Interim Results

Macfarlane Group PLC 17 August 2001 17 August 2001 MACFARLANE GROUP DELIVERS FIRST HALF EARNINGS OF £7.2M IN CHALLENGING CONDITIONS RESTRUCTURING WILL DELIVER FUTURE BENEFITS Pre-tax profit of £7.2m from a turnover of £105.1m Earnings per ordinary share increases to 3.98p Agreement to sell Plastics Division for a consideration of $70m, subject to shareholder approval As part of rebalancing, interim dividend increased by 12.5% to 1.80p Restructuring of Packaging Division will deliver annualised synergies of £2.5m by the end of 2002 ============== John Ward, Chairman of Macfarlane Group PLC today said: 'The results for the first six months of 2001 show good levels of profitability, a very creditable performance given that trading in 2001 continues to be impacted by the general downturn in the markets in which Macfarlane operates. Whilst the major downturn widely reported in the electronics sector caused particular problems at our Govan, Braehead and San Jose facilities, early action in reducing costs mitigated the earnings impact that might otherwise have been expected. In our Packaging Division turnover has increased, margins have been maintained and profitability has increased. At the start of 2001 we announced the consolidation of our Merchanting, Packaging and Labels businesses into a new stronger packaging division, providing opportunities by focusing on a wider range of packaging-related solutions to our customers. This Division was further enhanced by the acquisition of National Packaging on 9 April 2001. We then acquired the business of A1 Packaging in July 2001. We are confident that these acquisitions will deliver value to Macfarlane Group shareholders through the effective combination of the businesses. The remainder of 2001 and the first half of 2002 will see considerable effort in achieving synergies by eliminating the current duplication in sites and activities creating a business, which will deliver improved service to customers. We have today signed an agreement to sell the business, assets and certain liabilities of our Plastics business in the UK to Tyco Plastics Limited for a consideration of $70m, on a debt-free basis. The disposal is conditional on shareholder agreement at an Extraordinary General Meeting and a Circular detailing the transaction will be sent to shareholders shortly. Our efforts in the Plastics Division during the first half of 2001 have been targeted at cost reduction schemes with production efficiencies achieved by consolidating three manufacturing sites. Although significant production capacity was lost during this consolidation in the first half of the year full year savings of £1.0m on an annualised basis are expected as a result of this cost reduction programme. Despite the slow-down in the economy and problems in individual sectors, particularly electronics, our management team remains focused on its objectives and will take the necessary steps to maintain this focus and meet targets. Your Board remains committed to the objective of double-digit earnings growth after adjusting for the impact of disposals. The realignment of our asset base continues and the forthcoming restructuring of our packaging operations will provide a base to increase profits in future years, by delivering synergies on an annualised basis of £2.5m by the end of 2002. Despite the competitive trading conditions in the year to date, the Board expects to make further progress in the current year provided there is no further material deterioration in trading conditions outwith our control.' Further information: John M. Ward Chairman 0141 333 9666 Iain D. Duffin Chief Executive 0141 333 9666 John Love Finance Director 0141 333 9666 Press & Media: Gordon Beattie Beattie Media 01698 787878 Macfarlane Group PLC announces its interim results for the six months ended 30 June 2001. Financial Headlines Six months ended Six months ended 30 June 2001 30 June 2000 Pre-tax Pre-tax Sales Profit Sales Profit £000 £000 £000 £000 Packaging 74,264 4,974 66,126 4,219 Plastics 30,842 2,179 31,857 2,431 Under strategic review - - 191 517 Profit before taxation 105,106 7,153 98,174 7,167 Disposal of Flo-pak in 2000 - - - 500 Profit before disposal of business 105,106 7,153 98,174 6,667 The profit before tax for the six months ended 30 June 2001 increased to £ 7.2m, compared to £6.7m in the first six months of 2000 after taking account of the gain of £0.5m recorded on the disposal of Flo-pak (UK) Limited in February 2000. Earnings per share were 3.98p compared with 3.67p before this business disposal. Turnover in the period increased from £98.2m to £105.1m, with a good contribution from the recently acquired National Packaging Group. The performance achieved in Packaging was particularly encouraging and the Board confident that this can be maintained in challenging market conditions. As part of the rebalancing of the dividend, the Directors have declared an interim dividend of 1.80p, an increase of 12.5% on the 1.60p declared last year. The dividend will be paid on Thursday 11 October 2001 to shareholders on the register on Friday 7 September 2001. Packaging In spite of the economic climate, sales after acquisitions have increased by 12.3% and profits before taxation by 17.9%, with operating margins increasing from 6.4% to 6.7%. We continue to win new accounts for value added packaging and a number of new initiatives are underway to develop these accounts still further. All our management teams responded well to competitive pressures, maintaining margins and exercising strict control of overheads to produce a solid performance in the first half of 2001 given the market conditions. In our Packaging Division, we are experiencing mixed trading conditions. Clearly with the downturn due to the well-documented slowdown in demand in the electronics sector throughout the world, this particular part of our business is being impacted. Otherwise the remainder of our business continues to deliver good levels of profitability. Overall, margins are being maintained and we will continue to pursue opportunities to replace business from major Original Equipment Manufacturers (OEM's) as they move to new locations thus attempting to minimise the impact on this part of our business. Our Hungarian operation is an excellent example of the realisation of our strategy and this will continue as major OEM's move to lower cost production countries. The consolidation of our businesses has resulted in new cross-operational selling opportunities, which are being vigorously pursued. The acquisitions in 2000 in the Labels business are performing to expectation and the business is producing good results. Our Labels business has gained a number of new high quality accounts, which will have a positive impact in the second half of the year. Our distribution business aims to build further on its long-standing reputation for customer service in the nation-wide distribution of packaging materials, whilst maximising profitability from its UK-wide branch network. The high levels of service achieved in this Division and clear expertise in distribution and supply chain logistics are vital to the Group's future development. Customers will be provided with a national offering supported by full service at the local level. Agreements with premium brand partners to distribute their products in the UK on an exclusive or preferred basis are a key feature of our business. Supply partners will be key to us achieving our growth aspirations and in meeting our cost objectives. Other similar agreements are being considered and the product offering to customers is being expanded. The acquisition of National Packaging was followed by the purchase of the business and certain assets of A1 Packaging Limited in July 2001 for £3.4m. This enhances our leadership position within the UK with our packaging distribution business currently nearly three times the size of our nearest competitor. There will no doubt be further rationalisation within this sector and it is appropriate for Macfarlane Group to have a leading involvement in this process. We shall continue to seek other value enhancing acquisitions but will not be drawn into overpaying. Our Hungarian business continues to perform well and we aim to launch a start up distribution service there during the fourth quarter. Our e-commerce initiative has been slightly delayed to ensure complete compatibility with the systems and product range from National Packaging with trading now expected to commence in the final quarter. Substantial synergies are being sought as a result of the acquisition of National Packaging and the business of A1 Packaging. An integration team supplemented by external support has completed a comprehensive review of the total business, concluding