Accrol Group Holdings plc (AIM: ACRL), the AIM-listed independent tissue converter, announces the following (details of all of which are set out further below):
· Proposed Placing of £8.0 million, including c.£320k proposed participation by certain Directors
· Proposed Open Offer to raise up to a further £2.0 million from shareholders
· Background and Strategy
· Trading Update
· Banking Update
· Working Capital Position
· Outlook
· Management Incentive Arrangements
Dan Wright, Executive Chairman of Accrol, said: “Accrol's turnaround is gathering momentum and the new executive team appreciates the support of our shareholders in backing our plan through this fundraising. The recovery is underpinned by simplifying the business, in this way re-establishing our low-cost advantage to reinforce our market leading position.
“We are confident that our vision to re-build and grow Accrol, as the leading supplier of own-label paper products to major discounters and grocery retailers, is fully on track.”
Proposed Placing of £8.0 million
Accrol announces a proposed placing of £8.0 million, by way of a conditional placing (“Placing”) of 53,333,334 new ordinary shares of £0.001 each in the capital of the Company (the “Placing Shares”) at a price of 15 pence per share (the “Issue Price”). If approved by shareholders of the Company (“Shareholders”), the Placing Shares to be issued pursuant to the proposed Placing are expected to represent approximately 29.25 per cent. of the enlarged issued share capital of the Company immediately following the admission of the Placing Shares to trading on AIM (“Admission”). The Placing Shares will rank pari passu in all other respects with the Company's existing ordinary shares of £0.001 each (“Ordinary Shares”).
The Placing Shares were offered to certain qualifying investors by Zeus Capital acting as sole broker in connection with the Placing.
The proposed Placing will be subject to, and conditional on, amongst other things:
· the passing, without amendment, of certain resolutions (the “Placing Resolutions”) to be proposed at a general meeting of the Company (the “General Meeting”), as will be set out in a notice convening the General Meeting to be posted to Shareholders;
· the Placing Agreement becoming unconditional in all respects (save for the condition relating to Admission) and not having been terminated in accordance with its terms; and
· Admission occurring by no later than 8.00 a.m. on 1 June 2018 (or such later time and/or dates as may be agreed between the Company and Zeus Capital, being no later than 5.00 p.m. on 30 June 2018).
The Directors intend to use the proceeds of the Placing to:
· continue the implementation of the restructuring programme to improve operational efficiencies;
· support the future working capital requirements of the Group; and
· pay the costs associated with the Placing.
In addition, the Company intends to raise up to a further £2.0 million by way of a conditional open offer (the “Open Offer”) to Shareholders (other than certain overseas Shareholders) pursuant to which those Shareholders will be invited to subscribe for up to 13,333,333 Ordinary Shares (the“Open Offer Shares”), each Open Offer Share being offered at the Issue Price, on a basis that is pro rata to their shareholdings. The Open Offer will also allow those Shareholders to apply for more than their pro rata entitlement to the extent the Open Offer is not fully subscribed. The Open Offer will be conditional on the passing of certain resolutions at the General Meeting so far as they relate to the Open Offer (the “Open Offer Resolutions” and, together with the Placing Resolutions, the “Resolutions”), the passing of the Placing Resolutions and on the Placing having completed. Further details of the Open Offer will be announced, and a circular outlining the terms of the Open Offer will be sent to Shareholders (other than certain overseas Shareholders), in due course.
The Placing is not conditional on the Open Offer proceeding or on any minimum take-up under the Open Offer.
Shareholder approval will be sought in respect of the authorities required to issue the Placing Shares and the Open Offer Shares at the General Meeting which is convened for 11.00 a.m. on 31 May 2018 at Addleshaw Goddard LLP, One St Peter's Square, Manchester, M2 3DE.
The Placing cannot proceed unless the Placing Resolutions are passed at the General Meeting. The authorities granted by the Open Offer Resolutions, if passed, cannot be used for any purpose other than in respect of the Open Offer.
Directors participation in the Placing
The following Directors intend to subscribe for an aggregate of 2,133,332 Placing Shares as follows:
|
Name |
Title |
Number of existing Ordinary Shares |
Number of Placing Shares subscribed for |
Value of Placing Shares subscribed for |
Resulting shareholding |
Percentage of enlarged share capital |
|
Daniel Wright |
Executive Chairman |
415,168 |
1,333,333 |
£200,000 |
1,748,501 |
0.96% |
|
Gareth Jenkins |
Chief Executive Officer |
100,000 |
500,000 |
£75,000 |
600,000 |
0.33% |
|
Martin Leitch |
Interim Chief Financial Officer |
Nil |
266,666 |
£40,000 |
266,666 |
0.15% |
|
Joanne Lake |
Non-Executive Director |
35,000 |
33,333 |
£5,000 |
68,333 |
0.04% |
|
Stephen Hammett |
Non-Executive Director |
40,000 |
Nil |
– |
40,000 |
0.02% |
In addition, Don Coates, who is a PDMR, intends to subscribe for 266,666 Placing Shares at an aggregate price of £40,000.
Reasons for, the Placing and the Open Offer
The Company is undertaking the Placing and the Open Offer in order to raise funds to continue to support the Group's programme of simplification, aid its recovery and provide more working capital. The proceeds of the Placing and the Open Offer will enable Accrol to continue delivering on its business recovery and support its plan of becoming the leading supplier of own-label paper-based products to discounters and grocery retailers.
Background and Strategy
Background
Accrol is an AIM quoted independent tissue converter, manufacturing toilet rolls, kitchen rolls and facial tissue products to supply retailers throughout the UK. Accrol imports Parent Reels from around the world and converts them into finished goods at three manufacturing centres, two of which are located in Blackburn and one is located in Leyland.
As announced on 19 March 2018, the Group's trading performance in FY18 was significantlyimpacted by three major issues, namely an escalation in internal costs, input costs and adverse foreign exchange hedging. The Group has been and is continuing to make important progress in terms of improving operational efficiency, winning new business and pricing.
Accrol has a strong platform on which to build. It has a strong market position in the UK, supplying major discounters and grocery retailers. The Directors believe that the Group enjoys an excellent reputation for innovative products that outperform many of the branded competitors in independent market comparisons.
Accrol has strengthened its leadership and governance over recent months, with the appointment of a new CEO in September 2017, a new COO in October 2017 and a new Executive Chairman in February 2018. In addition, the Company is in the process of recruiting a new permanent CFO.
Accrol is also progressing its intention to exit its highly fragmented away from home (“AFH”) business due to the non-core nature of the work.
Strategy
The Company's strategy is to simplify and strengthen its core business in order to deliver recovery and growth. The Directors' objective is for the business to become a more focused own-label company, generating sustainable free cash flow and continuing to grow through its market share position in what they consider to be a fast growing segment of the tissue market.
Accrol is progressing with its strategy, driving greater disciplines in how it operates, and focusing the business on its core consumer growth markets. The Directors are confident that, with its focus on being a leading manufacturer with the lowest operational cost base, the business will deliver enhanced performance through increased business simplification, efficiency and standardisation.
Accrol has an established market position and its key strategic priority is to focus on the attractive, growing and profitable markets. Its market share position in the discount sector is particularly favourable, as the business grows on the back of its customers' own growth. The Directors believe they can strengthen Accrol's customer offering further:
· by extending its practice of securing longer terms contracts;
· by including indexation in its customer agreements where appropriate, discussions for which are progressing; and
· by increasing its portfolio of products to include pocket packs, nappies and feminine products.
The Directors believe that, by building on the Group's strong customer portfolio, the business can become the leading supplier of own-label paper-based products to discounters and grocery retailers.
Trading Update
Accrol has recently secured some major growth volume wins notified by new and existing customers that will positively impact revenue in the core consumer sector from August 2018.
Accrol has also agreed non-legally binding heads of terms to exit its onerous central distribution hub in Skelmersdale, which the Directors believe will result in savings of at least £5 million per annum. In addition, the business is progressing well in its restructuring programme, which the Directors expect will result in further reductions in its operational costs by August 2018.
The simplification process of the business is progressing well. The SKU range is expected to reduce from over 500 to less than 130 by July 2018 which, in conjunction with the exit from AFH and in the Directors' opinion, positions the core Accrol business well for continued growth due to its revised cost base and machine capability.
Accrol has agreed in principle a sole distribution agreement with one of its major suppliers for the distribution of one of its consumer products in the UK. Discussions to supply a range of other tissue related products are also underway.
It is anticipated that the new tissue line investment in Leyland once commissioned (scheduled to happen by August 2018) will be filled to the majority of its capacity through new committed volumes. As the simplification process continues to progress the Directors expect the business to increase its capacity to enable further growth. This additional tissue line is expected to be part funded by a finance lease, details of which are set out below.
In line with its simplification strategy, Accrol continues to reduce its product range in line with its customer requirements which has seen a c.50% reduction since the end of 2017. These changes have helped to drive operational and working capital efficiencies throughout the business.
The Directors confirm that they continue to expect that Accrol's underlying EBITDA for the year ended 30 April 2018 will be in line with market expectations.
Banking update
Facilities
The Group currently has a revolving credit facility (the “RCF”) of £16 million, drawn at c.£15 million, which is committed until 10 June 2021. As announced on 1 May 2018, the scheduled reduction in the limit of the RCF by £2 million to £14 million, which was due to occur on 30 April 2018, has been deferred until 31 October 2018.
The Group also has an Invoice Discounting facility (the “ID Facility”) of £23 million. The ID Facility is committed for a three month rolling period and the advance rate against fundable debtors in relation to the ID Facility is subject to change, pursuant to the terms of the facility. To the extent the advance rate reduces, this would decrease the level of funding available to the Group under the ID Facility.
In addition, indicative terms have been established for the finance lease funding of the new tissue line, which is scheduled to be commissioned at the Leyland plant in August 2018, which will allow the business to service major new business wins.
Covenants
As announced on 1 May 2018, the EBITDA covenant tests in respect of the periods ended 30 April 2018 and ending 31 July 2018 have been waived.
The Group's Lender has also agreed to work with the Group following completion of the Placing to agree appropriate revised financial covenants, and a revised RCF reduction profile, in respect of the financial years ending 30 April 2019, 2020 and 2021. These are intended to be set with reference to Board approved versions of the Group's latest forecasts, after taking into account a reasonable view of financial sensitivity headroom.
Notwithstanding the above, the remainder of the Group's existing banking covenants remain unaltered for the time being. These comprise standard liquidity (minimum cash balance) and asset coverage covenants together with a covenant based on minimum EBITDA levels. The current covenant tests can be summarised as follows:
Date of test Adjusted EBITDA
31 October 2018 for previous 6 months £1,116,000
31 January 2019 for previous 9 months £2,381,000
30 April 2019 for previous 12 months £4,125,000
Note – see paragraph below headed “Proposed amendments to covenants” in relation to the steps being taken to revise these covenant tests.
These minimum adjusted EBITDA levels are subject to upward revision in the event that there are upgrades to analyst forecasts.
It should be noted that delays in the operational restructuring of the business could also impact forecast FY19 EBITDA performance.
Any breach of the minimum adjusted EBITDA covenant would trigger a 90 day standstill period (commencing not later than the 15th day following the date of test), during which time the Group's Lender will not be able to withdraw its facilities or enforce its security, as long as the Company complies with its obligations during that period.
Proposed amendments to covenants
As referred to above, following the completion of the Placing, the Group's Lender has agreed to work with the Company with a view to amending the longer term financial covenants contained in its facilities to bring them in line with the Company's latest financial forecasts, incorporating a reasonable view of financial sensitivity headroom. Following a number of discussions with the Group's Lender, the Directors believe that these covenants will be re-set at appropriate levels within a reasonable timeframe and, in any event, ahead of the next covenant test dates.
Whilst the Directors believe that discussions with the Group's Lender in this regard have been positive to date, and the Group's Lender has agreed to act reasonably and in good faith to agree revised covenants post placing, there can be no guarantees that this will be achieved with the level of headroom desired by the Directors, or achieved at all.
Working capital position
The Directors believe, having taken into account the net proceeds of the Placing, that the Group will have sufficient working capital for its short term requirements. However, the Board is unable to make any confirmations about the sufficiency of working capital beyond this due to the Group's working capital being highly sensitive to, amongst other things, Parent Reel pricing, foreign exchange fluctuations, the level of turnover and the pace of progress on the Group's ongoing operational restructuring.
As such, whilst the Directors have undertaken work to understand the potential impact which the factors referred to above may have on the business, and potential mitigating strategies which may be available in this regard, they are not in a position to confirm that the net proceeds of the Placing, together with the available bank and other facilities that will be in place following Admission, will be sufficient for the Group's requirements for the next 12 months. It remains possible that the Group may require further funds to be raised during this period to secure the Company's longer term future.
Outlook
The Directors look forward with confidence to the new financial year. On an adjusted basis, the business is expected to return to profitability by the end of the first half of FY19, with the impact of the restructuring programme expected to deliver positive financial results in the second half of FY19.
The net debt position of the Company on Admission, taking into account the net proceeds of the Placing of c.£7.5 million, is expected to be c.£25.5 million.
As mentioned above, the Group's trading performance is extremely sensitive to a number of key variables which could have a significant effect (positive or negative) on the Company's profitability, which could in turn lead to a breach of the trading covenant detailed above (noting that it is currently envisaged that covenants will be reset post-Placing). These sensitivities, which underpin the Company's expected financial performance for FY19 and beyond, include:
· Parent Reel pricing;
· the exchange rate between Sterling and US$; and/or
· level of turnover.
Management incentive arrangements
In order to incentivise the delivery of key performance measures over the longer term, a new management incentive scheme, the Accrol Group Management Incentive Plan (“MIP”) will be introduced following completion of the Placing. A summary of the main terms of the MIP is set out below.
Participants in the MIP
The initial participants will be Daniel Wright (Executive Chairman), Gareth Jenkins (CEO) and Don Coates (COO). In addition, it is expected that the new CFO (whom the Company is in the process of recruiting) will also participate in the MIP following such appointment. There are three sets of awards, each one being conditional on targets based on the Company's EBITDA performance in FY19, FY20 and FY21 (the “3 Awards” and each an “Award”).
Vesting targets
The vesting criteria of each of the 3 Awards is based on adjusted EBITDA targets for FY19, FY20 and FY21 (the “EBITDA Targets”) and the Company not breaching any of its banking covenants.
Each Award has its own EBITDA vesting target. In each case, there are normal EBITDA Targets (the “Normal Targets”) and stretched EBITDA Targets (the “Stretched Targets”) which dictate the number of shares which vest in relation to each Award, with no awards for failing to achieve the bottom of the target range and 100% being awarded for achieving the top of the target range in relation to both the Normal Targets and the Stretched Targets. These EBITDA Targets are as follows: