Annual Results 2019

27 February 2020

ANNUAL RESULTS 2019

Macfarlane Group PLC achieved sales of £225.4m in 2019, (2018: £217.3m) a 4% increase on 2018, with 2019 profit before tax growing to £12.0m (2018: £10.9m), 10% ahead of 2018. This marks the tenth consecutive year of profit growth. The performance in 2019 was in line with market expectations and was achieved against a well-publicised backdrop of economic uncertainty resulting in weaker demand.

Packaging Distribution increased sales by 4% in 2019 to £196.7m (2018: £189.8m). Sales revenue from existing customers was impacted by both weaker demand and sales price deflation during 2019 but this was offset by good growth in new business and the benefit of £5.7m from acquisitions. The 2019 acquisitions of Ecopac (U.K.) Limited ("Ecopac") and Leyland Packaging Company (Lancs) Limited ("Leyland") have both performed well since acquisition. Gross margin in Packaging Distribution at 31.1% showed improvement on the prior year (2018: 29.4%) and reflected effective management of input price movements. The growth in sales and gross margin, combined with good cost control, resulted in Packaging Distribution achieving an 11% increase in operating profit before exceptional items to £12.4m (2018: £11.2m) after the impact of IFRS 16 "Leases".

Sales in Manufacturing Operations at £28.7m (2018: £27.5m) grew by 4% on the previous year. Gross margin increased to 39.8% in 2018 compared to 38.4% in 2018 and operating profit before exceptional items in 2019 increased to £1.2m (2018: £0.8m) after the impact of IFRS 16 "Leases".

After net finance costs of £1.6m (2018: £0.8m), Group profit before tax totalled £12.0m, an increase of 10% on 2018. Basic and diluted earnings per share for 2019 were 6.17p (2018: 5.55p) and 6.16p (2018: 5.55p) respectively.

IFRS 16 "Leases"

IFRS 16 'Leases' requires the Group to recognise right‑of‑use assets and lease liabilities on the balance sheet and depreciation on the assets and interest on the lease liabilities in the income statement. Previously, operating leases were off balance sheet and leasing costs were reported in overheads. IFRS 16 has been applied from 1 January 2019, with no requirement to restate comparative figures. Whilst there was no major impact on profit before tax, net assets or cash flows from applying the new standard, there are changes in classifications indicated in note 1.

Dividend

The Board is proposing a final dividend of 1.76 pence per share, amounting to a full year dividend of 2.45 pence per share, a 7% increase on the prior year's dividend of 2.30 pence per share. Subject to the approval of shareholders at the Annual General Meeting on Tuesday 12 May 2020, this dividend will be paid on Thursday 4 June 2020 to those shareholders on the register at Friday 15 May 2020.

Net Bank Debt

The Group's net bank borrowing at 31 December 2019 decreased by £0.5m to £12.7m from £13.2m at the previous year-end. The Group's bank facility of £30.0 million with Lloyds Banking Group is available until June 2022 and accommodates normal working capital requirements as well as supporting acquisition funding.

Pension Scheme

The Group's pension deficit at 31 December 2019 decreased by £3.3m to £6.5m (2018: £9.8m). Although the discount rate decreased, which increased the value of the pension liabilities, this was offset by increases in the value of the scheme's holding in liability-driven investments and its other investments.

Following the High Court judgement involving Lloyds Banking Group pension schemes on 26 October 2018, a charge of £0.3m was made in 2018 as an exceptional item. This represented past service cost in respect of the equalisation of Guaranteed Minimum Pensions ("GMP") benefits between 1990 and 1997. When we refer to items before exceptional items, it excludes these charges, which we believe provides a more meaningful basis for measuring our financial performance in 2018.

Outlook

Commenting on the 2019 results, Stuart Paterson, Chairman, said:

"Continued profit growth over a ten year period confirms the Board's confidence that its consistent strategy of positioning the business to serve key growth markets in the protective packaging sector remains appropriate and continues to be effective.

2020 has started well and profitability in the year to date is ahead of the same period in 2019.

The business will remain focused on the delivery of continued profit growth through the provision for our customers of added-value protective packaging products and services in target market sectors, combined with efficiency improvements and the completion of value-enhancing acquisitions. We will also focus on ensuring that we support our customers in achievement of their sustainability objectives.

Macfarlane Group's performance in 2019 reflects the successful implementation of our strategy and we are confident that the Group will deliver further progress in 2020."

Legal Entity Identifier (LEI): 213800LVRYDERSJAAZ73

Notes to Editors:

·; Macfarlane Group PLC is listed on the London Stock Exchange (LSE: MACF) in the Industrials Sector

·; The company is headquartered in Glasgow, Scotland and has more than 60 years' experience in the UK packaging industry

·; Macfarlane Group's businesses are:

o Macfarlane Packaging is the leading UK distributor of a comprehensive range of protective packaging products

o Labels designs and prints high quality self-adhesive and resealable labels, principally for FMCG companies

o Packaging Design and Manufacture designs and produces protective packaging for high value, fragile products

·; Macfarlane Group employs over 925 people at 31 sites, principally in the UK, but also in Ireland and Sweden.

·; The company has 20,000+ customers in the UK, Europe and the USA providing 600,000+ lines to a wide range of industry sectors including: consumer goods; food manufacturing; logistics; internet retail; mail order; electronics; defence and aerospace.

Macfarlane Packaging Distribution is the leading UK specialist distributor of protective packaging materials. Macfarlane operates a Stock and Serve supply model from 25 Regional Distribution Centres (RDCs) and 3 satellite sites, supplying industrial and retail customers with a comprehensive range of protective packaging materials on a local, regional and national basis.

Competition in the packaging distribution market is from local and regional protective packaging specialist companies as well as national/international distribution generalists who supply a range of products, including protective packaging materials. Macfarlane competes effectively on a local basis through its strong focus on and regular monitoring of customer service, its breadth and depth of product offer and through the recruitment and retention of high-quality staff with good local market knowledge. On a national basis Macfarlane has focus, expertise and a breadth of product and service knowledge, all of which enables it to compete effectively against non-specialist packaging distributors.

Macfarlane benefits its customers by enabling them to ensure their products are cost-effectively protected in transit and storage through the supply of a comprehensive product range, single source Stock and Serve supply, Just In Time delivery, tailored stock management programmes, electronic trading and independent advice on both packaging materials and packing processes.

Macfarlane Packaging Distribution grew sales by 3.6% in 2019. Whilst existing business was impacted by weaker demand conditions and sales price deflation, this was partly compensated for by good new business growth, 11% ahead of levels achieved in 2018. Gross margin in Packaging Distribution was 31.1%, (2018: 29.4%) with the improvement demonstrating our ability to effectively manage input price changes on paper-based products with our customers.

We also continued to deliver the benefit from acquiring high quality packaging distribution businesses - the acquisitions of Ecopac at the start of May 2019 and Leyland at the end of August 2019 both performed well and we benefited from a full year contribution from the 2018 acquisitions.

During 2019 we continued to make steady progress in extending our service into Europe to support a number of our pan-European customers. We also successfully transitioned our business in London from a high cost site in Enfield to a new lower cost facility in Harlow, supported by additional space in Sudbury.

Cost control remained strong and operating profit for Packaging Distribution at £12.4m grew 13.8% versus 2018, representing a return on sales of 6.3% (2018: 5.9%).

Future Plans

2020 plans are focused on continuing to grow sales and improving profitability by the following actions:

l Prioritising our sales activity on the growth potential for protective packaging in key markets - National Accounts in the industrial sector, the e-commerce sector in the retail space and Third Party Logistics ("3PL") operators;

l Demonstrating our ability to add value for customers through further development of our "Significant Six" sales approach to reduce their "Total Cost of Packaging" and support their sustainability objectives;

l Continuing to effectively manage the impact of input price changes on paper-based products;

l Rolling out our new web-based solutions to allow customers access to our full range of products and services;

l Accelerating our "Follow the Customer" programme in Europe;

l Improving our sourcing through strengthening our relationships with key strategic suppliers;

l Implementing further operational savings in logistics by expanding the use of the Paragon vehicle management system and extending our warehouse best practice programme;

l Reducing operating costs by consolidating our property footprint;

l Maintaining the focus on working capital management to facilitate future growth; and

l Supplementing organic growth through completion of further suitable quality acquisitions.

Manufacturing Operations comprises our Packaging Design and Manufacture and our Labels business.

The principal activity of the Packaging Design and Manufacture business is the design, manufacture and assembly of custom-designed packaging solutions for customers requiring cost-effective methods of protecting high value products in storage and transit. The primary raw materials are corrugate, timber and foam. The business operates from two manufacturing sites in Grantham and Westbury, supplying both directly to customers and also through the RDC network of the Packaging Distribution business.

Key market sectors are defence, aerospace, medical equipment, electronics and automotive. The markets in which we operate are highly fragmented with a range of locally based competitors. We differentiate our market offering through technical expertise, design capability, industry accreditations and national coverage through the Packaging Distribution business.

Our Labels business designs and prints self-adhesive labels for major Fast-moving Consumer Goods ("FMCG") customers in the UK and Europe and resealable labels for major customers in the UK, Europe and the USA. The business operates from production sites in Kilmarnock and Wicklow and a sales and design office in Sweden, which focuses on the development and growth of our resealable labels business, Reseal-it.

The Labels business has a high level of dependence on a small number of major customers. Management works closely with these key customers to ensure high levels of service and to introduce product and service development initiatives to achieve competitive differentiation.

2019 sales for Packaging Design and Manufacture were 2% below 2018 due to demand weakness particularly in the automotive sector. However actions to improve operational performance and margins resulted in profitability in 2019 being well above that in 2018. Our sales team has continued to develop a strong pipeline of new customer relationships, which should benefit the business in 2020.

Labels' sales increased by 8% in the year as penetration of our resealable range improved and a number of new business wins were achieved. Despite margin being impacted by the increasingly competitive conditions in the retail sector, profits in the Labels business were similar to 2018.

Future Plans

Priorities for the Manufacturing Operations in 2020 are to:

l Restore Design & Manufacture sales growth in target sectors, Defence, Aerospace and Medical;

l Continue to improve operational efficiency at both Design & Manufacture sites;

l Prioritise new sales activity on our higher added-value bespoke composite pack product range;

l Continue to strengthen the relationship between our Design & Manufacture operations and our Packaging Distribution business to create both sales and cost synergies;

l Accelerate the Reseal-it growth momentum for resealable labels through improved geographic penetration, extending the product range and introducing Reseal-it to new product sectors; and

l Achieve efficiency benefits from recent investments in additional printing capacity and digital printing capability to improve Labels' gross margins.

2020 Outlook

Our sales efforts in 2020 will focus on those segments of the protective packaging market, such as e-commerce, which are forecast to show above average growth rates and those industrial markets where customers recognise the added value brought to their operations by a specialist national protective packaging distributor.

We will continue to add value for customers through our Significant Six Sales Approach and support them in achieving their sustainability objectives.

In 2020 we plan to acquire further good quality protective packaging businesses, improve our geographic coverage, develop new products introduced by recent acquisitions, work more closely with strategic suppliers and improve operational efficiency by leveraging our property and logistics footprint.

Macfarlane businesses all have strong market positions with differentiated product and service offerings. We have a flexible business model and a clear strategic plan incorporating a range of actions, which are being effectively implemented and reflected in our consistent, profitable growth over a ten-year period.

Our future performance is largely dependent on the successful execution of actions to grow sales, increase efficiencies and bring high-quality acquisitions into the Group. We expect 2020 to be another year of progress for Macfarlane Group.

The principal risks and uncertainties faced by Macfarlane Group and factors mitigating these risks are detailed below. These risks are complemented by an overall governance framework including clear and delegated authorities, business performance monitoring and appropriate insurance cover for a wide range of potential risks. There is a dependence on good quality local management, which is supported by an investment in training and development and ongoing performance evaluation.

For highlighted risks shown as çè the risk level has remained broadly similar between 2018 and 2019. In respect of the pension scheme which is marked ê the risk is considered to have reduced in the year, given the balanced structure of the investment profile and recent changes in mortality tables.

Macfarlane Group has carried out an impact analysis and evaluated the potential short to medium-term implications of a no-deal Brexit including reversion to World Trade Organisation tariffs at 31 December 2020. Where practical, we would put in place contingency measures to try to mitigate any immediate effects on the supply chain. As a business with the majority of its trade in the UK, the principal impact on Macfarlane Group of a no-deal Brexit would be reduced levels of business caused by any significant downturn in the UK economy.

There are a number of other risks that we manage which are not considered key risks. The Group is subject to the impact of general economic conditions, including any economic uncertainty the competitive environment and risks associated with business continuity including cyber-security. These are mitigated in ways common to all businesses and not specific to Macfarlane Group.

Viability statement

The Board has considered the Group's viability as part of the ongoing programme to manage risk. Each year the Board reviews the Group's strategic plan for the forthcoming three-year period and challenges the Executive team on the plan's risks. The strategic plan reflects the Group's businesses, which have a broad spread of customers across a range of different sectors with some longer term contracts in place. The assessment period of three years is consistent with the Board's review of Group strategy, including assumptions regarding future growth rates for our business and acceptable levels of performance.

A detailed financial model covering a three year period is maintained and regularly updated. The model is subject to sensitivity analysis which flexes a number of the main assumptions, including future revenue growth, gross margins, operating costs, finance costs and working capital management. The results of flexing these assumptions, both individually and in aggregate, are used to determine whether additional bank facilities will be required during the three year period. The results of the exercise indicated that no additional facilities should be required.

The Board has carried out a thorough assessment of the principal risks facing the Group and how these risks affect the Groups' prospects and the strategic plan. The review includes consideration of the principal risks facing the Group as described on the current and previous page, which could prevent the Group from achieving its strategic plan and the potential impact these risks could have on the Group's business model, future performance, solvency and liquidity over the next three years.

The Directors' assessment has been made with reference to the resilience of the Group and the strength of its financial position, the Group's current strategy, the Board's risk appetite and the Group's principal risks including how these are managed. The Board is confident that the Group's major banking facility which runs until 30 June 2022 would be renewed on terms similar to those currently in place.

Going Concern

The Directors, in their consideration of going concern, have reviewed the Group's future cash flow forecasts and profit projections, which are based on the Directors' past experience and their assessment of the current market outlook for the business. The Group's business activities, together with the factors likely to affect its future development, performance and financial position are set out in the Chairman's Statement and Business Review on pages 1 to 8.

The Group's principal financial risks in the medium term relate to liquidity and credit risk. Liquidity risk is managed by ensuring that the Group's day-to-day working capital requirements are met by having access to banking facilities with suitable terms and conditions to accommodate the requirements of the Group's operations. Credit risk is managed by applying considerable rigour in managing the Group's trade receivables. The Directors believe that the Group is adequately placed to manage its financial risks effectively, despite any economic uncertainty.

The Group's principal banking facility is in place until June 2022. The Directors are of the opinion that the Group's cash forecasts and revenue projections, taking account of reasonably possible changes in trading performance given current market and economic conditions, show that the Group should be able to operate within its current facilities and comply with its banking covenants.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next twelve months. For this reason they continue to adopt the going concern basis in preparing the financial statements.

Cautionary Statement

The Chairman's Statement and the Business Review on pages 1 to 8 have been prepared to provide additional information to members of the Company to assess the Group's strategy and the potential for the strategy to succeed. It should not be relied on by any other party or for any other purpose.

This report and the financial statements contain certain forward-looking statements relating to operations, performance and financial status. By their nature, such statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors, including both economic and business risk factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements.