that fundamental changes, which harness the best aspects of our existing business practices should be adopted and effecting further consolidation of central activities. This will result in fewer, but higher quality sites, which will operate more efficiently. It is expected that at least half the combined branch network sites will close, in most cases simply eliminating the duplication of sites in key regions. As this process develops, the product range offered to customers will broaden beyond conventional packaging products, leaving ample scope for further consolidation as a result of the increase in the total market served. Improved sales and marketing processes will be introduced to support a national sales force. We are currently recruiting marketing and sales support personnel to support this initiative. Standardisation of best practices will be implemented before the end of 2001 and a common information system, already successfully in operation at our largest site, will be introduced throughout the business in the next eighteen months. Cost savings arising from these actions are forecast to include reduced ERP installation cost, reduced working capital, more efficient procurement, major reduction in property costs and reduced administration costs, reduced headcount, the latter primarily through natural wastage. Our restructuring plans are expected to generate £2.5m in annualised savings and the exercise will be complete by June 2002, with the full benefit of the resultant savings being achieved by the end of 2002. The costs of the restructuring programme will be met through ongoing savings from operations and the realignment of our property portfolio as we eliminate duplicated sites. Our strategy and focus continues to shift from primarily selling only what we traditionally manufactured to selling what the customers request. We will however maintain value added manufacturing and assembly businesses where this is determined to be a strategic customer requirement, which enables us to make satisfactory margins to justify the investments made. Plastics During the bid for BPI last year the position taken by your Board was that scale and leadership in the Plastics business were two of the necessary prerequisites to ensure robust performance on a recurring basis, and our view has not altered. Following the review of a number of strategic options, your Board concluded that the appropriate course of action to optimise shareholder value was to effect a trade sale whilst retaining our injection moulding business in Ireland. As part of this overall process we sold our residual holding in BPI on 3 August 2001. The Board of Macfarlane Group has therefore today announced the sale of the business, assets and certain liabilities of our Plastics business in the UK to Tyco Plastics Limited, for a consideration of $70m, on a debt-free basis. Further details will be given in the Circular to be distributed to shareholders shortly. The effect of the disposal will be dilutive to earnings per share compared to Macfarlane Group's earnings per share had the disposal not occurred. Efforts in the Plastics Division in the first half of 2001 were targeted at further aggressive cost reduction with production efficiencies achieved with the consolidation of three manufacturing sites. Full year savings of £1.0m on an annualised basis are expected as a result of this cost reduction programme. The Division acquired United Polythene Supplies Limited a polythene converter based in Oxford, for a total consideration of £1.2m in the second quarter of 2001. This acquisition was consistent with the Division strategy of bolt-on acquisitions in place of capital expenditure to expand the product portfolio in the Division with new products, to achieve good levels of profitability. The management team has consistently bought good quality existing capacity and integrated it quickly, achieving overhead savings and leveraging benefits through scale. These actions enabled Macfarlane Group to realise an attractive price for the business. Dividend At our annual results announcement in March 2001, we indicated that the company would increase the proportion of the interim dividend as a percentage of the total dividend for the year. The Board has declared an interim dividend of 1.80p per share (2000 1.60p per share). The directors will review the level of the final dividend in