Peter Cheung, Chairman of Accrol, said: “The past few weeks have been extremely challenging for Accrol and its shareholders, as we navigated our way through industry-wide issues and sought a solution to the Group's short-term funding problems. We believe that the business is through the worst and thank all our investors for their patience, during the period of suspension. The Board is very grateful to the Company's shareholders and its bank for supporting the business through this difficult period.
“Our new CEO, Gareth Jenkins, who joined the Company on 11 September, is already having a positive impact on the business. He has completed a full operational review and a restructuring is now underway. Gareth's considerable industry knowledge and proven track record for delivering significant operational efficiencies give the Board confidence going forward and we look forward to providing regular updates on the Group's progress.”
Lifting of Suspension on AIM
As detailed in the Company's announcement of 5 October 2017, Accrol's Ordinary Shares were suspended from trading on the AIM Market on that day. The closing mid-market price of an Ordinary Share immediately prior to suspension was 132p. The Company is now proposing to raise £18 million pursuant to the Placing, having renegotiated its banking terms with HSBC Bank plc (details of the revised terms are set out further below) and is providing a Trading Update and Outlook Statement in relation to the Directors' expectations going forward (which is also set out below).
Restoration of trading in the Shares will take effect from 07:30 today, 20 November 2017.
Trading Update
Pulp Paper Market Dynamics and Parent Reel Costs
As previously announced on 5 October 2017, the Company, along with the industry generally, began to experience a sudden and significant change in trading conditions in the second quarter of its current financial year. This was caused principally by rapid inflation in pulp prices with BHKP (hardwood) pulp prices increasing by 40.6% in the period from January to October 2017*, which relates to the majority of Accrol tissue production, and NBSK (softwood) pulp prices increasing by 13.7% in the same period. These rises resulted from a reduction in supply of pulp due, principally, to pulp mill closures in China and longer than expected mill maintenance in Brazil, which were also exacerbated by increased Chinese demand for pulp paper. This was further compounded by foreign exchange headwinds. Together, these factors substantially increased the Group's parent reel input costs.
Price Rises to Customers
Prior to the trading update issued on 5 October 2017, the Company had achieved limited success in passing on these inflationary pressures to its customers. Although input costs rose further in October, as pulp prices continued to rise (detailed above), the Company has, in the last few weeks, made tangible progress on agreeing price increases with its customers and the Board is confident of a positive outcome to these negotiations.
In its evaluation of the funds needing to be raised as part of the Placing, the Board's financial model includes some acceptance of price increases across Accrol's customer base. The Directors will keep this under close review, in light of the highly sensitive nature of price increases to the Company's financial performance and working capital position. In addition, the Board notes that price increases may result in a reduction in volumes from customers. Again, the Board has assumed some volume loss in its financial model but, if there were to be greater volume loss than expected, then this would adversely impact expected financial performance and its working capital position.
Operational Efficiencies and Restructuring
The Board has undertaken a full review of the Group's operations and has begun implementing a comprehensive restructuring to improve operational efficiencies.
The Company plans the following actions over the next 12 months, which the Board believes could result in savings of circa 6% per annum:
· a proposed reduction in headcount of 89, currently in consultation period, and reduction in overall labour costs;
· an ongoing focus on reduction in waste levels;
· a reduction in the number of SKUs;
· investment in systems and people to deliver efficiencies in purchasing, logistics, storage and manufacturing;
· streamlining and rationalising supply lines.
As the business drives towards its goal of being a leader in operational excellence in the industry, it has increased its focus on improving and redeploying skills throughout the manufacturing process and expects to see tangible results over the next 12 months.
Banking Update
The Group currently has a revolving credit facility of £16m (reducing to £14m in 30 April 2018) drawn at £15m, and an Invoice Discounting facility (the “ID facility”) of £23m. The Group has reached agreement with HSBC Bank plc to revise its covenants in line with the Directors' current expectations of trading (“the Revised Banking Arrangements”). In addition to standard liquidity (minimum cash balance) and asset coverage covenants, the revised covenants include a trading covenant based on minimum EBITDA levels, which is, in turn, based on a minimum EBITDA for the year ending 30 April 2019 of £4.6m.
Outlook
Given the ongoing input cost pressures, the Board expects that the Group will break even or make a marginal loss in the year to 30 April 2018 at the adjusted EBITDA level. In view of this, the Board will not be proposing a final dividend for the current year.
The Directors expect the Company to return to a small profit at adjusted EBITDA level in the year to 30 April 2019, which will enable it to comply with the requirements of the EBITDA banking covenant test detailed above. It is the Board's intention to return to the dividend list at the earliest appropriate opportunity.
The net debt position of the Company on Admission, taking into account the net proceeds of the Placing of £18 million, is expected to be approximately £22 million and the Directors expect that this will move to no more than approximately £23 million by 30 April 2018.