Accrol Group Holdings plc (LON:ACRL), the UK’s leading independent tissue converter, has announced its results for the six months ended 31 October 2023.
The Board is pleased to report that the Group performed strongly in H1 FY24. While revenue reduced as expected, as prices eased following the significant inflationary-led increases in FY23, branded volumes continued to grow in our key markets, rising by 45% in H1 FY24, and margins returned to pre-pandemic levels rising by 930bp to 27.3%.
The Group is firmly on track to deliver FY24 results in line with the Board’s expectations and, following the acquisition of Severn Delta Limited (“Severn Delta”), now expects to outperform its previous expectations for FY25.
| Key Financials | H1 FY24 | H1 FY23 | Change |
| Revenue | £100.3m | £121.1m | (17.2%) |
| Adjusted Gross margin1 | 27.3% | 18.0% | 930bps |
| Adjusted EBITDA2 | £10.2m | £7.1m | 43.7% |
| Adjusted profit before tax3 | £5.0m | £3.2m | £1.8m |
| Profit/(loss) before tax | £0.4m | (£0.9m) | £1.3m |
| Adjusted diluted earnings per share | 1.2p | 0.7p | 0.5p |
| Diluted earnings per share | 0.2p | (0.2p) | 0.4p |
| Adjusted net debt5 | £25.5m | £30.5m | (£5.0m) |
Market expectations (Shore Capital & Zeus) as at 29 January 2024 for FY24 and FY25 respectively – Revenue £205.0m EBITDA £21.0m and Revenue £211.1m EBITDA £21.9m.
Gareth Jenkins, Chief Executive Officer of Accrol, said:
“We are pleased with the Group’s performance which has come in ahead of our initial expectations at the start of the financial year. We continue to deliver by producing great quality and value products, which meet every consumer’s budget. Our unrivalled retail relationships and robust supply model ensure that we can continue to deliver strong results in this dynamic market environment. The Group is delivering on its strategy and is well positioned to deliver further growth, as it builds upon its broad customer base and market-leading products.”
H1 FY24 highlights:
| · | Private label market share increased to 55% in the Period (H1 FY23: 54%, H1 FY22: 50%) and is still growing against the traditional brands. |
| · | Strong EBITDA performance of £10.2m (H1 FY23: £7.1m), as margins returned to pre-pandemic levels quicker than expected, and inflationary pressures ease compared to FY23. |
| · | Return to profit before tax – £0.4m, an improvement of £1.3m. |
| · | Margin enhancing volume growth achieved throughout the Period in core products. |
| · | Adjusted net debt2 at 31 October 2023 reduced by £5m to £25.5m (H1 FY23: £30.5m), as a result of strong cash generation driven by the operational efficiencies of the business. |
| · | Strong performance in wet wipe business with a 33% increase in biodegradable sales – annualised sales run rate of c.£8m anticipated by FY24 end, up from c.£1.5m at acquisition. |
| · | Capital expenditure in core tissue business has normalised, driving improved free cash flow generation, following completion of investment in automation and capacity to achieve of one of the lowest cost bases in the industry. |
| · | Pocket-pack line introduced into facial tissue facility, driven by customer demand, further widening the product range. |
Post period end
| · | Acquisition of Severn Delta in January 2024, a £5m revenue wet wipe and tumble dryer sheets business, in line with strategy to broaden product offering. Severn Delta will be integrated into the Group’s fast-growing wet wipes business in H2 FY24. |
| · | The acquisition brings significant increased scale in wet wipes and brings new products to the Group by producing household, disinfectant wipes and tumble dryer sheets. |
| · | New long-term agreement signed with a global FMCG group to supply a well-known branded product under licence – due to launch in March 2024. |
Current trading and outlook
| · | Strong margin performance in H2 FY24 to date – driven by continued delivery of high quality, best-value products to our customer base. |
| · | Further volume growth expected, driven by the Group’s strong private label supply position, great brands, the new licenced products, which are benefiting from the cost-of-living pressures impacting consumers. |
| · | Adjusted net debt on track to reduce to c.1x EBITDA by year end, even after the acquisition of Severn Delta. |
| · | The Group on track to deliver FY24 revenue c.£205m and adjusted EBITDA in line with the Board’s expectations of at least £21m in – up 34% year-on-year. |
| · | Severn Delta expected to positively impact adjusted EBITDA in FY25. |
Dan Wright, Executive Chairman of Accrol, said:
“Over the last four years, Accrol has been transformed as an organisation into a leading manufacturer of private label, own branded and now licensed tissue products to the UK market. Our state-of-the-art businesses are in an incredibly strong position to benefit from the rapid and significant growth in the in these markets, and we have considerable further capacity to drive these opportunities. The growth in our branded range and the partnerships we are developing, to bring high quality valued licensed products with global brands, continues to strengthen our pricing and margin improvement. We look forward with increased confidence to the continued growth of the business.“
| 1 | Adjusted Gross margin is defined as gross margin after direct depreciation |
| 2 | Adjusted EBITDA is defined as profit before finance costs, tax, depreciation, amortisation, separately disclosed items and share based payments |
| 3 | Adjusted profit before tax is defined as profit before amortisation, share based payments and gains/(losses) on derivative instruments |
| 5 | Adjusted net debt excludes operating type leases recognised on the balance sheet in accordance with IFRS 16 |
OPERATIONAL REVIEW
Summary of progress
The Group has performed well in the Period, despite the ongoing volatility in global supply chains, due to our robust long-term supply arrangements and our simplified material requirements. We continue to benefit both from the strength of our key customer relationships and the extensive work undertaken over the last few years in building a highly-automated business of scale, efficiency, and product diversity.
The Group has made strong progress in returning gross margins back to pre-pandemic levels. In H1 FY24, adjusted gross margins improved materially to 27.3% up from 18% in H1 FY23, up 930 basis points. Revenue normalised in line with our expectations, as the benefits of lower input costs were passed on to our customers.
The Group’s strategic move into higher value private label and own branded products helped to drive margins higher. In the Period, the Group grew its own brands significantly with sales in this area now accounting for 20% of revenue. In addition, the business recently signed a long-term agreement with another major global FMCG business to produce under licence a range of tissue-based products. The initial reaction from retailers has been extremely positive and we look forward to the launch of the product which is expected in March 2024. As stated in the Group strategy review, we expect this part of our business to form at least 20% of revenue in the next three years.
Operationally, the Group has made significant progress across all parts of the business:
| · | All major capital investment and restructuring completed; |
| · | Leyland site improved output per head by 12% (excluding the new line); |
| · | Wipes business output per head up 24%; |
| · | Service level remains strong with on time delivery at more than 98.0%; |
| · | Customer Survey score of 8.34 vs industry norm of 7.75 – Accrol’s highest ever score; |
| · | Flint site is now three years accident free, while Leicester is almost four years accident free; |
| · | Absentee levels continue to be sector leading at 1.3% in the year to date; and |
| · | The Group has achieved the highest Retailer Manufacturing Auditor scores with all sites achieving an AA rating. |
The market
The market for the Group remains very strong; the cost-of-living crisis is pushing consumers to review their everyday essential items. Accrol’s growth in its own brands over the last 12 months is clear evidence of this. In H1 FY24, we have seen our Magnum Kitchen towel range volumes grow by 27%, our Elegance toilet roll range by 78% and our Softy Facial Tissue range by 34%. This part of our business now equates to 20% of revenue and carries a higher margin and stronger price position.
The Group’s total addressable market, following the acquisitions of John Dale (2021) and Severn Delta (2024), has expanded considerably to exceed £3.0bn. The Group expects to grow the Severn Delta business significantly and intends to roll out its broader product offering of tumble dryer towels and disinfectant wipes to its extensive UK customer base.
In addition, the Group is seeing new growth opportunities to sell toilet roll and disinfectant wipes into the hotel, restaurant, and pubs markets, currently dominated by Essity and Kimberley Clark. Group sales volumes in this area have grown by 42% when compared to H1 FY23.
Capital allocation
As the Group embarks on its next stage of strategic growth, as outlined in the Strategic Review Outcomes announced on 24 January 2023, and taking into consideration the higher interest rate levels, we continue to review our capital allocation policy and decisions.
In the Strategic Review Outcomes announcement, we outlined our core medium term ambitions:
| · | Continue to focus on our core toilet and kitchen towel business; |
| · | Grow our facial and wet wipe business; |
| · | Develop a licensed business model and grow direct to consumer Oceans brand; |
| · | Build a sustainable paper mill; |
| · | Acquire selectively to strengthen and extend our product offering; and |
| · | Maximise medium term tangible shareholder returns, through a combination of dividends and, potentially, share buybacks. |
A disciplined and regular review of our capital allocation priorities is an essential part of our decision-making process. The Board undertakes a rigorous approach to assessing all incremental investment decisions, including capital expenditure relating to the increase in Group capacity and efficiency. Underpinning all our decision making is an internal rate of return (“IRR”) hurdle today of in excess of 20%.
In line with our medium-term ambitions, the Group has also made a number of acquisitions; two in FY 2021, Leicester Tissue Company (“LTC”) and John Dale, and, most recently, Severn Delta. LTC and John Dale have enabled us to further transform and grow the Group and their financial performance has been excellent.
The acquisition of LTC in November 2020 was for a total cash outlay of £29.5m on a debt and cash free basis. The deal was prudently structured with a deferred contingent element which never became payable. At the time, the business had revenues totalling £31.5m and an adjusted EBITDA of £5.4m, equating to an EBITDA multiple of 5.6x, reducing to 4.6x post synergies.
After allowing for incremental capital expenditure and the charging of an appropriate element of Group overhead, the acquisition has delivered a return on invested capital of 77%.
John Dale, the wet wipe business, was purchased in April 2021 for a consideration of £3.4m on a debt and cash free basis. Total revenues at the time were £6.4m and adjusted EBITDA was £0.6m. The split of sales was £3.9m for facial tissue and £2.4m for wet wipes. This gave an initial multiple of 5.7x EBITDA, reducing to 3.1x post synergies.
The subsequent outcome has far exceeded our projected returns, largely driven by our ability to leverage our existing customer relationships to drive sales growth. By the FY24 year end, our wet wipes sales are projected to have a run rate of £8.0m. After allowing for incremental capital expenditure and the charging of an appropriate element of Group overhead, the wet wipes element of the John Dale business alone has delivered a return on invested capital of 57%.
The facial tissue business of John Dale was moved into our state-of-the-art facility in Blackburn, and, over the same period, this part of our business has doubled in size from £10m to £20m – with John Dale facial tissue volumes accounting for £3.9m of this growth. Whilst it is not possible to accurately identify the returns relating to the John Dale facial tissue business in isolation, the Blackburn site has a generated a return on invested capital in excess of 50% over this period.
We have recently announced the acquisition of Severn Delta, a £5m revenue wet wipe business, predominately supplying and manufacturing industrial cleaning type wipes into a market worth c.£500m in the UK. The amount paid is confidential but, based on current EBITDA performance, it amounts to a multiple of less than 3x, which is expected to reduce to less than 1.5x post synergies. More importantly, it opens up significant new customers and markets to the Group. We anticipate a similar trajectory here to the John Dale experience, where we successfully imported our broader base of customer relationships to drive incremental sales growth. In a similar fashion to John Dale, we anticipate delivering a very healthy return on invested capital and an overall IRR significantly ahead of our internal benchmark. Severn Delta is expected to positively impact earnings in FY25.
There is no change anticipated to the Group’s year end net debt position for the year end FY24 with an already announced expectation that leverage will be c.1x EBITDA.
Environmental, Social and Governance (“ESG”)
A number of UK businesses have recently warned about significant costs increases to the labour element of their operations, as minimum wage levels have increased materially. Accrol already pays more than the new minimum wage rates and is an accredited Living Wage Employer. We have, over the last three years, invested significantly in automation, mitigating the wage inflation we expected would impact the Group and as a result have seen headcount reduce by 26% and output increase by 24%. Whilst we are not complacent in this area and believe people should be appropriately rewarded, we expect and have consistently delivered operational improvements that more than offset wage rate increases.
The business has delivered the following key improvements in the last six months:
| · | Ahead of schedule to achieve 50% PCR film objective during 2024; |
| · | Waste down to 6% (from 6.4%) and on track to deliver 5% which would be industry leading; |
| · | The only UK tissue company who is a “Living Wage” accredited member; and |
| · | Donated 320,000 toilet rolls to charity. |
A summary of the Group’s progress is available in our ESG Report, which was published in our Annual Report in October 2023. This is available to view on the Group’s website: https://www.accrol.co.uk/app/uploads/2023/10/Annual-Report-2023.pdf.
Current Trading and Outlook
Accrol’s main markets in toilet roll, kitchen towel, facial tissue and flushable wet wipes continue to grow strongly, driven by the ongoing cost-of-living crisis. We continue to trade strongly and the Group is maintaining pre-pandemic margins.
Our increasingly strong market position and customer relationships position us very well to continue to capitalise on the structural change in consumers’ buying behaviour, moving away from high-cost brands into better value everyday products. The Group is focused on volume growth which delivers the right levels of return and expects to deliver further growth in its own branded range. The long-term agreement with a global FMCG group, to manufacturer a tissue-based product, which we have announced today, adds a further significant leg to growth.
Whilst always mindful of the wider economic uncertainties, the Group’s model is robust, and the Board is confident that the business is firmly on track to deliver FY24 revenue of £205m and at least £21m of EBITDA, with the acquisition of Severn Delta also positively impacting earnings in FY25.
Gareth Jenkins,
Chief Executive Officer
FINANCIAL REVIEW
Revenue
Revenue for the Period was £100.3m (H1 FY23: £121.1m), a decrease of £20.8m (17.2%) compared to H1 FY23. This decrease in revenue represents an easing of prices offered to customers following significant inflationary pressures in FY23. The Group remains on course to deliver FY24 revenue in line with the Board’s expectations at £205m.
