The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

22 January 2019

Accrol Group Holdings plc

("Accrol", the "Group" or the "Company")

HALF YEAR RESULTS

Turnaround delivering profitability on a monthly basis post half year end

Accrol Group Holdings plc (AIM: ACRL), the UK's leading independent tissue converter, announces its Half Year Results for the six months to 31 October 2018 ("H1 19" or the "Period").

The operational aspects of the comprehensive turnaround initiated in February 2018 were substantially completed by the Period end. The financial benefits of the changes we have implemented are beginning to accrue and are starting to flow through to the bottom line. This return to profitability on a monthly basis, positions the Group well to deliver the Board's revised performance expectations for FY 19 and beyond, as detailed in the announcement titled "Trading Update" which was announced on 8 January 2019, RNS Number: 4372M (the "8 January 2019 Trading Update").

Key financials:

¹ Adjusted gross profit which is defined as gross profit before exceptional items and includes losses on derivatives contracts is a non GAAP metric used by management and is not an IFRS disclosure.

² Adjusted EBITDA which is defined as profit before finance costs, tax, depreciation, amortisation, share based payments and exceptional items is a non GAAP metric used by management and is not an IFRS disclosure.

 Analysis of consumer revenue:

Consumer revenue comprises retail sales of Toilet Tissue, Kitchen Towel and Facial Tissue. It excludes discontinued operations, namely Accrol's "Away From Home (AFH)" business.

H1 19 Highlights:

Current trading and outlook:

Dan Wright, Chairman of Accrol, said:

"The business has changed beyond recognition since February 2018 and will exit the current financial year in a much stronger position operationally than it has ever been in before. We have delivered a highly complex restructuring, whilst absorbing a 29% increase in average tissue prices and now expect to deliver profit for the full year to 30 April 2019.

"Knowing the scale and complexities of the task in hand, I am very pleased with the outcomes achieved internally to date.  My only disappointment is that, as previously announced, we are, in effect, three months behind where we expected to be on the financial recovery. Thank you to everyone who has been involved in the turnaround; your contribution is highly valued. I believe Accrol has a bright future; one in which the Group delivers better levels of return throughout fluctuating macro-economic cycles. Whilst I recognise the ongoing macro-economic challenges, I am confident that we are through the main challenges that the business faced in this difficult period and the signs going forward look positive."

Gareth Jenkins, Chief Executive Officer of Accrol, said:

"This is one of the most challenging business turnarounds in which the leadership team and I have ever been involved. Whilst most of the issues we have faced are familiar to the team, it is highly unusual to face so many issues in a single business, at the same time and at such a pace.  I am pleased to say that the major actions are now behind us and we are beginning to see results.  We will never become complacent; ongoing success in the tissue conversion sector requires nothing less than operational excellence.  As a Board, we are convinced that we have created a more robust business with strong foundations on which to build and, whilst I am sure there will be challenges ahead, the Group is on a significantly improved path."

Notes to Editors

Accrol Group Holdings plc, based in Lancashire, is a leading tissue converter and supplier of toilet rolls, kitchen rolls and facial tissues, as well as other tissue products, to major discounters and grocery retailers throughout the UK. 

Accrol operates from three sites:

OPERATIONAL REVIEW

I am pleased to report the Group's results for the six months to 31 October 2018, a period of considerable change for the business which has resulted in a return to profitability, on a monthly basis, post the Period end.

Results

In the six-month to 31 October 2018, the Group reported revenues of £57.6m (H1 18: £72.3m). Consumer revenues (excludes discontinued AFH revenue) were £53.9m (H1 18: £55.8m).  Adjusted gross margin of 17.2% (H1 18: 17.9%) despite absorbing 29% price increases in average tissue prices.  Adjusted EBITDA loss was reduced to £1.1 million improving from a loss in H2 18 of £4.5 million.   Revenue from our core customers (top 10) increased by 11% from £47.3m to £52.5m during the Period, as the positive impact of new contracts began to flow through towards the half year end.

Margins have continued to strengthen post Period end, as price increases achieved across the business begin to impact day to day trading fully.

