Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Accsys Technologies PLC preliminary results for the year ended 31st of March 2019 conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press Star and One on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday, 25th of June, 2019. I would now like to hand the conference over to your speaker today, Mr. Paul Clegg. Please go ahead, sir.
Good morning, everybody, and welcome to the results call for the 31st of March 2019. You have in the room here myself, Paul Clegg, the CEO, and Will Rudge, the finance director. I think that if you're looking at the screen, you'll see that there's a disclaimer, which I think that as always, we have to go through. Please take a chance to have a look at it, then I will switch straight through to page four. I think while seeing those who are on the call, I don't think this is really necessary, but it is there as a reminder of who we are and what we do. In summary, we are a company that combines chemistry technology and ingenuity to make a highly sustainable product for the built environment, which of course is very pertinent in today's environment.
If I ask you to switch to next slide, if you have that. We've had a very strong year, given where we are. The demand continues to exceed supply. Capacity was running at full capacity with all the production that we could produce. This has resulted in a revenue of EUR 75.2 million, which is up 23%. This is also followed by a growth profit number up to EUR 18.6 million, which is up 37%, which is very encouraging, and this will be further examined by Will later on. This has produced for the first time, an operating or an underlying EBITDA of a positive of EUR 900,000 versus a loss of EUR 3.5 million in 2018. Quite a turn. The expansion in Arnhem was completed as expected and as you probably know, is running at full capacity now.
The whole Tricoya plant had a delay that we announced in March and is now expected to be operational in mid-2020. We've had a very significant period of CapEx, and as I've mentioned earlier, positive cash flow. A very good start to the new financial year, with the board's expectations unchanged. If I ask you to go to the next slide. This is something that's slightly more information about what we see and how do we see the market and where we are at the moment. We believe that through a bit of luck and design, our product is extremely well-positioned for this time and age. It is a highly sustainable and ecologically responsible product, these trends remain very strong across the world, and particularly in the built environment. Our products will outperform most man-made, if not all man-made products that are competitive.
We are not a polluter in the way that aluminum and PVC are. We sell our material through our distributors, both the Accoya, which is directly sold by Accsys, as well as the Tricoya panels that are manufactured by Medite and Finsa are sold through their distribution networks. We have put on the right-hand side here, where we see our current volume sold of 49,716 cubes, where we believe in the long run, as we have stated before, that the ultimate potential market is for the company of 2.6 million cubic meters, which is a significant increase from where we are today. Just to focus a little bit on sustainability before we get more into the numbers. Sustainability remains very important for us. We run the company as sustainably consciously as we can do.
The product is Cradle to Cradle gold and platinum for material health, which is extremely important. The bar to get that certification rises every year. The process has no waste, as I think many of you know. The product fits very well into the sustainable circular economy bio cycle, whilst it outperforms the non-renewable technocycle product. Clearly, this is an aim that us and industry in general should try to achieve. As an example, a window made out of Accoya is now regarded to be a carbon negative application. As far as strategic progress is concerned, there's a picture on the next slide of Hull, which shows the big silos, both the raw material silo on the left and the finished product silo on the right. The construction is progressing. We have had some hiccups, as we've discussed before, on the civil works.
The remedial action, I'm pleased to say is progressing and will be completed fairly shortly. Nonetheless, it means that the manufacturing or the operations of that site won't be complete until the middle of next calendar year. As far as Arnhem is concerned, third reactor is on stream. This has increased our capacity to about 60,000 cubic meters, up from 40,000 cubic meters. What is very encouraging is that it is running at full capacity and basically, it was running at full capacity within nine months of the startup, which is very encouraging. We're already underway of planning the fourth reactor, of which some of the basic infrastructure had already been included in the construction of the third reactor. We will be adding additional capacity as far as storage facilities are concerned, and an updated wood handling equipment as we increase our volumes.
This is very important in being able to take advantage of the increase in volumes of the company to fully benefit from the economies of scale. We are making progress with our U.S. discussions. Like all of these discussions, we can't announce it until it's completed, and until it's completed, it is not completed. I'm very encouraged by the progress, both as far as the relationship with the partner who we've known for a long time, as well as from the market's response to potential capacity being built in the U.S. As I mentioned earlier on the Tricoya, the construction, if I flip to page slide 10 now, we've invested about EUR 28 million in the year. It will be operational in the middle of next year.
The only additional point is to say that Medite, who is our key partner on this as an offtake partner, will take up to 40% of the capacity and has an option to go up to 60%, and their final demand reflection has been very good. We have shown 49% increase in sales of Accoya for Tricoya purposes, which shows the strong final demand. We've also added Finsa as a key partner during this period of time. Again, I'm very encouraged by the initial work that Finsa has done, and we're very grateful and excited about the future with them. Lastly, progression with the PETRONAS Chemicals Group, PCG, is going well. We are in a feasibility period, which will last at least another year.
We have both got encouraging feedback from the final demand market as well as the technical aspects of the construction of the plant and also the possibility of an acetyl or a cracker on site, which is part of the original plan. Good progress, but quite a way to go on that. With that, I will now turn it over to my colleague, Will Rudge, the Finance Director who will take us through the financial numbers.
Good morning, everybody. If you can look at the financial highlights. These figures we think represent our best set of results so far. Key to this is the three things, 23% increase in revenue to EUR 75.2 million for the year. This was driven by demand, but limited by our production capacity, as well as higher pricing and EUR 1.6 million of license income in the period. Secondly, 37% increase in our gross profit to EUR 18.6 million for the year. This enabled ultimately us to report an EBITDA positive figure for the year of EUR 0.9 million, as Paul mentioned earlier. Importantly, this also reflected a progression within the year with us reporting EUR 2.3 million of EBITDA in the second half of the year compared to the EUR 1.4 million lost in the first half of the year.
Lastly, our net debt has increased, the underlying operating cash flow was positive in the period, with the net debt increase being driven by CapEx, and I'll come on to detail all of this in a bit more. Overall, this means that we are well positioned and expect to benefit from the further increase in the profitability and revenue in the next period of time, the medium to longer term. We will benefit from the significant CapEx investment. First of all, the full year benefit of the third reactor as we move into the new financial year. Then in the following financial year from the Hull plant when that becomes operational in mid-2020 calendar year. Ultimately, this means that we think that a 30% Accoya gross margin is still achievable.
Noting that 46% of our volume sold in the period was at discounted or lower prices, which is only for a period of time. Secondly, when the Hull plant turns on, we expect this to have higher margins than that. Our corporate costs and R&D costs remained relatively stable at small increase, and we do expect that to increase a little bit as our activity levels increase, but that is relative to our overall performance. If I move on to the next slide to look at the revenue growth in a bit more detail. Revenue increased in all regions. This was driven by Accoya's sales up 16% by volume. Within that, the 33% increase in the second half year compared to the first half year, as we benefited from the third reactor. The third reactor, which started partly through the year, ramped up production.
It was only in the final quarter of the year that it was operating near its full capacity. To put that into perspective, in the final quarter of the year, we sold 14,926 cubic meters to give an indication of what we should be able to achieve going forward. The higher volume was also coupled with higher average selling prices, and that resulted in the Accoya wood revenue increasing by 19% to EUR 66.9 million. The increase in sales volumes is attributable to consistent and growing demand across the regions, driven by repeat business. The volumes were limited by capacity, and that's throughout the year, even with the addition of the third reactor. We have concentrated our sales volume allocation on our core customers, focused on developing our relationship with that core distributor base.
As a result, you have seen the number of distributors reduce by 12 from 64. Moving into the new financial year, we have started that as we finished the old one. Demand remains very strong throughout the regions, including particularly the U.S.A., in what continues to be a priority market for us. Moving on to the next slide, a little bit more detail looking at our profitability. In the year, our profitability was driven by the Accoya business ahead of the whole plant coming operational in the following year. The Accoya segmental EBITDA almost doubled to EUR 9 million from EUR 4.6 million last year. The chart on the bottom left there sets out the Accoya EBITDA excluding licensing income, and that shows a 77% increase to EUR 7.8 million last year. This is driven by a couple of things. One is that we continue to benefit from economies of scale.
As I said, we really started to see the benefit of the third reactor in the last quarter. That has enabled the manufacturing gross margin second half of the year to increase to 24.7% compared to 23.8% the same period the year before. Looking at our pricing and our costs, our raw wood cost price saw relatively small increases during the period. Our acetic costs, however, increased more significantly earlier in the financial year before decreasing a bit towards the end of the year. Looking forward, we expect our raw material prices to be relatively stable throughout the new financial year. We did implement a price increase to our customers in January 2019, and that was to take account of the net increase in cost that we are seeing.
That price increase, we do also expect that to have some margin benefit into the 2019 calendar year. The combination of all of those matters meant that our EBITDA did improve significantly to EUR 2.3 million in the second half of the year, as I mentioned before. In summary, looking ahead, the full year benefit of the third reactor will result in higher volumes. We should also benefit from the price increases implemented from January 2019. Our Tricoya volumes, which represented a significant proportion of our volumes, while expected to remain, will not increase in the same proportion as it has done in the past. As a result, we do expect further profitability improvements into the medium and longer term, and in particular when the whole plant turns on in the following financial year. If we move on to the next slide and looking at net debt.
The bridge here reflects the three real sort of key movements. Firstly, is the operating cash flow positive figure of EUR 0.3 million. That's made up of a few areas. Firstly, there's EUR 9 million EBITDA generated by the Accoya business, despite the fact the third reactor was only at capacity in the final quarter. That was offset by EUR 1.9 million cash outflow for the Tricoya business. That's reflecting its pre-operating phase ahead of the whole plant startup, as well as costs associated with the broader Tricoya business, which is focused on building future plants. The EUR 6.2 million cash outflow for corporate costs and R&D increased only marginally compared to the previous year. That means that the overall increase in net debt, which ultimately has increased from EUR 3.8 million to EUR 50.1 million, was driven by EUR 48 million of CapEx for the period.
That reflects our significant investment in our production facilities. EUR 8.4 million was for the final costs associated with the third reactor for the Accoya plant in Arnhem. EUR 27.8 million spent in the whole plant during the period. The remaining costs will be incurred in the new financial year and into the year after that. Finally, the remaining EUR 12 million of CapEx predominantly relates to the purchase of the land and buildings in Arnhem, which we purchased from the previous landlord, Grouw, in the first half of the year. That replaced a finance lease arrangement.
The net debt has increased to fund the new capacity, to do that, we have taken on some new facilities in the year. That has enabled us to reduce our effective interest rates from the year down to 7.3% from 9.3% the year before. With that, I shall pass back to Paul to look at the outlook.
Thank you, Will. As you can imagine, just to pick up from Will said, that we will continue to try and improve our cost of capital as time goes on. As far as the outlook is concerned, if you flip to the last chart, I don't know what page it is, but I hope that you can see it. We've had a very strong start to the financial year. Demand continues to exceed capacity. Fourth reactor is working very well. EBITDA continues to grow, which I think is extremely encouraging for us as a company. I think that what I would like to just concentrate on, because most of this is otherwise repetition, is if I can ask you to look at the bar graph on the right-hand side. What we've tried to do here is to show where we are on production.
You'll see that in the second half of 2018, we had 40,000 cubic meters of production. Second half of 2019, we are at 60,000. Once Hull turns on, which is the next step, that'll add the equivalent of 40,000 cubic meters in capacity. The additional reactor in Arnhem, if that happens, that will add another 20,000. The capacity in Malaysia would add equivalent of 40,000 cubic meters of capacity and adding to that, the U.S., if that goes ahead, that would add another 40,000, making a total of 200,000 cubic meters of total capacity if all of our plans are executed. I would add that in addition to that, the Hull site has always had the capacity and the intention to expand further to a second train and possibly even a third train, which would double and therefore, double the size of Hull.
We believe that at this time, we are entering into a very intense period of construction and expansion around the world, which I think will underpin the success of our technology and the commercialization of that technology. To conclude, the final statement is that the board also made an announcement earlier on today, where it says that as CEO, will be stepping down at the end of this year in order to really drive the company to increase its expertise in manufacturing and production around the world. I look forward to helping the company during this transition process, and I am sure that we will find a very capable person to take on the mantle after 10 years of working at this company. With that, I will turn it over to questions.
I think that we turn it over back to the moderator who will give the instructions of how to ask questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. Your first question is coming from the line of Christian Yggeseth from Numis. Please go ahead.
Morning, guys. Thanks for taking my questions. Just a couple from me, really. First of all, it sounds like at Arnhem, everything's going very well currently with the third reactor. As you say, you are planning for a fourth reactor. I just want to get a bit more sense of timing. How soon can construction around that fourth reactor actually start? Then just maybe a bit more color on timing in terms of when production could start from it as well. Then maybe just a bit more on the PETRONAS Malaysia opportunity, just since you last updated, what work has been done, how does this reflect in their thinking and just sort of really progress with that work would be much appreciated. Thank you.
Hi, Christian. I'll answer, in fact, both questions. The planning process at the moment is the following. We will aim to complete what is called a FEED study or Front-End Engineering Design study by the end of this year. That will allow us to then turn that information to detailed engineering, which will then allow construction to happen. The process to get the FEED study done is underway. We have yet to choose a partner to do that FEED study, but the expectation is that the contractor who will help build us will do both the FEED study and the full construction. The second part of it is as I'm sure, is that before we can start construction, we will have to be clear on how we finance this. I think again, that will be addressed in due course.
As far as PETRONAS is concerned, we have had, I think now three steering group sessions since we signed the agreement in Malaysia. I have regular contract with the CEO of PCG, and PCG is a quoted subsidiary of the PETRONAS group. Sazali Hamzah, and I hope to see him again in the next couple of weeks. We have done an extensive market work where we have visited multiple panel manufacturers, door skins door manufacturers, window manufacturers, panel operators. Recently, we have engaged in a full third-party market study, which will start fairly shortly with one of the world's leading agencies in that world, called Pöyry. We have had several detailed exchanges on engineering and engineering design. To be clear, the engineering design splits really into two pieces.
PETRONAS has a big chemical site on the east peninsula of Malaysia, in a city called Kerteh, where they have an acid plant. The aim is that we would build a chip acetylating plant there, as well as a ketene cracker to convert the acid into anhydride. There are several work streams that are fully engaged. As you can imagine, PCG is a much larger organization than us, so they will have many more engineers to throw at it. We sometimes struggle a little bit with bandwidth, progress is being made and milestones have been hit, so much so that the initial payment from PCG was done on time for the milestones that were set.
Good. Thank you very much.
Thank you. Your next question's coming from the line of Toby Thorrington, Edison Investments. Please go ahead.
Thank you. Morning, all. Couple of questions.
Morning, Toby.
Thank you. Couple of questions from me, one on sort of current market agreements in Accoya. The second one is just to follow up on the potential international new plants that you've been referring to. First of all, I was just curious with regard to Accoya, because I think the it's actually Tricoya, I suppose, but through the Arnhem plant, what the Finsa experience has been to date, because they're a relatively new customer. The follow on, related to the company currently known as Serdia. I think there's a reference in the statement to the offtake agreement with them ending in 2020. Perhaps you could give a bit more detail around that as well, please.
The experience with Finsa has been really good, in fact. Finsa is about four times the size of Medite, just for clarity's sake. Finsa also has multiple manufacturing sites. It also has a very large distribution network across Spain and all the Balearics. They have, I believe it's 12 centers. In each center, they have architectural support practices. They have run, I think, five campaigns now, i.e., five batches of it. Batch one was a huge success. Batch two had some learning difficulties. Three, four and five have been very successful. Their major issue is that we can't supply them with enough material.
Sure.
They have been very supportive, because frankly, we've had to tell them that we can't give them as much as we'd originally hoped. That is largely because of the delay in Hull. From all other aspects, they are very creative, very innovative, looking at multiple ways of optimizing the Tricoya chips and fines for their panel products, whether it's going to go into flooring applications or traditional windows and panels. As good as we could have hoped for. They are a partner that we have known for a long time. Just to show you how enthused they are about it, they have covered their headquarters in Accoya-
Oh, very good
in the last 18 months. Regarding Serdia, formerly known as Rhodia, they have made, and it might be worth looking at, they made a restructuring announcement yesterday about their other businesses. The license agreement that we have with them does have an ultimate drop dead date of November of next year, with a preliminary date in May of next year. Their obligations under the license agreement was that they need to build a plant.
Yeah
In order to maintain that. There is no evidence of them building a plant, it is highly likely that there will be a change. We are very close to them. They are a good customer of ours. I think that they took 12,000 cubes of-
Yeah
material over the last 12 months. They have a five-man sales team and one or two marketing team. We have very good relationship with them. It is one of those things that the next step will be revealed when the next step will be revealed, and that will be done at some stage.
Okay. Is there an inference there are conversations ongoing there already, Paul?
Yes.
Yeah.
I think we have a quarterly steering group on the business front. I have very regular contacts with Philippe Rosier, who is the CEO. In fact, I was in Basel, which is their new headquarters, only two weeks ago or three weeks ago. There are ongoing discussions, I don't want you to read into that any near-term expectations.
Understood. Okay. Sorry, my other question related to, follow-up to Christian's, I think, relating to the Malaysia and U.S. discussions which are underway. Obviously, I think Malaysia's probably more than a discussion, just wondering how the costs associated with those two projects are being treated. They're all being expensed as we go. They're being put through the corporate line or are they being treated differently?
Will, do you want to answer that?
I think expenses relating to any pre-work will be put through the respective divisional costs. For Tricoya into Tricoya, and the Accoya plant in the U.S. and Accoya. If anything progresses to a later stage, we may start to capitalize costs, we're not at that point yet, costs are expensed in the relative respective divisions.
There is some income that has come in from the PETRONAS discussions into the-
Into the Tricoya division
into the Tricoya division.
Correct.
Sorry, I didn't quite catch that. Into Tricoya, did you say?
There's some income relating to that relationship, which is being reported in the Tricoya segment as well.
Got it. Thank you very much. Final question, unrelated to the previous two. When are you planning the maintenance shutdown at Arnhem this year, please? How long is that going to take?
We've had the maintenance shutdown in May, Andrew. It's an annual stop that is usually, it's two weeks of shutdown.
Yeah
A couple of days of startup. That is included in this first quarter's activity.
Perfect. Thank you very much.
Okay. I did see a written question on that. Oh, that was Andrew. There is a question here. Can you talk about the sourcing of radiata pine as your volumes ramp up to 200,000 cubic meters in the long term? Can New Zealand supply this and/or more volume? The 200,000 cubic meters is split between Accoya and Tricoya. Just to remind everybody that Tricoya does not necessarily have to use radiata pine, and Hull will be sourcing its chips from local chip manufacturers. They will be a multiple species, primarily Scots pine, but possibly even some spruce in there. The Tricoya aspect of sourcing material and availability of material is not the issue. From an Accoya point of view, the New Zealand harvest cycle is going through an extended increase in harvestable forests over the next 15 years.
We do not believe that there are any issues of supply from New Zealand. In addition to which, we are looking at other materials, particularly geared towards the U.S. In the long run, we expect the U.S. to be using indigenous U.S. species or a mix of radiata and indigenous U.S. species. Radiata is already known in the market. If you go into Home Depot and you look at the high-end, the best wide board clear offering, it is radiata pine that is supplied from New Zealand, but it is billed as and is accepted. We are looking at taeda, we are looking at ponderosa pine. We are looking at various other materials that would be able to be used in the U.S.
At this stage, we feel very comfortable that as far as the supply material is concerned, that we are comfortable on the wood element of that. To the next question.
Thank you. Ladies and gentlemen, as a reminder, it's a star and one on your telephone if you wish to ask a question. Your next question is coming from the line of Rudolf Engler from Solidea. Please go ahead.
Yes, Paul. First of all, my compliments with what you performed in the past 10 years. I regret that you're stepping down, and I hope you find a good successor.
Thank you.
I have three short questions. The one is, will this coming year show a net profit? The second question is, with your expansion, how are you going to do the funding? The third is it possible to pay a visit to Arnhem? Thank you.
Rudolf, I'll answer the last question first. Of course, it is possible to visit Arnhem, and if you can either drop me an email so that we can arrange that. I think Hans Pauli, locally, who I think that you may have met, we can arrange that.
Right. Thank you.
To the second question, as far as capital raise is concerned or capital needed for expansion, I think that's an open question, and I think that it is often discussed how we would fund that. We have always said that if we have to do the fourth reactor early, and I believe that we're doing it early, that we would have to look for outside sources of capital, and we will do that, as Will suggested earlier, we will do that as cost effectively as we possibly can do. Then to the first question, when will we report a net profit? I will pass it over to Finance Director, Will Rudge.
Thank you, Paul. Net profit, I think not in this new financial year. I think net profit will follow on from the whole plant turning on and becoming operational and starting to ramp up volumes. It's the following financial year at earliest before net profit is likely to be reported.
All right. Thank you very much.
Thank you, Rudolf. Don't forget to email me and we'll arrange for you to go and see.
Yes
Northern Ireland.
Yes. Okay.
Thank you. There's a question here which says here: Please could you describe the actions taken to improve the repeatability of volume sales of Accoya to give more visibility? Thank you. That's almost a prompted question, but I'm very grateful for it. It is very important to recognize that most of our business is repeat order business. Most of our customers are joinery companies around the world who are making doors and windows on a regular basis. They buy their material from the distributors, and they buy that on a month-in, month-out basis. We continue to press on that. I've always believed that this repeat business of doors and windows and decking and cladding is core to our business. It may not be as showy as wonderful iconic projects, but it is extremely important to recognize that that is our core driver.
We work extensively with our distributors to make sure that they do focus on that core repeat business, that make sure that they understand the ordering patterns, the ordering visibility patterns that we need to have for the fast-moving items that serve this market. It is very much front and center of our business relationship with our distributors. That's why we also have a very strong relationship with their customers, the joinery companies, and often their final customers who may be assembling, the building companies. It is a very important part of our business model. I'm very glad to say that it looks as if I've exhausted all the questions, or we've exhausted all the questions. It only leaves me to thank everybody for taking the time and we're looking forward to a very good year. Thank you very much, everybody.
Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect.