Macfarlane Aktie

Good morning, and welcome to the Macfarlane Group plc 2025 Results Investor Presentation. Throughout the recorded presentation, investors will be in listen only mode. [Operator Instructions] Before we begin, I would like to submit the following poll.

And I would now like to hand you over to our CEO, Peter Atkinson. Good morning to you, sir.

Good morning, everybody. I'm Peter Atkinson. I'm the Macfarlane Group CEO, and I'm here today with my colleague, Ivor Gray, CFO. We announced our 2025 results last week, and you'll get to today to review those results with you and we'll bring out some key points to give color on the numbers. And also, obviously, we want to respond to any questions that you want to raise during the meeting.

If we take a look at the agenda, following some brief introductory remarks to myself, Ivor will take you through the detailed numbers in terms of P&L and cash flow. And then I'll talk through the 2 divisions, Package Distribution and Manufacturing Operations. Ivor will then update you on where we are in the pension scheme and I'll conclude with some final remarks, and then we'll pick up and respond to any questions.

Let me begin just as a refresh to some of you and for those of you new to follow, a little bit of detail about the business. We're a protective packaging specialist. We both distribute, design and assemble protective packaging products. 75% of our sales are through our Distribution division and then 25% of our sales are through our Manufacturing division. Our customer base is 80% industrial and 20% retail with a majority of our retail business with e-commerce clients. We've got strong market positions in each of the businesses. We deliver added value for customers, as you can see on the chart, and we've got clear differentiation from our competition.

So if we move on to the results. During 2025, we saw good sales growth. We saw marginal sales growth in the Distribution division, it's about 0.2% despite very difficult market conditions there. We saw very good growth in our design and manufacturing division, 12% up versus the previous year. Partly that was from the Polyformes acquisition, what we also saw good organic growth, particularly in the aerospace, space and defense sectors. And obviously, we have -- during the year, the benefit of the Pitreavie acquisition that we acquired in January 2025.

Despite the good sales growth, we saw a reduction in profit in the year and a mixture of features in there that we'll go through during the presentation. But partly, particularly in Distribution, we actually saw quite soft demand partly due to the weak U.K. economy and also due to the impact of EPR with our retail customers as they look to find a way of reducing EPR fees by reducing the amount of packaging they use.

The industry in trade at 2025 was extremely intense in terms of the competitive environment. And there was a lot of pricing pressure for us to have to retain market share against. And as a result of that, we -- as you will see in the presentation, we experienced lower margins in our Distribution division. We also saw increased costs, primarily labor at property. And again, we've got detail later on the breakdown of those cost increases.

Clearly, a key feature of 2025 was emotional operational and financial impact of the tragic accident at Pitreavie. And again, we'll provide you with an update on where we are with that, the Pitreavie business, later in the presentation.

The key issue for the management team is to how we address the challenges that we experienced in 2025, and we'll talk you through a profit recovery plan that we're currently working on.

The balance sheet remains strong. We've got good cash generation, and we're operating well within our banking facilities. And I think as a demonstration of the confidence in how we now execute the recovery, the Board is proposing the dividend to be maintained at 2024 levels.

So let me hand over to Ivor, who will take through the detailed financials, and then I'll come back on and we'll put some color to the numbers through the individual divisions.

Good morning, everyone. Just to take you through some of the kind of key financial performance measures for last year.

As you can see in the top left hand, we grew revenue by 11%, 10% of that growth was driven by acquisitions, so GBP 28.1 million of the GBP 30.4 million growth in revenue was down to the acquisition of Pitreavie at the beginning of last year and Polyformes, which was acquired in July 2024, and GBP 2.3 million of the growth was organic. So around 1% of that 11% is organic. And when I look at the organic growth, it's primarily volume driven with the prices on average being relatively flat year-on-year. And again, the split down of the growth is GBP 4.4 million of distribution, GBP 6.4 million of growth within Manufacturing, excluding Pitreavie and GBP 23.6 million of growth from the Pitreavie business.

In terms of adjusted operating profit, 20% down on the previous year. A large proportion of that is down to the Distribution business, GBP 8.8 million down on last year. And that's primarily down to even though we had flat still year-on-year, we had pressures on our gross margins, a lower gross margin. And as Peter described, higher operating costs, and Peter will describe that in a bit more detail later.

The Manufacturing business, excluding Pitreavie had a strong year, both the full year benefit of the Polyformes acquisition and again, good underlying organic growth from some of the sectors that they supply into. And as Peter described, the Pitreavie business at a tough year, we planned that business at the beginning of last year. We anticipated that business contributing a profitability of just under GBP 2 million this year in 2025, and it ended up making a loss of just under GBP 200,000. And that was really down to a combination of the trading conditions that as a phase through the year, but a large proportion of that was the impact of the [indiscernible] Peter said to earlier.

And if we move over to the adjusted profit before tax, we had higher interest costs from our bank board work from higher average bank volumes through the year. and also higher IFRS 16, we interest. And that's primarily due to lease renewals on both property and commercial vehicles and the new property in East Midlands.

If you move down bank debt, GBP 16.2 million at the end of 2025 compared to $1.9 million at the end of 2024. So an increase in our bank debt. But as Peter described earlier, we're within our GBP 40 million bank facilities and just under net debt to EBITDA. So still relatively low level of bank debt, and I'll come on to the cash flows in a bit more detail in a minute.

The pension surplus, we continue to be in surplus, albeit lower than last year at GBP 6 million versus GBP 9.6 million last year. We're very much in the process of preparing the scheme for buy-in. As part of that, process, we've taken an adjustment to reflect a change in the methodology to estimate historic equalization of pensions, which will need to be connected. But factually, the goal remains the same as what we've discussed before, albeit we're closer to that decision. So then go with the pension scheme is to be to want to buy in. Clearly, a buy in a price at a level that the company doesn't have to put any further cash contributions or very limited cash contributions. Should that not be the case in pricing, not right in the marketplace and we would continue to run the scheme on.

In terms of dividends, Peter described, we've maintained the dividend, albeit at a lower cover than we've historically seen previously. Part of that is primarily because we've got the cash flow is to support it, and we have confidence in the business going forward. Clearly, if you look at dividend cover an adjusted earnings per share basis is just over 2x. And clearly, the elements between the nonadjusted adjusted broadly noncash adjustments. So yes, the dividend cover is lower than historic levels, but given that confidence in the profitability going forward and the fact that we can support it with the cash flow is a net position of the business. We've decided to maintain the dividend at coils.

