The Accoya^® business produced lower sales volumes (-19%) in H1 FY23, due to the April-May plant shutdown during the completion of the R4 capacity expansion. 

Accoya^® segment revenue growth of 6% comprised wood revenue growth of 5% and acetic acid sales growth of 9%. The increase in wood revenue was driven by increased average sales prices, reflecting the continuing strong demand from customers and increased sales prices to offset higher raw material costs during the period. Price rises were implemented during the summer of 2022. An energy price premium was also introduced in the period which, in addition to the sales price increase, has mitigated the impact of high and volatile prices for acetic anhydride, the raw material we use in our acetylation process to acetylate the raw wood. Acetic anhydride prices have increased and become volatile in the period, with a corresponding trend in gas market pricing in Europe during the period due to wider macro-economic and geopolitical events.

Our sales of acetic acid, which is a by-product of our use of acetic anhydride for our acetylation process, increased by 9% driven by higher market pricing linked to the same macro-trend impacting our raw material purchase pricing. The business therefore has a part natural hedge against volatile acetic anhydride pricing.

As set out in further detail in the Financial Review, underlying Accoya segment EBITDA grew by 1% and the segment's manufacturing margin was 30.8%. While margin was down by 20 bps, it remains above our target level of over 30%. These profit outcomes reflect the impact of lower sales volumes while maintaining fixed operating costs, but where increased pricing has successfully mitigated the higher raw material costs in the period. As a result, profitability at the Accoya^® product level has improved significantly and for each cubic metre of product sold in the segment, gross profit increased from €581/m³ to €755/m³ representing a 30% increase compared to the same period last year. We expect further good progress over time on this metric through operating with greater economies of scale and product mix.

We have continued to see strong underlying demand for Accoya^® across our regions and with our Tricoya^® panel manufacturing partners. The reduction in sales volumes by 19% overall, was reflective of the reduced production level following the shut down in April and May connected with the R4 project.

The year-on-year sales movements across our geographic regions reflect the lower volumes available to those regions due to the limited supply as we remained at capacity production levels while the Arnhem plant was operational. We expect sales volumes in these markets to improve as increased volumes become available from Arnhem with the new capacity from the new fourth reactor  now online and ramping up to capacity over the next two years.

Accoya^®

Strategic progress

During the period, we were pleased to complete the expansion of our Accoya plant in Arnhem which adds a new 20,000m³ reactor, enabling the site's annual capacity to increase to 80,000 cubic metres.

As reported in May 2022, we experienced some unplanned delays in the final installation, tie-ins and supply of certain equipment, which led to a delay in the expected operational start-up earlier in H1. This also resulted in an unexpected second shutdown across the plant in April/May 2022. Subsequently, during commissioning and testing of the new expansion in June, defects were identified in certain installed items of equipment which required remedial work to repair. This was repaired over the following eight weeks. The remedial works costs were around €1m, and we continue to establish whether part of this may be recoverable.

In September, the new reactor commenced commercial operation. We have since started the operational ramp up of the reactor, where we are gradually increasing the reactor's output to full capacity over a two-year period. We continue to work closely with our customers who have been waiting patiently for more product and remain strong proponents of Accoya^®.

North America represents the largest potential regional market for our product, with an achievable market for Accoya^® of up to almost 1,000,000 cubic metres per annum. Under our joint venture with Eastman Chemical Company (Eastman), a world leader in the production of acetyls, we are building an Accoya^® plant in USA with an initial approximately 43,000 cubic metres capacity at Eastman's Kingsport, Tennessee site. The plant will replicate our existing Accoya^® technology at Arnhem. Under the JV, Accsys holds a 60% interest and Eastman a 40% interest.

In March 2022 we reached a final investment decision to proceed with the project and commenced construction with ground broken in April 2022.

During H1 FY23 we have made good progress together with Eastman in progressing the construction of the plant in line with our expected timeline and budget. The plant is expected to take around two years to build and to be operational by March 2024.

In the first part of the period, ground works and deep drilling were successfully completed. This has been followed by the commencement of steelwork. Construction of the main warehouse building is underway and progressing well. Photographs of this can be found in our H1 FY23 results presentation on our website in the investor relations section of the Accsys website.