These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report. Nothing in this Preliminary Announcement should be construed as a profit forecast or an invitation to deal in the securities of the Group.

Responsibility Statement of the Directors

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 31 December 2019. Certain parts of the full Annual Report are not included within this announcement.

The Directors of Macfarlane Group PLC are

S.R. Paterson Chairman

P.D. Atkinson Chief Executive

J. Love Finance Director

R. McLellan Non-Executive Director and Senior Independent Director

J.W.F. Baird Non-Executive Director

A.M. Dunstan Non-Executive Director

To the best of the knowledge of the Directors (whose names and functions are set out above), the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit for the Company and the undertakings included in the consolidation taken as a whole;

The Strategic Report, incorporated into the Directors' Report in the Annual Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

Pursuant to Disclosure and Transparency Rules, Chapter 4, the directors consider that the Company's annual report and financial statement, taken as a whole, are fair, balanced and understandable and provide information necessary for the shareholders to assess the Company's and the Group's position and performance, business model and strategy.

Peter Atkinson John Love

Chief Executive Finance Director

27 February 2020 27 February 2020

Consolidated income statement

For the year ended 31 December 2019

Consolidated statement of comprehensive income

For the year ended 31 December 2019

Consolidated statement of changes in equity

For the year ended 31 December 2019

Consolidated balance sheet at 31 December 2019

Consolidated cash flow statement

For the year ended 31 December 2019

1. General information

The financial information set out herein does not constitute the Company's statutory accounts as defined in Section 435 of the Companies Act 2006 and has been extracted from the full statutory accounts for the years for the years ended 31 December 2019 and 2018.

The financial statements for 2019 were approved by the Board of Directors on 27 February 2020. The auditor's report on the statutory financial statements for the year ended 31 December 2019 was unqualified pursuant to Section 498 of the Companies Act 2006 and did not contain a statement under sub-section 498 (2) or (3) of that Act.

The financial information for 2018 is derived from the statutory accounts for 2018 which have been delivered to the registrar of companies. The previous auditor has reported on the 2018 accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

Adoption of new IFRSs

The only major change from the adoption of new IFRS's in 2019 is in respect of the adoption of IFRS 16 'Leases'. This is the first set of Group financial statements where IFRS 16 'Leases' has been applied, with an initial application date of 1 January 2019. IFRS 16 introduces significant changes to lessee accounting by removing the distinction between operating and finance leases, requiring the recognition of a right‑of‑use asset and a lease liability at commencement for all leases, except for short‑term leases and leases of low value assets.

The Group has a large number of property and equipment leases. Details of the Group's accounting policies under IFRS 16 are set out below, followed by a description of the impact of adopting IFRS 16. Judgements applied in the adoption of IFRS 16 included determining the lease term for those leases with termination or extension options and determining an incremental borrowing rate where the rate implicit in a lease could not be readily determined.

The Group recognises a right‑of‑use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short‑term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these short-term or low value leases, the Group recognises the lease payments as an operating expense disclosed in administrative expenses on a straight‑line basis over the term of the lease.

For all other leases, the lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

Lease liabilities are presented on two separate lines in the consolidated balance sheet for liabilities due within one year and liabilities due after more than one year. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the liability by payments made. The Group remeasures the lease liability (and adjusts the related right‑of‑use asset) whenever the lease term has changed or a lease contract is modified and the lease modification is not accounted for as a separate lease. The Group did not make any such adjustments during the period presented.

Right‑of‑use assets comprise the initial measurement of the corresponding lease liability, lease payments made at, or before, the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Right‑of‑use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right‑of‑use asset reflects that the Group expects to exercise a purchase option, the related right‑of‑use asset is depreciated over the useful life of the underlying asset. Depreciation starts at the commencement date of the lease.

As a practical expedient, IFRS 16 permits a lessee not to separate non‑lease components, and instead account for any lease and associated non‑lease components as a single arrangement. The Group has not used this practical expedient and has separated out the non-lease components for its leases. These non-lease components, typically servicing and maintenance costs, have been recognised as an expense on a straight‑line basis and disclosed in administrative expenses in the consolidated income statement.

The Group has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative information. For leases previously treated as operating leases, the Group has elected to follow the approach in IFRS 16.C8(b)(ii), whereby right of use assets are set equal to the lease liability, adjusted for prepaid or accrued lease payments, including un‑amortised lease incentives.

The Group's incremental borrowing rates applied to lease liabilities as at 1 January 2019 range between 2.75% and 4.0%.

As part of the Group's adoption of IFRS 16 and application of the modified retrospective approach to transition, the Group elected to use the following practical expedients:

• a single discount rate has been applied to assets with reasonably similar characteristics; and

• hindsight has been used in determining the lease term.

Former operating leases

IFRS 16 changes accounting for leases previously classified as operating leases under IAS 17, which were off‑balance sheet. Applying IFRS 16, for all leases, the Group now recognises right‑of‑use assets and lease liabilities in the consolidated balance sheet, initially measured as described above. Lease incentives are recognised as part of the measurement of the right‑of‑use assets and lease liabilities, whereas under IAS 17 they resulted in the recognition of a lease incentive liability, amortised as a reduction of rental expenses on a straight line basis.

Right‑of‑use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets.

Under IFRS 16 the Group recognises depreciation of right‑of‑use assets and interest on lease liabilities in the consolidated income statement, whereas operating leases previously gave rise to leasing costs in administrative expenses.

The Group now separates the total cash paid for on balance sheet leases into a principal portion (part of financing activities) and interest (part of operating activities) in the consolidated cash flow statement. Under IAS 17 operating lease payments were presented as operating cash outflows.

Former finance leases

This change has not had a material effect on the Group's consolidated financial statements. 

The table below sets out the adjustments recognised at 1 January 2019, the date of initial application.

The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to lease liabilities recognised at 1 January 2019.

Movements in lease liabilities are set out in note 9.

The application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and interest expense compared to IAS 17. During 2019, for all leases the Group recognised the following amounts in the consolidated income statement.

2. Basis of preparation

The Group's business activities, together with the factors likely to affect its future development, performance and financial position are set out on pages 1 to 9.

The Group's principal financial risks in the medium term relate to liquidity and credit risk. Liquidity risk is managed by ensuring that the Group's day-to-day working capital requirements are met by having access to committed banking facilities with suitable terms and conditions to accommodate the requirements of the Group's operations. Credit risk is managed by applying considerable rigour in managing the Group's trade receivables. The Directors believe that the Group is adequately placed to manage its financial risks effectively, despite any economic uncertainty.

The Group's has a committed borrowing facility of £30 million with Lloyds Banking Group PLC in place until June 2022. The facility bears interest at normal commercial rates and carries standard financial covenants in relation to interest cover and levels of headroom over certain trade receivables of the Group.

The Directors are of the opinion that the Group's cash forecasts and revenue projections, which they believe are based on prudent market data and past experience taking account of reasonably possible changes in trading performance given current market and economic conditions, show that the Group should be able to operate within the current facility and comply with its banking covenants.

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next twelve months. For this reason they continue to adopt the going concern basis in preparing the financial statements for the year ended 31 December 2019.

Key sources of estimation uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the year. Due to the nature of estimation, the actual outcomes may well differ from these estimates. No significant judgements have been made in the current or prior year.

The key sources of estimation uncertainty that have a significant effect on the carrying amounts of assets and liabilities are discussed below:

Retirement benefit obligations

The determination of any defined benefit pension scheme liability is based on assumptions determined with independent actuarial advice. The key assumptions used include discount rate, inflation rate and mortality assumptions, for which a sensitivity analysis is provided in Note 10. The directors consider that those sensitivities represent reasonable sensitivities which could occur in the next financial year.

