The Final Results for the period ended 30 April 2018, announced on 26 September 2018, stated that, whilst the Group was currently trading in line with expectations, performance in the full year to 30 April 2019 (“FY19”) remained sensitive to external macro-economic variables, namely foreign exchange volatility and increasingly high paper costs.
Whilst the Group has been transformed operationally in 2018, addressing internal cost issues and customer margins to mitigate the significant impact of adverse headwinds, the continued weakening of Sterling against USD since September 2018 and increasing tissue prices have impacted profitability considerably. The negative impact of rising input costs and foreign exchange on the Group's profitability in H1 FY19 amounted to c.£5m. Should the current USD exchange rate and high tissue prices prevail, the Board estimates a further impact on input costs in H2 FY19 of c.£3.5m.
Given macro-economic headwinds potentially contributing a total of c£8.5m additional costs in FY19 and despite the mitigating effect of the operational improvements and sales price increases implemented, the Board now expects that Adjusted EBITDA in FY19 will be c.£1m*. In terms of the overall turnaround plan itself, this is expected to result in up to £8.0m of exceptional costs in the business during FY19.
On a positive note, the fundamentals of the business are now stronger. The operational restructuring conducted during the year is delivering like-for-like sales at record levels (excluding discontinued Away From Home revenue). Given this growth, the directors believe that Group revenue in FY19 will increase by c.8%, broadly in line with market forecasts to c.£126m (FY18: like-for-like £116m), compared with overall UK market growth of c.8%. This market is estimated to be worth in the region of £1.5bn with established household-name brand sales declining at c.6% per annum.
The Directors remain confident of delivering further revenue growth whilst continuing to exit low margin work as shareholder returns are driven back to acceptable levels. Looking forward, the Group's FY20 results will include the full annualised benefit of the structural cost savings achieved in FY19, meaning it is well placed to achieve the level of monthly margins from the start of FY20 that it had hoped to achieve by the end of calendar 2018 (assuming today's levels of currency rates and input costs).
Net debt as at 31 October 2018 was reduced to £22.6m and management expect FY19 year-end net debt to be no more than £30.0m (FY18: £33.8m), which is a result of improved working capital management.
The reduction in the expected Adjusted EBITDA outcome for the Group in FY19 falls within existing banking covenants and the Group's bank remains fully supportive.
Gareth Jenkins, Chief Executive Officer of Accrol Group, said:
“Whilst the ongoing macro headwinds encountered by the UK tissue converter industry as a whole in FY19 to date are beyond our control, we are building a more robust business which is increasingly resilient and agile under adverse macro conditions. We are confident that we can create a solid business which delivers acceptable levels of return even under difficult macro conditions and additional upside for shareholders given fair winds. The strategic plan for the Group remains on track, operationally, and the directors firmly believe Accrol Group will exit FY19 in a significantly stronger operational position.”