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2023 ReportA c c r o l i l G r o u p H o d n g s p c / A n n u a l l R e p o r t a n d A c c o u n t s 2 0 1 7 Accrol Group Holdings plc Annual Report and Accounts 2017 A c c r o l G r o u p H o l d i n g s p l c / A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 7 CONVERTING OPPORTUNITY INTO GROWTH Introduction and Highlights CONVERTING POTENTIAL INTO PERFORMANCE 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 manufacturing, storage and distribution facilities in Blackburn and Leyland, Lancashire. Strategic Report Introduction and Highlights What We Do Chairman’s Statement Chief Executive Officer’s Review Market Overview Business Model Strategy Strategy in Action Chief Financial Officer’s Report Risk and Mitigation Governance Board of Directors Corporate Governance Statement Remuneration Committee Directors’ Report Statement of Directors’ Responsibilities in Respect of the Financial Statements 1 2 4 6 8 10 12 14 16 20 22 24 29 34 36 Financial Statements Independent Auditor’s Report Consolidated Consolidated Income Statement 37 38 Consolidated Statement of Comprehensive Income 38 Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Consolidated Financial Information Independent Auditor’s Report Company Statement of Financial Position Company Statement of Changes in Equity Company Cash Flow Statement Notes to the Company Financial Information Company Information 39 40 41 42 62 63 64 65 66 70 Strategic Report Financial Statements Financial highlights Revenue £135.1m +14% Adjusted EBITDA (Note 25) £16.1m +7% 2017 2016 2015 £135.1m £118.2m £81.9m 2017 2016 2015 £16.1m £15.0m £12.3m Profit after tax £7.4m +29% Net debt (Note 18) £19.0m +68.7% 2017 2016 2015 £2.3m £7.4m £5.7m £19.0m 2017 2016 2015 £60.7m £61.7m Operational highlights • Successful maiden full year as a publicly listed company, with a solid trading performance. • New contract wins have seen market share grow to over 50% of the Discount Sector. • Good progress made in building a platform for future growth. • Key new hires to operations and management functions. • Opened new 168,000 sq ft. manufacturing facility at Leyland, Lancashire, with two tissue converting lines commissioned and a third line expected in FY18. • Supply Chain Optimisation plan implemented to improve and simplify warehousing and logistics through a 368,000 sq ft. central warehouse at Skelmersdale and managed by NFT Distribution. Accrol Group Holdings plc / Annual Report and Accounts 1 Governance What We Do CONVERTING OUR ADVANTAGE The Group’s competitive advantage lies in its market positioning, operational process and flexibility. Our sales The Discount market represents 16% of the overall tissue market and is the fastest growing sector at over 10% per annum. Accrol’s decision to focus on this sector in 2008, has delivered sales CAGR of 15.9% since 2013. Accrol is the market leader in the Discount segment with 50% share by market value. Technology and converting lines The Group currently has 17 converting lines in operation which includes 2 recently commissioned lines at Leyland. This provides a total converting capacity of approximately 143,000 tonnes per annum. 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. 2 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements £18.2m investment over 3 years 17.7m 17 products manufactured per week converting lines in total Sales by product Toilet tissue revenue1 £67.5m +28% YoY Kitchen towels revenue1 £27.3m +3% YoY Facial tissue revenue1 £12.6m +17% YoY Away from home (AFH) revenue1 £23.3m +1% YoY 1. Revenues are for current year ended 30 April 2017 but exclude bought in products of £4.4 million 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 4 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. Accrol Group Holdings plc / Annual Report and Accounts 3 Governance Chairman’s Statement CONVERTING INVESTMENT INTO GROWTH Peter Cheung Executive Chairman Overview of the year I am delighted to report that FY17 was another successful year for the Group. Our revenue grew to £135.1 million, increasing 14% compared to FY16 and in line with market expectations. site, and £250 million in aggregate. We currently have 2 lines installed and recently announced the addition of a 3rd line which will be installed towards the end of 2018 as we seek to extend our reach into the Major Multiples. Adjusted EBITDA increased to 16.1 million, up 7%, and adjusted profit before tax increased £4.8 million to £13.0 million, up 58%. Profit after tax has risen to £7.4 million, up 29%. With Grocery inflation rising during the year, consumer footfall in the Discount Sector showed no signs of slowing down as shoppers continued to look for ways of offsetting rising household prices and switching to lower cost alternatives. As a result of new contract wins starting in late 2016, our value market share in the Discount Sector grew to over 50%, firmly endorsing Accrol as the soft tissue supplier of choice for the sector. The year was not without its challenges. In anticipation of Sterling weakness and volatility following the UK’s decision to leave the European Union, we moved to protect ourselves from adverse exchange rate fluctuations by significantly hedging our exposure to help mitigate raw material cost price increases. However, we have continued to look ahead, positioning ourselves for growth, investing in both our facilities and our team to help us capitalise on the market opportunity. During the year, we opened our new production facility at Leyland, Lancashire, which gives us the opportunity to install a total of 6 tissue converting lines and the potential to generate revenues in excess of £100 million from the We also embarked on an ambitious plan to reorganise our warehousing and logistics operations, creating a centralised finished goods hub next to the M58 in Skelmersdale, Lancashire. This will enable us to better service our customers and prepare for future growth. Accrol’s founders, the Hussain family, have