Macfarlane Stock

Good morning, and welcome to the Macfarlane Group plc investor presentation.

[Operator Instructions]

Before we begin, I'd like to submit the following poll.

I'd now like to hand you over to Peter Atkinson, CEO. Good morning, sir.

Good morning, everybody, and thank you for joining our meeting this morning where we're here to review the Macfarlane Group's first half results for 2026. I'm Peter Atkinson, the Group CEO; and I'm here with my colleague, Ivor Gray, the Group CFO. Let me begin by sharing the agenda. What we'll do is I will start the meeting by talking about the key features of the H1 performance in terms of an executive summary. I then will take you through the numbers in terms of results, cash flow and review our capital allocation program. I'll then put a bit of color to the numbers by talking to the individual business unit performances. We'll then talk about sustainability and update on where we are with the pension scheme, and I'll make some concluding remarks before we turn over to questions.

So before I summarize H1, let's just remind everybody, I know some of you are new to the business, some of you know the business well, but just remind you what it is we do. Basically, McFarland through its various divisions work with businesses to cost effectively protect their products through the supply chain journey. And we differentiate ourselves by the breadth and depth of our product and service range the range of products and services that we supply, the depth of coverage that we have across both the U.K. and increasingly into Europe and then the added value proposition that we offer our customers when we do more than just on price.

And the final thing just to comment upon is our focus. I mean, unlike a number of our competitors, we're a pure protective packaging business. We live, breathe, sleep protective packaging 365 days a year and 24 hours a day. So that's the nature of our business, and it operates through 2 divisions: a specialist distribution division where we're the market leader in the U.K. and a fast-growing specialist manufacturing business, all in the world of protective packaging, protecting different types of packaging, different types of products across various different market sectors.

Let me move on to our recent results announcement and just summarize the key messages. As you all are aware, we had a particularly challenging 2025 following 15 years of consistent profit growth. And we entered 2026 with the main focus of the business being on profit recovery, particularly in our distribution business and our Pitreavie business, and I'll come on to talk about those in a moment.

So I think the results that we achieved in H1 reflect favorably on the progress we're making in implementing recovery actions in the 2 key businesses. In terms of distribution, and we'll put more color on this later on in the presentation, but we saw sales growth of just over 1 percentage point, more price than volume, but that's against a market background where we're seeing increasing headwinds with the environmental legislation, which again we'll touch on later on in the presentation. We see good margin stability. In fact, our gross margin improved slightly during the period. Most encouraging for us was our new business momentum, almost 40% up on the previous year, and that was following a difficult year in 2025, where despite having lots of new business opportunities and strong new business pipelines, we weren't able to convert those opportunities into revenue, and we've now started to see that coming through in 2026.

We've also taken actions to reduce the headcount in distribution. So we reduced our headcount by around about 6%. Half of that was redundancy and half of that was natural wastage. In terms of Pitreavie, obviously, 2025 was an awful year for Pitreavie for a whole range of different reasons. The key feature for us in terms of recovery was replacing the corrugated machine where the tragic incident occurred. And that was identified resource, purchased, commissioned and set up within the space of 6 months, which is quite spectacular to be fair. And the good news is that the Pitreavie was profitable in Q2. So as we go into the second half of the year, we're encouraged by the positive trends we're seeing in the Pitreavie.

In terms of our specialist packaging distribution -- Specialist Protective Packaging business, we saw good stability in that business. And as you know, that's the highest margin component of our overall business, and we're seeing good stability in that particular sector, helped by the tailwinds of our exposure to defense, space and aerospace industry. And all this achieved -- has been achieved against the backdrop of very difficult Middle East conditions which have affected us in terms of input price increases. As you're probably aware, 30% of what we buy is broadly linked to polymer pricing. And so we've seen material input price increase on a whole range of our polymer products, and we've been very effective in recovering those from our customers as reflected in our gross margin stability.

We've also announced in our half year results, the maintenance of the dividend, important to a whole range of shareholders and also the introduction of our second share buyback program. So we had our first share buyback program starting in 2025. That will come to an end September, this month effectively. And then we'll initiate a new buyback program valued at GBP 6 million, which will start in October and then run for 12 months.

So as we look forward, there's a little evidence of great catalysts for market improvement. We've got the environmental headwinds, which we'll talk about later on, which will always be affecting our revenue line, particularly in our retail -- on the retail sector. So the focus of all our activities is to execute an effective profit recovery program. And I think what we're seeing in the first half of this year is the beginning of that profit program beginning to come through.

So let me pass over to Ivor, and I'll let him take you through the key metrics.

Thanks, Peter. I'll just cover off some of the key numbers from half 1 2026. I mean Peter touched on the revenue growth, so 2% year-on-year growth half 1 '25 versus half '26. And that GBP 1.3 million of growth from distribution, just over 1%, GBP 1.5 million of growth from our manufacturing business, excluding Pitreavie, just over 5% and the Pitreavie business which is GBP 0.5 million down year-on-year, which given the trials that business has been through is a pretty strong performance. So overall, GBP 2.3 million of revenue growth predominantly in our distribution and manufacturing business, excluding Pitreavie. And that translated to a small reduction in adjusted operating cost of GBP 300,000, distribution going forward, GBP 300,000, Manufacturing has stayed stable and Pitreavie understand was GBP 600,000 below last year. So Pitreavie made a small loss in the first half of the year versus a profit of about GBP 500,000 in the first half last year.

Distribution, the flavor of distribution is smaller sales growth, good stability in the margins, still some inflation coming through on the cost base. The story in manufacturing, again, is good sales growth with some of the sector tailwinds that we have in that business, some margin pressure with some of the cost increases coming through in some of the materials and predominantly increased costs. They were probably the business most affected by the NI and national wage increases last year. And the Pitreavie business, as you said, small sales decline, a significant margin decline because most of the products were in the first quarter, we're still outsourcing a lot of the manufacturing to suppliers [indiscernible] Machine commissioned and a stable cost base.

A 9% reduction in adjusted profit before tax. Again, that's a slight down from the 3% operating because of increased interest costs predominantly related to leases, the most significant of that related to the new lease that we brought in last year. In terms of the balance sheet, bank debt position is still relatively low at GBP 17.9 million, albeit an increase of GBP 1.8 million from the end of the year, and that's predominantly related to absorption of working capital and predominantly inventories, and I'll cover that in a minute. Still relatively low level of debt, as you can see, of 0.9 of EBITDA to net debt. And you can see the pension surplus remain in surplus following the buy-in transaction that was completed on the 29th of June. And again, I'll cover that in a little more detail later on.

Despite the reduction in EPS of 9%, we've maintained the dividend at 0.96 last year, and we'll continue to do that as we see the business recovering and costs improving both through the back end of this year and as we move forward into next year.

Just covering off the income statement. Peter will cover this off in a bit more detail when it comes to the divisional performance. But overall, just touching on a couple of areas, you can see the gross margin stability and that's really due to that enhancement, small enhancement in the distribution gross margins, slight reduction in the manufacturing gross margins and a more pronounced reduction in the gross margin in Pitreavie, which is related to that what I described earlier, that outsourcing activity to suppliers where we got the business back to operational capacity.

You can see operational cost expenses increased by about GBP 1.1 million, and that's predominantly employee-related costs. So we have 3% less employees in the business than we did this time last year. However, that's been offset by inflation, the impact of that came in from 1st of April last year, some redundancy costs in the first half of the year. Half of the reduction in staff has been done through a small redundancy program of just over 20 employees. And actually, some of our business units are performing quite nicely this year. So again, we've got some increased bonus provisioning through this year. So GBP 1.3 million of that increase is related to employees, GBP 300,000 related to increased incremental logistics costs, and that's purely driven by the higher fuel costs and higher outside carriage costs that we're seeing as a result of the [indiscernible] in the Middle East and other costs are down GBP 400,000. So again, trying to keep a tight control in the other costs in the business. Interest rates are up predominantly related to incremental cost of leases.

