Final Results

Macfarlane Group PLC 31 March 2004 31 March 2004 2003 LOSSES BEFORE TAXTION IN LINE WITH MARKET EXPECTATIONS Significant reduction in trading losses anticipated in 2004 First quarter's trading in 2004 confirms expectations of improvement All 15 regional distribution centres now fully operational Sale of Braehead property for Â£8.6m with a gain of Â£3.8m to be recorded in 2004 Intention to declare special interim dividend for 2004 of 0.75p per share following Braehead disposal Expectation to be cash positive from trading in 2004 Archie Hunter, Chairman of Macfarlane Group PLC, today said: 'I am heartened to be able to report to you initial but clear indications of recovery in Macfarlane Group's trading operations. These are early days and there is a lot of work yet to be done but there are now positive signs that the Group's concentration on basic business processes is beginning to produce results. We welcomed Peter Atkinson into his role as Group Chief Executive at the beginning of October. He set about a review of the Group's business operations and presented his conclusions to the Board in January. Broadly these were to the effect that Macfarlane Group has good growth and performance improvement potential. The Chief Executive's review concluded that the reorganisation of the previous two years, particularly in the distribution business had been seriously disruptive and had diverted attention from satisfying customers. What was essential was a concentration on customer service, new business, supplier relationships and cost reduction. I can report that these areas have become and will remain the focus of management attention and the early indications are that the effort is well directed. The Board believes that the Chief Executive's review gives realistic pointers to Group potential. However I am conscious that before addressing these prospects I must report on a year, which has borne the heavy brunt of restructure and change. In line with market expectations and our January statement, the operating loss in 2003 prior to exceptional operating charges of Â£4.7m amounted to Â£9.4m, on group turnover down from Â£149.6m in 2002 to Â£131.0m in 2003. In the distribution business, the number of customers serviced fell through the restructuring period from 22,000 to 17,000 with a consequential fall in turnover. This was a major factor in the Group trading loss but a further element was in our packaging business, which had to contend with the migration of computer manufacture and assembly business from Scotland. Our labels business based in Kilmarnock continued to perform well. Our International business made little contribution but showed prospects for development. Our injection moulding business in Ireland struggled in 2003 but has been boosted in 2004 by securing a significant new business contract. For Brands it was a frustrating year as demand for the company's accredited software proved as sluggish as in the previous twelve months. A more detailed trading review is set out in the trading performance section following my statement. In October 2003, predominantly as a consequence of the loss of the computer related activity from Scotland we reported the disposal of our Scottish packaging manufacturing capacity at a loss of Â£3.2m including related asset write-downs. In January we reported that, as a consequence of the Chief Executive's review, we would be making provision in the 2003 accounts for exceptional restructuring charges of Â£3.4m to cover head-count reductions and the write-down of assets no longer used. The total effect of all of these features is a loss before taxation of Â£18.6m, a loss per share for 2003 of 14.98p and deduction from reserves of Â£17.2m, by any measure a significant figure but one which would have been so much more difficult to report were it not for the positive indications of recovery. Property disposals and Dividends It is the declared intention of the Board to reduce borrowings and significant steps have been taken to do so. Group net debt, which stood at Â£24.8m at June 2003 has reduced to Â£16.9m at 31 December 2003. The Board has already stated its conviction that nothing should be allowed to interfere with the establishment of the strongest possible platform for recovery and return to profitability. Consistent with this, cash generated from disposals and trading will be used with care in fostering sound trading opportunities. The trading operations for the Group are expected to be cash positive for 2004. I am pleased to report that we have now concluded terms for sale of the site at Braehead near Glasgow, which does not have a part to play under the new plans for the Group, for a consideration of Â£8.6m. Â£6.0m of the consideration will be paid in 2004 with the remaining consideration of Â£2.6m paid in instalments in 2005 and 2006. The transaction will give rise to a gain on disposal of Â£3.8m in Macfarlane Group's accounts in 2004. Since the end of the year one additional site has been disposed of for a further Â£0.5m. We now expect that the proceeds from sale of five surplus sites in 2004 and 2005 will now modestly exceed the indication of Â£10.0m given in December 2003. The Board made clear in January 2004 that the consideration of a dividend would be dependent both on clear improvements in trading performance and progress in realising cash from property disposals. Our expectation in relation to trading performance is currently being met and the disposal of the Braehead site was concluded last night. After careful consideration of the Group's trading and investment requirements and as an expression of its confidence in the progress being made, the board intends to declare a special interim dividend for 2004 of 0.75p per share. No dividend will be declared in respect of 2003. As to the future, dividends will be determined by reference to profits earned. Pensions The transitional arrangements of Financial Reporting Standard 17 on retirement benefits have again been adopted, requiring certain disclosures at 31 December 2003 of the net pension scheme deficit. Our UK defined benefits pension scheme has a deficit, net of tax, of Â£12.1m (2002 Deficit - Â£11.6m). The employer contribution rate increased from 13.5% to 15.5% of pensionable salary, and the employee contribution rate increased from 5.0% to 7.0% of pensionable salary with effect from 1 July 2002 which is expected to reverse the actuarial deficit over the estimated remaining service lives of the employees. Board changes and Corporate Governance As shareholders will be aware, the recommendations of the Higgs and Smith reports have been incorporated into new corporate governance regulations, which apply with effect from 2004. The Board intends that we will comply with all aspects of the recommendations except to the extent that it is not practicable for us to do so; and in these instances we will explain the approach we are adopting. Sir John Ward retired from his position as executive chairman and from the board last Autumn, with Peter Atkinson's arrival. In his seven years on the Board, Sir John never stinted in his efforts on behalf of the Group and we wish him well. In terms of the new governance regulations the Group has a need to strengthen the independent presence at Board level by the recruitment of two independent non-executive directors and this is currently being progressed. Future prospects The feature of greatest encouragement from Peter Atkinson's review was that Macfarlane Group had clear potential for profitable growth. That is the focus of Group attention and we will retain our present range of services and businesses as long as we can achieve sustainable performance and returns. Our packaging distribution business in the UK is more than double the size of our nearest competitor and it is significant that we receive encouragement both from our manufacturing suppliers and our customers. We intend to be a strong and profitable leader in the packaging distribution industry. In our other businesses there are realistic growth prospects - some of them quite exciting but not yet secure. We will not count our gains until they are confirmed. Through the whole period of restructuring, our staff have displayed loyalty and our shareholders have displayed a patience without which we would not now have the prospect of recovery. Some of our staff have endured pressures well beyond those which would normally be considered acceptable. On behalf of the Board I express, to them all, my very great appreciation. The Board indicated in January that it expected to see a significant reduction in trading losses in 2004 and that, since most of its expected capital expenditure needs had now been met, it expected trading operations, before property disposals, to be cash positive in 2004. There is no change to these indications and the board will tackle the challenges of 2004 and beyond with commitment and growing confidence.' Further information: Archie S. Hunter Chairman 0141 333 9666 Peter D. Atkinson Chief Executive 0141 333 9666 John Love Finance Director 0141 333 9666 Trading performance Distribution Macfarlane's Distribution business is the leading UK distributor of packaging products, supplying in excess of 17,000 customers through 15 Regional Distribution Centres ('RDCs'). We enable customers to cost effectively package their products through the provision of a comprehensive product range, single source supply, just-in-time delivery and tailored stock management programmes. The results for the Distribution business in 2003 were particularly disappointing as the impact of the extensive reorganisation reduced levels of customer service and resulted in customer erosion, low levels of new business and high staff turnover. However the relative performance improved in the second half of 2003 and particularly in the final quarter with service levels reaching an acceptable level, meant the business was experiencing positive trends that indicated our performance improvement targets in Distribution for 2004 were realistic. The 15 new RDCs are now fully operational, with 34 sites having been closed to achieve this. As each new RDC has become operational, internal problems have gradually receded and staff turnover and customer service levels have recovered. In recent months service levels measured by On-Time-In-Full ('OTIF') deliveries have continued to improve and this improvement in performance is being reflected in customer retention and new business figures. This has made the business considerably more stable and provides a much steadier platform for future growth. As we see service levels improve the reputation of Macfarlane in the market is being re-established and this gives us confidence in our ability to retain, develop and grow the base of customers. Our supplier base is also beginning to recognise the benefit that Macfarlane's Distribution business offers as a key 'sell through' channel to the market. There are ongoing opportunities to reduce the cost base of the business and this will be achieved in 2004 through eliminating duplication in the internal supply chain and implementing best practice across the 15 RDCs. The priority for management in 2004 is to deliver significantly improved performance through the effective implementation of 'business basics' to build sales