Macfarlane Group PLC (MACF) Earnings Call Transcript & Summary

Good morning, and welcome to the Macfarlane Group PLC 2025 Results Investor Presentation. [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 the objective to today is 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 from myself, Ivor will take you through the detailed numbers in terms of the P&L and cash flow. And then I'll talk through the two divisions, Packaging 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 who are new to Macfarlane, 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 split 80% industrial and 20% retail with the 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 through the Polyformes acquisition, but we also saw good organic growth, particularly in the aerospace 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, as you will see in the presentation, we experienced lower margins in our Distribution division. We also saw increased costs, primarily labor and property. And again, we've got detail later on the breakdown of those cost increases. Clearly, a key feature of 2025 was the 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 on 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 you 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% and 10% of that growth was driven by acquisitions, the 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 0.4 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 the adjusted operating profit, 28% 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 sales 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 acquired 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 business faced through the year, but a large proportion of that was the impact of the incident that Peter referred to earlier. And if we move over to the adjusted profit before tax, we had higher interest costs from our bank, but from higher average bank borrowings through the year, and also higher IFRS 16 lease 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 GBP 1.9 million at the end of 2024. So an increase in our bank debt. But as Peter described earlier, well within our GBP 40 million bank facilities and just under 1x 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 estimated historic equalization of pensions, which will need to be connected. But then thankfully, the goal and aim remains the same as what we've discussed before, albeit we're closer to that decision. So the end goal with the pension scheme is to move towards a buy-in. Clearly, a buy-in that priced 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, then we would continue to run the scheme on. In terms of dividends, as 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 flows to support it, and we have confidence in the business going forward. Clearly, if you look at dividend cover on adjusted earnings per share basis, it's just over 2x. And clearly, the elements between the non-adjusted, adjusted are broadly noncash adjustments. So yes, the dividend cover is lower than historic levels, but given that confidence in our -- in the profitabilities going forward and the fact that we can support it with the current cash flows and net debt position of the business. We've decided to maintain the dividend at current levels. 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 that 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 increases in employee cost of which GBP 1.1 million is the kind of enforced NI increases and the balance due to kind 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 costs 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 property 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 measures and alternative profit measures, really, the key things to draw out 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 Pitreavie 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 contingents considerations 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 earn-out payments in the Pitreavie business. Of course, given the performance of the business, we won't be paying any earn-outs in that business, and GBP 1.9 million is related to that pension adjustment that I 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 alternative 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 in working capital and also the noncash impact of the pension adjustment that I referred to earlier. And that cash is being utilized in the year to continue the acquisitions that we did, GBP 17.3 million in terms of acquisition activity, GBP 13.9 million of that related to Pitreavie and the balance related to earn-out payments for Allpack 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 at our GWP business in Swindon. 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 on buying back our shares over a 12-month period, of which GBP 2.1 million of that was 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 exited 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 performances 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 impact of 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 strengthened 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. And probably 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 the 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 one 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 and the minimum wage. We've got property rental increases coming through. And then we had the East 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 at 35%. 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, and 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 describes 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 under GBP 1 million in property costs. If I take the labor cost first, around about GBP 0.75 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 for part of our employee base, there was inflation in another part of our employee base to retain loyalty, 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 East Midlands transition, where we had to use a lot of temporary labor to help us transfer from four sites down to one 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, the dual running of property costs as part of the East Midlands 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 recovering. 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 is under a lot of stress at the moment. It's just very, very competitive. Prices are eroding, margins are 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 higher margins, more sustainable business, and not 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 manufacturing 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 a 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 with local and regional suppliers. And we're looking to actually adjust that balance, and we believe in a time when the supply chain and the suppliers we're dealing with are going through quite big changes 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 and '28. But we still work on warming up opportunities, the gestation period between contact and execution can be 3 to 5 years. So while we won't execute anything in the near term, we are continuing work on 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, one of one 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 Nottingham site and in the site in the Northwest of England that we moved 2, 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've developed. So moving on to our Manufacturing division, our design and manufacturing division. I've taken Pitreavie out of 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 for the reasons which will be apparent to you all. And that gives us extremely good momentum going into 2026, and we see 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 from 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 tragic incident causing one of our colleagues to -- the death of one 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 family 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 it fell into loss. What we were 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, where the incident occurs we have to take out of the business. So we've retained a high degree of customer loyalty, which is really, really positive. And what we also did was very quickly turn around and 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 up and running, not quite -- it's up, it's quite not running in the Pitreavie facility in Cumbernauld. 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 for staff, 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 and no customers is exited, no customers have talked about dual-sourcing going on. And the new machine 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, we only have a part year 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, we're 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 are important, particularly with certain customers who need the accreditations for you to be part of their supplier 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 relatively short distances. So we continue to rollout 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 use 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've mentioned EPR a number of times, I'm sure you'll all be familiar with the challenge of EPR in that retail space. But I think going forward, there is more regulation coming down the pipe. You've got the deforestation regulations and you've got the void fill regulations coming through, all of which are 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 and 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, the surplus has come down principally due to the adjustment that I referred to earlier. The 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 buy out 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 the scheme through a buy-in without drawing further cash from the group. If it required us to put 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 kind of cash flows 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 a commitment 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 which 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 payment 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 a 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 at 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 for the market conditions to be any different. We see the 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 probably 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 Pitreavie business to perform at the level that we expected to do when it was acquired. So from our point of view, 2026 is year one 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 biased very much towards H2, because obviously, Pitreavie in 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 versus 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. Ivor will host.

Yes. So just some of the questions coming through. First question, Peter, is on Distribution business. Clearly, the Distribution business kind of dropped 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 despite the 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 around that 35%, developing the pipeline of opportunities that we are very confident that we can execute this year. We're slightly difficult in 2025 to give ourself 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] pipelines have seen things improved...

There's two 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 everything that's going on in their businesses at the moment is jam today, save me 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 have a lot of customers where they're very close to the finishing line. But with everything in the world changing on a pretty 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 will come on stream, and we have seen some early interesting new wins as we go into 2026. So the pipeline is strong, difficult in 2025, but we expect it to come through in 2026 for us.

There's a question on buyback, clearly, covering capital allocation is, is this not a time 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 moved to higher levels than it's been in prior 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 it needs to be done within Distribution business and Pitreavie. So there's a lot of work that has got to go into those businesses. So that recovery path will generate operating cash flows which will then be consumed in, I suppose, four 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 the dividend, 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 and 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 at GBP 16.2 million leave us something in the order of about GBP 4 million to either spend on acquisitions or buybacks. At the moment, we've got GBP 2.6 million that we have to allocate to the earn-out 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 levels as described by the person who 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 one as well. What does success look like in 2026 for Packaging Distribution? And I think as Peter described the action plans for us, I think success comes in a number of different ways. One success is 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 would be success, and part of that's going to be the success in converting the new business pipeline, maintaining the gross margins at the level we exited that in 2025, that would be success. And clearly, there's work 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 NI 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 exit this year, a nudge up 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 in the earlier question is demonstrating that new business pipeline 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 very current 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 polymer-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 polymer products and potentially supply restrictions on polymer products. So that's where the sourcing team are focusing their time at the moment to ensure that we can ensure a clear 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 we're seeing or not seeing, but we expect to see.

And just to add to that, I mean, clearly, that's the products we buy. I mean, clearly, if you look at fuel costs and our kind of outside carriage cost, that represents around about 2.5% of our sales. So it's a significant cost and not a cost if it 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 just 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 one is particularly important to you. Could I please just ask you for a few closing comments.

Yes. So thank you, everybody, for your time this morning. I appreciate you giving up your time for Macfarlane Group. Top 25, I think we've explained the reasoning behind it. The most important thing now is we get away and go ahead with implementing a recovery plan. Hopefully, we've described that to you. And 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 my point of view to take away from today's session.

Peter, Ivor, thank you once again for updating investors today. Could I 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.