Toilet roll maker hit by rising costs and foreign exchange volatility

Accrol

Blackburn toilet roll maker Accrol has been hit by volatile foreign exchange rates and rising paper costs, it said today.

In a trading update for the six months to October 30, 2018, it said that while the group has been transformed operationally in 2018, the continued weakening of Sterling against the US dollar since September 2018, and increasing tissue prices have impacted profitability considerably.

It said the negative impact of rising input costs and foreign exchange on the group’s profitability in the first half of financial year 2019 amounted to around £5m.

Should the current dollar exchange rate and high tissue prices prevail, the board said it estimates a further impact on input costs in the second half of approximately £3.5m.

Given macro-economic headwinds potentially contributing a total of around £8.5m additional costs in 2019, and despite the mitigating effect of the operational improvements and sales price increases implemented, the board now expects that adjusted EBITDA in 2019 will be approximately £1m, compared with a current market forecast of £4.6m.

In terms of the overall turnaround plan itself, this is expected to result in up to £8m of exceptional costs in the business during 2019.

However, it added, 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 financial year 2019 will increase by around 8%, broadly in line with market forecasts to approximately £126m, against £116m like-for-like the previous year, compared with overall UK market growth of around 8%.

This market is estimated to be worth in the region of £1.5bn with established household-name brand sales declining at about 6% per annum.

The directors say they remain confident of delivering further revenue growth while continuing to exit low margin work as shareholder returns are driven back to acceptable levels.

Looking forward, the group’s financial year 2020 results will include the full annualised benefit of the structural cost savings achieved in 2019, meaning it is well placed to achieve the level of monthly margins from the start of 2020 that it had hoped to achieve by the end of calendar year 2018, assuming today’s levels of currency rates and input costs.

Net debt as at October 31, 2018, was reduced to £22.6m and management expect 2019 year-end net debt to be no more than £30m, against £33.8m the previous year, which is a result of improved working capital management.

The reduction in the expected Adjusted EBITDA outcome for the group in 2019 falls within existing banking covenants and the group’s bank remains fully supportive.

Chief executive Gareth Jenkins 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.”

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