Converting opportunity into growth Accrol Group Holdings plc Annual Report and Accounts 2016 Page Title at start:Content Section at start: Strategic Report Introduction and Highlights Introduction and Highlights We are a leading independent tissue converter Accrol is a leading independent tissue converter manufacturing toilet rolls, kitchen rolls, facial tissues and away from home products (AFH). We supply a range of Independents, Discounters and Multiples as well as a variety of AFH customers throughout the UK. Accrol imports Parent Reels from around the world and converts them into finished goods at its 350,000 sq. ft. manufacturing, storage and distribution facility in Blackburn, Lancashire. Strategic Report Governance Financial Statements Introduction and Highlights IFC Meet Our Board Corporate Governance Statement Remuneration Committee Directors’ Report Directors’ Responsibilities Statement What We Do Our History Chairman’s Statement Chief Executive’s Q&A Market Overview Business Model Strategy CFO’s Report Principal Risks 2 4 6 8 10 12 14 16 20 22 24 28 33 35 Independent Auditor’s Report Consolidated Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Change in Equity Consolidated Cash Flow Statement Notes to the Consolidated Financial Information 36 37 37 38 39 40 41 Independent Auditor’s Report Company 65 Company Statement of Financial Position Company Statement of Changes in Equity Company Cash Flow Statement Notes to the Company Financial Information Company Information 66 67 68 69 72 IFC Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Operational highlights • 35% share of the Discount market which is the fastest growing sector at 10% per annum • Focused on Private Label products which are taking market share from Brands • 60% of our plant is less than 5 years old • 143,000 tonnes of potential capacity with c.25% headroom for new business • 16.3m products produced per week Financial highlights Revenue £118m +17% YoY Revenue CAGR1 +16.5% Over last 3 years Adjusted EBITDA £15.0m +22.5% YoY EBITDA CAGR1 +16.5% Over last 3 years Investment in machinery £18.2m Over last 3 years 1 Compound Annual Growth Rate 1 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: What We Do What We Do We produce quality products at competitive prices The Group’s competitive advantage lies in its market positioning, operational process and flexibility. Our sales The Discount market represents 14% of the overall tissue market and is the fastest growing sector at 10% per annum. Accrol’s decision to focus on this sector in 2008, has delivered sales CAGR of 16.5% since 2013. Accrol is the market leader in the Discount segment with 35% share by market value. Technology and converting lines Accrol has invested c.£18.2m in machinery over the last three years. The Group currently has 15 converting lines in operation providing capacity of approximately 118,000 tonnes per annum. Additional capacity of c.25,000 tonnes per annum has recently been obtained with the purchase of two new machines which are yet to be installed. The Group’s operating machinery allows conversion of a wide variety of tissue grades, adding flexibility to the Parent Reel sourcing process and allowing manufacture of a wide range of product types. Products manufactured per week 16.3m 2 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Product range Accrol is able to manufacture toilet rolls, kitchen rolls, facial tissue and AFH products, providing a ‘one stop shop’ solution for customers. We believe the ability to produce all four key segments is a competitive advantage. Discounters’ tissue offerings are skewed towards Private Label and this is driving the growth of Private Label in the market as a whole. Discounters typically look for lower prices and suppliers that offer high, sustainable volumes. Discounters typically dedicate 3% of their shelf space to tissue products, compared to 2% in the Multiples. The majority of Accrol’s products are Private Label. Facial tissue revenue1 £10.8m Kitchen towels revenue1 £26.5m Toilet tissue revenue1 £52.9m S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Away from home (AFH) revenue1 £23.1m 1 Revenues are for current year ended 30 April 2016 but exclude Bought in product of £4.9m. 3 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Our History Building a sustainable business The Group’s competitive advantage lies in its market positioning, operational process and flexibility. Building the business foundations After founding in 1993, Jawid Hussain built the business and invested in capacity in anticipation of growth. People Jawid Hussain Our History Growing through the recession Consumer trends begin to change, Discounters offer good quality, own brand goods at low prices. They start to take market share from the Multiples. Hussain brothers buy business from their father 149 employees Capacity Customers Move to current Blackburn site. 3 converting lines installed 3 more lines – extends converting capacity 4 more converting lines installed Sign terms with the first of the Discounters 1993… 2003 2005 2008 2009 2011 4 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Market move from brands to own brands Private Label share of market starts increasing, taking share from Brands. Listing as a public limited company 10 June 2016, we list on the AIM Market of the London Stock Exchange. New storage facility 2 facial tissue lines installed NorthEdge acquire 46.25% stake • Peter Cheung becomes Chairman • James Flude becomes CFO Senior team strengthened: • CEO Steve Crossley and Non-Execs Joanne Lake and Steve Hammett appointed on listing • 460 employees 3 additional lines – 2 x toilet paper 1 x kitchen roll 2 x paper converting lines acquired, not yet installed Begin to establish relationships with the Multiples 2012 2013 2014 2015 More Discounter account wins 2016+ S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 5 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Chairman’s Statement Chairman’s Statement Our results show another year of excellent progress Overview of the year I am pleased to report that 2016 was another successful year for the Group. Revenue grew 17% year on year to £118.2m with adjusted EBITDA up 22.5% to £15.0m1. Our strong financial performance has been driven by continued focus on our strategy of growth through Private Label products into Discounter and Multiple retailers, supported by our flexible supply chain and continued investment ahead of growth in state of the art machinery. Peter Cheung Executive Chairman Financial performance Revenues grew by £17.2m year on year with Discounters providing the majority of the growth. This segment now accounts for 69% of our revenues, up 6% year on year, reinforcing our already strong relationships. Revenues from Multiple customers showed an encouraging 15%1 increase year-on-year growth in this key strategic area. Adjusted EBITDA increased by £2.8m1 year-on-year mainly due to greater revenues and favourable paper prices. This was partially offset by an increase in overheads due to growing our headcount. Strategy We continued to focus on organic growth through Discounters as this sector represents the fastest growing retail sector in the UK tissue market and is projected to continue to grow at a rate of 10% per annum. The Discounters’ tissue offerings are skewed towards Private Label and this is driving growth of Private Label in the market as a whole. Our strategy of focusing on the Discounters and providing Private Label products to Multiples, positions Accrol well to take advantage of new opportunities. Listing on the AIM Market On 10 June 2016 Accrol successfully listed on the AIM Market. This listing has reduced the Company’s debt burden and will increase Accrol’s profile and reputation, enable us to incentivise key employees and provide a platform to execute our strategy. The listing also provided a partial exit for the founders, the Hussain family and NorthEdge Capital who invested in Accrol in July 2014. The family will continue to support the management team as external consultants, and I would like to thank both the Hussain family and NorthEdge Capital for their support and commitment. 1 See the Adjusted income statement on page 17 for further explanation on the proforma result. Operational review We operate 15 converting lines, producing 16.3m units per week with a c.7% share of the UK tissue market. We continue to invest in machinery, with a further £3.2m committed on two high-speed converting lines. Capacity headroom is expected to be approximately 25%, ensuring we continue to deliver new business opportunities. With a 35% share of the Discount segment we continue to dominate this sector. The Multiple sector is the largest segment of the market and growth in this area remains a key strategic objective. We have continued to grow existing contracts, both organically and through new products, with the more significant growth through Discounters. Dividend policy 6% Progressive yield at IPO placing price Debt structure 1.5x EBITDA 6 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Meet the team On listing, Steve Crossley was appointed as Chief Executive Officer with Joanne Lake and Steve Hammett appointed as Independent Non-Executive Directors. Myself as Executive Chairman and Chief Financial Officer James Flude, complete the plc Board. Each individual brings a wealth of experience and expertise to the team. To demonstrate our intention of moving towards best practice, the Board adopted on listing the provision of the Quoted Companies Alliance Code (QCA) for Corporate Governance. Reasons for IPO • Strengthen the balance sheet • Reduce the interest burden and drive organic growth • • Enhance the profile of the business Incentivise management to deliver shareholder returns Use of funds • NorthEdge equity cash out of c.£9.6m and repay loan notes of £22.4m • The Hussain family equity cash out of c.£8.9m and repay loan notes of £22.4m • Management equity cash out of c.£1.6m and repay loan notes of £0.3m • Refinance existing third party debt of c.£21.5m to flexible new facilities of £23.1m – c.£10.1m invoice Discounting facility – c.£13.0m revolving credit facility Capital structure Debt structure on admission c.1.5x FY16 adjusted EBITDA as £3.2m investment in machinery was brought forward from FY17. Shareholder list As at 20 July 2016, the Company had been notified of, in accordance with the Disclosure and Transparency Rules, or was otherwise aware of, the following substantial interests of 3% or more in the Ordinary Share Capital of the Company. Investor Majid Hussain Wajid Hussain Mozam Hussain NorthEdge Capital Miton Asset Management Limited AXA Investment Managers UK Schroder Investment Management Majedie Asset Management Limited Ruffer LLP (for its discretionary clients of the Ruffer Group) Premier Fund Managers Limited Amount Holding 4,652,590 4,652,590 4,646,621 5.0% 5.0% 5.0% 13,987,377 15.0% 8,800,000 8,400,000 8,000,000 5,411,105 5,000,000 3,600,000 9.5% 9.0% 8.6% 5.8% 5.4% 3.9% S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Dividend policy As a listed Company, one of our key ongoing objectives is to create shareholder value. The Board have committed to a progressive dividend policy with the intention of paying both an interim and final dividend expected, in aggregate, to represent a strong 6% yield at the IPO placing price, for the financial year ending 30 April 2017. Outlook We have ambitious plans for future growth by building on our customer relationships supported by solid financial performance. Our focus on Private Label, 35% share of the Discount market and capital investment over the last five years, positions us well to take advantage of future opportunities. In the event that there is a period of reduced consumer expenditure following the UK’s decision to leave the European Union, it is possible that the move towards non-discretionary Economy and Private Label products will accelerate. If this happens, we believe we are well positioned to benefit as over 50% of our sales are generated from the Discount segment and we are primarily focused on supplying Private Label products to both Discounters and Multiple retailers. We have started FY17 strongly and we believe we are in a good position to deliver the next stage of our strategic plan. We remain confident in the outlook for Accrol in FY17. On behalf of all our stakeholders, I would like to thank our employees for their hard work and commitment over the past year and I look forward to a successful 2017. Peter Cheung Executive Chairman 22 July 2016 7 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Chief Executive’s Q&A Chief Executive’s Q&A Introducing our new Chief Executive Steve Crossley Chief Executive Officer What were your reasons for joining the business? A Accrol has already established itself as a major player in a non-discretionary and significant marketplace and there is huge opportunity for continued growth both within the Discount sector and with the Multiples. We have high quality assets with available capacity. Flexibility in sourcing Parent Reels also gives us a competitive advantage both in terms of pricing, availability and developments in new technologies. Finally, yet importantly, the opportunity to lead the transition of Accrol from a very successful privately owned business into a very successful publicly owned company on AIM is also very exciting. What are your first impressions? A Our short and remarkable rise to our AIM listing is huge testament to the capability and foresight of Jawid and the rest of the Hussain family. The business continues to have a family feel despite its significant size and rapid growth. The management team are very capable, committed, enthusiastic and focused on long-term future success. The assets are all relatively new and further investment continues at pace. There are significant opportunities to consolidate and improve operational performance, enhancing operational margins without losing our competitive edge. Tight overhead control will need to be maintained as the business continues its rapid growth. All these elements combine to create significant opportunity over the coming years. 8 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: 74% capacity utilised 60% production lines less than 5 years old £34m gross profit What are your key objectives for the coming year? What are your immediate priorities? 1 Maintain great service, quality and value to our customers. 3 4 2 Demonstrate consistent, steady growth and security of investment to our new and existing investors and shareholders. Focus on improving operational utilisation and performance from existing capability. Ensure the business has the appropriate resource to deliver the above whilst maintaining tight control on cost and overhead. Transition the business from a privately run business into a public listed entity without losing all the great things that have created the success to date. Install and commission the two lines recently purchased into a new facility that will allow space for further additional lines to meet sales opportunities. 5 6 Steve Crossley Chief Executive Officer 22 July 2016 A Following yet another year of strong sales growth and further investment in new capacity, Accrol will continue to build on its core strengths and maximise market place opportunities for FY17. The Discount sector continues to grow at c.10% per annum and challenge the Multiples as they, in turn, all reset their ranging and shopper offer. Accrol are well positioned to benefit from this continued growth in the Discount sector and have made a number of significant customer wins that will further strengthen this position. At the same time the business will seek to expand its position within the Multiples Private Label sector which presents significant growth opportunities. This growth will also require the business to continually review its capacity and capabilities in order to take advantage of opportunities gained, and ones being evaluated. The two manufacturing lines purchased at the end of the current financial year, will be located on a new site. As part of the investment in new plant, utilisation from existing manufacturing lines will receive greater focus as the business seeks to optimise capacity from current capability. The Company remains committed to its strategy of sourcing Parent Reels from tissue paper mills around the globe and has a number of long-term relationships with major tissue manufacturers. This strategy allows us to be the most competitive supplier to the UK market. New capacity for pulp and tissue manufacturing continues to be installed globally and so availability remains high and values competitive. We are uniquely placed to take advantage of this position in comparison to the vertically integrated competitor set. S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 9 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Market Overview Market Overview We are a leading player Accrol represents 7% of the UK tissue market share by revenue and is the fifth largest operator by capacity. The UK tissue market The UK tissue market is worth £1.43 billion at manufacturer’s selling price per annum. The market is growing at 1% per annum by value, driven primarily by macro-economic factors such as population growth, unemployment and consumer affluence. The market is dominated by the Multiples with a 74% share by value. The Discounters represent 14% by value. Total UK tissue market £1.43bn at manufacturers’ retail price Market by customer mix Multiples 74% Discounters 14% Others 12% 10 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Our focus Accrol customer mix Discounters 69% Multiples 9% Changes in consumer attitudes towards Discounters have driven the rise in their market share in the overall grocery sector in the last five years, at the expense of the big four Multiples, all of which have lost revenues directly to Discounters such as Aldi and Lidl. Management’s decision in 2008 to focus on the Discount market has driven contract wins in the sector and has led to Accrol becoming the market leader, holding 35% share of the Discount market. Others 22% Focus on Discounters 35% sector market share Discounters forecast growth c.10% per annum Opportunity in Multiples 74% Multiples total UK revenue market share We are under-represented in the biggest sector of the market where Multiples have invested into Private Label and offer a greater range of such products compared to other retailers. Multiples are expected to continue to increase their Private Label offerings and Private Label market share. Range of customers We have established long term relationships with many leading retailers in a range of market sectors. S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 11 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Business Model Business Model An established base with capacity to grow Our model of purchasing and converting Parent Reels (as opposed to manufacturing the Parent Reels from pulp and recycled fibre), requires lower fixed overhead and moreover provides flexibility in sourcing to capitalise on favourable pricing opportunities and production technology advancements. Sourcing The UK consumes 1.2m tonnes of tissue paper per annum, of which c.0.3m tonnes is imported. Accrol does not operate a paper mill and instead it imports Parent Reels from around the world. As such, the UK is a net importer of Parent Reels, of which Accrol takes 23% of all imports. There is a global over-supply of both pulp and Parent Reels and additional capacity is forecast to be brought on stream through to 2019. Parent Reel prices are driven by pulp prices and excess capacity in both the pulp and Parent Reel production. Excess global supply has suppressed Parent Reel prices allowing Accrol to compete on price compared to those competitors that operate mills. Converting Modern, efficient machinery Investment in state-of-the-art lines (>60% of the lines are less than five years old) has reduced our operating cost per unit to a market leading position. Production flexibility Our operating machinery allows conversion of a variety of input tissue grades, adding flexibility to the Parent Reel sourcing process and allowing manufacture of a wide range of product types. Segments Our products span the quality spectrum and are available in economy, luxury or premium variants. Toilet roll Kitchen roll Facial tissues AFH lines 12 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Storage and distribution We have benefited from the rise of Discounters, and are well positioned to capitalise on market shifts towards Discounters’ and Multiples’ increased focus on Private Label products. The breadth of our range and relationships with Multiples, Discounters and Independents and the AFH market are a source of competitive advantage. Discounters Multiples Independents AFH distributors R&D Accrol has taken advantage of customer led growth in the Private Label market. This includes our development of a true quilted toilet tissue to compete against leading brands and the development of a multi-purpose wiper. Our machinery is very flexible allowing us to convert a range of different tissue paper types. Not having a paper mill, means we are not tied to one particular type of tissue paper and as such, we are able to take advantage of new developments in paper technology. We have secured UK exclusivity for a new type of luxury tissue called NTT (New Textured Tissue) and we are working with our customers to develop a new luxury offering. 13 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Strategy Strategy We will build on our competitive strength We have identified key areas of operation to focus on improving the Group’s performance going forwards. Vision To be the leading independent supplier of Private Label tissue products to both the Discount and Multiple sectors. Strategic priorities Organic growth through Discounters We believe Accrol will benefit from continued growth in the sector, providing our quality and cost standards can be maintained. This is a key focus for the Group. Increase share through Multiples We intend to leverage our ability to supply Private Label products across the toilet, kitchen and facial tissue segments to increase orders and win new contracts with the Multiples. We believe the Multiples will increase their Private Label offerings in response to growth in the Discount sector. Operational improvements and capacity utilisation We believe there is scope to increase efficiency of the current converting process through incremental changes to production line management, as well as running additional capacity through our newest machinery. 