Accsys Technologies PLC

Chief executive's statement

Introduction

Accsys has delivered strong revenue growth in the first half of the 2022 financial year, reflecting the continuing significant demand for our products while also investing in our manufacturing and organisational capability to deliver the growth opportunity ahead of us.

In the period we have made good strategic progress under our long-term plan to increase production capacity five-fold to 200,000 m³ per annum in 2025. Work to expand our Arnhem plant capacity by 33% continued, and we successfully completed the equity funding and made key preparations for our planned JV to build an Accoya^® production facility in North America. Despite challenges in the completion of the Hull Tricoya^® plant, we have successfully taken control of the site, and are now directly managing the final completion ourselves towards commercial operations by July 2022. 

This has also been an important period of investing in our business and people. New colleagues have joined bringing expertise in functional areas to help lead and deliver our growth ambitions and we have begun to increase our operating teams ready to operate our new facilities. In H1 FY22 we have continued to develop our safety culture and processes and were free of lost-time incidents in the period.

Despite wider market pressures around raw materials and supply chains across many industries in this period, Accsys has delivered a robust performance and delivered further growth in underlying EBITDA. While we have seen increases in raw material costs, we have been able to substantially offset this through increased sales prices. This resilience has been supported by the strength of our supply contracts and nature of our raw materials with a partial natural hedge created by the conversion back into acetic anhydride or sale of valuable acetyl by-product.  

Summary of results

The Group has delivered strong revenue and sales volume growth while remaining capacity constrained at our Arnhem plant. Total revenue for the 6 months ended 30 September 2021 increased by 31% to €56.2m (H1 FY21: €42.9m). Accoya^® sales volumes of 29,555 cubic metres represent a 12% increase compared to the equivalent period last year which was impacted by COVID-19. We also grew revenues through an increase in average selling prices for our high-performance wood products.

In the period manufacturing margin was 31%, just above our target 30% level, with good cash generation. Higher average sales prices were the result of product price increases that took effect during the period and in H2 FY21, which helped to substantially offset increased raw material prices and reflect the continuing strong demand in the market for our products. A change in the mix of products sold year on year also impacted the percentage margin, where sales of lower priced Accoya^® for Tricoya^® and tolling (where we process the wood but are not responsible for the raw wood purchase and as a result are lower priced) were higher in the prior year due to the supply chain dislocation experienced in the early stages of the pandemic.

Group underlying EBITDA increased 5% against the prior year to €4.5m, despite higher Group operating costs in the period through planned investment in Group organisational capabilities and people with increased headcount to support our future growth. We have closed the period with a robust balance sheet with €2.4m net cash, with cash of €60.9m including the funds raised ready for investment in our US Accoya^® JV.

COVID-19

During the first 6 months of the 2022 financial year, we have not seen the same level of direct impact from COVID-19 on our revenue and sales as we did in the prior year. However, as with many businesses, the pandemic continues to affect the business indirectly. It has also contributed to the additional delay and challenges in completing construction and bringing production online at our Hull plant where the EPC lead contractor's agreement was terminated as previously announced.

We are continuing to operate in a more COVID-safe way to protect our people and those who we do business with. We continue to manage some supply chain effects which have impacted industries more broadly, which we detail later in these reports.

Last year during the 2021 financial year we received some government support in the Netherlands and the UK for our operations in the initial stages of the pandemic. At that time, Directors and other senior staff accepted a 20% reduction in their pre-tax salary for four months as part of our mitigation measures. Relative to many other organisations around the world, the effects of the pandemic on Accsys' financial performance has been limited by virtue of the strong underlying demand for our products and the rapid recovery in sales volumes. In H1 FY 22, after the scope of impacts and resilience became clear, we paid back in full the government grants received. In May 2021 while the Board and senior management team retained the 20% salary reduction, we paid back the salary difference to all employees below the senior-management team level, reflecting their hard work throughout that challenging period. 

Accoya^® - Global performance

The Accoya^® business delivered good growth in volumes in the first half of FY22, despite remaining at capacity production levels and with customer demand for our product continuing to exceed supply. A 12% increase in sales volumes was the combined result of our ongoing efficiency programme to improve productivity, lower production volumes in the prior year in Q1 due to the initial stronger effects of the COVID-19 pandemic, and the deferral of our scheduled maintenance stop at Arnhem into the second half of FY22 to coincide with planned tie-ins for the fourth reactor project. 

