U.K.-based Accsys Technologies reports 15% drop in Accoya modified wood revenue to €5.5M in six months to Sept. 30, attributes decline to reduction in orders from two significant customers
November 29, 2011
– Financial Summary
We have continued to make good progress towards our longer term objectives including progress towards licensing our technology and the launch of Medite Tricoya. However, sales in the first six months of the financial year proved particularly challenging for the Company as they were for the wood products industry as a whole.
We now have a stable management team in place which is continuing to have a significant impact on the operations of the Arnhem plant resulting in increased efficiency and processing times.
We have recently signed comprehensive heads of terms with a major multinational corporation concerning a licence for the production and sale of Accoya® wood in various European countries. While the heads of terms are non-binding, we believe they represent a significant milestone in our development of our long term objective of licensing our technology and we look forward to progressing towards completion of a full licence agreement.
I am particularly pleased about the launch of Medite Tricoya®, two years earlier than previously expected, following an agreement with Medite signed in the period. We, and independent industry experts, believe this revolutionary new product will have a significant impact on the panel product industry.
We have maintained a strong financial position following the fund-raising in February this year. As expected, we have reduced our inventory balance and significantly reduced our net cash out-flow. Over the six month period our combined Accoya® and raw wood inventory has reduced by 20% and we have reduced our net cash out-flow to €0.5m in the six months to September 2011 compared to €11.6m in the equivalent period in the previous year. The first part of the sale and leaseback of the Arnhem land and buildings has been completed and we have a finance facility in place from which we can draw down approximately €4m. Net cash as at 30 September 2011 was €27.1m.
The global Accoya® brand has grown with significant progress having been made in our marketing campaigns and we have now passed our previous target of 30 distribution or agency agreements world-wide.
We have however sold less Accoya® than we expected. We believe this is attributable to the current difficult economic situation which is particularly acute in the construction industry. We remain optimistic that in the longer term, sales will continue to grow and we have been obtaining positive continued feedback from our customers.
Tricoya® wood elements
In August we agreed to supply acetylated material to Medite for the production of Medite Tricoya® panels. As a result, these ultra-high performance medium density fibre boards (‘MDF’) with equivalent to class 1 durability, will reach the market place approximately two years earlier than previously expected.
Medite Tricoya® represents the first major innovation in the wood panel industry and, with an expected lifespan of sixty years, is expected to lead to a new generation of wood based panel products for exterior and wetted use.
Under this agreement, we expect to supply up to 7,500m3 of acetylated material to Medite by 31 December 2012 which will enable Medite to carry out final market testing and market seeding ahead of the commercial scale production to be carried out under the licence terms set out in our Joint Development Agreement with Medite.
We commenced the sale of acetylated material to Medite in the period and Medite has subsequently successfully completed the first two production runs at their MDF plant in Clonmel, Ireland with the first Medite Tricoya panels expected to reach the market in the New Year.
We have continued to invest in research and development which has enabled us to carry out a number of process and technology improvements. These developments have focussed on increasing production efficiency and reliability as well reducing operational and maintenance costs and as a result, following recent research and testing, we expect to achieve a number improvements in these areas over the next 12 months. Additionally, we have identified potential future improvements to our energy consumption, production capacity and product uniformity.
We significantly strengthened our intellectual property portfolio having successfully been granted an additional patent protecting the process under which Accoya® wood is now produced. Patents have been granted in the United Kingdom and South Africa, with grants in other territories expected to follow. The patent, which provides Accsys with a monopoly right over the current process to produce Accoya®, is expected to further enhance the Company’s licensing credentials and ability to robustly defend itself against potential competitors. Accsys now has a portfolio of four different patent families protecting its acetylation process, comprising 22 granted patents and 30 patent applications pending in various global territories.
In October we completed an annual plant shut down enabling us to complete required regulatory inspections while also implementing a number of improvements.
Progress with licensing activity
In November we signed comprehensive heads of terms with a major multinational corporation. Under these terms, which are not legally binding, it is expected that the licensee will construct and operate a plant to manufacture Accoya® and to distribute and sell in various European countries. If the full licence agreement is achieved, Accsys would be expected to receive licence technology fees in stages over the course of construction and commissioning of the plant and subsequently to receive royalty payments based upon the quantity of Accoya® manufactured at the plant. The heads of terms represents significant progress towards our longer term objective of licensing our technology and reflects the growing confidence in our technologies.
We previously reported that our licensee and distributor Diamond Wood was, together with its bankers, in an advanced stage of preparing for an Initial Public Offering on the junior market of the Malaysian Stock exchange. We understand Diamond Wood continues to make progress in this respect and has recently submitted a draft prospectus to the Securities Commission Malaysia, the regulator of the ACE Market of the Malaysian Stock exchange, for regulatory approval prior to issuing.
Discussions with a number of other potential new Accoya® and Tricoya® licensees and other business development partners have continued and we have made good progress. In particular we have noted an increase in the level of interest associated with Tricoya® following the announcement that Medite Tricoya® will be manufactured earlier than previously expected. As with the heads of terms referred to above, it is important to note that any resulting agreements may result in a significant investment by the other party and as such we expect these negotiations will take time to complete and there is no guarantee of success. However, I continue to remain confident that these discussions will lead to mutually beneficial arrangements which will enable Accsys to achieve its long term objectives.
Revenue from sales of Accoya® produced by our Arnhem plant decreased by 15% to €5.5m in the first half of the year compared to the same six months in the previous year. The reduction in sales is largely attributable to lower sales to Diamond Wood.
Excluding sales to Diamond Wood, Accoya® revenue in the first half decreased by 4% compared to the same period last year. The sales were less than hoped for given our historical growth, however were not unexpected given the weak demand being experienced in the wider wood products and building industries during this period. In particular a number of customers, notably in Germany, have been reducing their inventory levels to reflect the slower market conditions which have resulted from the current economic situation in Europe. Overall sales are expected to increase again as this adjustment is completed and I note that seven out of our top 10 territories recorded an increase in Accoya® revenue in the period.
We previously announced that Diamond Wood had postponed its orders pending finalisation of its fund-raising. As explained above, Diamond Wood expects to carry out an Initial Public Offering and in anticipation of this, recently recommenced placing of orders with us which is now expected to increase ahead of the completion of their Accoya® production plant.
We have signed four new distribution or agency agreements extending our coverage in the Netherlands and adding France, Estonia, Lithuania and Latvia. The total of 31 distribution or agency agreements now covers most of Europe, Australia, Canada, Chile, India, Morocco, New Zealand, China, parts of South-East Asia and the USA.
In September we held our first annual Accoya® sales and strategy meeting in Arnhem, bringing together representatives from the majority of our distributors. This proved a valuable experience for everyone involved, enabling the exchange of sales and marketing ideas and initiatives which had been developed over time.
We continue to investigate the potential of a number of other wood species and are progressing with the commercial production of Red Alder, a species with new application uses, as well as Scots Pine. These are expected to introduce a number of new application uses as well as increase options in respect of sourcing raw materials. We have also made progress in developing acetylated radiata pine and another wood species for use in structural applications and expect to launch this in the New Year.
The global Accoya® brand continues to grow. We launched an on-line ‘Sales & Marketing Toolkit’ for our distributors and have developed an Accoya® website template which has so far been rolled out to 19 distributors and manufacturers worldwide. We have exhibited at a number of trade shows including Timber Expo in the UK, Dubo Nationale in the Netherlands, Maderalia in Spain, Project Build in Belgium, By Reiss Degg in Norway, Greenbuild in Toronto and, more recently, Batimat in France.
We have continued an aggressive targeted multimedia campaign helping educate key audiences about the benefits and features of Accoya®, helping to generate sales leads and we have also carried out virtual architectural courses which have proved very popular. The company websites www.acccoya.com and www.accsysplc.com have been re-designed to inspire our key audiences, add new meaningful content and to ease the navigation around the sites. This has resulted in a dramatic increase in the website traffic averaging well over 2,000 unique visitors per week with enquiries for more information originating from our website also increasing.
In August Accoya® won the prestigious North American Architects magazine R&D award and in September we won the UK Timber Trade Journal’s 2011 Market Development award. There has been a significant focus on the promotion of Accoya® in architectural and other key target magazines’ editorial features in order to educate readers about Accoya’s® outstanding performance. There have been 371 credible Accoya® articles so far this calendar year across our main sales territories.
Statement of comprehensive income
The Group recorded revenue of €6.2m for the six months ended 30 September 2011 (2010: €7.2m) and a pre-tax loss of €6.3m (2010: €7.6m). Total manufacturing revenue decreased by 14% to €6.2m (2010: €7.2m). Revenue from Accoya® (included within manufacturing revenue) decreased by 15% to €5.5m, reflecting a reduction in orders from two significant customers. €0.1m of licence income was recorded in the period (2010: €nil) representing a licence option payment.
The gross manufacturing margin of -9% (2010: -2%) has remained below the break-even level as production volumes did not increase as much as previously expected. In particular we note that the production volumes decreased in the second half of the period as a result of the lower sales volumes and due to a planned maintenance stop in September. The margin is expected to improve as our production volumes increase.
Headcount decreased over the last six months from 98 at 31 March 2011 to 97 at 30 September 2011. This represents a 25% reduction compared to the peak headcount of 130 in March 2009. Total other operating costs have decreased by 20% to €5.9m in the six months (2010: €7.4m) representing a continued focus on cost control and increasing efficiency.
The decrease in the loss before tax by 17% to €6.3m (2010: €7.6m) can largely be attributed to the reduction in other operating costs.
Cash flow and financial position
At 30 September 2011, the Group held cash balances of €27.1m. The €0.5m reduction in cash compared to 31 March 2011 is mainly attributable to the reported loss together with purchases of property plant and equipment of €0.7m. These have been offset by a €3.4m decrease in working capital (including a reduction in inventories of €2.6m) together with €2.2m received in respect of the sale and leaseback of part of our land and buildings in Arnhem.
The decrease in inventory follows the previously reported increase of stock levels resulting from the postponement of orders by Diamond Wood in the previous financial year. We expect inventory levels to continue to decrease in the second half of the financial year.
Agreements were reached in August 2011 for the sale and leaseback of the land and buildings in Arnhem under which a total of €4m will be received. €2.2m was received in the period with the remaining amount to be received within 15 months. Under the terms of the agreement, the buyer has committed to build new storage facilities which will also allow for an improvement in wood handling logistics, being the first steps in our intended expansion of the Arnhem facility. The transaction has resulted in a finance lease creditor of €2.2m as at 30 September 2011.
Risks and uncertainties
The Group’s principle risks and uncertainties are unchanged from those set out in its 2011 Annual Report.
These condensed financial statements are prepared on a going concern basis, which assumes that the Group will continue in operational existence for the foreseeable future, which is deemed to be at least 12 months from the date these interim results were approved.
As part of the Group’s going concern review, the Directors have reviewed the Group’s trading forecasts and working capital requirements for the foreseeable future. These forecasts indicate that, in order to continue as a going concern, the Group is dependent on the achievement of certain operating performance measures relating to the production and sales of Accoya® wood from the plant in Arnhem and the collection of on-going working capital items in line with internally agreed budgets. No assumptions have been made concerning the collection of licence income from existing or new licensees.
The Directors have considered the internally agreed budgets and performance measures and believe that appropriate controls and procedures are in place or will be in place to make sure that these are met. The Directors believe, while some uncertainty inherently remains in achieving the budget, in particular in relation to market conditions outside of the Group’s control, that there are a sufficient number of alternative actions and measures that can be taken in order to achieve the Group’s medium and long term objectives.
Therefore, the Directors believe that the going concern basis is the most appropriate on which to prepare the financial statements. Accsys Technologies PLC
The economic climate has proved particularly challenging and has resulted in our first reported reduction in Accoya® sales. However we have a stronger financial position than before and, having passed our target of 30 distribution or agency agreements, are well placed to focus on increasing our sales growth going forward.
The agreement and resulting sales to Medite provide a new and potentially significant stage in the development of the Group and we look forward to working closely with Medite going forwards.
The recently signed heads of terms represents significant progression towards successfully licensing our technologies. In addition we continue to progress discussions with a number of potential licensees and as a result I am increasingly confident that our long term objective of profitably licensing the Group’s intellectual property will be successful.
The sale and leaseback of the Arnhem plant has allowed for the first stage of our expansion plans to progress, however we will only progress further with the expansion at an appropriate time, taking into account our future sales growth.
29 November 2011