Accrol Group Holdings PLC (LON:ACRL), the AIM-listed independent tissue converter, today announced the following (details of all of which are set out further below):
· Proposed Placing of £18 million including £200,000 proposed participation by the Directors and a Proposed New Director
· Lifting of Suspension on AIM
· Trading Update
· Banking Update
· Working Capital Position
· Update on Health & Safety Matters
· Proposed New Director Appointment and Management Changes
· Management Incentive Arrangements
Peter Cheung, Chairman of Accrol, said: “The past few weeks have been extremely challenging for Accrol and its shareholders, as we navigated our way through industry-wide issues and sought a solution to the Group’s short-term funding problems. We believe that the business is through the worst and thank all our investors for their patience, during the period of suspension. The Board is very grateful to the Company’s shareholders and its bank for supporting the business through this difficult period.
“Our new CEO, Gareth Jenkins, who joined the Company on 11 September, is already having a positive impact on the business. He has completed a full operational review and a restructuring is now underway. Gareth’s considerable industry knowledge and proven track record for delivering significant operational efficiencies give the Board confidence going forward and we look forward to providing regular updates on the Group’s progress.”
Proposed Placing of £18m
Accrol announces a proposed placing of £18 million, by way of a conditional placing (“Placing”) of 36,000,000 new ordinary shares of £0.001 each in the capital of the Company (the “Placing Shares”) at a price of 50 pence per share (the “Issue Price”). If approved by shareholders of the Company (“Shareholders”) the Placing Shares to be issued pursuant to the proposed Placing are expected to represent approximately 27.9 per cent. of the enlarged issued share capital of the Company immediately following the admission of the Placing Shares to trading on AIM (“Admission”). The Placing Shares will rank pari passu in all other respects with the Company’s existing ordinary shares of £0.001 each (“Ordinary Shares”).
The Placing Shares were offered to certain qualifying investors by Zeus Capital acting as sole broker in connection with the Placing.
The proposed Placing will be subject to, and conditional on:
· the passing, without amendment, of certain resolutions to be proposed at the General Meeting, as will be set out in the notice of General Meeting to be posted to Shareholders (the “Resolutions”);
· Admission occurring by no later than 8.00 a.m. on 11 December 2017 (or such later time and/or dates as may be agreed between the Company and Zeus Capital, being no later than 5.00 p.m. on 29 December 2017);
· the completion of legal documentation to reflect and implement the Revised Banking Arrangements (defined below) which shall be conditional only upon Admission; and
· the Placing Agreement becoming unconditional in all respects (save for the condition relating to Admission) and not having been terminated in accordance with its terms.
The Directors intend to use the proceeds of the Placing to:
· mitigate the identified short-term funding requirement;
· support future working capital requirements of the Group;
· implement restructuring to improve operational aspects of the business;
· implement plans to review and improve the Group’s health & safety procedures;
· assist in meeting the revised banking covenants contained in the Revised Banking Arrangements; and
· pay the costs associated with the Placing.
Director/Proposed Director Participation in the Placing
The following Directors and the Proposed Director have subscribed for an aggregate of 400,000 Placing Shares
Number of Shares
Value of Shares
Percentage of Enlarged Share Capital
Further details relating to the Placing are set out further below.
Lifting of Suspension on AIM
As detailed in the Company’s announcement of 5 October 2017, Accrol’s Ordinary Shares were suspended from trading on the AIM Market on that day. The closing mid-market price of an Ordinary Share immediately prior to suspension was 132p. The Company is now proposing to raise £18 million pursuant to the Placing, having renegotiated its banking terms with HSBC Bank plc (details of the revised terms are set out further below) and is providing a Trading Update and Outlook Statement in relation to the Directors’ expectations going forward (which is also set out below).
Restoration of trading in the Shares will take effect from 07:30 today, 20 November 2017.
