Mpac Group (LSE:MPAC) — Investor Q&A

0:02 Good afternoon, ladies and gentlemen. Welcome to the MPAC GROUP PLC investor q and a session. Questions are encouraged. They can be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just 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 we'll publish those responses where it's appropriate to do so on the Investor Meet company platform. Before we begin, we would decide to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from MPAC GROUP PLC. Adam, good afternoon, sir. Thank you very much. So, good afternoon, everybody. I'm Adam Holland. I'm chief executive of the MPAC GROUP. Now you may already have seen that earlier today, we released an RNS, covering two topics.

0:50 Firstly, a trading update, which, follows on from our full year results in '20 on the April 21. And and back in April, we flagged concern over, quarter one market conditions, particularly ongoing delays in customer decision making and growing pressure on margins, as we saw competitive pressures growing given the low, demand volumes that we were seeing at that point. Now those pressures have continued through April and May. And just to give you some sense of scale, in quarter one, we took about £36,000,000 worth of orders, original equipment and service. In just the two months of April and May, we've taken £38,000,000 worth of orders in quarter two to date. So we've learned an enormous amount in a very short space of time about how market conditions are evolving, and what we're seeing is really intense margin pressure.

1:36 The timing of customer decision making also continues to be very challenging. So for example, we took £111,000,000 at just over a third of all the orders in quarter two on the very last day of May, and that wasn't just a single order from a single customer. That was five or six orders from different customers all coming through on the same day. So in addition to those margin pressures, we're also seeing loading challenges across our operations and between our factories. We finished May with an order book that was up 10% at £98,800,000. Previously, you'll probably remember it's been flat at around £90,000,000 for about the last eighteen months from from July 2025 certainly through to to the start of this year. So it's good to see the order book up, but, you know, the the margin pressure in that sold order book is a challenge that we have to address. Why have we done it?

2:25 Well, it's helping to engage our teams. It's absolutely essential that when it comes to retaining our highly skilled workforce during a period of very difficult market conditions, so that we're ready to respond when that pent up demand that we see in the pipeline is released and market conditions improve, being able to respond to the upturn and take advantage of the recovery when it comes. But the margin pressure, the phasing, and the load balancing across our operations mean that we have to face into some difficult short term challenges. Now we've responded to those challenges by actively managing our load capacity levels across our production sites, reducing our overhead costs even further. You'll remember that we took a million pounds out of our overhead costs in quarter one this year, and that was on top of reductions last year and the consolidation of factories in North America last year. We've also taken actions to improve cash generation, and the net impact of all of this is two things. Firstly, we expect margins at the half year to be below prior years and the half one half two weighting that we've seen in prior years to start to come through again this year. So similar half one half two weighting to previous years, but the first half performance below prior year. The second thing is that full year underlying profit before tax will be substantially below the current market expectations.

3:38 And our focus, therefore, is on maintaining appropriate liquidity and the headroom in our banking covenants. And that brings us to the second part of the announcement that we released earlier today. Now last year, with the appointment of new nonexec directors to the board, we began a strategic review looking at aligning our group in a more focused way around the group strategy, specifically, a scalable, full aligned packaging machinery solutions group. The acquisitions that we've made in 2024 were absolutely aligned with that strategy, but it was clear to us that the Lambert business was a little different. Lambert creates highly automized high highly customized automation centered on the automation of our customers' product assembly processes and therefore bespoke to a particular customer's product.

4:24 Late last night, we agreed the sale of the Lambert business to Mechatronic, a group that is already very, very well aligned with the Lambert business and therefore a good strategic match for the team in Tadcaster and for Lambert customers. The price comprises an initial consideration of £16,000,000 on completion and up to £4,000,000 in earn out depending on the performance of the Lambert business this year. Completion depends on certain conditions, notably clearance in accordance with the National Security and Investment Act, NSIA, which we expect to take place during quarter three. Many of you will remember we went through a similar process when we acquired the CSI business in 2024. Proceeds from the sale will be used to reduce our net debt. Now the team have worked incredibly hard to bring this to the point of signature, and I'd like to thank them for their dedication and focus and also to extend my thanks to the Lambert team for their focus and support over many, many years.

5:16 This positions the Lambert business very well for the future. It aligns the group with our strategy in a much more coherent way, and the timing improves our liquidity. So I'd like to open up to Q and A. I'm sure you have questions and I'll hand over to Katie to read from the questions that have come in whilst we've been on the call. Thank you, Adam. Firstly, a question, will the market recover or do you believe this is the new normal? Okay. I think the first thing to say is we absolutely believe the market will recover and we believe that not just based on belief but based on looking at previous cycles. Capital equipment markets are cyclical in their very nature. We know during times of uncertainty and there's enormous amounts of macroeconomic uncertainty at the moment that customers pause in their investment in large capital projects, they delay decision making and that creates a pent up demand. We can see that in our pipeline. We've got a pipeline of projects that customers are considering placing.

6:15 That pipeline has continued to grow consistently. It's larger now than it has ever been at any time in the group's history and at some point that pent up demand will be released and of course the question is when? And the truth is none of us know. You know, it would be I think foolish and misleading frankly to give a prediction as to when that pent up demand will be released. But in every previous downturn, we have seen that pent up demand released and the market comes back not just with a trickle, but very strongly when it rebounds. The decisions that we've made not just today but over recent months are all designed to be ready for that rebound when it comes. So you know part of the reason that we've been working very hard to deal with pricing pressure in the market is to make sure that we are not faced with a significantly underutilized engineering and operations team. Want We the engineering and operations teams well utilized and ready, you know, ready and employed when the rebound comes, rather than resizing our workforce now to what will not be a normal position in the future. This is a short term factor, the market will recover.

7:21 Thank you, Adam. How is the Service business performing? How does this break down by sector and geography? Okay, well, I mean, the first part of the question is very easy to answer. The Service business is performing well. We've always said it's very resilient. Service business tends to be very robust during the economic cycles, and it's proven to be exactly that in the cycle that we're in today. So the service business is performing well. We always see opportunities there. The second part of your question about breakdown by sector and by geography is perhaps a little harder to answer. Let's start with The US. Now last year, one of the big themes was US tariffs and the impact that had on decision making in The US. We saw that in quarter two and quarter three, but by the time we got to the end of the year, we'd seen that become a global slowdown in decision making, focused on the large multinational blue chip companies that we support.

8:14 The US has started to recover, started to show some signs of recovery in our numbers. It has not come back to previous levels. We're still around about half the level of volume that we've seen in previous conditions, so there's still an awful lot of recovery to come in The US. But we've started to see the first signs that The US is stabilizing. However, I think if I was to look around the rest of the world, I couldn't break down a particular geography and give you a clear steer that would be meaningful. If I was to break it down by sector food and beverage, healthcare and the other sectors that we support, you know very little meaningful information there either. I think the biggest trend that I would point to other than this difference between how original equipment and service is performing is that within the original equipment business, our large multinational blue chip customers have slowed down more than the smaller businesses around the world. And when I say small, know, just for scale, that might be a business doing a billion in revenue, but they're perhaps not up with the many tens or, you know, a 100,000,000,000 of revenue that some of our larger multinational blue chips can achieve. So those smaller billion and below revenue customers that we support have continued to invest in their businesses and perhaps they see opportunities that the multinational blue chips haven't taken advantage of yet. But they will come back, they will come back and we expect the blue chips will rebound strongly when they do. That's what we've seen in previous cycles.

9:38 Thank you, Adam. You talked in April about a second half weighting. What split should we be expecting now? Yeah. Yeah, and I mentioned it earlier today as well. Look, the first half will be below previous years. We absolutely expect that. But the weighting between H1 and H2 two is likely to follow a very similar pattern to previous years. We've got good data now from the April and May order intake to substantiate the order book, which covers quite a lot of this year's book and bill revenue already. And that gives us a very clear indication of what the weighting is going to be H1, H2. So we're expecting similar a similar weighting change between H1 and H2 on profit that we've seen in previous years. Thank you, Adam. What while current, PBT expectations aren't stated in today's trading update, can you provide some definition to substantially below?

10:31 Yeah. Okay. Well, I mean, it's a good it's a good question. I'm not going to give a number today, that is different from the analyst briefing notes that are available to anyone dialed into the IMC call. I think on the MPAC website, you'll find a section called research and TringTriangle published a research note there that is available to all. That same research note is available on the Investor Meets Company website that you all dialled into today, you can obtain that research note in two places and then a number of other analysts write on us. They have all given their own indications of what they see the projections being for the balance of this year. So I'd refer that question asker there. Thank you, Adam. You refer to the headroom to covenants with respect to net debt given to the Lambert sale. How tight is this given revised expectations?

11:25 Okay. Well, I think it's probably a good point to bring Duncan in on this. And so Duncan, you all know, has been introduced to the world as our interim CFO, and he joins me on the call today. So, Duncan, perhaps I could turn to you for that. Yeah. Thank you, Adam. I'm delighted today to be joining Adam on the call and and and to take this question. The covenant that we have for leverage is three times EBITDA. That's the covenant. The actual measure of leverage at the end of twenty twenty five was just over two times EBITDA. And as Adam said just now, I would point investors to the the analyst notes that that are out there, including Tring Triangle, which points to a covenant number of 1.8 times EBITDA at the end of twenty twenty six.

12:14 Thank you. And staying on that, another question is around is the covenant's position such that all the Lambert proceeds need to be used to reduce debt? Or given the share price reaction today, could some be allocated to a share buyback? Okay. It's a good question. The intention of selling the Lambert business was to reduce the group's net debt. That's absolutely what we've done and to provide us more than adequate cover over the covenants. But there's no intention at this time to announce a share buyback program. We do as a board get asked from time to time by shareholders, would we consider one? We always weigh it up against the other possible allocations of capital. Our group strategy for growth has been set out on previous calls very clearly, and certainly, we don't see that share buybacks offer a better shareholder return than the other ways of allocating capital. So the short answer is no. Thank you, Adam. There's a question again around net debt. And what are you looking to do in terms of upcoming current debt obligations?

13:16 Oh, I'm sorry, Katie. Can you repeat the question? Of course. What are you looking to do in terms of upcoming current debt obligations? Oh, okay. Okay. So I think I think this question is referring to the fact we had some deferred consideration associated with the acquisitions that we made in 2024, and we've been we've been clear on when those those considerations come due. They're not performance related. They were simply deferred payments. There's a payment due towards the end of this end of this year, and there's a a final payment early in twenty twenty twenty seven. And so our intentions are to make those payments on time and clear that deferred consideration. Thank you, Adam. Could you give some color to the order mix? Is it largely spares, capacity expansion, changes in packaging or brand new packaging lines?

14:04 Okay. Well, there's let's start let's go right back to the very start. We if we break our business down into original equipment and services in the in the in the car in the previous year 2025, our services business made up about 23% of group revenues, The original equipment business made up the balance of 77% of group revenues. Actually, that that story probably needs expanding a little further because if we looked at the pre acquisition businesses, so excluding CSI and BCA that we acquired in 2024, last year, the group actually achieved 30% of revenue from services and 70% on original equipment.

14:54 The businesses that we bought in 2024 had a slightly lower percentage of their revenue from services. I think it was 17% in the case of CSI and 15% from BCA and diluted the group average down to 23. So we've got opportunity to grow the services business, just in the two acquired businesses, but in the rest of the group as well. And that 30% remains our objective for the group today to bring the whole of the group up to 30% revenue from services, 70% from from original equipment. Now services revenue includes, as you say Katie, a number of different revenue streams, not just field service support, but also spare parts. We do modifications, upgrades and modernizations, obsolescence programs and so on for existing lines in our customers' factory. We call those additional equipment programs to distinguish them from original equipment.