14 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Progress against strategy Channel Objective Discounters – Organic growth – New customer wins Multiples – Increase share Operations – Improve utilisation and performance from existing capabilities – Utilise capacity y Progress £22m annual sales from 3 new major contracts won at start of FY2017 2new lines up and running in the current year S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 15 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: CFO’s Report Continued strong sales, profit and cash growth Sales of Private Label products into Discounters and Multiples delivered a 17% year on year growth in revenues and a 22.5% growth in adjusted EBITDA. Investment in machinery continued with an additional £3.2m invested at the end of the year. James Flude Chief Financial Officer Key performance indicators Revenue Adjusted gross margin1 Adjusted EBITDA2 Adjusted EBITDA to revenue margin Investment in machinery3 Net debt Net debt/adjusted EBITDA 2016 £’000 118,219 28.1% 15,038 12.7% 3,152 60,656 4.0 times Statutory 2015 £’000 81,904 27.8% 9,971 12.2% 6,645 61,698 6.2 times CFO’s Report Unaudited Proforma* Change 2015 £’000 +50.8% +44.3% 101,056 26.0% 12,279 12.2% 6,645 61,698 5.0 times +1.7% Change +17.0% +22.5% +1.7% * See the Adjusted income statement for further explanation on the proforma result. • Revenues increased year on year by 17.0% to £118.2m. • Adjusted gross margin increased year on year by 2.1% to 28.1%. • Adjusted EBITDA increased by 22.5% year on year to £15.0m. • Continued strong cash generation year on year which included a £4.1m repayment of loan note interest. • Net debt reduced £1.0m year on year to £60.7m with net debt to adjusted EBITDA reducing from 5.0 times to 4.0 times in the current year. • Continued investment in machinery with £3.2m invested on two high-speed converting lines following the prior year investment of £6.6m in three high-speed lines. 16 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Growth in revenue 17% Growth in adjusted EBITDA 22.5% Adjusted income statement The statutory income statement in the financial statement section of this Annual Report presents the trading results of the Group post the acquisition of the main trading entity, Accrol Papers Limited, on 14 July 2014 by Accrol Group Holdings Limited through its subsidiary, Accrol UK Limited. As such, the revenues and costs in the statutory income statement are presented for the period from 14 July 2014 onwards rather than for the full twelve months. To facilitate the review of the underlying trends, we have included the proforma results for the full twelve months for the year ended 30 April 2015. Revenue 118,219 81,904 +44% 101,056 Cost of sales before gain/(loss) on derivative financial instruments Gain/(loss) on derivative instruments Cost of sales Gross profit Administration expenses Distribution Operating profit Analysed as: – Adjusted EBITDA2 – Depreciation – Amortisation – Gain/(loss) on derivative financial instruments – Exceptional items Operating profit Finance costs Profit/(loss) before tax Tax charge Profit/(loss) for the year attributable to equity shareholders Gross margin % Adjusted gross margin % Statutory 2015 £’000 2016 £’000 Unaudited Proforma Change 2015 £’000 Change +17% +37% (84,996) 1,266 (59,162) (1,455) (83,730) (60,617) 34,489 (13,138) (9,431) 21,287 (8,954) (8,549) (74,823) (1,027) (75,850) 25,206 (10,598) (8,086) +62% 11,920 3,784 +215% 6,522 +83% +22% +83% +51% 15,038 (1,831) (2,060) 1,266 (493) 9,971 (1,511) (1,691) (1,455) (1,530) 11,920 3,784 +215% (4,941) 6,979 (1,274) 5,705 29.2% 28.1% (4,132) (348) (352) (700) 26.0% 27.8% 12,279 (1,509) (1,691) (1,027) (1,530) 6,522 (4,231) 2,291 (871) 1,420 24.9% 26.0% 1 Adjusted gross margin, which is defined as gross profit excluding the (loss)/gain on derivative financial instruments is a non-GAAP metric used by management and is not an IFRS disclosure. 2 Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, (loss)/gain on derivative financial instruments and exceptional 3 items, is a non-GAAP metric used by management and is not an IFRS disclosure. Investment in machinery is the investment the business has made on converting machinery and for the prior year related to three high speed converting lines (two toilet and one kitchen) and in the current year related to two high speed converting lines that have yet to be installed and commissioned. S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 17 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: CFO’s Report Continued Revenues Discounter Multiple Other FY16 69% 9% 22% FY15 63% 9% 28% 100% 100% VAR 6% 0% (6)% 0% Administration costs Administrative expenses have increased year on year by £2.5m with £1.5m due to an increased headcount to support the sales growth, £0.4m due to an increase in the amortisation charge, with all of the following due to the three new lines installed during the prior year; £0.3m of the increase due to an increase in the depreciation charge, £0.3m due to an increase in rents and £0.3m due to increase in electricity costs. Revenues grew by 17.0% or £17.2m year on year with the majority of the growth from the Discounters. The Discount segment of the UK tissue market continues to grow strongly, taking share from the Multiples. Multiples, however, continue to be the biggest market segment and throughout the year, we have continued to work closely with our Multiple customers delivering a 15% increase year on year in the value of sales to this segment. In terms of products, toilet tissue revenues showed the highest year on year growth of 35.5% or £14.0m. As a proportion of revenue, toilet tissue has increased from 38% in the prior year to 44% in the current year, which reflects our investment last year in two toilet tissue converting lines. Gross margin Reported gross margin increased by 4.3% to 29.2% for the year to 30 April 2016. Adjusted gross margin excludes the impact of unrealised gains and losses on outstanding forward foreign currency contracts valued at the Balance Sheet date. Adjusted gross margin increased by 2.1% from 26.0% for the year ended 30 April 2015 to 28.1% for the year ended 30 April 2016. The increase of 2.1% is mainly due to: • In the prior year, we invested in, installed and commissioned three new high-speed converting lines ahead of the anticipated sales increase. In the current year, we have filled two of these lines with some capacity remaining on the third line which overall has contributed to an increase in gross margin year on year of c.0.8%. • Our average £:US$ transacted exchange rate decreased by c.6% year on year versus our average transacted US$ per tonnage paper purchase price decreasing by more at c.9%. As such, in the current year, we have a favourable purchase price variance of c.1.3% of gross margin. To mitigate adverse movements in exchange rates on both the US$ and Euro versus Sterling, we enter into forward currency contracts selling Sterling and purchasing both US$ and Euros. Prior to the UK’s decision to exit the EU in the recent referendum, we entered into additional forward currency contracts in both US$ and Euro. The amortisation charge relates to the writing down over 10 years of the intangible, customer relationships, that arose on the acquisition of Accrol Holdings Limited on 14 July 2014. The year on year increase is due to the acquisition occurring part way through the prior year. Exceptional costs of £1.5m in the prior year related to the expensing of the deal fees incurred as part of the acquisition of Accrol Holdings Limited on 14 July 2014. Current year exceptional costs of £0.5m relate to one off consultancy fees of £0.3m and £0.2m relating to a fire in September 2015 in the embossing unit in one of our converting lines. The line was back up and running within one week with no disruption to customer orders. Distribution costs Distribution costs as a percentage of sales have remained consistent year on year at 8.0%. We regularly review transport costs and use a variety of hauliers in order to ensure we are getting value and good service. Adjusted EBITDA Adjusted EBITDA has increased by £2.8m or 22.5% year on year from £12.3m to £15.0m. Finance costs Finance costs include the interest payable on the 10% fixed rate secured manager loan notes and the 10% fixed rate secured investor loan notes. Finance costs increased year on year by £0.7m, mainly due to the loan note interest and the bank loan interest being for a 12 month period in the current year versus part of the year in the prior period. One of the reasons for the listing on AIM in June 2016 was to reduce the debt burden on the business and reduce the financing costs by repaying both tranches of 10% fixed rate secured loan notes. Taxation The effective tax rate for the proforma period was high at 38.0% due to the add back of the amortisation of the customer relationships intangible and the add back of the loss on financial instruments. The effective tax rate for the current year is lower at 18.3% as the latter adjustment in the current was a gain. 18 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Balance sheet Property, plant and equipment In the previous financial period, we installed and commissioned three new high-speed converting lines, two toilet tissue lines and one kitchen towel line. At the end of the current financial year, two further converting lines were acquired for £3.2m, of which £0.3m was paid in cash and the balance of £2.9m funded through finance leases. These assets are key to supporting our strategy. Intangibles Intangibles comprise mainly of goodwill and customer relationships. Under IFRS, goodwill is not amortised but is subject to an impairment review on at least an annual basis. Consequently, during the year, the directors performed a review, which involved making assumptions about the future performance of the business. After carefully considering various scenarios that could occur and after looking at sensitivities on these scenarios, the directors concluded that no impairment was required. Customer relationships have been recognised at fair value and are amortised over 10 years. Working capital Inventories Trade and other receivables Trade and other payables 2016 £’m 9.4 21.3 (15.5) 15.2 Actual 2015 £’m 9.4 19.3 (17.1) 11.6 Var £’m – 2.0 1.6 3.6 Raw material stocks increased by £0.6m in line with the sales growth with finished goods stocks decreasing by a similar amount. Finished goods stocks at the year-end were lower than expected due to higher than expected demand around the year-end. Trade receivables increased by £1.6m in line with the sales growth, showing our continued tight control of cash collection. Trade payables decreased by £1.2m due to our decision to accept more favourable Parent Reel pricing versus credit terms. S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Borrowings and cashflow Bank loan facility Finance leases Shareholder loans Factoring facility Borrowings Cash and cash equivalents Net debt 2016 £’m 3.7 10.8 41.1 7.5 63.1 (2.5) 60.6 Actual 2015 £’m 4.8 11.0 40.8 5.8 62.4 (0.7) 61.7 Var £’m 1.1 0.2 (0.3) (1.7) (0.7) 1.8 1.1 The decrease in the bank facility is due to quarterly repayments of £0.3m per quarter made during the current year. Finance lease creditor reduced in the current year by the monthly capital repayments of £3.1m, offset by an increase of £2.9m due to financing of the two lines acquired towards the end of the current financial year. Shareholder loan interest of £4.1m was paid in July 2015 which was similar to the annual charge and so overall, the shareholder loans maintained a similar level year on year. Net cash generated during the year was £1.7m which supported a £1.1m decrease in net debt. On listing on AIM, the shareholder loan notes were repaid with part of the proceeds. In addition, on 13 June 2016, the bank loan facility and the finance leases were also repaid from a new Revolving Credit Facility (RCF). The RCF is a five-year £18m facility with a day 1 drawdown of £13.0m. The RCF reduces to £10m subject to the following profile: 30 April 2017: £16m 30 April 2018: £14m 30 April 2019: £12m 30 April 2020: £10m Looking forward After successfully completing our AIM listing, we are looking forward to the next chapter as a publicly owned company. As before, our goal is to provide shareholder value through the provision of quality products and services to our existing and new customers. We have committed to a 6% dividend yield at the IPO placing price which is supported by our strong historical cash generation. Trading in the first few months of the financial year ending 30 April 2017 is in line with management expectations and we remain confident in the financial outlook for the financial year end 30 April 2017. James Flude Chief Financial Officer 22 July 2016 19 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Principal Risks Principal Risks In order to gain an understanding of the risk exposure of the Group we review each area of our business annually and use a methodology that will assist the Group in measuring, evaluating, documenting and monitoring its risks within all areas of its operations. We use our risk management process as described to identify, monitor, evaluate and escalate risks as they emerge, enabling management to take appropriate action wherever possible in order to control them and also enabling the Board to keep risk management under review. The risk factors addressed below are those which we believe to be the most material to our business model, which could adversely affect the operations, revenue, profit, cash flow or assets of the Group and which may prevent us from achieving the Group’s strategic objectives. Additional risks and uncertainties currently unknown to us, or which we currently believe are immaterial, may also have an adverse effect on the Group. Principal risk Impact Mitigation Customer concentration The loss of a major customer. • The loss of a major customer and/or being too dependent on a small number of high value customers could seriously impact the sales revenue and hence profitability of the business. • Nurture relationships with key customers. • Understand our customers’ business in order to spot opportunities. • Ensure customer service levels are high. • Be ready to take advantage of market opportunities to take on new customers. Cost of input goods and materials Parent Reel and pulp pricing and capacity. • The Group considers that due to • Nurture relationships with key oversupply of Parent Reels and Pulp at present, Parent Reel prices are currently low. However, if prices rise above management expectations this could have a material adverse effect on the Group’s ability to achieve strategic objectives. Market and production capacity New entrant into market. • A new entrant into the market creating extra capacity and competition. Winning a large customer contract. • The winning of a large contract could absorb all capacity headroom and could lead to supply issues if not managed closely. Installation of new converting capacity. • As the Group grows it needs to install new converting capacity to supply customers. suppliers. • Buy ahead. • Take spot opportunities when available. • Remain close to market dynamics on pulp price and capacity. • Increase knowledge of overall capacity in market to identify new opportunities. • Remain flexible with regard to new suppliers. • Ensure that the Group remains cost competitive, delivering best quality and service to customers. • Ensure that we optimise the performance from our current production capacity and have clear plans to establish new production lines in line with business growth/winning new contracts. • We have done this on numerous occasions, most recently on the three new machines purchased in the previous financial year. • Regarding the two machines purchased in the current year, the original machine manufacturers have decommissioned and stored the machines. The manufacturers will re-install and commission them at a new site. 20 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Risk description Financial Volatility of foreign exchange rates. Impact Mitigation • The majority of our Parent Reel purchases are in US$ or Euros. Fluctuations in the exchange rates could adversely affect input costs and hence profitability. • We have a hedging policy. • Currency purchased in line with hedging policy and budgets/forecasts. • Flex purchasing towards US$, Euro or Sterling where appropriate. Information technology dependency The Group relies on IT systems in its day to day operations. • Disruption in critical IT systems could have a negative impact on production and important business processes. Human resources Key person dependency. • Loss of key individuals could impact the Company’s ability to deliver its strategic goals, and result in declining performance and loss of investor confidence. Regulatory Failure to adhere to regulatory requirements such as taxation, the Data Protection Act, Health and Safety and Fire Safety regulations in particular. • A major fire would lead to production loss and even factory loss. Due to the inflammable nature of tissue and the dust created during the converting process; the Group is at a greater risk of fire than many other industries. • Non compliance to Data Protection and Health & Safety regulations could result in fines, litigation and reputational damage. Increasing Decreasing No movement • A recent detailed IT review and mapping exercise has been undertaken. The IT strategy is in place and is reviewed on an ongoing basis. • Critical business continuity plans and disaster recovery contingencies are in place. The Group uses a variety of techniques to attract, retain and motivate its staff, with particular attention paid to those in key roles to help ensure the long-term success of the Group. These techniques include: • The regular review of remuneration packages, including share incentive schemes; • Regular communication with staff; and • An annual performance review process. • Ensure Group have robust operational policies, procedures, risk assessments and contingencies. • The Board has oversight over the management of regulatory risk and compliance and designates specific responsibilities to senior management who will seek external advice where relevant. • Update and test the Disaster Recovery Plan annually. 21 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Governance Meet Our Board Meet Our Board Since the IPO our Board of Directors now comprises: Peter Cheung Steve Crossley James Flude Joanne Lake Steve Hammett Position Executive Chairman Chief Executive Officer Chief Financial Officer Independent Non-Executive Independent Non-Executive Director Director Key strengths 30 years of operational and financial experience in blue chip manufacturing, FMCG and retail. 35 years of experience in UK food manufacturing and distribution at senior management or board level. Extensive experience in managing finance Extensive Board experience gained in a Range of retail experience. functions and financial reporting. plc environment and also with AIM companies. Extensive experience in the soft tissue industry. Date joined the Board Chairman since November 2014. June 2016. January 2015. June 2016. June 2016. Previous experience 20 years as a main board director. Peter has worked alongside private equity firms since 1997 and served on the board of AM Paper (SCA Soft Tissue) as Corporate Development Director, TMD Friction as Chief Financial Officer, Jemella Group (ghd) as Chief Operating Officer and Chairman of the Operating Board. He is a qualified CIMA accountant. Steve spent 27 years at Unigate plc and Northern Foods plc latterly as an Operating Board Director and Divisional Managing Director of Chilled Foods. Most recently, as Chief Executive Officer at Bright Blue Foods, he helped restructure, transition and re-finance the Company with a new investor. Steve has also had roles as Group Executive Board Director of Samworth Brothers (November 2010 to August 2014) and Managing Director of Grampian Country Pork (September 2006 to September 2008). Steve has experience working with venture capitalists and banks to raise capital for investment. James spent six years at ghd where he was key in delivering the first private equity buyout with Lloyds Development Capital in July 2006 and the second buyout with Montagu Private Equity in July 2007. James qualified as a Chartered Accountant with Arthur Andersen and holds a BSc Hons in Pure Mathematics from Birmingham University and a PhD in Mathematical Physics from the University of Nottingham. James has 13 years of industry experience Joanne has over 30 years’ experience in Steve has held a number of CEO roles in finance roles gained in blue chip and accountancy and investment banking with Tesco in Turkey, Thailand, Czech private equity backed businesses. primarily with Panmure Gordon, Evolution Republic and Slovakia. He held various financial reporting and Waterhouse. internal audit roles at Northern Foods plc. Securities, Williams de Broë and Price He was President of Al Futtaim Private and responsible for the growth of its retail brands, through c.400 stores in nine Middle East and North Africa markets. Other commitments 22 Deputy Chairman of AIM quoted Mattioli Interim Customer Director and a member Woods plc and main market listed Henry of the Food Board of the Co-operative Boot PLC and is also a Non-Executive Group. Responsible for c.3,000 stores. Director of AIM quoted Gateley (Holdings) Plc and Morses Club PLC. Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Peter Cheung Steve Crossley James Flude Joanne Lake Steve Hammett Position Executive Chairman Chief Executive Officer Chief Financial Officer Independent Non-Executive Director Independent Non-Executive Director Key strengths 30 years of operational and financial 35 years of experience in UK food experience in blue chip manufacturing, manufacturing and distribution at senior FMCG and retail. management or board level. Extensive experience in managing finance functions and financial reporting. Extensive Board experience gained in a plc environment and also with AIM companies. Range of retail experience. Extensive experience in the soft tissue industry. Date joined the Board Chairman since November 2014. June 2016. January 2015. June 2016. June 2016. Previous experience 20 years as a main board director. Steve spent 27 years at Unigate plc and Northern Foods plc latterly as an Peter has worked alongside private equity Operating Board Director and Divisional firms since 1997 and served on the board of Managing Director of Chilled Foods. AM Paper (SCA Soft Tissue) as Corporate Development Director, TMD Friction as Chief Most recently, as Chief Executive Officer at Financial Officer, Jemella Group (ghd) as Bright Blue Foods, he helped restructure, Chief Operating Officer and Chairman of the transition and re-finance the Company Operating Board. He is a qualified CIMA with a new investor. Steve has also had accountant. roles as Group Executive Board Director of Samworth Brothers (November 2010 to August 2014) and Managing Director of Grampian Country Pork (September 2006 to September 2008). Steve has experience working with venture capitalists and banks to raise capital for investment. Other commitments James has 13 years of industry experience in finance roles gained in blue chip and private equity backed businesses. He held various financial reporting and internal audit roles at Northern Foods plc. James spent six years at ghd where he was key in delivering the first private equity buyout with Lloyds Development Capital in July 2006 and the second buyout with Montagu Private Equity in July 2007. James qualified as a Chartered Accountant with Arthur Andersen and holds a BSc Hons in Pure Mathematics from Birmingham University and a PhD in Mathematical Physics from the University of Nottingham. Joanne has over 30 years’ experience in accountancy and investment banking primarily with Panmure Gordon, Evolution Securities, Williams de Broë and Price Waterhouse. Steve has held a number of CEO roles with Tesco in Turkey, Thailand, Czech Republic and Slovakia. He was President of Al Futtaim Private and responsible for the growth of its retail brands, through c.400 stores in nine Middle East and North Africa markets. Deputy Chairman of AIM quoted Mattioli Woods plc and main market listed Henry Boot PLC and is also a Non-Executive Director of AIM quoted Gateley (Holdings) Plc and Morses Club PLC. Interim Customer Director and a member of the Food Board of the Co-operative Group. Responsible for c.3,000 stores. 23 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Corporate Governance Statement Corporate Governance Statement Chairman’s introduction to Corporate Governance I am pleased to introduce the Corporate Governance Report for Accrol Group Holdings plc for the year ended 30 April 2016. This report includes my statement, an introduction to the members of the Accrol Board and the Corporate Governance Report. The Directors place a significant emphasis on ensuring that Accrol has the appropriate governance structures in place. The appropriate governance structure for a publicly listed entity looks very different to that required for an entrepreneurial business. As part of the preparatory work that was undertaken prior to our Initial Public Offering (IPO) on the AIM market, a review of the kind of governance structure that was required and that would be appropriate for Accrol at this time, was undertaken and began to be implemented. This review process is ongoing and will be continued by a Board that is committed to upholding the appropriate standards of corporate governance to ensure that there is an effective and efficient approach to managing the Group for the long-term benefit of all shareholders. The Committees noted below were formed upon our IPO and therefore after our current April 2016 year end. In this Corporate Governance Report, the Board take the opportunity to set out and explain our framework for Corporate Governance for future periods. Peter Cheung Executive Chairman 22 July 2016 24 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Governance statement The Company’s shares are listed on AIM and are subject to the AIM Rules of the London Stock Exchange and consequently are not required to comply with the provisions or report in accordance with the UK Corporate Governance Code issued by the Financial Reporting Council in 2014. However, the Board is committed to the principles of good corporate governance covering leadership, effectiveness, accountability, remuneration and shareholder relations. Since Admission, the Directors have moved towards applying the Quoted Companies Alliance (QCA) Corporate Governance Code for Small and Mid-size Quoted Companies 2013, as far as is practicable and appropriate for a public company of the Group’s size and nature. Role of the Board The role of the Board is to establish the vision and strategy for the Group, to deliver shareholder value and be responsible for the long-term success of the Company. Individual members of the Board have equal responsibility for the overall stewardship, management and performance of the Group and for the approval of its long-term objectives and strategic plans. Division of responsibilities There is a clear division of responsibilities between the role of the Executive Chairman and that of the Chief Executive Officer of the Company and the roles are clearly set out in writing and reviewed by the Board. The primary responsibility of the Chairman is to lead and manage the Board and that of the Chief Executive is to manage the business of the Group. The Chairman Peter Cheung was appointed as Chairman in November 2014. The Chairman is responsible for leading and managing the Board and ensuring its effectiveness in all aspects of its role. He works closely with the Chief Executive on developing Group strategy and provides general advice and support. The Board also delegates a number of its responsibilities to committees and management as described below. Board Committees The Board has delegated specific authority to the Audit Committee, Remuneration Committee and the Nomination Committee. Joanne Lake is Chairman of the Audit Committee which also comprises Peter Cheung and Steve Hammett. The Audit Committee has the primary responsibility for monitoring the quality of internal controls, ensuring that the financial performance of the Group is properly measured and reported on and reviewing reports from the Group’s auditors relating to the Group’s accounting and internal controls, in all cases having due regard to the interests of shareholders. The Audit Committee will meet at least 3 times a year. Peter Cheung is Chairman of the Nomination Committee which also comprises Joanne Lake and Steve Hammett. The Nomination Committee will identify and nominate, for the approval of the Board, candidates to fill Board vacancies as and when they arise. The Nomination Committee will meet as required. Steve Hammett is Chairman of the Remuneration Committee which also comprises Peter Cheung and Joanne Lake. The Remuneration Committee will review the performance of the Executive Directors and determine their terms and conditions of service, including their remuneration and the grant of options, having due regard to the interests of shareholders. The Remuneration Committee will meet at least once a year. Board and Committee meetings The Board will meet on a formal basis regularly. Members will be supplied with financial and operational information in good time for review in advance of the meetings. The Chief Executive Officer Steve Crossley is the Company’s Chief Executive. His principal responsibility is to manage the Group’s business and to lead the Senior Management Team in delivering the Company’s strategic and operational objectives. All Directors will have access to the advice and services of the Company Secretary. The Board approves the appointment and removal of the Company Secretary. The Non-Executive Directors are able to contact the Executive Directors, Company Secretary or Senior Managers at any time for further information. The Non-Executive Directors The Non-Executive Directors are each considered by the Board to be independent, in both character and judgement, in accordance with the recommendations of the Code. The operation of the Board The Board has the authority for ensuring that the Group is appropriately managed and achieves the strategic objectives it sets. To achieve this, the Board reserves certain matters for its own determination including matters relating to Group strategy, approval of interim and annual financial results, dividend policy, major capital expenditure, budgets, monitoring performance, treasury policy, risk management, corporate governance and the effectiveness of its internal control systems. It has a schedule of matters specifically reserved for its approval. The Board performs its responsibilities through an annual programme of meetings and by continuous monitoring of the performance of the Group. Matters considered by the Board going forwards will include: • Finance and operations review • Annual budget and forecasts • Risk review • Strategic plans • Health and safety • Potential merger and acquisition targets • Reports from the Board Committees • Board evaluation Effectiveness Board composition The Board comprises the Executive Chairman, the Chief Executive, the Chief Financial Officer and two Non-Executive Directors. The Directors’ profiles appear on pages 22 and 23 and detail their experience and suitability for leading and managing the Group. Together they bring a valuable range of expertise and experience to the Group. No individual or group of individuals dominate the Board’s decision making process. The Chairman will foster a climate of debate and challenge in the boardroom, built on his challenging but supportive relationship with the Chief Executive which will set the tone for Board interaction and discussions. Diversity Vacancies on the Board are filled following a rigorous evaluation of candidates who possess the required balance of skills, knowledge and experience, using recruitment consultants where appropriate. The process for the appointment of Non-Executive Directors is managed by the Nomination Committee. The Company recognises the importance of diversity at Board level and the Board comprises individuals with a wide range of skills and experiences from a variety of business backgrounds. Our current female representation on the Board is 20%. 25 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Corporate Governance Statement Continued Appointment of Non-Executive Directors Non-Executive Directors are appointed to the Board following a formal, rigorous and transparent process, involving external recruitment agencies, to select individuals who have a depth and breadth of relevant experience, thus ensuring that the selected candidates will be capable of making an effective and relevant contribution to the Board. The process for the appointment of Non-Executive Directors is managed by the Nomination Committee. Terms of appointment and time commitment All Non-Executive Directors are appointed for an initial term of 6 months after which the appointments are terminable by either the Company or the Non-Executive Director on one month’s notice. All Non-Executive Directors are expected to devote such time as is necessary for the proper performance of their duties. Directors are expected to attend all Board meetings and committee meetings of which they are members and any additional meetings as required. Further details of their terms and conditions are summarised in the Remuneration Report on pages 28 to 32 and the terms and conditions of appointment of the Non-Executive Directors are available at the Company’s Registered Office. Induction and professional development New Directors are given a formal induction process including details of how the Board and Committees operate, meetings with Senior Management and information on Group strategy, products and performance. Training and development needs of Directors are reviewed regularly. The Directors are kept appraised of developments in legal, regulatory and financial matters affecting the Group from the Company Secretary, the Chief Financial Officer and the Group’s external auditors and advisers. Professional advice, indemnities and insurance There is provision for Directors to take independent professional advice relating to the discharge of their responsibilities should they feel they need it. The Company has arranged Directors’ and Officers’ liability insurance against certain liabilities and defence costs. However, the Directors’ insurance does not provide protection in the event of a Director being found to have acted fraudulently or dishonestly. Board and committee evaluation The performance evaluation of the Board, its Committees and Directors will be undertaken by the Chairman annually and implemented in collaboration with the Committee Chairmen. Election and re-election of Directors At each Annual General Meeting the shareholders shall vote on resolutions to both elect any director who has been appointed since the last Annual General Meeting and also to re-elect any director who has not been appointed, elected or re-elected at one of the two previous annual general meetings. Remuneration Committee The Remuneration Committee comprises Steve Hammett, Peter Cheung, and Joanne Lake. The Committee has Terms of Reference that will be reviewed at least annually. The role of the Committee is to: • Set the remuneration policy for all Executive Directors and the Chairman of the Board; • Recommend and monitor the level and structure of senior management remuneration; • Ensure that the remuneration payments made to any director are consistent with the approved policy; and • Oversee incentives-based remuneration for senior management or employees. In carrying out these duties the committee shall ensure the appropriateness, relevance and market practice in respect of such remuneration policy. Nomination Committee The Nomination Committee comprises Peter Cheung, Joanne Lake and Steve Hammett and will meet as and when it is necessary to do so. The Committee has Terms of Reference that will be reviewed at least annually. The Committee’s role is to: • Ensure that appropriate procedures are in place for the nomination and selection of candidates for appointment to the Board considering the balance of skills, knowledge and experience of the Board; • Make recommendations to the Board regarding re-election of Directors, succession planning and Board composition, having due regard for diversity, including gender; and • Consider succession planning for Senior Management and membership of the Audit and Remuneration Committees. Audit Committee The Chief Executive Officer, Chief Financial Officer and external audit partner will attend a number of these meetings. The Audit Committee will also meet with the external audit partner without the Executives present. The role of the Committee will be to: • Consider the appointment, fees, independence and effectiveness of the auditor and the audit process, and discuss the scope of the audit and its findings; • Review audit and non audit services and fees; • Monitor the Group’s accounting policies; • Review and challenge the Group’s assessment of business risks and internal controls to mitigate these risks; • Review the annual and interim statements prior to their submission for approval by the Board; • Review and challenge the going concern assumptions for the Group; • Review the Group’s whistle-blowing policy; and • Annually assess the performance of the external auditor. It is the task of the Audit Committee to ensure that auditor objectivity and independence is safeguarded when non-audit services are provided by the auditor. To ensure auditor objectivity and independence there is a process in place to approve any non-audit work. The Audit Committee provides advice to the Board on whether the Annual Report is fair, balanced and provides the necessary information shareholders require to assess the Company’s performance, business model and strategy. In doing so, the following issues have been addressed: • Review of key strategic risks – the Audit Committee will conduct a review of the key strategic risks every six months. The review will highlight the key risks based on a combination of likelihood and impact and then also considers what appropriate mitigation has been and should be implemented. The key risks are included in the Strategic Review; • Review of judgements made by management, including the discount rate used in determining whether there has been an impairment of goodwill; and • Going concern – the conclusion of the review of the going concern assessment is included below. The Board is confident that the collective experience of the Audit Committee will enable them to act as an effective committee. The Audit Committee has access to the financial expertise of the Group and its auditors and can seek professional advice at the Company’s expense if required. 26 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Remuneration The level of remuneration of the Directors is set out in the Remuneration Report on page 29. Relations with shareholders The Board appreciates that effective communication with the Company’s shareholders and the investment community as a whole is a key objective. The Chairman’s Statement, the Chief Executive’s Statement and the Strategic Report and Financial Review, together with the information in the Annual Report of the Group, provides a detailed review of the business. The views of both institutional and private shareholders are important, and these can be varied and wide-ranging, as is their interest in the Company’s strategy, reputation and performance. The Executive Directors have overall responsibility for ensuring effective communication and the Company maintains a regular dialogue with its shareholders, mainly in the periods following the announcement of the interim and final results, but also at other times during the year. The views of shareholders are sought through direct contact and via feedback from advisors and are communicated to the Board as a whole. The Board encourages the participation of shareholders at its Annual General Meeting, notice of which is sent to shareholders at least 14 working days before the meeting. The Company’s website ‘www.accrol.co.uk’ is regularly updated and provides additional information on the Group including information on the Group’s products and technology. Annual General Meeting This year’s AGM includes a presentation by the Chief Executive on the current progress of the business and allows the opportunity for questions on this or any of the resolutions before the meeting. The Company proposes separate resolutions for each issue and specifically relating to the Reports and Accounts. The Company ensures all proxy votes are counted and indicates the level of proxies on each resolution along with the abstentions after it has been dealt with on a show of hands. After the meeting, shareholders have the opportunity to talk informally to the Board and raise any further questions or issues they may have. The outcome of the AGM, a copy of the AGM presentation and details of the poll results will be posted on the Company’s website after the meeting. Richard Almond Company Secretary 22 July 2016 Risk management The Group’s corporate objective is to maximise long-term shareholder value. In doing so, the Directors recognise that creating value is the reward for taking and accepting risk. The Directors consider risk management to be crucial to the Group’s success and give a high priority to ensuring that adequate systems are in place to evaluate and limit risk exposure. Management will report to the Audit Committee regularly on their review of risks, how the risks are managed and monitored, and what actions have been assigned in relation to those risks. The Audit Committee will review the inherent risks, including the key risks and the system of control necessary to manage such risks. The Audit Committee will review the effectiveness of the Group’s procedures in managing risk. The business risks and controls to mitigate the risks will be formally reviewed by the Audit Committee and the Board at least twice a year. The Board are satisfied that this will be an ongoing process, which will operate throughout the year, for identifying, evaluating and managing the significant risks faced by the Group. Internal control The Board are responsible for the Group’s system of internal control and for reviewing its effectiveness, taking guidance from the Audit Committee. In the context of the Group’s business any such system can only reasonably be expected to manage rather than eliminate risks arising from its operations. It can therefore only provide reasonable and not absolute assurance against material loss or misstatement. Key features of the internal control system are as follows: • The Group has an organisational structure with clear responsibilities and lines of accountability. The Group promotes the values of integrity and professionalism. The members of the Board are available to hear, in confidence, any individual’s concerns about improprieties; • The Board has a schedule of matters expressly reserved for its consideration. This schedule includes potential acquisitions, major capital projects, treasury, risk management policies, approval of budgets and health & safety; • The Board monitors the activities of the Group through the management accounts, monthly forecasts and other reports on current activities and plans. The Senior Management Team regularly monitors financial and operational performance in detail; • The Group has set appropriate levels of authorisation which must be adhered to as the Group concludes its business; and • The Group operates a whistle-blowing policy which is communicated to all employees via the Employee Handbook. Going concern In carrying out their duties in respect of going concern, the Directors have carried out a review of the Group’s financial position and cash flow forecasts for the foreseeable future. These have been based on a comprehensive review of revenue, expenditure and cash flows, taking into account specific business risks and the current economic environment. With regard to the Group’s financial position, it had cash and cash equivalents at the year end of £2.5m (2015: £0.7m). Having taken the above into consideration, the Directors have reached the conclusion that the Group is well placed to manage its business risks in the current economic environment. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. 