Moving on to the income statement. Just a couple of things I want to pull out here. Peter will pick up some of the detail when he goes through the various segmentations, clearly, as you can see, gross margins, as I described at a lower level than where they were last year. And that's primarily with our distribution business where the gross margin has gone down from 37.2 to 35.3, just related to kind of competitive pressures in the marketplace. The manufacturing business, excluding Pitreavie has held up well with actually gross margins slightly improving year-on-year. And the Pitreavie business has had lower gross margins than we anticipate and that's primarily due to the fact in the final quarter of the year, the busiest part of the year for Pitreavie, we had to outsource quite a proportion of work due to the instant.

In terms of operating expenses, quite an increase in operating expenses of GBP 14.5 million, GBP 9.6 million of that is related to the acquisitions we've brought in, as I said, the full year impact of Polyformes and the Pitreavie business, GBP 3.6 million of that is in PCs and employee cost of which GBP 1.1 million is the -- they can enforce NICs and the balance going ticket of inflationary challenges within the employee costs and GBP 1.3 million is related to kind of property and logistics costs, primarily due to increases in our rental cost for property and some of the renewal of our commercial vehicle fleet.

Just drawing your attention to the interest costs, higher last year, GBP 1 million -- GBP 0.8 million of that increase is due to bank interest costs due to the higher average borrowings through the year and GBP 1 million is due to IFRS 16 interest related to crop renewals and commercial vehicle renewals.

The next slide just gives you a kind of feel for the adjustments that have been made between kind of statutory mergers and alternative profit measures, really, the key things to drive here, the things that we're adjusting for our amortization related to intangibles related to acquisitions. The goodwill impairment, as you'd expect, is related to the PCB business, reflecting the kind of gradual recovery of that business as we see going forward. The GBP 1.5 million benefit you see in deferred consideration is also primarily related to Pitreavie because that business is going to have 0 earn out, whereas we anticipated around GBP 1.6 million of our net payments in the Pitreavie business. Of course, given the performance of the business, we won't be paying any outlets in that business and GBP 1.9 million is related to that pension adjustment reflected earlier related to the equalization of pensions going back to an historic change in methodology. So those are the kind of key features in terms of reconciling our statutory measures to term to profit measures.

In terms of cash flows, as Peter described, the operating cash flows were very strong, GBP 24.7 million. compared to GBP 27 million, and that's because of good working capital management. You can see a positive inflow of working capital and also the noncash impact of the pension adjustment that are to earlier. And that cash has been utilized in the year to continue the acquisitions that we did, GBP 17.3 million in terms of acquisition activity, GBP 15.9 million of that related to Pitreavie and the balance related to earn-out payments for OPAP, [indiscernible] and Polyformes, all of which are performing well. GBP 4.5 million on capital expenditure, GBP 1.8 million of that was on the Pitreavie business. The majority of that related to the new machine that we announced in the November update that we're bringing in to restore the capacity at that site following the incident. We also invested in improving the capacity and design capability of our business in Grantham. We had the fit-out of our new site in East Midlands and also we had an investment in the water treatment facility or GWP business in [indiscernible].

We also had the -- we started the buyback program, the share buyback program that we announced in June last year. So that's a commitment to buy back -- to spend GBP 4 million in buying back our shares over a 12-month period, of which GBP 2.1 million of that we spent up to December 2025. As Peter mentioned earlier, we've maintained the dividend. So we spent GBP 5.8 million on dividends through the course of 2025. And as we said, we're looking to maintain that as we go into 2026.

So again, although we've consumed cash in the year, we entered the year at GBP 16.2 million of net debt, as I said, still a relatively low level of net debt compared to our facilities and also relative to the EBITDA of the business.

So I'll pass it over to Peter now to go through the kind of individual performing sites of each of the divisions.

Thanks, Ivor. So beginning with the Packaging Distribution division. This represents 75% of the group's revenue. And as you know, we're the market leader in the U.K. and the new entrant into Europe within this particular business. So during the year, very difficult market conditions. I mentioned earlier on the active EPR on our retail customer base and just generally weak conditions through the macroeconomics and uncertainty around what's happening in world economics generally. So to deliver a marginal increase in revenue from our point of view was encouraging and gives us momentum as we go into 2026.

The pressure that we've seen in terms of the revenue line has been impacted by customers just delaying decisions and that's impacted our new business revenues. So our new business revenue was 20% down versus the previous year. And that's not because we've got strong pipelines. We have rebuilt the sales team and strengthen the sales team. So we're very optimistic as we go into 2026 that we can execute against that new business pipeline and add more momentum into our sales line or the most important figure from a distribution point of view in the year was the gross margin and the gross margin fell back from the heights of the previous year. And that's mainly been down to a lot of very aggressive price competition. We've had to work really hard in defending customers from competitors where they've been using price as their major tool to win business. And we decided to make a decision that we'll retain market share and protect and defend those customers and then look to build the margins back over time.

I'll talk more about operating expenses on 1 of the later lines, but we have seen an increase in operating expenses. And within that, you've got an increase in national insurance costs on the minimum wage. We've got property rental increases coming through. And then we had these Midlands consolidation during 2025, where we had some run-on costs in terms of both property and in terms of labor as part of that.

If I move over to the next page, we mentioned gross margin. This gives you a flavor of how our gross margin has evolved over the last 4 or 5 years. And as you see, coming out of COVID, we had a very strong gross margin, probably a gross margin that was unsustainable going forward. So what we're now into is a gross margin level around about 35% that we believe is sustainable. And that's part of our forward forecast, that's our assumption that we can retain that gross margin One of the reasons, a small part of the reason that our gross margin declined in 2025 was we had a particular supplier in the corrugate industry that unfortunately went into administration and they were in a very effective low-cost supplier. We had to replace that supplier with a higher cost source. So that could have some impact on gross margin. But going forward, we can see that 35% is a gross margin that we can sustain.

