Interim Results for period ending 30 September 17

FINANCIAL REVIEW

Statement of comprehensive income

Group revenue increased by 13% to €28.3m for the six months ended 30 September 2017 (2016: €25.1m). Accoya segment revenue increased by 13% to €28.3m with revenue from Accoya^® wood increasing by 16% to €26.2m largely as a result of higher sales volumes and price increases early in the period. Included in this is sales revenue for wood products supplied to Medite for the manufacture of Tricoya^®, which increased by 16% to €3.2m (2016: €2.7m) driven by of Medite's own sales of Medite Tricoya panels growth of 24% compared to the same period last year. 

Licensing and business development revenue of €0.1m, included in other revenue (2016: €0.7m, including €0.5m licence revenue), was attributable to our Accoya licensee, Rhodia Acetow, in respect marketing services. The prior year included €0.5m in respect of licence fees from Rhodia Acetow as a result of the commencement of the Arnhem expansion, which was not repeated in the current period as expected given the milestone nature of the agreement. €2.1m of other revenue predominantly relates to the sale of acetic acid and remained consistent with prior year (€2.0m) given similar production levels.

Gross margin decreased from 27% to 20% compared to the same period in the previous year due to lower licencing income and lower manufacturing margin. Gross Accoya manufacturing margin decreased from 25% to 20% (year ended 31 March 2017: 23%). The decrease in margin was due to a one off €0.5m loss on low grade wood, increased material costs for raw wood and acetyls, together with an additional maintenance stop in the period due to tie ins for the plant expansion in Arnhem. This was offset by with an increase in pricing as noted above. The Group has implemented a further price increase following the period end.

Other operating costs, increased from €10.2m to €12.0m. This increase is largely due to exceptional items and other adjustments of €2.1m (2016: €0.3m), with underlying operating costs remaining constant at €9.9m (2016: €9.9m).

Underlying operating cost adjustments include:

·      €1.4m annual bonus paid in the current year which was attributable to the year ended 31 March 2017. The accrual for the current year bonus is included in underlying operating costs. This double charge in the period results from a re-alignment of the timing of recognition of bonuses reflecting the more structured annual bonus scheme now in place compared to previous years. In addition the bonus paid in the current period relating to the year ended 31 March 2017 included one-off targets relating to the formation of the Tricoya consortium.

·      €0.2m of exceptional restructuring charge has been recorded following from staff changes necessary following the formation of the Tricoya consortium.

·      €0.5m foreign exchange loss arose from holding cash in pounds sterling which was held primarily as a cash flow hedging instrument to hedge future Sterling project expenditure on the new plant in Hull. This has been impacted by the volatility of the exchange rate post Brexit (see note 4).

Underlying operating costs remained constant at €9.9m (2016: €9.9m). Staff costs increased by €0.1m to €4.9m due to inflationary salary increases and an increase in headcount. This increase was mitigated as our UK cost base benefited from the strengthening of the Euro against Sterling during the period, with a €0.1m decrease relating to the changes in foreign exchange. Other costs benefitted from an additional €0.1m foreign exchange decrease, offset by small increases in facility and sales and marketing costs as the business prepares for the larger production capacity. 

Research and development costs increased from €0.6m to €0.7m as a result of exceptional items (See note 4).

Finance expenses increased to €0.4m (2016: €0.1m) due to interest payable on loan notes with BGF and Volantis entered into at the end of the prior period together with finance charges attributable to our lease arrangements including those relating to the expansion project in Arnhem. This charge is after allowing for a gain of €0.6m relating to foreign exchange due to holding these loan notes in pounds sterling which has been reported as an other adjustment.

The increase in the loss before tax by €3.9m to €6.8m (2017: €2.9m) includes €1.9m attributable to changes in exceptional items and other adjustments. This is largely attributable to the decrease in gross margin as noted above.

The tax charge of €0.1m (2016: €0.4m) is based on our expected tax rate for the year and is attributable to the profits arising from manufacturing operations, offset by expected research and development tax credits. The decrease reflects the lower manufacturing profits arising in the period compared to the previous year.

Group average headcount increased to 135 in the period to 30 September 2017, from 125 in the period to 30 September 2016, with the increase predominantly attributable to temporary staff supporting the two major projects, in addition to management and administrative functions as the group continues to grow.

Full details of TTL's results have been included in note 6.

Cash flow

At 30 September 2017, the Group held cash balances of €46.9m, representing a €5.7m increase in the 6 months from 31 March 2017. The increase in cash in the 6 month period is largely attributable to the net proceeds from the issue of share capital in Accsys of €12.3m and issue of share capital in Tricoya Ventures UK Limited of €11.5m, offset by investment in tangible and intangible fixed assets of €7.2m, an increase in working capital of €5.0m, out-flows from operating activities of €4.1m and a foreign exchange loss on revaluation of €0.7m.

Cash out-flow from operating activities before changes in working capital of €4.1m represented an increase compared to €1.6m cash out-flow in the equivalent period in the previous year, reflecting the underlying decline in profits of the Group and exceptional items. The change in working capital in the six months to September 2017 of €5.0m (2016: €1.1m) included an increase relating to inventories of €2.9m in the period due to an expected increase in raw wood inventory to satisfy customer demands and increases arising from lower than expected production in the period. There was also a decrease in trade and other payables of €0.7m largely due to increased capital expenditure payments and an increase in trade and other receivables of €1.4m due to inventory prepayments. In the second half of the year the inventory balance is expected to decrease significantly resulting in a decrease in working capital.

Financial position

Tangible fixed assets additions of €7.4m (2016: €1.4m) in the last 6 months consisted predominantly of equipment and services in respect of the Accoya plant expansion and the Tricoya plant build in Hull. €0.3m of internal development costs were capitalised in respect of Tricoya Technologies Limited (2016: €0.2m).

Trade and other receivables increased to €9.0m (2016: €6.4m) largely as a result of a €1.0m increase in inventory prepayment, with the inventory received shortly after the period end in order to satisfy the expected continued higher sales in the second half of the year. Additionally trade receivables increased by €1.6m, noting only a €0.7m increase from March 2017, due to increased sales in the period. Inventory increased to €14.7m (2016: €10.2m) due to the expected high volume of raw wood receipts in the first half of the year in preparation for the expected increased sales and as a result of the lower than previously expected production and resulting sales. The inventory level is expected to unwind in the second half of the year.

The increase in trade and other payables to €11.5m (2016: €9.5m) includes the expenses associated with various projects currently being undertaken by the Group such as the Arnhem plant expansion and the Hull Plant construction.

Amounts payable under loan agreements increased to €20.5m (2016: €nil), noting this has increased from €20.1m since March 2017. This balance represents the loan agreements entered into in the prior period, with accrued interest to date. €7.5m of the Rhodia loan facility remains available (31 March 2017: €7.5m) and this is expected to be utilised in the second half of the financial year as the Arnhem expansion is completed. €15.0m of the Royal Bank of Scotland loan facility remains available (31 March 2017: €15.0m), with the BGF and Volantis loans being fully drawn down in the prior period.

Risks and uncertainties

The business, financial condition or results of operations of the Group could be adversely affected by any of the risks set out below. The Group's systems of control and protection are designed to help manage and control risks to an appropriate level rather than to eliminate them.

The Directors consider that the principal risks to achieving the Group's objectives are those set out below.

(a)        Economic and market conditions

The Group's operations comprise the manufacture of Accoya^® wood and Tricoya^® wood elements, technology and product development and licensing the technology to manufacture and sell Accoya^® and Tricoya^® wood elements to third parties. The cost and availability of key inputs affects the profitability of the Group's own manufacturing whilst also impacting the potential profitability of third parties interested in licensing the Group's technology. The price of key inputs and security of supply are managed by the Group, partly through the development of long term contractual supply agreements.

An element of the Group's strategy for growth envisages the Group selling new or existing products and services into other countries or into new markets. However, there can be no assurance that the Group will successfully execute this strategy for growth. The development of a mass market for a new product or process is affected by many factors, many of which are beyond the control of the Group, including the emergence of newer and more competitive products or processes and the future price of raw materials. If a mass market fails to develop or develops more slowly than anticipated, the Group may fail to achieve sustainable profitability.

(b)        Regulatory, legislative and reputational risks

The Group's operations are subject to extensive regulatory requirements, particularly in relation to its manufacturing operations and employment policies.  Changes in laws and regulations and their enforcement may adversely impact the Group's operations in terms of costs, changes to business practices and restrictions on activities which could damage the Group's reputation and brand.

(c)        Employees

The Group's success depends on its ability to continue to attract, motivate and retain highly qualified employees. The highly qualified employees required by the Group in various capacities are sometimes in short supply in the labour market. There are risks associated with operating a chemical plant and accordingly the health and safety of our staff is made a priority. We continuously seek improvements to exceed industry expectations by challenging our methods, improving our reporting and continuing to learn

(d)        Intellectual property

The Group's strategy of exploiting its technology via manufacturing, partnerships and licensing depends upon maintaining effective protection of its intellectual properties worldwide. Protection is afforded by a combination of trademarks, patents, confidentiality agreements and the structuring of legal contracts relating to key licensing, engineering and supply arrangements. Unauthorised use of the Group's intellectual property may adversely impact its ability to exploit the technology and lead to additional expenditure to enforce legal rights. The wide geographical spread of our products increases this risk due to the increasingly varied and complex laws and regulations in which we seek to protect the Group's intellectual property.

Further details of how risks and uncertainties relate to our strategy and performance in the year are set out in the Group's 2017 Annual Report. In addition, as described above, there is increased foreign exchange exposure relating to our pounds sterling expenditure for the new Hull plant. The Group has implemented its cash flow hedging strategy of using sterling cash holdings to hedge against foreign exchange rate changes in the expected sterling project expenditure.

Going concern

These condensed consolidated financial statements are prepared on a going concern basis, which assumes that the Group will continue in operational existence for the foreseeable future, which is deemed to be at least 12 months from the date these interim results were approved.  As part of the Group's going concern review, the Directors have reviewed the Group's trading forecasts and working capital requirements for the foreseeable future. These forecasts indicate that, in order to continue as a going concern, the Group is dependent on achieving certain operating performance measures relating to the production and sales of Accoya^® wood from the plant in Arnhem and the collection of on-going working capital items in line with internally agreed budgets. 

The Directors have considered the internally agreed budgets and performance measures and believe that appropriate controls and procedures are in place or will be in place to make sure that these are met. The Directors believe, while some uncertainty inherently remains in achieving the budget, in particular in relation to market conditions outside of the Group's control, that there are a sufficient number of alternative actions and measures that can be taken in order to achieve the Group's medium and long term objectives.

Therefore, the Directors believe that the going concern basis is the most appropriate basis on which to prepare the financial statements.

William Rudge

Finance Director

21 November 2017