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Macfarlane Group PLC (MACF)

Macfarlane Group PLC

Final Results
Macfarlane Group PLC
22 March 2005


Significant reduction in losses before taxation from £18.6m to £0.8m achieved in

                 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 £8.6m with a gain of £3.8m in 2004

          Net debt reduced below £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 £2.1m against £14.1m for 2003. After gains
on property disposals and exceptional items, the 2004 loss before tax was £0.8m
compared with a loss of £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 £121.2m in 2003 to £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

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 £1.4m to exit this business, compared to a rate of operating loss of £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 £32.0m in
the third quarter of 2003 had been reduced to £13.1m at 31 December 2004 and
with the property disposals announced last month, has been further reduced to
£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 £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

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 £6m. The
improvement in results was achieved through :-

•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.

•Increased product range penetration in our existing customer base
 In 2004 the average number of lines purchased by customers was 8 versus 7 in

•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.

•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%

•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 £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

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

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

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

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 £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

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 £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


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 £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:-

   •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.
   •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.
   •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

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        £000           exceptional        £000
                  £000                              £000
                                        £000                              £000
operations     126,075           -   126,075     121,168           -   121,168
operations       1,265           -     1,265       9,803           -     9,803
               -------     -------   -------     -------     -------   -------

Total          127,340           -   127,340     130,971           -   130,971
Cost of        (84,741)          -   (84,741)    (88,757)       (310)  (89,067)
sales          -------     -------   -------     -------     -------   -------

Gross           42,599           -    42,599      42,214        (310)   41,904
Net            (44,669)          -   (44,669)    (51,593)     (4,370)  (55,963)
overheads      -------     -------   -------     -------     -------   -------

OPERATING       (2,070)          -    (2,070)     (9,379)     (4,680)  (14,059)
LOSS           -------     -------   -------     -------     -------   -------

operations        (815)          -      (815)     (6,205)     (4,468)  (10,673)
operations      (1,255)          -    (1,255)     (3,174)       (212)   (3,386)
               -------     -------   -------     -------     -------   -------

OPERATING       (2,070)          -    (2,070)     (9,379)     (4,680)  (14,059)
disposal of          -       3,845     3,845           -        (239)     (239)
fixed assets
Loss on
disposal of
business             -      (1,400)   (1,400)          -      (3,235)   (3,235)
               -------     -------   -------     -------     -------   -------

BEFORE          (2,070)      2,445       375      (9,379)     (8,154)  (17,533)
INTEREST       -------     -------               -------     -------

income                                    94                               152
payable and
charges                               (1,255)                           (1,203)
                                     -------                           -------

TAXATION                                (786)                          (18,584)
Tax on loss
ordinary                                 (75)                            1,354
activities                           -------                           -------

FINANCIAL YEAR                          (861)                          (17,230)
Dividends on
equity                                  (844)                                -
shares                               -------                           -------

FINANCIAL YEAR                        (1,705)                          (17,230)
                                     -------                           -------

Basic and
diluted loss
per ordinary
share                                  (0.77p)                          (15.31p)

Dividends per
share                                   0.75p                              Nil

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 £8.6 million. The disposal gave rise to a gain on
disposal of £3,845,000, which is classed as an exceptional item.
3.        In October 2004, the company incurred an exceptional charge of
£1,400,000 to exit the Brands business, which sustained an operating loss of
£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 £861,000 (2003 - loss of £17,230,000).

                                     Consolidated     As at 31       As at 31
                                  balance sheet       December       December
                                                          2004           2003
                                                          £000           £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
                                                     =========      =========


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
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
                                                        £000              £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
                                                        £000             £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)
                                                   =========        =========


1.             Reconciliation of operating loss to   Year ended 31  Year ended
net cash inflow/(outflow) from operating                December   31 December
                                                            2004          2003
                                                            £000          £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
Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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