Good morning, and welcome to the Macfarlane Group PLC investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time via the Q&A tab situated on the right-hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and 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 welcome. I am Peter Atkinson, the CEO of Macfarlane Group. I am with our CFO, Ivor Gray, and we are going to take you through our interim results presentation this morning. Before I do that, I recognize some of you may not be familiar with the Macfarlane story. So a brief introduction to Macfarlane. The company is almost 80 years old. We have been on the main market since 1974. Our business is a supplier of protective packaging to businesses. We have two divisions, a distribution division where we are a classic wholesaler of protective packaging materials. We are the market leader in the U.K. in that particular division, and we are also a new entrant into Europe. Our second business is we run a specialist design and manufacture business where we provide protective packaging for those companies with very high value or sensitive items.
So let us move on to the presentation of our 2024 H1 results. If we go to the end there. I will make some opening remarks, and then Ivor will cover off the key metrics. I will come back and cover the individual divisions and put some color to the numbers. Ivor will cover off the pension scheme and how we are progressing with that, and then we will make some concluding remarks. We obviously welcome your questions, and we will pick those up later on. So in terms of a summary of the first half, we indicated to you with our full year results for 2023 that H1 2024 was going to be challenging, and this has very much been the case. The market has been difficult.
There has been weak demand, and that is existing customers buying less because of macroeconomic environment and also existing customers buying less as they drive sustainability programs in their business. We have also seen price deflation. I think the features that we are describing in our business are well reflected in our peer group across the industry. So the story of H1 for us has been implementing actions to offset the weak demand. As we go through the presentation, we will talk about our new business progress, which is 10% ahead of the previous year. We will talk about the fact that we improved our gross margin and our net margin through effective price management and also better sourcing. We maintained good control of costs, and we have also had the benefit of acquisitions, the rollover of 2023 acquisitions, and the benefit of early progress on acquisitions in 2024.
Despite the weakness in the market, the impact of the actions has only meant a marginal change in our profitability for the first six months of the year. If we move on to the next slide, it just talks about why is our business so resilient, and I think we shared this slide with you before, and it is about the breadth of the markets we serve. It is about the focus and depth of our expertise in protective packaging. The fact that we do not do product and price, we are offering customers a value-added proposition.
We have got well-established supply relationships over a long period of time. Our business is all about performance. Everybody in the business has got a performance metric around profitability, which they are measured on and motivated against. The bespoke nature of our business, both in terms of the product and service, differentiates us from our competitors. I will pass over now to Ivor to talk you through the key metrics, and then we will put a little bit more color on the presentation by talking about the divisional performances later in the presentation.
Good morning, everyone. I am just going to take you through just some of the key KPIs for the first six months of the year. As you can see at the top left-hand, revenue was down 8% year -on -year. We moved forward 3% with the benefit of the acquisitions we made in 2023, Gottlieb, Suttons, and B&D, and also Allpack Direct at the beginning of this year. So our organic sales are actually down 11%, and that is just down to what Peter described earlier. That is down to weak demand from our existing customers and some price deflation that has been flowing through at the back end of this year into the start of this year. That has been offset. You can see to the right-hand side, the top right-hand side, our profitability has only gone down 2%.
Due to good control of our gross margins and good control of our operating costs, the effective impact on our profitability is only 2%, and that breaks down -6% organic + 4% contribution from acquisitions. Moving down to returns on the balance sheet, you can see that we are actually in cash funds at the end of June, and that compares to GBP 800,000. That compares to cash funds of GBP 500,000 at the end of 2023. So a positive cash inflow for the year, and I will cover that in a bit more detail later. The pension scheme surplus has increased marginally. As we explained before, the scheme is well funded. From the start of this year, the company is no longer putting in any cash contributions into the scheme.
As we move forward, we work with the trustees towards preparing the scheme for a potential buyer at some point in the future. The dividend is now GBP 0.96 for the first half of the year. That is the interim dividend for 2024. That compares to GBP 0.94 interim dividend last year, so a nudge forward in the dividend. To the left-hand side, our diluted EPS is down 4%. That is a bit more than the profitability, and that is principally due to the fact the tax rate has increased from a blended 23.5% last year to 25% this year. Moving on to the results for the year. Peter will pick up some of the revenue movements across the divisions in the later slides. I just want to pick out a couple of things in this slide.