This slide just covers off that kind of reconciliation between the statutory measures and alternative performance measures. So you can see that the kind of 2 key areas that we adjust for is amortization related to historic acquisitions and then any small adjustments that we need to make related to any deferred contingent consideration. The small adjustments that have come through in 2026 are related to some time value of money adjustments related to the Polyformes deferred contingent consideration, which was ultimately paid out in full in August this year. So that was GBP 2.6 million was paid out to the Polyformes because of the strong performance of that business, and that was paid in the second half of this year.

In terms of cash flow, you can see that the business has consumed cash at GBP 1.8 million in the first part of the year. Probably the 3 areas to pick out here are the working capital absorption. And that's really an incremental increase in our stock days of around 49 to 52, so a GBP 2.4 million increase in our inventory levels from the end of last year and GBP 1.7 million compared to 30th of June last year. And that's predominantly related to us building some stocks to deal with some of the supply chain challenges that we're seeing coming through in the Middle East and also some of the price increases that we've been flowing through really since April, May this year. So these are kind of elevated inventory levels that I expect to see us start to bring down between now and the end of the year.

Second thing to pick out is obviously tax costs are a bit lower and that's because last year, we quite a lot of overpayment of taxes. And that's -- we pay obviously tax in advance on a quarterly basis. And also the performance of the business in the first half of the year was relatively strong. Second half of the year declined quite significantly. So therefore, we [indiscernible] a significant amount of tax that we overpaid in the first part of last year, which we recovered in the first part of this year.

And then the last thing to pick out just some of the CapEx that we've had in the first part of this year, that GBP 1.8 million. Some of the key features are we put solar panels into our Polyformes manufacturing site, which is actually starting to generate some nice efficiencies in terms of energy usage. GBP 400,000 was related to the final payments related to the machines coming, and we spent GBP 400,000 fitting out a new distribution site that we've got in Ireland. So we had to move from our existing site south of Dublin into a new site on the west of Dublin at the middle part of this year, we spent GBP 400,000 fitting that new warehouse so that we've actually got room for growth for the future in the business in Ireland. So the key feature. As I said earlier, net debt levels at GBP 17.9 million, still relatively low, and we plan to keep it that way in the short term.

In terms of capital allocation, the features here really is clearly, we're committed to continue to invest in the business in terms of capital expenditure, whether that's essential replacement or for value-added investment returns, and we allocate around GBP 3.5 million to GBP 5 million per year to internal CapEx. We've got a commitment to maintain our dividend levels. We know that the dividend is important to quite a number of our shareholders, and we're committed to maintain those dividend levels. And as the EPS starts to recover after the reduction last year and the reduction in the first part of this year, we see the profitability improving through the second half of this year and into the next 2 to 3 years. And we'll continue to maintain that dividend until the dividend cover restores to somewhere around 2.5x plus against adjusted EPS. Currently, we're running about 2.1x.

In terms of the remainder of the cash, then we'll allocate that primarily our focus in the short term is to allocate that to share buybacks. You'll notice in the announcement that we'll complete the current share buyback of GBP 4 million by the end of September this year. So that's about GBP 900,000 of additional spend in the second half of this year, and we'll commence a new buyback program of GBP 6 million from the 1st of October this year, and that will be spent over a period of a year. So GBP 1.5 million quarterly tranches of GBP 1.5 million between 1st of October this year and the end of September next year. So we've allocated that.

And really the focus on share buybacks rather than M&A at the moment is really reflective of our view of the current valuation of business and also the fact that the management team is focused on the profit recovery program. So as we see valuations improve, as we see the profit recovery advance more as we get through next year, then we'll look to get back on the front foot with our M&A activity once we can demonstrate that we've got that recovery program more advanced and once we can start to see the valuations improve in the market.

So I'll hand back to Peter now, who will go through the kind of the performance of the individual divisions.

Thanks, Ivor. Let's start with the Distribution division. So the key points to note from our first half performance is we've achieved sales growth and profit growth. The sales growth is primarily being price driven rather than volume, although we have seen good new business -- a good new business performance, I mentioned earlier on about 40% up. And why is our new business performing so strong at the moment relative to the previous year? Firstly, we're finding customers looking in an uncertain world for supply to give the reliability and certainty. And clearly, we fill that gap nicely. We're also seeing now the benefits of the investment we made in 2025. We brought on some strong new business people during the year. We thought they impact the business in '25 and they're now coming to fruition in 2026.

Also the breadth of the product offer, we are doing more work combining our distribution offer and our manufacturing offer with certain key customers in the industrial sector, and that's helping support our new business growth. And finally, we were finding it more and more difficult as customers get tighter and tighter on their costs and control budgets of getting customers into our innovation labs, which as most of you will know, is a key part of our sales proposition. And so we've done a lot more work in '26 in taking the innovation lab out to customers, and that has helped in terms of our new business performance.

I guess the point to note, as I mentioned earlier on, is that despite the new business performance, we are seeing this headwind of environmental legislation, which is slowing down and getting customers to reduce the amount of packaging they're using, particularly in the retail space. And if you look at our major retail business in the first half year, it's down by 6% versus the same period last year. And a key component of that is customers looking to buy less packaging in line with the environmental legislation that is penalizing them if they use too much packaging and the wrong type of packaging. And that, as I repeat, will be a constant headwind going forward.

We've done an effective management of the polymer-based input price increases. We've seen certain polymer-based products go up to 20%, up to 40%, things like stretch and tape products, bubble wrap and so on and so forth. But I think we've done a pretty effective job so far in managing those with customers, and that's impacted with the state of gross margin during the period relative to last year. And I think we've touched on the headcount reduction. So we're squeezing the distribution business. We're taking heads out and realigning work. We are canceling projects or delaying projects to just get very, very tight on this profit recovery.

The next slide just shows you our margin evolution over really the last sort of 5 or 6 years. And a lot of information on this slide, I'll just pick out a number of things for you. First thing to note is that in terms of the first half, in terms of distribution, we have seen our net margin improved, which is positive versus the same period previous year. We've not got polymer on this graph, we've seen explosion in polymer prices and corrugate is relatively stable. There's been a little bit of pushing upwards in the first half of the year. Our operating costs are broadly flat on last year if you take into account the redundancy program initiated cost as part of that. And as you can see, it reflects our stable gross margin. And as you know, and I'll talk about this later on in the presentation, our objective here is to get our operating -- our net margin back to 7% to 8%, which we were delivering on average in the period '21 to 2024.

If I move over the page, a little bit more detail here for you in terms of our cost breakdown. I talked about the cost inflation that we've got and how we're managing that. So we've instituted the redundancy program distribution, which has taken a number of heads out of the business. The good news, I think it is good news is that we've got likely a bigger bonus payout this year because we have got a number of sites performing extremely well. And so part of the year-on-year difference is the bonus provision, continuing increase in national insurance costs. Lastly, we've got some property cost reduction, but that's really the effect of the duplicated property costs that we had in 2025. So underlying property costs still increase as landlords to put up rents and we get local authorities putting up rates.

And then transport costs are slightly higher than last year, and that's predominantly related to fuel costs vis-a-vis the Middle East activities.

The next page details -- again, a lot of information on this chart details the elements of our profit recovery plan and getting this business from where we are today back to the 7% to 8% that we see as the base point, which we're delivering in '21 to 2024. A number of things to pull out of this slide. Firstly, we are pivoting the business away from retail towards industrial. Industrial markets for us are more stable. The customers are less transient and the margins we earn from industrial customers are at 2% to 3% higher than our retail customers. As I mentioned earlier on, retail is that market, which is more affected by the environmental legislation in the current situation than industrial is. So the split currently is 80-20. It's not a hand rate turn, but our new business focus is very much around industrial, and we'll see that mix over time slowly begin to change.

The other key part of our profit recovery plan is pricing disciplines. And within our local core customers, so we have major core local, different types of sizes and geography of customers. And particularly our local core customers across the U.K., we have quite a band of different margins that we earn at a gross level. And so we're doing work at the moment to try and improve the margins we earn across all the bands across all the sites to at least the average of the business as a whole. We've talked about the H1 cost reduction, and we expect that to flow through during the remainder of 2026, and we've got more cost reduction plans that we're working on as we speak.

And then we have a program called RDC Best Practice. At the moment, we've got a number of sites performing extremely well with net returns above 10%, and we've got a number of sites performing not as well with net returns below 5%. And what we're working on at the moment is best practicing the sites comparing the really good with the relatively weak and then working out what changes we need to make in terms of customer mix, in terms of pricing, in terms of resourcing, in terms of geography distribution. And all those things will help to improving the operating margin of the business and getting back to the 7.5% to 8%. Why is that a realistic number? It's because we have achieved it in the past. Why is it a realistic number because we've got some of our sites that are performing way beyond that number already. So we get all our sites performing to the average, then we should be on track to get back to that 7.5% to 8%.

So moving on to our manufacturing operations, and I'll talk firstly about our specialist operations, which don't include Pitreavie. Good progress during the period, slight weakness in gross margin, profits are broadly flat, but we're happy with the way this business is performing. It's got a little bit of tailwind from our exposure to defense, the aerospace and the electronics industry and a little bit also into the space industry. But nevertheless, it's still dealing with the same conditions that we've got within our distribution business, but they've got more of a tailwind than a headwind at the moment. So we're pretty happy with the way that business is performing, and we expect that sort of level of margin that we deliver the business to be sustainable in the medium term.

And then moving over to Pitreavie. And you're very aware of what happened in 2025, very difficult for everybody involved and obviously, a tragedy for the family involved in that particular instance. So we're managing through that as we speak. We've got the replacement machine in. We've had a lot of customer visits during Q1 to see the machine as it starts up and more during Q2 as we see the machine performing against expectations. Although the business was unprofitable in the whole of H1, it was profitable in Q2 of H1. So we're exiting H1 with the business profitable, having got the machine up and running. We've done a really good job in retaining customer loyalty during the period despite the fact that we're outsourcing work and using external suppliers to keep customers running. And those customers have now come back to us, and there's no major or medium-sized customer that we've lost during this period.

So I think we've got some good recovery actions in place in terms of Pitreavie. And I've obviously got the benefit of the knowing what on my July and August numbers look like and Pitreavie is continuing to come through in terms of delivering profitability during those months as well as the Q2 in H1.

Let me touch on the health and safety investigation in relation to the incident. So you're aware that health and safety have been obviously reviewing what happened. They're not yet fully started their investigation. So we're waiting for them to confirm when that investigation will start. And so we have no more information that we can communicate at the moment on any possible fine. Obviously, we obviously want to keep you brief at the moment there's no information that's available to share with you. But obviously, we will keep you brief as more inflation starts to flow.

In terms of Pitreavie recovery plan, again, relatively busy chart, a number of points to call out. Firstly, is getting the machine up to its optimum level of throughput. So we're currently running just under 80,000 per day in terms of the corrugate throughput. Our objective is to increase that to 100,000, square meters we're talking about, and we're on track to do that as we come through into Q3. And that will give us the security of being able to ensure that all our customers are supported in service during that period and give us the potential for growth also.

Second point in terms of recovery plan is as we service effectively our external customers, then we'll switch into using some of that capacity to service in-house Macfarlane sites to provide security of supply on corrugate. We started that activity and we bought the business, we obviously have to put it on hold. The business went through its difficulties. But as we come through into hopefully, the fourth quarter, end of third and fourth quarter, we'll start to look at using Pitreavie to supply corrugate to in-house Macfarlane operations.

And then the third bullet point is, as Ivor touched on, the end of outsourcing to third parties. That is now almost completed. It will be completed as we are now into Q3. So our medium-term objective for Pitreavie is to get it back to the GBP 2 million of operating profit that we effectively acquired when we bought the business. And then that gives us a benchmark to start growing the business beyond the GBP 2 million, which from our point of view is the starting line.

Let me move over to -- we talked about environment quite a bit in terms of the headwind it's delivering, particularly in the distribution business. Let me pass over to Ivor, and you can touch on what's happening in the world of environment and how it's impacting the business and how we're addressing it.

Thanks, Peter. I mean, Peter has covered quite a lot of the kind of customer challenges for sustainability. And this slide covers quite a lot of stuff that we've already covered with the full year results. But I just want to pick out one or two features on this slide. One, we've invested in the solar panels at the poly business. And as I said earlier, that's quite a nice investment. We're quite a high consumer of energy. So therefore, that gives us quite a bit of energy efficiency, but also takes that carbon out of our footprint. The other thing to know is you've noted that we have invested in electric vehicles over the last number of years. And I think to be fair, we've probably been at the front end of that investment relative to the industry. And clearly, these trucks have been coming in at a more expensive cost than the diesel trucks, where we felt the right thing to do to move forward. So we could trial these vehicles out, see the levels of efficiency, see the levels of range, see the challenges we have with infrastructure.

And it's pleasing to see that some of the latest developments in electric vehicles are seeing, one, the range extension now in some of these vehicles is actually getting quite significant. So some of the technology improvements that have been made. And also actually from a cost point of view, some electric vehicles are now coming in very cost effectively against diesel vehicles. So hopefully, over the next few years, you'll gradually see that transition from diesel to electric start to accelerate. And clearly, that those advancements in technology and advancements in range. The only kind of caveat there is infrastructure is still a challenge because obviously, every site, you don't necessarily have the input of electricity to be able to charge up the vehicles. So that remains a bit of a challenge for us as it does for many companies.

And the only other thing I just want to pick out here, which I'll cover in the next slide in more detail is basically from a regulation point of view, clearly, there's some developments there. And the most recent regulation that comes in that affects a number of our customers is PPWR, which is a kind of EU legislation. I'll just cover that off here. You can see on the left-hand side some of the regulation that's already going through, and I think we've covered the extended producer responsibility in quite a lot of detail in prior presentations. The one in the middle there is probably the most important one, this is a new piece of legislation, EU legislation, and that's really all encompassing, and that's going to come in phases over a number of years. But the ultimate aim is really across EU is to have a standard, which is looking at ultimately reducing unnecessary packaging, increasing recyclability rates and improving traceability and actually looking to eliminate some forms of packaging that's considered non environmentally friendly.

So this doesn't just impact retail like the extended producer responsibility that came in the U.K. last year. This impacts all packaging. And it impacts us because we get quite a number of customers that actually have packaging that then goes into the EU market. And actually quite a number of our customers are multinational customers. So -- and they want to standardize our packaging, so they don't want to have packaging that they use in the EU market and the U.K. market. So -- and of course, 8% to 10% of our business is actually in the EU with our operations in Germany, Netherlands and Ireland.

So I think this legislation, just given the kind of all-encompassing aspect of it, will have quite a significant impact on the business over the next few years and certainly have significant impact on quite a number of customers either businesses or have quite a lot of cross-border transactions between the EU and the U.K. So that will develop quite nicely. But the ultimate aim is to try driving down the use of packaging, driving down the, I suppose, unnecessary packaging, so too much void in the pack and also moving to more environmentally friendly packaging. So more to come, but that's probably the biggest piece of explanation, and that started off in August this year.

In terms of pensions, I'll just touch on that. I mean, clearly, the kind of biggest change in pension this year is we completed a buy-in transaction on the 29th of June where all the assets were effectively bought over by Royal London. I suppose in essence, what that means for members, it gives members much more security and the benefits remain the same. So the benefits are totally unchanged. But instead of relying on Macfarlane Group as a covenant, they're now relying on Royal London as a covenant. Now Macfarlane Group is a good covenant, Royal London clearly a very strong covenant. So it gives members a lot more security in terms of going forward. There is some excess assets you can see post that buy-in. So effectively what happens is the insured assets now effectively manage all pensions and payment and any deferred pensions that are due to be paid.

So any volatility related to those pensions are now covered by those insured assets. It takes a lot of volatility in terms of the discount rate in terms of inflation, in terms of mortality assumptions and it takes a lot of volatility to the group. The only thing that the scheme now has to deal with over the next 2 years is dealing with a lot of equalization adjustments related to guaranteed minimum pension and some historic equalization adjustments. So they need to be dealt with over the next 2 years. And we've made provisions for those within our assumptions and also the fees that are required to be paid to protect those pensions. So that GBP 5.5 million of cash that you see that's there to cover those adjustments and the fees related to managing the scheme over the next 2 years between buy-in and buyout.

And what we are kind of predicting at the moment is between now and buyout, we should be in a position to exit the scheme completely either within a range of plus GBP 1 million to minus GBP 1 million in terms of potential cash that we might either recover or cash that we might have to pay into the scheme. That's the kind of range we are working with between now and buyout. So good progress, more security for members and less volatility for the group with the ultimate aim within 2 years is to get the pension scheme completely off the balance sheet.

So with that, I'll pass back to Peter who just do a quick summary and conclusions.

Thanks. One more slide, and then we'll move on to questions. So 3 key final messages. Firstly, not easy out there at the moment. Market conditions are weak in the U.K., the impact of the Middle East slowing down -- further slowing down demand and obviously affecting our input pricing work hard with customers to get recovery on those. And we've got the headwind of the environmental regulation, which will cause people to use less packaging, particularly in that retail sector.

I think when we look at what we've achieved in H1, we've made some progress, Middle East impact largely being offset by managing those price increases. Packaging distribution, we're seeing performance improvement. Pitreavie, we've got back into profitability and manufacturing operations are performing in a stable fashion. So the focus for us continues to be our profit recovery. We had a number of people asking us last week when we were talking with them about what's the plan in terms of acquisitions. And just to clarify that, clearly, acquisitions have been a key part of our strategy up to date in terms of consolidating and widening the offer to customers.

At the moment, we've got all acquisition activity on hold. Those target acquisitions that we've got in the pipeline, we're talking with the owners of those businesses. And in the main, they're agreeing to different timing and managing delays. And where acquisitions come to us at the moment, unless they are absolutely must do acquisitions, then we're effectively saying now is not the right time. So I think from an acquisition point of view, not a priority at this point in time, I expect it to be back on the acquisition trail early 2028 is what we're scheduling as we focus management time on the profit recovery.

And in terms of that profit recovery, just as a reminder of the things that we're doing, so focusing on sales development in industrial markets, partly in distribution, reducing our cost base and we started that program as we described it, increasing the performance of the lower return sales RDCs and distribution through the Best Practice program, improve the input prices that we're achieving despite the Middle East thing, we're refining our sourcing program and trying to find ways of getting better input prices, particularly on corrugate products. And then clearly, getting the Pitreavie business back to the GBP 2 million of operating profit that we had when we acquired the business.

And then in terms of capital allocation, just to repeat what Ivor said, maintenance of the dividend, instituting a new share buyback program and continuing that net debt level at a relatively low 1x EBITDA. So in terms of the presentation, the presentation is already up on the website. We will be up on the website later on today, so you can delve into a bit more detail. I recognize we've gone through that at quite a pace. But we will now move on to questions.

[Operator Instructions]

I'd like to remind you that recording of this presentation, along with a copy of the slides and the published Q&A can be accessed by you. As you can see, we have received a number of questions throughout today's presentation. So 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.

Okay. Thanks. The first question was one really, and I think we kind of covered that off in the slide around the profit recovery program around distribution, which was really how do we get the business from 4.6% to 7.5% in the medium term. So I think Peter covered the actions, but I suppose ultimately, if we can get the business growing roughly about 3% per annum, which is where we're targeting to get to and we can maintain the gross margins at the current level. Really, if we can hold the cost base which is the kind of challenge for us hold the cost base at the current levels, then within a kind of 3-year program, we should see the bottom line operating margin improve to that kind of 7% to 8% level.

So just that natural flow-through of organic growth, maintain the gross margin and holding -- stopping that inflationary pressure on the cost increases. And we appreciate there will continue to be inflationary pressure there, but we will be taking active actions to try and reduce our cost base, whether that's looking at kind of site consolidations as leases come up looking at software technology investments as we go forward to try and reduce some of the processing strains on the business. But ultimately, that's how we get the business from 4.6% to 7.5% that natural flow through of the growth, holding the operating costs where they currently are and maintaining margin roughly where they currently are at the moment.

One of the questions is probably for you, Peter. Just in terms of the Middle East, what extent have we been able to recover the costs that will come through as a result of the Middle East? And do you see some maybe potential margin pressure coming through in the second half of the year?

Yes, it's a good question. I mean, so far, we've managed to do an effective job in recovering those price increases. And you can see that in the way our gross margins performed in the first half of the year. We probably see, as we go into the second half of the year, a slight weakening of that gross margin, but that will be offset by the fact that because we'll be implementing these price increases as a result of the flow-through, we'll see our revenue line strengthen. So if you look to the second half of the year, expect a year-on-year stronger sales line versus 2025, but probably a slight weaker margin, not materially so, still within that tight range that we operate.

So far, we're doing a good job. And the key thing -- one of the key things is obviously security of supply because you do not want to let down customers in the current market because if you let down a customer, it just opens the door for a new entrant. And so far, we've been able to manage the supply chain particularly effectively.

Next question is around M&A. So it's really -- I'll pick this up when will we see M&A feature again? And is it likely to be focused on Europe versus the U.K. I couldn't answer that, put a time scale on it. Clearly, at the moment, our focus given, as I said, the current valuations that we've got at the moment, both of acquiring business relative to our own we see allocating capital to buyback is a more efficient way to manage our capital in the short term. And as Peter described earlier, our management resources are really focused on the profit recovery program. But as we hope to develop that profit recovery program over the next 18 months and hopefully, valuations start to improve those features start to move in a positive direction, then clearly, the timing of that means that we'll get on the front foot with M&A activity. And actually, we're focused on both continuing to do some buy and build within the U.K., and we continue to look for strategic opportunities in Europe. I don't know if you want to add to that, Peter?

No, I think that's the best summary. And the only other thing I'd add to it is that the acquisition opportunities are there for us. I mean we're probably seeing a couple of acquisition opportunities a week come through at the moment. And as we said, I mean, we only buy quality businesses against an agreed strategy and against an agreed profile. And there's nothing we've seen so far that fits those criteria. So more to come in acquisitions, but management time at the moment is focused on profit recovery.

And in terms of the wider protective packaging market, where do you see the kind of opportunities and threats currently? And how do you see Macfarlane delivering against the wider market?

Yes. I mean I think the wider market, if you look at it, people are trying to find ways of using less packaging. People are trying to find ways of using packaging more effectively. People are trying to find ways of using packaging in a way that reduces our operating costs. So we're still very confident that the Macfarlane proposition around adding value to people's protective packaging requirements is still relevant, and that's reflected in our new business performance in the first half of this year. I think in terms of the segments of the market, we see defense, aerospace, space and tech for the reasons that we all understand will continue to be pretty robust and potentially as they are doing at the moment, give us sustainable tailwinds.

And we see the retail space is probably the space that's going to be most difficult and most challenging, primarily because all the legislation that's currently in play and the legislation that Ivor touched on, which is coming into play all has a really material effect on that retail space. So hence, the pivot that we're making at the moment to refocus our business around industrial. And the industrial customers as a final point, is good for us because it allows us to blend our distribution business and our specialist manufacturing activity together. So we can deal with the customers' sort of more simple protective packaging needs and also their very sophisticated packaging needs and genuinely become a one-stop supplier for those industrial clients.

A question on sourcing, Peter, how do we refine our sourcing strategy and the financial benefits that we could get from that?

So in round terms, 50% of what we buy, we buy centrally through a central team. That's where we buy wrap and tape on a central basis, agreed terms and all our business units buy from that centrally agreed contract. And then 50%, we tend to deal with local and regional suppliers, and that's managed by our local sites and our regional operations. The plan going forward is to bring more of our regional purchasing into a centralized fashion so that we can get a better bang for our buck and spread our resources more effectively. And also create stronger strategic supplier relationships. But as you're all aware, the corrugate industry at the moment is going through a period of consolidation and rationalization.

And so what we're doing at the moment is building and strengthening our relationships with key corrugate suppliers. So for sustainability going forward, we've got long-term relationships and long-term partnerships, which will work well for them and for ourselves.

I think that's all the questions.

So I mean, thank you, everybody, for your time today and your questions. As I say, the presentation will be up on our website. So you'll get a chance to look in a bit more detail. And clearly, if there's anything that comes out from that, you can contact us directly or through Capital.

The summary of the first half year is, look, we had a really difficult 2025 after 15 years of consecutive profit growth. The focus is on profit recovery, and we're beginning to demonstrate those profit recovery actions are coming through, and that's reflected in the performance that we've seen in the first half of the year, and that will only strengthen as we go to the second half of the year. And we've got clear recovery targets for each of the key businesses that are not performing to plan at the moment in terms of Distribution and Pitreavie, which will see us through the next really 12 to 24 months. So again, thank you for your time.

That's great. Thank you for updating investors today. Can I please ask investors not to close this session as you'll 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'm sure will be greatly valued by the company.

On behalf of the management team, we'd like to thank you for attending today's presentation, and good morning to you all.

Good morning, and welcome to the Macfarlane Group plc 2025 Results Investor Presentation. Throughout the recorded presentation, investors will be in listen only mode. [Operator Instructions] Before we begin, I would like to submit the following poll.

And I would now like to hand you over to our CEO, Peter Atkinson. Good morning to you, sir.

Good morning, everybody. I'm Peter Atkinson. I'm the Macfarlane Group CEO, and I'm here today with my colleague, Ivor Gray, CFO. We announced our 2025 results last week, and you'll get to today to review those results with you and we'll bring out some key points to give color on the numbers. And also, obviously, we want to respond to any questions that you want to raise during the meeting.

If we take a look at the agenda, following some brief introductory remarks to myself, Ivor will take you through the detailed numbers in terms of P&L and cash flow. And then I'll talk through the 2 divisions, Package Distribution and Manufacturing Operations. Ivor will then update you on where we are in the pension scheme and I'll conclude with some final remarks, and then we'll pick up and respond to any questions.

Let me begin just as a refresh to some of you and for those of you new to follow, a little bit of detail about the business. We're a protective packaging specialist. We both distribute, design and assemble protective packaging products. 75% of our sales are through our Distribution division and then 25% of our sales are through our Manufacturing division. Our customer base is 80% industrial and 20% retail with a majority of our retail business with e-commerce clients. We've got strong market positions in each of the businesses. We deliver added value for customers, as you can see on the chart, and we've got clear differentiation from our competition.

So if we move on to the results. During 2025, we saw good sales growth. We saw marginal sales growth in the Distribution division, it's about 0.2% despite very difficult market conditions there. We saw very good growth in our design and manufacturing division, 12% up versus the previous year. Partly that was from the Polyformes acquisition, what we also saw good organic growth, particularly in the aerospace, space and defense sectors. And obviously, we have -- during the year, the benefit of the Pitreavie acquisition that we acquired in January 2025.

Despite the good sales growth, we saw a reduction in profit in the year and a mixture of features in there that we'll go through during the presentation. But partly, particularly in Distribution, we actually saw quite soft demand partly due to the weak U.K. economy and also due to the impact of EPR with our retail customers as they look to find a way of reducing EPR fees by reducing the amount of packaging they use.

The industry in trade at 2025 was extremely intense in terms of the competitive environment. And there was a lot of pricing pressure for us to have to retain market share against. And as a result of that, we -- as you will see in the presentation, we experienced lower margins in our Distribution division. We also saw increased costs, primarily labor at property. And again, we've got detail later on the breakdown of those cost increases.

Clearly, a key feature of 2025 was emotional operational and financial impact of the tragic accident at Pitreavie. And again, we'll provide you with an update on where we are with that, the Pitreavie business, later in the presentation.

The key issue for the management team is to how we address the challenges that we experienced in 2025, and we'll talk you through a profit recovery plan that we're currently working on.

The balance sheet remains strong. We've got good cash generation, and we're operating well within our banking facilities. And I think as a demonstration of the confidence in how we now execute the recovery, the Board is proposing the dividend to be maintained at 2024 levels.

So let me hand over to Ivor, who will take through the detailed financials, and then I'll come back on and we'll put some color to the numbers through the individual divisions.

Good morning, everyone. Just to take you through some of the kind of key financial performance measures for last year.

As you can see in the top left hand, we grew revenue by 11%, 10% of that growth was driven by acquisitions, so GBP 28.1 million of the GBP 30.4 million growth in revenue was down to the acquisition of Pitreavie at the beginning of last year and Polyformes, which was acquired in July 2024, and GBP 2.3 million of the growth was organic. So around 1% of that 11% is organic. And when I look at the organic growth, it's primarily volume driven with the prices on average being relatively flat year-on-year. And again, the split down of the growth is GBP 4.4 million of distribution, GBP 6.4 million of growth within Manufacturing, excluding Pitreavie and GBP 23.6 million of growth from the Pitreavie business.

In terms of adjusted operating profit, 20% down on the previous year. A large proportion of that is down to the Distribution business, GBP 8.8 million down on last year. And that's primarily down to even though we had flat still year-on-year, we had pressures on our gross margins, a lower gross margin. And as Peter described, higher operating costs, and Peter will describe that in a bit more detail later.

The Manufacturing business, excluding Pitreavie had a strong year, both the full year benefit of the Polyformes acquisition and again, good underlying organic growth from some of the sectors that they supply into. And as Peter described, the Pitreavie business at a tough year, we planned that business at the beginning of last year. We anticipated that business contributing a profitability of just under GBP 2 million this year in 2025, and it ended up making a loss of just under GBP 200,000. And that was really down to a combination of the trading conditions that as a phase through the year, but a large proportion of that was the impact of the [indiscernible] Peter said to earlier.

And if we move over to the adjusted profit before tax, we had higher interest costs from our bank board work from higher average bank volumes through the year. and also higher IFRS 16, we interest. And that's primarily due to lease renewals on both property and commercial vehicles and the new property in East Midlands.

If you move down bank debt, GBP 16.2 million at the end of 2025 compared to $1.9 million at the end of 2024. So an increase in our bank debt. But as Peter described earlier, we're within our GBP 40 million bank facilities and just under net debt to EBITDA. So still relatively low level of bank debt, and I'll come on to the cash flows in a bit more detail in a minute.

The pension surplus, we continue to be in surplus, albeit lower than last year at GBP 6 million versus GBP 9.6 million last year. We're very much in the process of preparing the scheme for buy-in. As part of that, process, we've taken an adjustment to reflect a change in the methodology to estimate historic equalization of pensions, which will need to be connected. But factually, the goal remains the same as what we've discussed before, albeit we're closer to that decision. So then go with the pension scheme is to be to want to buy in. Clearly, a buy in a price at a level that the company doesn't have to put any further cash contributions or very limited cash contributions. Should that not be the case in pricing, not right in the marketplace and we would continue to run the scheme on.

In terms of dividends, Peter described, we've maintained the dividend, albeit at a lower cover than we've historically seen previously. Part of that is primarily because we've got the cash flow is to support it, and we have confidence in the business going forward. Clearly, if you look at dividend cover an adjusted earnings per share basis is just over 2x. And clearly, the elements between the nonadjusted adjusted broadly noncash adjustments. So yes, the dividend cover is lower than historic levels, but given that confidence in the profitability going forward and the fact that we can support it with the cash flow is a net position of the business. We've decided to maintain the dividend at coils.

Moving on to the income statement. Just a couple of things I want to pull out here. Peter will pick up some of the detail when he goes through the various segmentations, clearly, as you can see, gross margins, as I described at a lower level than where they were last year. And that's primarily with our distribution business where the gross margin has gone down from 37.2 to 35.3, just related to kind of competitive pressures in the marketplace. The manufacturing business, excluding Pitreavie has held up well with actually gross margins slightly improving year-on-year. And the Pitreavie business has had lower gross margins than we anticipate and that's primarily due to the fact in the final quarter of the year, the busiest part of the year for Pitreavie, we had to outsource quite a proportion of work due to the instant.

In terms of operating expenses, quite an increase in operating expenses of GBP 14.5 million, GBP 9.6 million of that is related to the acquisitions we've brought in, as I said, the full year impact of Polyformes and the Pitreavie business, GBP 3.6 million of that is in PCs and employee cost of which GBP 1.1 million is the -- they can enforce NICs and the balance going ticket of inflationary challenges within the employee costs and GBP 1.3 million is related to kind of property and logistics costs, primarily due to increases in our rental cost for property and some of the renewal of our commercial vehicle fleet.

Just drawing your attention to the interest costs, higher last year, GBP 1 million -- GBP 0.8 million of that increase is due to bank interest costs due to the higher average borrowings through the year and GBP 1 million is due to IFRS 16 interest related to crop renewals and commercial vehicle renewals.

The next slide just gives you a kind of feel for the adjustments that have been made between kind of statutory mergers and alternative profit measures, really, the key things to drive here, the things that we're adjusting for our amortization related to intangibles related to acquisitions. The goodwill impairment, as you'd expect, is related to the PCB business, reflecting the kind of gradual recovery of that business as we see going forward. The GBP 1.5 million benefit you see in deferred consideration is also primarily related to Pitreavie because that business is going to have 0 earn out, whereas we anticipated around GBP 1.6 million of our net payments in the Pitreavie business. Of course, given the performance of the business, we won't be paying any outlets in that business and GBP 1.9 million is related to that pension adjustment reflected earlier related to the equalization of pensions going back to an historic change in methodology. So those are the kind of key features in terms of reconciling our statutory measures to term to profit measures.

In terms of cash flows, as Peter described, the operating cash flows were very strong, GBP 24.7 million. compared to GBP 27 million, and that's because of good working capital management. You can see a positive inflow of working capital and also the noncash impact of the pension adjustment that are to earlier. And that cash has been utilized in the year to continue the acquisitions that we did, GBP 17.3 million in terms of acquisition activity, GBP 15.9 million of that related to Pitreavie and the balance related to earn-out payments for OPAP, [indiscernible] and Polyformes, all of which are performing well. GBP 4.5 million on capital expenditure, GBP 1.8 million of that was on the Pitreavie business. The majority of that related to the new machine that we announced in the November update that we're bringing in to restore the capacity at that site following the incident. We also invested in improving the capacity and design capability of our business in Grantham. We had the fit-out of our new site in East Midlands and also we had an investment in the water treatment facility or GWP business in [indiscernible].

We also had the -- we started the buyback program, the share buyback program that we announced in June last year. So that's a commitment to buy back -- to spend GBP 4 million in buying back our shares over a 12-month period, of which GBP 2.1 million of that we spent up to December 2025. As Peter mentioned earlier, we've maintained the dividend. So we spent GBP 5.8 million on dividends through the course of 2025. And as we said, we're looking to maintain that as we go into 2026.

So again, although we've consumed cash in the year, we entered the year at GBP 16.2 million of net debt, as I said, still a relatively low level of net debt compared to our facilities and also relative to the EBITDA of the business.

So I'll pass it over to Peter now to go through the kind of individual performing sites of each of the divisions.

Thanks, Ivor. So beginning with the Packaging Distribution division. This represents 75% of the group's revenue. And as you know, we're the market leader in the U.K. and the new entrant into Europe within this particular business. So during the year, very difficult market conditions. I mentioned earlier on the active EPR on our retail customer base and just generally weak conditions through the macroeconomics and uncertainty around what's happening in world economics generally. So to deliver a marginal increase in revenue from our point of view was encouraging and gives us momentum as we go into 2026.

The pressure that we've seen in terms of the revenue line has been impacted by customers just delaying decisions and that's impacted our new business revenues. So our new business revenue was 20% down versus the previous year. And that's not because we've got strong pipelines. We have rebuilt the sales team and strengthen the sales team. So we're very optimistic as we go into 2026 that we can execute against that new business pipeline and add more momentum into our sales line or the most important figure from a distribution point of view in the year was the gross margin and the gross margin fell back from the heights of the previous year. And that's mainly been down to a lot of very aggressive price competition. We've had to work really hard in defending customers from competitors where they've been using price as their major tool to win business. And we decided to make a decision that we'll retain market share and protect and defend those customers and then look to build the margins back over time.

I'll talk more about operating expenses on 1 of the later lines, but we have seen an increase in operating expenses. And within that, you've got an increase in national insurance costs on the minimum wage. We've got property rental increases coming through. And then we had these Midlands consolidation during 2025, where we had some run-on costs in terms of both property and in terms of labor as part of that.

If I move over to the next page, we mentioned gross margin. This gives you a flavor of how our gross margin has evolved over the last 4 or 5 years. And as you see, coming out of COVID, we had a very strong gross margin, probably a gross margin that was unsustainable going forward. So what we're now into is a gross margin level around about 35% that we believe is sustainable. And that's part of our forward forecast, that's our assumption that we can retain that gross margin One of the reasons, a small part of the reason that our gross margin declined in 2025 was we had a particular supplier in the corrugate industry that unfortunately went into administration and they were in a very effective low-cost supplier. We had to replace that supplier with a higher cost source. So that could have some impact on gross margin. But going forward, we can see that 35% is a gross margin that we can sustain.

I mentioned costs and the schedule just described for you the major cost change in the year. And in reality, it's broken into GBP 3.1 million increase in labor costs and just GBP 100 million in property costs. If I take the labor cost first, around about GBP 3.75 million of that GBP 3 million is the NI increase. And that's only 8 months. So we've got a 12-month impact of that in 2026. We've got inflation in salary costs, although we had a salary freeze during 2025, but part of our employee base. There was inflation in another part of our employee base to retain lag, et cetera. And then we have made some significant new investments in people, particularly in the sales team, which gives me the confidence why that sales pipeline that we've got will come to fruition in 2026. And then there were some carryover costs as a result in property and in -- sorry, in labor as a result of the Midlands transition, where we had to use a lot of temporary labor to help us transfer from 4 sites down to 1 side or the new site in Nottingham.

In terms of property costs, that broadly half of that profit cost increase is just the normal rent renewal rate cost increases that we incurred during the period. And then about half of that number was the additional property cost that dual running of property costs as part of the [indiscernible] transition. We feel the step change in costs we've seen in 2025 will not repeat in 2026. We've got programs in place I'll talk to you about later on, which will allow us to stabilize our cost base going forward and give us a good degree of more certainty of the cost base.

If we look at the priorities now, obviously, we've got to start the packaging distribution business recovery. And there's a number of things that we're doing. I won't go through all of these points. But One of the key things is that, as I mentioned, the retail sector, which within distribution is a rent represents about 25% of our revenue. It's done to all of stress at the moment. It's just very, very competitive. Prices are eroding, margins were eroding and the impact of all the putting legislation, EPR with more to come is going to put extra stress on that sector. So as part of our medium-term plan, we're looking to refocus our business against the industrial market. It doesn't mean we're walking away from retail, but we're reallocating resources towards growing in the industrial markets, which for us are high margin, more sustainable business. and not as quite the same pressure from the environmental legislation. We're also pulling together and creating a more connected customer proposition, where we are combining the benefits of our distribution, our design and manufacture and our European capabilities for key strategic accounts, and we've identified 6 key strategic accounts across both the U.K. and Europe, who will fully benefit from the combination of those businesses with a new strategic account team, which is up and running and is now operational.

In terms of operating cost reduction, we've seen the step change in 2025, we've got efficiency programs that we're implementing as we speak, both in terms of sales, in logistics and administration. As I say, we expect our costs in 2026 to be flat to only marginally ahead of 2025 despite the fact we've got things like NI, which will still be an increased cost during the period. We're also looking as part of the gross margin sustainability to review our sourcing model. At the moment, around about 60% of our sourcing is done with major national suppliers and 40% is done local region suppliers. And we're looking to actually adjust that in the balance. And we'll believe at a time when the supply chain and the suppliers we're dealing with are going through [indiscernible] change themselves and also give us an opportunity to reduce input prices.

In terms of acquisitions, we've indicated that we don't plan to do any more acquisitions in 2026. As you know, acquisition has been a key part of our growth platform. But with the Pitreavie story, which I can't talk about, we feel we've got enough -- we need to allocate management bandwidth to actually developing what we've got, and we're putting acquisitions on hold certainly until the back end of '27. But we still work on warming up opportunities the gestation put between contact and execution can be 3 to 5 years. So while we won't execute anything in the near term. We are tinting work and opportunities to make sure the pipeline is strong. And then we'll continue to work on working capital management, and we've done a pretty good job this year, and we'll continue to do that despite the weak environment.

Going forward, on the -- just 1 [indiscernible], going forward, 1 of the cost opportunities that give us confidence in being able to reduce our cost base. It's got a number of property leases that come up for renewal in '27 and '28. And we've got capacity available in new noting sites in the site in the Northwest of England that we moved to 3 years ago now. And as some of the leases come up in other sites, that gives us the opportunity to fully utilize the new sites that we developed.

So moving on to our Manufacturing division, our design and manufacturing division. I've taken Pitreavie out to this for the moment. Good sales growth of 12%. That's a mixture of the full benefit of the Polyformes acquisition and organic growth of around about just over 3%. And despite the weakness in certain markets like automotive, we've seen good growth, particularly in the aerospace, space and defense markets, but the reasons which will be apparent to you all. And that gives us extremely good momentum going into 2026, and we've seen this business now being a key contributor to profits in 2026 as well. So representing now around about 40% of group profits. So really good performance in this division, and we expect that to continue.

If we move on to Pitreavie. I think most of you are aware of the Pitreavie story. We acquired Pitreavie in January 2025, and then in October 2025, we had a traffic incident causing 1 of our colleagues to the debt of 1 of our colleagues. Clearly, that's taken an emotional burden of the business as well as the operational financial burden, which we've been working through, both with our employees and with the founder that was affected.

Where are we in terms of the numbers? So we expected Pitreavie in its first year of ownership to make just under GBP 2 million operating profit and obviously because of the Pitreavie incident loss. What we're doing post the incident as well as all the emotional support, we were actually ensuring that we could retain customer loyalty by using external suppliers to supply customers because the machine ready in core we have to take out of the business. So we've retained a high degree of customer loyalty, which is really, really positive. And we also did was very quickly turned around an order program to acquire a new replacement machine. And the visual you have on display is the new machine out of China which is now running not quite -- it's not by running in the Pitreavie facility in [indiscernible]. We expect it to be operational at the end of this month, which is going through commissioning and training and so on and so forth to start and we expect it to be fully operational in Q2 of this year. So I think we can see the Pitreavie business recovering. The fact that we've got significant customer loyalty to customers is exited, no customers have talked about dual sourcing going on. And the new machine gives -- also gives us increased capacity, so as we start moving customers back into the facility from being outsourced, once we settle those customers down, then we'll be looking to utilize that capacity to win new customers in the Scottish market.

In terms of the priorities going forward for manufacturing, clearly, the recovery could treat is critical. And we expect to get the sort of the GBP 2 million operating profit that we were expecting to achieve through the acquisition. We expect to deliver that in 2027 when we got a full year clearly, 2026, going out to partner with the new equipment, but we certainly expect the business to get back to the underlying profitability we inherited through the acquisition in 2027. And as I mentioned, in terms of our core manufacturing operations, we've got some good opportunities around defense, aerospace and space, which is giving us momentum -- gave us good momentum in 2005 and will continue to give us good momentum in 2026. So we once we get the Pitreavie where it needs to be, pretty happy this division has got a very good medium-term outlook in terms of both growth and profitability.

Just moving on from the financials and picking up on ESG matters. In terms of the Macfarlane business, we've done well in terms of adding accreditations, which to report on particularly with certain customers who need the accreditations for you to be part of their supply base.

In terms of our own impact on the environment, we continue to roll out more electric trucks. As you know, electric trucks on work in our industry because the things we ship are light and the distances we travel are relative short distances. So we continue to roll out the electric truck program. And we're now close to 100% of our electricity we use in the facilities is now coming from renewable resources. So good, good progress there.

And in terms of supporting our customers, our innovation labs are increasingly busy as we help customers through the EPR legislation by finding ways of supporting them on reducing that packaging used while still protecting their products and the packaging they use being made of sustainable materials, so obviously helping from an environmental point of view.

In terms of legislation, I mentioned EPR a number of times, I'm sure you all be familiar with the challenge of EPR in that retail space. But I think going forward, there is more regulation can be down the pipe. You've got the deforestation regulations and you've got the void fill regulations coming through. All the ore going to put extra stress and strain, particularly in that retail space, and hence, the point I made earlier on about how we begin to start pivoting more towards industrial markets where there's not the same stress and strain that's coming through in terms of the sustainability legislation driven by the government by the European authorities.

So I'll pause there and move on to the pension scheme. I'll ask Ivor to touch on that.

Yes, I think I covered most of this earlier. But I think the key thing to note with the pension scheme and the surplus has come down principally due to the adjustment that I referred to earlier, scheme is not drawing any cash from the group currently. And as I said, we've got a decision that we'll be making over the next few months in terms of whether we progress the scheme to but and that decision will be based on the favorability of pricing in the market at that point. As I said, our goal and aim is to exit and scheme through a buy-in without growing further cash from the group. If it required there's a small amount of cash in the bit -- into the scheme, then we would probably still proceed. Beyond that, then we can continue to run the scheme on and at this point, would not draw any further cash from the group.

In terms of the capital allocation, as you can see, this slide described the kind of outcomes from the capital allocation for 2025, which are really covered within making a cash flow earlier. I think the key thing to mention here is a bit of reprioritization of our capital allocation. So obviously, clearly, we'll continue to invest in the business. I suppose is number two, we made to maintain the dividend. So this year, we'll be looking to spend about GBP 5.8 million on dividends in terms of maintaining it. The kind of third priority would be completing the buyback program of GBP 1.9 million is still to be spent this year. And then the kind of final element is acquisitions. So as Peter described, we're not planning on doing any acquisitions in 2026. However, we do have an outstanding payment for Polyformes of about GBP 2.6 million, and that business has performed well. So we would fully expect to make that parent around about July and August this year. But other than that, I wouldn't expect any further movements in terms of acquisition activity this year. So bit of a refocusing in terms of our capital allocation, focusing on maintaining the dividend, then the buyback program for shareholders, returning cash to shareholders and then obviously, acquisitions the bottom of the kind of priorities at the moment.

So I'll pass it back to Peter to kind of summarize the presentation, and then we'll move on to Q&A.