15:47 The intention is to continue to grow all of those service revenue streams in order to bring us up to that 30% of our revenue from services in the current group. That's the objective. In terms of how we're seeing the business perform in 2026, I would say that the service business revenues, all the above are holding up well, with the one exception of additional equipment programs, which tend to be treated by our customers as CapEx rather than OpEx. And so they're making the same capital equipment decisions that they're making on original equipment programs. Therefore, we tend to see additional equipment slow during a down cycle. Indeed, that is what we're seeing today. Thank you, Adam. We've had a couple of questions around the sales cycles.

16:33 One is how are you taking steps to ensure a more robust pipeline during periods of slowdown going forward? And with the cyclical pressures causing pricing competition, are there any structural issues as well? For example, competition increasing, taking shares, etcetera. Yeah. Okay. I mean, I think the the question on steps to ensure a more robust pipeline. I mean, we we are we are blessed in our market by the fact we have a very robust pipeline. I think I said earlier on this call that the pipeline continues to fill at a faster rate than we've ever seen before. The approach that we took in the acquisitions we made in 2024 was about looking at commercial synergies between the businesses in the group. And and that really is important to us. We want we want to ensure that when we find an opportunity for one of our businesses with the customer, that creates other opportunities with those same with those same customers for the other companies in the group. So our pipeline's growing. Our pipeline's very healthy. That's not the issue. We're also not not losing a lot of business to competitors.

17:34 You know, what we're seeing is that the slowdown in customer decision making is delaying how quickly projects are coming through the pipeline. When they do get to a point of decision, having taken the approach we have on pricing, you know, our win rate compared with losing to a competitor is actually pretty healthy at the moment. You know, we've we've done that deliberately to make sure that the team are well loaded within the business. So I'm not concerned there at all. We are seeing some customers deciding to despec projects. So rather than rather than going in at the kind of ultimate the optimum return on investment on a new production line, for example, taking the decision to invest slightly less cash given the current environment, except that that ends up with a line that is is perhaps specified to work at a less than optimal ROI, but maybe it's all that can be afforded in the current environment.

18:24 That does lead to an opening up of of competition. You know, we're we're known for producing very high performance, very high high speed packaging and and end of line machinery. If you bring those speeds down and bring the performance expectations down, there are more players in the market who can can perform at those lower specification levels. And although they might not be new entrants, they perform there for for many years. You know? Nevertheless, we're competing with those today in a way that perhaps we we wouldn't have done. I'm absolutely clear we've made the right decisions to make sure we keep volume through our factories and retain the utilise utilization of our engineers. Loading imbalances between our factories is a is a a challenge that we have to get onto, and the best way we can do that is by driving volume through the business. Thank you, Adam. On the April 21, the group reiterated full year '26 expectations despite acknowledging difficult market conditions and geopolitical uncertainty.

19:19 What specifically changed in customer behavior between the April 21 and today that caused management to conclude the full year '26 profits will now be substantially below expectations? Okay. Yeah. Okay. So I'm I'm gonna I'm gonna paraphrase the question. I think I think what this question is really saying is, it's not long since the April 21. How can so much have changed so quickly? Well, back on the April 21, we had get back to that end of quarter one. We'd taken 30 plus million pounds worth of orders in the year to date. We've seen margin pressure in the orders that we've taken. We had cut a million pounds worth of overheads calendarized for the year 2026 to deal with the pressure that was in the sold order book at that point, and that had allowed us to to see a route through. But what we didn't know was how the market was gonna continue to pull perform through through quarter two.

20:15 You know, here we are just a few weeks on from that. It is only a few weeks, but we've already doubled the order intake for the year in that in that short space of time. And, you know, if you'd ask me a day before the end of May, you know, it would have been lower than that. So a lot of information came through on the very last day of May with those £11,000,000 worth of orders there as well. So we now know an awful lot more about the sold order book and the margin in the sold order book. We know an awful lot more about the loading and the timing of those orders across our factories, and we can see the challenges in underutilization of some some of our plants and over over demand in other of our plants. Now that to the extent that we can move work around with it between the group, we can we can address that. But we are you know, that those are the challenges that we're facing in our business today. And what we've done in today's revision to the to the trading expectations is to say that we don't expect that to improve during the balance of 2026.

21:07 So we're expecting that gross margin pressure to remain in our markets through the whole of 2026. Now, you know, I think I think implicit in that is a question of is that really what we think will happen? And the answer is, I don't know. You know, none of us know when the markets will rebound. I think all of us can say that we don't expect consumer demand is is finished and that the fundamental drivers of automation, the structural drivers of our industry, you know, labor cost inflation, reassuring into The US, the need to drive operational efficiency in our in our customers' bases, and the need to expand capacity as as FMCG demand increases and trends change. All of those fundamental drivers are still there. So this market will recover, but we don't know when. And so we've taken what we believe is the right approach in in setting the business up to manage a long period of slow recovery, And we are ready to respond to the markets when they recover without any expectation of when they will. And I think that's exactly the right way of approaching this the current environment.

22:08 Thank you, Adam. There's been a question around the time line on the decision of Lambert and if you can find any more detail on that. Yes. Yeah, I'd be happy to because it's an obvious question to ask. We've got difficult trading conditions and we just hold a business. So the two things linked. Well, look. We we started thinking about the Lambert business strategically as a board towards the end of twenty twenty five. So I think we had a number of new non execs join our board late last year. It gave us the perfect opportunity with fresh eyes to bring those sorts of strategic questions back to the board for discussion. And and we talked at length about, you know, the position of the Lambert business within the group. Lambert's a great business. You know, don't get me wrong. It's a great business, but it is a little different from the other businesses within the group. And and we started thinking about what will position Lambert best for the future and exploring potential buyers for the Lambert business.

23:03 There were a number of potential buyers in in the market. We we reached out to and and spoke with a number of of potential trade buyers. Mechatronic were were absolutely aligned strategically with what we think is the best outcome for Lambert. And as we got into pricing discussions, it was clear that we saw eye to eye in pricing as well. So things progressed with with Mechatronic, and that gave us an option, frankly, for this year. You know, that these things don't come about by chance, and they don't come about quickly. So it's taken a long time, a lot of hard work to get it to the point where we had that option. And, you know, I'm I'm I'm delighted that we brought it to the the point where we could we could close this with with a Mechatronic and sign the SBA late last night. There is still work to be done before completion, of course, but that process is now fairly mechanistic and and we'll we'll work through with Mechatronic and the legislative authorities on that. So it's it's a very long term activity.

23:58 And when you start to think about why have we done it, you know, what why why sell that business? Well, you know, I I've talked, I think, in the r and s about about the type of work that Lambert does. Highly customized automation really focused on product assembly, and that lines it up perfectly with what Mechatronic and and their group is all about. They focus on on on custom automation, on bespoke automation for their customers, and they've got a huge focus on the assembly of products, which is frankly not what we do. We're we're a packaging machinery and automation, end of line automation group. That's what we're trying to be. So the the the lineup was very good. Think the other thing I would point at is is, you know, I I measure I measure the the the interaction between our businesses in terms of customer synergy.

24:44 And, you know, I think it's interesting to note that in the in the seven years that we've owned the Lambert business, there have only ever been five customers in common between Lambert and any other any other business within the MPAC GROUP, including those that we acquired in '24 in 2024. So very little in the way of of customer synergy there today, and that's not for lack of trying. That's simply a fact that the two the two businesses are different, Lambert and the rest of the group. So I think that really, you know, that really opens up why we've made that strategic decision, how long we've worked on it. It's given us options today. I think it's a really good assessment for, you know, corporate governance frankly and the success of corporate governance when it works well and it has worked well in this case. You know, the the the board asked challenging questions of the strategy. We thought through carefully. It's created an option, which in the current environment we're facing in the market is exactly the right option for us to to exercise to address the liquidity that we had in the group. So I think it's a a very good advertisement for what can go well in corporate governance.