Accoya^® revenue growth of 33% reflects these same factors driving the sales volume growth, and further supported by increased average sales prices in the period. These price increases reflect both the continuing strong demand from customers and higher raw material and logistics costs in our supply chain in the period. Price rises were implemented in the last financial year for all customers and have continued to benefit the first half of the 2022 financial year. In addition, we have put through further price increases in the period in June 2021 and September 2021. Average prices were also higher than the prior year period due to changes to the product mix, which included a lower proportion of material sold to Tricoya^® customers and lower tolling sales.

Overall, we have continued to see strong underlying demand for Accoya^® across our regions and with our Tricoya^® panel manufacturing partners.

Our H1 FY22 regional sales trend on a period-on-period basis, primarily reflects the impact of the early stages of the pandemic on prior year sales in our different regions in H1 FY21. The strong growth in H1 FY22 sales to the UK & Ireland compares against the significant negative decline in H1 FY21 sales volume to UK & Ireland which was more acutely impacted by supply chain dislocation in the early stages of the pandemic. By comparison H1 FY21 sales volumes were stronger in Europe as we redirected volume around the UK disruption, and in this period's results this appears as a negative movement in Rest of Europe. Excluding the one-off nature of COVID-19 comparative impacts from the 2021 financial year, over-all we believe that the regional demand and sales volumes flow in our geographic markets is steady period-on-period. The exception to this is the Americas, where we are actively increasing our allocation of product volumes available to customers as we develop this market ahead of our planned US capacity expansion. 

Accoya^® manufacturing gross margin was 31.0% (H1 FY21: 33.5%). Whilst this is 2.5% lower than the prior year, it remains above our target range of 30% or higher. While the higher average selling price in the period more than offset the effect from the higher raw material costs, the margin also reflects a shift in the mix of types of products sold within Accoya^® against the prior year period as explained above. In H1 FY21 we increased sales of material for Tricoya^® and of tolling sales due to the initial supply chain disruption impacting certain geographies at the time from COVID-19 effects. In H1 FY22 these sales reverted to a normal level.  

Accoya^® strategic progress

In the period we made good progress in projects to expand our Accoya^® production capacity and business development projects in the Netherlands, the USA, and the UK. Work continued to expand the capacity of our existing Accoya^® plant in Arnhem by adding a fourth reactor, through which we expect to increase the site capacity by 33% to an annual production capacity of 80,000 cubic metres.  Having 'broken ground' for the construction in February 2021, we received the new reactor on site in May 2021. The civil works have now been completed and the main steel structure is erected, with equipment and piping in the process of being installed.

The broader expansion project also includes increased chemical storage and an upgrade of our wood handling equipment, which will benefit the entire Arnhem plant. The expansion remains on track to be complete by around the end of Q1 calendar year 2022.

North America represents the largest potential regional market for our product, with an achievable market for Accoya^® there of up to 948,500 cubic metres per annum within a wider addressable market of up to approximately 9.6 million cubic metres. North America is a market that Accoya^® is already sold into, but in which we are also significantly constrained by the volume of product we can produce from our Arnhem facility. We have strong foundations for growth in the region with a number of key distributor customers in place and have rolled out our Approved Manufacturers Programme for our distributors' customers, which has been highly successful in Europe.

Under the joint venture with Eastman Chemical Company (NYSE: EMN), a world leader in the production of acetyls, we are planning to construct an Accoya^® plant in USA with an initial approximately 40,000 cubic metres capacity at Eastman's Kingsport, Tennessee site, and replicate our existing Accoya^® technology at Arnhem. Under the JV, Accsys holds a 60% interest and Eastman a 40% interest.

In the first half of the 2022 financial year, we have completed a number of workstreams in the planning for the plant. The detailed front-end engineering design ('FEED') of the plant has been completed. The initial plant designs will target a two-reactor 40,000 cubic metres capacity plant, while the plans and site also allow for further efficient expansion (subject to market conditions) of up to eight reactors in total. Key commercial agreements between the JV parties in relation to operational support and supply agreements, for example in relation to raw materials supply, support services, land and utilities have been well advanced and are expected to be entered into on completion of the financing work stream.

The project will be funded through a combination of equity contributions from the JV partners, and project debt finance. In May 2021, Accsys successfully completed the issuance of new shares to fund Accsys' equity share of the project, through a placing and open offer. Further details on this can be found in the Financial Review. The workstream to complete the project debt finance is continuing and we expect to finalise terms in the coming months in line with our anticipated returns.

