Accrol Group Holdings plc (LON:ACRL), the UK’s leading independent tissue converter, has announced the outcomes of its strategic review, undertaken in 2022 with the support of Deloitte.
INTRODUCTION
The Board’s longstanding vision for Accrol has been to build a diversified group of size and scale, better positioned to manage external risks and to capture the growing opportunity within the private label household and personal hygiene market. As we enter 2023, we believe the Group has made considerable, and demonstrable, progress in delivering against this vision.
The Strategic Review process has been focused on how best to maximise both value for our stakeholders and the potential of the business, building on the strategic progress already achieved. Within this process, the Board has carefully reviewed the current and future capital needs of the Group and the anticipated free cashflow generation, as Accrol continues to execute successfully against the market opportunity in front of it.
Our ambitions over the medium term are:
| · | Continue to focus on our core toilet and kitchen towel business; |
| · | Grow our facial and wet wipe business; |
| · | Develop a licensed business model and grow direct-to-consumer Oceans brand; |
| · | Build a sustainable paper mill; |
| · | Acquire selectively to strengthen and extend our product offering; and |
| · | Maximise medium term tangible shareholder returns, through a combination of dividends and, potentially, share buybacks. |
Below, we outline the substantial internal progress that has been made over the last few years; the market opportunity that will continue to drive our growth; and the future steps we intend to make. One of the key opportunities that we have been carefully reviewing has been whether to acquire, or develop, our own paper mill capacity. We have taken the decision to proceed with building a mill, having made considerable progress in this area over the last six months.
The building of a paper mill should be seen as a culmination of a lengthy process of internal investment that has seen the Group transformed. Even after taking account of the capital requirements of the mill, which are not onerous and represent excellent value to our stakeholders, Accrol is now entering a period in which the benefits of the substantial investments made into the Group’s capacity, efficiency and routes to market will become much clearer. This allows the Board to outline, today, its broader intentions around capital allocation, as we seek to maximise returns for our stakeholders.
Dan Wright, Executive Chairman of Accrol, said:
“Over the last four years, Accrol has been transformed as an organisation to one that currently supplies c.21.5% of the UK market’s tissue volumes and has considerable further capacity. Our state-of-the-art businesses are in an incredibly strong position to benefit in a private label market, which is growing rapidly and significantly. Our customer base is strong and varied and the ability to pass-on cost increases swiftly has been evidenced in the Group’s Half Year Results, also announced today. We look forward with increased confidence, having clearly identified where we can grow the business.”
FOUNDATIONS FOR GROWTH
The outcomes to the Strategic Review, which we are announcing today, are set against the marked structural shifts that we have witnessed in our core markets and the internal transformation of our Company achieved over the last five years.
Market
In 2017, Accrol’s total addressable market in the UK was worth £1.7bn, of which private label products represented 47%. Today, the market is worth £2.5bn, of which private label products represent 54%. Although a good proportion of this growth has been driven by rising input costs, over more recent years, the shift towards private label products, Accrol’s core strength, has been more consistent with every indication pointing to a continuation of this trend.
Accrol’s position and prominence within this market has grown materially under the current management team; partly through the outperformance of the private label segment, but also as a result of our internal transformation and improved competitive positioning. In 2017, Accrol was focused on supplying an overly complex range of entry level products to a narrow customer base of discount retailers and multiple, low-value, low-margin Away From Home Products. Our share of the total tissue market in 2017 was just 5.6%. Today, Accrol supplies a broad base of retail customers with a full but simplified range of paper-based products. Our total market share (volume) has grown to c.21.5%, as we have consistently outperformed the private label market, which is itself the fastest growing segment in the broader market. Our share of the private label market (volume) is now c.45%.
We look forward to a market opportunity that offers further growth, as UK consumer spending behaviour continues to shift in our favour. This market dynamic pre-dated the current cost-of-living squeeze, which itself is likely to accelerate this shift over the shorter term. Our ability to offer our retail partners a compelling, high quality product range at competitive pricing points is founded on the internal transformation we outline below. This has positioned Accrol into, what we believe is, the best invested multi-site tissue convertor in the UK, employing full automation with state-of-the-art machinery across all our sites. We are now the largest private label supplier in the UK market and third largest player overall, behind Kimberly Clark and Essity. Our ambition does not stop there.
Continued Operational Excellence
At the time when the current Board was constituted, Accrol faced multiple challenges, some of which had been self-inflicted. From the outset, the priority of the Board has been to:
| · | Reverse the significant historic under-investment in terms of capital, physical capacity and people; |
| · | Simplify the Group’s product range; |
| · | Improve the efficiency of the Group’s processes; |
| · | Strengthen the senior commercial, operational, and financial leadership; and |
| · | Address an historic lack of control over key input costs. |
With the support of our shareholders, bank (HSBC), and people, the business has been transformed and we are delighted with the progress made across all of these areas.
The need to invest in the business and simplify our product range should be seen through the same lens. Put simply, in order to improve our competitive positioning, we identified a need to increase our capacity materially, whilst reducing our cost to produce. Over c.£20m has now been invested in the installation of state-of-the-art tissue conversion machinery and automation across all the Group’s primary sites. Critically, we are past the peak of this investment programme with an ongoing annual capital requirement in the core tissue conversion business of c.£3m.
As a result of this investment, the Accrol business we see today has been completely transformed from the operations we inherited in 2017. We now convert only six tissue types, down from 75, and have delivered a material increase in overall volumes, whilst seeing core like-for-like headcount reduce from 695 to 275. Following our two most recent acquisitions, our total headcount now stands at 445 and an expectation that, by the end of this financial year, it will be c.435. Critically, revenue per head has increased from c.£150k to £575k. Looking solely at our volume per head efficiency, we see over a 150% increase compared to 2017. Not only has our efficiency as an organisation improved, we exited 2022 with 20% volume capacity to spare. We believe that the Group is now the best invested tissue convertor operating in the UK, providing a robust underpin to our commercial proposition and ambitions.
Strengthening our senior leadership was another priority and this has extended beyond the Board. Since 2018 and the initial appointments of Gareth Jenkins as CEO and Dan Wright as Executive Chairman, we have appointed a new Managing Director and Operations Director of the Tissue Division. We have also added depth and experience to our financial management teams.
Lastly, but by no means least, Accrol has made considerable progress in addressing one of the most fundamental challenges facing a business such as ours; how to best manage the interplay between our input cost risks (predominantly paper costs, energy and foreign exchange) and customer pricing in a manner that is sustainable and equitable. This has not always been an easy task but 2022, with its backdrop of sustained inflationary pressures throughout the UK economy, has been a year of real progress within the business.
Unlike the situation we found in 2017, Accrol enters 2023 in a strong position with no fixed price agreements in place and instead a range of index linked supply agreements that have substantially de-risked our margins. As we announced in our recent half year trading update and confirmed in the Half Year Results announcement today, we have managed to recover all the additional input costs incurred in 2022. Price rises in a cost-conscious industry are not easy to deliver rapidly. They can only be achieved in partnership with our retail customers and only when our retail partners understand and value our proposition.
However, it has always been clear to us that price rises alone cannot be the whole solution, especially if the current inflationary environment begins to ease. We owe it to all of our stakeholders, including our customers, to find a broader solution that allows us to maintain the price leadership that our customers value, whilst also reducing our internal risk profile. As we have discussed before, we have long believed that securing our own paper mill capacity is critical to achieving this outcome. The challenge for the Board, throughout the Strategic Review process, has been to find the optimal solution from a stakeholder perspective. Our plans for a sustainable mill solution have advanced greatly in recent months, and we are pleased to outline these below. Identifying and securing the right long-term solution for each key element on the project, however, takes time and we will announce key milestones in the project, as they are achieved.
PAPER MILL DEVELOPMENT
Headlines:
| · | Optimal location, which provides a low-cost energy and labour solution, identified |
| · | Initial capacity: one machine producing 70k tonnes in a single grade, representing c.40% of Accrol’s expected annual tissue volume |
| · | Sustainable: 30% of the mill’s energy costs to be delivered through PV solar |
| · | Expected to be operational by mid-2025 |
| · | Total cash cost to the Group are not expected to exceed £10m |
| · | Expected to be fully profitable and substantially accretive to Accrol earnings, within its first year of operation |
| The primary benefits to Accrol will include: | |
| · | Reduced volatility in tissue input costs for the UK tissue conversion business, providing greater customer pricing visibility and certainty; and |
| · | Enhanced security and visibility of tissue supply, which will reduce working capital requirements in the UK tissue conversion business. |
As previously announced, we have been considering a mill purchase or development since before the COVID pandemic. The business logic for owning a mill has always been compelling. It centres around the ability to better manage, or mitigate, the risks and costs throughout our supply chain. Paper price visibility, energy costs, labour costs, and the cost and land and construction all fall into this category.