now fully exited the business in line with the strategy we set out at IPO, and we have made a number of new senior management hires across the business. I would like to thank the Hussain family for a smooth and successful transition to new management. Strategy and outlook The continued oversupply of Parent Reels shows no sign of abating and as of January 2017, a further 111 tissue mills were on order or in their final stages, keeping pricing competitive and supporting our strategy to procure Parent Reels versus own manufacture. We will continue to source reels from around the globe, taking advantage of new technology and spare capacity. The majority of Private Label retail shelf prices for soft tissue are still at pre-EU referendum levels. There are positive signs that this is changing, albeit slower than we expected, and we expect the industry as a whole to pass on the effects of the weaker pound as currency contracts unwind. 4 Accrol Group Holdings plc / Annual Report and Accounts CONVERTING INVESTMENT INTO GROWTH Strategic Report Financial Statements Dividend policy 6% Progressive yield at IPO placing price Final dividend proposed 4p per ordinary share Key to our expansion will be to strengthen our relationships in the growing Discount Sector, the continued consumer shift towards Private Label tissue products and winning new business in the Premium Retail Sector. Our recent investment in new production capacity, logistics and warehousing facilities will allow us to build on our strong market position. Dividend policy The Board remains committed to a progressive dividend policy. The interim dividend of 2.0p per share was paid in February 2017. The Board has proposed a final dividend of 4.0p per share, which together with the interim dividend represents a 6% yield at the IPO listing price. The final dividend is subject to the approval of the Company’s shareholders and will be paid on 26 September 2017 to shareholders on the register on 1 September 2017. The Company’s Ordinary shares will become ex-dividend on 31 August 2017. Peter Cheung Executive Chairman 10 July 2017 Shareholder analysis Institutional Non-institutional Private individuals Other 81% 2% 16% 1% UK tissue 9% market share Accrol Group Holdings plc / Annual Report and Accounts 5 Governance Chief Executive Officer’s Review POSITIONING FOR FUTURE GROWTH Steve Crossley Chief Executive Officer Market overview FY17 has been a year of delivery and positioning for future growth of Accrol, with the UK tissue market currently worth £2.2 billion at retail selling price. Although there has been a small decline, due to promotional activity, in the value of consumer sales through Multiples and Discounters, down 1.5% to £1.5 billion, the Discount Sector continues to demonstrate the most significant growth at over 10% per annum. Brands continue to be slowly eroded with Own-Label within the Major Multiples reaching 47% of the total market by March 2017. Inflation, driven by a fall in the value of Sterling following the EU referendum, first appeared in the tissue category in early 2017 and is expected to accelerate as the year continues. In anticipation of exchange rate volatility immediately ahead of, and following, the EU Referendum, Accrol entered into a significant number of forward contracts to hedge its currency exposure. This, along with favourable Parent Reel pricing dynamics, enabled Accrol to minimise the impact of foreign exchange rate volatility on its financial performance through FY17. As exchange rates continue to be weak in favour of the US Dollar, tissue manufacturers and convertors are facing rising raw material prices as pulp is traded in US Dollars on global markets. Accrol is well advanced in conversations with customers regarding inflation recovery but they are challenging and will take time to conclude. 6 Accrol Group Holdings plc / Annual Report and Accounts Strategy Throughout the year we have focused on our long-term strategy of increasing our share of the Discount Sector as increasing inflation encourages UK shoppers to search out quality and value and further accelerates the growth of the Discount Sector. Evidence of this can already be seen with Aldi and Lidl both recently reporting market share growth of almost 20%. Increasing product prices will also see further moves in sales from brands into Own-Label within the Major Multiples as they all seek to re-set their ranges and shopper offering. Our aim of gaining further Own- Label business with the Major Multiples therefore remains a key strategic objective. Our sourcing strategy of purchasing Parent Reels globally from partner paper mills will continue to be a key point of difference. Leveraging strong commercial terms, flexibility on sourcing new technologies and better use of cash remain the key advantages of this sourcing strategy as opposed to a vertically-integrated model. There is still significant over capacity in the world pulp and tissue markets, as new paper mills come online, which appears set to continue through to 2019. Contracts We won a number of new contracts in FY17, the most significant being the launch of Lidl’s Floralys range in November 2016. The account has continued to trade above the original expected levels of circa £10 million per annum. Relationships with key customers remain positive and our investment for future growth by increasing capacity and improving our supply chain has been well-received. Our relationship with Booker, Accrol’s largest customer, continues to be strong and we have recently signed a new supply agreement. Conversations with the Major Multiples continued throughout the year and all outlined the need for an increase in Accrol’s manufacturing capacity in order to move major tranches of volume, underlying the importance of our continued investment in the business. Increased input costs driven by exchange rates have prompted inflation recovery conversations and, subsequently, more tender processes across the industry. Strategic Report Financial Statements