# Accrol Group make strong progress across all businesses and products

- Link: https://www.directorstalkinterviews.com/accrol-group-make-strong-progress-across-all-businesses-and-products/4121099298
- Published: 2023-01-24T07:18:48+00:00
- Author: Giles

**Accrol Group Holdings plc** ([LON:ACRL](https://www.directorstalkinterviews.com/company/accrol-group-holdings/acrl.l)),
the UK’s leading independent tissue converter, has announced its unaudited results
for the six months ended 31 October 2022.

> **Gareth Jenkins, Chief Executive Officer of Accrol, said**:
> “The Board is pleased to report that the Group performed strongly in H1 FY23, 
> delivering substantial growth in volume, revenue, and profit, as well as further
> strengthening its market position. The Group continues to demonstrate its resilience
> against the challenges of input cost inflation, and we successfully leveraged 
> our supply position with customers to recover all additional costs incurred in
> the Period.
> “The Group delivered a notable 14% volume growth in the Period, against an overall
> market which grew by just 1%. This was achieved by offering the consumer great
> value products which suit every budget. Our strengthened supply model and established
> relationships with the retailers will ensure that the Group is well positioned
> to deliver strong results in difficult market conditions.
> “As announced in our trading update on 21 November, adjusted net debt at 31 October
> 2022 was lower than anticipated at c.£30.5m. This was achieved despite a significant
> increase in tissue stocks, as the Group continued to manage uncertainty in its
> supply chains and the effect of strikes at UK ports. This working capital position
> is unwinding, as we progress through H2 and trading conditions normalise. Adjusted
> net debt at the full year end remains on track with market forecasts, which were
> lowered at the time of the trading update to less than 1.5x EBITDA.
> “The Group has performed well in H2 to date and is on track to achieve revenue
> and adjusted EBITDA growth for the year ending 30 April 2023 (“FY23″) marginally
> ahead of expectations at £230m and £15.5m respectively.”

| **Key Financials** | **_H1 23_** | _H1 22_ | **_Change_** | 
| Revenue | **£121.1m** | £73.7m | **64.3%** | 
| Gross margin | **18.0%** | 24.7% | **(6.7%)** | 
| Adjusted EBITDA^(1) | **£7.1m** | £5.0m | **42.0%** | 
| Adjusted profit before tax^(2) | **£3.2m** | £0.5m | **£2.7m** | 
| Loss before tax | **(£0.9m)** | (£3.5m) | **£2.6m** | 
| Adjusted diluted earnings per share | **0.7p** | 0.2p | **0.5p** | 
| Diluted loss per share | **(0.2p)** | (0.8p) | **0.6p** | 
| Adjusted net debt^(3) | **£30.5m** | £21.6m | **(£8.9m)** |

^([1]) Adjusted EBITDA is defined as profit before finance costs, tax, depreciation,
amortisation, separately disclosed items and share based payments.

^(2) Adjusted profit before tax is defined as profit before amortisation, separately
disclosed items and share based payments.

^(3) Adjusted net debt excludes operating type leases recognised on the balance 
sheet in accordance with IFRS 16.

**H1 23 highlights:**

| · | Accrol’s market share by volume increased further to 21.5% (FY22: 19.5%), compared to a flat overall UK market | 
| · | Private label sector strengthened in the Period with Accrol’s volumes continuing to outpace the sector – the Group’s share of private label now totals 46% (FY22: 44%) | 
| · | Private label volumes ahead of pre-pandemic levels and growing at an unprecedented rate against those of the traditional brands (Q1 FY23: 54% vs Q1 FY22: 50%) | 
| · | Strong EBITDA performance of £7.1m, despite considerable inflation driven input cost rises and supply chain issues, which impacted margin in the short term as additional costs were recovered | 
| · | Significant price increases implemented in the Period through a supportive retail customer base | 
| · | Strong performance from John Dale with a 33% increase in biodegradable wet wipe sales – this business has grown sales from c.£1.5m at acquisition in 2021 to exit FY23 with anticipated sales of c.£6m | 
| · | Final investment in automation and capacity concluded in Q1 on time and in budget – major investment programme into the Group’s tissue business now completed |

**People**

| · | Richard Newman, Chief Financial Officer, to step down at the end of April but will stay with the Group until the full year results which are expected by September 2023. He will be succeeded by Chris Welsh, who joined the Group from Ineos Chemicals in October 2022 |

**Current trading and outlook**

| · | Strong volume performance in H2 to date, driven by continued strengthening of private label | 
| · | Gross margins expected to continue to improve in H2 and into FY24, as time lag impact on price increases works through – any further input cost increases will be mitigated in the main by new index linked contracts | 
| · | Group on track to deliver revenue growth of 50% to c.£230m and Adjusted EBITDA marginally ahead of market expectations in FY23, despite an annualised increase in costs of over £80m |

**Strategic Review update**

The Group has today announced the outcomes of its strategic review, which defines
the Group’s medium-term ambitions:

| · | Continued focus on core toilet and kitchen towel business; | 
| · | To grow the facial and wet wipes business; | 
| · | To develop a licensed business model and grow direct to consumer Oceans brand; | 
| · | Build a sustainable paper mill; | 
| · | Acquire selectively to strengthen and extend Accrol’s product offering; and | 
| · | Maximise medium term tangible shareholder returns through a combination of dividends and, potentially, share buybacks. |

> **Dan Wright, Executive Chairman of Accrol Group, 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._“

The Strategic Review Outcomes announcement is available on the Company’s website:
https://www.accrol.co.uk/investors/regulatory-news/.

**OPERATIONAL REVIEW**

**Summary of progress**

The Group made strong progress in the Period, successfully navigating the ongoing
well-reported macro challenges. Over the last four years, we have built a business
with increased scale, operational efficiency, and product diversity, which has enabled
sustainable growth in both volume and market share. We are well positioned to benefit
from the significant further growth expected from private label and discount retailers,
as consumers seek greater value given the ongoing cost-of-living pressures.

Group revenues increased by 64.3% in the Period, when compared to H1 FY22, due to
a strengthening in volume demand of 14% and the successful recovery of input price
increases from all customers. Our market share in volume terms also increased in
the Period to 21.5% (FY22: 19%), in a market that showed an overall increase of 
1%.

The success of Accrol’s simplified range is demonstrated by this increase in market
share and increase in customers, which has grown from c.6% to 21.5% since 2017. 
No one customer represents more than 20% of total revenue. The Group has also made
progress on the development of higher margin, third party licensed brands, which
are a part of the Group’s mid to long-term growth ambitions for revenue growth in
its core toilet and kitchen towel business.

Key performance improvements in the Period included:

| · | Production increased by 57 million rolls in H1 FY23 compared to H1 FY22; | 
| · | Wet wipes sales doubled in the Period and volumes have more than tripled since John Dale was acquired 24 months ago. Sales in FY23 expected to be c.£6m, compared to £1.5m on acquisition; | 
| · | Two new lines installed in the Blackburn facial tissue business, which was transferred from the John Dale site, reducing our cost base there and driving increased outputs in Blackburn; | 
| · | Automation programme completed with installation of one new line, which went operational in the New Year; | 
| · | New warehouse opened in Leyland to improve supply chain efficiency and further reduce inbound costs; | 
| · | Attained and retained our Living Wage employer accreditation; | 
| · | Relationships with all our key customers strengthened and Accrol’s position as the UK’s leading private-label supplier consolidated further; | 
| · | Successfully delivered major price increases recovering over £80 million in additional costs to the business; and | 
| · | Transitioned all toilet roll products to 38mm core, significantly increasing rolls per journey and taking 12% of the Group’s lorries off the road. |

**The market**

The Group’s markets are covered in detail with a full update in the Strategic Review
Outcomes announcement, published today.

**People**

Engaged, well-trained people are a key part of our business model and [sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news).
We have an outstanding team and I would like to thank everyone for their continued
hard work and commitment, which has enabled the Group to perform so well in these
challenging economic conditions.

Richard Newman, the Group’s Chief Financial Officer, has informed the Company of
his intention to step down from the Board and his role as Chief Financial Officer(“
CFO”) at the end of April 2023. He will remain in the business until the FY23 audit
process is completed and the FY23 Final Results are released, no later than September
2023.

Richard joined Accrol in early in 2021 with the remit to professionalise and transform
the finance function of the Group and has established a finance infrastructure capable
of serving a much larger business. Richard has strengthened the finance team through
the recruitment of high-quality people and has helped to lead the business through
a challenging period of significant cost inflation.

Chris Welsh, Group Financial Controller, who joined Accrol from Ineos Chemicals 
in October 2022 as part of the Board’s succession planning, will step up into the
role of Chief Financial Officer from the start of May 2023. Chris is a highly skilled
and experienced financial executive, who has held several senior roles at Ineos 
in the last seven years, latterly as Head of Financial Reporting at its Enterprises
Division. Chris is a Chartered Accountant, who qualified with PwC in 2015.

**Environmental, Social and Governance (“ESG”)**

The business has delivered the following key improvements in the last 12 months:

| · | 15% reduction in tissue waste; | 
| · | 15% more rolls per journey, resulting is a 12% reduction in vehicles used; | 
| · | Zero waste to landfill; | 
| · | 7% less plastic packaging; | 
| · | 3% energy reduction; | 
| · | 8% reduction in carbon emissions, despite the business growing 14%; | 
| · | 22% females in leadership roles up from 6% in 2020; | 
| · | Sedex membership; | 
| · | All sites BRCGS accredited to A or AA; | 
| · | 89% of employees are “proud to work at Accrol”; and | 
| · | Living Wage Accredited Employer. |

**Current Trading and Outlook**

The outcomes of the Strategic Review announced today showcase the Group’s strengths
and the market opportunity. Accrol’s main markets, the discount retailers and private
label products, continue to grow strongly, driven by the ongoing cost-of-living 
crisis. The latest industry data is demonstrating a continuation of the consumer
shift away from the traditional tissue brands into best value, private label alternatives.