We have, over the last 18 months, carefully reviewed a number of mill options. Whilst there have been a number of facilities available for sale in the UK, Europe and further afield, they shared a similar characteristic; they were operating close to the end of their normal life and would have required significant capital investment. Building a new mill in the right location for input and people costs is the optimal and sustainable solution.
Improved Land and Construction Dynamics
On a fully comparable basis, the land and building costs in the location that we have chosen are expected to be c.50% lower than originally announced.
We intend to finance the construction costs of the mill, which total no more than £10m, through cash or debt, whichever is the most financially viable at the time, rather than sale and leaseback, removing rental inflation as a potential future drag on the mill’s profitability. It is expected that all funds required for the completion of the project will be met from existing cash resources and any increase in debt will be more than offset by the returns expected from the mill, ensuring that the Group remains within the net debt limits detailed below.
Energy Cost Stability, Efficiencies and Savings
Even prior to the war in Ukraine, the UK has seen a long-term trend of energy cost inflation, rising from an average of 8p per KW/Hr in 2011 to 14p in 2021 and, subsequent to the war, in excess of 60p. Government support measures notwithstanding, it is widely reported that UK energy prices are likely to remain elevated over historic averages over the longer term. Against this context, the energy price outlook for the planned mill is compelling. We have secured visibility over energy costs that are materially lower than those described above. In addition, we envisage that solar PV capacity will be installed at the mill, accounting for up to 30% of its energy requirement.
We anticipate that the mill will operate, crucially for the duration of its life, with an energy cost that is lower than levels seen in the UK prior to the war in the Ukraine.
Continued Emphasis on People and Culture
Accrol is proud of its record as a responsible employer and has previously committed to matching or exceeding living wage thresholds in all of its locations. The mill will deliver on this commitment and will also be fully captured within, and reported on, in Accrol’s future ESG reporting.
MEDIUM TO LONGER TERM AMBITIONS
As the mill solution has progressed, we are now in a position to provide an indicative outline of what we believe Accrol will be capable of delivering over the medium to long-term, if we maintain our current pace of execution against our commercial strategy:
| · | A core toilet and kitchen towel business capable of delivering £250m plus revenue, of which 10% to 20% will be made up of higher margin, third party licensed brands; |
| · | A facial tissue business that is expected to grow three-fold from current levels; |
| · | A wet wipe business that is expected to grow five-fold from current levels; |
| · | A direct-to-consumer business of scale, based around the Oceans brand, suppling a range of plastic-free household products; and |
| · | A paper mill with an initial revenue capacity of c.£80m and rapid payback, selling primarily into the Accrol tissue conversion business with attractive margins. |
CAPITAL ALLOCATION
Over the next three to five years, as already outlined, the Group’s ongoing capital requirement in the core tissue conversion business is not expected to exceed £3m per annum. We are still investing in our wet wipes business, John Dale, but anticipate that capital requirements will not exceed £3m to deliver the growth expectation outlined. Our initial capital commitment to the paper mill is not expected to exceed £10m, with a very rapid payback once the mill comes into commercial operation in 2025. All capital requirements outlined above are expected to be funded out of free cash flow, existing banking facilities and or banking finance, whichever is most appropriate at the time. Net debt will be managed within the limits detailed below.
With the peak of capital investment in the rear-view mirror, the Board has greater visibility over the Group’s free cashflow generating capability. With this in mind, the directors have identified the following priorities for the allocation of surplus capital, which will be implemented as appropriate:
| · | Dividends – the Group intends to resume dividend payments, as soon as is practicable, with a prudent and sustainable dividend cover of c.2.5x – 3.5x; |
| · | Share buybacks – The Group intends to request from shareholders the authority to buy back its ordinary shares either through a mechanical daily purchase process or via a tender offer route, which would return cash to shareholders in an irregular but in a more significant manner. The Board is mindful of liquidity constraints but sees significant value in the current Accrol equity valuation and seeks the flexibility to act accordingly; and |
| · | Acquisitions – The acquisitions of Leicester Tissue Company and John Dale have demonstrated the Group’s ability to integrate and grow the right businesses with significant success. The Board is aware of the potential for bolt-on acquisitions that are aligned with, or provide extensions to, the existing core UK tissue conversion business. As we begin to exit this period of heightened inflation, the Board believes the number of such potential acquisition opportunities is likely to increase. |
Underpinning these identified uses of surplus free cashflow lies a disciplined approach to debt and balance sheet structure. The Group intends is to limit net debt to a maximum of 1.5x EBITDA over the cycle.