New manufacturing site Leyland 168,000 sq. ft. New finished goods warehouse Skelmersdale Capacity to service sales up to £200m Market opportunities/outlook The Directors believe that Accrol’s strategy remains relevant for the marketplace and that there continue to be opportunities for further growth. The move toward Discounters and Own-Label will be accelerated as shoppers try to reduce the inevitable impact of inflation without compromising on quality. Despite the exchange rate driven inflationary pressures and the slower than expected consumer price increases which the whole industry faces, the Directors remain confident that when price increases do come through, our sourcing policy and investment in capacity, supply chain efficiency and people has positioned Accrol to take advantage of the marketplace dynamics. Steve Crossley Chief Executive Officer 10 July 2017 Investment Significant progress has been made on building a platform for future growth during the year. A suitable 168,000 sq ft site was quickly identified and secured at Leyland, Lancashire. From moving into the building in late October 2016, the premises were modified for manufacturing use with the 2 converting lines installed from January 2017 onwards. Commissioning on the first line was completed in April 2017 and on the second line in June 2017. Ramp up of volume has continued with the addition of new shift patterns and will continue into FY18. We recently announced the purchase of a further tissue conversion line which will take the total business capacity to 158,000 tonnes for FY18 or circa £200 million per annum sales. The Leyland site has space for a further 3 conversion lines in addition to the 3 lines that will be in place. In addition to laying down new capacity, an investment programme commenced in the year on the existing Blackburn sites to improve operational efficiency, and hence overall capacity. This includes staff training and a new rotating shift pattern that is more employee friendly. The final part of the investment for growth strategy in FY17 was the implementation of a Supply Chain Optimisation plan to improve and simplify warehousing and logistics, creating additional capacity for growth. A more efficient single ‘big shed’ solution was adopted and a site quickly identified on the M58 at Skelmersdale in Lancashire. This 368,000 sq ft warehouse is newly refurbished and will house finished goods and provide central distribution facilities to all UK customers. Warehouse management and national logistics will be contracted out to a 3rd-party provider, NFT, enabling the Accrol management team to focus on its core competencies of sourcing and manufacturing. People Following our IPO in June 2016, a new PLC Board was put in place and a review of our organisational structure was undertaken. Key gaps were identified and have subsequently been filled with highly experienced industry experts. The new team helped transition the Hussain family out of the business by October 2016 as agreed in a collaborative and controlled manner. People remain our most important asset and further investment continues to be made into their working environment through a focus on equipment and health and safety, into their welfare through more employee-friendly rotating shift patterns, and into respecting their views and opinions through employee engagement. Accrol Group Holdings plc / Annual Report and Accounts 7 Governance Market Overview WE ARE A LEADING MARKET PLAYER Accrol represents 9% of the UK tissue market share by revenue and is the 5th largest operator by capacity. Discounters forecast growth c.10% per annum Focus on Discounters 50% market share 8 Accrol Group Holdings plc / Annual Report and Accounts The UK tissue market The total UK tissue market is worth c. £2.2bn at retail selling price with c. £1.5bn attributable to consumers sales through the Multiples and Discounters. The consumer sector of the market is dominated by the Multiples with a 72% share by value*. Discounters represent 16% of the consumer sector which is the fastest growing sector at over 10% per annum*. The total market value is in slight decline by 1.5% pa* due to promotional activity and growth from the Discounters with volume of rolls down 1.2%* largely due to migration to bigger rolls.Brands continue to be eroded with Private label products reaching 47% of the overall market by March 2017*. * Kantar to March 2017 Our focus Changes in consumer attitudes towards Discounters have driven the rise in their market share in the overall grocery sector in the last 5 years, at the expense of the big 4 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 50% share of the Discount market. Future growth 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. Opportunity in Multiples 72% Multiples total UK revenue market share Strategic Report Financial Statements Range of customers We have established long-term relationships with many leading retailers in a range of market sectors. Tissue market by customer mix Multiples Others Discounters 72% 12% 16% Accrol customer mix Multiples Others Discounters 8% 18% 74% Accrol Group Holdings plc / Annual Report and Accounts 9 Governance Business Model OUR MODEL Our vision is to be the leading independent supplier of Private Label tissue products to both the Discount and Multiples sectors. KEY STRENGTHS Dynamic Sourcing The UK consumes 1.2 million tonnes of tissue paper per annum, of which c. 0.3 million 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 32% of all imports. Low capital model 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 provides flexibility in sourcing to capitalise on favourable pricing opportunities and production technology advancements. 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. 