You can see that the gross margin has moved forward just over 3%, and that is due to the manufacturing division margins have stayed relatively stable at 44%. The manufacturing business has had a stronger first half of the year than distribution. So there is a mix impact with the stronger gross margin for our manufacturing business impacting the overall margin of the group. The distribution business has increased its margin from just over 34% to just under 38%. That is really a flow-through from the back end of last year. In H2 last year, the margins had improved to just over 37%, so that has continued through the first part of this year. So, good performance in terms of the gross margin. That has helped offset some of the weakness in the sales line.
The other line I just want to pick up here is operating expenses have increased by GBP 0.5 million. GBP 1.1 million of that is the impact of the acquisitions I referred to earlier, and GBP 600,000 reduction in operating costs for the organic business, primarily related to employee costs within the business. Just moving on to cash flow. Again, you can see we have had very strong operating cash inflow for the business. It is a feature of the business that we have good, strong operating cash flows, which allows us to reinvest that money into capital expenditure, into acquisitions, and ultimately to pay dividends to our shareholders.
So really just to pick out, the working capital continues to be managed well, allowing the profitability of the business to drop through to positive cash flow. We have invested that money in the first part of the year, primarily in acquisitions. So GBP 2.1 million of that is due to the acquisition of Allpack made at the beginning of the year, and GBP 2 million is due to earn-out payments for Suttons, Gottlieb , and PackMann as all those businesses have performed well through the earn-out periods.
The capital expenditure of GBP 1.4 million, that is primarily two areas. We are going through a site consolidation in our East Midlands business. So we are consolidating four of our operations in East Midlands into one new site, which will open at the start of next year. But currently we are spending money fitting that site out at the moment. So about half of that capital expenditure is the fit out of our new site in East Midlands, and then GBP 200,000 of that capital expenditure is implementing solar panels at our manufacturing site in GWP.
That should give us some benefit in terms of utility costs as we go through the back end of the year. But as you can see, positive cash flow, good investment in acquisitions and CapEx, and strong operating cash flow from the business. This slide hopefully you are familiar with, and it is really just setting out our capital allocation priorities. The priorities that we have as a team are to invest in capital expenditure to drive organic growth and efficiency within the business, to then focus on earnings enhancing acquisitions, followed by continuing to pay a sustainable, aggressive dividend. Finally, if we have surplus cash left over after the first three, then we would look to return some of that cash to shareholders.
As you can see to the right-hand side, I think I have covered this in previous slide, but we invested GBP 1.4 million CapEx, GBP 4.1 million in acquisitions. Paid the final dividend in the first part of the year for 2023, GBP 4.2 million. We made a small amount of share purchases so that we have got shares to satisfy LTIPs and any deferred bonus payments in future years. What we have done historically is we have issued shares to satisfy LTIPs and deferred bonus, but what we have taken advantage of some of the cash inflow that we have had in the year to buy some shares so that we can satisfy the amount of own shares going forward and not dilute the holdings of our existing shareholders. I will pass back to Peter now to cover some of the divisional performance in a bit more detail.
Thank you, Ivor. Let us begin by talking about the performance of our Packaging Distribution business. I think you are familiar that Packaging Distribution is our main division and represents around about 85% of group revenue. If we begin with the chart on the right-hand side, revenue in the period down by just over 10%. As Ivor indicated, that is a mixture of the positive benefit of acquisitions this year and prior year, volume decline, and price decline. Offsetting that, we have improved our margin by over 3 percentage points. That is a mixture of a better customer mix and more effective sourcing and effective price pass-through. Our operating expenses, we have held tight, and I will talk more about those later on. The impact at the end of the period is our adjusted operating profit, which broadly flat on the previous year despite the sales weakness.
