Interim Rslts/Acquisition,etc

MACFARLANE GROUP PLC 7 September 1999 MACFARLANE GROUP CONFIDENT DESPITE VARIABLE TRADING CONDITIONS HIGHLIGHTS Board restructuring complete New Group Executive in place Initial conclusions of strategic review Consolidation of 13 Companies into four Divisions Fundamental strategic review to be completed by end of 1999 Acquisition in California ============== Interim profits in line with expectations Pre-tax profit down 14% by £1.0 million to £6.0 million Earnings per share down 14% to 3.33p Group sales down 4.1% to £91.3 million Interim Dividend held at 1.58p Gearing remains modest John Ward, Chairman of Macfarlane Group PLC today said: 'The results for the first six months reflect the variable trading conditions noted in our trading statement at the start of July. The Board has been restructured and strengthened and this statement details the initial conclusions of Iain Duffin, our new Group Chief Executive, since his appointment on 14 June 1999. Our key objective in the remainder of 1999 is to consolidate 13 subsidiaries into four focused business divisions. The immediate aims are to increase operating efficiencies and reduce costs to enable the reshaped Macfarlane Group to be a competitive player in all its key operating activities and an attractive profit generator, capable of delivering superior shareholder returns. An interim report will be given before the end of the year to track our progress against these stated objectives.' 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 and Media: Gordon Beattie Beattie Media 01698 787 878 David Rydell Beattie Media 0171 930 0453 Macfarlane Group PLC announces its interim results for the six months ended 30 June 1999. Financial Headlines In line with our trading statement in July 1999, profit before taxation for the half year ended 30 June 1999 decreased from £7.0 million to £6.0 million. Sales in the period fell by 4.1% from £95.2 million to £91.3 million. Earnings per share were 3.33p compared with 3.88p for the corresponding period last year. The Directors have declared an interim dividend of 1.58p, unchanged from last year. Strategic review A detailed strategic review of all the group's operations has commenced following Iain Duffin's arrival in June 1999. This review continues but the initial conclusions are to reduce 13 companies into four main divisions as set out below. The remaining companies, Daniel Montgomery and Flo-pak are currently the subject of more detailed strategic reviews to maximise their potential to the Group. The reporting presentation at 30 June 1999 reflects these new combinations. Merchanting Packaging Plastics Labels Abbott's Aston Packaging Alport Plastics N S Macfarlane Packaging Clansman Cases Clansman Films Controlled Packaging Services Dalewood Packaging A & W Fullarton Orion Flexo Mitchell Packaging Saranne Packaging Wicklow Custom Packaging Key managers have been identified to lead the integration process and further senior appointments are imminent. We are reviewing the reward structure for managers to maximise internal trading. Merchanting Abbott's Packaging continues to outperform its competitors in driving forward the Group's packaging sales activities, whilst providing a secure distribution channel for a large number of products manufactured elsewhere in the Group. The main development of Abbott's activity in recent years has been to pursue the addition of new branches to the network. As the branch network has become more comprehensive in its geographical coverage, now 23 locations, so the effectiveness of this strategy has gradually diminished. This strategy is now being carefully reviewed to determine the best method of building on Abbott's clear competence for the nation-wide distribution of packaging materials, allowing the branches to focus on customer service, whilst at the same time maximising profitability from the branch network. Packaging Two of the companies previously in our Ventures Division, Aston Packaging and A & W Fullarton, have now been integrated into the Packaging Division. All five companies in the Division will integrate to form one corporate entity from 1 January 2000, reducing costs, increasing efficiencies and providing an increased focus. There will be restructuring undertaken to achieve the benefits of the integration and whilst costs will be incurred, the exercise will be carried out in conjunction with a thorough review of the Division's existing property portfolio with the intention of reducing the number of sites and mitigating costs. Plastics The Plastics Division (formerly Industrial Film) has performed extremely well in the first half of 1999. Wicklow Custom Packaging, the plastic injection moulding specialists, has now been integrated into the division due to its common customer approach and processes with the other companies in the Division. Following the purchase of Orion Flexo in February 1999, plans are well advanced to combine the six companies into one corporate entity from 1 January 2000. The process of integration will deliver efficiency benefits with the required costs being incurred prior to 31 December 1999. Further strategic acquisitions are being sought to enhance the product portfolio in the Division. Labels Our Labels Division solely comprises N S Macfarlane. It remains our intention to develop the Division by a mixture of organic growth and selected acquisitions to build on the excellent results achieved in the year to date at our high quality operation in Kilmarnock. Activities under strategic review For some time Daniel Montgomery has suffered from weak demand in its two main markets and a lack of focus. However since the start of 1999 customer confidence has been rebuilt. A detailed review is now in progress in conjunction with the management of Wicklow Custom Packaging. The initial conclusions will result in the manufacture of selected household products being consolidated into Wicklow. A phased implementation plan is being prepared to effect this transfer in a measured and orderly manner. The reshaped Montgomery will now focus solely on its key competence, the manufacture of closures for the spirits industry, with its strengthened management team. A far-reaching review is now taking place to evaluate this operation and to determine the steps necessary to reset the overhead base of the company to one more in line with the existing levels of operations and provide the opportunity to return the company to profitable trading. The results of this review will be reported, as they become available. Flo-pak has successfully manufactured expanded polystyrene loose- fill for many years. As a means of diversifying its product range, the company successfully developed the Ultrawood wood substitute product from the same recycled polystyrene materials from which the Flo-pak product is manufactured. The Ultrawood product continues to show potential, however in developing relationships with strategic partners in the USA it has become apparent that further substantial strategic partners will be required to direct the product to the most appropriate end markets and this process is currently underway. Summary The Board draws considerable encouragement from the range of packaging products and the manufacturing capability in Macfarlane Group. The combination of high quality manufacturing and the merchanting activity is a key strength and with selective restructuring should enable the company to produce good top line and bottom line growth. However, there remain considerable challenges ahead to reduce the number of operating companies as a first step towards reducing costs and improving efficiencies. Whilst this exercise will clearly involve costs, which have not yet been quantified, there remain obvious benefits which will be achieved from removing duplicated activities and reducing the number of trading sites. Further benefits will be realised by rationalising each division's sales force to produce a unified customer approach and take advantage of the opportunities for increased inter-company trading. A comprehensive property portfolio review has commenced to eliminate unnecessary or under- utilised sites. Our core Divisions have already acknowledged the need to meet our customer's requirements for growth abroad. A number of them already have links in Europe and other continents to more effectively service our global customers. I am delighted that we have now concluded the purchase of Western Foam Packaging Products in Hayward, California as the first step in extending our global manufacturing network by acquisition. This is likely to be the first of a select number of strategically sited locations to help us meet our objectives worldwide. These overseas acquisitions will be carefully considered and financed from our existing resources. The strategic review, the objective of which is to generate additional shareholder value, is not yet complete. The review will encompass potential divestment as well as acquisition strategy. Acquisition The Group today confirmed the acquisition Western Foam Packaging Products in Hayward, California for £5.1 million ($8.1 million), £4.5 million payable in cash the remainder in year loan notes. Western Foam is a family-controlled firm, which has been in existence for three years. The company converts foam blocks into cushioned packaging fitments and manufactures Corrupad, employing 87 staff. The most recent annual accounts disclose turnover of £7.5 million and operating profits of £1.1 million. Net assets acquired will amount to £1.9 million. Western Foam will join the Packaging Division of Macfarlane Group, which consists of five operations throughout the United Kingdom. The acquisition is in line with the group's strategy to service global customers by providing a local manufacturing base from which to service their requirements for the group's proprietary products. Trading performance Six months ended Six months ended 30 June 1999 30 June 1998 Operating Operating Sales Profit/ Sales Profit (loss) £000 £000 £000 £000 Merchanting 24,754 1,528 23,024 1,562 Packaging 26,708 1,189 27,692 2,633 Plastics 26,859 2,735 28,137 1,935 Labels 8,212 1,638 7,757 1,404 Under strategic review 4,758 (658) 8,577 88 ----------------------------------- 91,291 6,432 95,187 7,622 ----------------------------------- Trading Activities In the first six months of 1999, the Group experienced variable trading conditions and continuing uncertainties in the packaging sector and the economy generally, which impacted on the results. The performances achieved in Plastics and Labels are particularly encouraging. However, major reviews are in progress to improve the disappointing performance in certain other areas. Merchanting Trading in the Division has remained strong, despite significant competition to the most recently opened branches. The performance in the first six months is marginally below that achieved in 1998. As a result the management team is reviewing the existing branch network in an effort to optimise returns. The only additional branch expected to be added to the network before the end of 1999 is in Peterborough, which has been identified as a key geographical location to service a number of larger customers. Packaging A number of our packaging companies experienced considerable pricing pressures in the first half of 1999, although the specialist manufacturers such as Controlled Packaging Services and Mitchell Packaging continued to perform well. The inclusion of Aston Packaging and A & W Fullarton in the Division will enable a sharper focus to be brought to bear on the consistent management of all operational sites offering bespoke packaging solutions to meet customers' requirements, as well as offering significant opportunities to improve Group purchasing arrangements. Plastics Profits in the first half of 1999 continued the improvements achieved in the second half of 1998, achieving pre-tax returns well in excess of our internal benchmark of 8%. Benefits of improved utilisation and site rationalisation remain evident. Despite falling raw material prices, sales volumes have increased by 7% and further progress is expected in the second half of 1999, despite a hardening in raw material prices now evident. From January 2000 the new corporate entity will be a major player in its markets. Labels Our Labels Division has performed well in the first half of 1999 despite considerable pricing pressures. The latest technology, combined with excellent production processes have helped counter these pressures and have placed the Division in a strong position to further develop sales to new customers. Activities under strategic review The results for Daniel Montgomery remain disappointing but the company is now being refocused on its core competence to provide closures for the spirits industry. Margins at Flo-pak remain under pressure and opportunities are being sought to increase capacity as well as to develop business in other areas. Finance We have continued to invest, albeit on a relatively modest basis, where there are key needs to meet future growth plans. In the first six months of 1999, net capital expenditure was restricted to £0.5million, reflecting our objectives to generate returns from the significant capital expenditure incurred in previous years. Following the acquisition of Orion Flexo in February 1999, at a cash cost of £1.6 million with inherited borrowings of £400,000, net debt remains modest at £12.0 million at the end of June 1999. The effect on profits is a net interest charge of £396,000 compared to £584,000 in the same period last year, primarily reflecting the impact of lower interest rates. Dividend The Board has declared an unchanged interim dividend at 1.58p. Board and Management Iain Duffin was appointed Chief Executive on 14 June 1999 and has now completed the initial steps of his strategy review. On 12 July 1999 John Love was appointed Finance Director. As previously announced, Bill Mackie and Andrew Reekie left the service of the Group in June and July respectively after many years service in the company. Gordon Lane stepped down from the Board in August 1999 to pursue other interests. Iain Duffin has assumed his responsibilities for acquisition and divestment policy. As announced last week Hamish Macfarlane will leave the Board in December 1999. It is the Board's intention to significantly enhance the management capability within the Group by making a number of key appointments to support the newly constituted Divisional teams in fulfilling the challenging objectives set for them by the Board. Year 2000 As outlined in our 1998 Annual Report and Accounts, the Group has for some time been undertaking a programme to ensure that all systems are Year 2000 compliant. This programme was based on an earlier assessment of the potential risks carried out by each subsidiary and the necessary work has been carried out to modify or replace affected systems and hardware. Regular progress reports are received from each subsidiary, which confirm that the process is now nearing completion and the majority of our companies have tested their systems to ensure compliance. Prospects John Ward concluded :- This is undoubtedly a time of exciting changes within Macfarlane Group. The Board fully supports Iain Duffin in his strategic review of operations and considers the initial appraisal of the core activities to be sound. The appraisal of activities subject to more detailed strategic review will be completed by the end of 1999. New management structures will be implemented between now and January 2000. This process will have initial cost implications primarily in the final quarter of 1999, but future benefits will become evident from the beginning of January 2000. We shall not shirk from tough decisions to deliver additional shareholder value in Macfarlane Group. The reshaped Macfarlane Group will provide total packaging solutions in its key markets. It will be a competitive player and will be an attractive profit generator capable of delivering superior shareholder returns. Unaudited accounts will be sent to shareholders on 14 September 1999 and will be available to members of the public at the Company's Registered Office, 21 Newton Place, Glasgow, G3 7PY from 16 September 1999. Macfarlane Group PLC Six months ended 30 June 1999 Consolidated profit and loss account (unaudited) Six Six Year months Months ended ended ended 30 31 30 June June December 1999 1998 1998 £000 £000 £000 Turnover 91,291 95,187 192,143 Cost of sales 57,270 60,823 122,841 -------------------------------- Gross profit 34,021 34,364 69,302 Net overheads 27,589 26,742 52,977 -------------------------------- Operating profit 6,432 7,622 16,325 Interest receivable and 18 27 54 similar income Interest payable and (414) (611) (1,302) similar charges -------------------------------- Profit before taxation 6,036 7,038 15,077 Tax on profit on ordinary 1,810 2,111 4,464 activities -------------------------------- Profit for the financial 4,226 4,927 10,613 year Dividends on equity shares 2,004 2,004 5,745 -------------------------------- Retained profit for the 2,222 2,923 4,868 year -------------------------------- Earnings per ordinary 3.33p 3.88p 8.37p share of 25p ------------------------------ Diluted earnings per 3.33p 3.88p 8.36p ordinary share ------------------------------ Dividends per share 1.58p 1.58p 4.53p ------------------------------ Corporation tax rate 30.0% 30.0% 29.6% ------------------------------ Notes: 1. The earnings per share are calculated on the basis of the weighted average of 126,828,240 shares in issue (30 June 1998 - 126,828,240, 31 December 1998 - 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 127,012,664 shares. (30 June 1998 - 126,921,150, 31 December 1998- 127,006,301). 2. Taxation has been provided at a rate of 30.0% for the six months ended 30 June 1999, which is the expected rate of tax for the full year. 3. The figures for the year ended 31 December 1998 are derived from the published accounts. A copy of the full accounts for 1998, on which the auditors issued an unqualified report, has been filed with the Registrar of Companies. Macfarlane Group PLC 30 June 1999 Consolidated balance sheet (unaudited) As at As at As at 31 30 June 30 June December 1999 1998 1998 £000 £000 £000 Fixed assets Intangible assets 1,670 - 963 Tangible assets 71,517 71,667 73,342 -------------------------- 73,187 71,667 74,305 -------------------------- Current assets Stocks 12,689 12,530 12,767 Debtors 42,336 42,655 42,301 Cash at bank and in hand 1,752 1,115 1,610 --------------------------- 56,777 56,300 56,678 Creditors: amounts falling due within 50,720 53,436 53,761 one year -------------------------- Net current assets 6,057 2,864 2,917 -------------------------- Total assets less current liabilities 79,244 74,531 77,222 Creditors: amounts falling due after 153 295 119 more than one year Provisions for liabilities and charges 2,807 1,906 2,702 --------------------------- Total net assets 76,284 72,330 74,401 --------------------------- Operating assets by division Merchanting 19,527 16,426 18,945 Packaging 29,026 27,836 27,293 Plastics 19,571 21,858 18,622 Labels 4,638 4,535 3,812 Under strategic review 15,555 15,110 17,145 --------------------------- Operating assets 88,317 85,765 85,817 Net debt (12,033) (13,435) (11,416) --------------------------- Net assets 76,284 72,330 74,401 --------------------------- Macfarlane Group PLC Six months ended 30 June 1999 Consolidated cash flow statement (unaudited) Six Six Year Months months ended ended ended 31 30 June 30 June December 1999 1998 1998 £000 £000 £000 Net cash flow from operating activities 6,590 8,758 24,609 (see note 1 below) Cash outflow from returns on investments and (449) (580) (1,252) servicing finance Tax paid (566) (1,429) (5,815) Cash outflow from capital expenditure and (537) (5,881) (10,863) financial investment Net cash outflow from acquisitions and (1,732) - (1,777) disposals Equity dividends paid (3,741) (3,741) (5,745) ----------------------------- Net cash outflow before liquid resources and (435) (2,873) (843) financing Management of liquid resources - - - Net cash outflow from financing (491) (736) (1,066) --------------------------- Decrease in cash in the period (926) (3,609) (1,909) (see note 2 below) --------------------------- Notes: 1. Reconciliation of operating profit to net 1999 1998 1998 cash flow from operating activities £000 £000 £000 Operating profit 6,432 7,622 16,325 Depreciation 4,362 4,450 9,073 Amortisation of intangible assets 40 - 16 Gain on disposal of assets (62) (282) (1,074) Decrease/(increase) in stocks 271 (33) (67) Decrease in debtors 251 1,428 2,459 Decrease in creditors (4,704) (4,427) (2,123) ------------------------ Net cash inflow from operating activities 6,590 8,758 24,609 ------------------------ 2. Reconciliation of movement in net debt Decrease in cash in the period (926) (3,609) (1,909) Cash inflow from decrease in debt and lease 491 736 1,066 financing Cash outflow from decrease in liquid - - - resources --------------------- (435) (2,873) (843) Borrowings acquired with subsidiaries (182) - (11) New finance leases and loan notes - - - ------------------------- Movement in net debt in the period (617) (2,873) (854) Opening net debt (11,416)(10,562) (10,562) ------------------------- Closing net debt (12,033)(13,435) (11,416) ------------------------- Macfarlane Group PLC Six months ended 30 June 1999 Analysis of turnover and operating profits by division Six months ended 30 June 1999 Under Merchanting Packaging Plastics Labels strategic 1999 review £000 £000 £000 £000 £000 £000 Turnover 24,754 26,708 26,859 8,212 4,758 91,291 Cost of 16,682 17,939 16,423 4,573 1,653 57,270 sales ------------------------------------------------------- Gross profit 8,072 8,769 10,436 3,639 3,105 34,021 Net 6,544 7,580 7,701 2,001 3,763 27,589 overheads ------------------------------------------------------- Operating 1,528 1,189 2,735 1,638 (658) 6,432 profit/(loss) Net interest 8 (183) (206) 59 (74) (396) -------------------------------------------------------- Profit 1,536 1,006 2,529 1,697 (732) 6,036 before tax -------------------------------------------------------- Six months ended 30 June 1998 Under Merchanting Packaging Plastics Labels strategic 1998 review £000 £000 £000 £000 £000 £000 Turnover 23,024 27,692 28,137 7,757 8,577 95,187 Cost of 15,486 17,940 19,346 4,429 3,622 60,823 sales ------------------------------------------------------- Gross profit 7,538 9,752 8,791 3,328 4,955 34,364 Net 5,976 7,119 6,856 1,924 4,867 26,742 overheads ------------------------------------------------------- Operating 1,562 2,633 1,935 1,404 88 7,622 profit Net interest 36 (225) (486) 7 84 (584) ------------------------------------------------------- Profit 1,598 2,408 1,449 1,411 172 7,038 before tax ------------------------------------------------------- Year ended 31 December 1998 Under Merchanting Packaging Plastics Labels strategic 1998 review £000 £000 £000 £000 £000 £000 Turnover 47,996 56,842 56,072 15,977 15,256 192,143 Cost of 32,251 37,948 37,063 8,877 6,702 122,841 sales ------------------------------------------------------- Gross profit 15,745 18,894 19,009 7,100 8,554 69,302 Net 12,113 13,985 13,957 3,631 9,291 52,977 overheads ------------------------------------------------------- Operating 3,632 4,909 5,052 3,469 (737) 16,325 profit Net interest 55 (479) (868) 54 (10) (1,248) ------------------------------------------------------- Profit 3,687 4,430 4,184 3,523 (747) 15,077 before tax ------------------------------------------------------- Macfarlane Group PLC Six months ended 30 June 1999 Segmental information on operating assets by division 30 June 1999 Under Merchanting Packaging Plastics Labels strategic 1999 review £000 £000 £000 £000 £000 £000 Fixed assets 13,652 23,644 18,281 4,591 13,019 73,187 -------------------------------------------------------- Stocks 2,952 3,320 3,442 1,026 1,949 12,689 Debtors 10,784 12,914 12,591 3,416 2,631 42,336 ------------------------------------------------------- Current 13,736 16,234 16,033 4,442 4,580 55,025 assets Creditors 7,740 9,998 13,694 3,911 1,745 37,088 ------------------------------------------------------ Net current 5,996 6,236 2,339 531 2,835 17,937 assets ------------------------------------------------------ Total assets less current 19,648 29,880 20,620 5,122 15,854 91,124 liabilities Deferred 121 854 1,049 484 299 2,807 taxation ------------------------------------------------------ Operating 19,527 29,026 19,571 4,638 15,555 88,317 assets Net 108 (6,875) (4,051) 1,620 (2,835) (12,033) funds/(debt) -------------------------------------------------------- Total net 19,635 22,151 15,520 6,258 12,720 76,284 assets -------------------------------------------------------- 30 June 1998 Under Merchanting Packaging Plastics Labels strategic 1998 review £000 £000 £000 £000 £000 £000 Fixed assets 12,405 24,083 17,479 4,314 13,386 71,667 ------------------------------------------------------- Stocks 2,686 2,790 3,654 950 2,450 12,530 Debtors 9,631 12,926 13,797 3,392 2,909 42,655 ------------------------------------------------------ Current 12,317 15,716 17,451 4,342 5,359 55,185 assets Creditors 8,175 11,233 12,541 3,706 3,526 39,181 ------------------------------------------------------ Net current 4,142 4,483 4,910 636 1,833 16,004 assets ------------------------------------------------------ Total assets less current 16,547 28,566 22,389 4,950 15,219 87,671 liabilities Deferred 121 730 531 415 109 1,906 taxation ------------------------------------------------------- Operating 16,426 27,836 21,858 4,535 15,110 85,765 assets Net 579 (4,725) (9,522) 377 (144) (13,435) funds/(debt) -------------------------------------------------------- Total net 17,005 23,111 12,336 4,912 14,966 72,330 assets -------------------------------------------------------- Macfarlane Group PLC Six months ended 30 June 1999 Segmental information on operating assets by division 31 December 1998 Under Merchanting Packaging Plastics Labels strategic 1998 review £000 £000 £000 £000 £000 £000 Fixed assets 14,032 24,688 16,696 4,913 13,976 74,305 ------------------------------------------------------- Stocks 2,986 3,125 3,181 1,195 2,280 12,767 Debtors 10,552 12,843 11,887 3,628 3,391 42,301 ------------------------------------------------------- Current 13,538 15,968 15,068 4,823 5,671 55,068 assets Creditors 8,504 12,509 12,198 5,440 2,203 40,854 ------------------------------------------------------- Net current 5,034 3,459 2,870 (617) 3,468 14,214 assets ------------------------------------------------------- Total assets less current 19,066 28,147 19,566 4,296 17,444 88,519 liabilities Deferred 121 854 944 484 299 2,702 taxation ------------------------------------------------------- Operating 18,945 27,293 18,622 3,812 17,145 85,817 assets Net 406 (4,975) (5,502) 1,902 (3,247) (11,416) funds/(debt) -------------------------------------------------------- Total net 19,351 22,318 13,120 5,714 13,898 74,401 assets ---------------------------------------------------------

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