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. BASIS FOR GROWTH Developing sales channels • Increasing share with Discounters • Building relations with Multiples • Expanding our offering to customers to supply the full range of products Adding capacity • Our new manufacturing facility at Leyland • Investment in line refurbishment at Blackburn Increasing capability • 7 new senior management • Increased training and a changed employee shift pattern to improve skills • Utilisation of third-party expertise to manage warehouse and logistics at Skelmersdale 10 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements WHO BENEFITS Shareholders • Long-term capital growth. • Progressive dividend payments. Customers • Competitive independent supplier. • Focused on Private label/ Discounters. Employees • Quality local employer providing long-term security, training and development. Suppliers • Growing business requiring additional services. Accrol Group Holdings plc / Annual Report and Accounts 11 Governance Strategy OUR STRATEGY We have identified key areas of operation to focus on to improve the Group’s performance going forward. GROW THE TOP LINE PROTECT THE MARGIN Ambition to achieve £250m+ p.a. sales through building on our core business with the Discounters, gaining new Own-Label business with the Multiples and complementary acquisitions. Protecting our margin whilst delivering a quality product is key to retaining our customers, building our sales and ultimately creating shareholder value. OBJECTIVE OBJECTIVE • Protect our customer base in the growing Discount Sector. • Continue to source quality Parent Reels at the best value from • Drive new sales in the Discount Sector. • Gain new sales in the growing Private Label sector of the Multiples. • Explore complementary acquisitions that drive sales and PBT. our unique worldwide sourcing model. • Continue to protect where possible our raw material purchasing through hedging currency movements. • Work with our customers to recover inflationary costs whilst protecting sales value and volume. PROGRESS TO DATE PROGRESS TO DATE • Our share of the Discounter segment has grown to c. 50% during FY17 following contract gains with Lidl, Booker and Poundstretcher. • We hedged significantly pre & post EU referendum and this coupled with lower paper pricing year on year has underpinned the financial performance for FY17. • Lidl contract started October 2016 and delivered £8.8m • Tissue sourcing is under constant review to optimise pricing in year – NTT supported our commercial case. and quality. • Branded gains in Major Multiples include Morrisons • Inflation recovery discussions started with our customers in (£0.5m) and Tesco (£1.5m). • We believe inflation recovery in the marketplace will accelerate consumers moving to Discount Sector. Furthermore, it will increase volatility in sales to Discounters and Multiples as price inflation discussions will drive more business to being tendered. December 2016 and continued through FY17. Whilst we have had some success, further recovery of adverse exchange rate movements will be a significant element of achieving FY18. KPIs KPIs • 14.2% or £16.8m sales growth year on year (FY16: 17.0% growth). • Underlying gross profit increased £4.5m or 13.4% to £37.7m (FY16: £33.2m). • 50% share of Discount market (FY16: 35% share). • Underlying gross margin 27.9% (FY16: 28.1%). • 9% share of total tissue market (FY16: 7% share). • Adjusted EBITDA increased £1.1m or 6.8% to £16.1m (FY16: £15.0m). • Adjusted profit before tax increased £4.8m or 57.5% to £13.0m (FY16: 8.3m). 12 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements BEST IN CLASS SUPPLY CHAIN AND CUSTOMER SERVICE BUILD A PLATFORM FOR GROWTH Deliver market-leading service levels through an optimised Supply Chain that is efficient and provides capacity for future growth. We are investing in infrastructure for growth as inflation drives shoppers towards good value products through Discounters and retail own label. OBJECTIVE OBJECTIVE • Supply Chain Optimisation Review to ensure the solution takes • Increase capacity at Blackburn through efficiency into consideration future sales growth and exit existing leasehold warehouses where appropriate. • Improve the link between sales and manufacturing to optimise warehousing and manufacturing. • Improve our customer experience through better information and systems. improvements. • Create a new facility at Leyland that can facilitate significant growth which will include investment in new machinery. PROGRESS TO DATE PROGRESS TO DATE • ‘Single Big Shed’ solution recommended. A suitable • Blackburn Manufacturing Optimisation Plan includes spend 368,000 sq ft. facility was identified at Skelmersdale, Lancashire. • Outsourcing of the warehouse management to a third party and to provide an integrated, optimised logistics solution. NFT identified as the most suitable partner and they were appointed in April 2017. • Full transition to Skelmersdale expected to be completed in August 2017. • NFT have brought into our business a world-class warehouse and logistics system which will ultimately allow us to enhance the customer experience and to save cost. • Sales and Operations Planning resource introduced to improve the link between sales and manufacturing. on machine enhancements, staff training and the introduction of a new rotating shift pattern from May 2017 onwards with commissioning on line 1 completed by April 2017 and line 2 by June 2017. Leyland has space for a further 4 lines giving 6 in total. One more new line ordered in May 2017 for Leyland which will add 15,000 tonnes p.a. • In both sites we have hired first-class management with relevant industry experience. We have also engaged support services in Engineering, HR, Procurement, and Planning. KPIs KPIs • Service level on volume fill improved from 90.0% to 99.6% • Increase total capacity to 143,000 tonnes p.a. at year end after a challenging 6 months of growth. (FY16: 118,000 tonnes). • On Time In Full (OTIF) will be introduced from August 2017. • Increase total capacity to 170,000 tonnes being 143,000 base above plus 15,000 tonnes new Leyland line plus 12,000 tonnes efficiency improvement at Blackburn. Accrol Group Holdings plc / Annual Report and Accounts 13 Governance Strategy in Action GROW THE TOPLINE New Lidl contract £10m+ per annum Winning new contracts – Lidl • Drawing on our experience in the Discount Sector, we pitched for the Lidl own-label tissue contract. The Lidl team visited our Blackburn site to review our credentials and facilities, and reassure themselves we had available capacity for growth. • We were awarded supply contracts for 10 products (3 promotional) with deliveries to commencing in September 2016. Design, artwork and pack formats were agreed and capacity booked to ensure successful delivery of this significant contract win. • We carried out a marketplace review and made recommendations to Lidl on range and price points. We also presented a variety of embossing options for the product tiers (good/ better/ best) and made recommendations for each tier. Our new NTT toilet tissue was proposed for their Supersoft products on an exclusive basis. • Following a tender process and approval of samples we made a value-added proposal to reconfigure Lidl’s current pallets to become front facing, maximising product visibility – making them more shopper-friendly and potentially boosting sell through. • This win accelerated the need for new capacity which would require new factory space – our Leyland site. • The contract kicked off with a four week, 18 pack toilet roll promotion, followed in November 2016 by the full range. 14 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements BUILDING A PLATFORM FOR GROWTH NFT awarded a £60.0m 5 year contract Enhancing our supply chain – Leyland and Skelmersdale • A review was undertaken to determine the requirements to deliver our £250m revenue ambition. We identified the need to increase capacity and optimise our supply chain to meet delivery criteria required to win potential large Multiple contracts. • We have also invested further in our Blackburn sites to enhance key lines, train staff and implement a new, employee friendly, rotating shift system. This will increase our existing capacity by 12,000 tonnes pa by October 2017. CAPACITY CAPABILITY • Following the review, we accelerated the search for suitable premises to house 2 converting lines purchased in April 2016 and provide space for future expansion. Our new Leyland site is able to house up to 6 converting lines, providing a potential of 60,000 tonnes or over £100m in sales pa. • Our Supply Chain Review was challenged with finding an optimal solution to match the growth ambitions and a ‘Big Shed’ solution was presented to the Board in November 2016. The plan was to exit our current 6 warehouses and move to a simpler, more efficient central distribution system. • Works began in October 2016, with commissioning in January 2017. Line 1 is dedicated to toilet rolls and Line 2, which came on stream in April, will produce kitchen roll. Both lines will be fully manned on a rotating shift pattern, employing 80 new staff and management. • A 368,000 sq ft. warehouse was found near Skelmersdale and NFT awarded a 5 year, £60m contract in March 2017 to provide world class logistics and warehouse management. The transition of stock and distribution commenced during April and will be complete for August 2017. • A third line has been ordered and will be commissioned in March 2018, adding a further 15,000 tonnes pa capacity. This creates significant spare capacity allowing Accrol to bid for further Multiple contracts. • A combination of investment in new capacity at Leyland, improving efficiency at Blackburn, and adopting the ‘Big Shed’ solution in Skelmersdale provides a robust platform for growth which matches the sales opportunity. Accrol Group Holdings plc / Annual Report and Accounts 15 Governance Chief Financial Officer’s Report CONTINUED STRONG SALES, PROFIT AND CASH GROWTH Growth in adjusted profit after tax 57.3% Key performance indicators 2017 £’000 2016 £’000 Revenue Adjusted gross margin(1) Adjusted EBITDA(2) Finance costs Adjusted profit before tax(3) Adjusted profit after tax(4) Free cash flow(5) Net debt Net debt/adjusted EBITDA EPS – basic 135,053 27.9% 16,061 1,129 13,022 10,999 7,384 18,988 118,219 28.1% 15,038 4,941 8,266 6,992 4,696 60,656 1.18 times 4.03 times £576.26 £0.09 Change +14.2% +6.8% -77.2% +57.5% +57.3% +57.2% -68.7% • Revenues increased by 14.2% to £135.1m. • Gross profit increased 9.3% to £37.7m (FY16: £34.5m). • Adjusted gross margin was 27.9% (FY16: 28.1%) supported by favourable Parent Reel pricing and significant currency hedging. • Adjusted EBITDA increased by 6.8% year on year to £16.1m (FY16: £15.0m). • Adjusted profit before tax increased 57.5% year on year to £13.0m. • Adjusted profit after tax increased 57.3% year on year to £11.0m. • Continued strong cash generation which included a £3.6m repayment of loan note interest in the current year. • Net debt reduced £41.7m year on year to £19.0m with net debt to adjusted EBITDA reducing from 4.0 times to 1.2 times in the current year. • Basic EPS of 9p (FY16: 57,626p). • Final dividend proposed of 4p per Ordinary share giving a total of 6p per Ordinary share for the full year. 2017 2016 Multiple Other Discounter 8% 18% 74% Multiple Other Discounter 9% 22% 69% James Flude Chief Financial Officer Sales of Private Label products into Discounters and Multiples delivered year on year a 14% growth in revenues and a 58% growth in adjusted profit before tax. Net debt reduced by 69% to £19.0m. Growth in revenue 14% Growth in adjusted profit before tax 58% 16 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Income statement Revenue Cost of sales before gain/(loss) on derivative financial instruments Gain on derivative instruments Cost of sales Gross profit Administration expenses Distribution costs Operating profit Analysed as: – Adjusted EBITDA(2) – Depreciation – Amortisation – Gain on derivative financial instruments – Exceptional items Operating profit Finance costs Profit before tax Tax charge Profit for the year attributable to equity shareholders Gross margin % Adjusted gross margin % (1) Statutory 2016 £’000 2017 £’000 135,053 118,219 (97,374) – (84,996) 1,266 (97,374) (83,730) 37,679 (15,698) (11,453) 34,489 (13,138) (9,431) Change +14% +9% 10,528 11,920 (12%) +7% 16,061 (1,910) (2,042) – (1,581) 15,038 (1,831) (2,060) 1,266 (493) 10,528 11,920 (12%) (1,129) (4,941) 9,399 (2,023) 7,376 27.9% 27.9% 6,979 (1,274) 5,705 29.2% 28.1% +35% +29% Note 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. Note 2: Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation, (loss)/gain on derivative financial instruments and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure. Note 3: Adjusted profit before tax, which is defined as profit before tax, amortisation, (loss)/gain on derivative financial instruments and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure. Note 4: Adjusted profit after tax, which is defined as profit after tax, amortisation, (loss)/gain on derivative financial instruments and exceptional items, is a non-GAAP metric used by management and is not an IFRS disclosure Note 5: Free cash flow, which is net cash flow from operating activities is a GAAP measure used by management. Key performance indicators Revenue 2017 2016 Finance costs 2017 £1.1m Adjusted gross margin(1) Adjusted EBITDA(2) £135.1m 2017 £118.2m 2016 27.9% 2017 28.1% 2016 £16.1m £15.0m 2016 £4.9m Adjusted profit before tax(3) Adjusted profit after tax(4) 2017 2016 £13.0m 2017 £11.0m £8.3m 2016 £7.0m Free cash flow(5) Net debt Net debt/adjusted EBITDA 2017 2016 £7.4m 2017 £19.0m 2017 1.18 times £4.7m 2016 £60.7m 2016 4.03 times Accrol Group Holdings plc / Annual Report and Accounts 17 Governance Chief Financial Officer’s Report continued Revenues Revenues grew by 14.2% or £16.8m year on year with the majority of the growth coming from the Discounters. The Discount segment of the UK tissue market has increased from 14% to 16%, taking share from the Multiples. In terms of products, toilet tissue revenues showed the highest year on year growth of 27.3% or £14.6m. As a proportion of revenue, toilet tissue has increased from 44% in the prior year to 49% in the current year. Gross margin Adjusted gross margin decreased marginally by 0.2% from 28.1% for the year ended 30 April 2016 to 27.9% for the year ended 30 April 2017. Adjusted gross margin excludes the impact of unrealised gains and losses on outstanding forward foreign currency contracts valued at the Balance Sheet date. The decrease of 0.2% is mainly due to: • In order to reduce the impact of the adverse movements in both the US$ and Euro exchange rates, we entered into a significant volume of forward currency contracts ahead of, and following, the EU referendum, selling Sterling and purchasing both US$ and Euros. This coupled with favourable Parent Reel pricing delivered a 0.3% improvement in adjusted gross margin. • We have continued to invest in production head count to support the sales growth at a cost of 0.5% of adjusted gross margin. Administration costs Administrative costs have increased year on year by £2.6m to £15.6m mainly due a £1.1m increase in exceptional costs, £0.6m due to increased wage costs as we continue to invest in people to support the sales growth, £0.3m due to plc related running costs and £0.6m due to insurance, depreciation and utilities. Exceptional costs of £1.6m in the current year relate to AIM flotation costs of £0.2m (balance of £1.6m is included in the share premium account), consulting costs of £0.6m, an early settlement fee on finance leases of £0.4m and the write-off of previous deal related costs attached to the previous debt structure of £0.4m. Distribution costs Distribution costs as a percentage of revenue has increased year on year by 0.5% to 8.5%. The increase is mainly due to destination mix change with an increased number of southern depots coupled with an increased usage of packaging materials. Finance costs Finance costs have decreased significantly year on year by £3.8m to £1.1m mainly due to the restructuring of the debt at listing on AIM in June 2016. The 10% fixed rate secured manager loan notes, the 10% fixed rate secured investor loan notes and the majority of the finance leases were repaid at listing. A new Revolving Credit Facility of £18.0m was put in place at IPO with a drawdown at IPO of £13.0m. Taxation The effective tax rate for the year was 21.5% which is higher than both the standard rate of taxation and the prior year (18.3%) primarily as a result of non-deductible expenses which largely relate to professional fees and to an element of interest charges on loan notes which are not deductible for tax purposes. The change in the statutory tax rate to 19.92% (2016: 20%) is due to the reduction in the main rate of corporation tax from 20% 1 April 2016 to 19% from 1 April 2017. Balance sheet Property, plant and equipment In the previous financial year, we acquired 2 further converting lines at a cost of £3.2m. In the current year, we have installed both of these machines in our new production facility at Leyland. Start-up costs of £3.4m are included in assets under construction with deprecation of the 2 lines and the start-up costs starting from May 2017. 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 2017 £’m 14.4 24.7 (18.8) 20.3 Actual 2016 £’m 9.4 21.3 (15.5) 15.2 Var £’m 5.0 3.4 (3.3) 5.1 Raw material stocks have increased by £2.1m with the majority of the increase supporting the sales growth with a smaller element due to us taking spot deals to take advantage of lower Parent Reel pricing. Finished goods stocks have increased by £2.9m year on year with last year significantly lower than expected due to higher sales demand around year end. Finished goods stock levels at 30 April 2017 are of an appropriate level to ensure we provide good service to our customers. Trade receivables have increased by £3.4m in line with the sales growth, showing our continued tight control of cash collection. Trade payables have increased £3.3m as we are choosing to take advantage of favourable credit terms on Parent Reels. 18 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Borrowings and cash flow Bank loan facility Finance leases Shareholder loans Factoring facility Borrowings Cash and cash equivalents Net debt 2017 £’m 12.8 0.5 - 9.5 22.8 (3.8) 19.0 Actual 2016 £’m 3.7 10.9 41.1 7.5 63.2 (2.5) 60.7 Var £’m (9.1) 10.4 41.1 (2.0) 40.4 1.3 41.7 As part of the AIM flotation process, shareholder loan notes, bank loan facility and the majority of finance leases were repaid. A new Revolving Credit Facility of £18.0m was put in place with a day 1 draw down of £13.0m. The opening day net debt position following flotation was £23.1m with the above position representing a reduction of £4.1m to 1.18 times the FY17 adjusted EBITDA. Net cash flows from operating activities increased £2.7m or 57.2% to £7.4m mainly due to higher adjusted EBITDA year on year, lower relative investment in working capital and lower interest paid following the debt restructuring noted above. Looking forward After completing our first year on AIM, we are looking forward to consolidating the investments in our new production facility in Leyland and our new distribution centre in Skemersdale. As before, our goal is to provide shareholder value through the provision of quality products and services to our existing and new customers. The Board has proposed a final dividend of 4p per Ordinary share giving a total of 6p per Ordinary share for the full year. The Board remains committed to a progressive dividend policy. James Flude Chief Financial Officer 10 July 2017 Accrol Group Holdings plc / Annual Report and Accounts 19 Governance Risk and Mitigation 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. Cost of input goods and materials Parent Reel and pulp capacity and pricing. • 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 identify opportunities. • Ensure customer service levels are high. • Be ready to take advantage of market opportunities to take on new customers. • If prices rise above management • Nurture relationships with key suppliers. expectations this could have a material adverse effect on the Group’s ability to achieve strategic objectives. • Buy ahead. • Take favourable 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. Market and production capacity New entrant into Market. • A new entrant into the market creating • Ensure that Group remains cost extra capacity and competition. competitive, delivering best quality and service to customers. 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. • 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 2 new machines purchased in the previous financial year. 20 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Increasing Decreasing No movement Principal risk 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. • Significant adverse weakening of Sterling will impact the entire market with a market price increase most likely required. • 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. 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. Regulatory Failure to adhere to regulatory requirements such as taxation, the Data Protection Act, Health and Safety and Fire safety regulations in particular. • Loss of key individuals could impact the Company’s ability to deliver its strategic goals and, resulting in declining performance and loss of investor confidence. 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. • 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. • 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. • Ensure Group have robust operational policies, procedures, risk assessments and contingencies around fire safety regulations. • Update and test the Disaster Recovery Plan annually. Accrol Group Holdings plc / Annual Report and Accounts 21 Governance Board of Directors 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 Over 30 years of operational and financial experience in blue-chip manufacturing, FMCG and retail. Over 35 years of experience in UK food manufacturing and distribution at senior management or Board level. Extensive experience in managing finance functions and financial Extensive Board experience gained in a plc environment and also with reporting. 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. 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 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 6 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 Steve has held a number of CEO in accountancy and investment banking primarily with Panmure Gordon, Evolution Securities, Williams de Broë and Price Waterhouse. 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 9 Middle East and North Africa markets. Other commitments Appointed Non-Executive Chairman of Clearly Drinks, a private equity backed soft drinks business, in April 2017. 22 Accrol Group Holdings plc / Annual Report and Accounts 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. Strategic Report Financial Statements Extensive experience in the soft tissue industry. 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 as Chief Operating Officer and Chairman of the Operating Board. He is a qualified CIMA accountant. Chief Financial Officer, Jemella Group (ghd) Bright Blue Foods, he helped restructure, 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 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. Other commitments Appointed Non-Executive Chairman of Clearly Drinks, a private equity backed soft drinks business, in April 2017. 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 Over 30 years of operational and financial experience in blue-chip manufacturing, FMCG and retail. Over 35 years of experience in UK food manufacturing and distribution at senior 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. Date joined the Board Chairman since November 2014. June 2016. January 2015. June 2016. June 2016. 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 9 Middle East and North Africa markets. 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 6 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. 