Interim Results for six months ending 30 Sept 2018

Financial Review

Statement of comprehensive income

Group revenue increased by 12% to €31.6m for the six months ended 30 September 2018 (2017: €28.3m). Accoya^® segment revenue increased by 10% to €31.1m with revenue from Accoya^® wood increasing by 7% to €28.1m largely as a result of higher sales volumes and price increases implemented from January 2018. Included within this is sales for the manufacture of Tricoya^®, which increased by 63% to €5.2m (2017: €3.2m). 

Tricoya^® segment revenue of €0.5m represented sales of Tricoya^® panel purchased from our Tricoya^® licensees to other geographies in order to develop the global market for Tricoya^®.

Licence revenue of €0.5m was attributable to our Accoya^® licensee, Rhodia Acetow, reflecting the milestone nature of our contract with them. Other revenue of €2.5m (2017: €2.1m) predominantly relates to the sale of acetic acid and increased compared to prior year given higher production levels and higher acetic acid prices.

Gross margin increased from 20% to 22% compared to the same period in the previous year due to higher licencing income and Accoya^® manufacturing gross margin. The Accoya^® manufacturing gross margin increased from 20% to 21%.  The increase was driven by the price increase noted above however being somewhat offset by an increase in lower margin sales. 48% of Accoya^® sold in the period was to Rhodia Acetow or for Tricoya^®, both of which are at discounted prices, compared to 42% in the same period last year. This proportion is expected to decrease in the second half of the financial year allowing for greater volumes for sale to other Accoya^® customers.

In addition, the previous year included an additional plant shut down which was required as part of the third reactor construction project and which was not required in the current year.

Other operating costs, decreased from €12.0m to €10.1m. This decrease is largely due to exceptional items and other adjustments of €2.1m in the prior period. Excluding exceptional items, underlying* operating costs remained broadly consistent at €10.1m (2017: €9.9m). (*see note 4 for details of exceptional items and other adjustments, and note 2 for reconciliation).

Underlying staff costs increased by €0.7m to €6.6m due to inflationary salary increases and an increase in headcount by 20 compared to prior year. Group average employee headcount increased to 155 in the period to 30 September 2018, from 135 in the period to 30 September 2017, with the increase predominantly attributable to an increase in Arnhem operations staff following the commissioning of the third Accoya^® reactor and recruitment of the first phase of Hull Plant staff.  Total headcount including direct contractors and the non-executives increased to 192 in September 2018 from 171 at 31 March 2018.

Third party sales and marketing expenditure decreased in the period; however this was offset by an increase in administration costs due to increased headcount and inflationary increases, recruitment fees for new hires, increased property service charges for the new Arnhem office and rent for the Hull offices. Depreciation charges increased in the period compared to prior year following the completion of the third reactor and following the new office and building in Arnhem coming into operation at the end of 2017 calendar year. 

Underlying finance expenses increased to €1.4m (2017: €1.0m) due to interest payable on our loan with Rhodia Acetow no longer being capitalised following the completion of the third Accoya^® reactor, together with finance charges attributable to the lease arrangements relating to the new building in Arnhem which was occupied in November 2017 and which was subsequently replaced by loans with ABN AMRO and Bruil following the purchase of the land and buildings in the period. A further adjustment has been recorded to reflect a gain of €0.2m (2017: €0.6m) relating to foreign exchange due to holding the BGF and Volantis loan notes in pounds sterling.

An exceptional finance charge has been recognised in respect of the acquisition of the land and buildings in Arnhem from Bruil. The non-cash charge reflects the difference between the assets held under the finance lease and the finance lease liability which was terminated at the point the acquisition was completed. The prior year included €1.6m of exceptional expenses and other adjustments.  See note 4.

The decrease in the underlying loss before tax by €0.7m to €4.5m (2018: €5.2m) is largely attributable to an increase in Accoya^® gross manufacturing margin to 21% (2017: 20%) including the effect of a price increase implemented on 1 January 2018, and receipt of €0.5m licence income relating to milestone payments from Rhodia Acetow.

The tax credit of €1.0m (2017: tax charge of €0.1m) reflects a prior period adjustment and results from a change to the Group's transfer pricing policy to more accurately reflect the Group's business model.

Cash flow

At 30 September 2018, the Group held cash balances of €22.0m, representing a €17.7m decrease in the 6 months from 31 March 2018. The decrease in cash in the 6 month period is largely attributable to investment in tangible fixed assets of €23.7m (excluding the land and buildings purchase), offset by €5.7m in-flow from the issue of new ordinary shares in Accsys to VP Participaties BV and drawdown of our working capital facility of €0.8m. Loan receipts of €23m from ABN AMRO and Bruil relating to the land and buildings purchase in Arnhem affected both investing and financing activities, with the freehold purchase included within fixed assets, offset by the termination of the associated finance lease. See note 11.

Cash flow from operating activities of €0.7m compared to €9.6m out-flow in the equivalent period in the previous year, reflected reduced operating loss, changes in working capital, tax receipts and a decrease in exceptional items compared to prior year. 

