In the six month period, the Group incurred an operating loss of £5.7 million compared to a reported operating profit of £3.9 million in the prior year first half.
Following the appointment of Gareth Jenkins as CEO in September 2017 and the identification of a number of significant issues affecting the Group's performance and financial liquidity, the Company requested a suspension of its shares on 5 October 2017. After engagement with shareholders and development of a series of business recovery action plans, Accrol's shares were relisted on 20 November 2017 in conjunction with a planned share placement of £18 million (gross of expenses) which was approved by shareholders on 8 December 2017. At the same time, the Company renegotiated its banking facilities with revised financial covenants which took account of the projected operating performance of the Group.
As previously announced, this has been a difficult period for the Group and its shareholders and a range of business challenges are now being addressed by a new executive leadership team. These will take some time to resolve but progress is being made.
H1 FY18 financials:
· Revenue increased by 13.1% to £72.3m (H1 FY17: £63.9m)
· Gross profit declined by 34.7% to £11.9m (H1 FY17: £18.2m)
· Adjusted gross margin(1) 10.7% lower at 17.7% (H1 FY17: 28.4%)
· Adjusted EBITDA(2) reduced by £8.7m to a loss of £1.6m (H1 FY17: profit £7.1m)
· Net debt rose by £9.4m to £29.3m (H1 FY17: £19.9m)
December 2017 Placing
Post the half year end, the Company successfully raised £16.8m (net of expenses) by way of a placing.
Statement from Gareth Jenkins, Chief Executive Officer of Accrol
It is with disappointment that, in my first communication to shareholders, I have to address the fact that the performance of and short-term outlook for the Group have been so contrary to prior expectations. I do believe, however, that the capabilities of this business are significant and, if well managed, it can deliver a considerably improved performance in the medium term.
The Group's recent problems have arisen from the combination of adverse factors, including:
· rising input costs – tissue cost growth following upstream pulp cost growth;
· adverse FX – forward hedging of USD for paper purchases protected results immediately after the Brexit inspired Sterling devaluation. Significant ongoing, fixed period USD financial hedges, however, were taken out at rates which have become adverse to current market spot rates. These hedges are negatively impacting the Group's financial performance in the short term; and
· internal cost growth – increases in the fixed cost base as a consequence of the new logistics arrangements at Skelmersdale, the new Leyland plant and changes to shift patterns in mid-2017, at a time when the business was managing an overly complex product portfolio.
As these problems came to light in early in October 2017, action was taken to manage liquidity issues by extending credit from suppliers and reducing inventory levels. Whilst this was necessary under the circumstances, it put additional pressure on supplier relations and on customer service levels.
I am pleased to report that significant progress is being made on tackling these issues:
· the leadership team has been strengthened with Don Coates joining as COO. He has extensive experience in business turn around and operational improvement;
· price increases being negotiated and agreed with customers are starting to impact results positively;
· the product range is being rationalised, the benefits of which should flow through progressively during 2018;
· a number of cost savings initiatives are being pursued, including the previously announced reduction in headcount;
· an increased focus on investing the necessary funds to maintain equipment efficiency; and
· current cash flow projections reflect the improved operating outlook but will also be subject, in the short term, to the adverse FX contracts and the payment for a new operating line, which will be installed at the Leyland plant in the summer of 2018. The combined effect of which is expected to increase net debt modestly until mid 2018 before declining thereafter.
In addition to the foregoing actions, I have met personally the Group's major customers and am encouraged by the positive attitude they have to developing further business opportunities with Accrol, despite the recent service challenges. I have also met the Group's major suppliers. They remain supportive of doing business with Accrol and of working with us on our ongoing product reformulation plans.
Outlook
The Board expects that recent and planned actions will drive Accrol forward. Whilst the Board continues to expect a small loss at the adjusted EBITDA level for the financial year ending 30 April 2018, the Board is comfortable that the Group will continue to operate within its borrowing covenants while work on the turnaround continues and the directors look forward to the longer-term future of Accrol with confidence.
The directors are confident the 12-month restructuring programme being implemented by the Company's new management team, combined with an invigorated focus on the right customers, products, markets and people, will create a much stronger base on which Accrol can rebuild its profitability and, ultimately, shareholder value.
The Board expects the Company to return to profit at adjusted EBITDA level in the year to 30 April 2019. It remains the Board's intention to return to the dividend list at the earliest appropriate opportunity.
Gareth Jenkins, Chief Executive Officer of Accrol, said:
“I believe that actions we are taking and plan to take to effect the turnaround at Accrol will put the business back on track towards its goal of becoming a market leader in the supply of innovative, high quality, tissue based products to the UK's largest retailers and ultimately the consumer. I continue to believe Accrol can achieve this by investing and leading in operational excellence, to ensure that our customers get the best value product with market leading quality and service.”