Final Results

Macfarlane Group PLC 22 March 2005 2004 RESULTS IN LINE WITH MARKET EXPECTATIONS Significant reduction in losses before taxation from Â£18.6m to Â£0.8m achieved in 2004 Cash generated in 2004 from trading operations All 15 regional distribution centres now fully operational, 13 of the 15 showed major improvements on 2003 Sale of Braehead property for Â£8.6m with a gain of Â£3.8m in 2004 Net debt reduced below Â£10m in the first two months of 2005 Intention to declare special interim dividend for 2005 of 0.75p per share ___________________________ Archie Hunter, Chairman of Macfarlane Group PLC, today said: 'I am glad to report that the Group recovery continues to progress to plan. In my statement a year ago, I indicated that the Board had two principal targets for 2004 - to reduce trading losses significantly and to effect a major reduction in bank borrowings. Both have been achieved. Results for 2004 The Group operating loss for 2004 was Â£2.1m against Â£14.1m for 2003. After gains on property disposals and exceptional items, the 2004 loss before tax was Â£0.8m compared with a loss of Â£18.6m for 2003. The loss per share for 2004 was 0.77p compared with a loss of 15.31p for 2003 and turnover from continuing activities was up from Â£121.2m in 2003 to Â£126.1m in 2004, the first time an increase has been recorded in recent years. Particularly heartening for the recovery and for the future has been the improvement in trading performance as the year progressed. In the last quarter of 2004 the Group recorded an operating profit for the first time since early 2002; a performance which is due in large part to the efforts of Chief Executive, Peter Atkinson, to concentrate attention on growing sales through improved customer service and reducing costs through increased efficiency. Our market leadership in the packaging distribution business presents an exciting opportunity and our increasing market strength is welcomed by both customers and suppliers. It is encouraging to see the progress of our regional distribution centres, with 13 out of 15 showing significantly improved results over 2003. Our labels business continues to demonstrate the value to be derived from commitment to quality. Our International businesses in the Americas and Hungary progressed well, recording profits in the second half of 2004 and in our packaging manufacturing businesses in Grantham and Westbury, trading difficulties experienced since 2002 were substantially overcome in the last quarter. The two areas of trading disappointment were in Brands and Plastics. I reported in August that Brands losses were continuing at substantial levels in 2004. In the event, despite considerable efforts and discussions with various stakeholders in Brands, in particular its major property creditor, no satisfactory conclusion could be reached. As a consequence therefore the Macfarlane Board withdrew financial support from the Brands business and the directors of Brands petitioned for the appointment of a provisional liquidator at the end of October 2004. Our financial statements record an exceptional cost of Â£1.4m to exit this business, compared to a rate of operating loss of Â£1.3m for the ten months to October 2004. Despite a major contract win in the second half of the year, our Plastics business in Ireland suffered in 2004 from rising raw material prices, which could not be passed on fully to customers. The management team has been strengthened since the end of the year and 2005 is expected to show recovery. More detailed comments are set out in the trading performance section, following my statement. Cash and dividends One of the objectives set by the Board a year ago was that the Group should be cash positive from trading operations in 2004 and this has been achieved. It was also the declared intention that borrowings should be reduced and significant steps have been taken to deliver this. Group net debt, which peaked at Â£32.0m in the third quarter of 2003 had been reduced to Â£13.1m at 31 December 2004 and with the property disposals announced last month, has been further reduced to Â£9.5m at the end of February 2005. The Board has previously stated that nothing should be allowed to interfere with the strongest possible platform for return to profitability. The Board also concluded that consideration of a dividend would be dependent on substantial improvements in both trading performance and in the bank borrowing position. Clear progress has been made in both these measurements. As an expression of its confidence and recognising further property gains at the start of 2005 the Board intends to declare a special interim dividend for 2005 of 0.75p per share subject to the completion of the capital restructuring referred to below. International Financial Reporting Standards (IFRSs) 2005 sees the introduction of IFRSs for the first time and future results announcements will adopt these new standards. A preliminary assessment by management of the impact on reported trading performance suggests that the effect is unlikely to be significant in either 2004 or 2005 relative to existing reporting under UK GAAP. The benefit of not having to charge annual amortisation of goodwill is expected to cover potential additional costs of funding the pension scheme deficit and charges in relation to share options. However, so far as the balance sheet is concerned, by far the most significant aspect of the adoption of IFRSs relates to the need to incorporate the deficit in the group's defined benefits pension scheme on to the balance sheet. In common with most UK companies we will have to incorporate a net pension scheme deficit, which at 31 December 2004 stood at Â£12.2m under FRS 17. In bringing the pension scheme deficit on to the balance sheet, the Company's distributable reserves will be eliminated. As the Board's aim is to recognise improvements in trading performance by restoring regular dividend payments to shareholders, we shall be seeking shareholder approval at the AGM in 2005 to restructure the company's capital base by cancelling non-distributable reserves and reinstating these as distributable reserves. Subject to shareholder approval and the subsequent completion of the related Court Process, the Board intends to declare a special interim dividend for 2005 of 0.75p per share as referred to earlier. The Board and Corporate Governance In May 2004 we welcomed both Kevin Mellor and Graeme Bissett to the Board as non-executive directors, with Kevin taking on the role of Senior Independent Director. Both have settled well and are making valued contributions. As announced at last year's Annual General Meeting, Guy Stenhouse will retire from the board at this year's Annual General Meeting on 10 May 2005 after seven years as a non-executive director. Throughout his period of service Guy has made a significant contribution and I thank him on behalf of all shareholders. The recommendations of the Higgs and Smith reports have applied in 2004 and a report on Corporate Governance in the Annual Accounts will detail the action taken by the Group in relation to the Combined Code. I believe these actions reflect the Board's wish to comply with the spirit of the code in the manner that brings the Group maximum benefit. I regard the Board as having an appropriate balance of experience and expertise. Future prospects The Group recovery plan adopted in January 2004 identified further significant results improvement in 2005. Nothing has changed the Board's expectation in this regard and the good trading results for the last quarter of 2004 give encouragement that the recovery is gaining momentum. The Group is trading to plan in the first two months of 2005. The achievement of turnaround creates the opportunity to consider how far and how quickly the Group can build on its recovery to create value for shareholders. A lot of Board attention in recent months has been directed to the strategic development plans of the Chief Executive and his team. These show interesting and stimulating growth prospects for the Group and it is to these plans that much of the executive effort will be directed in 2005 and beyond. None of this would be possible without the support of all our employees in the Group. It is through their efforts that the recovery has been achieved and will be maintained. On behalf of the Board, I thank them all.' 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 The improvement in our results in 2004 reflects the success we have had in the implementation of our 'business basics' approach. All our major businesses have made good progress. Customer relationships are improving, we are experiencing sales growth, our suppliers are supporting our new approach and this has all been achieved with a lower cost base. Following a period of extremely disappointing results for the Group our objectives for 2004 were to bring stability to the business and commence the process of recovery. The key priority was to focus on business basics with a particular emphasis on improved customer service, the development of new customers, the re-building of supplier relationships and cost reduction. 2004 has demonstrated our ability to begin the recovery process. There is a lot still to do but there is now some momentum in the business, which gives us a degree of confidence in our ability to return the Group to profitability. Packaging Distribution Macfarlane's Packaging Distribution business is the leading UK distributor of a wide range of packaging consumable products. In a highly fragmented market, Macfarlane currently has a 10% market share and enables 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. In 2004 sales growth of 5.5% was achieved and the loss was reduced by Â£6m. The improvement in results was achieved through :- â€¢Better customer retention resulting from improved customer service In 2004 our On-Time-In-Full ('OTIF') deliveries averaged 85% (rising to 87% in the final quarter) compared to 71% in 2003 reflecting the customer service progress we are making. â€¢Increased product range penetration in our existing customer base In 2004 the average number of lines purchased by customers was 8 versus 7 in 2003. â€¢The development of new business In 2004 we opened over 2,500 new customer accounts and had a number of strategic wins in National Account customers. â€¢Improved supplier relationships In 2004 we created a number of key strategic supplier relationships and these have helped contribute to gross margin improvements of 2.5% â€¢Reduced costs In 2004 we introduced operational efficiencies that enabled us to operate with a headcount of 415 at December 2004 compared to 495 at 31 December 2003. We have also exited a further eight surplus properties in 2004 and reduced property costs by Â£0.4m. During 2004 we completed the Regional Distribution Centre ('RDC') rationalisation programme and the business now operates from 15 state-of-the-art sales and distribution locations across the UK, which gives us ready access to 85% of the UK market potential. All but two of the 15 RDCs showed significant improvements in operating results in 2004 and the best individual RDC sales performance showed 19% growth on 2003. Our plan for 2005 is to build on the good progress achieved in 2004. We are looking to continue the sales momentum and a number of new initiatives are planned to increase our visibility and access in key market sectors. Despite some volatility in raw material prices, the strengthening of our supplier relationships should enable us to at least maintain the gross margin delivered in 2004. There remain a range of internal operating efficiencies still to be achieved and during 2005 we will target to benefit from these efficiencies through more effective use of our IT system and this will enable us to grow sales with minimal cost increases. Trading performance (continued) Labels and Plastics Both Labels and Plastics supply major FMCG customers primarily based in the UK and Ireland. Labels operate from two plants, Kilmarnock and Dublin, supplying design and production of high quality self-adhesive labels for consumer packs. Plastics operate from Wicklow in Ireland and design and produce injection-moulded closures and dispensers primarily for powdered consumer products. Volume growth in Labels during 2004 continued, primarily due to the expansion of business with existing customers. Major contract renewals were achieved during the year and there was significant sales investment in new major customers that will benefit the business in the future. Price pressure from both customers and suppliers continued to be an issue during the year but we were able to minimise the effect this pressure had on margins through ongoing vigilance in all cost areas. The focus in 2005 is to build new business particularly in the toiletries and household product sectors of the FMCG market and maintain existing levels of profitability. In addition the Kilmarnock plant has recently gained accreditation for the production of self-adhesive labels for the pharmaceutical industry. The Plastics business was adversely affected by significant rises in material prices in the second half of 2004. It was not possible to recover the level of increase incurred through customer price increases and therefore margin was eroded. Despite volume gains from a major contract win and cost reductions, these could not offset the margin erosion and the business was unprofitable in 2004. In 2005 the management team has been strengthened and increased focus on raw material pricing and price indexation with the customer base should enable the Plastics business to return to a break-even level. Packaging Manufacture Macfarlane's Packaging Manufacture business operates from two UK sites and produces a range of low volume, custom designed packaging solutions using corrugate, timber and foam materials. The range of products is particularly focussed on the electronics, medical and automotive markets where product protection, for both storage and transportation are key requirements. Following the disposal of the Govan operation last year, 2004 was an important year in bringing stability to our UK manufacturing business. The operating loss in 2004 was reduced by Â£1.4m from the previous year, partly achieved through the exit of a large loss-making contract in the middle of the year, but also due to a significant reduction in operating costs. Cost reduction programmes were implemented during the year at the Grantham operation and these together with a strengthening of the management team gives us confidence that this site will return to profitability in 2005. OTIF levels improved to 85% by the end of the year. The Westbury operation progressed well in 2004 with sales growth of 4.5% and margin improvements of 3.9% and was close to being profitable for the full year. The priority for 2005 is to focus our sales activity on key market sectors, to continue the profitable recovery at Westbury and return Grantham to profitability. Trading performance (continued) International Operations Macfarlane has packaging manufacturing and assembly operations in California, Hungary and Mexico. These plants provide corrugate, foam and timber packaging solutions primarily to the electronics sector. The US operations focus particularly on foam based products in relation to their position in the electronics sector and have diversified into the healthcare and fresh produce display sectors of the market. There was a significant recovery in demand in the US business particularly in the second half of the year and although a loss was incurred for the full year, the business recorded a profit in the second half. The improvement in results in 2004 amounted to Â£0.7m. The growth in sales of 14.1% was aided by the absorption of the foam assembly operations in Southern California of one of our key customers in November 2004 and the successful diversification of our business into new sectors. The strengthening of the management team in North America and the sales momentum experienced in the second half of 2004 gives us confidence that the business will be profitable in 2005. During 2005 we will exit the residual business in the electronics market in Mexico and this should enable the growing packaging operations in Mexico to move into profit. During 2004 our business in Hungary continued to progress and there was some expansion of the customer base. However Hungary is becoming an increasingly competitive market and our business still remains over-dependent on one major customer. Brands We had been hopeful during 2004 that the pipeline of sales opportunities would be converted and Brands could become a profitable contributor to Macfarlane Group. However this did not happen and in October 2004 the decision was made to exit the Brands business. An exceptional charge of Â£1.4m was recorded to secure a complete exit from the business. Future Outlook Significant work has been undertaken during 2004 to identify the strategic growth potential of all the businesses. This work is part of a continuous process, however a number of initial conclusions have been reached:- â€¢Macfarlane has strong market positions and good product/service offerings in the UK labels and packaging distribution markets. Both these businesses have significant organic and acquisition growth opportunities in highly fragmented markets. â€¢Macfarlane's packaging manufacturing businesses in the UK and overseas are well established in specific product and geographic niches and performance improvement is achievable through improved market focus, and offering discrete packaging services to key global customers. â€¢Macfarlane's plastics business is a cyclical business with a high dependency on raw material pricing. Assuming we can retain market share, the recovery prospects look good as we move from the current low point in the cycle. In order for us to realise the strategic potential of the businesses it is important that in 2005 we build on the improvements achieved in 2004 and continue to make progress towards our financial objectives. In order for this to be achieved the focus in 2005 will be on continuing to improve customer service, building new business, further strengthening our key supplier relationships and reducing costs. Consolidated profit and loss account Before Exceptional 2004 Before Exceptional 2003 exceptional Â£000 exceptional Â£000 Â£000 Â£000 Â£000 Â£000 TURNOVER Continuing operations 126,075 - 126,075 121,168 - 121,168 Discontinued operations 1,265 - 1,265 9,803 - 9,803 ------- ------- ------- ------- ------- ------- Total 127,340 - 127,340 130,971 - 130,971 turnover Cost of (84,741) - (84,741) (88,757) (310) (89,067) sales ------- ------- ------- ------- ------- ------- Gross 42,599 - 42,599 42,214 (310) 41,904 profit Net (44,669) - (44,669) (51,593) (4,370) (55,963) overheads ------- ------- ------- ------- ------- ------- OPERATING (2,070) - (2,070) (9,379) (4,680) (14,059) LOSS ------- ------- ------- ------- ------- ------- OPERATING LOSS Continuing operations (815) - (815) (6,205) (4,468) (10,673) Discontinued operations (1,255) - (1,255) (3,174) (212) (3,386) ------- ------- ------- ------- ------- ------- OPERATING (2,070) - (2,070) (9,379) (4,680) (14,059) LOSS Exceptional items Gain/(loss) on disposal of - 3,845 3,845 - (239) (239) fixed assets Loss on disposal of business - (1,400) (1,400) - (3,235) (3,235) ------- ------- ------- ------- ------- ------- PROFIT/ (LOSS) BEFORE (2,070) 2,445 375 (9,379) (8,154) (17,533) INTEREST ------- ------- ------- ------- Investment income 94 152 Interest payable and similar charges (1,255) (1,203) ------- ------- LOSS BEFORE TAXATION (786) (18,584) Tax on loss on ordinary (75) 1,354 activities ------- ------- LOSS FOR FINANCIAL YEAR (861) (17,230) Dividends on equity (844) - shares ------- ------- LOSS FOR FINANCIAL YEAR (1,705) (17,230) ------- ------- Basic and diluted loss per ordinary share (0.77p) (15.31p) Dividends per share 0.75p Nil Notes: 1. The figures for 2004 are extracted from those shown in the statutory financial statements 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 financial statements for 2003 on which the auditors have issued an unqualified report, has been filed with the Registrar of Companies. 2. In March 2004, the company sold its premises at Braehead near Glasgow for a consideration of Â£8.6 million. The disposal gave rise to a gain on disposal of Â£3,845,000, which is classed as an exceptional item. 3. In October 2004, the company incurred an exceptional charge of Â£1,400,000 to exit the Brands business, which sustained an operating loss of Â£1,255,000 in 2004. The results have been included as discontinued operations in these financial statements. 4. The majority of the 2004 corporation tax charge related to overseas operations. The rate varied significantly from the standard UK rate of 30% due to UK capital gains on property assets which were not taxable due to available allowances and the accumulation of tax losses from trading in the current year and previous years, the balance of which have been carried forward and are available for offset against future profits. 5. The loss per ordinary share of 0.77p (2003 - 15.31p) is calculated on the basis of the weighted average of 112,527,675 ordinary shares in issue, (2003 - weighted average 112,527,675), being 115,019,000 ordinary shares less 2,491,325 ordinary shares held by the company's Employee Share Ownership Trust and on a loss of Â£861,000 (2003 - loss of Â£17,230,000). Consolidated As at 31 As at 31 balance sheet December December 2004 2003 Â£000 Â£000 Fixed assets Intangible assets 15,994 17,054 Tangible assets 22,882 28,613 --------- --------- 38,876 45,667 --------- --------- Current assets Stocks 8,689 9,919 Debtors 30,853 28,901 Cash at bank and in hand 2,018 2,026 --------- --------- 41,560 40,846 Creditors: amounts falling due within one year 41,870 45,780 --------- --------- Net current liabilities (310) (4,934) --------- --------- Total assets less current liabilities 38,566 40,733 Creditors: amounts falling due after more than one year 367 683 Provisions for liabilities and charges 214 180 --------- --------- Total net assets 37,985 39,870 ========= ========= Operating assets and net debt Operating assets 51,039 56,781 Net debt (13,054) (16,911) --------- --------- Net assets 37,985 39,870 ========= ========= Notes: 1. Audited financial statements will be sent to shareholders on or about 8 April 2005 and will be available to members of the public at the Company's Registered Office, 21 Newton Place, Glasgow, G3 7PY from 11 April 2005. 2. The Annual General Meeting will be held in Glasgow on Tuesday 10 May 2005. Reconciliation of movements in shareholders' funds Year ended 31 Year ended December 31 December 2004 2003 Â£000 Â£000 Loss for the financial year (861) (17,230) Dividends on equity shares (844) - --------- --------- (1,705) (17,230) Movement in own shares - (581) Exchange movement on retranslation of overseas subsidiaries (180) 18 --------- --------- Net reduction in shareholders' funds (1,885) (17,793) Opening shareholders' funds 39,870 57,663 --------- --------- Closing shareholders' funds 37,985 39,870 ========= ========= Consolidated cash flow statement Year ended 31 Year ended December 31 December 2004 2003 Â£000 Â£000 Net cash inflow/(outflow) from operating activities (note 1) 2,599 (492) Cash outflow from returns on investments and servicing finance (1,080) (974) Tax received 744 1,415 Net cash inflow from capital expenditure & financial investment 2,638 88 Net cash inflow from acquisitions and disposals - 706 Equity dividends paid (844) (3,643) --------- --------- Net cash inflow/(outflow) before liquid resources and financing 4,057 (2,900) Net cash outflow from financing (469) (604) --------- --------- Increase/(decrease) in cash in the year (note 2) 3,588 (3,504) ========= ========= Notes: 1. Reconciliation of operating loss to Year ended 31 Year ended net cash inflow/(outflow) from operating December 31 December activities 2004 2003 Â£000 Â£000 Operating loss (2,070) (14,059) Depreciation and impairment of tangible assets 3,407 8,000 Amortisation of intangible assets 890 905 Gain on disposal of tangible assets (66) (566) Decrease in stocks 1,205 2,274 (Increase)/decrease in debtors (437) 4,936 Decrease in creditors (330) (1,982) --------- --------- Net cash inflow/(outflow) from operating activities 2,599 (492) ========= ========= 2. Reconciliation of net cash flows to movement in net debt Increase/(decrease) in cash in the year 3,588 (3,504) Cash outflow from decrease in debt and lease financing 469 604 --------- --------- Movement in net debt resulting from cash flows 4,057 (2,900) Loan notes issued during the year (200) - --------- --------- Movement in net debt in the year 3,857 (2,900) Opening net debt (16,911) (14,011) --------- --------- Closing net debt (note 3) (13,054) (16,911) ========= ========= 3. Net debt Cash at bank and in hand 2,018 2,026 Bank borrowings (14,226) (17,822) Finance leases (846) (1,115) --------- --------- Closing net debt (13,054) (16,911) ========= ========= This information is provided by RNS The company news service from the London Stock Exchange

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