Pulp Paper Market Dynamics and Parent Reel Costs
As previously announced on 5 October 2017, the Company, along with the industry generally, began to experience a sudden and significant change in trading conditions in the second quarter of its current financial year. This was caused principally by rapid inflation in pulp prices with BHKP (hardwood) pulp prices increasing by 40.6% in the period from January to October 2017*, which relates to the majority of Accrol tissue production, and NBSK (softwood) pulp prices increasing by 13.7% in the same period. These rises resulted from a reduction in supply of pulp due, principally, to pulp mill closures in China and longer than expected mill maintenance in Brazil, which were also exacerbated by increased Chinese demand for pulp paper. This was further compounded by foreign exchange headwinds. Together, these factors substantially increased the Group’s parent reel input costs.
* Source: Foex Indexes Ltd
Price Rises to Customers
Prior to the trading update issued on 5 October 2017, the Company had achieved limited success in passing on these inflationary pressures to its customers. Although input costs rose further in October, as pulp prices continued to rise (detailed above), the Company has, in the last few weeks, made tangible progress on agreeing price increases with its customers and the Board is confident of a positive outcome to these negotiations.
In its evaluation of the funds needing to be raised as part of the Placing, the Board’s financial model includes some acceptance of price increases across Accrol’s customer base. The Directors will keep this under close review, in light of the highly sensitive nature of price increases to the Company’s financial performance and working capital position. In addition, the Board notes that price increases may result in a reduction in volumes from customers. Again, the Board has assumed some volume loss in its financial model but, if there were to be greater volume loss than expected, then this would adversely impact expected financial performance and its working capital position.
Operational Efficiencies and Restructuring
The Board has undertaken a full review of the Group’s operations and has begun implementing a comprehensive restructuring to improve operational efficiencies.
The Company plans the following actions over the next 12 months, which the Board believes could result in savings of circa 6% per annum:
· a proposed reduction in headcount of 89, currently in consultation period, and reduction in overall labour costs;
· an ongoing focus on reduction in waste levels;
· a reduction in the number of SKUs;
· investment in systems and people to deliver efficiencies in purchasing, logistics, storage and manufacturing;
· streamlining and rationalising supply lines.
As the business drives towards its goal of being a leader in operational excellence in the industry, it has increased its focus on improving and redeploying skills throughout the manufacturing process and expects to see tangible results over the next 12 months.
Working Capital Management
The Company has already implemented a number of working capital initiatives, which have resulted in working capital improvements of circa £5m (relating to reduction in finished goods, raw material stocks and the collection of older debtors). The operations team will continue to seek to identify opportunities to improve working capital, including the simplification of the manufacturing process.
Foreign Exchange Hedging
In FY17, the Group entered into a significant volume of forward currency contracts ahead of, and following, the EU referendum, selling Sterling and purchasing both US$ and Euro. The Company continued and will continue to follow the same policy in FY18.
The Group currently has a revolving credit facility of £16m (reducing to £14m in 30 April 2018) drawn at £15m, and an Invoice Discounting facility (the “ID facility”) of £23m. The Group has reached agreement with HSBC Bank plc to revise its covenants in line with the Directors’ current expectations of trading (“the Revised Banking Arrangements”). In addition to standard liquidity (minimum cash balance) and asset coverage covenants, the revised covenants include a trading covenant based on minimum EBITDA levels, which is, in turn, based on a minimum EBITDA for the year ending 30 April 2019 of £4.6m. Taking into account the agreed tolerances from this minimum adjusted EBITDA level, the covenant tests can be summarised as follows:
Date of test
30 April 2018 for previous 12 months
31 July 2018 for previous 3 months
31 October 2018 for previous 6 months
31 January 2019 for previous 9 months
30 April 2019 for previous 12 months
These minimum adjusted EBITDA levels are subject to upward revision in the event that there are upgrades to analyst forecasts.
The minimum adjusted EBITDA levels, on which this covenant is set, are highly sensitive to the following three factors, namely parent reel pricing, US$/Sterling exchange rates and level of turnover.
Any breach of the trading covenant would trigger a 90-day standstill period (commencing from the 15th day following the breach test date), during which time the bank will not be able to withdraw its facilities or enforce its security, as long as the Company complies with its obligations during that period. It is likely in such a scenario that the Company would need to consider all funding possibilities available at that time, which could include refinancing of its debt facilities and/or raising further equity.