I mentioned costs and the schedule just described for you the major cost change in the year. And in reality, it's broken into GBP 3.1 million increase in labor costs and just GBP 100 million in property costs. If I take the labor cost first, around about GBP 3.75 million of that GBP 3 million is the NI increase. And that's only 8 months. So we've got a 12-month impact of that in 2026. We've got inflation in salary costs, although we had a salary freeze during 2025, but part of our employee base. There was inflation in another part of our employee base to retain lag, et cetera. And then we have made some significant new investments in people, particularly in the sales team, which gives me the confidence why that sales pipeline that we've got will come to fruition in 2026. And then there were some carryover costs as a result in property and in -- sorry, in labor as a result of the Midlands transition, where we had to use a lot of temporary labor to help us transfer from 4 sites down to 1 side or the new site in Nottingham.

In terms of property costs, that broadly half of that profit cost increase is just the normal rent renewal rate cost increases that we incurred during the period. And then about half of that number was the additional property cost that dual running of property costs as part of the [indiscernible] transition. We feel the step change in costs we've seen in 2025 will not repeat in 2026. We've got programs in place I'll talk to you about later on, which will allow us to stabilize our cost base going forward and give us a good degree of more certainty of the cost base.

If we look at the priorities now, obviously, we've got to start the packaging distribution business recovery. And there's a number of things that we're doing. I won't go through all of these points. But One of the key things is that, as I mentioned, the retail sector, which within distribution is a rent represents about 25% of our revenue. It's done to all of stress at the moment. It's just very, very competitive. Prices are eroding, margins were eroding and the impact of all the putting legislation, EPR with more to come is going to put extra stress on that sector. So as part of our medium-term plan, we're looking to refocus our business against the industrial market. It doesn't mean we're walking away from retail, but we're reallocating resources towards growing in the industrial markets, which for us are high margin, more sustainable business. and not as quite the same pressure from the environmental legislation. We're also pulling together and creating a more connected customer proposition, where we are combining the benefits of our distribution, our design and manufacture and our European capabilities for key strategic accounts, and we've identified 6 key strategic accounts across both the U.K. and Europe, who will fully benefit from the combination of those businesses with a new strategic account team, which is up and running and is now operational.

In terms of operating cost reduction, we've seen the step change in 2025, we've got efficiency programs that we're implementing as we speak, both in terms of sales, in logistics and administration. As I say, we expect our costs in 2026 to be flat to only marginally ahead of 2025 despite the fact we've got things like NI, which will still be an increased cost during the period. We're also looking as part of the gross margin sustainability to review our sourcing model. At the moment, around about 60% of our sourcing is done with major national suppliers and 40% is done local region suppliers. And we're looking to actually adjust that in the balance. And we'll believe at a time when the supply chain and the suppliers we're dealing with are going through [indiscernible] change themselves and also give us an opportunity to reduce input prices.

In terms of acquisitions, we've indicated that we don't plan to do any more acquisitions in 2026. As you know, acquisition has been a key part of our growth platform. But with the Pitreavie story, which I can't talk about, we feel we've got enough -- we need to allocate management bandwidth to actually developing what we've got, and we're putting acquisitions on hold certainly until the back end of '27. But we still work on warming up opportunities the gestation put between contact and execution can be 3 to 5 years. So while we won't execute anything in the near term. We are tinting work and opportunities to make sure the pipeline is strong. And then we'll continue to work on working capital management, and we've done a pretty good job this year, and we'll continue to do that despite the weak environment.

Going forward, on the -- just 1 [indiscernible], going forward, 1 of the cost opportunities that give us confidence in being able to reduce our cost base. It's got a number of property leases that come up for renewal in '27 and '28. And we've got capacity available in new noting sites in the site in the Northwest of England that we moved to 3 years ago now. And as some of the leases come up in other sites, that gives us the opportunity to fully utilize the new sites that we developed.

So moving on to our Manufacturing division, our design and manufacturing division. I've taken Pitreavie out to this for the moment. Good sales growth of 12%. That's a mixture of the full benefit of the Polyformes acquisition and organic growth of around about just over 3%. And despite the weakness in certain markets like automotive, we've seen good growth, particularly in the aerospace, space and defense markets, but the reasons which will be apparent to you all. And that gives us extremely good momentum going into 2026, and we've seen this business now being a key contributor to profits in 2026 as well. So representing now around about 40% of group profits. So really good performance in this division, and we expect that to continue.

If we move on to Pitreavie. I think most of you are aware of the Pitreavie story. We acquired Pitreavie in January 2025, and then in October 2025, we had a traffic incident causing 1 of our colleagues to the debt of 1 of our colleagues. Clearly, that's taken an emotional burden of the business as well as the operational financial burden, which we've been working through, both with our employees and with the founder that was affected.

Where are we in terms of the numbers? So we expected Pitreavie in its first year of ownership to make just under GBP 2 million operating profit and obviously because of the Pitreavie incident loss. What we're doing post the incident as well as all the emotional support, we were actually ensuring that we could retain customer loyalty by using external suppliers to supply customers because the machine ready in core we have to take out of the business. So we've retained a high degree of customer loyalty, which is really, really positive. And we also did was very quickly turned around an order program to acquire a new replacement machine. And the visual you have on display is the new machine out of China which is now running not quite -- it's not by running in the Pitreavie facility in [indiscernible]. We expect it to be operational at the end of this month, which is going through commissioning and training and so on and so forth to start and we expect it to be fully operational in Q2 of this year. So I think we can see the Pitreavie business recovering. The fact that we've got significant customer loyalty to customers is exited, no customers have talked about dual sourcing going on. And the new machine gives -- also gives us increased capacity, so as we start moving customers back into the facility from being outsourced, once we settle those customers down, then we'll be looking to utilize that capacity to win new customers in the Scottish market.

In terms of the priorities going forward for manufacturing, clearly, the recovery could treat is critical. And we expect to get the sort of the GBP 2 million operating profit that we were expecting to achieve through the acquisition. We expect to deliver that in 2027 when we got a full year clearly, 2026, going out to partner with the new equipment, but we certainly expect the business to get back to the underlying profitability we inherited through the acquisition in 2027. And as I mentioned, in terms of our core manufacturing operations, we've got some good opportunities around defense, aerospace and space, which is giving us momentum -- gave us good momentum in 2005 and will continue to give us good momentum in 2026. So we once we get the Pitreavie where it needs to be, pretty happy this division has got a very good medium-term outlook in terms of both growth and profitability.

Just moving on from the financials and picking up on ESG matters. In terms of the Macfarlane business, we've done well in terms of adding accreditations, which to report on particularly with certain customers who need the accreditations for you to be part of their supply base.

