Good morning, and welcome to the Macfarlane Group PLC full year results investor presentation. Throughout this recorded meeting, investors will be in listen-only mode. Questions are encouraged, can be submitted at any time by the Q&A tab situated on the right-hand corner of your screen. Just click Q&A, scroll to the bottom, type your question, and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. I would now like to hand you over to Peter Atkinson, CEO. Good morning, sir.
Good morning, everybody, and thank you for joining us. We announced our results for 2023 last week, and our objective today is to talk you through the results and put some color behind the numbers. I am joined this morning by our Group CFO, Ivor Gray. In terms of the agenda for the presentation, I will make some brief introductory remarks to set the scene. Ivor will then talk you through the key metrics. I will then come back on and talk you through the performance of the individual business units. Ivor will touch on the pension scheme, and then we will conclude and move to Q&A. In terms of the performance in 2023, as we entered 2022, we always knew 2023 was going to be a difficult year.
We could see that demand was going to be weak, and we were also recognizing cost inflation was going to come through the business. So our plan for 2023 was to work on a self-help program that was going to offset the worst of cost inflation and the worst of the weak demand. What we have achieved in 2023 is good new business growth, good sales momentum in Europe, an improvement in gross margins through more effective sourcing. We have accelerated our acquisition program with three acquisitions during the year, and we have also done a pretty effective job in controlling costs. So, I think the profit growth we have achieved in 2023 reflects a good reaction to difficult and challenging market conditions and really reflects on the resilience of the Macfarlane Group business model.
If you, just as a reminder, really, you know, what is it about Macfarlane that creates such resilience? There are really six key features. The first one is we have got a huge breadth of markets and customers served. Our largest customer is less than 1.5% of revenue. So we, we have got natural hedges within our customer base, particularly during weak demand times like this. The second key feature of our resilience is that all we do is live and breathe protective packaging and, you know, we obviously specialize and focus on protective packaging and 365 days, 24 hours a day, that is our business. The third element is the value-added proposition. We are doing far more than selling products and price.
We're generally and genuinely selling an added value proposition, and I think a number of you are aware of the Significant Six program and the Packaging Optimiser, which helps customers lower costs, particularly in this environment. Critical to us is our supply base, and we've got a range of long-established suppliers who've been operating with us, major protective packing manufacturers who've been working with us for over 25 years. And they, you know, help us with our resilience. Throughout the business, as you know, we're a decentralized business with lots of different profit centers, lots of GMs managing their own P&Ls, and that performance-driven culture means there's a strong local profit ownership. So it's not just Ivor and I who have to worry about the P&L.
Finally, bottom right-hand corner there, we've got a bespoke product and service range. 70% of what we sell in distribution is bespoke to the customer, and in our manufacturing business, every single thing that we sell to our customers is bespoke to them. So again, it's not just churning out any old box to any old customer. Bespoke is a key part of our business model. So that's the resilience story, and I'll hand over to Ivor now just to talk you through the key metrics, and then I'll come back and talk to you about the individual business performances.
Thank you, Peter. Just going to cover off some of the KPIs for the year. As you can see up at the kind of top row, in terms of the performance of the business, we had revenue decline of 3% in a year, and that roughly splits between 5% positive contribution from acquisitions. We made three acquisitions in a year, Suttons and Barum & Dewar within our manufacturing business, and Gottlieb Packaging within our distribution business. And also we had the full year benefit of the PackMann business that we acquired in 2022. So 5% contribution from those acquisitions, and we've seen a decline in the organic side of the business by -8%, and that's mainly volume driven, albeit we saw price deflation in the second half of the year.
As you look at our kind of two key profit measures, adjusted profit before tax, adjusted operating profit, we've actually seen 10% growth in our profitability. As Peter described earlier, clearly despite the fact we've seen weak demand in the revenue line, and we've seen inflation predominantly in employee costs and energy costs, we've offset that with some growth in our gross margins, and clearly we've had strong input from the acquisitions. So in terms of the operating profit, you know, we've had a 13% improvement in profitability contributed by the acquisitions, and we've had a slight decline of -3% on organic profitability. Just to explain the kind of key adjustments that we make to get to our kind of statutory measures, amortization of intangibles, which were GBP 4 million in 2023 versus GBP 3.6 million in 2022.
We have adjustments for deferred consideration adjustments. That was nil in 2022 and GBP 1.5 million in 2023. The main reason for that was when we acquired the PackMann business in 2022, at that time, just given the performance of the business at the time we bought the business, we did not anticipate that the business would actually hit its earnout targets. Pleasingly, the business has actually performed far better than we anticipated. Given the performance of the business, that business will now hit its earnout targets. We are actually now taking that GBP 1.5 million charge through the profit and loss account. So it is a kind of capital cost that we are having to take through the P&L. So that is the two key adjustments we make between adjusted profit and statutory profit.