As announced on 8 January 2018, exceptional costs associated with executing the turnaround continue to be incurred and these were higher than expected in H1 19 at £4.4m.  Given the scale and speed of the turnaround, the exceptional costs incurred by Accrol are not out of the ordinary. These exceptional costs cover the following:

With most of the cash cost already incurred in the Period and many of the exceptional costs having ended or being due to end in Q4 19, the business can look forward with confidence. Exceptional costs will not exceed the c.£8 million figure, detailed in the 8 January 2019 Trading Update.

Net debt as at 31 October 2018 was reduced to £22.6m and management expect FY19 year-end net debt to be no more than £30.0m (FY18: £33.8m), which is a result of improved working capital management.

It is not the Board's intention to return to the dividend list in the short term.

Turnaround update

The scale and complexity of the turnaround programme commenced in February 2018 must not be underestimated. Our aim, however, was simple: to build a robust, agile and market-leading business, capable of delivering growth and acceptable levels of return to shareholders in the toughest economic conditions.

Every element of the organisation has now been reviewed and changed in some way, to maximise the Group's commercial opportunities and deliver financial and operational efficiencies.  In summary, we have focused on and delivered a successful outcome on the following:

All these improvements have been achieved without the loss of a single customer of size.  The business, however, continues to challenge and exit poor margin business as it progresses back to the reasonable levels of return.

A new line at the Group's Leyland facility was commissioned in September 2018. This started to deliver significant output improvements by late December 2018, which are supporting our growth ambitions. The Group's productivity has improved by 76% since September 2018, supported by an ongoing comprehensive training programme which reaches right across the business.

In addition, we are advancing on the planning and implementing a new, cloud-based IT system, which will provide an end to end solution by early Q1 FY20. This will deliver, on a timely basis, the appropriate levels of financial reporting needed to run the business efficiently and effectively and enables us to achieve our goal of operational excellence.

This is, undoubtedly, one of the most complex business turnarounds that this highly experienced leadership team has ever undertaken but all major changes have now been implemented and, in the most part, concluded successfully.

Macro Headwinds

As previously announced, the industry generally has endured a rapid and unprecedented rise in the price of parent reels over the last 12 months. The primary cause of this rise was increasing upstream pulp costs, which was due, in large part, to a global supply and demand squeeze exacerbated by the closure of certain pulp production facilities.  The industry has been ineffective at passing on such increases in the past. Over the last 12 months, we have led the market in the recovery of rising input costs.

Whilst further recovery of historic input cost increases is planned in Q4 19, a period of input costs stability is forecast by the industry for the next 12 months.

Our markets

The UK tissue market is worth c.£1.5 billion and it continues to increase in line with population growth. The private label element of the industry, however, continues to take market share from the best-known brands, delivering 8% growth year on year (Source: Kantar).  With the leading discounters outperforming the market further with reported tissue sales growth in excess of 12% year on year (Source: Kantar).

Accrol remains the largest independent supplier of Toilet Roll and Kitchen Towel in the UK, supplying three of the top four retailers and all the major discounters. The business is in a strong position to deliver further growth, profitably, in the UK market.

People and the Board

As noted above, the business has undergone enormous change in respect of its workforce and management over the past 11 months. More recently, Mark Dewhurst joined the business in September 2018 as Chief Operating Officer having previously been employed by DS Smith Packaging as their Northern European Operations Director, he comes with an exceptional track record of delivering operational improvements.  We continue to review progress and will make further improvements across the Group as necessary. 

The Board was strengthened further in the period under review with the appointment of two new non-executive directors. Euan Hamilton joined the Board in August 2018, as Chairman of the Remuneration Committee. He is an international financier with over 35 years' experience. Simon Allport joined in October 2018 and is Chairman of the Audit Committee. He has 32 years' experience in the professional services industry, rising to managing partner for the North of England and Scotland at Ernst & Young.