Financial position

Plant and machinery additions of €23.2m (2017: €7.4m) in the period largely consisted of the construction of the third Accoya^® reactor (€4.9m) and the Tricoya^® plant build in Hull (€18.3m). €0.2m of internal development costs were capitalised in respect of Tricoya Technologies Limited (2017: €0.2m).

Net additions of €9.8m were made in the period as a result of the purchase of the land and buildings in Arnhem, representing the purchase price of €23.0m net with €13.2m of assets which had previously been accounted for as a finance lease. This purchase was financed by two new loans, set out below.

Trade and other receivables increased to €9.2m (2017: €9.0m) largely as a result of a €2.0m increase in trade receivables due to increased sales in the period compared to prior year, net with a decrease in prepaid raw wood. VAT receivable increased to €1.3m (2017: €0.6m) due to increased activity relating to equipment orders for the Hull plant.

Inventory levels increased in the period to €16.2m (31 March 2018: €13.1m), driven by an increase in raw materials. The increase has resulted from the anticipated increase in production volumes combined with the start-up of the third reactor being slightly later than previously anticipated.  Raw material levels are therefore expected to decrease in the second half of the financial year. Levels of Accoya^® inventory remain low and we will be working to increase this to more optimal levels over the coming months as production from the third reactor ramps up.

The increase in trade and other payables to €22.1m (2017: €11.5m) is primarily due to the Hull Plant construction with Tricoya^® related balances increasing to €12.9m (2017: €1.4m).

Amounts payable under loan agreements increased to €54.1m (2017: €20.5m). New financing arrangements in respect of the Arnhem property of €23m were undertaken in the period, comprising of a €19m partially amortising five year package from ABN AMRO, and a commercial loan from the seller and former landlord, Bruil of €4m.  The loans fully financed the purchase of the land and buildings associated with the Group's Accoya^® plant and logistics centre in Arnhem. The financing terms will result in a lower overall income statement charge over the next 20 years and ownership of the land is expected to provide enhanced strategic options, operational security and greater flexibility in respect of the use of the land. The purchase replaced the previously held finance and operating lease which was terminated in the period. The net impact of the above transaction was to increase fixed assets by €9.8m with net debt increasing by €10.9m.

The remainder of the loan balance represents loan agreements entered into in prior periods, with accrued interest to date. This includes the fully drawn down Rhodia Acetow loan facility (€9.5m) utilised for the completion of the Arnhem expansion. €15.0m of the Royal Bank of Scotland loan facility remains available (31 March 2018: €15.0m), with the BGF and Volantis loans being fully drawn down in a 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)           Developing market and driving growth

Manufacturing capacity may be limited should sales grow faster than capacity allows. Our ability to manage demand should we operate at or near capacity levels could result in negative market reaction. A delay in expansion of the Tricoya^® plant in Hull may result in uncertainty with our customers impacting sales in the shorter term.

The Group expects to sell 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.

We are still uncertain as to the arrangements post Brexit and the implications, if any, for trade into the UK. We have always had the benefit of a frictionless border and would hope the final outcome will allow this to continue. However in the event this does not happen we do not expect any significant impact noting that our UK customers are experienced in importing goods from other countries outside of the EU and any associated volatility in the related logistics.

(b)           Developing manufacturing capacity

The Group's current strategy is focused on additional capacity by the construction of new plants, working with other partners where appropriate however developing such new arrangements is not certain and may take time. Further Accoya^® process improvements are likely to be more difficult to achieve with no certainty that capacity from existing assets can be increased further. The Tricoya^® process is based on our core acetylation knowledge but may present unexpected design issues requiring more complex engineering.

The Group's Intellectual Property ('IP') 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 IP, including by obtaining such IP through cyber-attacks, 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 IP.

The cost and availability of key inputs affects the profitability of 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, as necessary through the development of long term contractual supply agreements.

(c)           Research and technology development

Additional applications and new species development remains uncertain given the inherent nature of R&D. An element of the Group's strategy for growth envisages existing or new products being sold into new markets such that slower development could impact longer term growth.

As our products and IP becomes increasingly valuable, an increased risk of third parties challenging our IP or seeking to copy or use it without authorisation develops.

(d)           Organisational development

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.

(e)           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.

(f)            Movements in foreign exchange

The Group's functional currency is the Euro. There is the risk that movements in the Euro exchange rate against other currencies may result in significant, unexpected, financial gains and losses.

The Group's risk management strategy is to minimise the financial risk associated with exchange rate movements by using foreign exchange hedging. Where possible, the Group will use natural hedges where assets and liabilities exist in the same currency, otherwise it will use foreign exchange derivatives such as forward contracts to minimise the risk.  

The Group aims to minimise foreign exchange risks via hedging arrangements, taking account of the affordability of appropriate foreign exchange derivatives.

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, and at least 12 months from the date these financial statements are 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 the achievement of certain operating performance measures relating to the production and sales of Accoya^® wood from the plant in Arnhem and eventually, of Tricoya^® chips from the new plant in Hull, with the collection of on-going working capital items in line with internally agreed budgets.  The Group is also dependent upon certain banking and finance facilities which are in place.

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 that 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 on which to prepare the financial statements.

William Rudge

Finance Director

19 November 2018