25:46 Thank you, Adam. What will the margin profile and capital intensity look like going forward after the sale? Perhaps I'd turn to to Duncan to give him a chance to talk a little bit about where where margins will be. Yeah. I mean, I think it's a it's a percentage margin question, isn't it? And where we hope to recover to. So Duncan? Yeah. Thank you, Adam. In terms of the the margin for the the ongoing group, you know, we expect it to be, you know, down in in FY twenty six compared with the the previous guidance. In terms of weighting, we would expect the weighting of of absolute margin first half, second half to be similar to previous periods. That's what we tend to see as a group. And maybe if I try and answer the question around asset intensity, I think it's a question around return on capital employed.

26:37 That's a number that we stated at the 2025 full year results. We don't talk about it today, but we would expect return on capital employed of the group to be broadly unchanged as a result of the transaction. Yeah. And perhaps I'll just add to that with with my view of where we're where we're aiming strategically. You know, last last year, we managed to achieve a 10.4% return on sales. It was the first time we got into to double digits. You know, we were delighted to achieve it, and here we are stepping back in in 2026. Does that change our expectation of of of double digit being the right objective? Absolutely not. You won't see it in our objectives for the next next couple of years of being, you know, stated as a as a an expected outcome because as I said, we're gonna plan on the basis that the market recovers very slowly, the conditions stay stay poor for a long time, but we are working very hard in the background so that as the market recovers, we can take advantage of that operational leverage. And as that comes back in, I would expect us to be into into double digit percentage returns on sales. And as Duncan says, our ROCE last year was 13.2% return on capital employed.

27:42 I think even with the difficult market conditions and with the sale of the Lambert business, we'd expect to be around that number in terms of return on capital employed this year. And we certainly have no expectations of that being an acceptable number. We want to continue to drive ROCE up in future as well. Thank you very much, Adam. And then just the final questions before you have some closing comments is beyond the disposal of Amber and the reduction in debt, what specific actions is management taking to improve profitability and shareholder returns if current market conditions remain weak for another twelve twenty four months? Yeah. I mean, bearing it away and amongst all of the other things we've talked about today, we have we are looking at taking a further roundabout a million pounds out of it out of overhead in the balance of this year. So those if you add together that the overhead cuts we've made last year, the million pounds reduced in the start of this year, a further million to come in the balance of this year, there are some significant reductions in our overhead costs which all drive through to bottom line performance.

28:44 Those are hard to see in amongst all the other effects in the P and L right now, I understand that. But as the volume starts to come back, those improvements to our overhead base really start to have a gearing effect as operational leverage comes through. So I think there's I think there's a lot to be said for those those activities. I I'm also very clear in my my thinking about what we're doing short term versus long term. I have absolutely no intention of of starting to cut into muscle within the group and to making changes to the group, which might appear, you know, wonderful in the short term and drive improvements in short term profit, but at the expense of giving up on long term growth and the strategy for the group. That is not what this board is about. It's not what I'm about. We're here to drive long term performance, and and that means, making decisions that are strategic in their very nature and not acting like a hero for the short term. So, you know, we're gonna focus on what is the right thing to do. Look. I I I think probably it is right to turn to to closing closing comments, and and maybe that's a a good segue into that. We are we are facing some very challenging market conditions. We're seeing customers continuing to delay decision making. The low volume that we're seeing in the market, has gone on for quite some time now, is putting considerable pressure on our gross margins.

29:56 We are absolutely convinced that the market will rebound. We've seen that after every previous capital equipment cycle downturn that there's been a rebound and when it comes, it comes strong. So our intention is to position the group to respond to that pent up demand as it comes through. We've taken actions to address the liquidity. We've taken very quick actions as far as the market's concerned, but we've been working on these in the background for quite some time now, and that will address the liquidity concerns that I know many shareholders had back when we talked in April. And we remain absolutely focused on our growth strategy. We're taking the right leadership decisions at the right time, and I think we've demonstrated that today. So thank you very much, Katie. Thank you very much, Adam and Duncan. Thank you. Perfect, guys. If I may just jump back in there at this point, and thank you very much indeed for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that management team can really better understand your views and expectations.

30:53 This won't take a few moments to complete, but I'm sure be greatly valued by the company. On behalf of management team of MPAC GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session, so good afternoon to you all.