As announced this morning, Steve Townsley has today stepped down from the Board and his role as Chief Financial Officer for health reasons. Steve has played a short but important role in the turnaround and we wish him well. Hannah Argo, who joined the Group on 10 January 2019, has been appointed Interim CFO. Hannah has extensive experience in senior financial roles gained with a number of global Blue Chip FMCG and Pharma businesses, including Alliance Boots, Robert McBride's and latterly Tulip UK. Her all-round business knowledge and a strong commercial focus are well suited to the Group's current needs and we look forward to working with her.

The Board now comprises, Dan Wright (Executive Chairman), Gareth Jenkins (Chief Executive Officer), Euan Hamilton (Non-Executive), & Simon Allport (Non-Executive) and plans to commence a process to find a new permanent Chief Financial Officer in due course.

Outlook

In the 8 January 2019 Trading Update, the Board announced that, whilst the Group was transformed operationally in 2018, the continued weakening of Sterling against USD and increasing tissue prices was currently impacting FY19 profitability by c.£5m. Should higher input costs prevail, the Board identified a further possible impact on input costs before the full year end of c.£3.5m.  Given a potential increase of c.£8.5m in input costs, the Board's expectations on adjusted EBITDA in FY19 were reduced to c.£1.0m with exceptional costs at c.£8.0m.

Input costs have increased by 29% from 31 October 2017 to 31 October 2018. Despite these exceptional circumstances, we have continued to grow margins and improve returns, albeit small improvements to date. The Board expects that the structural cost savings delivered in H1 19, however, will deliver substantial benefits in the next financial year. The Board and management team continues to seek further improvements to the business and remains committed to delivering a business which can deliver better levels of return to shareholders, despite difficult and fluctuating macro trading conditions.  

The Group has undergone a dramatic transformation in 2018. The comprehensive operational and commercial changes we have implemented have created solid foundations on which to grow the Group's margins. As such, the Board continues to expect the Company to return to profitability at the adjusted EBITDA level in the year to 30 April 2019 and views the future with confidence.

Gareth Jenkins

22 January 2019

Consolidated Interim Income Statement
For six months ended 31 October 2018

Consolidated Interim Statement of Comprehensive Income

For six months ended 31 October 2018

Consolidated Interim Balance Sheet

For six months ended 31 October 2018

Consolidated Interim Statement of Changes in Equity
For six months ended 31 October 2018

Consolidated Interim Cash Flow Statement
For six months ended 31 October 2018

The notes below form part of these condensed interim financial statements.
 

Notes to the Interim Financial Statements
For six months ended 31 October 2018

1.      General Information

Accrol Group Holdings plc (the "Company") and its subsidiaries (together "the Group") is incorporated in the United Kingdom with company number 09019496.

The registered address of the Company is the Delta Building, Roman Road, Blackburn, United Kingdom, BB1 2LD.

The Company's shares are quoted on the Alternative Investment Market.

The principal activity of the Company and its subsidiaries (together the 'Group') is soft paper tissue conversion.

The condensed consolidated interim financial information was approved and authorised for issue by a duly appointed and authorised committee of the Board of Directors on 22 January 2019.

This condensed interim financial information has not been audited or reviewed by the Company's auditor.

Forward looking statements

Certain statements in this results announcement are forward looking. The terms "expect", "anticipate", "should be", "will be" and similar expressions identify forward-looking statements. Although the Board of Directors believes that the expectations reflected in these forward-looking statements are reasonable, such statements are subject to a number of risks and uncertainties and events could differ materially from these expressed or implied by these forward-looking statements.

2.      Basis of preparation

This condensed consolidated interim financial information for the six months ended 31 October 2018 should be read in conjunction with the group's Annual Report and Accounts for the year ended 30 April 2018, prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU ('Adopted IFRSs'), IFRIC Interpretations and the Companies Act 2006.

The interim financial statements included in this report are not audited and do not constitute statutory accounts within the meaning of the Companies Act 2006. The Annual Report and accounts for the year ended 30 April 2018 have been filed with Companies House. The Group's auditor, PricewaterhouseCoopers LLP have reported on those accounts, their report was unqualified but did include a statement regarding material uncertainty in relation to going concern.

The interim financial statements have been prepared on a going concern basis and on the historical cost convention modified for the revaluation of certain financial instruments.

The Group has recently agreed revised bank covenant tests for the revolving credit facility that underpins its borrowings. In assessing the Group's ability to continue as a going concern, the Board has reviewed the Group's cash flow and profit forecasts against these covenants. The impact of potential risks and related sensitivities to the forecasts were considered in assessing the likelihood of a breach of the covenants, whilst identifying what mitigating actions are available to the Group to avoid a potential breach.

The Group's performance is dependent on a number of market and macroeconomic factors particularly the sensitivity to the price of parent reels and the sterling/USD exchange rate which are inherently difficult to predict. In addition, the significant activity in restructuring and re-positioning the operational and commercial side of the business increase the uncertainty in future forecasts.

The Directors have confirmed that, after due consideration, they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

3.      Accounting Policies

The accounting policies applied in preparing the unaudited interim financial statements are consistent with those used in preparing the statutory financial statements for the year ended 30 April 2018 as set out in the Group's Annual Report and Accounts.

In these unaudited half year results two new standards are effective from 1 May 2018 - IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.

IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets.  The Group has assessed the qualification criteria for hedge accounting and has concluded that hedging relationships that qualified under IAS 39 will continue to do so under IFRS 9.

The Group has reviewed the five-step process of IFRS 15, including the impact of the performance obligation criteria and the determination of the transaction price on the timing and value of revenue.   In these unaudited statements the Group has adopted the cumulative effect method and no adjustments have been made on transition.

4.      Revenue

The Group has one type of revenue and class of business.

The analysis of geographical area of destination of the Group's revenue is set out below:

5.      Exceptional Items

The exceptional costs are further described below.  For the current period, £2,990,000 is included within cost of sales and £1,448,000 in included within administration expenses.

Six months ended 31 October 2018

Surplus waste - £1,431,000

Since the start of calendar year 2018, the business has implemented a large-scale turnaround programme, including significant headcount reduction, the introduction of new suppliers and the installation of a new production line in Leyland which has led to an abnormal level of waste levels.  These amounts are identified as exceptional because of their significance in terms of quantity and their non-recurring nature.

As we move out this period of unprecedented change, a waste reduction programme has been implemented and we are already seeing improvement post the period of reporting.

Reorganisation costs (people) - £1,086,000

This includes additional head count during the transition out of Away From Home (AFH), to allow the intensive training programme embarked upon, the additional labour costs for the new line installation in Leyland, the redundancy costs as part of the re-structuring and exit of AFH, and external engineering resources used to bring the machines up to a minimum standard and for the upgrades made across much of the asset park.

Reorganisation costs (operations) - £740,000

Included in this category are additional set up costs for the new line in Leyland, additional shunting costs as we moved stock around the network of warehousing as we re-racked the sites to allow all finished goods to housed onsite and the early exit from the NFT warehousing agreement.

Consultancy fees - £966,000

This comprises the legal and business consultation costs incurred as the business needed to engage a significant number of external professionals to cover several contractual renegotiations and additional interim resources to action the numerous transformational projects.

Six months ended 31 October 2017

Set up costs relating to the new finished goods warehouse at Skelmersdale of £225,000 were classified as exceptional as these were additional to normal and ongoing costs relating to the warehousing of stock.

Redundancy and restructuring costs of £343,000 related mainly to the change in CEO in the period.

Loss on derivatives of £891,000 relate to hedges deemed ineffective in the period.

Other costs include £254,000 relating to arose due to commercial decisions taken to release the value in working capital despite the short-term cost and the Health and Safety Executive fine of £120,000.

6.      Earnings per share

The basic earnings per share is calculated by dividing the loss attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share is calculated by dividing the loss after tax by the weighted average number of shares in issue during the year, adjusted for potentially dilutive shares.

The following reflects the income and share data used in the basic earnings per share calculation:

For the periods above, no adjustment has been made to the weighted average number of shares for the purpose of the diluted earnings per share calculation as the effect would be anti-dilutive.

