Interim Results for six months ending 30 Sept 2019

Chief Executive's statement

Introduction

I am pleased to report results which demonstrate further momentum in profitable growth together with continued progress in respect of our strategy to develop production capacity to support the increasing demand for our sustainable products, Accoya^® and Tricoya^®.

Our Accoya^® plant in Arnhem has been operating at capacity levels throughout the period and into the second half of the financial year. We have progressed the initial planning for the further expansion of the plant and are pleased to also announce today an equity capital raise with the majority of the proceeds to be used to fund this 33% expansion in capacity.

As previously announced, the Tricoya^® plant construction in Hull, the first of its kind in the world, has been challenging and is now expected to be operational in the second half of 2020 calendar year. However I am happy with the progress now being made with engineering almost complete and construction work substantially progressed. Part of the net proceeds from today's announced capital raise will be used to fund Accsys's share of the cost overruns resulting from the delay in completion of the plant, with our Tricoya^® consortium partners also expected to fund their share.  

We continue to make good progress with Eastman Chemical Company ("Eastman") and PETRONAS Chemical Group in respect of new Accoya^® and Tricoya^® plants in the USA and Malaysia respectively. Whilst these projects are still at the feasibility stage, they are important given the lead time taken to construct new plants and in considering our expectation for continued sales growth and our understanding of the substantial market opportunity globally.

The strong environmental credentials of our products support our continued belief that we are changing wood to change the world. We are pleased to have recently been confirmed as among the first cohort of companies to be awarded London Stock Exchange's new Green Economy Mark, a clear endorsement of our green credentials for investors.

In October this year Accsys announced that Rob Harris had been appointed as CEO with effect from 20^th November. Rob, who formally joins the Board as a director tomorrow, 29^th November 2019, brings deep operational and leadership experience in the chemicals industry, a skillset which will help deliver its growth strategy over the coming years. As mentioned previously I will remain on the Board until 31 December 2019 allowing for a smooth transition and wish Rob all the best for the future.

Summary of results

Total revenue for the six months ended 30 September 2019 grew by 39% to €44.0m (H1 FY19: €31.6m) driven by a 32% increase in Accoya^® sales volumes to 28,113 cubic metres compared to the same period last year. We also benefited from sales price increases implemented at the start of the 2019 calendar year as well as an improvement in the sales product mix.

Group underlying EBITDA of €2.5m compares to a loss of €1.4m for the same period last year with the improvement due to higher sales volumes and higher gross margin from Accoya^® manufacturing. Gross profit increased by 83% to €12.8m, driven by the higher volumes and the gross manufacturing margin increasing to 28.6% from 20.7% as a result of price increases, improved sales product mix and due to the economies of scale resulting from operating the third Accoya^® reactor.  Gross margins continue to be impacted by the proportion of sales used for the production of Tricoya^® ahead of the Hull plant being completed, although the proportion decreased marginally from 25% to 24% of the total volume sold in the period.

Net debt increased to €59.3m at 30 September 2019 from €50.1m as at 31 March 2019. The increase in net debt was principally due to the expenditure on the on-going construction of the Tricoya^® plant in Hull together with the adoption of IFRS 16. We generated positive cash from operating activities of €2.6m for the six month period compared to €0.7m in the same period last year.

Accoya^® - Global performance

Revenue from the sale of Accoya^® increased 43% to €40.2m in the first half of the year compared to the equivalent period in the previous year. The increase was attributable to a 32% increase in Accoya^® volumes sold together with the benefit of a price increase implemented in January 2019.

Demand has continued to exceed production capacity during the period and we have continued to manage this by allocating available volumes between our customer base.

Sales of Accoya^® to our Tricoya^® licensees for the production of Tricoya^® panels increased by 22%, with the lower than average increase reflecting the allocation to balance the significantly above average increase of 49% in the last financial year.

The increase in sales volumes in other countries reflects the higher available production volumes in the period compared to last year given the additional capacity of the third reactor. The first half of the year also included an annual maintenance shut down which was completed successfully, consistent with previous years and as planned this resulted in no production being possible for half a month.  Sales volumes in Benelux grew below the overall average, in part due to the deferment of a number of larger projects. As such we are working to reduce our reliance on and exposure to construction project timing in this region.

We implemented a price increase effective from January 2019 which addressed anticipated higher raw material costs but also benefitted gross manufacturing margins in the period. Margins also benefitted from the economies of scale resulting from operating the third reactor at full capacity. The combined effect was to increase the manufacturing gross margin from 20.7% to 28.6% and in turn, the Accoya^® segment profit from operations increased by 303% to €5.3m.

The improvement in gross margins was achieved despite a significant proportion of our sales continuing to be sold at discounted prices, with 46% of Accoya^® sold in the period to Cerdia or for Tricoya^®, compared to 48% in the same period last year. This situation is expected to continue to improve, in particular with the start-up of the plant in Hull such that we remain of the view that gross Accoya^® manufacturing margins of at least 30% are achievable in the medium to longer term.

We have progressed the planning for the further expansion of the Arnhem plant through the addition of a fourth Accoya^® reactor and are pleased to announce the proposed funding today to be able to complete this next stage of our growth strategy.