Valuation of trade receivables

The provision held against trade receivables is based on applying an expected credit loss model and related estimates of recoverable amounts. Whilst every attempt is made to ensure that the provision held against doubtful trade receivables is as accurate as possible, there remains a risk that the provision may not match the level of debt, which ultimately proves uncollectable. An increase in the average default rate of trade receivables beyond terms from 1.04% to 3.12% above the historic loss rates observed would lead to an increase in the provision recognised of £600,000.

3. Segmental information

The Group's principal business segment is Packaging Distribution, comprising the distribution of packaging materials and supply of storage and warehousing services in the UK. This comprises over 85% of Group revenue and profit. The Group's Manufacturing Operations segment comprises the design, manufacture and assembly of timber, corrugated and foam-based packaging materials in the UK, the design, manufacture and supply of self-adhesive labels to a variety of FMCG customers in the UK & Europe and the design, manufacture and supply of resealable labels to a variety of FMCG customers in the UK, Europe and the USA. None of the individual business segments within Manufacturing Operations represents more than 10% of Group revenue or profit.

Exceptional item Guaranteed Minimum Pension ("GMP") equalisation

As reported in the 2018 Annual Report, following the High Court judgement involving Lloyds Banking Group in October 2018, the Directors made the judgement that the estimated effect of Guaranteed Minimum Pension ("GMP") equalisation on the Group's pension liabilities was a past service cost for pensionable service between 1990 and 1997 that should be reflected as an exceptional item. Any subsequent change in estimate will be recognised in other comprehensive income. The judgement was based on the fact that pension liabilities for the Group's pension scheme at 31 December 2017 did not include any amounts for GMP equalisation.

Accordingly, an exceptional cost of £330,000 was recognised in the 2018 financial statements as a past service cost in respect of the equalisation of GMP benefits. We believe that this classification as an exceptional cost provides a more meaningful basis for measuring the 2018 financial performance. 

Interest on leases in 2019 includes the interest on all leases following the transition to IFRS 16 'Leases'. Interest in 2018 only includes the interest on finance leases under IAS 17 'Leases'.

The standard rate of tax based on the UK average rate of corporation tax is 19.0%. Taxation for other jurisdictions is calculated at the rates prevailing in these jurisdictions.

The actual tax charge for the current and previous year varies from the standard rate of tax on the results in the consolidated income statement for the reasons set out in the following reconciliation:-

A proposed dividend of 1.76p per share will be paid on 4 June 2020 to those shareholders on the register at 15 May 2020. This is subject to approval by shareholders at the Annual General Meeting on 12 May 2020 and therefore has not been included as a liability in these financial statements.

7. Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

On 2 May 2019, the Group's subsidiary, Macfarlane Group UK Limited acquired 100% of the issued share capital of Carnweather Limited, the parent company of Ecopac, for a maximum consideration of approximately £3.9 million. £3.1 million was paid in cash on acquisition. The deferred consideration of £0.8 million is payable in 2020, subject to certain trading targets being met in the twelve month period ending on 30 April 2020.

On 30 August 2019, Macfarlane Group PLC acquired 100% of the issued share capital of Leyland, for a maximum consideration of approximately £3.05 million. £2.00 million was paid in cash on acquisition with shares to the value of £0.25m issued to the Vendors on acquisition. Deferred consideration of £0.8 million is payable 2020, subject to certain trading targets being met in the twelve month period ending on 31 August 2020. 

Contingent considerations are recognised as a liability in trade and other payables and are remeasured to fair value of £1.6 million at the balance sheet date based on a range of outcomes between £Nil and £1.6 million. Trading in the post-acquisition periods to 31 December 2019 supports the remeasured value of £1.6m.

In 2018, Macfarlane Group UK Limited acquired 100% of Tyler Packaging (Leicester) Limited for a consideration of approximately £2.1 million. £1.5 million was paid in cash on acquisition, with the deferred consideration of £0.6 million paid in 2019, as trading targets were met in full. In 2018 Macfarlane Group UK Limited also acquired 100% of Harrisons Packaging Limited for a maximum consideration of approximately £2.8 million. £1.8 million was paid in cash on acquisition. Of the maximum deferred consideration of £1.0 million, £0.6 million was paid in 2019, reflecting the results in the trading year after acquisition and £0.4 million was released to the income statement.

