AGM Statement

Macfarlane Group PLC
13 May 2003

           Statement of Sir John Ward, Chairman of Macfarlane Group,

     to the Annual General Meeting held on Tuesday 13 May 2003 at 12 noon.


2002 was a difficult year for the Group with disappointing results, which were
unacceptable to the Board. The problems were primarily a result of the delays
and costs associated with the acquisition, management of change and integration
of the distribution businesses, and the absorption of losses following the
Brands acquisition. In this address, I will comment on the results and their
implications under six headings:


 1. Economic backdrop;

 2. Distribution integration;

 3. Brands;

 4. Remainder of group businesses;

 5. Governance;

 6. Property realisation and dividends.




FIRST


The economic situation throughout 2002 was uncertain and weak, particularly in
the second half of the year. The continuing contraction of manufacturing in the
UK is well documented, as is the massive erosion in stock market values both
here and across the world, which has led to a lowering of confidence. In
addition the severe downturn in electronics manufacturing in Scotland, and the
continuing weakness of this sector across the world, has led to massive pressure
on margins and volumes. Although not the principal cause of the poor results in
2002 these trends have had a significant impact on the Group, in particular the
collapse of electronics, which resulted in the Group losing over £20 million of
profitable turnover between 2000 and 2002. Economic prospects in 2003 continue
to be uncertain, with the first quarter showing weakness across all sectors and
geographic areas, compared to the same period in 2002.




SECOND


The distribution strategy is to create critical mass and be the industry leader
in providing packaging, bespoke manufacturing and solutions in the UK. To
achieve this A1 Packaging and National Packaging were acquired, with the logical
objective of integration with the Macfarlane Merchanting and Packaging
divisions. This integrated business would require 15 Regional Distribution
Centres across the UK backed by a single advanced IT system, and two state of
the art manufacturing facilities.


The continuing erosion of the manufacturing sector in the UK has led us to
extend the strategy to offer to support those international OEM companies, as
they now have to service their customers in the UK, USA and Western Europe from
remote assembly locations in the Far East. The acquisition of Brands together
with our existing investment in Hungary was directed at extending the Group's
capability to offer a solution to these international customers.


The strategic direction is clear and continues to be supported by the Board, but
the implementation schedule and management of the change resulted in a
significant range of problems, which are the fundamental reasons for the poor
results in 2002. In summary these problems have been:


  • Delays in securing the new locations and the completion of the IT
    installation.

  • High staff turnover and dislocation through the integration process.

  • The magnitude of the change to be managed, leading to variable service
    levels.


Whereas the implementation should have been substantially completed in 2002 with
benefits beginning to appear in the latter part of that year, we will not now
achieve that key objective until the end of 2003. Currently 12 of the 15
Regional Distribution Centres are operational and we have good teams of people
ready to take advantage of the opportunity.


Our very sincere and very real thanks must go to our regional directors and
managers and their staff, some of whom are with us today manning the displays,
who have given tremendous commitment in difficult circumstances, coping with the
problems which the management of change imposed upon them. I with the
non-executives have visited the distribution locations and can vouch for that
commitment, and the enthusiasm to get on with achieving the strategic direction
and building quality of service levels. Thank you to them all.




THIRD


The acquisition of Brands had two objectives. One was to strengthen our presence
in the west coast of North America, by adding a capability in Mexico to the
existing investment in California. The second was to add a capability to the
group, which would facilitate product tracking in western markets, for
manufacturing companies who had moved their assembly locations to the Far East.
This would include unique web-based project management capability for warranty
returns, product visibility and financial management. There are currently
expressions of interest from blue-chip global companies, which are in the
process of being quantified.


The other part of Brands, based in Scotland, has been impacted by the global
electronics slowdown and has made losses. These losses continue into 2003, and
it was this continuing situation, together with ongoing uncertainty in world
electronic markets, that caused the board to write off the goodwill paid for
Brands in 2002 as a matter of prudence.




FOURTH


The rest of the businesses were profitable in 2002, but are feeling the economic
impacts of the general slowdown. To comment on each:


        4.1     Labels continued to perform well in 2002 and maintained its
        profit levels, albeit at lower margins. Our patented product, ReSeal-It
        has done well in Ireland and we are now exploring opportunities in
        Australia and Europe.


        4.2     Plastic moulding rebuilt its profits from the low base in 1999/
        2000 with supplies primarily to the pharmaceutical and oil industries.
        Volumes are dependent on the economic pressures on these two sectors.


        4.3     Internationally, our operations in East Europe and North
        America, maintained profitability in 2002 the latter benefiting from an
        acquisition in California. These locations primarily supply the
        electronics industry, which is exerting pressure on margins, and in some
        cases subcontracting manufacturing to Far East subcontractors. The
        integration of Brands will be important in continuing to offer support
        to these international businesses.




FIFTH


In agreement with the Board, the Group Chief Executive, Iain Duffin, stepped
down last week and is not today offering himself for re-election to the Board.
The recent period has been difficult with disappointing results, which were
unacceptable to the Board. The Board agrees with Iain Duffin that now is the
right time to identify a new Chief Executive to take the Group forward. As you
will know from the Results Announcement on 25th March, the Board initiated a
process earlier in the year to find a Chief Operating Officer with the
capability to become Chief Executive. This process is well advanced and I have
begun to meet potential candidates, a number of whom clearly have the ability to
be Chief Executive. Those who may have read the advertisement, which has been
supported by a search process, will have noted the requirement for sales and
marketing capability, which is key to delivering the next phase of the strategic
direction. The exact timing of any appointment will depend on suitability and
release availability. The Board has agreed with Iain Duffin that he will provide
support in specific areas should this be required in the short term.


During the interregnum I will act as Executive Chairman, supported by the
Corporate Team of Graham Casey, Andrew Cotton and John Love. As Bob Speirs, the
senior independent director, is presently recuperating following an operation,
Archie Hunter will act as Senior Independent Director.




SIXTH


Property and dividend. As you will know the group is reducing from over 45
locations to 15. This is a major management task, which involves giving up
leases and selling sites, both of which bring challenges. For the sites being
sold, they break into three categories


  • straight sale with no change of use

  • sale with simple change of use

  • complex planning consents




Categories one and two are progressing well and broadly to plan. Category three,
which by its nature brings the greatest gain, is a much longer and more complex
process, sometimes with local political as well as planning implications. One of
the most significant for us is at Braehead, where the Scottish Executive are
involved in the determination of the roads solution which involves several other
consents as well as our own application. The executive team has continued to
work through this process over the last nine months, which has caused
month-by-month delays in finalising the transaction. Currently we await a final
traffic resolution from the Scottish Executive for the development of the whole
area, before any transaction can be finalised.


As we have stated before, it has been the Board's objective to use the profits
from property disposals to support both earnings and dividends in the period of
reorganisation. The longer and more difficult process of change within the
business, coupled with delays in certain property disposals, means that we will
have to consider very carefully the appropriate level of dividends for 2003 in
the light of the progress we make on improving trading and disposing of
properties.




OUTLOOK


Our outlook will be determined by three factors. The first is the UK and global
economic environment, which has an effect across all our businesses. This is
currently unclear and will probably remain weak during the remainder of 2003.
This weakness is reflected across all our businesses.


The second will be the completion of the integration of the distribution
businesses during 2003, and the subsequent success in achieving sales and
financial recovery. Subject to the economic situation, we expect that the
Regional Teams will rebuild the business through the second half of 2003, with
the first manufacturing centre of excellence established and all Distribution
Locations in place by the end of the year. The second manufacturing centre of
excellence will be complete in the first half of 2004.


The third will be the resolution of the continuing losses in the UK part of
Brands, and the securing of international contracts for the use of the Viper
Software owned by Brands. At this time there are several potential expressions
of interest and a pilot programme underway for a major customer in the Americas.
This situation will resolve over the next few months.


The board believe the correct course for the group is to complete the current
investment programme as quickly as possible, and to focus our efforts on
satisfying our customers and growing the top-line revenues. The new CEO is
profiled to have sales and marketing capability, and will have the absolute
objective to support the Regional and Managing directors and their teams in
achieving this objective. Again, I would like to repeat my thanks to our staff
for their commitment through a difficult year and for their enthusiasm to tackle
the problems and deliver their budgets and strategic objectives.


In taking on the role of Executive Chairman, I have carried out an immediate
review of expectations for 2003. Our present expectation is that turnover in
distribution will be lower in 2003 than 2002, more so in the first half rather
than the second half, with turnover in our other businesses as a whole broadly
in line with last year. At this early stage in the year it is difficult to
predict with accuracy the results for 2003, but our immediate challenge will be
to contain the losses before taxation in the first half of this year at a level
similar to the £6.3 million incurred in the second half of 2002. Thereafter we
expect to see a gradual improvement in the results in the second half of this
year. However this takes no account of property gains, which we are working to
achieve but the timing of which remains uncertain for the reasons already given.


As I have said, the results in 2002 and into 2003 have been disappointing and
have not achieved the expectation set by the Board. 2003 is proving to be a
challenging year for the reasons I have mentioned, but as the strategic platform
is completed, we expect the company to be better positioned at the end of it
than at the beginning as the disruption arising from the restructuring reduces
and the integration begins to deliver benefits.


Over the next three months, I will work with the businesses, to review critical
areas of the Groups Operation to ensure budgets and expectations for the current
year and 2004 are set at challenging but realistic levels. This analysis and
outlook will be a central part of my report to you with the half-year results in
August and will set the basis for the performance objectives of the new Chief
Executive Officer.


Going forward, our focus must be to complete the strategic investments and to
select a new Chief Executive who will have the ability to build on this platform
and release the enormous potential of the very committed people who work in
every part of Macfarlane Group.


With the majority of the change now behind us the focus can switch from internal
issues to external customer service and revenue. We have enthusiastic teams in
every part of the Group eager to grasp these challenges and opportunities. They
will have the full support of the Board over the interregnum period and beyond
that the leadership of the new Chief Executive.



                      This information is provided by RNS
            The company news service from the London Stock Exchange