Good news is our adjusted profit margin is now up at over 8%. As we always indicated, the objective in this business is to get our net margin to around about 8%-10%. We always communicate our Net Promoter Score. I think most of you will be familiar with this as a measure. It is a measure of how effective you are in servicing your customers and good progress going forward in terms of our Net Promoter Score from 56 to 61. Just to give you an idea, the average Net Promoter Score for customers in B2B is about 25, so we are way above the average for B2B companies. Moving on to other features of our revenue line performance. New business revenue is up by 10% to GBP 4.5 million, which will flow through to GBP 11 million or GBP 12 million for the full year.
Good progress in both the e-commerce new business wins and industrial new business wins, with particular success in the health and beauty sector. I mentioned gross margin and the effective job we have done there in terms of improving that through the more effective sourcing and the price management. I have mentioned the Net Promoter Score. The only other thing to comment upon in terms of the Packaging Distribution division is the progress we are making in Europe. Europe now represents about 10% of our total revenue in this division, and both the follow-up customer program is progressing nicely, and also the performance of our first acquisition in Europe, PackMann, is also progressing well during the period.
The next slide just tries to break out for you the revenue change, and really is just a simple demonstration of the impact of the volume features of the business, and the impact of the acquisition features of the business. Broadly, volume is about half the decline, and price is about half the decline in terms of the revenue performance during the period, with additional 2% coming through from the acquisitions. If we look at our cost structure, as I indicated, we have done a pretty good job in offsetting wage inflation. Wage inflation in the year was 4%, but we have managed to offset that by keeping a lower headcount and reducing our temporary costs. Our headcount is down by around 3% versus 2023. Also because a big part of our employee cost line is our bonus pool, that has flexed in line with the weaker sales revenue.
We expect as we go into the second half of the year to get additional cost benefits coming through from actions we have taken in the first half of the year. Just over the page, we have talked about what has been happening with pricing. This gives you an idea of the key indices that we work to in terms of measuring the input prices. 75% of our business is fiber-based, so it is the paper index, and 25% is plastic product, so it is the Polymer Index. As you can see, these are very volatile indices. What we are now seeing as we move into the second half of the year is price inflation coming through. While the story of H1 has been price deflation, the challenge we now have is actually recovering price increases from our suppliers that we will be passing on to our customers.
We are well into that program. Again, for those of you who know us, if we took this graph back for the last 10 years, you would see the volatility and one of the successes at Macfarlane is very effective price management, and we have got good pass-through of input prices into selling prices. If I move on to acquisitions, right at the bottom of this chart, we completed one acquisition in the first half of the year, a local infill acquisition at Bury St Edmunds, a company called Allpack Direct. The environment for acquisitions is very strong at the moment. We probably turned down the first six months this year 20 acquisitions that for various reasons did not quite fit. The pipeline is strong and really you have got two things happening. You have got, firstly, a lot of private owners coming towards retirement without succession, family succession plans.
They are making their businesses available for acquisition. The second feature, which I will touch on later on when we talk about sustainability, there is a lot of government-driven legislation coming down the pipe around sustainability, information capture, information reporting. I think this is motivating a lot of privately owned small and medium-sized businesses to actually look at early exit because they realize the burden of legislation is going to get even more intense. What these guys have been really successful at is buying and selling packaging, and the management of information and the reporting information is something that they do not feel is their strength. So, really strong pipeline. In the manufacturing division, which I will talk about later on, we have completed another acquisition at the beginning of the second half of the year.
We are unlikely to complete another acquisition this year just because of timing, but we are pretty confident that as we move into the first part of 2025, we will likely be announcing more acquisitions based on the pipeline that we are working with at the moment. In terms of the action plan, the priorities, I think we shared this with you last time we met. Nothing new on here. We have got a clear plan across the business. Probably one of the most important things which will benefit us in Q4 is the relaunch of our website, our trading website.
We have recognized over time that the website has become a little bit too clunky. It is not as competitive as it should be relative to some of our peers. We will launch that website effectively in September, and we will benefit from that in the back half of the year. I have touched on the property consolidations. The next property consolidation is the East Midlands, which is Nottingham moving four sites into one. That was planned for the second half of 2024. We have now decided to move it to the first half of 2025, slightly delay the move of that site for practical reasons.
No sort of major drama in that. The final point I want to make is that we have talked about U.K. acquisitions. We are moving, at a relatively good pace in terms of European acquisitions. Again, nothing likely this year, but a degree of confidence as we move towards the back end of 2025 and 2026, we will be able to execute a European acquisition. Our target acquisitions in Europe are tending to be larger than those we have done in the U.K. because U.K. is very much buy and build.
In Europe, we are clearly wanting to buy something that will give us significant infrastructure that we can then build around. By the very nature, these acquisitions take a little bit more time, hence the reason why the timescale is a little bit elongated. Moving on to our Manufacturing Operations, representing around that 15% of our revenue. As you know, we have significantly bulked up this business, particularly through acquisitions, and the business is performing well. They have had a good first half in terms of revenue growth. They have been able to maintain their gross margins, as you can see in the table. Operating expenses slightly higher than we would have liked them to be, and that is mainly due to the acquisition impact, and those will flex in the second half of the year. Adjusted operating profit just slightly down on the previous year.
Clearly, the attractions of this business are the high gross margins, close to 45% gross margin. Even though the adjusted profit margin slightly dips at 15%, that is where we expect this business to be. It does not reflect in the numbers, but we are also making good progress in using this business as a supplier to distribution. It looks as if that 12%, 13% has gone down, but in reality, the big factor there is volume is up in terms of in-house buying, but pricing is down because we do immediate price pass-through in a deflation environment. The second key feature for us in terms of this year is clearly the acquisition of Polyformes that we completed in July. It has not played a part in our first half year. It will clearly have a big impact in our second half year, and that is a really exciting business.
It gives us particular opportunities in terms of synergies from a purchasing point of view. Polyformes have a particular relationship with a particular supplier that, as Macfarlane, we found it difficult to engage with. Through the acquisition of Polyformes, we will get immediate ability to use that supplier across the Macfarlane business, which will benefit the broader Macfarlane business. So good progress in terms of our Manufacturing Operations and now become a significantly important part of the group. I touched on acquisitions. We have acquired Polyformes. We have probably got one more acquisition to make in the U.K., and we are advancing that one quite nicely.
The other evaluation we are doing at the moment is the opportunity to move the manufacturing business into Europe, because certainly a number of their key clients, a bit like in the distribution business, are now asking us about our capability to supply them in Europe. Currently we are doing that on an export basis, but they are asking us to have a location and be able to supply them more directly through Europe. So that is something that we are working on at the moment to see how that would fit within this business. No, we are pretty happy with the manufacturing division and it is making good progress. Just over the page, similar schedule you have seen before in terms of the action plan for manufacturing. We are starting a process of integration, bottom left-hand corner of the individual sites.
We have just closed the B&D site in Southampton and relocated that into GWP. So you will start to see over the next 12, 24 months, consolidation around locations. As I mentioned, we have got one more acquisition to do and the potential to consider whether we actually extend this business into Europe based on customer demand. Let me move on to sustainability, and there is really a number of features to this I just want to cover. It is a complicated chart, but a couple of things I will pull out. In terms of our own carbon footprint, the key thing for us is we have to run our own delivery vehicles. We have around about over 100 delivery vehicles. The majority of those have been diesel, and we are in the process of transitioning those to electric.
We've now got around about 10% of the fleet electric, and that will extend further in the back end of this year and into 2025. We're also implementing solar panels on a number of our facilities, and we completed the GWP installation this year, and we've got more sites that we will install solar panels in during the process. We've now got to a stage where more than 90% of electricity we use comes from renewable sources, certified renewable sources. We're doing a really good job in terms of managing our own carbon footprint, and we've just scoped out Scope 3 of the carbon footprint reporting, and that really is predominantly about our suppliers. We're now beginning to work with our suppliers to help them and support them in terms of the reduction of their carbon footprint to improve our Scope 3 returns.
A key feature of our environmental program is obviously supporting our customers. As you know, we have the Innovation Labs and we have Significant Six program where we do a very, very effective job in helping our customers use less packaging, and the less packaging they're using, making sure that's packaging that has the sustainability tag behind it. We've got lots of really good case studies to validate what we're doing. The industry is moving towards even further sustainability. The government legislation, particularly around EPR, is going to drive that sustainability agenda strongly, and we're very well positioned to be a beneficiary of that agenda going forward. Let me move on to the pension scheme and ask Ivor to talk to the pension scheme, and then I'll make some closing remarks and we can then move into answering some of the questions.
As I said earlier, the pension scheme surplus has increased slightly year -on -year, and that's down to the fact that the discount rate has increased between the end of December and the end of June, and that's been offset by the LDIs, which are there to kind of really offset any movements in bond yields and inflation so that the assets and liabilities move in the same direction, therefore protecting the business from any significant movements in its surplus. The key thing is from the start of this year, the company is no longer required to put any company contributions in, and that's because the scheme is in a well-funded position. As I said to you previously, we are working with the trustees and advisors to prepare the scheme for any potential buyout in the future.
We are a good couple of years off before that would manifest itself. I do want to just flag up one thing, and there is a court case going through at the moment. It's called the Virgin Media case. It was held, and effectively, in essence, what that case says is, any amendments that were made between 1997 and 2016 that affected contracted out rights of pensioners, required an actuarial certificate to be completed. If there's no evidence of an actuarial certificate being completed for that amendment, and being available, then there is a potential that some of these amendments would actually be invalid. At the moment, all we're doing is we're waiting for the conclusion of the legal process, and at that point, we will then assess what the impact is on the Macfarlane pension scheme. At this stage, I just really want to make you aware of that.
Thanks, Ivor. Let me just sort of summarize some key messages that sort of conclude our H1 presentation. Firstly, it has been a challenging market, recognized across the industry, and we feel we've navigated the challenges pretty well, both in terms of new business growth, in terms of managing deflation, controlling our costs, and obviously, offsetting the organic growth position within organic growth through acquisition. The second half of the year, we'll start to see price inflation coming through. We'll benefit from the new business momentum that we've created in the first half of the year. We've got the full half year benefit of the Polyformes acquisition. We'll get the Q4 uplift, the seasonal Q4 uplift. And as I referred to earlier on, we've made cost savings, in the back part of H1, which we'll get the benefit of in H2.
We see ourselves as being well-positioned as we go into H2. Our full-year profit expectations remain broadly unchanged. And as Ivor has mentioned, the balance sheet is in very good shape, so we're well resourced to continue with our acquisition program, and our ESG program is developing well. The only other thing to add, which you may have picked up, is the non-exec gap that we had through a retirement has now been filled, and David Stirling, who some of you may be familiar with, will start as our new non-exec, in January of next year. I will pause there and we can move on to questions.
Peter, Ivor, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab situated on the top right-hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this 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 have 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.
Thanks very much. We've had a few questions that have been coming through the course of Peter's presentation. Quite a few on acquisitions, Peter. If I can maybe just see if you could cover one or two of these. First one is, how are the acquisitions that we've done over the last couple of years performing at the moment?
Yeah. So, interesting question. All the acquisitions that we've done in the recent years, with the exception of one, have performed in line with expectations. As you know, we have an earn-out mechanism that motivates the previous owners to drive the business forward during the certainly first 24 months post-acquisition. That's been a big benefit to us in sustaining performance, post the earn-out end. We've had one business, B&D, which we bought around about, what, about 12 months ago now.
That operates in the space sector and the defense sector. That's got slightly lower revenues than we're expecting, mainly because of defense slowdown in spending because of the political changes that were going on. So, we see that just as a short-term blip rather than anything more material. We expect as once the MOD gets comfortable with its new leaders, then we expect that to come on back strong. So that's probably the only of the recent acquisitions that hasn't quite performed in line with expectations, but not far off.
Just following on from that, in the current climate, are you seeing a stronger pipeline of opportunities?
Yeah, I touched on that in the presentation. We turned down 20 probably so far this year. We've got a lot of privately owned businesses, small to medium-sized businesses, where the owners are retiring with no succession. As I mentioned, we've got a lot of sustainability legislation coming through, which is, from the feedback we're getting, motivating a number of these owners of smaller private businesses to say, "Hey, I just got the bandwidth to deal with this. I'm looking to exit." We're very confident that we've got a good flow of acquisition opportunities going into the next sort of two to four years.
Continuing on the theme of acquisitions, are we confident that further European acquisitions you referred to earlier, do you still feel they are more beneficial than U.K. acquisitions?
Yeah. I think let's just go back a stage. The reason that we are moving the business into Europe, is about customers. A high proportion of our customers in the U.K. are part of European groups, or they have European subsidiaries, and it is they who are asking us to provide them with a service in Europe. If we look at a number of our major competitors, they've already got a footprint in Europe. If we don't have a footprint in Europe, then we do run the risk of being outsold by some of our European competitors. Europe for us is all about customers. The program of acquisition really is all about speed. We can do it organically, but it will take us a while.
If we can find the right acquisition, then we can immediately create a presence for ourselves in Europe and also, through that acquisition, bring in all the relevant skills in terms of cultural skills, language skills, and market knowledge skills. It's not either/or in terms of Europe or the U.K., it's both.
Just finally on acquisitions, Peter, we have just done the recent acquisition of Polyformes. Has that improved the engagement with some of the suppliers? Has that given us more access to other product areas that we have not previously had?
Yes, certainly. There are certain suppliers that we share with Polyformes, and we have immediately been able to get some extra and better pricing based on the incremental volume that we now bring to them. Then there is one particular supplier who is a strong supplier to Polyformes, an important supplier to Macfarlane, but not a strong supplier unfortunately. Through the Polyformes acquisition, we will get immediate benefits from that new supplier relationship. No, we are very excited about the supplier opportunity, and some of it is coming through immediately, and some of it is in the process of coming through.
Moving on to the theme of new business. What is driving the increase in new business year-on-year after the 10% increase in distribution you referred to earlier?
Yeah. So I think there is a couple of things. One is, we opened a new Innovation Lab in the north of England, just outside Manchester. So we have now got two Innovation Labs, one in Milton Keynes and one in Manchester. The Innovation Labs are a really effective way of getting the customers to understand what we can do for them, to see the benefits we can bring them. It is undoubtedly a key factor in terms of our new business growth that the Innovation Labs have helped with that. Secondly, I think I mentioned the sustainability agenda. I think more and more customers are looking for suppliers who can do product and price but can also do things beyond product and price. Our strong sustainability agenda, our strong track record of helping customers in terms of helping them achieve their sustainability objectives, is allowing us to get access to more customers and win them because we are offering sustainability, which some of our competitors are not offering.
You referred to the new web offering. Do you see that increasing the new business opportunities further?
Yeah. This is mainly in the smaller. So about 10% of our revenue is in small customers. A lot of those buy through our website, a lot of those buy through our bricks and mortar sites. It is probably that part of the market that we recognize that we are not as strong as we need to be. In analyzing our transactional website, we have recognized that it is just not up to the standards of some of our competitors, and it is not up to the standards of some of the websites we all use just doing our normal web purchasing. So we launched the website in September, and we would see that as a big benefit, particularly in the smaller customer sector to new business growth.
Thanks, Peter. That is all the questions we have had so far. Unless anyone wants to ask any further questions.
Peter, Ivor, thank you for answering all those questions from camera investors. The company can review all questions submitted today, and will publish those responses on the InvestorMeetCompany platform. Just before redirecting investors to provide us their feedback, which I know is particularly important to the company, Peter, could I please just ask you for a few closing comments?
Yeah. So closing comments from me. A pretty resilient H1. H2 will have different challenges, particularly in terms of price inflation, but we have experienced these before and are well capable of managing them. Lots of upside potential in terms of acquisitions, in terms of the new website, and in terms of our Significant Six and Innovation Lab offer built around the benefits we can bring to customer around sustainability. So, we feel we are in good shape as we go into H2 and particularly as we move on to 2025.
Peter, Ivor, thank you for updating investors today. Can I please ask investors not to close this session as you will 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 am sure will be 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.