The impact of the acquisitions on the 2019 results is set out in the Strategic Report on page 3.

All the businesses detailed above are part of the Packaging Distribution segment. Goodwill arising on the acquisitions is attributable to the anticipated future profitability of the distribution of Group product ranges and anticipated operating synergies from future combinations of activities in the Packaging Distribution network.

Fair values assigned to net assets acquired and consideration paid and payable are set out below:-

Cash and cash equivalents (which are presented as a single class of asset on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with maturity of three months or less.

10. Pension scheme

Macfarlane Group PLC sponsors a defined benefit pension scheme for certain active and former UK employees - the Macfarlane Group PLC Pension & Life Assurance Scheme (1974) ("the scheme").

The scheme is administered by a separate Board of Trustees composed of employer nominated representatives and member nominated Trustees and is legally separate from the Group. The assets of the scheme are held separately from those of the Group in managed funds under the supervision of the Trustees. The Trustees are required by law to act in the interest of all classes of beneficiary in the scheme and are responsible for investment policy and the day-to-day administration of benefits. The scheme was closed to new entrants during 2002.

The scheme provides qualifying employees with an annual pension of 1/60 of pensionable salary for each completed year's service on attainment of a normal retirement age of 65. Pensionable salaries were frozen for the remaining active members at the levels current at 30 April 2009 with the change taking effect from 30 April 2010 and as a result no further salary inflation applies for active members who remained in the scheme. Active members' benefits also include life assurance cover, albeit the payment of these benefits is at the discretion of the scheme's Trustees.

On withdrawing from active service a deferred member's pension is revalued from the time of withdrawal until the pension is drawn. Revaluation in deferment is statutory and since 2010 has been revalued on the Consumer Price Index ("CPI") measure of inflation. Revaluation of pensions in payment is a blend of fixed increases and inflationary increases depending on the relevant periods of accrual of benefit. For pensions in payment, the inflationary increase is currently based on the Retail Price Index ("RPI") measure of inflation or based on Limited Price Indexation ("LPI") for certain defined periods of service.

During 2012, Macfarlane Group PLC agreed with the Board of Trustees to amend benefits for pensioner, deferred and active members in the defined benefit pension scheme by offering a Pension Increase Exchange ("PIE") option for deferred and active members at retirement after 1 May 2012.

Balance sheet disclosures

The fair value of scheme investments, the present value of scheme liabilities and expected rates of return are based on the results of the actuarial valuation as at 1 May 2017, updated to the year-end.

The Trustees review the investments of the scheme on a regular basis and consult with the Company regarding any proposed changes to the investment profile. Liability-Driven Investment Funds are intended to provide a match of 100% against the impact of movements in inflation on pension liabilities and a match of 80% against the impact of movements in interest-rates on pension liabilities. During 2019 adjustments were made between investments to bring the overall allocations into line with the Trustees' strategic asset allocation.

The ability to realise the Scheme's investments at, or close to, fair value was considered when setting the investment strategy. 86% of the Scheme's investments can be realised at fair value on a daily or weekly basis. The remaining assets have monthly or quarterly liquidity, however, whilst the income from these helps to meet the Scheme's cash flow needs, they are not expected to require to be realised at short notice.

The present value of the scheme liabilities is derived from cash flow projections over a long period of time and is thus inherently uncertain.

The scheme's liabilities were calculated on the following bases as required under IAS 19:

In 2018, the Directors have made the judgement that the estimated effect of GMP equalisation on the Group's pension liabilities is a past service cost in respect of pensionable service between 1990 and 1997. The average uplift for GMP service for impacted members has been reflected through the consolidated income statement as an exceptional item as set out in note 3, with any subsequent changes in the estimate to be recognised in other comprehensive income. This treatment is based on the fact that the reported pension liabilities for the scheme as at 31 December 2017 did not include any amount in respect of GMP equalisation.