27 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Remuneration Committee Remuneration Committee Our directors’ remuneration policy In the lead up to Admission the Company undertook a review of the underlying policy and remuneration structures of companies in the competitive marketplace in which we operate. We considered the approach necessary to attract and retain individuals with the relevant experience and skills to help drive future value creation and the achievement of our strategic goals and objectives. Our overall goal is to have a remuneration strategy which stimulates sustainable value creation for the business and rewards the performance of management accordingly. The policy is set out in the following pages, with a summary of key principles provided below: • Fixed levels of remuneration will be set at an appropriate level for each individual and in doing so the Remuneration Committee will take into account the levels of fixed remuneration for similar positions with comparable status, responsibility and skills. This will ensure we can attract and retain the individuals needed to grow the Company. • Recognising our growth aspirations and the need to deliver ongoing superior returns for shareholders, the Executive Directors are eligible to participate in market competitive incentive arrangements. They will have the opportunity to receive appropriate levels of remuneration based on achievement of quantitative and qualitative objectives and measures as relevant for their role. Business context and Remuneration Committee decisions on remuneration The following factors have been identified as key areas of focus for improving the Group’s performance going forward: • Organic growth through Discounters; • Increasing market share through multiples; and • Operational improvements and capacity utilisation. In addition to these key areas, the Board will also consider complementary acquisitions. It is intended that our remuneration policy reflects and is aligned to the Company’s long-term strategy and facilitates the achievement of the above objectives. During the year the Board considered and approved the implementation of an annual bonus plan and management incentive plan to incentivise key management to generate growth post-Admission. Further detail on these are set out in the Remuneration Policy section of this report. The remainder of this report is split out into the following two sections: • Annual Report on Remuneration providing details of the payments made to directors in the year ending 30 April 2016, pages 29 to 32. • Directors’ Remuneration Policy setting out the Company’s forward looking remuneration policy, pages 29 to 32. Steve Hammett Chairman of the Remuneration Committee 22 July 2016 Statement from the Chairman of the Remuneration Committee I am pleased to introduce the Directors’ Remuneration Report for Accrol Group Holdings plc for the year ended 30 April 2016. This report includes my statement, the Annual Report on remuneration for the period and sets out our forward-looking directors’ remuneration policy. The Directors acknowledge the importance of the principles set out in the Quoted Companies Alliance (QCA) Corporate Governance Code and we intend to apply this Code as far as we consider appropriate given the size of the Company. As part of this we have chosen to include information in this report which we believe is important to shareholders, notwithstanding that this goes beyond what we are required to disclose. We hope that you will find this useful. 28 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Annual Remuneration Report for 2016 Remuneration Committee On Admission, the Company established a Remuneration Committee comprising of the following members: • Steve Hammett • Peter Cheung • Joanne Lake The Remuneration Committee has responsibility for setting the remuneration policy for all Executive Directors and the Chairman of the Board, including pension rights and any compensation payments. This includes reviewing the performance of the Executive Directors and determining their terms and conditions of service, their remuneration and the grant of any options, having due regard to the interests of shareholders. In setting the remuneration policy, the Remuneration Committee takes into account the objective to attract, retain and motivate executive management of the quality required to run the Company successfully without paying more than is necessary. The remuneration policy also has regard to the risk appetite of the Company and alignment to the Company’s long term strategic goals. The Remuneration Committee also recognises that a significant proportion of remuneration should be structured so as to link rewards to corporate and individual performance and designed to promote the long-term success of the Company. The Remuneration Committee meets at least once a year and otherwise as required. Remuneration policy This policy has been developed to apply from the time of Admission. The Remuneration Committee will periodically review the policy to confirm the remuneration framework continues to align with the strategy and objectives of the business. In developing the policy, the Remuneration Committee has taken into account the best interests of the business and the agreed terms and conditions of employment for each director of the Company. The overall remuneration philosophy aims: • To recognise the importance of ensuring that employees of the Group are effectively and appropriately incentivised. • To operate a remuneration policy that is a mix of fixed and variable pay. Variable pay is both short term and long-term. • To align directors’ interests with those of the Company. • To have a pay for performance approach. • To provide a market competitive level of remuneration to enable the company to attract and retain high level individuals, to support the ongoing success of the Company. As part of this an annual bonus plan has been introduced which takes effect from the start of the financial year ending 30 April 2017. The Company has also adopted the Management Incentive Plan (‘MIP’), to align the interests of senior management with those of the shareholders. There are no other employee share plans currently in place however, the Company may, in the future, look to introduce an employee share plan for the broader employee base. S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Directors’ remuneration The tables below set out the total remuneration for Executive and Non-Executive Directors for the financial year ending 30 April 2016 and 30 April 2015. Executive Director Majid Hussain1 Jawid Hussain1 John Flanagan1 Gary Earle1 Colin Platt1, 4 James Flude2,4 Non-Executive Director Peter Cheung2, 3 Total remuneration 2016 £ Total remuneration 2015 £ 84,000 108,000 102,180 204,804 96,000 114,000 64,578 74,624 89,123 150,260 51,693 38,000 Total fees 2016 £ Total fees 2015 £ 72,000 37,500 1 On 10 June 2016, Majid Hussain, Jawid Hussain, John Flanagan, Gary Earle and Colin Platt 2 resigned as Directors of the Company as part of the Admission process. James Flude purchased 100 C Shares and 572 D Shares and Peter Cheung purchased 250 C Shares and 572 D Shares in June 2015. 50% of the shares were sold on Admission and the remaining 50% are subject to a lock-in which expires on 10 June 2017. There are no performance conditions or other conditions attaching to these shares which are fully vested in the individuals. 3 At the time of Admission, Peter Cheung took on an Executive Chairman role. He will continue this role for a short period post-Admission before moving back into a Non-Executive role. 4 Colin Platt and James Flude became Directors of the Company part way through the year ended 30 April 2015. 29 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Remuneration Committee Continued Remuneration policy summary – Executive Directors Purpose and link to strategy Operation Base salary To reflect market value of the role and individual’s performance and contribution and enable the Group to recruit and retain directors of sufficient calibre required to support achievement of both short and long-term value creation. Benefits To attract and retain the right individuals and level of talent required to support achievement of both short and long-term value creation. Pension To attract and retain the right individuals and level of talent required to support achievement of both short and long-term value creation. The salary of each Executive Director will be reviewed annually by the Remuneration Committee without any obligation to increase such salary. Base salaries are benchmarked against the AIM companies of a comparable size with a targeted approach of median positioning against the market, subject to satisfactory performance. There may be reviews and changes to base salary during the year if considered appropriate by the Remuneration Committee. The Remuneration Committee will take account of relevant comparator group data as well as pay increases awarded to other groups of employees within the Company. Benefits include but may not be limited to private medical insurance, cash car allowance and life assurance cover. Other benefits may be provided to the Directors if considered appropriate by the Committee. An annual pension allowance equivalent to 12.5% of base salary which is paid either into a pension scheme operated by the Company or a personal pension held by the individual, with the balance paid as an additional cash payment through payroll. Consideration of the new rules applying to pensions, taking into account the individual lifetime and annual allowances, are made when determining the most appropriate mix of pension and cash contributions for each individual on an annual basis. 30 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Purpose and link to strategy Operation Annual Bonus Plan To incentivise delivery of the Group’s annual financial and strategic goals. Management Incentive Plan (MIP) To incentivise the delivery of key performance measures over the long-term. To retain key executives and ultimately increase their share ownership in the Company, thus aligning their interests with those of shareholders. The annual bonus payment will depend on the level of performance delivered against specific targets, with a threshold level being set below which no bonus will be paid. The performance range is outlined below: • Threshold performance – achieving 90% of the relevant target – pay out of 25% of the relevant part of the award. • Budget performance – achieving 100% of the relevant target – pay out of 60% of the relevant part of the award. • Maximum performance – achieving 110% of the relevant target – pay out of 100% of the relevant part of the award. In measuring performance, the following performance measures will be used: • Profit before tax – 80% of award. • Cash generation – 20% of the award. The maximum bonus available is 100% of base salary per annum. This would only be paid out if the maximum targets are met. The Remuneration Committee will review the bonus plan each year and may amend the terms of the plan to ensure it remains fit for purpose. The MIP is a one-off award in connection with the Admission, there is no intention to make ongoing annual awards. The MIP involves the use of shares (‘MIP Shares’) which entitles the holders to a proportion of the value of the business above a pre-determined hurdle level. The hurdle has been set at a premium of 30% to the share price of the Company on Admission. The MIP has a three year vesting period after which a participant can choose to sell their MIP Shares to the Company (or the Company could choose to call for their MIP Shares). MIP participants will also be able to sell their MIP Shares prior to the end of the vesting period should the Company be acquired by a third party. The Company may, at its discretion, purchase the MIP Shares for cash or by way of the issue of Ordinary share in the Company as consideration. The number of Company shares that can be acquired in exchange for the vested growth shares will be calculated based on the value of the growth shares held by an individual at the time of the exchange and the share price of the Company on that date. Footnotes to the Remuneration Policy • Ancillary benefits include private medical insurance expenses, life assurance cover (at four times basic salary), provision of a £10,000 per annum car allowance (Steve Crossley only) and the reimbursement of all reasonable and authorised expenses (including, for Peter Cheung only, the reimbursement of reasonable travel expenses to and from the Company’s offices in Blackburn). 31 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Remuneration Committee Continued Termination of employment Each Executive Director has a service agreement which may be terminated by either party serving twelve months written notice. However, payment of remuneration during the notice period will be made monthly and terminated at the discretion of the Company should the individual take-up alternative employment. Annual Bonus Plan Payment of the bonus is conditional upon notice to terminate the employment not having been served by either party for any reason on or prior to the relevant bonus payment date. MIP During the vesting period, if a participant ceases to be a director or employee of a member of the Group other than in certain ‘Good Leaver’ circumstances, participants can be required to transfer their MIP shares at the lower of fair value and the cost value of the MIP shares (subject to a minimum amount of £2,000). A Good Leaver is someone who ceases employment as a result of death, ill health, injury or disability evidenced to the satisfaction of the Board with Remuneration Committee consent; retirement at the normal retirement age in accordance with the Group’s internal policies; or any other reason the Board (acting with Remuneration Committee consent) permits. If the participant’s employment is deemed to have ceased in any of these ‘Good Leaver’ circumstances, they will be permitted to retain their MIP Shares until the expiry of the normal vesting period. They will then be able to transfer their MIP shares to the Company at their fair value, pro-rated by reference to the period of employment as a proportion of the vesting period. The Company will have flexibility to buy back the relevant proportion of MIP Shares that have not vested, at cost (subject to a minimum amount of £2,000), at the end of the vesting period or at an earlier date. Remuneration policy summary – Non-Executive Directors Purpose and link to strategy Operation Non-Executive Directors’ fees To attract and retain the right individuals required to support the achievement of both short and long-term value creation. Fees for Non-Executive Directors are based on market practice and are reviewed by the Board each year. All Non-Executive Directors receive a basic fee each year with an additional fee provided for each committee chairmanship and membership. The maximum aggregate amount of fees that the Company may pay to all the Directors who do not hold executive office for their services as such is £120,000 per annum, or such larger amount as the Company may by ordinary resolution decide. These fees are to be divided among the Directors as the Board decides or, if no decision is made, equally. 32 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Directors’ Report Directors’ Report S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Corporate structure In anticipation of Admission, Accrol Group Holdings Limited, completed a capital restructuring on 1 June 2016 in which all existing A, B, C and D Ordinary shares were converted into simply Ordinary and Deferred shares. Following the capital restructuring, on the same day, 1 June 2016, Accrol Group Holdings Limited re-registered as Accrol Group Holdings plc, a public company limited by shares. On 10 June 2016, Accrol Group Holdings plc was admitted to the AIM market of the London Stock Exchange. The Board The Directors who served during the year under review were: Peter Cheung Steve Roy Crossley (appointed 10 June 2016) James Paul Maurice Flude Joanne Carolyn Lake (appointed 10 June 2016) Steve Hammett (appointed 10 June 2016) Dan Wright (resigned 10 June 2016) Majid Hussain MBE (resigned 10 June 2016) Jawid Hussain (resigned 10 June 2016) John Flanagan (resigned 10 June 2016) Gary Earle (resigned 10 June 2016) Colin Platt (resigned 10 June 2016) Details of the Directors’ remuneration are shown in the Report of the Remuneration Committee on pages 28 to 32. Details of the Directors’ interests in the share capital of the Company are set out below. The roles and biographies of the Directors as at the date of this report are on pages 22 to 23. Directors’ indemnity and insurance The Company has granted a third-party indemnity to each of its Directors against any liability that attaches to them in defending proceedings brought against them, to the extent permitted by English law. In addition, Directors and officers of the Company and its subsidiaries are covered by Directors’ and Officers’ liability insurance. Dividends In respect of the year ended 30 April 2016, the Directors do not recommend payment of a dividend. Going forward to the year ending 30 April 2017, the Directors’ have stated their intention to approve a 6% dividend payment at the IPO placing price. Financial instruments Details of the Group’s financial risk management objectives and policies are disclosed in note 18 to the financial statements. Post balance sheet events On Admission, the net proceeds of the Placing receivable by the Company were £41.4m being the gross proceeds of £43.3m less estimated fees and expenses related to the Placing of £1.9m. Future developments in the business of the Company The likely future developments in respect of the business of the Company can be found in the Strategic Report on pages 1 to 21 and forms part of this report by reference. Corporate governance A report on Corporate Governance and compliance with the QCA Corporate Governance Code is set out on pages 22 to 27, and forms part of this report by reference. Health & Safety The Group is committed to providing a safe working environment for all employees. Group policies are reviewed regularly to ensure that policies relating to training, risk assessment and accident management are appropriate. Health and safety issues are reported at each Board and Operations meeting. Charitable and political donations Charitable donations of £35,230 (2015: £41,457) were made during the year. There were no political donations during the year. Employee involvement and policy regarding disabled persons The Company operates an equal opportunities policy that aims to treat individuals fairly and not to discriminate on the basis of sex, race, ethnic origin, disability or on any other basis. The Company’s policy and procedures are designed to provide for full and fair consideration and selection of disabled applicants, to ensure they are properly trained to perform safely and effectively and to provide career opportunities that allow them to fulfil their potential. Where a member of staff becomes disabled in the course of their employment the Company will actively seek to retain them wherever possible by making adjustments to their work content and environment or by retraining them to undertake new roles. The Group provides staff with information on the Group’s performance and on matters concerning them on a regular basis. Considerable value is placed on the involvement of its staff; regular, open, fair and respectful communication; zero tolerance for human rights violations; fair remuneration and, above all, a safe working environment. Share capital The details of the issued share capital at the end of the year can be found in note 20 to the consolidated financial statements. On the 1 June 2016 the Company completed a capital restructuring of the Group in which all existing A, B, C and D Ordinary shares were converted into one class of Ordinary and Deferred shares. The rights attached to the Company’s Ordinary and Deferred shares are set out in the Articles of Association. Pursuant to the Placing agreement, each of the Directors and the pre Admission shareholders have undertaken not to dispose of any Ordinary shares (without the consent of Zeus Capital), for a period of 12 months from the date of Admission. Additionally, shareholders have agreed for a further 6 months to comply with certain conditions prior to any disposal. The Directors believe that this has: • Strengthened the Company’s capital structure and positioned it for the continued implementation of its growth strategy; • Given the Company access to a wider range of capital-raising options which may be of use in the future; and • Further improved the ability of the Company to recruit, retain and incentivise its key management and staff. Authority for the Company to purchase its own shares On 1 June 2016, the Company passed resolutions and entered into a share buyback contract with each member of the Company to buy back, on 11 July 2016, all of the deferred shares of £0.001 each held by each member, buying back in aggregate, 27,476,142 deferred shares of £0.001 each for an aggregate consideration price of £1. As a consequence, the Directors believe that the Company is in a strong financial position to continue in operational existence for the foreseeable future. Authority to allot shares Powers related to the issue and buy-back of the Company’s shares are included in the Company’s Articles of Association and such authorities are reviewed annually by shareholders at the Annual General Meeting. 33 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Directors’ Report Continued Directors’ interests The interests in the shares of the Company of those Directors serving at 30 April 2016, and as at the date of signing of these financial statements, all of which are beneficial, in the share capital of the Company were as follows: Class of share As at 30 April 2016 Number of £1 Ordinary share As at 30 April 2016 % of issued share capital As at 30 April 2016 Majid Hussain Peter Cheung Gary Earle John Flanagan Colin Platt James Flude 1,542 B C and D 250 C & 572 D C and D 100 C and 572 D C and D 100 C and 572 D C and D 100 C and 572 D C and D 100 C and 572 D 12.1% 6.3% in total 5.3% in total 5.3% in total 5.3% in total 5.3% in total Number of £0.001 Ordinary shares As at 20 July 2016 % of issued share capital As at 20 July 2016 Significant agreements The Company is not a party to any significant agreements that would take effect, alter or terminate on a change of control of the Company. Going concern The Chairman’s review and the Chief Executive’s Review on pages 6 and 8, outline the business activities of the Group along with the factors which may affect its future development and performance. The financial review discusses the Group’s financial position, along with details of its cash flow and liquidity. Note 18 to the financial statements sets out the Group’s financial risks and the management of those risks. Having prepared management forecasts and made appropriate enquiries, the directors are satisfied that the Group has adequate resources for the foreseeable future, as the Group is at the start up stage of its business life cycle. Accordingly, they have continued to adopt the going concern basis in preparing the Group and Company financial statements. Peter Cheung James Flude Joanne Lake 611,683 244,680 25,000 0.66% 0.26% 0.03% Disclosure of information to the Auditor Each of the persons who is a Director at the date of approval of this Annual Report confirms that: Substantial shareholders As at 30 April 2016, the Company was aware of the following interests representing 3% or more of the issued share capital of the Company, correct as at the date of notification. Investor Majid Hussain Wajid Hussain Mozam Hussain NorthEdge Capital Peter Cheung Gary Earle John Flanagan Colin Platt James Flude Number of shares Percentage 1,542 1,542 1,541 4,625 822 672 672 672 672 12.1% 12.1% 12.1% 36.2% 6.3% 5.3% 5.3% 5.3% 5.3% a So far as each Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware; and b Each of the Directors has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information. PricewaterhouseCoopers LLP have expressed their willingness to continue in office as Auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. Annual General Meeting Your attention is drawn to the Notice of Annual General Meeting accompanying this Annual Report which sets out the resolutions to be proposed at the forthcoming Annual General Meeting. The meeting will be held at Stanley House Hotel, Mellor, Lancashire, BB2 7NP on 30 September 2016 at 11am. On behalf of the Board Steve Crossley Chief Executive Officer 22 July 2016 As at 20 July 2016, the Company was aware of the following interests representing 3% or more of the issued share capital of the Company, correct as at the date of notification. It should be noted that these holdings may have changed since notified to the Company, however notification of any change is not required until the next applicable threshold is crossed. Investor Number of shares Percentage Majid Hussain Wajid Hussain Mozam Hussain NorthEdge Capital Miton Asset Management Limited AXA Investment Managers UK Schroder Investment Management Majedie Asset Management Limited Ruffer LLP (for its discretionary clients of the Ruffer Group) Premier Fund Managers Limited 4,652,590 4,652,590 4,646,621 13,987,377 8,800,000 8,400,000 8,000,000 5,411,105 5,000,000 3,600,000 5.0% 5.0% 5.0% 15.0% 9.5% 9.0% 8.6% 5.8% 5.4% 3.9% 34 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Directors’ Responsibilities Statement The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; and • state whether IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors’ Responsibilities Statement S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 35 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Financial Statements Independent Auditor’s Report Consolidated Independent Auditor’s Report to the Members of Accrol Group Holdings plc For year ended 30 April 2016 Report on the group financial statements Our opinion In our opinion, Accrol Group Holdings plc’s group financial statements (the ‘financial statements’): • give a true and fair view of the state of the group’s affairs as at 30 April 2016 and of its profit and cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. • • We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Other matter We have reported separately on the company financial statements of Accrol Group Holdings plc for the year ended 30 April 2016. Hazel Macnamara (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Manchester 22 July 2016 What we have audited The financial statements, included within the Annual report and Accounts (the ‘Annual Report’), comprise: • • the Consolidated statement of financial position as at 30 April 2016; the Consolidated income statement and Consolidated statement of comprehensive income for the year then ended; the Consolidated cash flow statement for the year then ended; the Consolidated statement of changes in equity for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. • • • The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law. In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Other matters on which we are required to report by exception Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. 36 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Consolidated Income Statement For year ended 30 April 2016 Continuing operations Revenue – Cost of sales before gain/(loss) on derivative financial instruments – Gain/(loss) on derivative financial instruments Cost of sales Gross profit Administration expenses Distribution Operating profit Analysed as: – Adjusted EBITDA1 – Depreciation – Amortisation – Gain/(loss) on derivative financial instruments – Exceptional items Operating profit Finance costs Profit/(loss) before tax Tax charge Profit/(loss) for the year attributable to equity shareholders Consolidated Statement of Comprehensive Income Profit/(loss) for the year attributable to equity shareholders Other comprehensive income for the year Total comprehensive income/(loss) attributable to equity shareholders Earnings per share Basic and Diluted Adjusted Consolidated Income Consolidated Statement of Statement Comprehensive Income S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Note 2016 £’000 2015 £’000 4 118,219 81,904 (84,996) 1,266 (59,162) (1,455) (83,730) (60,617) 34,489 (13,138) (9,431) 21,287 (8,954) (8,549) 5 11,920 3,784 10 11 5 8 9 Note 15,038 (1,831) (2,060) 1,266 (493) 11,920 (4,941) 6,979 (1,274) 5,705 9,971 (1,511) (1,691) (1,455) (1,530) 3,784 (4,132) (348) (352) (700) 2016 £’000 5,705 – 5,705 2015 £’000 (700) – (700) £ £ 6 25 576.26 865.15 (73.58) 510.51 The notes on pages 41 to 64 are an integral part of these consolidated financial statements. Note 1: Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, gain/(loss) on derivative financial instruments and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure. 37 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Consolidated Statement of Financial Position Note 2016 £’000 2015 £’000 10 11 12 13 14 16 9 16 15 17 20 24,407 31,744 22,740 33,804 56,151 56,544 9,361 21,277 2,456 9,381 19,301 735 33,094 29,417 89,245 85,961 50,919 4,478 49,968 4,984 55,397 54,952 12,193 15,454 909 190 12,465 17,143 586 1,455 28,746 31,649 84,143 86,601 5,102 (640) 13 84 5,005 5,102 10 50 (700) (640) Consolidated Statement of Financial Position As at 30 April 2016 ASSETS Non-current assets Property, plant and equipment Intangible assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Non-current liabilities Borrowings Deferred tax liabilities Total non-current liabilities Current liabilities Borrowings Trade and other payables Income taxes payable Derivative financial instruments Total current liabilities Total liabilities Net assets/(liabilities) Capital and reserves Share capital Share premium Retained earnings/(deficit) Total equity shareholders’ funds/(deficit) The financial statements on pages 37 to 40 were approved by the Board of Directors on 22 July 2016. Signed on behalf of the Board of Directors Steve Crossley Chief Executive Officer Company Registration Number 9019496 James Flude Chief Financial Officer 38 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Consolidated Statement of Change in Equity For year ended 30 April 2016 Balance at 30 April 2014 Transactions with owners Issue of Ordinary shares Total for transactions with owners Comprehensive income Loss for the year Total comprehensive income Balance at 30 April 2015 Transactions with owners Issue of Ordinary shares Total for transactions with owners Comprehensive income Profit for the year Total comprehensive income Balance at 30 April 2016 Consolidated Statement of Change in Equity Note 20 20 Share capital £’000 Share premium £’000 Retained earnings/ (deficit) £’000 – 10 10 – – 10 3 3 – – 13 – 50 50 – – 50 34 34 – – 84 – – – (700) (700) (700) – – 5,705 5,705 5,005 Total equity/ (deficit) £’000 – 60 60 (700) (700) (640) 37 37 5,705 5,705 5,102 S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 39 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Consolidated Cash Flow Statement Note 2016 £’000 2015 £’000 11,920 3,784 5,10 5,11 22 1,831 2,060 (1,266) (61) (22) 14,462 20 (1,975) (1,433) 11,074 (1,460) (4,918) 4,696 (683) 48 – – – (635) 37 – 1,656 (3,082) (1,200) – 249 1,511 1,691 1,455 (22) 11 8,430 2,375 (2,534) 1,238 9,509 (1,105) (581) 7,823 (761) – 1,000 (25,100) (850) (25,711) 60 (781) (4,395) (1,856) (900) 6,000 20,495 (2,340) 18,623 1,721 735 2,456 14 14 735 – 735 Consolidated Cash Flow Statement For the year ended 30 April 2016 Cash flows from operating activities Operating profit Adjustment for: Depreciation Amortisation (Gain)/loss on derivative financial instruments Grant income (Profit)/loss on disposals Operating cash flows before movements in working capital Decrease in inventories Increase in trade and other receivables (Decrease)/increase in trade and other payables Cash generated from operations Tax paid Interest paid Net cash flows from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Government grants received Purchase of subsidiary Net cash acquired with subsidiary Net cash flows used in investing activities Cash flows from financing activities Proceeds of issue of Ordinary share Cost of raising finance Increase/(decrease) in amounts due to factors Repayment of capital element of finance leases Repayment of bank loans Drawdown of bank loans Drawdown of shareholder loans/loan notes Net cash flows used in/(from) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at year end 40 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Notes to the Consolidated Financial Information For the year ended 30 April 2016 S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 1. General information Accrol Group Holdings plc (formerly Accrol Group Holdings Limited) (the ‘Company’) was incorporated in the United Kingdom on 30 April 2014 with company number 9019496. The registered address of the Company is the Delta Building, Roman Road, Blackburn, United Kingdom, BB1 2LD. Accrol UK Limited, which was incorporated on 24 April 2014, subsequently became a direct wholly owned subsidiary undertaking of the Company on 14 July 2014. On 14 July 2014, Accrol UK Limited acquired Accrol Holdings Limited and its trading subsidiary, Accrol Papers Limited (the ‘Acquisition’). Accrol Papers Limited is engaged in the business of soft tissue paper conversion. The Company’s subsidiaries are listed in note 21, which together with the Company form the Accrol Group Holdings plc Group (the ‘Group’). 2. Summary of significant accounting policies A summary of the significant accounting policies is set out below. These have been applied consistently in the financial statements. Statement of compliance The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted for use in the EU, International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Basis of preparation The consolidated financial statements have been prepared on a going concern basis under the historical cost convention as modified by financial liabilities (including derivative instruments) at fair value through the profit and loss. The consolidated financial statements are presented in pounds sterling and all values are rounded to the nearest thousand pounds, except where otherwise indicated. Transition to IFRS This is the Group’s first set of financial statements prepared in accordance with IFRS. The Group previously prepared its financial statements under UK Generally Accepted Accounting Practice. The Group’s deemed transition date to IFRS is 1 May 2014, the beginning of the first year presented, and the requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards (‘IFRS 1’) have been applied as of that date. IFRS 1 allows certain exemptions in the application of particular IFRS to prior years in order to assist companies with the transition process. The exemptions applied are detailed in note 23. Standards issued not yet effective At the date of authorisation of this financial information, the following new standards and interpretations which have not been applied in this financial information were in issue but not yet effective (and in some cases, had not yet been adopted by the EU): IAS 16 and IAS 38 amendments – Clarification of Acceptable Methods of Depreciation and Amortisation (effective 1 January 2016) • IFRS 11 amendments – Accounting for Acquisitions of Interests in Joint Operations (effective 1 January 2016) • IAS 16 and IAS 41 amendments – Agriculture: Bearer Plants (effective 1 January 2016) • IAS 27 amendments – Equity Method in Separate Financial Statements (effective 1 January 2016) • IFRS 10 and IAS 28 amendments – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective 1 January 2016) • • IAS 1 amendments – Disclosure Initiative (effective 1 January 2016) • Annual Improvements 2012–2014 Cycle (effective 1 January 2016) • • IFRS 15 – Revenue from Contracts with Customers (effective 1 January 2018) IFRS 9 Financial Instruments (effective 1 January 2018) The adoption of these Standards and Interpretations is not expected to have a material impact on the consolidated financial statements of the Group in the year of initial application when the relevant standards come into effect. IFRS 16 ‘Leases’ is a new standard that has been published and is effective from 1 January 2019 but has not been early adopted by the Group and could have a material impact on the Group financial information. At the time of preparing this financial information, the Group continues to assess the possible impact of the adoption of this standard in future years. However, it is likely to result in an increase in leases recognised in the statement of financial position as finance leases and a reduction in the number of leases treated as operating leases and hence not recognised in the statement of financial position. Going Concern The Directors have made appropriate enquiries and formed a judgement at the time of approving the financial information that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial information. Consolidation Subsidiaries A subsidiary is an entity controlled, either directly or indirectly, by the Company. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: • power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); • exposure, or rights, to variable returns from its involvement with the investee; and • the ability to use its power over the investee to affect its returns. 41 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 2. Summary of significant accounting policies continued When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • • • the contractual arrangement with the other vote holders of the investee; rights arising from other contractual arrangements; and the Group’s voting rights and potential voting rights. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. When necessary, adjustments are made to the financial information of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Segments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segment, has been identified as the Board of Directors. The Group’s activities consist solely of the conversion of paper products, primarily within the United Kingdom. It is managed as one entity and management have consequently determined that there is only one operating segment. Segment results are measured using adjusted earnings before interest, tax, depreciation, amortisation, gain/(loss) on derivative financial instruments and exceptional items. Segment assets are measured at cost less any recognised impairment. Revenue is attributed to geographical regions based on the country of residence of the customer. All revenue arises in and all non-current assets are located in the United Kingdom. The accounting policies used for segment reporting reflects those used for the Group. Revenue Revenue representing sales to external customers, which is stated excluding Value Added Tax and trade discounts, is measured at the fair value of the consideration receivable for goods supplied. Revenue from the sale of goods is recognised at the point of dispatch of goods from the warehouse as this reflects the transfer of risks and rewards of ownership. Revenue is presented net of trade spend, including customer rebates, which consists primarily of customer pricing allowances, listing fees and promotional allowances (overriders) which are governed by agreements with our trade customers. Accruals are recognised under the terms of these agreements, to reflect the expected promotional activity and our historical experience. These accruals are reported within trade and other payables. Cost of sales Cost of sales comprise costs arising in connection with the conversion of paper products. Cost is based on the cost of a purchase on a first in first out basis and includes all direct costs and an appropriate portion of fixed and variable overheads where they are directly attributable to bringing the inventories into their present location and condition. Exceptional items Items that are material in size or unusual or infrequent in nature are included within operating profit and disclosed separately as exceptional items in the consolidated income statement. The separate reporting of exceptional items, which are presented as exceptional within the relevant category in the consolidated income statement, helps provide an indication of the Group’s underlying business performance. 42 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: EBITDA and Adjusted EBITDA Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) and Adjusted EBITDA are non-GAAP measures used by management to assess the operating performance of the Group. EBITDA is defined as profit before finance costs, tax, depreciation and amortisation. Depreciation is the write down of fixed assets and amortisation of the write down of customer relationships held in intangibles. Exceptional items and gains/(losses) on derivative financial instruments are excluded from EBITDA to calculate Adjusted EBITDA. The Directors primarily use the Adjusted EBITDA measure when making decisions about the Group’s activities. As these are non-GAAP measures, EBITDA and Adjusted EBITDA measures used by other entities may not be calculated in the same way and hence are not directly comparable. Foreign currency Functional and presentation currency Items included in the financial information are measured using the currency of the primary economic environment in which the Group operates (‘the functional currency’). The financial information is presented in Sterling, which is the functional currency of all companies in the Group. Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Property, plant and equipment Property, plant and equipment are included at cost less accumulated depreciation and any recognised impairment loss. Depreciation is calculated to write down the cost of the assets on a straight-line or reducing balance basis over the estimated useful lives on the following bases: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s • Land and buildings • Plant and machinery • Motor vehicles • Fixtures, fittings and office equipment straight line over term of lease 10% straight line, 40% residual value 30% straight line 25% reducing balance Assets under construction are not depreciated, but transferred into the appropriate asset class when they are ready for use. The estimated useful lives are reviewed at the end of each reporting period and adjusted if appropriate. The carrying values of tangible fixed assets are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose and was identified according to operating segment. Customer relationships and order books Customer relationships are shown at historical cost. Customer relationships have finite useful lives and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of customer relationships over their estimated useful lives of 10 years. Customer order books relate to order for goods awaiting dispatch at the date of acquisition on 14 July 2014. Amortisation is calculated using the straight-line method to allocate the cost of customer order books over their estimated useful lives up to 1 year. Impairment of non-financial assets Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Assets that are subject to depreciation and amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit (‘CGU’) to which the asset belongs. All tangibles and intangibles are allocated to the Group’s sole CGU (see note 11). Any impairment charge is recognised in the income statement in the period in which it occurs. Impairment losses relating to goodwill cannot be reversed in future periods. Where an impairment loss on other assets, subsequently reverses due to a change in the original estimate, the carrying amount of the asset is increased to the revised estimate of its recoverable amount. 43 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 2. Summary of significant accounting policies continued Financial instruments Financial Assets The Group classifies its financial assets as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting date, which are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and cash and cash equivalents in the balance sheet. Subsequent to initial recognition, these assets are carried at amortised cost using the effective interest method. Income from these financial assets is calculated on an effective yield basis and is recognised in the income statement. Financial liabilities The Group initially recognises its financial liabilities at fair value net of transaction costs where applicable and subsequently they are measured at amortised cost using the effective interest method. Transaction costs are amortised using the effective interest rate method over the maturity of the loan. Derivative financial instruments The Group’s activities expose it to financial risks associated with movements in foreign exchange rates. The Group uses forward foreign exchange rate contracts to hedge its foreign exchange rate exposure. The Group does not apply hedge accounting and re-measurements of the derivative financial instruments are recognised in the income statement. The use of financial derivatives is governed by the Group’s treasury policies, as approved by the Board. The Group does not use derivative financial instruments for speculative purposes. All derivative financial instruments are initially measured at fair value on the contract date and are also measured at fair value at subsequent reporting dates. Leases Finance leases Assets funded through finance leases are capitalised as property, plant and equipment, and are depreciated over their estimated useful lives or the lease term, whichever is shorter. The amount capitalised is the lower of the fair value of the asset or the present value of the minimum lease payments during the lease term at the inception of the lease. The resulting lease obligations are included in liabilities net of finance charges. Finance costs on finance leases are charged directly in the income statement on an effective interest rate basis. Material lease arrangements do not include any contingent rental conditions, options to purchase or escalation clauses. There are no restrictions imposed by these lease arrangements. Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Government grants Government grants relating to tangible fixed assets are treated as deferred income and released to the income statement over the expected useful lives of the assets concerned. Other grants are credited to the profit and loss account as the related expenditure is incurred. Inventories Inventories are valued at the lower of cost and net realisable value. Cost is based on the purchase on a first in first out basis and includes all direct costs and an appropriate portion of fixed and variable overheads. Net realisable value is the estimated selling price reduced by all costs of completion, marketing, selling and distribution. Supplier rebates are credited to the carrying value of inventory to which they relate. Once the inventory is sold, the rebate amount is then recognised in the income statement. Trade and other receivables Trade and other receivables relate mainly to the sale of paper products to trade customers. Cash and cash equivalents (excluding bank overdraft) Cash and cash equivalents in the balance sheet comprise cash at bank, short-term deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less, excluding any bank overdrafts which are disclosed separately within borrowings within current liabilities. Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Current taxation Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Income tax relating to items recognised in comprehensive income or directly in equity is recognised in comprehensive income or equity and not in the income statement. 44 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Deferred taxation Deferred income tax is provided using the liability method on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, with the following exceptions: • where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business • combination that at the time of the transaction affects neither accounting nor taxable profit or loss; in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and • deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense. 3. Significant accounting judgements, estimates and assumptions The preparation of the financial information in accordance with IFRS requires estimates and assumptions to be made that affect the value at which certain assets and liabilities are held at the balance sheet date and also the amounts of revenue and expenditure recorded in the year. The Directors believe the accounting policies chosen are appropriate to the circumstances and that the estimates, judgements and assumptions involved in its financial reporting are reasonable. Accounting estimates made by the Group’s management are based on information available to management at the time each estimate is made. Accordingly, actual outcomes may differ materially from current expectations under different assumptions and conditions. The estimates and assumptions for which there is a significant risk of a material adjustment to the financial information within the next financial year are set out below. Critical accounting estimates and judgements in applying the entity’s accounting policies Goodwill impairment The Group is required to test, on an annual basis, whether goodwill has suffered any impairment based on the recoverable amount of its sole CGU. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the determination of a pre-tax discount rate in order to calculate the present value of the cash flows. More information including carrying values is included in note 11. Determining carry values of intangibles identified in business combinations Valuation of separable intangible assets identified on new business combinations during the year requires management to make assumptions and estimates regarding the expected future cash generation of the intangibles identified, for which management employed the use of external valuation services to facilitate this exercise. Details of the intangible assets identified are set out in note 11. Income taxes The Group recognises expected liabilities for tax based on an estimation of the likely taxes due, which requires significant judgement as to the ultimate tax determination of certain items. Where the actual liability arising from these issues differs from these estimates, such differences will have an impact on income tax and deferred tax provisions in the period when such determination is made. Detail of the tax charge and deferred tax are set out in note 9. Customer rebates The Group provides for amounts payable to customers in relation to rebates and promotional activity. Whilst the Directors do not consider the Group’s rebates to be highly complex as they are predominantly volume related, there is judgement required in calculating amounts due, as terms vary by customer. 45 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 4. Revenue The analysis of geographical area of destination of the Group’s revenue is set out below: United Kingdom Europe Total 2016 £’000 118,041 178 2015 £’000 81,624 280 118,219 81,904 Major customers In 2016 there were four major customers that individually accounted for at least 10% of total revenues (2015: two customers). The revenues relating to these customers in 2016 were £25,369,000, £14,300,000 and £13,769,000, £12,375,000 (2015: £21,701,000 and £9,444,000). 5. Operating profit Operating profit is stated after charging/(crediting): Employee benefit expense Depreciation of property, plant and equipment (included in administration expenses) Amortisation of intangible assets (included in administration expenses) (Profit)/loss on disposal of property, plant and equipment Operating lease rentals Net foreign exchange (gains)/losses Grants income Auditor’s remuneration Inventories recognised as expenses Exceptional items Acquisition deal fees Consultancy fees Other The exceptional items are described below: 2016 £’000 9,927 1,831 2,060 (22) 1,946 (1,332) (61) 59 66,807 – 334 159 493 2015 £’000 6,172 1,511 1,691 11 1,283 1,396 (22) 52 44,332 1,530 – – 1,530 Year ended 30 April 2015 On 14 July 2014, Accrol Group Holdings plc through its subsidiary, Accrol UK Limited, purchased the entire issued share capital of Accrol Holdings Limited for a consideration of £45,600,000. Deal fees of £1,530,000 were incurred and have been fully expensed in the year of acquisition. Year ended 30 April 2016 One off consultancy fees totalling £334,000 were incurred in relation to a market, competitor, customer and working capital review to support the growth strategy following the acquisition in July 2014. In September 2015, there was a fire within the embossing unit of one of the converting lines. The line was back up and running within one week with no disruption to customer orders. The cost of repair was £159,000. Auditor's remuneration Audit services Non audit services: Tax compliance services Tax advisory services 2016 £’000 2015 £’000 36 10 13 59 28 11 13 52 A fee of £556,000 was paid to the Group’s auditors for services provided as part of the Group restructuring in the year ended 30 April 2015. 46 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 6. Earnings per share The basic earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of Ordinary shares outstanding during the year. The following reflects the income and share data used in the basic earnings per share calculation: Profit/(loss) for the year attributable to shareholders Basic weighted average number of shares1 Basic earnings per share Diluted earnings per share 2016 £’000 5,705 2015 £’000 (700) Number Number 9,900 9,514 £ £ 576.26 576.26 (73.58) (73.58) Note 1: The basic weighted average number of shares is calculated by excluding the D class of shares as this class is subject to a dividend cap that does not materially impact upon the profit due to the remaining Ordinary equity shareholders. During the year under review the group had no shares or options with a dilutive effect and, therefore, the basic and diluted earnings per share are the same. 7. Employee costs Employee costs during the year amounted to: Wages and salaries Social security costs Other pension costs The average number of employees (including the executive directors) during the year were: Production Administration 8. Finance costs Shareholder loans Bank loans and overdrafts Finance lease interest Interest on factoring facility Amortisation of finance fees 2016 £’000 9,171 684 72 2015 £’000 5,712 411 49 9,927 6,172 Number Number 431 29 460 296 39 335 2016 £’000 4,099 158 358 183 143 2015 £’000 3,263 154 284 143 288 4,941 4,132 47 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 9. Income tax expense Tax charged in the income statement Current income tax Current tax on profits for the year Total current income tax Deferred tax Origination and reversal of temporary differences Change in tax rate Total deferred tax Tax charge in the income statement 2016 £’000 1,780 1,780 (31) (475) (506) 1,274 2015 £’000 895 895 (348) (195) (543) 352 The tax charge for the period is lower (2015: higher) than the effective rate of Corporation Tax in the UK of 20% (2015: 20%). The differences are explained below: Profit/(loss) before income tax Effective rate At the effective income tax rate Expenses not deductible for tax purposes Change in rate During the year the Group recognised the following deferred tax (assets)/liabilities: 30 April 2014 Acquired Charge in year Change in deferred tax rate 30 April 2015 Acquired Charge in year Change in deferred tax rate 30 April 2016 2016 £’000 6,979 20% 1,396 353 (475) 1,274 Other £’000 – – (344) 18 (326) – 254 7 2015 £’000 (348) 20% (70) 617 (195) 352 Total £’000 – 5,528 (349) (195) 4,984 – (31) (475) Accelerated capital allowances £’000 Intangibles £’000 – 1,237 349 (10) 1,576 – 127 (176) – 4,291 (354) (203) 3,734 – (412) (306) 1,527 3,016 (65) 4,478 The Finance Act 2013 reduced the main rate of corporation tax to 21% from 1 April 2014 and to 20% from 1 April 2015. Further future rate reductions, to 19% from 1 April 2017 and 18% from 1 April 2020, were substantively enacted on 26 October 2015. Therefore, the rate of 20% (2015: 21%) has been reflected in the consolidated financial statements and deferred tax assets and liabilities have been measured at the rate expected to be in effect when the deferred tax asset or liability reverses. Deferred tax has been provided at the rate of 18% as at 30 April 2016 (2015: 20%). 48 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: 10. Property, plant and equipment Cost 30 April 2014 Acquisition of subsidiary Additions Disposals At 30 April 2015 Transfer Additions Disposals At 30 April 2016 Accumulated depreciation 30 April 2014 Charge Disposals At 30 April 2015 Charge Disposals At 30 April 2016 Net book value At 30 April 2015 At 30 April 2016 Leasehold land & buildings £’000 Fixtures & fittings £’000 Plant and machinery £’000 Motor vehicles £’000 Assets under construction £’000 S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Total £’000 – 15,832 8,443 (24) 24,251 – 3,524 (84) – – 4,417 – 4,417 (4,417) 3,152 – 3,152 27,691 – – – – – – – – 1,511 – 1,511 1,831 (58) 3,284 4,417 22,740 3,152 24,407 – 126 30 – 156 – – – 156 – 39 – 39 10 – 49 – 435 97 – 532 – 173 – 705 – 86 – 86 119 – 205 – 15,138 3,899 (24) 19,013 4,417 162 (49) 23,543 – 1,335 – 1,335 1,626 (23) 2,938 117 107 446 500 17,678 20,605 – 133 – – 133 – 37 (35) 135 – 51 – 51 76 (35) 92 82 43 The net book value of tangible fixed assets includes an amount of £16,052,000 (2015: £13,718,000) in respect of plant and machinery assets held under finance leases and £3,152,000 (2015: £4,417,000) in respect of assets under construction held under finance leases. 11. Intangible assets Cost 30 April 2014 Additions At 30 April 2015 Additions At 30 April 2016 Amortisation 30 April 2014 Charge At 30 April 2015 Charge At 30 April 2016 Net book value At 30 April 2015 At 30 April 2016 Customer lists £’000 Order book £’000 Total £’000 Goodwill £’000 – 14,982 14,982 – – – – – – – 20,427 20,427 – – 1,623 1,623 2,042 14,982 20,427 – 86 86 – 86 – 68 68 18 – 35,495 35,495 – 35,495 – 1,691 1,691 2,060 3,665 86 3,751 14,982 18,804 14,982 16,762 18 – 33,804 31,744 The balance for Goodwill, Customer relationships and Order book arose on the Group’s Acquisition of Accrol Holdings Limited (note 22) and are attributed to the sole cash-generating unit (‘CGU’). Impairment test for goodwill Goodwill is monitored for internal management purposes at the Group’s sole CGU level. The recoverable amount of the CGU has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by the board covering a three to five year period. Cash flows beyond this period are extrapolated using the estimated growth rates stated in the key assumptions. 49 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 11. Intangible assets continued The key assumptions used in the value in use calculations are a pre-tax discount rate of 16% (2015: 16%) and a long term growth rate of 2% (2015: 2%). The discount rate is derived from the Group’s weighted average cost of capital and is calculated with reference to latest market assumptions for the risk free rate, equity market risk premium and the cost of debt. Goodwill is tested for impairment on at least an annual basis, or more frequently if events or changes in circumstance indicate that the carrying value may be impaired. In the years under review management’s value in use calculations have indicated no requirement to impair. Sensitivity to changes in assumptions The estimates of the recoverable amounts associated with these CGU affords significant head room over the carrying value, consequently only significant adverse changes in these key assumptions would cause the group to recognize an impairment loss. 12. Inventories Raw materials Finished goods and goods for resale 13. Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Trade receivables – net of provisions Prepayments The trade receivables balance is aged as follows: Less than one month past due Between one and two months past due Between two and three months past due Between three and six months past due 2016 £’000 6,996 2,365 9,361 2015 £’000 6,416 2,965 9,381 2016 £’000 20,793 (85) 20,708 569 2015 £’000 19,206 (62) 19,144 157 21,277 19,301 2016 £’000 12,831 7,120 383 459 2015 £’000 11,705 6,909 342 250 20,793 19,206 Trade and other receivables which are less than three months past due are not considered impaired unless specific information indicates otherwise. Trade and other receivables greater than three months past due are considered for recoverability, and where appropriate, a provision against bad debt is recognised. There are no trade receivables amounts more than six months past due. The directors consider that the carrying amount of trade and other receivables is approximately equal to their fair value. The movement in the provision for trade and other receivables is analysed below: At the beginning of the year Acquisition of subsidiary Provisions made for receivables impairment Amounts unused reversed 2016 £’000 (62) – (23) – (85) 2015 £’000 – (52) (28) 18 (62) The creation and release of the provision for impaired receivables has been included in administrative expenses in the Income Statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. 50 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 14. Cash and cash equivalents Cash and cash equivalents 2016 £’000 2,456 2015 £’000 735 Cash and cash equivalents earn interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. 15. Trade and other payables Trade payables are non-interest bearing and are payable on average within 29 days at 30 April 2016 (2015: 36 days). Trade payables Social security and other taxes Accruals and deferred income Deferred government grant income Deferred government grant income relates to grants received for purchase of plant and machinery. 16. Borrowings Non-current Bank facility Finance leases Shareholder loans Current Bank facility Factoring facility Finance leases Loan maturity analysis Within one year Between one and two years Between two and five years After five years The following amounts remain undrawn and available: Factoring facility 2016 £’000 7,868 1,947 4,613 1,026 2015 £’000 9,149 1,821 5,086 1,087 15,454 17,143 2016 £’000 2015 £’000 2,600 7,232 41,087 3,700 5,444 40,824 50,919 49,968 1,103 7,485 3,605 1,070 5,829 5,566 12,193 12,465 12,294 4,164 5,768 41,240 12,465 3,515 5,629 41,321 63,466 62,930 2016 £’000 9,879 9,879 2015 £’000 10,051 10,051 The Group’s bank borrowings are secured by way of fixed and floating charge over the Group’s assets. Term loan under the £20.495m 10% Fixed Rate Secured Manager Loan Notes 2023 (‘Shareholder loans’) On 14 July 2014 the Group entered into a 9 year, £20.495m credit facility with Majid Hussain, Wajid Hussain, Mozam Hussain to part finance the Group’s acquisition of Accrol Holdings Limited. Interest is accrued on the loan from date of issue at the rate of 10% per annum and compounded on each anniversary. Interest is then also payable on the PIK notes at a rate of 10% per annum by the issue of further PIK notes. The shareholder loans are repayable in full in June 2023. These notes were listed on the Channel Island Securities Exchange. Term loan under the £20.495m 10% Fixed Rate Secured Investor Loan Notes 2023 (‘Shareholder loans’) On 14 July 2014 the Group entered into a 9 year, £20.495m credit facility with NorthEdge Capital LLP to part finance the Group’s acquisition of Accrol Holdings Limited. Interest is accrued on the loan from date of issue at the rate of 10% per annum and compounded on each anniversary. Interest is then also payable on the PIK notes at a rate of 10% per annum by the issue of further PIK notes. The shareholder loans are repayable in full in June 2023. These notes were listed on the Channel Island Securities Exchange. 51 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 16. Borrowings continued HSBC term loan under the £6.0m revolving bank facility (‘Bank facility’) On 8 August 2014 the Group entered into a 5 year, £6.0m sterling revolving credit facility. The facility was to part finance the Group’s acquisition of Accrol Holdings Limited and to provide financing for general corporate and working capital requirements. The variable interest rate payable under the facility is LIBOR plus a variable margin between 2–3% (dependent upon gearing ratio) plus mandatory costs. The loan is repayable in quarterly instalments commencing 31 October 2014. All amounts outstanding under the facility are repayable on 8 August 2019. HSBC £20m factoring credit facility (‘Factoring facility’) On 8 August 2014 the Group entered into a £20.0m multi-currency revolving credit facility to provide factoring financing for general working capital requirements for a minimum period of 3 years. Under the terms of this facility the drawdown is based upon gross debtors less a retention with 90% of the remaining debt funded. Each drawing under the facility is repayable within a maximum of 90 days from date of invoice for jurisdictions within the United Kingdom and 120 days for other countries. Covenants The Group is subject to financial covenants in relation to the Bank Facility and the Factoring Facility. The covenants in relation to the Bank Facility cover the following ratios: a) Cash flow cover, b) Interest cover and c) Leverage. The covenants in relation to the Factoring Facility cover the following: a) Debt turn, b) Debt dilution, c) Disputed debt and d) Tangible net worth. The Group has been in compliance with all of the covenants during the periods under review. Breach of the covenants would render any outstanding borrowings subject to immediate settlement. Finance fees Finance fees incurred for the arrangement of Shareholder loans by the Group’s lenders are not included in the Loan Maturity Analysis table. The finance fees after amortisation are as follows: Finance fees 2016 £’000 354 2015 £’000 497 17. Financial instruments Derivative financial instruments Derivative financial instruments represent the Group’s forward foreign exchange contracts. The liabilities representing the valuations of the forward foreign exchange contracts at the year end are: Current Foreign currency contracts 2016 £’000 190 2015 £’000 1,455 The Group has entered into a number of foreign exchange contracts that were open as at the year end. The total value of open foreign exchange contracts at the Balance Sheet date are as follows: EUR (in €’000) USD (in $’000) 2016 2015 – 19,500 26,000 19,700 The fair value of a derivative financial instrument is split between current and non-current depending on the remaining maturity of the derivative contract and its contractual cash flows. The foreign currency swaps are designated as fair value through profit or loss at initial recognition. The fair value of the Group’s foreign currency derivatives is calculated as the difference between the contract rates and the mark to market rates which are current at the balance sheet date. This valuation is obtained from the counterparty bank and at each period end is categorised as a Level 2 valuation, see below. The maximum exposure to credit risk is the fair value of the derivative as a financial asset. Fair value hierarchy IFRS 7 requires fair value measurements to be recognised using a fair value hierarchy that reflects the significance of the inputs used in the value measurements: Level 1: inputs are quoted prices in active markets. Level 2: a valuation that uses observable inputs for the asset or liability other than quoted prices in active markets. Level 3: a valuation using unobservable inputs i.e. a valuation technique. There were no transfers between levels throughout the years under review. 52 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Fair values The fair values of the Group’s financial instruments approximates closely with their carrying values, which are set out in the table below: Financial assets Current Trade and other receivables Cash and short-term deposits Financial liabilities Current Borrowings Trade and other payables Derivative financial instruments Non-Current Borrowings Fair values and carrying values 2016 £’000 2015 £’000 21,277 2,456 19,301 735 12,193 15,454 190 12,465 17,143 1,455 50,919 49,968 18. Capital and financial risk management objectives and policies (a) Capital risk management The Group’s objective when managing capital is to safeguard the group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust capital the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the group monitors net debt. Net debt is calculated as total borrowings less cash and cash equivalents. Total borrowings Less: cash and cash equivalents Net debt (b) Financial risk management The Group has exposure to the following risks from its use of financial instruments: • Foreign currency risk • Interest rate risk • Liquidity risk • Credit risk 2016 £’000 2015 £’000 63,112 (2,456) 62,433 (735) 60,656 61,698 This note presents information about the Group’s exposure to each of the above risks, and the Group’s objectives, policies and procedures for measuring and managing risk. The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. (i) Foreign currency risk The Group has transactional currency exposures arising from purchases in currencies other than the Group’s functional currency. These exposures are forecast on a monthly basis and are monitored by the Finance Department. Under the Group’s foreign currency policy, such exposures are hedged on a reducing percentage basis over a number of forecast time horizons using forward foreign currency contracts. The Group’s largest exposures are the US Dollar and Euro forward contracts. The derivative analysis below had been prepared by reperforming the calculations used to determine the balance sheet values assuming a 1% strengthening of Sterling: Euro – gain USD – gain/(loss) 2016 £’000 – 135 135 2015 £’000 157 (81) 76 53 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 18. Capital and financial risk management objectives and policies continued (ii) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s Factoring facility and Bank facility, both of which have floating interest rates. The Group manages its interest rate risk by holding the majority of borrowings in fixed rate secured loan notes. The exposure to the remaining risk is deemed to be manageable and is reviewed on a continual basis. The Group are not expecting any reduction in interest rates over the next 12 months, the impact of 0.5% increase in interest rates on profit before tax is shown below: Change in interest rate 2016 £’000 56 2015 £’000 55 (iii) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Ultimate responsibility for liquidity risk management rests with the Board of Directors. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows, matching the maturity profiles of financial assets and operational liabilities and by maintaining adequate cash reserves. The table below summaries the maturity profile of the Group’s financial liabilities: As at 30 April 2016 Borrowings Trade and other payables Derivative financial instruments Total financial liabilities As at 30 April 2015 Borrowings Trade and other payables Derivative financial instruments Total financial liabilities Due within 1 year £’000 12,295 15,454 190 27,939 Due within 1 year £’000 12,465 17,143 1,455 31,063 Due between 1 and 2 years £’000 4,163 – – 4,163 Due between 1 and 2 years £’000 3,515 – – 3,515 Due between 2 and 5 years £’000 5,768 – – Due in more than 5 years £’000 41,240 – – Total £’000 63,466 15,454 190 5,768 41,240 79,110 Due between 2 and 5 years £’000 5,629 – – 5,629 Due in more than 5 years £’000 41,321 – – Total £’000 62,930 17,143 1,455 41,321 81,528 (iv) Credit risk The Group’s principal financial assets are bank balances and cash, trade and other receivables and investments. The group’s credit risk is low. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. 19. Commitments and contingencies Operating lease commitments The Group has entered into leases on commercial real estate. These leases have an average life of 12.6 years with no renewal option included in the contracts. There are no restrictions placed upon the Group by entering into these leases. The lease expenditure charged to the income statement during the year is disclosed in note 5. Future minimum rentals payable under non-cancelable operating leases as at the year end, analysed by the period in which they fall due, are as follows: Within one year Between one and two years Between two and five years Greater than five years 54 2016 £’000 1,740 1,740 5,220 6,516 2015 £’000 1,740 1,740 5,220 8,256 15,216 16,956 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Finance lease commitments Future minimum lease payments under finance leases and hire purchase contracts together with the present value of the net minimum lease payments are, as follows: Within one year Between one and two years Between two and five years Future finance charges Present value The present value of finance lease liabilities is as follows: Within one year Between one and two years Between two and five years Capital commitments Contracted for but not provided 20. Share capital and reserves Called up, allotted and fully paid Class A Ordinary shares of £1 each Class B Ordinary shares of £1 each Class C Ordinary shares of £1 each Class D Ordinary shares of £1 each The number of Ordinary shares in issue is set out below: Class A Ordinary shares of £1 each Class B Ordinary shares of £1 each Class C Ordinary shares of £1 each Class D Ordinary shares of £1 each The movements in shares occurred on the following dates set out below: 14 July 2014 Issue of A Ordinary shares of £1 each Issue of B Ordinary shares of £1 each Issue of C Ordinary shares of £1 each 10 September 2014 Issue of C Ordinary shares of £1 each 4 March 2015 (transacted on 19 June 2015) Issue of C Ordinary shares of £1 each Issue of D Ordinary shares of £1 each 2016 £’000 3,989 3,228 4,617 2015 £’000 5,917 2,687 3,302 11,834 (997) 11,906 (896) 10,837 11,010 2016 £’000 3,605 2,963 4,269 2015 £’000 5,566 2,415 3,029 10,837 11,010 2016 £’000 – 2015 £’000 – 2016 £ 4,625 4,625 650 2,860 12,760 2015 £ 4,625 4,625 300 – 9,550 Number Number 4,625 4,625 650 2,860 4,625 4,625 300 – Number Number – – – – 350 2,860 4,625 4,625 200 100 – – On 14 July 2014, Accrol Group Holdings plc through its subsidiary, Accrol UK Limited, purchased the entire issued share capital of Accrol Holdings Limited for a consideration of £45,600,000 which comprised of £20,500,000 loan notes (‘Shareholder Loans’) issued by Accrol UK Limited to the Vendors and cash of £25,100,000. The vendors of Accrol Holdings Limited, entered into put and call options with Accrol Group Holdings plc over £4,625 of their loan notes in Accrol UK Limited. The options were exercised such that the Shareholder loans notes were transferred to Accrol Group Holdings plc in exchange for new B Ordinary share in Accrol Group Holdings with a nominal value of £4,625 with no impact on cash. 55 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 20. Share capital and reserves continued The issue of the A, B and C Ordinary shares in July and September 2014 were satisfied by the receipt of £55,000 in cash and the exchange of £4,625 of shareholder loan notes, resulting in share premium of £50,000. The issue of the C and D Ordinary shares in March 2015 (transacted on 19 June 2015) were satisfied by the receipt of £37,000 in cash, resulting in share premium of £34,000. The A Shares, B Shares and C Shares rank pari passu in all respects. The D Ordinary shares rank pari passu with the other share classes except that the dividend payable to D shareholders are subject to a cap. Each holder of an A Share, B Share or D Share is entitled to vote at general meetings of the Company. The C Shares do not confer on the holders any right to vote at general meetings of the Company. Every holder of an A Share or B Share shall have one vote for each A Share or B Share held; and the D Shares entitle the holders to such number of votes (in aggregate) as is equal to 30% of the total votes to be cast, such votes being divided proportionately between the holders of such D shares being cast on such poll. No dividends have been paid or proposed in either 30 April 2016 or 30 April 2015. 21. Related party disclosures (a) Identity of related parties The Company is under joint control. The Company’s controlling shareholders are NorthEdge Capital LLP and members of the Hussain family. Phoenix Court Blackburn Limited is a company under the control of the Hussain family providing commercial premises for letting. Alklar Limited is an entity under the common directorship of Peter Cheung, to which payments for Peter Cheung’s services as a director for Accrol UK Limited are made. The subsidiaries of the Group are as follows: Company Accrol UK Limited Accrol Holdings Limited Accrol Papers Limited Principal activity Country of incorporation Holding company Holding company Paper convertor United Kingdom United Kingdom United Kingdom Holding % 100% 100% 100% (b) Transactions with related parties The following table provides the total amounts owed to/(due from) related parties as at the end of each year: Transactions NorthEdge Capital LP NorthEdge Capital – GP The Hussain family Alklar Limited Owed from related parties Opening balance Loans advanced during year Interest charged Purchases Repayments Owed from related parties Borrowings Trade & other payables Owed from related parties 2016 £’000 21,704 460 22,126 270 2015 £’000 21,668 460 22,126 8 44,560 44,262 44,262 249 4,099 1,898 (5,948) – 40,990 3,264 1,190 (1,182) 44,560 44,262 41,239 3,321 40,990 3,272 44,560 44,262 Note 16 details loan notes net of financing fees. The following table provides the total amounts of purchases and interest charged from related parties for the relevant financial year: Transactions NorthEdge Capital LP The Hussain family Phoenix Court Blackburn Limited Alklar Limited Total 2016 £’000 2,129 2,050 1,740 78 5,997 2015 £’000 1,698 1,632 1,085 39 4,454 Terms and conditions of transactions with related parties The purchases and loans from related parties are made at normal market prices. Outstanding balances at the year end are unsecured, interest free and settlement occurs in cash. There have been no guarantees provided for any related party payables. Loans from related parties carry interest at 10%. Payments to Phoenix Court Blackburn Limited are in respect of the provision of services. 56 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: (c) Directors’ emoluments Directors’ fees Emoluments Other pension costs 2016 £’000 72 709 – 781 2015 £’000 38 565 – 603 During the year retirement benefits were accruing to nil directors under defined contribution schemes (2015: nil). The aggregate amount of emoluments paid to the highest paid director was £204,000 (2015: £150,000). Key management personnel comprises the directors of the Company and the trading subsidiary. The remuneration of all directors who have been identified as the key management personnel of the group is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures: Short-term employee benefits Post-employment benefits Other long-term benefits 2016 £’000 986 – – 986 2015 £’000 663 – – 663 22. Acquisitions On 14 July 2014, Accrol Group Holdings plc through its subsidiary, Accrol UK Limited, purchased the entire issued share capital of Accrol Holdings Limited for a consideration of £45,600,000. The operations of Accrol Papers Limited, a wholly owned subsidiary of Accrol Holdings Limited, are focussed on soft tissue paper conversion from its premises in Blackburn, Lancashire from where it produces toilet rolls, kitchen rolls and boxes of facial tissues. The acquisition brought additional funding into the business allowing it to focus and deliver its growth strategy. Goodwill represents the expected benefits to the wider Group arising from the acquisition. The fair value of assets and liabilities acquired are set out below: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Net assets acquired Intangibles Property, plant and equipment Inventories Trade and other receivables Bank overdraft Trade and other payables Deferred tax liabilities Net assets Goodwill Total consideration Satisfied by: Cash Loan notes Shares issued Total consideration Net cash outflow arising on acquisition: Cash consideration Bank overdraft acquired Net cash outflow Fair value £’000 20,513 15,832 11,756 17,642 (850) (28,747) (5,528) 30,618 14,982 45,600 25,100 20,495 5 45,600 25,100 850 25,950 Professional deal fees of £1,530,000 incurred in effecting the acquisition were fully expensed during the year ended 30 April 2015. These costs are classed as an exceptional item and are included in ‘Administrative expenses’. The amount of revenue and profit for Accrol Papers Limited from 1 May 2014 to 14 July 2014 was £19.2m and £2.0m respectively. For analysis of the full year revenue and profit of the Group including Accrol Papers Limited, refer to note 26 Proforma result. 57 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 23. Explanation of transition to IFRS This is the first time that the Group has presented its financial information under IFRS. The last financial information under UK GAAP was for the year to 30 April 2015 and the date of transition to IFRS was 1 May 2014. 2015 is the earliest year for which Accrol Group Holdings plc has published UK GAAP financial information. IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ offers a number of exemptions from full retrospective application of applicable standards on transition to IFRS. Following a review of these exemptions it has been concluded the Group has taken advantage of the exemption not to adopt retrospective application of IFRS 3 ‘Business Combinations’ to historic acquisitions prior to the date of transition to IFRS. Set out below are the UK GAAP to IFRS consolidated statements of financial position reconciliations for Accrol Group Holdings plc at 30 April 2015 (last financial information under UK GAAP) and profit reconciliation for Accrol Group Holdings plc for the 10 months ended 30 April 2015. UK GAAP to IFRS reconciliation of the Consolidated Statement of Financial Position as at 30 April 2015 of Accrol Group Holdings plc ASSETS Non-current assets Property, plant and equipment Intangible assets Investments in subsidiaries Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Borrowings Trade and other payables Income taxes payable Derivative financial instruments Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets/(liabilities) Capital and reserves Issued capital Share premium Retained earnings/(deficit) Total equity shareholders’ funds/(deficit) Note UK GAAP £’000 IFRS adjustments £’000 IFRS £’000 a(i) b(ii),c 22,124 31,430 – 616 2,374 – 22,740 33,804 – 53,554 2,990 56,544 d 9,306 19,301 735 29,342 75 – – 75 9,381 19,301 735 29,417 82,896 3,065 85,961 a(ii) e f(iii) (g) 11,834 16,823 496 – 631 320 90 1,455 12,465 17,143 586 1,455 29,153 2,496 31,649 49,968 1,539 – 3,445 49,968 4,984 f(ii) 51,507 3,445 54,952 80,660 5,941 86,601 2,236 (2,876) (640) a(iii),b(i),c,d,e,f(i),f(ii),g 10 50 2,176 – – (2,876) 2,236 (2,876) 10 50 (700) (640) (a) IAS 17 ‘Leases’ The Group reclassified leases previously treated as operating leases to finance leases as they satisfied the recognition criteria outlined under IAS 17. This resulted in the following impact in the years under review as follows: Tangible assets – recognition Borrowings – recognition of lease liability Net reduction in net assets resulting from IAS 17 2015 £’000 616 (631) (15) (i) (ii) (iii) 58 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s (b) IFRS 3 ‘Business Combinations’ – Intangible assets Under IFRS 3 ‘Business Combinations’ the Group is required an assessment of the fair value of any identifiable intangibles assets that exist at the date of acquisition and to also identify any transaction fees that were capitalised in determining the carrying value of goodwill in the acquisition accounting. The carrying value of goodwill is reduced by these amounts under IFRS 3, the transaction fees being recognised in the income statement in the year of acquisition and the separately identified intangibles recognised as assets alongside goodwill. The recognition of these intangibles also gives rise to a deferred tax liability at the date of acquisition in July 2014 which will unwind as the intangible assets are amortised. The table below itemises the impact of goodwill during the year ended 30 April 2013 and subsequent years. Transaction fees expensed in the year Recognition of identifiable intangibles on acquisition Deferred tax Net reduction in goodwill carrying value resulting from IFRS 3 Increase in other intangible assets carrying value under IFRS Net impact in goodwill carrying value resulting from IFRS 3 (i) 2015 £’000 (1,530) (20,508) 4,290 (17,748) 20,508 (ii) 2,760 (c) IAS 38 ‘Intangible Assets’ Amortisation of intangible assets Under IAS 38 ‘Intangible Assets’ goodwill is treated as an intangible asset with an indefinite useful life and is not amortised as such all amortisation recognised under the previous UK GAAP treatment must be written back. In addition, the intangible assets recognised in (b) do not have indefinite useful lives and as such give rise to amortisation in the years under review as follows: Writeback of amortisation of goodwill (cumulative) Amortisation of intangibles recognised on acquisition (cumulative) Net decrease due to amortisation under IAS 38 (d) IAS 2 ‘Inventories’ Overheads absorbed have been re-evaluated to ensure compliance with IAS 2. Overhead absorption (cumulative) Supplier rebates absorption (cumulative) Net increase in inventories arising under IAS 2 (e) IAS 19 ‘Employee Benefits’ IAS 19 requires the accrual of unpaid holiday benefits. Holiday pay accrual (f) IAS 12 ‘Income Taxes’ Deferred taxes Net decrease in deferred tax liabilities due to IFRS adjustments Net (increase) in deferred tax following recognition of intangibles on acquisition Net (increase) in deferred taxes Incomes taxes Net increase in income taxes payable due to IFRS adjustments 2015 £’000 1,305 (1,691) (386) 2015 £’000 91 (16) 75 2015 £’000 (320) 2015 £’000 (i) (ii) 845 (4,290) (3,445) (iii) (90) (g) IAS 39 ‘Financial Instruments’ Under IFRS the group are required to recognise financial derivatives at fair value. However the group did not qualify for hedge accounting under IAS 39 ‘Financial instruments’ and as such all movements in fair value are recognised in the income statement. The net impact on net assets is as follows: Fair value of foreign currency contracts 2015 £’000 (1,455) 59 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 23. Explanation of transition to IFRS continued Statement of Comprehensive Income for the Year ended 30 April 2015 Revenue Cost of sales Gross profit/(loss) Administration expenses Distribution Operating profit/(loss) Analysed as: – EBITDA1 – Depreciation – Amortisation – Gain/(loss) on derivative financial instruments – Exceptional items Operating profit/(loss) Finance costs Loss before tax Tax (charge)/credit UKGAAP £’000 81,904 (58,917) 22,987 (7,067) (8,549) 7,371 9,786 (1,110) (1,305) – – 7,371 (4,088) 3,283 (1,107) IFRS adjustments £’000 – (1,700) (1,700) (1,887) – (3,587) 185 (401) (386) (1,455) (1,530) (3,587) (44) (3,631) 755 Note d,e,g a(i),b,c a(ii) f Profit/(loss) for the year attributable to equity shareholders 2,176 (2,876) IFRS £’000 81,904 (60,617) 21,287 (8,954) (8,549) 3,784 9,971 (1,511) (1,691) (1,455) (1,530) 3,784 (4,132) (348) (352) (700) Note 1: Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, gain/loss on derivative financial instruments and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure. Notes to the Consolidated Statements of Comprehensive Income (a) IAS 17 ‘Leases’ The Group reclassified leases previously treated as operating leases to finance leases as they satisfied the recognition criteria outlined under IAS 17. This resulted in the following impact in the year under review as follows: Depreciation (P&L) Operating lease rental (P&L) Net impact on Administrative expenses resulting from IAS 17 Interest (P&L) 2015 £’000 (400) 429 29 (44) (i) (ii) (b) IFRS 3 ‘Business Combinations’ – Intangible assets Under IFRS 3’Business Combinations’ the group have expensed transaction fees associated with the acquisition in 2014. The net impact in the years under review is as follows: Transaction fees expensed in the year 2015 £’000 (1,530) (c) IAS 38 ‘Intangible Assets’ Under IAS 38 ‘Intangible Assets’ goodwill is treated as an intangible asset with an indefinite useful life and is not amortised, as such, all amortisation recognised under the previous UK GAAP must be written back. In addition the intangible assets recognised in (a) do not have indefinite useful lives and as such give rise to amortisation in the years under review as follows: Writeback of amortisation of goodwill (cumulative) Amortisation of intangibles recognised on acquisition (cumulative) Net increase/(decrease) due to amortisation under IAS 38 2015 £’000 1,305 (1,691) (386) 60 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s (d) IAS 2 ‘Inventories’ Overhead absorption (cumulative) Supplier rebates absorption (cumulative) Net reduction in ‘Cost of Sales’ under IAS 2 (e) IAS 19 ‘Employee Benefits’ IAS 19 requires the accrual of unpaid employee holiday benefits. Holiday pay accrual 2015 £’000 91 (16) 75 2015 £’000 (320) (f) Income taxes Other than the deferred tax arising on the recognition of separately identifiable intangibles there are income and deferred tax effects arising on recognition of the IFRS adjustments. The impact of taxes payable and deferred tax liabilities are as follows: Deferred taxes Incomes taxes Net impact of recognition of IFRS adjustments 2015 £’000 845 (90) 755 (g) Financial instruments (i) IFRS adjustment – derivative financial instruments Under IFRS the Group are required to recognise financial derivatives at fair value. However the Group did not qualify for hedge accounting under IAS 39 ‘Financial Instruments’ and as such all movements in fair value are recognised in the income statement. The net impact on net assets is as follows: Fair value of foreign currency contracts 2015 £’000 (1,455) Cash flow statement The move from UK GAAP to IFRS does not change any of the cash flows of the Group. The IFRS cash flow format is similar to UK GAAP but presents various cash flows in different categories and in a different order from the UK GAAP cash flow statement. All of the IFRS accounting adjustments net out within cash generated from operations except for the intangible assets reclassification and the inclusion of liquid investments with a maturity of less than three months on acquisition, together with related exchange adjustments, within cash and cash equivalents under IFRS. 24. Subsequent events Re-registration as Accrol Group Holdings plc On 26 May 2016, the Group issued a notice of intention to seek admission to AIM (the ‘Admission’) through a share reorganisation in the parent company, Accrol Group Holdings Limited, and then re-registering the Company as a public limited company by the name of Accrol Group Holdings plc. Share re-organisation On 2 June 2016 Accrol Group Holdings plc issued 50 new A Ordinary share of £1 each and 50 new B Ordinary share of £1 each to NorthEdge Capital LLP and the Principal Shareholders (Majid Hussain, Wajid Hussain and Mozam Hussain) respectively. Accrol Group Holdings plc undertook