The Group’s increasingly strong market position and customer relationships, combined
with its plans for a paper mill, mean Accrol is very well positioned to capitalise
on this forecast market growth. The business has delivered substantial increases
in volumes in the Period, significantly ahead of the wider market, and the Board
is increasingly confident that the growth trajectory of the business, as set out
in the strategic review, is both attainable and sustainable. The volume growth seen
in the first half is expected to continue, following a strong start to H2.

Whilst always mindful of the wider economic uncertainties, the Group’s model is 
robust, and the Board is confident the Group to be on track to deliver results for
FY23 marginally ahead of market expectations.

**Gareth Jenkins**

**Chief Executive Officer**

**FINANCIAL REVIEW**

**Revenue**

Revenue in the Period was £121.1m (H1 22: £73.7m), an increase of £47.4m (64.3%)
compared to H1 22. This increase in revenue represents a growth in volume of 14%
as demand in the private label market strengthened to above pre-pandemic levels.
The Group also successfully delivered significant price increases to demonstrate
resilience against the pressures of rising cost price inflation. 

**Gross profit**

Gross profit for the Period was £21.7m (H1 22: £18.2m), an increase of £3.5m (19.2%)
compared to H1 22. Gross profit as a percentage of revenue at 18.0% (H1 22: 24.7%)
was lower than H1 22, as higher input costs were only partially mitigated by pricing
increases in the Period, given the relative time lag of implementing pricing pass
throughs with retail customers.  

In line with the wider market, the Group continued to experience supply chain disruption
around the world and specifically at shipping ports in the UK. The business continues
to manage customer supply well; having invested into working capital and secured
additional key raw material products to maintain consistent supply.

**Adjusted EBITDA**

Adjusted EBITDA increased to £7.1m (H1 22: £5.0m), an increase of £2.1m (42.0%),
compared to H1 22; largely reflecting the robust gross margin performance. Operating
costs remain a key focus of the Group and, despite general price inflationary pressures,
have largely remained flat to maintain EBITDA profit margin.

**Separately disclosed items**

Separately disclosed items totalled £0.5m (H1 22: £0.7m), all of which related to
exceptional incremental costs of supply chain disruption, particularly at ports.

**Depreciation and amortisation**

The total charge for the Period was £5.3m (H1 22: £6.1m), of which £3.1m (H1 22:
£2.9m) related to the amortisation of intangible assets.

**Share-based payments**

The total charge for the Period under IFRS 2 “Share-based payments” was £0.6m (H1
22: £0.6m). This charge related to the awards made under the 2022 Long Term Incentive
Plan, that was approved on 5 March 2021.

**Operating profit and earnings per share**

Net finance costs were £1.6m (H1 22: £1.1m), resulting in a loss before taxation
of £0.9m (H1 22: £3.5m). Basic losses per share were 0.2 pence (H1 22: 0.8 pence).
Adjusted diluted earnings per share were 0.7 pence (H1 22: 0.2 pence).

**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. In addition, the Group 
also intends to request from shareholders the authority to buy back its ordinary
shares. The Board is mindful of liquidity constraints but sees significant value
in the current Accrol equity valuation and seeks the flexibility to act accordingly.

**Cashflow**

The Group’s adjusted net debt was £30.5m (H1 22: £21.6m). The net cash flow from
operating activities was £6.1m (H1 22: £0.9m) with the increase reflecting improved
operating margins offset by an investment into working capital of £1.0m (H1 22: 
£3.4m outflow). This net working capital outflow primarily represented an investment
into building inventory, securing additional key raw material products to maintain
consistent supply during supply chain disruptions at UK ports. 

Capital expenditure in the Period was £5.8m (H1 22: £3.5m), which primarily related
to the continued automation of production facilities. Lease payments of £3.0m (H1
22: £3.4m) include leases capitalised in accordance with IFRS 16.

**Balance Sheet**

The Group had net assets of £82.7m (H1 22: £82.7m), as at 31 October 2022. Property,
plant and equipment increased reflecting the renewal of property related leases,
capitalised in accordance with IFRS16. During the Period, the Group increased its
multi-currency factoring facility, used to provide financing for general working
capital requirements, from £27.0m to £35.0m to recognise the significant growth 
in revenue. The Group also maintains a £17.0m revolving credit facility and continues
to operate within the associated covenants attached to this facility.

**Investment**

The final automation of the Leyland site was completed in the Period, notably on
time and to budget which, alongside a final machine installation, completed all 
major investments into the Tissue businesses with only c.£3m investment required
in existing machinery per year going forward for general maintenance capital. This
now positions the Group well with four state-of-the-art fully automated factories
in Blackburn (x2), Leyland and Leicester operating at significantly lower cost levels.

**Outlook**

The Group is well invested with adjusted net debt on track to be less than 1.5x 
EBITDA by the current year end (FY22: 3.0x). The Group’s margins, which were impacted
by the time-lag on price increases, are recovering in H2 FY23 and we are confident
that this recovery to continue throughout FY24.

**Richard Newman**

**Chief Financial Officer**

**Consolidated Interim Income Statement
For six months ended 31 October 2022

**STRATEGIC REVIEW OUTCOMES**

**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.

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