In terms of the balance sheet, clearly positive things, we are in net funds at the end of the year, and that is that cash inflow of GBP 4 million during the year, and I will cover off some detail around the cash flow later. That is against a bank facility of GBP 35 million. So we have got plenty of firepower to be able to continue investing in the business and also do further acquisitions.
In terms of the pension surplus, there has been a marginal movement in that in the year, GBP 10.2 million down to GBP 9.9 million. I think the pleasing thing to report on the pensions, it has been well managed, and we are now in a position where going forward, we have just completed the recent triennial valuation, which means that over the next triennial period, the next three years, there is not a requirement for the company to put further funds into the scheme.
The scheme is broadly self-sufficient at the moment. If you remember, we have been putting GBP 1.25 million in per annum over the last three years, so that is certainly a GBP 1.25 million cash saving to the business over the next three-year period. In terms of the diluted EPS, that is down 5%. Two reasons for that. One, the GBP 1.5 million charge for deferred consideration I explained earlier, and also the fact that the tax rate has changed.
Clearly, we were paying 19% corporation tax in 2022, and the blended corporation tax for 2023 was 23.5%. If you kind of reverse those two factors out, we would have seen growth in EPS. Again, pleasing to report given the profit improvement in the business, we have actually managed to improve the dividend by 5%. So pleasing to be able to return more funds to shareholders.
Just moving on to some of the later on the kind of income statement. Peter will cover the kind of revenue line in more detail when he discusses the individual businesses. But I just want to pick out clearly you can see quite a step forward in our gross margin, and that is both within the distribution business and the manufacturing business. So, within the distribution business, we have improved our gross margins from just over 32% to just under 36% during 2023, and in the manufacturing business, just under 42% to around 44.5%. So both businesses have moved their gross margins forward. It is important to describe that one of the reasons for that is clearly our operating expenses have been increasing.
If you look at the increase in our operating expenses of GBP 3.9 million, of that is the impact of the acquisitions coming in, but GBP 1.6 million of that is increases in employee costs. I think if you remember this time last year, we had a wage inflation of around about 7% for employees through the year, and clearly that has increased our operating expenses. The other factor is our utility costs have gone up from GBP 1.2 million to GBP 1.9 million. So we are quite a step forward in terms of energy costs. It is important to look at that gross margin in the context of the fact that we are trying to cover the inflationary impacts on our cost base.
Again, you can see on the amortization, the fair consideration impact on the amortization costs, and that really probably is the key features I want to pull out on the income statement. In terms of cash flows, very positive cash flows in the year. We generated GBP 4 million of cash. As I said earlier, we are in net funds at end of the year. Clearly you can see a big impact of that is the cash inflow from working capital. About GBP 2 million of that working capital inflow is down to efficiency gains. So that is reducing our stock days, reducing our debtors days, and that has been good management by the teams across the business. GBP 2.6 million of that is due to unwinding as volumes have decreased in the marketplace. We have actually pulled our working capital down in line with that.
A positive cash inflow from working capital. That has allowed us to invest in the business both from a CapEx point of view, where we spent GBP 2.1 million in a year. I suppose the biggest single investment that we made is opening the Innovation Lab, and Peter will discuss that in a wee bit more detail in the north of England. That was our GBP 1.2 million investment, and clearly that is really to drive our new business program forward. The acquisitions, GBP 14.5 million of acquisitions, GBP 2.9 million of that was paying earn-outs for prior year acquisitions, and the balance was related to the three acquisitions I referred to earlier, Suttons , Gottlieb , and B&D.
Just to give an indication of cash flows going forward, we anticipate earn-out payments in the current year of about GBP 3.6 million related to prior acquisitions and a further GBP 600,000 in 2025. The next slide really just covers capital allocation priorities. Clearly the first priority the Group has is really focusing on driving the organic growth of the business and investing in capital expenditure.
Both essential capital expenditure, so those would be items like racking out warehouses, replacing machines within our manufacturing business, but also value adding CapEx. So in the current year, we put solar panels into one of our manufacturing sites, and as I mentioned earlier, the Innovation Lab in the north. So clearly our first priorities are to invest in the business for organic growth. The second priority is earnings enhancing acquisitions.
You can see certainly our track record over the last 10 years, we have been doing two to three acquisitions per year. Again, we made further acquisitions in 2023. Again, they are all earnings enhancing acquisitions. The third priority is continuing to pay a kind of sustainable and progressive dividend back to shareholders. We try and work to a dividend cover of around about 2.5 to 2.6, and as I mentioned earlier, we have improved our dividend from 2022 to 2023 by 5%. If we have surplus cash and we have no short or medium-term investment opportunities, either in terms of investing in the business or, as I said earlier, earnings enhancing acquisitions, we would look to return money back to our shareholders through either share buybacks or enhanced dividends.