The Group has reached agreement with HSBC Bank plc for the revolving credit facility to remain committed until13 June 2021 and the ID facility is committed for a three months’ rolling period, in line with the terms of the existing agreement. As is normal with such facilities, the advance rate against fundable debtors in relation to the ID Facility is subject to change, pursuant to the terms of the facility, and the Directors believe this is a standard term incorporated into the majority of invoice discounting providers terms and conditions. To the extent the advance rate reduces, this would decrease the level of funding available to the Group under the facility.
The Revised Banking Arrangements have received credit approval from HSBC Bank plc but are subject to formal legal agreement. It is anticipated that formal legal agreement of the Revised Banking Arrangements, which is a condition of the Placing, will be in place ahead of the General Meeting (details of which are contained further below) and conditional only on Admission.
Working Capital Position
The Directors believe, having taken into account the proceeds of the Placing and the availability of funds pursuant to the Revised Banking Arrangements, that the Group will have sufficient working capital for its short-term requirements. However, the Board is unable to make any confirmations about sufficiency of working capital beyond this, due to the Group’s working capital being highly sensitive to, amongst other things, parent reel pricing, foreign exchange fluctuations and level of turnover. As such, there can be no guarantees that the funds raised pursuant to the Placing, together with the available bank and other facilities that will be in place following Admission, will be sufficient for the Group’s requirements for the next 12 months and that the Group may require further funds to be raised during this period to secure the Company’s longer-term future.
Given the ongoing input cost pressures, the Board expects that the Group will break even or make a marginal loss in the year to 30 April 2018 at the adjusted EBITDA level. In view of this, the Board will not be proposing a final dividend for the current year.
The Directors expect the Company to return to a small profit at adjusted EBITDA level in the year to 30 April 2019, which will enable it to comply with the requirements of the EBITDA banking covenant test detailed above. It is the Board’s intention to return to the dividend list at the earliest appropriate opportunity.
The net debt position of the Company on Admission, taking into account the net proceeds of the Placing of £18 million, is expected to be approximately £22 million and the Directors expect that this will move to no more than approximately £23 million by 30 April 2018.
As mentioned above, the Group’s trading performance is extremely sensitive to a number of key variables which could have a significant effect (positive or negative) on the Company’s profitability, which could in turn lead to a breach of the trading covenant detailed above. These sensitivities, which underpin the Company’s expected financial performance for FY2018 and FY2019, include:
· parent reel pricing;
· the exchange rate between Sterling and US$; and/or
· level of turnover.
Update on Health & Safety Matters
As previously announced at a hearing on 12 October 2017, Accrol Papers Limited (a wholly owned subsidiary of the Company) pleaded guilty to a single health and safety regulatory offence arising out of an incident, whereby an employee sustained a serious injury to the top of his right index finger whilst attempting to remove a paper jam from a section of machine. The accident resulted in the employee’s right index finger being crushed and subsequently amputated below the first distal joint. The employee returned to work two weeks after the injury occurred and remains an employee of the Company. The Health and Safety Executive (HSE) has indicated to the Company that the offence sits within the “high culpability” category (which is disputed by Accrol Papers Limited), meaning it is seeking a fine in the range of £550,000 to £2.9 million for this incident with a starting point of £1.1m. The Court has stated that Accrol Papers Limited will receive maximum credit for its early guilty plea. Consequently, any fine imposed will be subject to a discount of one third. Sentencing is expected on 17 January 2018 and, as previously announced, any such fine is likely to have a material impact on the Company’s cash position. An announcement detailing the fine will be made following this hearing. The employee has since issued a civil claim which is being handled by the Group’s insurer.