a bonus issue of 4 A, B, C or D Ordinary share for each existing A, B, C and D ordinary share, respectively, to existing shareholders financed from the share premium reserve in order to enable Accrol Group Holdings plc to have a minimum nominal share capital of £50,000. The bonus shares were issued in the same proportions to the existing shareholdings. Each A, B, C and D ordinary share of £1 each was then sub-divided into 1,000 A, B, C and D Ordinary share of £0.001 each. Immediately prior to Admission, Accrol Group Holdings plc converted and re-designated the existing A, B, C and D shares of £0.001 each into Ordinary share of £0.001 each and deferred shares of £0.001 each. Following Admission, Accrol Group Holdings plc purchased all of the deferred shares of £0.001 each in its capital for an aggregate consideration of £1. Adoption of employee share plans On 2 June 2016, the Group adopted a Management Incentive Plan (MIP). Initially, there are three participants in the MIP. Participation in the MIP is at the discretion of the Board. There is an intention that at a future date, further shares will be issued to a member or members of the senior team. 61 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 24. Subsequent events continued Relationship agreements On Admission, Accrol Group Holdings plc entered into two relationship agreements, the first with the Principal Shareholders (Majid Hussain, Wajid Hussain and Mozam Hussain) and the second with NorthEdge Capital Fund I LP and NorthEdge Capital I GP LLP (the ‘NorthEdge Capital Funds’). The principal purpose of the relationship agreements was to ensure that the Company is capable of carrying on its business independently of each of the Principal Shareholders and the NorthEdge Capital Funds and their respective associates. The relationship agreements contain undertakings from each of the Principal Shareholders and the NorthEdge Capital Funds that: (i) transactions and relationships with them and their connected persons will be conducted at arm’s length and on a commercial basis; (ii) neither them nor any of their connected persons will take any action that would have the effect of preventing the Company from complying with its obligations under the AIM Rules; and (iii) neither them nor any of their connected persons will propose or procure the proposal of certain shareholder resolutions. The relationship agreements were effective from Admission and will remain in effect until: (i) the Principal Shareholders in aggregate cease to hold in aggregate a shareholding to which attaches in excess of 10% of the total voting shares in the Company from time to time; and (ii) the NorthEdge Capital Funds cease to hold in aggregate a shareholding to which attaches in excess of 10% of the total voting shares in the Company from time to time (as the case may be). Initial Public Offering (IPO) On the 10 June 2016 the company listed on AIM. The net proceeds of the Placing receivable by the Company being gross proceeds of £43.3m less estimated fees and expenses related to the Placing of £1.9m. Authority for the Company to purchase its own shares On 1 June 2016, the Company passed resolutions and entered into a share buyback contract with each member of the Company to buy back, on 11 July 2016, all of the deferred shares of £0.001 each held by each member, buying back in aggregate, 27,476,142 deferred shares of £0.001 each for an aggregate consideration price of £1. Revolving Credit Facility agreement At 30 April 2016, the Group had borrowings under a committed bank loan facility of £4m provided by HSBC plc, a factoring facility of £20 million and finance leases of £8m. Subsequent to the year end, on 13 June 2016, the bank loan facility and the finance leases have been repaid from a new Revolving Credit Facility (‘RCF’). The RCF is a 5 year £18m facility with a day 1 drawdown of £13m. The RCF reduces to £10m subject to the following profile: 30 April 2017: £16m 30 April 2018: £14m 30 April 2019: £12m 30 April 2020: £10m The minimum drawing is: £500,000 with the maximum number of outstanding drawings at any one time being 10. Interest is charged on the RCF at LIBOR plus a margin of 2.0% subject to the below ratchet: ≥2.0x Net Debt: EBITDA = 2.25 basis points ≥1.5x Net Debt: EBITDA = 2.00 basis points ≥1.0x Net Debt: EBITDA = 1.75 basis points <1.0x Net Debt: EBITDA = 1.50 basis points An arrangement fee of 1.5% of the RCF is payable at inception. An annual commitment fee of 40% of applicable margin on any undrawn RCF commitment is also payable. There is no commitment fee or ticking fee arising between signing and Admission. The facility is subject to financial covenants and each of Accrol Group Holdings plc, Accrol UK Limited, Accrol Holdings Limited and Accrol Papers Limited will enter into a guarantee and the security each have previously granted in favour of HSBC shall remain in respect of all liabilities arising under the RCF agreement. 62 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: 25. Non-GAAP measures Adjusted earnings per share The adjusted earnings per share is calculated by dividing the adjusted earnings attributable to ordinary equity holder of the parent by the weighted average number of Ordinary share outstanding during the year. The following reflects the income and share data used in the adjusted earnings per share calculation. Earnings attributable to shareholders Adjustment for: Depreciation Amortisation Gain/(loss) on derivatives Exceptional items – deal costs Exceptional items – consultancy Tax effect of adjustments above Adjusted earnings attributable to shareholders Basic weighted average number of shares1 Basic adjusted earnings per share Diluted adjusted earnings per share 2016 £’000 5,705 1,831 2,060 (1,266) – 493 (258) 8,565 2015 £’000 (700) 1,511 1,691 1,455 1,530 – (630) 4,857 Number Number 9,900 9,514 £ £ 865.15 865.15 510.51 510.51 S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Note 1: The basic weighted average number of shares is calculated by excluding the D class of shares as this class is subject to a dividend cap that does not materially impact upon the profit due to the remaining ordinary equity shareholders. 26. Proforma result The consolidated financial statements contain comparative information for the year to 30 April 2015 which does not include a full year of trading information. The statutory consolidated income statement contains 10 months of trading results as the acquisition of the trading subsidiary, Accrol Papers Limited occurred on 14 July 2014 and not at the beginning of the financial year. In order to aid year on year comparison, the statutory audited income statement has been adjusted to include the results relating to the period 1 May 2014 to 13 July 2014 that would have been included in the Accrol Group Holdings plc financial statements for year ended 30 April 2015 had the acquisition occurred on 1 May 2014. 2015 is the first year reporting under IFRS for Accrol Group Holdings plc, and there are a number of IFRS adjustments. As Accrol Group Holdings plc was incorporated in the financial period, the opening balance sheet did not include these IFRS adjustments and the cumulative IFRS impact has been included in the statutory comparatives. The adjustments column in the table on page 64, adjusts this cumulative IFRS impact and includes only the element of the IFRS adjustment relating to the year to 2015. 63 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Consolidated Financial Information Continued For the year ended 30 April 2016 26. Proforma result continued Proforma consolidated income statement for the year ended 30 April 2015 Revenue Cost of sales before gain/(loss) on derivative financial instruments (Loss)/gain on derivative instruments Cost of sales Gross profit Administration expenses Distribution Operating profit Analysed as: – EBITDA1 – Depreciation – Amortisation – (Loss)/gain on derivative financial instruments – Exceptional items Operating profit Finance costs (Loss)/profit before tax Tax charge (Loss)/profit for the year attributable to equity shareholders Statutory 2015 £’000 Adjustments £’000 Unaudited proforma 2015 £’000 81,904 19,152 101,056 (59,162) (1,455) (15,661) 428 (74,823) (1,027) (60,617) (15,233) (75,850) 21,287 (8,954) (8,549) 3,784 9,971 (1,511) (1,691) (1,455) (1,530) 3,784 (4,132) (348) (352) (700) 3,919 (1,644) 463 2,738 2,308 2 – 428 – 2,738 (99) 2,639 (519) 2,120 25,206 (10,598) (8,086) 6,522 12,279 (1,509) (1,691) (1,027) (1,530) 6,522 (4,231) 2,291 (871) 1,420 This approach enables the reader of the financial statement to easily reconcile the statutory 2015 results to those that would have been presented in 2015 had a full year of trade been included under ongoing IFRS accounting treatment which was presented in the Historical Financial Information presented within the Admission document. 64 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Independent Auditor’s Report to the Members of Accrol Group Holdings plc Independent Auditor’s Report Company Report on the company financial statements Our opinion In our opinion, Accrol Group Holdings plc’s company financial statements (the ‘financial statements’): • give a true and fair view of the state of the company’s affairs as at 30 April 2016 and of its cash flows for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • have been prepared in accordance with the requirements of the Companies Act 2006. What we have audited The financial statements, included within the Annual report and Accounts (the ‘Annual Report’), comprise: • • • the Company statement of financial position as at 30 April 2016; the Company cash flow statement for the year then ended; the Company statement of changes in equity for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. • Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law, and as applied in accordance with the provisions of the Companies Act 2006. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. • • S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Other matters on which we are required to report by exception Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns. • We have no exceptions to report arising from this responsibility. Directors’ remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Other matter We have reported separately on the group financial statements of Accrol Group Holdings plc for the year ended 30 April 2016. Hazel Macnamara (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Manchester 22 July 2016 65 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Company Statement of Financial Position Note 2016 £’000 2015 £’000 3 4 5 6 6 6 10 10 25 262 287 297 200 200 200 97 13 84 – 97 10 10 50 – 50 60 – – – 60 10 50 – 60 Company Statement of Financial Position For the year ended 30 April 2016 ASSETS Non-current assets Investments in subsidiaries Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Total current liabilities Total liabilities Net assets Capital and reserves Share capital Share premium Retained earnings Total equity shareholders’ funds The financial statements on pages 66 to 68 were approved by the Board of Directors on 22 July 2016. Signed on behalf of the Board of Directors Steve Crossley Chief Executive Officer James Flude Chief Financial Officer Company Registration Number 9019496 66 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Company Statement of Changes in Equity For the year ended 30 April 2016 Balance at 30 April 2014 Transactions with owners Issue of ordinary shares Total for transactions with owners Comprehensive income Loss for the year Total comprehensive income Balance at 30 April 2015 Transactions with owners Issue of ordinary shares Total for transactions with owners Comprehensive income Profit for the year Total comprehensive income Balance at 30 April 2016 Company Statement of Changes in Equity Share capital £’000 Share premium £’000 Retained earnings £’000 Total equity £’000 Note 6 6 – – 10 10 – – 10 3 3 – – 13 – – 50 50 – – 50 34 34 – – 84 – – – – – – – – – – – – – – 60 60 – – 60 37 37 – – 97 S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 67 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Company Cash Flow Statement For the year ended 30 April 2016 Cash flows from operating activities Operating profit Decrease/(increase) in trade and other receivables Increase in trade and other payables Cash generated from/(used in) operations Tax paid Interest paid Net cash flows from/(used in) operating activities Cash flows from investing activities Purchase of subsidiary Net cash flows used in investing activities Cash flows from financing activities Proceeds of issue of ordinary shares Net cash flows from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at year end Company Cash Flow Statement 2016 £’000 – 25 200 225 – – 225 – – 37 37 262 – 262 2015 £’000 – (50) – (50) – – (50) (10) (10) 60 60 – – – 68 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Company Financial Information Notes to the Company Financial Information For the year ended 30 April 2016 1. General information Accrol Group Holdings plc (formerly Accrol Group Holdings Limited) (the ‘Company’) was incorporated in the United Kingdom on 30 April 2014 with company number 9019496. The registered address of the Company is the Delta Building, Roman Road, Blackburn, United Kingdom, BB1 2LD. Accrol UK Limited, which was incorporated on 24 April 2014, subsequently became a direct wholly owned subsidiary undertaking of the Company on 14 July 2014. On 14 July 2014, Accrol UK Limited acquired Accrol Holdings Limited and its trading subsidiary, Accrol Papers Limited (the ‘Acquisition’). Accrol Papers Limited is engaged in the business of soft tissue paper conversion. The Company’s subsidiaries are listed in note 21 to the consolidated financial statements, which together with the Company form the Accrol Group Holdings plc Group (the ‘Group’). 2. Summary of significant accounting policies A summary of the significant accounting policies is set out below. These have been applied consistently during the financial year. Statement of compliance The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted for use in the EU, International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Basis of preparation The financial statements have been prepared on a going concern basis under the historical cost convention as modified by financial liabilities (including derivative instruments) at fair value through the profit and loss. The financial statements are presented in pounds sterling and all values are rounded to the nearest thousand pounds, except where otherwise indicated. The Company has taken advantage of the exemption in Section 408(3) of the Companies Act 2006 not to present its individual profit and loss account and related notes that form part of the approved Company financial statements. Transition to IFRS This is the Company’s first set of financial statements prepared in accordance with IFRS. The Company previously prepared its financial statements under UK Generally Accepted Accounting Practice. The Company’s deemed transition date to IFRS is 1 May 2014, the beginning of the first year presented, and the requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards (‘IFRS 1’) have been applied as of that date. IFRS 1 offers a number of exemptions from full retrospective application of applicable standards on transition to IFRS and it has been concluded that no exemptions are applicable to the Company. S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s Standards issued not yet effective At the date of authorisation of this financial information, the following new standards and interpretations which have not been applied in this financial information were in issue but not yet effective (and in some cases, had not yet been adopted by the EU): • • • • • IAS 16 and IAS 38 amendments – Clarification of Acceptable Methods of Depreciation and Amortisation (effective 1 January 2016) IFRS 11 amendments – Accounting for Acquisitions of Interests in Joint Operations (effective 1 January 2016) IAS 16 and IAS 41 amendments – Agriculture: Bearer Plants (effective 1 January 2016) IAS 27 amendments – Equity Method in Separate Financial Statements (effective 1 January 2016) IFRS 10 and IAS 28 amendments – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective 1 January 2016) • IAS 1 amendments – Disclosure Initiative (effective 1 January 2016) • Annual Improvements 2012–2014 Cycle (effective 1 January 2016) • • IFRS 15 – Revenue from Contracts with Customers (effective 1 January 2018) IFRS 9 Financial Instruments (effective 1 January 2018) The adoption of these Standards and Interpretations is not expected to have a material impact on the Company financial statements in the year of initial application when the relevant standards come into effect. IFRS 16 ‘Leases’ is a new standard that has been published and is effective from 1 January 2019 but has not been early adopted by the Group. Its unlikely to have a material impact on the Company. At the time of preparing this financial information, the Company continues to assess the possible impact of the adoption of this standard in future years. Going concern The Directors have made appropriate enquiries and formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. Investments On initial recognition, investments in subsidiaries are recorded at cost, which is the fair value of the consideration paid. Where consideration is paid by way of shares, the excess of fair value of the shares over nominal value of those shares is recorded in share premium. Investments in subsidiaries are reviewed for impairment at each balance sheet date with any impairment charged to the income statement. 69 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Notes to the Company Financial Information Continued For the year ended 30 April 2016 Financial instruments Financial assets The Company classifies its financial assets as loans and receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets. The Company’s loans and receivables comprise debtors and cash and cash equivalents in the balance sheet. Subsequent to initial recognition, these assets are carried at amortised cost using the effective interest method. Income from these financial assets is calculated on an effective yield basis and is recognised in the income statement. Financial liabilities The company initially recognises its financial liabilities at fair value and subsequently they are measured at amortised cost using the effective interest method. 3. Investments in subsidiaries Cost 30 April 2015 and 2016 The Company’s subsidiary undertakings are shown in note 21 to the consolidated financial statements. 4. Trade and other receivables Prepayments and accrued income Amounts owed by group undertakings Amounts owed by group undertakings and falling due within one year are unsecured, interest free and repayable on demand. 5. Trade and other payables Amounts owed to group undertakings Amounts owed to group undertakings and falling due within one year are unsecured, interest free and repayable on demand. Group undertakings £’000 10 2016 £’000 25 – 25 2016 £’000 200 200 2015 £’000 – 50 50 2015 £’000 – – 70 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: 6. Issued capital and reserves Called up, allotted and fully paid Class A Ordinary shares of £1 each Class B Ordinary shares of £1 each Class C Ordinary shares of £1 each Class D Ordinary shares of £1 each The number of Ordinary shares in issue is set out below: Class A Ordinary shares of £1 each Class B Ordinary shares of £1 each Class C Ordinary shares of £1 each Class D Ordinary shares of £1 each The movements in shares occurred on the following dates set out below: 14 July 2014 Issue of A Ordinary shares of £1 each Issue of B Ordinary shares of £1 each Issue of C Ordinary shares of £1 each 10 September 2014 Issue of C Ordinary shares of £1 each 4 March 2015 (transacted on 19 June 2015) Issue of C Ordinary shares of £1 each Issue of D Ordinary shares of £1 each S t r a t e g i c R e p o r t F i n a n c i a l S t a t e m e n t s 2016 £ 4,625 4,625 650 2,860 2015 £ 4,625 4,625 300 – 12,760 9,550 Number Number 4,625 4,625 650 2,860 4,625 4,625 300 – Number Number – – – – 350 2,860 4,625 4,625 200 100 – – The issue of the A, B and C Ordinary shares during July and September 2014 were satisfied by the receipt of £55,000 in cash and the exchange of £4,625 of shareholder loan notes, resulting in share premium of £50,000. The issue of the C and D Ordinary shares in March 2015 (transacted on 19 June 2015) were satisfied by the receipt of £37,000 in cash, resulting in share premium of £34,000. The A Shares, B Shares and C Shares rank pari passu in all respects. The D Ordinary shares rank pari passu with the other share classes except that the dividend payable to D shareholders are subject to a cap. Each holder of an A Share, B Share or D Share is entitled to vote at general meetings of the Company. The C Shares do not confer on the holders any right to vote at general meetings of the Company. Every holder of an A Share or B Share shall have one vote for each A Share or B Share held; and the D Shares entitle the holders to such number of votes (in aggregate) as is equal to 30% of the total votes to be cast, such votes being divided proportionately between the holders of such D shares being cast on such poll. No dividends have been paid or proposed in 30 April 2016 or 30 April 2015. 71 GovernanceAccrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Company Information Company Information Directors Peter Cheung Steve Crossley James Flude Joanne Lake Steve Hammett Secretary Richard Almond (Executive Chairman) (Chief Executive Officer) (Chief Financial Officer) (Independent Non-Executive Director) (Independent Non-Executive Director) Registered office Delta Building Roman Road Blackburn Lancashire BB1 2LD Registered number 9019496 Share capital The Ordinary share capital of Accrol Group Holdings Limited plc is listed on AIM, a market operated by London Stock Exchange plc. The shares are listed under the trading ticker ACRL. The ISIN number is GB00BZ6VT592 and SEDOL number is BZ6VT59. Registrars Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Auditors PricewaterhouseCoopers LLP 101 Barbirolli Square Lower Mosley Street Manchester M2 3PW Nominated advisor and broker Zeus Capital Limited 82 King Street Manchester M2 4WQ 41 Conduit Street London W1S 2YQ Solicitors Addleshaw Goddard LLP 100 Barbirolli Square Manchester M2 3AB 72 Accrol Group Holdings plc / Annual Report and Accounts 2016Page Title at start:Content Section at start: Page Title at start:Content Section at start: Accrol Group Holdings plc Roman Road Blackburn Lancashire BB1 2LD www.accrol.co.uk Page Title at start:Content Section at start: