the impacts of that as much as possible. As you can see, there's a number of other things that are gonna come through over the next two to five years that will impact the packaging market, in terms of regulation. So, you know, clearly a lot going on, but the immediate impacts for our customers and for us as a business is the impact of of extended producer responsibility, which is coming in in October this year and will continue to evolve over the next few years.

27:47 In terms of the pension scheme, I suppose the key message you see here is pension schemes and accounting surplus. The company hasn't had to put any cash contributions into the scheme for a couple of years now, and, actually, we're actively working towards a buy in within the next six to twelve months. So, you know, we always said that we'd be working towards a buy in somewhere around 2026. There is a possibility we might be able to achieve a buy in this side of Christmas,

28:15 but we're certainly in more than that kind of short term. So first of all, moving the scheme to buy in and then ultimately to buy out. At the point buy out, that's the point where the scheme would come off our balance sheet. So the scheme is well funded. It's not drawing any cash and resources from the group, and we're working towards a position of taking the pension scheme off the balance sheet.

28:35 First stage of that is buy in, which we hope to complete in the next six twelve twelve months, and then a buyer that would take a further eighteen months beyond that. In terms of capital allocation, as I've described earlier, we've invested in we've continued to generate good operating cash flows both through the profitability of the business and good management of working capital. We've invested down the first half in in capital expenditure programs, and we've also continued that acquisition program with the acquisition of at the beginning of the year, and we paid the final dividend out in the first half of the year.

29:12 Clearly, the the new thing that we've introduced in the first half of this year is the buyback program, which we commenced in June. So we are looking to spend £4,000,000 buying MACFARLANE shares between now and June next year. And that's really a reflection of the fact that, you know, if you look at the rating of our share price relative to the profitability of the business, it does there's not a huge differential between that and some of the acquisition program. So at the moment, we're prioritizing some some of our capital towards the share buyback program in the short term. Clearly, we're not planning in doing further m and a this side of Christmas, but we'll get get back onto the front foot of m and a in 2026. So a slight prioritization of of of resources towards buyback as opposed to m and a in the short term, but we'll get back on the front foot with m and a program in 2026.

30:06 Thanks, Iva. So before we go into q and a, let me just sort of conclude. It's clearly been a difficult h one. There's been significant headwinds that we are trying to and and to a certain extent managing to navigate through, and those headwinds are around, you know, at the end of the day, our customers just aren't buying as much as they previously were buying, so that weak demand is impacting customer volumes. The whole customer uncertainty, you know, you wake up every morning at the moment something new has happened in the marketplace, so customer is certain about making big decisions that's slowing down our new business performance. And then, obviously, we've got rising operating costs, a big part of which has been the the taxation on on employment. So as we look to the second half of the year, and we're now sort of two months in, we don't expect the market to improve in the second half of the year. We will benefit from the seasonal uplift, and I touched on that earlier on, both in the MACFARLANE business and more acute in the Petrievy business that we acquired.

31:04 And then from there on in, it's really us focusing down on a series of management actions around converting a new business pipeline, which is extremely strong, and we're we really feel very confident about new business in the second half of the year, managing through the price changes to improve margin. On both those things, I say we're seeing some positive trends in the early parts of the second half of the year. Continue to drive operational efficiencies. We won't have the challenge in East Midlands in the in the from now on in because we've managed the transition, so we'll benefit from East Midlands consolidation. And then I just touched on sustainability and how we're helping customers manage through the EPR, challenges. The Patrivia acquisition, there's still some more benefits to come from that, particularly around in house sourcing.

31:54 So, that's something that we're focusing very hard on at the moment. And then as Ivor touched on, we've got strong control of working capital, and that will continue to be the case. Ivor's touched on the fact that we're we're not planning to do any more acquisitions this year, but the acquisition pipeline is strong. And as I say as I said earlier, expect us to be back on the acquisition trail in in 2026. And then the share buyback program we initiated, we're continuing with that. And, also, obviously, we've announced our our sort of dividend position, which is a continuation of the current dividend at the current levels. So in overall terms, difficult period. We're navigating well through it. Setting off, we will we will demonstrate improved improved performance, and we will exit the year on a good trajectory for 2026.

32:42 So we will move from here to questions. Peter, I've got Peter. Thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab situated on the top right hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via investor dashboard. Peter, Ivor, as you can see, we received a number of questions throughout today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end? Okay. Now I've got a few questions here, Peter. First one is, can we kinda write the the relative kind of contributions from price inflation, the impact of demand, customer churn on the kind of organic decline.

33:33 Sorry. I think I covered off in the financials that, basically, the the price deflation impact was the primary reason for the kind of 1% reduction in organic decline. But, yes, there is ups and downs. I think we Peter touched on new business growth of about 3,700,000, and we've also seen an equal and opposite reduction of that of that kind of similar sale in terms of customer spending less and and some losses of business, albeit some of the losses of business have been primarily up in a smaller customer end. So if you think of our movement across in in sales line, particularly within distribution in the year, then most of that is kind of price driven.

34:20 Impact of new business is 3,700,000, and there's been an offset in terms of lower demand from existing customers and a better loss of customers within the smaller customer base, which kind of offsets that in equal order. I don't know if you can That's fine. That's In terms of the there was a discussion of the EPR there. Is EPR gonna significantly increase the cost of the business? And I suppose adding on to that, do you see any kind of a continual headwind in customer demand declining as a result of that in terms of environmental pressures? Yeah. I mean, it's really difficult to judge because EPR is is complicated. The the rules around EPR and the metrics around EPR keep changing, so we've not got steady state at the moment in terms of where EPR is is gonna impact. In terms of the direct impact on MACFARLANE, it's relatively small, primarily because as you're all aware, you know, retail is an important but relatively small part of our overall business. It's about 25% of our distribution business revenue.

35:26 And and, you know, a a majority of what we're doing in which is EPR related is ecommerce. It's not FMCG. So it's a small direct cost of business, which is not material. Where we are very active at the moment is working with customers to help them reduce their risk of EPR taxation. So there's a lot of work going on, a lot of work in the innovation labs, a lot of road shows that we're doing, which is basically guiding our customers and helping them navigate through what is a a very tricky and complicated period and process. Is it going to overall reduce demand going forward? Undoubtedly, I think there'll be a demand reduction around FMCG, which is where the EPR has the most material impact.

36:20 There may be some slight reduction around ecommerce potentially, but I don't think it's gonna be a material feature that's going to impact the business and its future over the next three to five years. Thanks, Peter. There's a question here on on operating margins. So, you know, what does the half to run rate in terms of margins look like in terms of first half versus second half? And what does the outlook look like for for operating margins going forward? If I can pick that one up, I mean, you if look at our net margins in the first half of the year, they were just under 7%. We'd expect that to be kind of near 9% in the second half of the year, and that that's primarily driven by more volume throughput. You know, there's quite seasonal uplift in volume that we expect in the second half of the year, and that naturally absorbs our cost base more effectively in the second half of the year. And we actually do see the gross margin has been slightly higher in the second half than the first half. They are the kind of two key features. The other feature is the Petrivy business, as Peter described, is more weighted towards the second half of the year, and some of that is down to some of the seasonal uplift in spend that Peter described earlier. Also, we're driving some of our more internal corrugated buying and distribution through our Petrieger business. So that's also retaining some profitability within the group.

37:43 So we'd expect our margins in the second half of the year to be higher than the first half. Certainly, as we exit this year, we'll probably target our net margins around about 8%. We don't see that probably improving much next year because I think next year, we continue to see those kind of operating cost pressures where we see the kind of gross margin stabilizing. We don't see the margins changing significantly next year. So we would expect the margins next year, the net margins to stay around 8%, which we're starting to see some improvements from about '27 onwards. So what we're looking at next year is seeing some uplift in sales next year falling to the bottom line, but not a significant change in terms of the bottom line margins. I think there was an add on to that, whether that changes our view in terms of capital allocation between m and a and returns to shareholders.

38:37 I don't think it does. I mean, I think at the end of the day, we are trying to achieve a balance between returning some money to shareholders through the buyback program, but we want to be recognized in the m and a program is still an important feature of the growth story going forward. And, certainly, I don't think we're missing out on any significant opportunities at the moment, but we do want to invest strategically in m and a both within the manufacturing and distribution business going forward. So, clearly, where those opportunities arise and the price points are right and are strategic for business, we will certainly continue the m and a program and try to balance that return to shareholders and then improve the program in line with each other where we can. In terms of looking at, you know, a question around Europe, Peter, in terms of yourself, kind of, third party logistics.

39:27 Do we see third party logistics being a key part of supporting the growth story in terms of our European expansion? Yeah. It's a good question, and and and the answer, bluntly, is yes. We we we through through all the research we did before we entered Europe, we've recognized that that a big part of the model in Europe for successful distributors is more outsourcing of activities, particularly warehousing and distribution. While in The UK, the majority of our activity is running through our own warehouses with our own trucks. We do recognize in Europe, it's different. And so, certainly, in terms of our operations today, we are very active in using third party logistics companies, and that will be a growing feature of of our European story to make more use of third party logistics companies both for storage and for distribution.

40:16 A specific question here around you mentioned East Midlands site consolidation. I think previously, we had we had mentioned that we would get some cost savings out of that once we're through the program. Do we still see those level of cost savings coming through? The the, you know, the question I mentioned that we've mentioned £400,000 per annum. Once we're through the program, do we still expect to see that, or or is that to change given the current circumstances? Yeah. When we when we get to steady state, probably, it might not be 400,000 was based on assumed volumes. Clearly, as we've said, the market is weaker, so the volumes are weaker. So the benefits are probably not gonna be as as great. So you're probably talking more in the 300 range than the 400 range.

41:04 But, yes, we would expect to see, once we get to steady state, savings coming through these Midlands consolidation. And just moving on to the we we we talked about the relaunch of the the website and, you know, is that having a positive impact? And, you know, how much of our revenues do you see coming through the online shop? Yeah. So in relative terms, the online shop is a small proportion of our revenue today. It's less than 5%. We in terms of, yeah, trading electronically with cost trading electronically with customers, we've got about 50% of our revenue where we trade electronically. But in terms of direct people buying over the website, less than 5%. We clearly would like to increase that. The new website is is the start of the journey to increase that because we recognize the both the the functionality, appearance, and presentation of our old website was was not in line with with current sort of website trends.

42:03 So we've done the relaunch. It's still early stages, but we are seeing some positive progress, and we'd expect to see further progress as we exit this year year and into 2026. And as a question around the kind of margins within the distribution business, You know, our our competitors facing the same challenges that we are facing. Do see the opportunity for us to recover that? And specifically, our gross margins is the decline in gross margins, a sign of that in a competitive tense intensity or kind of discipline within the marketplace starting to loosen? Yeah. I mean, I think the, you know, the the the market conditions are the market conditions, so it's certainly affecting, you know, all the key players in The UK market to different degrees.

42:54 How they're managing it, you know, is their business rather than our business. But, certainly, we've seen the margin fall back in the first six months of this year compared to the first six months of last year, but we're now seeing the margin start to recover as we've gone into h two. And we would certainly expect to see the margin when it's currently running at sort of just under about 35.6 for the the end of h one. We'd certainly expect as we exit the year to be back up the the exit rate at the end of twenty twenty four, which was sort of around about 36%. So certainly, pressures there, but certainly, we we can see a way of getting back to a sort of 36% gross margin. We're we're we're probably never gonna get back to the heights of gross margin that we saw during the COVID period, where I think most of you were aware, you know, that was where, you know, demand was outstripping supply and price increases were going going crazy, and we over recovered during that period, and and hence, margins were high. So we I don't see us getting back to those levels, but certainly so around about 36% is, we see as a sustainable level going forward.

44:06 And in terms of the one of the questions is we, you know, we you mentioned headcount reduction within action distribution. What are kind of key areas that that's impacting? Yeah. So the the the what we've tried to do is to, focus our headcount reductions primarily in in the head office, the central functions. So we've tried to retain staffing levels as best we can in our operational business units. As you know, we operate the business through a series of business units, so we've not tried to strip out major costs there. It's really been in the head office function. And if you look at the the increase that we've seen in terms of headcount over the last two, three years, it's primarily been not in the operational side of the business, but in head office support functions.

44:54 And it's that where we focused our activity at the in the first six months this year, and we'll continue to focus our activity. Clearly, we want to be able to service customers effectively, so in terms of salespeople, in terms of drivers, in terms of salespeople, in terms of sales administration, those are functions that we continue to ensure that we've got strong resources in place to service our customers. And, again, I think we've probably covered this one. Do we intend to continue to acquire companies as a regular process? Yeah. No. Acquisition is a key part of our strategy. Clearly, it's finding the right companies at the right price. I think we've got a a well, sort of rehearsed program in doing that over the last sort of, seven or eight years, and, we continue to work on that. The fact that we're in a pause now is good because, obviously, for Trevy, we did it in January, was the the biggest acquisition we've done the last twenty years, was complicated in terms of the components, the four components of the business. So we wanted to spend management time making sure that bedded in and making sure we generated the synergies, which I've touched on.

45:58 But we'll be back on the acquisition trail, right companies, the right time, right place, right price back in '26. And, obviously, one of the features of the first half of the year is manufacturing's clearly contributing more of the cost of the group than than distribution. Historically, distribution's been a a kind of stronger contributor in terms of overall. Do you see that as a kind of structural shift in the profit mix of the business? No. I mean, it's right to identify that proportionally, the business has always been sort of ninety, ten historically, 90% distribution, 10% manufacturing. But I think we've seen a really good opportunity in manufacturing. As you can see, it's a specialist niche. The customers are extremely sticky. The margins are higher than distribution.

46:43 Although it's a smaller market and is a more complicated market, we do see it as a nice adjunct to our distribution business. And and as you see from the stats, a a a significant proportion of manufacturing sales is driven through distribution, so there are synergies by the two businesses working together. So I think in terms of the scale of opportunity, distribution still represents the biggest scale opportunity for MACFARLANE, but we we do see manufacturing as an important adjunct to our distribution business to provide a comprehensive sort of protected packaging suite of products and services. I think, again, we may cover some of this in terms of operating margins. You know, we've always talked about making a 10% goal.

47:29 I think we got there last year. Obviously, we've gone back a little bit this year. Does that feel still, like, the medium term target, and what are the levers to kinda get us from where we are now back up to that kind of level? I mean, we've always, you know, over, you know, quite a period, talked about 10% being the underlying operating margin we were looking to achieve, and we've touched that, you know, recently, as I ever said. I think the the sort of things that we do, we've gotta make sure that we get our gross margin back up to 36%, which we mentioned, and we've got to ensure that the cost increases that we have inherited in a way or or or come our way, a big part of that through government legislation, we've got to ensure that we find ways to offset those either through pricing or through a lower cost structure.

48:18 I think there's no doubt that the the property portfolio, as I touched on this and I'll repeat it, the increase in rental cost is is gonna be an increasing challenge for us going forward. So having completed these Midlands project, we'll be looking to accelerate the opportunity to rationalize our property portfolio. It's a balance between ensuring that we've got effective customer service on a regional local level, ensuring that we've got a a property portfolio that that that fits and is cost effective. But there's clearly some more opportunities to do property rationalization and property consolidation, and we'll be accelerating those programs, in the coming period. I think we've covered all the the key areas. I think we covered EPR. Didn't we impact EPR directly in the business?

49:07 Whether that's a long term headwind from customers to continue to reduce packaging. We covered that one earlier. Nope. So I think we've covered all the questions from what we can we can see. If anybody has got another question, happy to take it. If not, then we will thank you for all your questions, and thanks for your attendance today, and appreciate your, your continuing support as we we navigate through what are turbulent times. Thanks very much. Thank you. Peter, Ivor, thank you for updating investors today. Can I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of MACFARLANE GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you all.