We expect that the plant will take approximately two years to construct from the point of the final investment decision. Following construction, sales are expected to ramp up over a further two years to the plant's full production capacity. The planning to date confirms the strong financial returns from the plant itself, with a leveraged pre-tax IRR of over 20% targeted. In addition, Accsys will licence its technology to the Accoya^® USA JV, with sales and marketing support also expected to be provided by Accsys under a separate fee bearing agreement with the Accoya^® USA JV.

Accoya^® Color combines the benefits of Accoya^® wood with colour all the way through the wood from surface to core, achieved through a patented process. Since launching Accoya^® Color in the DACH region (Germany, Austria, and Switzerland) in Europe last year, we have seen very strong demand from our customers, with a present focus on the decking product category. 

On 29 July 2021 we announced plans to expand our ability to produce Accoya^® Color, through the acquisition of assets of the former Lignia Wood Company business in Wales, UK for consideration of €1.2m. Through the acquisition, which included equipment, raw wood inventory, and technology at the 50,000 square foot (4,650 square metre) manufacturing plant in Barry, Wales, Accsys has increased its ability to convert Accoya^®  wood into its new Accoya^® Color product. The integration of the acquisition is progressing well, we successfully repurposed the site for Accoya^® Color production and produced our first batch of Accoya^® Color at the site in the period.

The purchased assets will allow us to accelerate our plans to grow Accoya^® Color both in its current markets and into more geographic markets and for more product applications as part of our ongoing global growth strategy. Once  integrated, the site will be expected to be able to produce up to 12,500 cubic metres of Accoya^® Color per annum with expansion in future being possible. We therefore expect increased Accoya^® Color sales in the medium term with its unique proposition proving attractive to customers in our target markets. This will be supported by increased sales and marketing activity overall to drive end consumer awareness and demand.

Tricoya^® 

Strategic progress

Accsys and its consortium partners in Tricoya UK Limited ('TUK') are building the world's first Tricoya^® plant at Hull. During the period and despite ongoing challenges in progressing the plant, further progress has been made towards its completion. The plant, which is in its final stages of construction, is due to become operational by July 2022.

In April 2021 we updated our guidance and at that time we expected a three-to-six month delay to the lead contractor's schedule in completing the construction. Subsequently in early June 2021, we received a notice from the lead contractor responsible for the delivery of the plant, purporting to terminate the engineering, procurement, and construction ('EPC') agreement for the project by reason of force majeure arising out of the COVID-19 pandemic. In June 2021 Accsys took over the project to complete the final stages of plant construction and conducted an extensive gap analysis to review and validate the remaining works, costs, timeline, and people required to complete the project.

On 23 August 2021 we provided an updated outlook for the completion of the project. This included an updated timeline where the plant is now anticipated to be commercially operational by July 2022. The remaining final stages of the works are being directly project managed by TUK with experienced internal and recently-added people and resources, without requiring the appointment of another lead EPC contractor. Third-party expertise and support are being brought in as and when required to complete works safely and quickly. Since 23 August various workstreams have safely re-commenced on the site with a significant increase in our own project team, improvements to project governance, and the engagement and remobilisation of key mechanical, electrical, and civil contractors.

We also announced in August 2021 that TUK and the former lead EPC contractor had entered into a settlement agreement where the parties settled and released each other from liability for claims against each other under the EPC contract, including any claims in respect of COVID-19 and outstanding contractual payments.

At that time we also reported that the total project capital cost is expected to be an additional €9m to €15m more than previously anticipated. The additional costs are largely due to the extended project duration, including the previously reported engineering changes, delays due to COVID-19, and time and recovery actions resulting from past management of, and demobilisation from, the site. The costs also reflect the settlement agreement with the former lead contractor. As a result, the total cumulative project capital cost for the plant is anticipated to be €90m to €96m.

In the process of taking over control of the site and establishing the remaining works required for completion, TUK has used third party experts to review the overall integrity of the plant. These reports have not indicated any material issues with the plant. 

Recently on 8 November, after the end of the reported period, Accsys agreed funding arrangements with our TUK consortium partners relating to the anticipated costs to complete the plant. Accsys has entered into a new loan

agreement with TUK under which Accsys will lend up to €17m to TUK to be used towards the Hull plant construction project alongside existing funding in place for TUK. The supply and offtake agreements with TUK partners Medite (sale and purchase of Tricoya^® wood elements) and INEOS (acetic anhydride supply) have also been updated and reflect the partners' ongoing commitment to the project.

Recently in November we successfully ran our first batch of wood chips through the first stage of the front of plant, as we begin to test and commission parts of the plant once they are completed. The introduction of wood chips is the first time that we have run the equipment in this zone of the plant in combination with our raw material wood chips, and we are looking forward to bringing more zones into commissioning as we work through the remaining works to completion.

Our planning for the plant continues to allow for the ramp-up of production to full capacity over approximately three years following start-up. This reflects that this is the first plant of its type and that various modifications and operating improvements may be identified once the plant is initially operational. Once at capacity, we continue to expect that a gross margin of approximately 40% should be achievable. Accsys remains committed to the safe completion and operation of the plant to realise the potential of the Tricoya^® product with a large market opportunity, and ongoing high demand.

Once the Hull plant is operational, we plan to expand Tricoya^® production in Malaysia. We have an on-going feasibility study with PETRONAS Chemicals Group Berhad for the construction of a Tricoya^® plant in Malaysia.  The full decision to progress with the plant will only follow after the Hull Tricoya^® plant has been operational for a sufficient period to ensure that any engineering learnings can be factored into the Malaysian plant design.

Group Strategic Development

Technology & IP

Accsys continues to invest in growing, researching, developing and protecting its valuable portfolio of intellectual property and confidential information. Our technology covers not only the physical equipment and engineering that underpins our manufacturing and production, but also the processes and methodology we follow in our entire supply and production chain, from the way we prepare our wood to the way we market and sell Accoya^® and Tricoya^® in the market.

We continue to carry out research and development projects on all aspects of our technology, including our process technology where we continually aim for the best efficiency and best quality for our products and production.

We have reviewed and implemented new improved procedures seeking to safeguard as much as possible our proprietary information and are working with teams across the Group to ensure better understanding of, and training on, our confidentiality protocols. In addition, enhanced procedures have been incorporated into our project management process to capture protectable technology as early as possible.

Accsys' patent portfolio totals 399 patent family members, covering 27 distinct inventions in 45 countries with over 60% of the patent family members now granted. The core technologies associated with our current and future plants for the production of Accoya^® and Tricoya^® wood products continue to be protected by using a combination of patenting and trade secrets to maintain our differentiation in the marketplace.

Our principal trademark portfolio covers our brands Accoya^®, Tricoya^®, the Trimarque device and Accsys^®, protected by registrations in over 60 countries, with continued activity focused on increasing the strength of those brands.

Accsys continues to maintain an active watch on the commercial and IP activity of third parties to ensure its IP rights are not infringed, and to identify any IP which could potentially hinder our commercial activity.

Building organisational capability

In the period we have made good progress in developing our people and organisational capabilities to manage our growth, with Accsys' average headcount increasing from 190 to 241 people. Key hires in place include new heads of departments hired last year, whom now are developing platforms for supporting our growth and ensuring that the Group can expand effectively including into new locations. The areas in which we have added these senior leaders include HSE, Technology, Engineering, IT, and Acetyls management.

We have also increased our headcount through the recruitment of new operating roles for our teams who will operate our expanded capacity at Arnhem and new capacity at Hull as these become operational and expanded our project management team at Hull in the period to oversee the project construction as previously mentioned.

In addition, we are increasing our focus on training and development and have established leadership training programmes and talent mapping, which is an ongoing but important process to ensure we have the right skills and talent in place and a pipeline to maintain this, during our growth journey.

Environment, Social and Governance

Accsys remains committed to growing and operating its business in a sustainable way. In H1 FY22 we have continued to build on the foundations we laid in November 2020 when we launched our first sustainability report and new ESG strategy. In that report we identified our 10 key material issues and impact areas and created an ESG framework that aligns with our purpose, values, and strategy, while also setting out how we contribute to five main UN Sustainable Development goals, with additional impacts on seven more.

Since November 2020, we have completed stage one of our sustainability strategy roadmap. This has included reviewing and developing our data and assessments, establishing baseline metrics, and identifying initial actions for improvement in each of our material issues. We are now working on stage two which is to set the direction of ESG development we want to make in each of our key areas.

In H1 FY22 we have made good progress in four key ESG material issue areas.