In terms of our own impact on the environment, we continue to roll out more electric trucks. As you know, electric trucks on work in our industry because the things we ship are light and the distances we travel are relative short distances. So we continue to roll out the electric truck program. And we're now close to 100% of our electricity we use in the facilities is now coming from renewable resources. So good, good progress there.

And in terms of supporting our customers, our innovation labs are increasingly busy as we help customers through the EPR legislation by finding ways of supporting them on reducing that packaging used while still protecting their products and the packaging they use being made of sustainable materials, so obviously helping from an environmental point of view.

In terms of legislation, I mentioned EPR a number of times, I'm sure you all be familiar with the challenge of EPR in that retail space. But I think going forward, there is more regulation can be down the pipe. You've got the deforestation regulations and you've got the void fill regulations coming through. All the ore going to put extra stress and strain, particularly in that retail space, and hence, the point I made earlier on about how we begin to start pivoting more towards industrial markets where there's not the same stress and strain that's coming through in terms of the sustainability legislation driven by the government by the European authorities.

So I'll pause there and move on to the pension scheme. I'll ask Ivor to touch on that.

Yes, I think I covered most of this earlier. But I think the key thing to note with the pension scheme and the surplus has come down principally due to the adjustment that I referred to earlier, scheme is not drawing any cash from the group currently. And as I said, we've got a decision that we'll be making over the next few months in terms of whether we progress the scheme to but and that decision will be based on the favorability of pricing in the market at that point. As I said, our goal and aim is to exit and scheme through a buy-in without growing further cash from the group. If it required there's a small amount of cash in the bit -- into the scheme, then we would probably still proceed. Beyond that, then we can continue to run the scheme on and at this point, would not draw any further cash from the group.

In terms of the capital allocation, as you can see, this slide described the kind of outcomes from the capital allocation for 2025, which are really covered within making a cash flow earlier. I think the key thing to mention here is a bit of reprioritization of our capital allocation. So obviously, clearly, we'll continue to invest in the business. I suppose is number two, we made to maintain the dividend. So this year, we'll be looking to spend about GBP 5.8 million on dividends in terms of maintaining it. The kind of third priority would be completing the buyback program of GBP 1.9 million is still to be spent this year. And then the kind of final element is acquisitions. So as Peter described, we're not planning on doing any acquisitions in 2026. However, we do have an outstanding payment for Polyformes of about GBP 2.6 million, and that business has performed well. So we would fully expect to make that parent around about July and August this year. But other than that, I wouldn't expect any further movements in terms of acquisition activity this year. So bit of a refocusing in terms of our capital allocation, focusing on maintaining the dividend, then the buyback program for shareholders, returning cash to shareholders and then obviously, acquisitions the bottom of the kind of priorities at the moment.

So I'll pass it back to Peter to kind of summarize the presentation, and then we'll move on to Q&A.

Thanks, Ivor. So just some concluding remarks before we move on to Q&A. It's been a tough 2025 for the business. And we're not expecting 2026, so the market conditions to be any different markets continuing to be challenging. And then you could probably see at the moment the industry is at the bottom of the cycle. And it's not necessary that the next move is going to be upwards. We could see a 12- to 18-month period where the industry continues to run the bottom of the cycle. So for us, it's all about actually the priorities to recover the business to recover the distribution business and get it back to the 7.5%, 8% return on sales that is our midterm target and obviously, to get the treated business to perform at the level that we expected to do when it was acquired.

So from our point of view, 2026 is year 1 of the recovery program. We're well into implementing a lot of things that we've discussed already. I think the balance of the year is going to be used very much towards H2 because obviously, Bertrand H1 will still lose money because we'll have a quarter where we're still working with outsource suppliers, but we should see and expect to see a step change in performance in the second half of the year in terms of like-for-like is the first half year, and we'll see 2026 showing profit growth versus 2025. So the medium term, the short-term view back into profitable growth. and the medium things that we have got planned and the opportunities to improve the performance of the business, the medium term from our point of view, continues to look very positive.

So I will pause there and pick up on some of the questions that we can see coming through. [indiscernible] the host.

Yes. So just some of the questions coming through first question, Peter, is on Distribution business. clearly, the distribution business going to drop its operating margin to 5% this year. What are the kind of actions you see getting the business back to 8%? And what kind of time lines are you looking at?

Yes. I think Distribution really has had a difficult year. We described the reasons behind that. Sales has been relatively robust lysine difficulties. It's really the gross margin reduction and the increase in costs. So our objective is to get it back to 7.5% to 8%, and that will be a mixture of holding the gross margin line and developing the pipeline of opportunities that we are very confident that we can execute this year. We're slightly difficult in 2015 to give us some around about 2% to 3% sales growth this year. and then holding the operational cost line, let's say, we saw a significant step change in the '25 and '24. But with the programs we've got in terms of cost reductions, in terms of the squeeze on property, we believe we can actually hold our costs flat in 2026, and then it start to reduce as a percentage of sales in '27, '28. So certainly, we expect a 2- to 3-year, this is year 1, year 2, year 3 time line to get ourselves back to around 7.5% to 8% in terms of sales.

A question here on new business, obviously, reflected the fact that your business was down year-on-year. Given that [indiscernible] things improved [indiscernible].

There's 2 main reasons why the new business pipeline didn't convert. One is the program we have to win new business is offering customers sort of medium-term cost savings. And the priority for customers with even what's going on in their businesses at the moment is jam today, safely money today. And the only way you can do that is by reducing prices. And so -- we weren't -- we did go down that route in terms of our new business program. We still believe our medium-term benefit is a way to go in terms of giving customers opportunities going forward. The pipeline is extremely strong. And the other thing that caused customers to not make positive decisions is just uncertainty. So we had a lot of customers where they're very close to the finishing line. But with everything in the world changing on a pre frequent basis at the moment, we find customers just not prepared to actually press the button and go ahead with us. So we're confident these customers have come on stream, and we have seen some early interesting new wins as we go into 2026. So the pipeline is strong, difficulty trying to , but we expect it to come through in 2006 for us.

There's a question on buyback, clearly, covering capital allocations is us not tend to be more aggressive in the buyback given the weakness in the share price.

So Peter, if I answer that one. I mean this year, clearly, our net debt level moves to higher levels than it's been in 5 years, albeit it's still relatively low at GBP 16.2 million. I mean in terms of how we see the cash flows for this year, we see them broadly neutral. We see clearly, there's some recovery and it needs to be done within distribution business in Pitreavie. So there's a lot of work has got to go into those businesses. So that recovery path will generate operating cash flows which will then be consumed in, I suppose, 4 different areas, really, we've got the capital expenditure we have to invest in the business. So we have about GBP 4.5 million allocated for capital expenditure this year to reinvest both in distribution and the manufacturing business to support some of the capacity and growth that we're seeing. We've got GBP 5.8 million, which, as I said earlier, is to maintain the dividend. And I know it's not important to some shareholders, but clearly, a large proportion of our shareholders. Clearly, the dividend is very, very important. So we believe that, that investment in maintaining that dividend is important for those shareholders and the confidence that we see in the business going forward. So that kind of leaves us maintaining our net debt level in lead is something in the order of about GBP 4 million design spend on acquisitions or buybacks. At the moment, we'll be GBP 2.6 million that we have to allocate to the earning payment for Polyformes and clearly, we are looking to complete the buyout program that we've got in play at the moment of GBP 1.9 million. As we move through into next year, then we can start to be a bit more aggressive in the buyback program because clearly, we don't have any acquisition payments in 2027. So depending on where we are strategically from an acquisition point of view, we can -- if the share price remains where it is at the low level as described by the person move raised the question, then we can start to be a bit more aggressive. But we don't intend, I suppose, at this stage, leveraging up the balance sheet to do a buyback at this point. So hopefully, that answers the question on buyback for now.

In terms of the priorities, Peter, you described the priorities around distribution. I suppose I could probably answer this 1 as well. What does success look like in 2026 for package and distribution?

And I think as Peter described the action plans for us, I think success coming to a number of different ways. One successes getting growth back into the business. And we're not looking for spectacular growth, but we are looking for growth around 2% to 3% this year. In terms of Distribution that we pay success, and part of that's going to be the success in converting the new business pipeline, maintaining the gross margins at a level we exited that in 2025, that would be success. And clearly, there's lock to be done on that because the competitive intensity doesn't change as we go into 2026.

And then the third element is there's clearly still inflation coming through in 2026 related to the full year impact of and obviously, continuing impact within inflation and employee costs. So we would still see the operating cost base not going down in 2026, but we want to try and keep it as flat as possible. So I think as we end this year, our nut drop in the operating profit margins from 5% to somewhere between 5% and 6% is where we go for 2025, albeit that enhanced by that 2% to 3% organic growth in sales.

Yes. And thanks, Ivor. The only thing I would add to that is, as we touched on it on earlier questions is demonstrating that new business like line can be executed against, so getting the new business momentum back into the business that we haven't had in 2025.

A good question here clearly on vetted comp events. How do you see the likely impact of the recent oil price spike?

Yes, it's very difficult, and it's probably too early to make any key judgments, but around about 20% of our revenue is holder-related in distribution. So there may be issues around that. The team are working at the moment to understand what the implications are. So I think probably the most obvious implication is going to be potential price pressure on poly products and potentially supply restrictions on panel products. So that's where the sourcing team are focusing their time at the moment to ensure that we can ensure a plea supply line of those products. I mean we buy those products, some from the Middle East some from Turkey and some from the Far East. But at the end of the day, it's polymer and clearly, that's exposed at the moment in terms of Middle East. So that's the most immediate effect not seeing, but we expect to see.

And just to add to that, I mean, clearly, that's the product we buy. I mean, clearly, if you look at fuel costs and kind of say carriage cost, that represents around about 2.5% of our sales. So it's a significant cost and not a cost that went up by 20%, 30%, would cause a significant problem. I think the main challenge will be the impact on our input pricing on the materials that we buy and how we translate that through to customers and to what extent it's a short-term spike versus a long-term change.

Yes.

That's great. Ivor, Peter, if I may, to jump back in there. And thank you for addressing all those questions from investors today. But Peter before we direct investors to provide you with a feedback, which 1 is particularly important to you. Could I please just ask you for a few closing comments.

Yes. So thank you, everyone, for your time this morning. I appreciate you giving up your time for Macfarlane Group. Top 25, I think we explained the reason behind it. The most important thing now is we go our way and go ahead with implementing a recovery plan. Hopefully, you can strike that to you. And when we're confident the business will start the recovery in 2026. And then we see medium-term outlook extremely positive. So that would be the key messages for [indiscernible] to take away from today's session.

Peter, Ivor, thank you once again for updating investors today. Could you please ask investors not to close this session as you will now be automatically redirected to provide your feedback, which will help the company better understand your views and expectations. On behalf of the management team, would like to thank you for attending today's presentation, and good morning you all.

Good morning, and welcome to the Macfarlane Group PLC Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself, however, the company can review questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to CEO, Peter Atkinson. Good morning, sir.

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, Ivor 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 Ivor will then take you through the key metrics for 2025 first half. I'll cover off the 2 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 questions.

In terms of the introduction to the business for those who may be not familiar with Macfarlane Group, we're a specialist business in the protective packaging market, and we supply customers across the U.K. and increasingly in Europe with a range of protective packaging products and solutions. And we're here to protect their products through the supply chain to ensure the products are effectively packed, stored and transported. Key benefit we bring is the working capital reduction and administration burden. And clearly, from a sustainability point of view, we're working to optimize and minimize the 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 supplier partnerships going back for sort of 50, 60 years.

And our business is focused on protective packaging. We don't deal with any other materials. We don't deal with any other product groups. We simply focus on protective packaging. 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 the first 6 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 Pitreavie that we made in January and the benefit of Polyformes that we made in 2024. We've seen weak organic sales growth, and we've seen price deflation in the first 6 months of the year. So the sales growth was then offset by weaker margin, and there are 3 components to that. We've been slower in recovering input price changes.

We've seen quite a lot of competitive activity that has 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 wage costs.

The effect of the stronger sales, but weaker margin and higher costs means that our profitability is down versus the previous period. So what we're going to talk about in the presentation is clearly what's going to happen in the second half that's going to recover that position. And there's a number of features that 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 base business and it's particularly acute within the Pitreavie 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 -- 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 win it in the first 6 months and then it really starts to expand in the second 6 months. So we'll see a benefit from that. And then 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 revenue line and the margin line in the early weeks of 2020 -- the second half 2025, 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 clearly 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.