Currently, we do not have the authority to buy back shares, but we will be going to shareholders at the AGM in May, to seek authority for that buyback so that we have got that available in our armory. It is important to emphasize that, we do not have any immediate plans to do any share buybacks because we believe we have got opportunities to invest in the business, but we believe we should have that as an available option to us. This slide again just shows the kind of progression over a period of time. Obviously, you can see the nudge down in EPS in 2023. As explained earlier, that is down to kind of changes in tax rate and the GBP 1.5 million charge we took for the deferred consideration adjustment.
Again, pleasing to see that we have moved the overall profitability forward, and that is now 14 years of consecutive improvement in profitability. I think given the tough conditions we had last year, I think that is a fairly respectable performance. I will now pass back to Peter, who will kind of discuss in detail a wee bit more about the divisional performance between the distribution business and manufacturing.
Thank you, Ivor. As you are aware, we have two divisions within the business, all in protective packaging. The main division is packaging distribution, where we are buying and selling protective packaging materials. Then we have a very specialist design and manufacture division, which I will talk about after this. In terms of the performance of packaging distribution in 2023, sales were down by around just under 6%.
That is a mixture of 9% base business decline, the majority of which was volume, and I will touch on that in a moment. Then we benefited from acquisitions that improved revenue by 3.2%. The good things in revenue that happened during the year are the acquisitions that we made historically and the acquisition that we made in 2023, Gottlieb . Both of those are performing really well and have performed very well.
Good momentum in terms of the acquisitions. We have very good progress in our Follow the Customer program in Europe, where we grew revenue there by 20% versus the previous year. As you know, we are a startup in Europe, so we are getting faster revenue growth there. We have also improved on Net Promoter Score, which is effectively our customer service measure, from 50 to 60.
J ust for your information, the average for B2B companies is 25, so we are way above the average, which is extremely encouraging. Then, as Ivor touched on, during the year, we invested in our second Innovation Lab at our new RDC in Heywood, up north of Manchester. That is beginning to benefit us in terms of new business growth in the north of England. We had 9 months benefit in 2023. Clearly, we will get a full year benefit in 2024.
Clearly, as Ivor touched on in his review of the Group, one of the key standout numbers in terms of our 2023 performance in distribution was the improvement in gross margin. That was primarily down to the fact that we did a far better job in sourcing from our suppliers, through effective negotiation and also some supplier switching during the year. If we flip to the next slide. As you know, our business is, we are buying products which are either linked to the paper index or the polymer index. In round numbers, paper about 70% of our business, polymer about 30% of our business. As you can see, these lines are very volatile lines. They are global commodities which move around on an ongoing basis.
But what we have seen over the last two years is obviously a steep incline in terms of both commodities, but particularly paper, up to really the end of 2022. Then what we have seen since then is a decline. Typically, what we are doing is recovering these prices. When prices are going up, we tend to slightly under-recover. When prices are going down, we slightly over-recover. That is just the way the business works.
But what we have been able to demonstrate over a long period of time is a consistent gross margin performance. We are very effective at managing the transition between buying prices and selling prices. I mentioned price volume, and this is the sort of the packing distribution performance 2023, 2022. To be blunt, it is mainly volume that has impacted our decline in 2023 versus 2022. There is a little bit of price, but not very much.
But price became a factor in the second half of the year. As we go into 2024, we are probably going to see price deflation being a little bit more of a factor in terms of our revenue line. As you can see in the schedule, in relative terms, retail, our e-commerce retail business, which is about 20% of revenue, is slightly weaker than our industrial business. Just moving on to the cost base. Again, Ivor talked about it in macro terms, but if you dial into the details of the packing distribution cost base, you see the major change we have had in the year in terms of the base business is wage inflation in response to obviously market pressures. That has gone up quite significantly and was 13.6% revenue. It is now 15% revenue.
We've been able to flex transport costs effectively in line with demand, so that's encouraging. Utility costs still going up, but beginning to actually soften as we exit the year. IT costs broadly flat with the previous year. The other key part of our cost increase during the year was obviously the costs we inherited from the acquisitions. Acquisition, as you're all aware, is a key part of our strategy to complement organic growth.
What you have on this schedule is our recent history of acquisitions with the most recent acquisition being Gottlieb, which we completed first quarter 2023. As you can see, I won't go through the slide and all the detail, but you see we operate at tight multiples. We only buy quality businesses, and typically what we're doing is buying privately owned businesses where you've got owners looking to retire.
If you look across that list, that tends to be the pattern that we're working towards. We've got a very strong pipeline of acquisitions, both in distribution and manufacturing, which I'll touch on later. We're very confident that we will be completing more acquisitions during this year. If we look at our key priorities for the distribution business going forward, again, I won't go through all the components of this slide.
Bottom left-hand corner, we recognize that in terms of our online capability, we've probably fallen behind there, and so we've got a major program on at the moment to actually update and relaunch our website. Bottom right-hand corner, as I'm facing the screen, we've got another property consolidation to take place in 2024, which is in the East Midlands, where we're consolidating four sites into one in the Nottingham area.
We're also relocating our NDC. About 10% of our purchases are sourced from outside the U.K., and we typically bring those into our NDC and then redistribute them for cost benefit reasons. We're able to get out a lease for our NDC and relocate it in one of our sites, so there's cost savings that will apply from that. The other key thing in the middle of that slide, the sourcing comment. Clearly, we've got very strong, longstanding relationships with key suppliers, but also as our in-house manufacturing division grows, we've got quite a big opportunity to do more in-house sourcing through our manufacturing division. So you'll see that as a key feature of our business going forward in the next two or three years. Currently, we've got about 13% of our manufacturing revenue, which is sold for distribution.
We're looking to get that up to around about 20%-22% over the next couple of years, and we've got plans which are being implemented as we speak to ensure that it's executed. That's basically keeping profit in-house rather than giving it to external suppliers. Those are probably. The only other thing is just to recap my comments on acquisitions of both in the U.K. and in Europe. We've got pipelines, good quality pipelines in both geographies, and obviously more news on that as the year unfolds. If we move on to our manufacturing division, which is a growing part of the group. This last year it was over GBP 40 million. We're making good progress here. A mixture of organic growth, and also acquisition growth.
We made two acquisitions during the early acquisition of Suttons that I've touched on middle of the year. Then we also acquired a business called B&D towards the end of the final quarter. Both those are performing really well. It's early days with B&D, but it started off really well, and Suttons is a really strong business. It's doing well. I touched on the partnership with distribution.
We see that as a big opportunity, and as I say, from 13%, we'd expect that percentage of revenue to get up to 20% plus going forward. We did see more of an overhead increase in this business, partly down to the acquisitions, but also shown in employee costs. The manufacturing business, by their own nature of it, actually is a big consumer of energy, so hence they've been impacted by our energy costs.
But we expect those to ease, as I mentioned, going into 2024, 2025. Again, just touching on the acquisitions. We've done three acquisitions in this space, in the last couple of years. GWP Group was our first acquisition in 2021, and since then we've done Suttons and B&D back in 2023. As I say, in this business, there is a good pipeline. Profile is not dissimilar in terms of types of businesses, privately owned, specialist design and manufacturing businesses within a range of GBP 10 million-GBP 20 million in revenue. As I say, we've got a good pipeline and hopefully be good news on the acquisition front in this sector of our business as we move forward into, as we move forward during 2024. Again, a slide over the page on the action plan.
As you're aware, our targeted growth for new business is medical electronics, aerospace, and more increasingly space with the acquisition of B &D. What we're doing here is we're providing unique packaging solutions for specific customer requirements of very valuable or very fragile equipment or components. We've got a very successful track record in terms of customer retention. The customers in this business are extremely sticky. We've got some integration opportunities, as we start working on the acquisitions. There's some integration opportunities that we will execute during 2024, particularly around B&D, which will generate some savings. Then I talked about the in-house supply opportunity with the work to do with packaging distribution. Just moving on from the individual business performances, just a slide on ESG.
Again, I won't go through all the points on this slide, but we made good progress in terms of electric vehicles. In terms of our own carbon footprint, our major issue is to do with the fact that we run 120 diesel vehicles, and we're starting the transition of moving towards electric vehicles. We'll have nine by the end of this year. They are more expensive than the diesel vehicles to operate and to lease.
But we are moving in that direction on the basis that similar to electric cars, over time, the pricing of these vehicles will equalize, and they will become competitive with diesel vehicles. So good progress there. As I mentioned, part of the role of the Innovation Labs is to work with our customers to help them improve their sustainability through the way they use packaging and the types of packaging that they buy.
The investment in the northern Innovation Lab, probably half the visits we had during 2023, the people came in to talk about sustainability and how we could help them from a sustainability point of view. So the Innovation Labs are a key part of our selling proposition and will continue to be so. The final point on this page, as you know, there's lots of people rating companies in this space, and we achieved a gold award under the EcoVadis Sustainability rating during the year. So let me pause there, and I'll pass over to Ivor to cover the pension surplus, then I'll finalize with some concluding remarks.
Yeah. I think the key message from the pension point of view is it's been well managed. We remain in surplus. As I said earlier, the most recent trend of valuation means that over the next trend of year, there's no requirement for further company contributions, so that from a cash point of view saves the company GBP 1.25 million per annum. We are working with trustees and advisors to have this scheme in a position to be prepared for buyout, but clearly our initial goal and aim was to make sure the pension scheme was self-sufficient from a cash point of view, and we're pretty much there. Clearly the buyout is something that's an option for us in the future, depending on the kind of pricing in the marketplace.
But certainly it's been well managed, and the only other thing you would notice is quite a change in the kind of asset allocation, and that really fundamentally, that's to reduce volatility and increase liquidity. Again, that makes sure that we're in a good place if we want to sell the scheme to an insurance company at some point in the future, the scheme's in a position that we can do that. So I'll pass back to Peter just for some concluding remarks.
Thanks, Ivor. So just some key conclusions. I think the description of 2023 from our point of view is that the business has demonstrated high-level resilience. We always knew the year was going to be difficult from a demand point of view, and so it sort of flowed that way. So the actions that we've taken around new business, around Europe, around accelerating our acquisition program, the investment in the iLabs to support our new business, and the control of operating costs in terms of offsetting inflation by price input management, have really all been very effective in delivering another year of profit growth for the group. As I mentioned earlier on, we've made good progress against our ESG objectives.
As we look towards 2024, we've obviously got an early sighter with our numbers for January and February, and the shape of 2024 looks very much like it was in 2023. The year has started with weak demand, but margin is strong, costs are under control. We've got the momentum from acquisitions that we did in previous period. As I said, we're very well developed in terms of acquisitions for the first half of 2024. As Ivor flagged, our balance sheet is in good shape. We've got good cash generation. So the plans we've got both for in-house investment and for external investment in terms of acquisitions, is well resourced in terms of our funding capability. Thank you for listening to us. I'll pass back to Paul, if I may, and then we'll pick up with some of the questions.
Super. Peter, Ivor, thanks again for that presentation. As Peter said, ladies and gentlemen, please do continue to submit your questions just using the Q&A tab situated on the right-hand corner of your screen. We just want the team take a few moments to review those questions submitted today. I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, we've received a number of questions throughout today's presentation. Thank you to all the investors who have submitted those. Ivor, if I may just hand back to you to click on that Q&A tab, and where appropriate, if I could ask you just to read out the question and give your response addressed to Peter, and I'll pick up from you both at the end.
Okay. Thanks very much for your questions. We'll try and answer as many as we can in the time we've got. Peter, one of the questions we've got is any kind of trends that you see in customer demand by sector that you think are worth pulling out?
Yeah. An interesting question. I think one of the trends that we're seeing as part of a mix of activity is clearly in the commerce field. As I mentioned in my presentation, e-commerce represents about 20% of our revenue, an important part of our business. E-commerce was extremely strong during COVID because we didn't have very much to do during COVID, so we all spent our time buying stuff online. What's happened during 2023 is obvious, and 2022, to be fair, obviously as we came out of COVID, we started to return to high street. So e-commerce has dropped off from a very, very high peak. I think what we're seeing is a sort of a re-stabilization of the e-commerce opportunity for us, and we expect e-commerce growth to start to recover probably second half of 2024 and moving into 2025. So that's sort of one thing we're seeing.
I mentioned sustainability. All customers in all sectors, sustainability is becoming a more important feature of the debate we're having with them. We brought in a new head of sustainability, and a big part of his time is working on improving the sustainability footprint of the group. The other 50% of his time he spends working with customers and helping them with their sustainability footprint. We're pretty well resourced and focused to help our customers to achieve their sustainability objectives. Other than that, I think just the underlying weakness in the economy and uncertainty. When we talk to customers at the moment, they're all just holding fire on making any big decisions, pending a little bit more certainty coming into the political environment and into the economic environment.
We've had a couple of questions really. Clearly, we've always been weak. We've had a couple of questions on how we drive new business. One around how does the investment in the new Innovation Lab drive new business, and another one really is just how do you find new customers?
Okay. If you take the Innovation Lab question first. I mentioned in my what is it that makes us resilient, I mentioned that we provide added value to customers, and the Innovation Lab experience is there to give our customers the opportunity to help us understand how they source packaging and how they use packaging. We have something called the Significant Six, to persuade customers to stop thinking about product and price and think about the things that are impacted, the costs that are impacted in their business by the way they use packaging. To give you a prime example.
You can buy the cheapest boxes you want, but if that increases your damage rate, then it's a false economy because all you're doing is having to then manage lots of returns and lots of unhappy customers and the cost of all that is far beyond the price of buying a cheaper box. The Significant Six is all about helping customers understand their damage rate and minimizing it. To understand how they pack their products because a big part of using packaging is the cost of putting the stuff into the boxes. If we can find ways of designing packaging that makes it easier for them to fill the packs, we can lower their cost in the area of operations. Again, labor saving is a bigger benefit to them than simply a few pence off the price of a box.
And similar programs around transportation, around warehousing, around branding, and around single sourcing. Those are what we call the Significant Six, and we use the Innovation Lab to showcase those benefits to the customers to model their business, and demonstrate to them what savings we can make in all of or a couple of those six areas for them. All the cost savings we describe to them, we can also back that up with carbon footprint savings as well.