Accsys and Eastman teams are working together seamlessly, reflecting the joint and complementary expertise and strong project leadership. The construction is managed by an EPC contractor, with Eastman taking a lead role within the JV in overseeing the EPC contractor and construction project management. A strong focus on project and cost management continues by the JV. All major equipment has now been procured and multiple large sub-contracts, including piping, have now been placed.  A small site team was put in place in the period as the construction continues across the site.

Safety has been established as a key priority for Accoya USA LLC at the site.  Around the end of H1 FY23 we were able to celebrate 50,000 hours worked without accident. 

In July 2021 we acquired a business in which to establish an Accoya Colour manufacturing plant in Barry, Wales. The 50,000 square foot (4,650 square metre) manufacturing plant has increased our ability to convert Accoya^® wood into Accoya^® Color - a product which combines the benefits of Accoya^® wood with colour all the way through the wood from surface to core, through a patented process.

During the period, we have continued to increase production of Accoya^® Color at the site compared to the end of the FY22, however the rate of increase has been moderated by the lower Accoya production volumes from Arnhem in the period.

The site is able to produce up to 12,500 cubic metres of Accoya^® Color per annum, with future expansion being possible to support global demand. Accoya® Color generates higher gross profit per cubic metre than Accoya^®,and will support our product-level margin over time. As we increase our Accoya production capacity, we continue to expect increased Accoya® Color sales in the medium term with its unique proposition proving attractive to customers in our target markets, particularly in the decking category where the surface-to-core grey colour will require less maintenance to retain over the long term.

Tricoya^®

Strategic progress

Accsys and its former consortium partners in Tricoya UK Limited (TUK) have been building and looking to commission the world's first Tricoya^® plant in Hull.

The construction of the plant was in its final stages across the period. .During the early part of H1 FY23 the project moved into the commissioning stage for the plant, with a small amount of construction work  being completed concurrently during the commissioning process. Based on third party specialist reports, as at November 2022, the construction of the plant is substantially complete.

During the period, the commissioning process identified that unplanned time and costs would be required in order for the plant to be brought into commercial operation. A number of factors have been identified which are relevant to this unplanned time and cost, including rework of certain areas - such as the plant's control system, the unique and 'world first' nature of the plant and its technologies and being unable to mitigate certain third-party costs, including in relation to mechanical, electrical, instrumentation, control and piping subcontractor work, to the extent previously forecast. The construction challenges and rework extended the timeline to completion and the project team costs required to oversee this, have also led to higher costs than expected.

From June 2022, Accsys moved into discussion with its consortium partners regarding the consortium's funding options for the additional costs. In September 2022, Accsys agreed to provide a further bridging loan facility of up to €8m (on a then uncommitted basis), to enable TUK to continue progressing a reduced level of commissioning activities whilst funding discussions continued. At this time, Accsys also reported that it had reduced the level of activity on site in order to reduce costs, during these discussions. These costs were lowered from a level of around €4m per month to €0.5m per month going forward. The company reported that commercial operation of Hull was unlikely to occur before the end of calendar year 2022, and that the project costs would be higher than previous estimates.

In November 2022 Accsys announced a resolution of these discussions which involved Accsys acquiring 100% of the Tricoya entities, including the Tricoya Hull plant, in exchange for issuing shares in Accsys representing 5.74% of its issued share capital. 

At the same time, the debt arrangements between TUK and Natwest have been restructured, resulting in the principal debt being reduced to €6m and put onto new 7-year terms, with no capital repayments during this period.

The solvent solution allows for the continuation of Ineos and Medite's supply and off-take agreements.  The reorganisation provides Accsys the option to take the Tricoya Hull Project forward on its own terms and to benefit from 100% of the long-term returns from Tricoya^® wood including any future licencing in respect of the global Tricoya market opportunity.

Initially, we have stopped current site activity for at least six months (the "Hold Period"), to mitigate the

risk of weaker economics on start-up due to current high and volatile acetyls raw material prices in Europe.

Third party reports have been concluded confirming up to around €35m for the remaining project capital costs to bring the plant into commercial operation, with further reviews ongoing. This would bring the expected total capital costs for the project to up to around €138m compared to the previously announced maximum of €103m reported in June 2022. However, the final total project costs will remain subject to the timeline that the project is completed over and excludes up to €0.5m monthly costs anticipated during the Hold Period.

At normalised acetyls prices the Company expects that gross margins for the Hull plant of up to 40% continue to be achievable once operating at target capacity.

Further details of this agreement, the resulting restructure of the Tricoya project, and the Company's most recent outlook for the plant in terms of costs and the timing of the Hold Period, can be found in the Company's announcement of 2 November 2022 and in the notes to the financial statements.

Group Strategic Development

In the period we have continued to focus on maintaining a strong organisational platform on which to grow and develop our operating process.

We conducted a strategic review of our engineering capabilities and other actions to drive improved capital project delivery. This has led to the establishment of a Global Engineering Centre of Excellence within the Group, and further development of our R&D function. We have increased our skills and talent in key areas including project management in addition to engineering.

Accsys also continues to invest in 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.

Accsys' patent portfolio totals 402 patent family members, covering 28 distinct inventions in 45 countries with 75% 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.

ESG

With its stated purpose of 'Changing wood to change the world', Accsys is committed to growing and operating its business in a responsible and sustainable way. Aligned with our values and business strategy, our ESG framework outlines the 10 key material issues and impact areas that we are focussed on, and how they line up against the 5 main UN Sustainable Development Goals that we look to contribute towards.

Having completed stage one of our 2020 sustainability strategy roadmap, we have moved into the second stage where we are focused on establishing specific development plans, including the setting of a site-based carbon intensity reduction target at our Arnhem facilities. We plan to have a target in place in time for the start of FY24.

Building on our commitment to transparency, Accsys is currently undergoing the re-submission process for year two of the S&P Global Corporate Sustainability Assessment (CSA). This third-party rating of ESG credentials benchmarks Accsys alongside forest and paper products industry companies, the strong majority of which are large companies with a market capitalisation of over €1bn. We intend to build on our baseline inaugural score of 38 (industry average 37) in parallel with our own internal performance metrics.

Safety

The Group has set 'Zero Harm' as a key target for our operations and is committed to developing best practice Health & Safety (HSE) across Accsys.

H1 FY23 has seen some positive HSE improvements. Our performance is improving as can be shown via our leading and lagging HSE metric indicators and also through discussions with our teams. The awareness around safety is growing day by day enabling us to develop a safety-first culture across our organisation.

Within H1 FY23 we have increased safety observation card reporting (SOC) to over 900, which is greater than our prior year total of 811. In addition, we have seen a significant increase in leadership safety tours to almost 500 tours within the first half of the year. We continue to hold monthly safety briefings for all staff and send out regular safety communications to help raise awareness.

In H1 FY23 our Lost Time Incident Rate (LTIR) per 200,000 hours worked has increased slightly from 0.5 to 0.7 (our interim target is 0.5), in part reflecting a reduction in contractor working hours from both the R4 and Hull construction projects. Our Total Recordable Incidence Rates (TRIR) has improved from 4.9 to 3.5 per 200,000 hours worked.

Outlook

We continue to see strong demand for our Accoya^® and Tricoya^® products as customers focus on higher performance materials and sustainability in their procurement decisions.

With this demand, we have been able to substantially offset the wider market pressures from raw materials costs and supply chain disruption through price increases. 

Construction of a fourth Accoya^® reactor in Arnhem is complete and we expect to see the benefit of this with additional volumes now coming through. We reported on challenges at our Hull plant in the period and I am pleased we have recently taken 100% control of the Tricoya project giving the option to complete the plant on our terms and at the right time. We have also made continued progress on our US plant construction with Eastman.

As we move into the second half of the year, demand for our products remains strong, and production levels at Arnhem (reactors 1-3) have been at capacity, while R4 production is ramping up. We recorded sales of 6,600 cubic meters in October 2022, which benefitted from R4 and some unwinding of higher inventory (work in progress) levels and are now targeting sales for the second half of the year to be approximately 50% higher than the first half.

The Hold period of at least six months for the Hull plant will allow us to focus on cash generation from Accoya^® sales.  Together with careful cost management and an expected reduction in inventory levels, this will help strengthen the balance sheet now that the Accoya fourth reactor has been completed.

Expectations for customer orders, as we plan over the next three months and beyond, continue to indicate customer demand remains in excess of our production capacity, while customers are also pleased to be seeing the benefit of gradually increasing volumes with R4 now producing Accoya. We remain confident both in the near term and longer-term demand and growth opportunity for our market-leading products.

Rob Harris

Chief Executive

22 November 2022