Macfarlane Group PLC (MACF) Earnings Call Transcript & Summary

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.