the light of the Group's continued progress for the year as a whole. Finance We have continued to invest where there are key needs to meet future growth plans. In the first half of 2001, capital expenditure reflected our objective to pursue incremental acquisitions as an alternative to significant capital expenditure as a means of combining new capacity to the Group with a ready-made customer base. The realignment of the asset base has continued with the utilisation of asset gains to finance the prompt implementation of actions and expenditure required to stimulate future growth and reduce our cost base. During the period from March 2001 until June 2001, the Group repurchased a total of 2,642,500 ordinary shares, at an average price of 79p and a total cost of £2.1m, for cancellation. The repurchases were in line with the authority given at recent Annual General Meetings and enhance earnings per share. It is the intention of the Board to continue to make tactical share buy backs in accordance with the authority limits given, provided there is a clear enhancement to earnings per share. Macfarlane Group tendered its full entitlement in respect of BPI's tender offer receiving £6.3m in respect of the shares tendered. Following the acquisition of National Packaging Group Limited and United Polythene Supplies Limited in the second quarter of 2001, at a combined cash cost of nearly £ 24.0m with inherited borrowings of £0.8m, net debt stands at £39.1m at the end of June 2001. The effect on profits is a net interest charge of £0.2m compared to £0.3m in the same period last year and interest cover remained strong. Macfarlane Group sold its residual shareholding in BPI for a net consideration of £6.5m in August 2001 and a gain of £0.2m will be recorded in the second half of the year. The sale of our Plastics Division and the residual BPI shareholding will be used to eliminate the Group's existing borrowings with funds then being utilised to finance further acquisition opportunities and share repurchases in line with the existing authority. Management and employees As envisaged at our Annual General Meeting in May this year, Graham Casey, the Managing Director of the Packaging Division joined the board of Macfarlane Group PLC on 1 June 2001. Andrew Cotton recently joined our team at Macfarlane Group's offices in Glasgow supporting the executive in the acquisition activity in the first half of 2001. Andrew was appointed Company Secretary of Macfarlane Group with effect from 3 August 2001. The Board is confident that both Graham and Andrew will make a significant contribution to the future success of the Group. Given the considerable challenges in the market place, all our management teams and employees deserve our gratitude for their commitment to the Group. As part of the disposal of our UK Plastics business Mike Clark will step down from the Board of Macfarlane Group to lead the management team in Plastics under its new ownership. Mike has always been an excellent colleague and we wish Mike and his team every success in the future. Prospects John Ward concluded: - 'Macfarlane Group's strategy is now clear with a focus to be a leading distributor and value add service provider in the packaging industry. Manufacturing is retained where we can provide robust and sustainable earnings while providing critical manufacturing skills to augment both the benefits of scale now within the Group and the extensive choice of products available to our 50,000 customers. We aim to offer customers what they want and to have the resources, management and employees to meet these requirements in a profitable manner for Macfarlane Group. Your Board remains confident for the future of Macfarlane Group. There is an enthusiastic Executive Team in place and our restructuring programme will be pursued in the second half of the year with the aims of achieving the restructuring plan on a cost neutral basis. Sales growth opportunities are still evident despite cost and competitive pressures. In spite of the competitive trading conditions in the year to date the Board expects the remaining businesses to make further progress in the current year provided there is no further material deterioration in trading conditions, outwith our control. Following the sale of the Plastics Division our balance sheet and cash flow position will be very strong, allowing the Executive Team to make further investment to support plans for organic growth and take advantage of acquisition opportunities. The Board intends to use the share repurchase facility approved at the 2001 Annual General Meeting to make further tactical share buy-backs, where appropriate. Your Board remains committed to the objective of double-digit earnings growth after adjusting for the impact of disposals. The reshaped Macfarlane Group will provide leadership in selected markets through the innovative delivery of total packaging solutions to our customers. Macfarlane Group intends to be a competitive player and an attractive profit generator capable of delivering superior shareholder returns.' The interim report will be sent to shareholders on 24 August 2001 and will be available to members of the public at the Company's Registered Office, 21 Newton Place, Glasgow, G3 7PY from 27 August 2001. Consolidated Profit and Loss Account (unaudited) Six months ended 30 June 2001 Six Six Year to months Months 31 Continuing to 30 to 30 December June June activities Acquisitions 2001 2000 2000 £000 £000 £000 £000 £000 Turnover 93,989 11,117 105,106 98,174 197,927 Cost of sales 62,815 7,365 70,180 66,207 130,026 Gross profit 31,174 3,752 34,926 31,967 67,901 Net overheads recurring (24,353) (3,337) (27,690) (24,977) (52,682) restructuring (675) - (675) - (4,471) Operating profit 6,146 415 6,561 6,990 10,748 Gain on disposal of fixed 830 - 830 - 1,391 assets Gain on disposal of business - - - 500 500 Profit before interest 6,976 415 7,391 7,490 12,639 Investment income 755 - 755 17 46 Interest payable and similar (617) (376) (993) (340) (1,027) charges Profit before taxation 7,114 39 7,153 7,167 11,658 Tax on profit on ordinary 2,150 2,160 3,926 activities Profit for the financial 5,003 5,007 7,732 period Dividends on equity shares 2,235 2,029 6,024 Retained profit for the 2,768 2,978 1,708 period Earnings per ordinary share 3.98p 3.95p 6.10p of 25p Diluted earnings per ordinary 3.96p 3.95p 6.09p share Earnings per share before restructuring/disposals 3.98p 3.67p 9.03p Dividends per share 1.80p 1.60p 4.75p Corporation tax rate 30.1% 30.2% 33.7% Notes 1. Earnings per share are calculated on the basis of the weighted average of 125,769,950 shares in issue (30 June 2000 - 126,828,240, 31 December 2000 - 126,828,240). Diluted earnings per share are calculated on the weighted average on a diluted basis in accordance with FRS 14 Earnings Per Share of 126,333,617 shares. (30 June 2000 - 127,012,664, 31 December 2000 - 126,907,178). 2. Taxation has been provided at 30.1% for the period to 30 June 2001, the expected tax rate for the full year. 3. The figures for year ended 31 December 2000 are derived from the published accounts. A copy of the accounts for 2000 on which the auditors issued an unqualified report, has been filed with the Registrar of Companies. 4. The interim financial statements have been prepared using accounting policies consistent with those adopted in the 2000 financial statements. No impact will arise in the 2001 financial statements as a result of the adoption of FRS18. Consolidated Balance Sheet (Unaudited) 30 June 2001 As at As at As at 31 30 June 30 June December 2001 2000 2000 £000 £000 £000 Fixed assets Intangible assets 26,312 7,056 10,316 Tangible assets 55,506 58,542 55,404 81,818 65,598 65,720 Current assets Stocks 16,099 12,296 13,277 Debtors 54,762 47,611 47,287 Current asset investments 6,324 - 12,279 Cash at bank and in hand 3,592 3,059 2,230 80,777 62,966 75,073 Creditors: amounts falling due within one 89,509 55,248 68,936 year Net current (liabilities)/assets (8,732) 7,718 6,137 Total assets less current liabilities 73,086 73,316 71,857 Creditors: amounts falling due after more 1,568 645 880 than one year Provisions for liabilities and charges 2,007 2,272 2,140 Total net assets 69,511 70,399 68,837 Operating assets by division Packaging 73,168 51,943 54,107 Plastics 35,464 27,465 38,010 Operating assets 108,632 79,408 92,117 Net debt (39,121) (9,009) (23,280) Net assets 69,511 70,399 68,837 Consolidated Cash Flow Statement (Unaudited) Six months ended 30 June 2001 Six Months Six months Year ended ended 30 ended 30 31 June June December 2001 2000 2000 £000 £000 £000 Net cash flow from operating 8,530 7,799 16,431 activities (see note 1 below) Cash outflow from returns on (484) (315) (963) investments and servicing finance Tax paid (1,166) (1,523) (4,593) Cash outflow from capital 797 (1,577) (14,083) expenditure and financial investment Net cash (outflow)/inflow from (16,657) 858 (3,183) acquisitions and disposals Equity dividends paid (3,950) (3,805) (5,834) Net cash (outflow)/inflow before (12,930) 1,437 (12,225) liquid resources and financing Management of liquid resources - - - Net cash outflow from financing (2,270) (266) (1,128) (Decrease)/increase in cash in the (15,200) 1,171 (13,353) period (see note 2 below) 1. Reconciliation of operating 2001 2000 2000 profit to net cash flow from £000 £000 £000 operating activities Profit before interest and disposal 7,391 6,990 12,139 of business Depreciation 3,122 3,467 6,590 Amortisation of intangible assets 453 179 468 Provision against value of current - - 2,526 asset investment Gain on disposal of assets (1,334) (487) (1,391) Decrease/(increase) in stocks 1,411 (357) (1,062) Decrease/(increase) in debtors 3,193 (2,128) (527) Increase/(decrease) in creditors (5,706) 135 (2,312) Net cash inflow from operating 8,530 7,799 16,431 activities 2. Reconciliation of movement in net debt (Decrease)/increase in cash in the (15,200) 1,171 (13,353) period Cash inflow from decrease in debt 176 266 1,128 and lease financing Cash outflow from decrease in liquid - - - resources (15,024) 1,437 (12,225) Borrowings acquired with subsidiaries (17) (780) (1,389) New finance leases and loan notes (800) - - Movement in net debt in the period (15,841) 657 (13,614) Opening net debt (23,280) (9,666) (9,666) Closing net debt (39,121) (9,009) (23,280) Analysis of Turnover and Operating Profits by Division Six Months Ended 30 June 2001 Strategic Packaging Plastics review 2001 £000 £000 £000 £000 Turnover 74,264 30,842 105,106 Cost of sales 48,600 21,580 70,180 Gross profit 25,664 9,262 34,926 Net overheads 20,395 7,140 27,535 Profit before interest 5,269 2,122 7,391 Net interest (295) 57 (238) Profit before tax 4,974 2,179 7,153 Six months ended 30 June 2000 £000 £000 £000 £000 Turnover 66,126 31,857 191 98,174 Cost of sales 44,417 21,777 13 66,207 Gross profit 21,709 10,080 178 31,967 Net overheads 17,438 7,378 161 24,977 Operating profit 4,271 2,702 17 6,990 Gain on disposal - - 500 500 Profit before interest 4,271 2,702 517 7,490 Net interest (52) (271) - (323) Profit before tax 4,219 2,431 517 7,167 Year ended 31 December 2000 £000 £000 £000 £000 Turnover 136,538 61,198 191 197,927 Cost of sales 91,408 38,605 13 130,026 Gross profit 45,130 22,593 178 67,901 Net overheads 34,525 16,605 161 51,291 10,605 5,988 17 16,610 Exceptional costs - (4,471) - (4,471) Gain on disposal - - 500 500 Profit before interest 10,605 1,517 517 12,639 Net interest (214) (767) - (981) Profit before tax 10,391 750 517 11,658 Segmental Information on Operating Assets by Division Six Months Ended 30 June 2001 30 June 2001 Packaging Plastics 2001 £000 £000 £000 Fixed assets 58,966 22,852 81,818 Stocks 11,560 4,539 16,099 Debtors 36,742 18,020 54,762 Current asset investments - 6,324 6,324 Current assets 48,302 28,883 77,185 Creditors 33,305 15,059 48,364 Net current assets 14,997 13,824 28,821 Total assets less current liabilities 73,963 36,676 110,639 Deferred taxation 795 1,212 2,007 Operating assets 73,168 35,464 108,632 Net debt (16,959) (22,162) (39,121) Total net assets 56,209 13,302 69,511 30 June 2000 Packaging Plastics 2000 £000 £000 £000 Fixed assets 42,747 22,851 65,598 Stocks 7,579 4,717 12,296 Debtors 28,880 18,731 47,611 Current assets 36,459 23,448 59,907 Creditors 25,983 17,842 43,825 Net current assets 10,476 5,606 16,082 Total assets less current liabilities 53,223 28,457 81,680 Deferred taxation 1,280 992 2,272 Operating assets 51,943 27,465 79,408 Net funds/(debt) 797 (9,806) (9,009) Total net assets 52,740 17,659 70,399 Segmental Information on Operating Assets by Division Six Months Ended 30 June 2001 31 December 2000 Packaging Plastics 2000 £000 £000 £000 Fixed assets 44,687 21,033 65,720 Stocks 8,593 4,684 13,277 Debtors 31,420 15,867 47,287 Current asset investments - 12,279 12,279 Current assets 40,013 32,830 72,843 Creditors 29,642 14,664 44,306 Net current assets 10,371 18,166 28,537 Total assets less current liabilities 55,058 39,199 94,257 Deferred taxation 951 1,189 2,140 Operating assets 54,107 38,010 92,117 Net debt (10) (23,270) (23,280) Total net assets 54,097 14,740 68,837

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