The Company takes the health and safety of its employees very seriously and has co-operated fully with the HSE in its investigations. In common with other manufacturing businesses, however, there are workplace accidents from time to time. Since January 2016 (to the date of this announcement) Accrol Papers Limited has submitted a total of 11 reportable incidents to the HSE (excluding the incident referred to above) under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013. Accrol Papers Limited has not received any communication from the HSE following these reports. The Board is of the view that this indicates that there is unlikely to be further prosecution. However, Accrol Papers Limited cannot guarantee that there will be no further investigations or prosecutions made by the HSE in respect of such reported incidents.
The Company is aware that the Local Authority is intending to inspect the Company’s Skelmersdale warehouse which is operated by a third party on the Company’s behalf. This is as a result of previous HSE concerns relating to the stacking of pallets at that site. Therefore, further investigations or enforcement actions cannot be discounted.
Proposed New Director Appointment and Management Changes
Conditional on the Placing completing and on Admission, it is proposed that Dan Wright will join Accrol’s main board as a non-executive director. Dan joins the Company as a non-executive director, having previously spent eight years at NorthEdge Capital, a lower mid-market private equity fund targeting businesses in the north of England, where he was founder Partner, Chief Operating Officer and Head of Portfolio with primary responsibility for financial, development, portfolio and operating matters. Dan held a Board role at Accrol Group Holdings Limited, prior to the IPO, from July 2014 – the time of NorthEdge’s investment into the Company. Dan has also held previous roles at Cable Partners LLC, Deutsche Morgan Grenfell Private Equity and RBS, during which time he was involved in multiple restructuring and refinancing projects. Further details in relation to Dan Wright, including those required by Schedule 2(g) of the AIM Rules for Companies will be provided in a separate announcement once the appointment is confirmed.
The Company has created a new interim COO role and appointed Don Coates, formerly CEO of DS Smith Paper, Powerflute and Brintons Carpets, to the operational board. His experience of operational and business restructuring in quoted and private equity backed organisations requiring step change improvement is considerable.
A senior finance executive, Martin Leitch, has also been appointed to the operational board on an interim basis to support in the restructuring of the business. He began his career with Price Waterhouse and has subsequently held a number of senior finance roles in major quoted and private equity backed businesses. Martin has significant experience in manufacturing and consumer facing businesses.
Management Incentive Arrangements
In order to incentivise the delivery of key performance measures over the longer term a new Management Incentive Scheme will be introduced following completion of the Placing.
Further Details of the Placing
The Directors have given careful consideration as to the structure of the proposed placing and have concluded that the Placing is the most suitable option available to the Company and its Shareholders at this time.
Placing Shares will be issued through the Placing at 50 pence per Placing Share to raise gross proceeds of £18 million.
The allotment and issue of the Placing Shares is conditional on shareholder approval for the Directors to allot the Placing Shares and for statutory pre-emption rights to be disapplied in respect of such allotment.
Principal terms of the Placing
In accordance with the terms of a conditional placing agreement to be entered into between the Company and Zeus Capital (the “Placing Agreement”), Zeus Capital has, as agent for the Company, conditionally placed, with institutional and other investors, the Placing Shares at the Issue Price to raise gross proceeds of £18 million.
The Placing is not being underwritten.
Under the Placing Agreement, the Company has agreed to pay to Zeus Capital a fixed sum and to pay Zeus Capital commissions based on the aggregate value of the Placing Shares placed at the Issue Price and the costs and expenses incurred in relation to the Placing together with any applicable VAT.
The Placing is conditional, inter alia, upon the following:
· the passing, without amendment, of the Resolutions;
· Admission occurring by no later than 8.00 a.m. on 11 December 2017 (or such later times and/or date as may be agreed between the Company and Zeus Capital, being no later than 5.00 p.m. on 29 December 2017);
· the completion of legal documentation to reflect and implement the Revised Banking Arrangements which shall be conditional only upon Admission; and
· the Placing Agreement becoming unconditional in all respects (save for the condition relating to Admission) and not having been terminated in accordance with its terms.
If the conditions set out above are not satisfied or waived (where capable of waiver), the Placing will lapse and the Placing Shares will not be allotted and issued and no monies will be received by the Company from investors in respect of the Placing Shares.
Application for Admission
Application will be made to London Stock Exchange plc for the Placing Shares to be admitted to trading on AIM. Admission of the Placing Shares is expected to take place, and dealings on AIM are expected to commence, at 8.00 a.m. on 11 December 2017 (or such later time and/or dates as may be agreed between the Company and Zeus Capital). No temporary document of title will be issued.
Effect of the Placing
The Placing Shares will, following Admission, rank pari passu in all respects with the existing Ordinary Shares in issue at the date of this announcement and will carry the right to receive all dividends and distributions declared, made or paid on or in respect of the Ordinary Shares after Admission.
Upon completion of the Placing the Placing Shares will represent approximately 27.9 per cent. of the Company’s share capital immediately following Admission, which will include the Placing Shares.
The Placing Agreement
Pursuant to the terms of the Placing Agreement, Zeus Capital, as agent for the Company, has agreed to use its reasonable endeavours to procure subscribers for the Placing Shares at the Issue Price. The Placing Agreement is conditional upon, among other things, the conditions set out above and none of the warranties or undertakings given to Zeus Capital prior to Admission being or becoming untrue, inaccurate or misleading in any material respect.
The Placing Agreement contains customary warranties given by the Company in favour of Zeus Capital in relation to, inter alia, the accuracy of the information in this document and other matters relating to the Group and its business. In addition, the Company has agreed to indemnify Zeus Capital (and its affiliates) in relation to certain liabilities which they may incur in respect of the Placing.
Zeus Capital has the right to terminate the Placing Agreement in certain circumstances prior to Admission. In particular, in the event of a breach of the warranties or a material adverse change or if the Placing Agreement does not become unconditional.
For the purposes of effecting the Placing, the Resolutions will be proposed at the General Meeting.
The full text of the Resolutions will be set out in the notice of General Meeting that will be posted shortly.
The Directors consider the Placing and the passing of the Resolutions to be in the best interests of the Shareholders and the Company as a whole. Accordingly, the Directors recommend that Shareholders vote in favour of the Resolutions as they intend to do in respect of their beneficial holdings of an aggregate of 881,363 existing Ordinary Shares, representing approximately 0.95 per cent. of the existing Ordinary Shares.
Importance of Vote
If Shareholder approval of the relevant resolutions is not achieved, the Placing will not proceed and the Company is at risk of not being able to continue trading as a going concern. Under such circumstances, Shareholders could lose all or a substantial amount of the value of their investment in the Company. Accordingly, the Directors believe that the successful completion of the Placing represents the best option available to the Company and Shareholders.
Related Party Transactions
Peter Cheung, Gareth Jenkins, Steve Hammett, Joanne Lake and Dan Wright each of whom are either a Director or a Proposed Director have conditionally subscribed for an aggregate of 398,000 Placing Shares as set out above. NorthEdge Capital LLP, a substantial shareholder in the Company (as defined by the AIM Rules for Companies) has conditionally subscribed for 5,500,000 Placing Shares. Therefore, the participation of each of these parties in the Placing constitutes a related party transaction under Rule 13 of the AIM Rules for Companies.
In the case of each of the Directors or Proposed Director above who have conditionally committed to invest, the remaining Directors on the Board shall be deemed to be the independent directors and, in the case of NorthEdge Capital LLP, all Directors of the Board shall be deemed to be independent, Therefore, having consulted with the Company’s Nominated Adviser, Zeus Capital, each of the Director’s, the Proposed Director’s and NorthEdge Capital LLP’s participation in the Placing is considered, by the relevant independent Directors, to be fair and reasonable insofar as Shareholders are concerned.
EXPECTED TIMETABLE OF PRINCIPAL EVENTS
Announcement of the Placing
20 November 2017
Dispatch of the circular and form of proxy
21 November 2017
Latest time and date for receipt of forms of proxy for the General Meeting
11.00 a.m. on 6 December 2017
11.00 a.m. on 8 December 2017
Admission of the Placing Shares to trading on AIM
8.00 a.m. on 11 December 2017