7.      Finance costs

8.      Taxation

The taxation credit is recognise based on management's best estimate of the weighted average annual tax rate expected for the full financial year.

The tax credit for the period has been calculated at an effective rate of 16.8% (half year ended 31 October 2017: 15.6%; year ended 30 April 2018: 17.1%. The differences to the standard rate of 19% are due to the timing of anticipated realisation of deferred tax assets. As at 31 October 2018 the Group has recognised a deferred tax asset of £2,001,000 in relation to current and prior year losses on the basis that, following a review of forecasts, management expect that these will be recovered against future taxable profits

During the period the Group recognised the following deferred tax (assets) / liabilities:

9.      Intangible assets

The balance for Goodwill and Customer relationships arose on the Group's Acquisition of Accrol Holdings Limited and are attributed to the sole cash-generating unit ('CGU').

10.    Borrowings

The following amounts remain undrawn and available

11.    Financial instruments

Derivative financial instruments represent the Group's forward foreign exchange contracts. The assets/(liabilities) representing the valuations of the forward foreign exchange contracts at the period end are:

The fair value of a derivative financial instrument is split between current and non-current depending on the remaining maturity of the derivative contract and its contractual cash flows. The foreign currency contracts are designated as hedged accounted at initial recognition. The fair value of the Group's foreign currency derivatives is calculated as the difference between the contract rates and the mark to market rates which are current at the balance sheet date. This valuation is obtained from the counterparty bank and at each period end is categorised as a Level 2 valuation. The maximum exposure to credit risk is the fair value of the derivative as a financial asset.

12.    Provisions

Onerous contract provisions of £3,064,000 as at 31 October 2018 relate to the decision to exit from the Skelmersdale facility and logistics agreement (30 April 2018: £3,164,000).  Of the current year total, £738,000 is due in less than one year is £2,326,000 in due greater than one year.

13.    Share capital and reserves

The number of ordinary shares in issue is set out below:

Each holder of the £0.001 Ordinary Shares is entitled to vote at general meetings of the Company. Every holder of an Ordinary Share shall have one vote for each Ordinary Share held.

On 1 June 2018 53,333,334 £0.001 Ordinary Shares were issued and on 8 June 2018 a further 12,901,200 Ordinary Shares of £0.001 were issued at £0.15 per share. Net proceeds of £9,249,000 increased share capital as at 31 October 2018 by £66,000 to £195,000 and share premium by £9,183,000 to £68,015,000.

14.    Share Based Payments

During the period awards were made over the company's Ordinary Shares under the Accrol Group Holdings plc unapproved share option plan. The total number of awards under option at 31 October 2018 is 51,907,213. The fair value of the awards has been calculated and a charge of £493,000 has been recognised in the Income Statement with the corresponding credit to retained earnings.

15.    Dividends

The Board will not pay an interim dividend for the year ending 30 April 2019 (H1 FY18: 2 pence per share, totalling £3,720,000).

16.    Related party disclosures

(a) Identity of related parties

The Company's significant shareholders include NorthEdge Capital LLP and members of the Hussain family. Phoenix Court Blackburn Limited is a company under the control of the Hussain family providing commercial premises for letting.

The subsidiaries of the Group are as follows: 

(b) Transactions with related parties

The following table provides the total amounts charged for the relevant financial periods:

Terms and conditions of transactions with related parties

Purchases from related parties are made at normal market prices. Outstanding balances at the year-end are unsecured, interest free and settlement occurs in cash. There have been no guarantees provided for any related party payables.

As at 31 October 2018, 31 October 2017 and 30 April 2018, no amounts are owed to/from related parties.

17.    Non-GAAP measures

Adjusted earnings per share

The adjusted earnings per share is calculated by dividing the adjusted earnings attributable to ordinary equity holder of the parent by the weighted average number of ordinary shares outstanding during the year. The following reflects the income and share data used in the adjusted earnings per share calculation.

For the periods above, no adjustment has been made to the weighted average number of shares for the purpose of the diluted earnings per share calculation as the effect would be anti-dilutive.