The addition of the fourth reactor will increase the production capacity by 33% to 80,000 cubic metres, enabling Accoya^® revenues of €120m to be achievable over the medium term.  The project will include adding additional chemical storage which is necessary as we handle the higher volumes and will enable us to operate the plant more efficiently.  In addition, in order to handle the higher volume of wood, we plan to invest in new automated wood handling equipment noting our existing stacking machine is now 10 years old. The total cost of this expansion is expected to be approximately €26m. The project will involve detailed engineering and equipment procurement followed by the construction itself. A period of commissioning will be required ahead of the fourth reactor becoming operational, which is planned by the end of the financial year ending March 2022.

Looking further ahead, we are working with Eastman Chemical Company ("Eastman") to evaluate the  feasibility of jointly constructing and operating an Accoya® wood production facility in North America (the "Project"). Eastman is the world's largest producer of acetic anhydride, the key chemical used in the production of acetylated wood. By establishing a production plant in the USA, Accsys would be able to provide increased volumes of locally-produced Accoya®, supply new customers and improve logistical efficiency in the region. A decision as to whether or not to proceed with the next stage of the Project is expected to be taken by each party following conclusion of the evaluation, and subject to entering into legally binding agreements, during the course of 2020.

Tricoya^® 

Construction work on the Tricoya^® plant in Hull as part of our consortium with BP and MEDITE has continued to progress throughout the period.  The previously reported delay has been disappointing and resulted in a slow-down in work over the period with €5.5m invested in the site compared to €18.3m in the same period last year. We continue to expect the plant to be operational in the second half of calendar year 2020 with the issues concerning engineering and related works being addressed and work now accelerating on site.

Construction on site is advanced in most areas of the plant, with the additional works associated with the acetylation tower being a key focus. Construction is expected to be complete by mid-2020 with a period of commissioning to follow ahead of start-up. 

The delay has resulted in costs for the project now forecast to be approximately €28m higher than initially expected with an increase in both the capital costs and associated project overheads increasing as a result of the additional time. This additional cost is to be funded between the Tricoya^® consortium partners and RBS, with Accsys's share expected to be approximately €12m.

Reflecting that this is the first plant of its type, we continue to expect the plant to ramp-up production to full capacity over approximately three years following start-up. Once at capacity, a gross margin of approximately 40% is expected to be achievable. This is higher than the Accoya^® plant gross margin due to lower wood input costs and a higher level of automation resulting from the continuous process in Hull. 

Demand for Tricoya^® panels by our licensees, MEDITE and FINSA, continued to be strong with demand being limited by the allocation of production capacity from the Arnhem plant. Sales volumes increased by 22% to 6,620 cubic metres in the period, with the majority of this continuing to be sold to MEDITE. MEDITE have also committed to purchase a minimum of 40% of the production of the Hull plant, allowing for a ramp up, and we anticipate the vast majority of the Hull plant output to be sold to MEDITE and FINSA. The plant is anticipated to be EBITDA break-even when operating at approximately 40% of its capacity.

We are also progressing the feasibility study which is being undertaken with PETRONAS Chemicals Group Berhad concerning the possible construction of a Tricoya^® plant in Malaysia, with a conclusion likely to come after the Hull Tricoya^® plant becomes operational. In addition, the Hull site construction has been planned in a way which allows for further expansion.

Intellectual property

Accsys has increased its patent portfolio in the recent period to a total of 329 patent family members, in over 40 countries. The number of granted patents has increased to 167, which includes patents relating to key technologies in various countries throughout the world. By using a combination of patenting and know-how we continue to invest in the generation and protection of core technologies associated with the Arnhem plant expansion and the Tricoya^® plant, as well as on complementary technologies for use with Accoya^® and Tricoya^® wood products.

Our principal trademark portfolio covers our brands Accoya^®, Tricoya^®, the Trimarque device and Accsys^®, protected by registration in over 60 countries, with recent trademark 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.

Outlook

Accsys is now very well positioned to take advantage of its sustainable products and substantial market opportunity, with an estimated 2.6 million cubic metres of annual sales ultimately being possible.

These results coupled with the Firm Placing and Placing and Open Offer launched today mark an exciting and important milestone for the Company and we expect to build upon the 12 months of positive EBITDA trading with real momentum across the Group.

The second half of the financial year has started well and we expect this to benefit from production at capacity levels as well as further improvement to our sales product mix.  We are targeting further improvement to gross margins over the medium term with the anticipated benefit from the Hull plant becoming operational, enabling an increase of higher priced sales to replace the volume currently being sold to our Tricoya^® licensees.

The expansion of the Accoya^® plant by the addition of a fourth reactor and completion of the Hull plant will enable Accsys to significantly increase its sales over time targeting Group revenues of €160m over the medium term.

While the significant increase in production capacity enables us to grow to meet increasing demand, we believe it is essential to plan for the next phase of expansion and we will continue to develop the discussions concerning potential new manufacturing plants in USA and Malaysia.

Paul Clegg

Chief Executive

28 November 2019