Thanks, Ivor. So just some concluding remarks before we move on to Q&A. It's been a tough 2025 for the business. And we're not expecting 2026, so the market conditions to be any different markets continuing to be challenging. And then you could probably see at the moment the industry is at the bottom of the cycle. And it's not necessary that the next move is going to be upwards. We could see a 12- to 18-month period where the industry continues to run the bottom of the cycle. So for us, it's all about actually the priorities to recover the business to recover the distribution business and get it back to the 7.5%, 8% return on sales that is our midterm target and obviously, to get the treated business to perform at the level that we expected to do when it was acquired.

So from our point of view, 2026 is year 1 of the recovery program. We're well into implementing a lot of things that we've discussed already. I think the balance of the year is going to be used very much towards H2 because obviously, Bertrand H1 will still lose money because we'll have a quarter where we're still working with outsource suppliers, but we should see and expect to see a step change in performance in the second half of the year in terms of like-for-like is the first half year, and we'll see 2026 showing profit growth versus 2025. So the medium term, the short-term view back into profitable growth. and the medium things that we have got planned and the opportunities to improve the performance of the business, the medium term from our point of view, continues to look very positive.

So I will pause there and pick up on some of the questions that we can see coming through. [indiscernible] the host.

Yes. So just some of the questions coming through first question, Peter, is on Distribution business. clearly, the distribution business going to drop its operating margin to 5% this year. What are the kind of actions you see getting the business back to 8%? And what kind of time lines are you looking at?

Yes. I think Distribution really has had a difficult year. We described the reasons behind that. Sales has been relatively robust lysine difficulties. It's really the gross margin reduction and the increase in costs. So our objective is to get it back to 7.5% to 8%, and that will be a mixture of holding the gross margin line and developing the pipeline of opportunities that we are very confident that we can execute this year. We're slightly difficult in 2015 to give us some around about 2% to 3% sales growth this year. and then holding the operational cost line, let's say, we saw a significant step change in the '25 and '24. But with the programs we've got in terms of cost reductions, in terms of the squeeze on property, we believe we can actually hold our costs flat in 2026, and then it start to reduce as a percentage of sales in '27, '28. So certainly, we expect a 2- to 3-year, this is year 1, year 2, year 3 time line to get ourselves back to around 7.5% to 8% in terms of sales.

A question here on new business, obviously, reflected the fact that your business was down year-on-year. Given that [indiscernible] things improved [indiscernible].

There's 2 main reasons why the new business pipeline didn't convert. One is the program we have to win new business is offering customers sort of medium-term cost savings. And the priority for customers with even what's going on in their businesses at the moment is jam today, safely money today. And the only way you can do that is by reducing prices. And so -- we weren't -- we did go down that route in terms of our new business program. We still believe our medium-term benefit is a way to go in terms of giving customers opportunities going forward. The pipeline is extremely strong. And the other thing that caused customers to not make positive decisions is just uncertainty. So we had a lot of customers where they're very close to the finishing line. But with everything in the world changing on a pre frequent basis at the moment, we find customers just not prepared to actually press the button and go ahead with us. So we're confident these customers have come on stream, and we have seen some early interesting new wins as we go into 2026. So the pipeline is strong, difficulty trying to , but we expect it to come through in 2006 for us.

There's a question on buyback, clearly, covering capital allocations is us not tend to be more aggressive in the buyback given the weakness in the share price.

So Peter, if I answer that one. I mean this year, clearly, our net debt level moves to higher levels than it's been in 5 years, albeit it's still relatively low at GBP 16.2 million. I mean in terms of how we see the cash flows for this year, we see them broadly neutral. We see clearly, there's some recovery and it needs to be done within distribution business in Pitreavie. So there's a lot of work has got to go into those businesses. So that recovery path will generate operating cash flows which will then be consumed in, I suppose, 4 different areas, really, we've got the capital expenditure we have to invest in the business. So we have about GBP 4.5 million allocated for capital expenditure this year to reinvest both in distribution and the manufacturing business to support some of the capacity and growth that we're seeing. We've got GBP 5.8 million, which, as I said earlier, is to maintain the dividend. And I know it's not important to some shareholders, but clearly, a large proportion of our shareholders. Clearly, the dividend is very, very important. So we believe that, that investment in maintaining that dividend is important for those shareholders and the confidence that we see in the business going forward. So that kind of leaves us maintaining our net debt level in lead is something in the order of about GBP 4 million design spend on acquisitions or buybacks. At the moment, we'll be GBP 2.6 million that we have to allocate to the earning payment for Polyformes and clearly, we are looking to complete the buyout program that we've got in play at the moment of GBP 1.9 million. As we move through into next year, then we can start to be a bit more aggressive in the buyback program because clearly, we don't have any acquisition payments in 2027. So depending on where we are strategically from an acquisition point of view, we can -- if the share price remains where it is at the low level as described by the person move raised the question, then we can start to be a bit more aggressive. But we don't intend, I suppose, at this stage, leveraging up the balance sheet to do a buyback at this point. So hopefully, that answers the question on buyback for now.

In terms of the priorities, Peter, you described the priorities around distribution. I suppose I could probably answer this 1 as well. What does success look like in 2026 for package and distribution?

And I think as Peter described the action plans for us, I think success coming to a number of different ways. One successes getting growth back into the business. And we're not looking for spectacular growth, but we are looking for growth around 2% to 3% this year. In terms of Distribution that we pay success, and part of that's going to be the success in converting the new business pipeline, maintaining the gross margins at a level we exited that in 2025, that would be success. And clearly, there's lock to be done on that because the competitive intensity doesn't change as we go into 2026.

And then the third element is there's clearly still inflation coming through in 2026 related to the full year impact of and obviously, continuing impact within inflation and employee costs. So we would still see the operating cost base not going down in 2026, but we want to try and keep it as flat as possible. So I think as we end this year, our nut drop in the operating profit margins from 5% to somewhere between 5% and 6% is where we go for 2025, albeit that enhanced by that 2% to 3% organic growth in sales.

Yes. And thanks, Ivor. The only thing I would add to that is, as we touched on it on earlier questions is demonstrating that new business like line can be executed against, so getting the new business momentum back into the business that we haven't had in 2025.

A good question here clearly on vetted comp events. How do you see the likely impact of the recent oil price spike?

Yes, it's very difficult, and it's probably too early to make any key judgments, but around about 20% of our revenue is holder-related in distribution. So there may be issues around that. The team are working at the moment to understand what the implications are. So I think probably the most obvious implication is going to be potential price pressure on poly products and potentially supply restrictions on panel products. So that's where the sourcing team are focusing their time at the moment to ensure that we can ensure a plea supply line of those products. I mean we buy those products, some from the Middle East some from Turkey and some from the Far East. But at the end of the day, it's polymer and clearly, that's exposed at the moment in terms of Middle East. So that's the most immediate effect not seeing, but we expect to see.

And just to add to that, I mean, clearly, that's the product we buy. I mean, clearly, if you look at fuel costs and kind of say carriage cost, that represents around about 2.5% of our sales. So it's a significant cost and not a cost that went up by 20%, 30%, would cause a significant problem. I think the main challenge will be the impact on our input pricing on the materials that we buy and how we translate that through to customers and to what extent it's a short-term spike versus a long-term change.

Yes.

That's great. Ivor, Peter, if I may, to jump back in there. And thank you for addressing all those questions from investors today. But Peter before we direct investors to provide you with a feedback, which 1 is particularly important to you. Could I please just ask you for a few closing comments.

Yes. So thank you, everyone, for your time this morning. I appreciate you giving up your time for Macfarlane Group. Top 25, I think we explained the reason behind it. The most important thing now is we go our way and go ahead with implementing a recovery plan. Hopefully, you can strike that to you. And when we're confident the business will start the recovery in 2026. And then we see medium-term outlook extremely positive. So that would be the key messages for [indiscernible] to take away from today's session.

Peter, Ivor, thank you once again for updating investors today. Could you please ask investors not to close this session as you will now be automatically redirected to provide your feedback, which will help the company better understand your views and expectations. On behalf of the management team, would like to thank you for attending today's presentation, and good morning you all.