momentum, whilst at the same time effectively implementing plans to reduce the cost base. The early signs for 2004 are promising with the business meeting sales targets and costs running below forecast levels. Packaging Macfarlane's Packaging business currently operates from two UK sites at Grantham and Westbury. The business manufactures a range of custom designed packaging solutions to improve product storage, protection and presentation. Customers benefit from the ability to cost effectively source low volume, custom designed packaging solutions through flexible design and assembly capability. The results in 2003 were particularly disappointing, primarily from our Northern operation based at Govan. On 4 November 2003, the Group confirmed the disposal of the business, certain assets and liabilities of the Northern packaging manufacturing operations in Dundee, Govan and North Shields, for a cash consideration of Â£1.0m. A book loss on disposal of Â£3.2m was recorded in the accounts to 31 December 2003, primarily due to asset write-downs. The business had made losses for some time and the results are disclosed as discontinued operations. The decision to exit this business was made because we could not return the business to profitability following the loss of revenue resulting from the erosion of the IT manufacturing industry in Scotland. The plan for the packaging business in 2004 is to drive performance improvements in the Grantham and Westbury operations through continued close control of costs and a focus on building new business. Labels & Injection Moulding Macfarlane Group's Labels and Plastic Injection Moulding businesses operate from locations in the UK, Ireland and Sweden and continue to provide high quality self-adhesive labels and plastic closures primarily for a range of major international customers in the FMCG sector. Both businesses provide innovative solutions with a high design component and strong emphasis on quality and service delivery. Considerable progress was made in 2003 to grow sales with existing customers and develop new markets. Results in 2003 showed the labels business producing a satisfactory performance however the injection moulding business suffered from lower volumes. In overall terms, 2004 has started well with strong demand from existing customers and we are confident of making a number of new business breakthroughs in 2004. International The continuing erosion of manufacturing activities in the UK led us to support international companies, as they service their customers in the UK, USA and Europe from remote lower cost assembly locations. Our international operations comprise packaging manufacturing and distribution operations in the US and in Hungary, which are strategically positioned to service key customers. The businesses provide tailored packaging solutions for key international customers using Macfarlane design and assembly know-how. These businesses also help enhance our relationships with key strategic suppliers in markets outwith the UK. Our international operations have suffered pressure on margins, but have both improved their performance in the second half of 2003. The recovery in the performance of our operation in Hungary reflects particularly well on our team managing this operation. 2004 has started with an improvement in trading results over that achieved in 2003. Further improvements from all overseas' operations are expected in 2004. Brands Brands was acquired with the strategic objective of developing a new business, offering key customers operating in the electronics and IT equipment sectors, web-based project management control and tracking covering spare parts and warranty returns. The benefit of the Brands service is to allow customers to cost effectively control and manage their supply chain through the visibility of spare parts and warranty returns using Brands' unique proprietary software package. The first commercial development is in progress in Mexico to establish the financial viability of the offering and is progressing well. In the UK, the company has continued to make losses into 2004 and although new contracts in UK/ Europe have been secured in the area of computer assembly and repair, the opportunity to develop the potential of the proprietary software continues as the principal strategic option. There is an extensive pipeline of potential customers for this service offering and management is focused in 2004 on developing the new business required to bring the Brands operation into profitability. Macfarlane Group PLC Year ended 31 December 2003 Consolidated profit and loss account Before Exceptional 2003 Before Exceptional 2002 exceptional Â£000 Â£000 Exceptional Â£000 Â£000 Â£000 Â£000 TURNOVER Continuing 123,100 - 123,100 134,754 - 134,754 Discontinued operations 7,871 - 7,871 14,864 - 14,864 Total turnover 130,971 - 130,971 149,618 - 149,618 Cost of sales 88,757 310 89,067 99,189 - 99,189 Gross profit 42,214 (310) 41,904 50,429 - 50,429 Net overheads 51,593 4,370 55,963 52,380 5,044 57,424 OPERATING LOSS (9,379) (4,680) (14,059) (1,951) (5,044) (6,995) OPERATING LOSS Continuing (8,401) (4,468) (12,869) (1,013) (4,367) (5,380) Discontinued operations (978) (212) (1,190) (938) (677) (1,615) OPERATING LOSS (9,379) (4,680) (14,059) (1,951) (5,044) (6,995) Exceptional items (Loss)/gain on disposal of fixed - (239) (239) - 2,145 2,145 assets Loss on disposal of business - (3,235) (3,235) - (410) (410) LOSS BEFORE INTEREST (9,379) (8,154) (17,533) (1,951) (3,309) (5,260) Investment income 152 215 Interest payable and similar charges (1,203) (613) LOSS BEFORE TAXATION (18,584) (5,658) Tax on loss on ordinary (1,354) (1,836) activities LOSS FOR FINANCIAL YEAR (17,230) (3,822) Dividends on equity shares - 5,745 LOSS FOR FINANCIAL YEAR (17,230) (9,567) Basic and diluted loss per ordinary share (14.98p) (3.25p) Dividends per share Nil 5.00p Corporation tax rate 7.3% 32.4% Notes: 1. Earnings per share are calculated on the basis of the weighted average of 115,019,000 shares in issue (31 December 2002 - 117,605,351). As the diluted loss per share reduces the loss per share the original loss per share has been reflected as the diluted figure in the accounts. 2. The figures for 2003 are extracted from those shown in the statutory accounts on which the auditors will issue an unqualified report today and which will not contain a statement under s237(2) or (3) of the Companies Act 1985. A copy of the full accounts for 2002 on which the auditors have issued an unqualified report, has been filed with the Registrar of Companies. The figures for 2002 are derived from the published accounts as restated for the effects of applying UITF 38 as set out in note 3 to the consolidated balance sheet. 3. The corporation tax rate varies significantly from the UK standard rate of 30% due to the accumulation of tax losses in 2003, which have been carried forward and are available for offset against future profits. Macfarlane Group PLC 31 December 2003 Consolidated balance sheet As at As at 31December 31December 2002 2003 Â£000 Â£000 As restated (See note 3) Fixed assets Intangible assets 17,054 18,250 Tangible assets 28,613 35,951 45,667 54,201 Current assets Stocks 9,919 12,883 Debtors 28,901 37,055 Cash at bank and in hand 2,026 2,915 40,846 52,853 Creditors: amounts falling due within one year 45,780 48,196 Net current (liabilities)/assets (4,934) 4,657 Total assets less current liabilities 40,733 58,858 Creditors: amounts falling due after more than one year 683 1,080 Provisions for liabilities and charges 180 115 Total net assets 39,870 57,663 Operating assets Operating assets 56,781 71,674 Net debt (16,911) (14,011) Net assets 39,870 57,663 Notes: 1. Audited accounts will be sent to shareholders on or about 13 April 2004 and will be available to members of the public at the Company's Registered Office, 21 Newton Place, Glasgow, G3 7PY from 15 April 2004. 2. The Annual General Meeting will be held on Tuesday 11 May 2004. 3. The results for the year ended 31 December 2002 have been restated for the effects of applying UITF Abstract 38 'Accounting for ESOP trusts'. The value of the shares held at 31 December 2002, Â£825,000, has been re-categorised from investments and reflected as a reduction from shareholders' funds. Accordingly shares purchased during 2003 totalling Â£581,000 have been treated in the same manner. Macfarlane Group PLC Year ended 31 December 2003 Consolidated cash flow statement Year ended Year ended 31 December 31 December 2003 2002 Â£000 Â£000 Net cash outflow from operating activities (note 1) (492) (281) Cash outflow from returns on investments and servicing finance (974) (318) Tax received/(paid) 1,415 (3,780) Net cash inflow from capital expenditure & financial investment 88 735 Net cash inflow/(outflow) from acquisitions and disposals 706 (4,422) Equity dividends paid (3,643) (5,917) Net cash outflow before liquid resources and financing (2,900) (13,983) Net cash outflow from financing (604) (4,116) Decrease in cash in the year (note 2) (3,504) (18,099) Notes: 1. Reconciliation of operating loss to net cash outflow Year ended Year ended from operating activities 31 December 31 December 2003 2002 Â£000 Â£000 Operating loss (14,059) (6,995) Depreciation and impairment of tangible assets 8,000 4,964 Amortisation and impairment of intangible assets 905 3,699 Gain on disposal of tangible assets (566) (145) Decrease in stocks 2,274 1 Decrease in debtors 4,936 2,529 Decrease in creditors (1,982) (4,334) Net cash outflow from operating activities (492) (281) 2. Reconciliation of net cash flows to movement in net debt Decrease in cash in the period (3,504) (18,099) Cash inflow from decrease in debt and lease financing 604 1,508 (2,900) (16,591) Borrowings acquired with subsidiaries - (143) Movement in net debt in the year (2,900) (16,734) Opening (net debt)/funds (14,011) 2,723 Closing net debt (16,911) (14,011) Macfarlane Group PLC Year ended 31 December 2003 Reconciliation of movements in shareholders' funds Year ended Year ended 31 December 31 December 2003 2002 Â£000 Â£000 As restated Loss for the financial year (17,230) (3,822) Dividends on equity shares - (5,745) (17,230) (9,567) Purchase of ordinary shares - (2,608) Movement in own shares (581) (825) Exchange movement on retranslation of overseas subsidiaries 18 (6) Net reduction in shareholders' funds (17,793) (13,006) Opening shareholders' funds as previously stated 58,488 70,669 Prior year adjustment (825) - Opening shareholders' funds as restated 57,663 70,669 Closing shareholders' funds 39,870 57,663 Macfarlane Group PLC Year ended 31 December 2003 Details of exceptional costs in the year EXCEPTIONAL COSTS Year ended Year ended 31 December 31 December 2003 2002 Â£000 Â£000 Cash costs Cost of headcount reductions 1,369 1,475 Costs to maintain and vacate empty properties 1,747 705 External programme to restructure distribution - 144 Non-cash costs Impairment of goodwill - 2,720 Impairment of tangible assets 1,254 - Other asset write-downs 310 - Exceptional operating costs 4,680 5,044 Loss/(gain) on disposal of fixed assets 239 (2,145) Loss on disposal of business 3,235 410 Total exceptional costs 8,154 3,309 This information is provided by RNS The company news service from the London Stock Exchange

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