Safety

Health & Safety (HSE) remains an absolute priority for the Group and we are aiming to ensure zero harm in our operations and increase our monitoring and awareness of our safety policies and strategy as well as developing a safety-first culture across our organisation. We are monitoring a number of metrics in FY 22 as we implement this, which include increased safety observation reporting, increased safety inspections and audits, increased safety communication and awareness.

In H1 FY22 we have increased our focus on leading indicator reporting, for example increasing our rate of safety inspection tours made by our senior leadership teams on our sites and our safety observation card (SOC) reporting. SOCs are also an important tool in embedding a safety-focussed culture by increasing safety awareness. Each month we also now communicate a HSE scorecard to all staff, sharing our HSE performance and where we are against our ambition to achieve zero lost time accidents, zero major injuries whilst improving our leading HSE performance indicators.  In the 2021 financial year we reported three lost time incidents (LTIs), a lagging safety indicator. In the H1 FY 22 period we have had no lost time incidents, which is a positive development, and our goal remains zero LTIs.

Accsys has also established a Board HSE committee to provide dedicated governance oversight of HSE at a Board level. Accsys considers that good HSE performance is good for business and with the continued support of our people we aim to continue to develop our safety practices and zero-harm commitment.

Energy & Climate change

We are in the process of developing our specific Energy & Climate change policy. This has included both developing the way that we assess the impact of our operations on the environment, which will lead to a robust approach and policy to reduce our impacts.

Our approach to Energy & Climate includes a focus on energy efficiency and process optimisation, assessing the carbon impact of our products and integrated climate considerations and activities (e.g. risks and opportunities) across multi-functions across the business.

Society and Communities

In the period we have begun to implement our new Society and Communities strategy, under which we have developed a more structured approach to social and environmental impact through tools such as charitable giving and employee engagement. We began working with our official charity partners and to engage our employees in our chosen charities' missions. 

In September we completed a charitable employee initiative called 'Step out, to help out!'. This saw colleagues across our organisation collectively walk over 16,000km over two months in the summer to promote wellbeing throughout Accsys and in our wider society. The challenge was set up to boost employee wellbeing particularly during the pandemic which has affected daily life over the past year.

Recording their walks online and sharing photos and anecdotes along the way, the Accsys team walked a distance to cover the journey between Accsys' global office locations: from Arnhem in the Netherlands, to Hull in the UK, via our Head Office in London and on to our North American Sales Office in Dallas, USA - and then back again. As colleagues

passed each milestone stage of the journey, this also triggered Accsys to pledge donations to three charities which were chosen due to their focus on improving wellbeing in Accsys' communities, with a total of €10,000 donated.

Sustainable & Quality products

In the period we achieved a renewal of our Cradle to Cradle (C2C) gold certification for Accoya^®, where C2C certified^® is the global standard for products that are safe, circular and responsibly made. Accoya^® wood is one of the very few building products to have acquired C2C certification on the stringent Gold level. C2C assesses the safety, circularity and responsibility of materials and products across five categories of sustainability performance, including material health where Accoya^® achieves a platinum rating.

Outlook

In summary, we are pleased to report our first half results, delivering strong growth in both revenue and gross profits. This continued strong performance demonstrates further progress on our strategy and the hard work of our employees to deliver for our customers.

There is continuing high demand for our Accoya^® and Tricoya^® products as customers focus on higher performance materials as well as on sustainability. It is this demand, which continues to exceed supply, that has enabled us to substantially offset the wider market pressures from raw materials costs and supply chain disruption through price increases. 

We are progressing our strategic growth projects to increase production capacity five-fold by 2025. The construction of a fourth Accoya^® reactor in Arnhem is progressing well and our US Accoya^® JV with Eastman is approaching final investment decision. With Accsys now directly project-managing the completion of our Hull Tricoya^® facility, we have made good progress towards having the plant commercially operational by July 2022. Our expansion at Arnhem and the new Hull plant will together see Accsys double its present operating production capacity of 60,000 cubic metres to 120,000 cubic metres by July 2022.

Looking ahead we remain confident in delivering on market expectations. Longer term we believe there will be significant further demand for Accsys' higher performance, lower maintenance and more sustainable products as the world focuses on decarbonisation.

We remain confident in the significant long-term growth opportunities ahead and in our ability to execute our strategy in pursuit of sustainable growth. 

Rob Harris

Chief Executive

22 November 2021