Gross profit
Gross profit performance for the Period was strong at £27.4m (H1 FY23: £21.7m), a notable increase of £5.7m (26.3%), compared to H1 FY23. Adjusted gross profit as a percentage of revenue at 27.3% (H1 FY23: 18.0%) was higher than H1 FY23, as margins recovered to pre-pandemic levels following a partial settling of challenging inflationary input costs in FY23 and these have now stabilised as we move through FY24.
The business continues to manage customer supply effectively; having invested in both working capital and securing additional key raw material products to maintain consistent supply.
Adjusted EBITDA
Adjusted EBITDA increased to £10.2m (H1 FY23: £7.1m), an increase of £3.1m (43.7%), compared to H1 FY23, largely reflecting the strong recovery in adjusted gross profit margin performance. Operating costs remain a key focus of the Group and, following the successful investments in automation and capacity, provide a solid base for the business to continue to be one of the lowest cost operators in its market.
Depreciation and amortisation
The total charge for the Period was £6.2m (H1 FY23: £5.3m) of which £3.3m (H1 FY23: £3.1m) related to the amortisation of intangible assets. This increase represents the unwinding of a higher capital base following investments to operating facilities.
Share-based payments
The total charge for the Period under IFRS 2 “Share-based payments” was £0.4m (H1 FY23: £0.6m).
Operating profit and earnings per share
Net finance costs were £3.3m (H1 FY23: £1.6m), with the increase attributable to the growth in underlying UK base rates resulting in a profit before taxation of £0.4m (H1 FY23: loss £0.9m). Basic earnings per share was 0.2 pence (H1 FY23: loss 0.2 pence). Adjusted diluted earnings per share was 1.2 pence (H1 FY23: 0.7 pence), representing the growth in profitability year-on-year as operating margins continued to improve.
Capital allocation and dividends
The Group intends to resume dividend payments, as soon as is practicable, with a prudent and sustainable dividend cover of c.2.5x – 3.5x. Furthermore, the Board, albeit mindful of liquidity constraints, continues to see significant value in the current Accrol equity valuation and seeks the flexibility to act accordingly in terms of potential share buybacks. Current operating performance is expected to continue to drive strong free cash-flow, through both margin recovery and the step down in capital expenditure requirements in the core business moving forward. The increasing visibility over free cash-flow generation increases the range of options in front of the Board, when it comes to broader capital allocation, and the balance between organic and inorganic growth investment.
Cashflow
The net cash flow from operating activities was £7.1m (H1 FY23: £6.1m) with the increase reflecting improved operating margins and an anticipated release of working capital of £0.8m (H1 FY23: £1.0m).
Capital expenditure in the Period was £1.8m (H1 FY23: £5.8m), which included the purchase and implementation of a pocket-pack line into our facial tissue facility bringing in-house a wider product range to offer to our valued customers. Lease payments of £3.6m (H1 FY23: £3.0m) include leases capitalised in accordance with IFRS 16.
Balance Sheet
The Group had net assets of £78.6m (H1 FY23: £82.7m) as 31 October 2023 and adjusted net debt had improved to £25.5m (H1 FY23: 30.5m), representing 1.4x leverage down from 2.7x H1 FY23. The Group has strong liquidity with cash and equivalents totalling £3.3m (H1 FY23: £7.6m). The Group maintains a £24.0m revolving credit facility, of which £10.0m (H1 FY23: £10.0m) was drawn at the balance sheet date. The Group continues to operate within the associated covenants attached to this facility and access to liquidity remains available.
The Group maintained its £30.0m multi-currency factoring facility, used to provide financing for general working capital requirements; of which £12.8m (H1 FY23: £25.5m) was drawn at the balance sheet date.
The Group is well invested with net debt on track to be c.1.0x EBITDA by the current year end (FY23: 1.7x).
Post Period end acquisition
In January 2024, the Group completed the acquisition of Severn Delta, a £5m revenue wet wipe and tumble dryer sheets business based in Somerset, which will be integrated in to the Accrol Group in H2 FY24. Consideration was funded from cash generation with no further contingent or deferred considerations. This acquisition offers significant increased scale for our already growing wet wipes business, as well as the ability to enhance our product offering to our broad range of customers.
Outlook
Accrol Group has continued to perform well in to H2 FY24 with gross profit margins having stabilised and returned to pre-pandemic levels quicker than originally anticipated. The Group is continuing to trade in line with the market expectations of at least £21m of adjusted EBITDA.
Following the recent acquisition, the Group looks forward to integrating Severn Delta in to our already growing wet wipes business and, therefore, expects FY25 adjusted EBITDA to be positively impacted.
Christopher Welsh,
Chief Financial Officer