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 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 kind of 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 Pitreavie in January this year and the acquisition of Polyformes in July last year and a small amount related to the acquisition of Allpack 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. Volumes are relatively flat year-on-year. In terms of adjusted operating profit, we're down 22%. So we're down GBP 2.7 million versus this time last year, a reduction from GBP 12.5 million to GBP 9.8 million.

We have a positive contribution from the acquisitions that I mentioned earlier of GBP 1.7 million and an organic decline of 4.5%. And that's 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 debt in terms of profitability and rising operating costs, as Peter described earlier, which has impacted the business. So overall, those 2 elements, the reduction in gross margin and increase in costs are the prime reason for the reduction in profitability with a small amount related to the reduction -- organic reduction in sales. In terms of the balance sheet, we've had cash outflows of GBP 13.3 million 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 GBP 1.9 million, rising to GBP 15.2 million 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 capital -- the share buyback program, along with investment in capital expenditure in the business.

With regard to the pension surplus, it's down slightly from the year-end, GBP 9.6 million to GBP 9.2 million. 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 6 to 12 months. In terms of the dividend, we've held the dividend at GBP 0.96. That's the same as last year, and that gives us dividend cover of 2.4x and the EPS is moving down in line with the reduction in profitability.

Moving on to the income statement. Peter will cover the revenue line in a bit more detail. But as you can see, as I described earlier, 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 37.9% 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 the second half of this year. And there is a margin reduction in manufacturing of 44.3% to 41%. That's primarily related to the mix impact of the Pitreavie business.

The Pitreavie business does run at a lower gross margin than the rest of the manufacturing division. So if you strip out the Pitreavie impact, the gross margin is in line with last year. In terms of the cost base, we've got a GBP 6.6 million increase in the operating expenses, GBP 5.1 million of that is related to the acquisitions that we brought in and GBP 2 million of that -- I'm sorry, GBP 0.7 million of that is due to incremental labor costs, GBP 1.3 million related to incremental property costs, some of that related to the consolidation of East Midlands operation, which people -- Peter will describe later. And we've got GBP 0.5 million 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 16 interest related to the incremental property costs coming through on East Midlands business.

In terms of cash flows, really, the key message here is our operating cash flows have stayed relatively robust, albeit 15% down on 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 GBP 1.4 million as a result of that. And we've used that GBP 12.4 million of cash inflows from operating activities to spend GBP 15.1 million on acquisitions, GBP 13.9 million of that relates to the Pitreavie acquisition and GBP 1.2 million of earn-out payments related to Gottlieb and Allpack. We've had GBP 1.3 million of capital expenditure. That's primarily related to the consolidation of these properties in East Midlands and the Rockingham of the new facility and GBP 0.3 million related to expansion of capacity at our Grantham manufacturing operation and some other capital expenditure we made within the manufacturing operation.

You can see that we spent GBP 0.2 million in the first half of the year on the purchase of our own shares. That is part of the GBP 4 million buyback program that we announced in June. So primarily, you'll see around GBP 2.5 million of outflows in the second half of the year related to that buyback program, but a very small amount of that related in the first half of the year. And again, you can see the dividend there of GBP 4.3 million. That's the final dividend payment that was made in June. So an outflow of GBP 13.2 million and an increase in net debt from GBP 1.9 million to GBP 15.2 million 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.

Thanks, Ivor. 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 slide, sales -- like-for-like sales were broadly flat year-on-year. What we've seen is, as Ivor has already indicated, we've seen price deflation and volume declines. And that's simply because our customers are not buying as much packaging as they're used to. So hence, they're not buying as much packaging from us. And that's more acute in the retail space than it is in the industrial space. The split between retail and industrial within distribution is sort of 70-30, 70% being the industrial business.

The new business performance in the first 6 months has been slightly weaker than the previous year. What we're finding in this sort of period of uncertainty, which we're all 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 the new business customers come on stream. Our gross margins, as I indicated in the exec 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.

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 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 to be found in September as well is that our margin is beginning to improve. The operating cost increases, which I'll talk about on the next page are really the labor cost increases, national insurance and national minimum wage, property cost increases and issues around the East Midlands property consolidation. So I'll pick those up on the next page. The final metric just to comment on is our 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 the Net Promoter Score has remained pretty solid at 61. As you know, the average for B2B customers and Net Promoter Score is sort of late 20s, early 30s. So we're way above average for B2B 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 a series of ups and downs because we're operating in 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 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 cost program. So here's a breakdown 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'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 the East Midlands project, which I'll come back to. We've also had some redundancy costs in the first half of the year as we've taken 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 2 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 very aggressive rent increases from our landlords and not really had much opportunity to offset that in any material way.

So that's impacted us by about GBP 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. Ivor referred to it, and I touched on it, is the East Midlands project. The East Midlands project has been something which has impacted the first half of the year. 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 4 sites into 1, closing 4 sites and moving into 1. 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, [indiscernible] 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 4 sites. All the business is in the new site, and we won't see a recurrence of that incremental cost in the second half of the year. Next page just is a refresh and reminder really of our acquisition program. While we haven't specifically acquired in 2025 in the distribution business, as you know, we bought the Pitreavie business, which is part distribution and part manufacturing. We've classified it within our manufacturing division. We've got a very strong pipeline of acquisition opportunities, both in the U.K. and in Europe. 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 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, the acquisition of Pitreavie has given us a big opportunity to use our manufacturing capability for some of our RDCs to buy from an internal supplier rather from an external supplier. And obviously, 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 6 months ago. 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, Europe, as you know, is a key part of our development of the 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 the 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 Frankfurt with the PackMann business. 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 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 the 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 revenue growth was primarily through the acquisition of Pitreavie and then also part benefit of the acquisition of Polyformes that we made in 2024, and there was some small organic growth. The partnership with distribution, as you know, this is -- it's not a stand-alone 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 a wider product offer. And as you're aware, everything we do in this business is bespoke.

So these customers coming to us with particular requirements and 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 weakened slightly here, but that's primarily a mix issue. As we've added Pitreavie into this business, Pitreavie has generally a lower gross margin than the base manufacturing business. So the margin reduction is a mix issue, not a pricing or margin issue related to transactional activity. And our operating expenses are well under control, while we've got increase in obviously NI and national minimum wage here, we managed 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 about 4 acquisitions in the last 2 years, Suttons, B&D Group, Polyformes more recently and Pitreavie very recently. Pitreavie is doing well for us. Pitreavie, I think if you remember from when we made the announcement, it's like a mini Macfarlane in many ways. It's got a box-making facility up in Scotland. It's got a distribution 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 control packaging business.