So the customer, having gone through the Innovation Lab experience, goes away with a program and a proposal from Macfarlane, which demonstrates not only cost savings but also carbon savings. In terms of how we identify new business opportunities, we have a central marketing team, and they work with a whole bunch of external organizations to identify key opportunities in the various sectors that we focus on.
And we also look at the sectors that we are most successful in, and then identify through back office research, the types of other customers that operate in those sectors and target them. I think you're all aware that the packaging distribution market for protective packaging is about GBP 1 billion in the U.K. That supplied by manufacturers is GBP 5 billion +. So we are very focused on that GBP 1 billion market, which is serviced by distributors. And we know it very well, and we know the customers in it very well. The customers within protective packaging, they tend to, if they've got very simple product requirements and lots of storage space and don't want to use lots of different forms of packaging, then, quite rightly, they will buy directly from manufacturer.
The customers that we target, those customers who've got complex packaging needs because they've got a complex product range, they don't have space to store packaging, and they need the expertise that we can bring to them in terms of our packaging knowledge, both for paper-based products and polymer-based products. So it's a well-oiled machine, and as you can see from our new business performance in 2023, 20% ahead of 2022, we've got some good momentum.
A couple of questions on the gross profit. Clearly, the gross profit or gross margins have risen during 2023. So a couple of questions on how sustainable that is going forward. Do you want to do that?
I will do that. I think I am going to do that one. As I have described, when we are talking to customers about how we price, it is a function of the products that we are buying and also the service that we are providing. Yes, our gross margin has improved. How have we done that? We have done that through effectively better sourcing, as I mentioned in the presentation. We have worked harder with our existing suppliers, to negotiate better deals from them, and then we have also done some bringing new suppliers into our supply base, who have been more competitive than our existing suppliers. Then we have also used our in-house manufacturing operations to provide a supply source as well. Those are the things that have allowed us to improve our input prices. Are they sustainable?
Certainly as we look at the outlook for 2024, early performance is saying yes. I think as Ivor said, the argument for customers is, if you look at our gross margin, it is improving, but our net margin is only marginally improving. In reality, what you are paying for is the price of products and also the price of services. We would see going forward, we are not going to see another 3% improvement in 2024 or 2025, but I think stability around where we are with high 30% gross margins, I think from our point of view, we believe that is sustainable, yes.
Okay. A couple on acquisitions, which I will pick up here. I think there was one asking about, the reported profit for acquired businesses. Is this EBIT or does it exclude goodwill, amortization, and transaction costs? I think just to put in context, the number, when I was talking about the number, the adjusted profit improvement year on year, I think of about 13% growth, and that equates to about GBP 3.3 million for 2023. That is before amortization, and transaction cost. I suppose to put in context, the increase in amortization costs in 2023 was GBP 400,000, and the transaction cost related to the acquisition to be completed in the year was GBP 200,000. Hopefully, that kind of puts some context to the numbers.
But in answer to your question, the numbers we quote, certainly in the RNSs on acquisitions are before goodwill amortization, and transaction costs, and certainly the adjusted profits before amortization and transaction costs. Hopefully that puts that in context. Another question was obviously with the increase in interest rates to 7%, does that make you think, I suppose, about continuing to do acquisitions?
I suppose from our perspective, I think interest rates, although they are elevated from where they have been, they are still at a relatively low level historically. It certainly makes us think about pricing. So we do tend to try and keep within a range of 5x to 6x. I suppose more of the recent acquisitions have been more towards the 5x, and it tends to be the kind of initial consideration we pay is slightly less than 5x.
Then through the earn-out period, if the business proves itself, we are prepared to go up to five, possibly 5.5 x, but probably more to the lower end of that range to accommodate the fact that we have got kind of higher transactional costs through interest. There was another question that was asked around the kind of pension scheme. What do we need to do to get pension scheme ready for buyout? I suppose there is quite a lot of administrative work to get the scheme. Ultimately, any insurance company who wants to buy the scheme, they want to know exactly what they are buying. I suppose with a lot of defined benefit schemes, they have made a lot of adjustments to schemes over the years.
You have to have that extremely well documented, and you have to understand exactly the implications of each of those changes to every individual pensioner. Of course, more recently, obviously, with the GMP kind of equalization challenge. Clearly, again, we need to understand what that means for every single pensioner before an insurance company will buy that out. I think a lot of the schemes are in better shape now, and a lot of schemes are now competing for the same resource to do those calculations. Part of the issue is getting resource to do it, and clearly part of the issue is the time it takes to do that. We are realistically looking at a period of something like 18 months to two years, potentially, to be in a position for an insurance company to buy out.
But it is mostly, as I said, administrative work in the background to get the scheme ready for a buyout. I suppose the key message for us is in that intervening period, the scheme itself is self-sufficient and not requiring extra cash injection from the company. I suppose passing back to Peter, a couple other questions on acquisitions. Does the current environment make it a better environment for acquisitions at the moment? I suppose by European perspective, is the focus on Germany, are we looking elsewhere?
If I take the second one first, in terms of geography, as you know, the first acquisition we made in Europe was PackMann, which is not far away from Frankfurt. Our profile of the targets that we are working with at the moment, it is Scandinavia, Benelux, and Germany. So it is that sort of spine of Europe. We are not currently working in France, Spain, Italy, or Portugal.
As I say, Scandinavia, Benelux, and Germany is where our acquisition program is targeted from a European perspective. If we look at the environment for acquisitions, yeah, if you just take the first two months of this year, we probably had about 10 companies approach us to ask us if we are interested in pursuing them as an acquisition target. We think there is a number of things going on. One is people are bringing forward their retirement dates.
The local and regional privately owned businesses, a lot of the ones that we talk to, they see the increase of regulation coming down the pipe, be it on the environment or health and safety and the administrative workload that's required and their inability to focus on the day-to-day as much as they used to do. That's motivating people to look at exit. Secondly, they're seeing the strength of the bigger guys like us. Why not take the opportunity now while these guys are obviously looking to consolidate the market?
Then thirdly, on a sort of a political note, I think certainly in terms of the U.K., you've got a number of people who are saying, "Well, I'd probably prefer to sell my business under the current tax regime than under a potential future tax regime." Yeah, the environment is as strong as it's ever been in terms of the acquisition opportunities. As I say, that's why we're so confident about our acquisition program being delivered in 2024.
Just on the acquisition theme, a question has come through around the potential merger of Mondi and DS Smith, and whether that would have an impact on the group.
Yeah, it's an interesting development. Obviously, you've got Smurfit doing things in the States, and then you've got Mondi returning to the corrugate industry because they used to be in the corrugate industry in the U.K. I think the Smurfit thing will probably not impact on us because that's a U.S. thing, so we don't expect to see any impact there. I think in terms of DS Smith, Mondi, I'd be surprised if there's an impact there. We've got a very good relationship with Smiths. They're a key supplier to us. We've been with them for a long time. Our business with them is developing nicely. So we'd like to see there would be benefits coming about through the potential merger.
The other comment to make is that if you look at our number of corrugate suppliers we have, we have about 90, and I think Michael might correct me on this, but I think DS Smith represents about 7% of our corrugate purchases. So even if the worst thing happened, which I don't imagine will, then we've always got the ability to source from other suppliers. The answer is, we're not assuming it's going to be a major impact on our business.
Does it impact the pricing in the marketplace for the acquisitions that we do, Peter?
I would be surprised if it did, to be fair. As you know, we work on pretty tight multiples, 5x to 6 x, and we have been able to execute high-quality acquisitions on those multiples for quite a period of time. I think these sort of mega scale mergers of significant global organizations, that to me is a different ballpark altogether. So I may be proved wrong, but I'll be surprised if it has a material impact.
I suppose going back a few years, obviously, with Brexit, has that had an impact on the business?
To be honest, not noticeable. I cannot argue that if you look at our numbers or our performance, maybe in terms of employees in our manufacturing business, we have maybe had some struggles with some of our employees because we have quite a lot of European workers operating in our facilities. That is probably the only tangible thing I can think of. But other than that, no, it is not really been an issue that has impacted the data of the business, other than that recruitment issue and resourcing issue in our manufacturing businesses.
Then a question on the environment, what is the benefit of switching from diesel to electric trucks? Maybe I will pick this one up. I suppose purely in commercial terms, it is not a benefit really. It is a cost to the business. An individual truck will be about GBP 35,000 per annum more expensive than a diesel truck at the moment. But I suppose our view is, look, it is important that we are making an impact on our carbon footprint, and we see that as a critical objective for the group, and we have got targets out until 2030.
I think we believe that electric trucks currently at the moment are probably the best alternative from an environmental perspective. Clearly from an investment perspective, what we are hoping clearly is the demand picks up for electric trucks, clearly the price point comes down to something that is more commercially viable.
However, although electric trucks is the best option that is available for us at the moment, it is not certainly the only option that is being explored by the manufacturers. We are certainly flexible in terms of our fleet. We have about 120 vehicles, currently electric trucks. By the end of this year, will make up around 10 of those vehicles. It just gives us the opportunity to really try them out to see if they work for us, to assess their capabilities from an operational perspective.
Clearly, if that is the right way to go and the commercials are more sensible going forward, we will continue that program. If other options come available, then we are still flexible within our fleet to be able to take advantage of those other options, whether that is hydrogen, whether it is a combination of fuels.
I think we have got enough flexibility in our fleet to be able to adjust. I think as a group, we feel as if we have to start making some progress on what is our biggest kind of contribution to the carbon footprint, which is our vehicles.
And just to add to that, it is interesting because we've had some customers who, as we've introduced electric vehicles into the fleet, have asked for their deliveries to only be made on electric vehicles. So, it is something that customers recognize and that it's the right thing to do. So it's been a positive for some of our key customer relationships to have electric vehicles in the fleet.
I suppose a couple of quick questions on some of the investments we've been making. Can we quantify the impact in sales growth of the Macfarlane Innovation Lab at this point?
Yeah, good question. We targeted in 2023 to add GBP 750,000 worth of incremental revenue through the Innovation Lab, and we slightly underachieved. We got to about 700, I think. So in terms of new business revenue, we got very close to where we expected to be. The innovation side is also about customer retention. And there have been at least four customers where we've been in contractual renew situations with them, and we've used the Innovation Lab as one of the parts of the sort of reselling process to reconfirm and, I won't say it was just the Innovation Lab, but Innovation Lab was instrumental in us actually renewing those contracts.
The third aspect, again, difficult to value unfortunately, is that we've run a number of sustainability days at the Innovation Lab, where we just put an open invite out to any and all customers, be they existing or new, to come and talk with us about sustainability. And they have been very, very highly supported. And while I can't say today that generated some new income for us, I do know there were quite a lot of interesting opportunities that came about through that, which hopefully we will execute in 2024.
Any kind of profitability impact from the NDC move and the consolidation in East Midlands?
Yeah. So, two moves this year, as I mentioned. One is the East Midlands consolidation and one is the NDC move. When you get back to taking out all the one-off costs, et cetera, because there's overlapping costs, et cetera, the move in the East Midlands will benefit us by around about GBP 300,000, bottom line, and the move of the NDC will benefit us around about GBP 100,000. So together, about GBP 400,000 bottom line benefit once you've taken out the one-off cost of making the transition.
I suppose going back to organic growth, is there any kind of evidence out there, data out there that kind of shows where organic growth is going in the industry as a whole?
I won't quote their numbers, but if you look at DS Smith, Smurfit Kappa, if you look at Sealed Air, if you look at Bunzl, all people operating in our space, and all quoted companies, they're all talking about high single digit, if not high or medium double-digit revenue decline 2023 on 2022. So, clearly, we're disappointed that our sales line isn't stronger. But I think when you look across the industry, it just reflects how the industry is at the moment, in terms of the economic environment that we're in. It's difficult. Our customers aren't buying as much as they used to buy or as we hope they'll buy because of the economic activity or low levels of economic activity. So hence that's why we are focusing on things that we can influence, which is new business, which is acquisitions, which is gross margin, which we've talked about.
And the final question we've got here is really, is the current pension surplus cost adequate to support a buyout in your view? As I described earlier, there's quite a bit of work to be done to prepare the scheme for buyout. So irrespective of where we are in the marketplace, that still has to be done. I suppose buyout really depends on the supply and demand in the marketplace at the time we're ready to go or choose to go. Certainly, the surplus that we have on the balance sheet from an accounting perspective doesn't represent the pricing that someone would pay to buy out the scheme or that what they would return to us if we bought out the scheme. The indications we've had is to buy out the scheme at the moment would be broadly break even from the group.
But of course, that is really totally dependent on the demand and availability of supply. If lots of schemes are going to the market at the same time, and there's not enough availability of capacity from insurance companies, then the pricing will be not attractive to us, and flip wise the other way. But I suppose from our perspective, what we've got is we're in a good position that we've got the scheme to position where it's broadly self-sufficient, so that we can actually be in a position where we can pick and choose the time that we want to go to the marketplace. If the price point's right, then we will choose to go, and if it's not right, then we can choose to continue as we are.
Fantastic. I'll step in there, guys. Thank you very much. You've asked every single question that we've had through, and of course, any further questions that do come through, the team will be able to review those. Perhaps before redirecting investors to provide you with their feedback, I know it's particularly important to you and the team, Pete, if I can just ask you for a few closing comments, please.
Yes. Thank you. Firstly, very much appreciate your support this morning. Thanks for your time this morning as well. Most importantly, thanks for your really good questions. I guess the key message is that we just want to reconfirm is that 2023 performance was resilient, in difficult market conditions. We don't expect those market conditions to improve in 2024.
So our time will be spent on accelerating our acquisition program, getting more momentum into new business, and growing in Europe from both an organic point of view and building on the acquisitions we've already got there, and obviously, ensuring that we can maintain the strong gross margin and also ensure that we can cover our costs effectively as well and strong cost control. So we expect 2024 to be a challenging year, but we can see it being another year of progress from Macfarlane. Thank you.
Thank you.
Fantastic. Peter, Ivor, thank you indeed for updating investors today. Can I please ask investors not to close this session? You will be automatically redirected to provide your feedback in order that the management can better understand your views and expectations. This will only take a few moments to complete and is greatly valued by the company. On behalf of the management team of Macfarlane Group PLC, we would like to thank you for attending today's presentation, and good morning to you all.