And we're now working to create synergies within Pitreavie that benefit the group, particularly from 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 2 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 through everything. We've touched on in-house supply, and that's progressing really well with both Pitreavie and with GWP. Bottom left-hand corner, integration. We have now effectively closed the B&D site in Southampton and that's been integrated into our Westbury business, and we've got further integration programs in place for the next 12, 18 months. Acquisitions, I've talked about, as I say, there's 2 more acquisitions we'd like to do in this space to strengthen our U.K. proposition. And then going forward, it's not on the schedule, 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 got certain customers who are asking us to actually co-locate with them, and we're working on plans to actually evaluate that and see where that's a fruitful journey for this particular business.

So I'll pause there and turn to Ivor 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 external pressures around government legislation and also take you through the pension scheme and the capital allocation.

Yes. Thank you, Peter. Yes, in terms of sustainability agenda, a lot of information in this slide. I think off the left-hand side, you can see we continue to make good progress in terms of the impact that is having in the 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 carbon impact down that we're managing internally within the business and also working with our suppliers on the broader impact that we're having in the environment through Scope 3 emissions. In terms of customers, clearly, we continue to support our customers through the innovation labs.

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 going to 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 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. Across the right-hand side, we continue to progress the accreditations and that kind of 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 our investors. So overall, we're making pretty good progress on our sustainability agenda. And if I 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 on 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 from a Macfarlane perspective, it effectively impacts around about 20% of our customers, and it's broadly customers that are involved in e-commerce retail. And we are working with our customers.

So effectively, any packaging that we provide to those customers that they are then shipping to their customers then they will have to pay a charge on that packaging, depending on whether it's paid for plastic or any other kind of substrate. So we are working with our customers to educate them on the impact of that packaging, supporting them through in terms of what impact that's going to 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 actual amount of packaging they're actually using. So we do that through our innovation lab, and we do that through our significant progress. There's clearly some evolution of that coming through next year in Phase 2, 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 that's considered more environmentally friendly. So it's like an evolution of the EPR that's coming in this year. So again, we see ourselves as being well positioned 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 going to come through over the next 2 to 5 years that will impact the packaging market in terms of regulation.

So clearly, a lot going on, but the immediate impacts for our customers and for us as a business is the impact of extended producer responsibility, which is coming in, in October this year and will continue to evolve over the next few years. In terms of the pension scheme, I suppose the key messages here is pension scheme is an 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 6 to 12 months. So we always said that we'll be working towards a buy-in somewhere around 2026. There is a possibility we might be able to achieve a buy-in this Christmas, but we're certainly more in that kind of short term. So first of all, moving the scheme to buy-in and then ultimately to buy out at the point of buyout, 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. First stage of that is buy-in, which we hope to complete in the next 6 to 12 months and then a buyout that would take a further 18 months beyond that. In terms of capital allocation, as I 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 that in the first half in capital expenditure programs, and we've also continued the acquisition program with the acquisition of Pitreavie at the beginning of the year, and we paid the final dividend out in the first half of the year.

Clearly, 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 GBP 4 million buying back own shares between now and June next year. And that's really a reflection of the fact that if you look at the rating of our share price relative to the profitability of the business, there's not a huge differential between that and some of the acquisition program. So at the moment, we're prioritizing some of our capital towards the share buyback program in the short term. Clearly, we're not planning in doing further M&A this side of Christmas, but we'll get back on to the front foot of M&A in 2026. So a slight prioritization of resources towards buyback as opposed to M&A in the short term, but we'll get back on the front foot with M&A program in 2026.

Thanks, Ivor. So before we go into Q&A, let me just sort of conclude. It's clearly been a difficult H1. There's been significant headwinds that we are trying to and to a certain extent, managing to navigate through. And those headwinds are around -- at the end of the day, 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 wake up every morning at the moment something new has happened in the marketplace. So customers uncertain 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 taxation on employment.

So as we look to the second half of the year, and we're now sort of 2 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 Pitreavie business that we acquired. And then from there on in, it's really us focusing down on a series of management actions around converting the new business pipeline, which is extremely strong, and 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 part of the second half of the year. Continue to drive operational efficiencies. We won't have the challenge of East Midlands in the -- from now on in because we've managed the transition.

So we'll benefit from East Midlands consolidation. And then Ivor has touched on sustainability and how we're helping customers manage through the EPR challenges. The Pitreavie acquisition, there's still some more benefits to come from that, particularly around in-house sourcing. 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 has touched on the fact that we're not planning to do any more acquisitions this year, but the acquisition pipeline is strong. And as I said earlier, expect us to be back on the acquisition trail in 2026. And then the share buyback program we initiated, we're continuing with that.

And also, obviously, we've announced 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. Second half, we will demonstrate improved performance, and we will exit the year on a good trajectory for 2026. So we will move from here to questions.

[Operator Instructions] 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&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. No, I've got a few questions here, Peter. First one is, can we kind of write the relative kind of contributions from price inflation, the impact of demand, customer churn on the kind of organic decline story?

I think I covered off in the financials that basically, the price deflation impact was primarily a reason for the kind of 1% reduction in organic decline. But yes, there is ups and downs. I think Peter touched on new business growth of about GBP 3.7 million. And we've also seen an equal and opposite reduction of that kind of similar scale in terms of customers spending less and some losses of business, albeit some of the losses of business have been primarily a kind of smaller customer end. So if you think of our movement in profit and sales line, particularly within distribution in the year, then most of that is kind of price driven. Impact of new business is GBP 3.7 million and there's been an offset in terms of lower demand from existing customers and a bit of loss of customers within the smaller customer base, which kind of offsets that in equal order.

I don't know if you -- in terms of -- there was a discussion of EPR there, is EPR going to 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?

Yes. I mean it's really difficult to judge because EPR is complicated. The rules around EPR and the metrics around EPR keep changing. So we've not got a steady state at the moment in terms of where EPR is going to impact. In terms of the direct impact on Macfarlane, it's relatively small, primarily because as you're all aware, retail is an important but relatively small part of our overall business. It's about 25% of our distribution business revenue. And a majority of what we're doing in -- which is EPR related is e-commerce. It's not FMCG. So there's a small direct cost of the 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 roadshows that we're doing, which is basically guiding our customers and helping them navigate through what is a very tricky and complicated period and process. Is it going to overall reduce demand going forward? Undoubtedly, I think there will be a demand reduction around FMCG, which is where the EPR has the most material impact. There may be some slight reduction around e-commerce potentially, but I don't think it's going to be a material feature that's going to impact the business and its future over the next 3 to 5 years.

Thanks, Peter. There's a question here on operating margins. So what does the half 2 run rate in terms of margins look like in terms of first half versus second half? And what does the outlook look like for operating margins going forward?

If I can pick that one up. I mean, if you look at our net margins in the first half of the year, they were just under 7%. We would expect that to be kind of near 9% in the second half of the year. And that's primarily driven by more volume throughput. There's quite a seasonal uplift in volume that we expect in the second half of the year, and that naturally absorb our cost base more effectively in the second half of the year. And we actually do see the gross margins being slightly higher in the second half than the first half. So they are the kind of 2 key features.

The other feature is the Pitreavie 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. But also, we're driving some of our more internal corrugated buying and distribution through our Pitreavie business. So that's also retaining some profitability within the group. So we would expect our margins in the second half of the year to be higher in the first half. Certainly, as we exit this year, we're probably targeting 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. While 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% with we're starting to see some improvements from '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&A and returns to shareholders. 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 recognize and the M&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&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 to the business, we will certainly continue the M&A program and try to balance that return to shareholders and [indiscernible] program in line with each other where we can.

In terms of looking at a question around Europe, Peter, in terms of the use of third-party logistics, do we see third-party logistics being a key part of supporting the growth story in terms of our European expansion?

Yes. It's a good question. And the answer is yes. We -- through all the research we did before we entered Europe, we recognize that a big part of the model in Europe for successful distributors is more outsourcing of activities, particularly in warehousing and distribution. While in the U.K., 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 our European story to make more use of third-party logistics companies, both for storage and for distribution.

A specific question here around you mentioned East Midlands site consolidation. I think previously, 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 question mentioned that we had mentioned GBP 400,000 per annum once we're through program. Do we still expect to see that? Or has that changed given the current circumstances?

Yes. When we get to steady state, probably it might not be -- GBP 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 going to be as great. So you're probably talking more in the GBP 300,000 range than the GBP 400,000 range. 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 talked about the relaunch of the website and is that having a positive impact? And how much of our revenues do you see coming through the online shop?

Yes. So in relative terms, the online shop is a small proportion of our revenue today. It's less than 5%. We -- in terms of 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, it's less than 5%. We clearly would like to increase that. The new website is the start of the journey to increase that because we recognize both the functionality, appearance and presentation of our old website was not in line with current sort of website trends. 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 and into 2026.

And as a question around the kind of margins within the distribution business. Are our competitors facing the same challenges that we are facing? Do you see the opportunity for us to recover that and specifically around gross margins, is the decline in gross margins a sign of that kind of competitive intensity or kind of discipline within the marketplace starting to loosen?

Yes. I mean I think the market conditions are the market conditions, so it's certainly affecting all the key players in the U.K. market to different degrees. How they're managing it is their business rather than our business. But certainly, we've seen the margin fall back in the first 6 months of this year compared to the first 6 months of last year. But we're now seeing the margins start to recover as we've come into H2. And we would certainly expect to see the margin. It's currently running at sort of just under about 35.6% at the end of H1. We'd certainly expect as we exit the year to be back up the exit rate at the end of 2024, which was sort of around about 36%.

So certainly, pressures there, but certainly, we can see a way of getting back to a sort of 36% gross margin. We're probably never going to get back to the heights of gross margin that we saw during the COVID period, where I think most of you were aware that was where demand was outstripping supply and price increases were going crazy, and we over-recovered during that period and hence, margins were high. So I don't see us getting back to those levels, but certainly, around about 36% is we see as a sustainable level going forward.

And in terms of the -- one of the questions is you mentioned headcount reduction within Packaging Distribution, what are the kind of key areas that that's impacting?

Yes. So the -- what we've tried to do is to focus our headcount reductions primarily 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 functions. And if you look at the increase that we've seen in terms of headcount over the last 2 or 3 years, it's primarily been not in the operational side of the business, but in head office support functions. And it's that where we focused our activity in the first 6 months of 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 warehouse people, 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 probably covered this one. Do we intend to continue to acquire companies as a regular process?

Yes. 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 well sort of rehearsed program in doing that over the last sort of 7 or 8 years, and we continue to work on that. The fact that we're in a pause now is purely because, obviously, Pitreavie, we did in January was the biggest acquisition we've done in the last 20 years, was complicated in terms of the components, the full components of the business. So we wanted to spend management time making sure that bedded in and making sure we generated the synergies, which Ivor touched on. But we'll be back on the acquisition trail, the right companies at 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 clearly contribute more of the profit of the group than distribution, where historically distribution has been the 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 proportionately, the business has always been sort of 90-10 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. Although it's a smaller market and it is a more complicated market, we do see it as a nice adjunct to our distribution business. And as you see from the stats, a significant proportion of manufacturing sales is driven through distribution. So there are synergies by the 2 businesses working together. So I think in terms of the scale of opportunity, distribution still represents the biggest scale opportunity for Macfarlane. But we do see manufacturing as an important adjunct to our distribution business to provide a comprehensive sort of protective packaging suite of products and services.

I think, again, we might cover some of this in terms of operating margins, we've always talked about the kind of 10% goal. I think we got there last year and also we've gone back a bit this year. Does that feel still like the medium-term target? And what are the levers to kind of get us from where we are now back up to that kind of level?

I mean we've always, over quite a period, talked about 10% being the underlying operating margin we were looking to achieve, and we've touched that recently, as Ivor said. I think the sort of things that we do, we've got to 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 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. I think there's no doubt that the property portfolio, as I touched on this, and I'll repeat it, the increase in rental cost is going to be an increasing challenge for us going forward.

So having completed the East 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 property portfolio 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 key areas. I think we've covered EPR. Don't really impact EPR directly in the business, that's a long-term headwind from customers continue to reduce packaging. We covered that one earlier.

No. So I think we've covered all the questions from what 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 continuing support as 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 it 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.