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. Accrol Group Holdings plc / Annual Report and Accounts 23 Governance Corporate Governance Statement THE CHAIRMAN’S INTRODUCTION TO CORPORATE GOVERNANCE Peter Cheung Executive Chairman I am pleased to introduce the second Corporate Governance Report for Accrol Group Holdings plc for the year ended 30 April 2017. 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 Board recognise that the 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 in June 2016, a review of the kind of governance structure that was required and appropriate for Accrol, was undertaken and implemented. This 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 benefit of all shareholders. The Committees noted below were formed upon our IPO and therefore commenced operating during the current April 2017 year end. Peter Cheung Executive Chairman 10 July 2017 24 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Governance statement As an AIM listed business, the Group is not required to comply with the provisions or report in accordance with the UK Corporate Governance Code. The Board is, however, committed to the principles of good corporate governance and applies 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 Group. 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 Group and the roles are clearly set out in writing and reviewed by the Board. Board responsibilities Role Name Responsibility Executive Chairman Peter Cheung Chief Executive Officer Steve Crossley Chief Financial Officer James Flude Non-Executive Directors Steve Hammett and Joanne Lake P Lead and manage the Board P Set the Board’s agenda, style and tone of discussions P Ensure the Board’s effectiveness in all aspects of its role P Work closely with the Chief Executive Officer on developing the Group’s strategy, and providing general advice and support P Facilitate active engagement by all members P Participate in shareholder communications P Promote high standards of corporate governance P Manage the Group’s business P Develop Group strategy for consideration and approval by the Board P Lead the Senior Management Team in delivering the Group’s strategic and day-to-day operational objectives P Lead and maintain communications with all stakeholders P Manage the Group’s finances P Develop financial budgets and reports and communicate those budgets and reports to the Board P Lead the finance team P Be available to meet with shareholders and aid communication of shareholder concerns when normal channels of communication are inappropriate P Constructively challenge and contribute to the development of Group strategy P Monitor the integrity of financial information, financial controls and systems of risk management to ensure they are robust P Review the performance of the Senior Management Team P Assist in formulating Director remuneration The Non-Executive Directors Each of the Non-Executive Directors are free from any relationship with the Executive Management of the Group and are free from any business or other relationship that could affect or appear to affect the exercise of their independent judgment. Accordingly, the Non-Executive Directors are each considered by the Board to be independent, in both character and judgement. 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 during the year ended 30 April 2017 included: • Finance and operations review • Annual budget and forecasts • Risk review • Strategic plans • Health & safety • Potential merger and acquisition targets • Reports from the Board Committees • Board evaluation • Impact of Brexit • Market Abuse Regulations (MAR) • Major capital expenditure Accrol Group Holdings plc / Annual Report and Accounts 25 Governance Corporate Governance Statement continued 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 meets 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 meets as required given the infrequency of senior appointments. Steve Hammett is Chairman of the Remuneration Committee which also comprises Peter Cheung and Joanne Lake. The Remuneration Committee reviews the performance of the Executive Directors and determines 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 meets at least once a year. Diversity Vacancies on the Board will be 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 Group 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. The current female representation on the Board is 20%. 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 Group or the Non-Executive Director on 1 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. Board and Committee meetings The Board meets on a formal basis regularly and met formally 8 times in the year ended 30 April 2017. Members are supplied with financial and operational information in good time for review in advance of the meetings. Further details of their terms and conditions are summarised in the Remuneration Report on pages 29 to 33 and the terms and conditions of appointment of the Non-Executive Directors are available at the Company’s Registered Office. The Directors attended the following meeting in the year ended 30 April 2017: Peter Cheung Steve Crossley James Flude Steve Hammett Joanne Lake Total meetings Board Audit Remuneration Nomination 8 8 8 7 8 8 3 n/a 3 – 3 3 – – – – – – – – – – – – The Remuneration and Nomination Committees have not met in the current financial year as the recent IPO process had already determined the placement and remuneration of the Executive Directors and other members of the Board. All Directors 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. Effectiveness Board composition The Board comprises the Executive Chairman, the Chief Executive Officer, the Chief Financial Officer and 2 Non-Executive Directors. The Directors’ profiles appear on pages 22 to 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 Executive Chairman fosters an atmosphere of debate and challenge in the boardroom, built on his challenging but supportive relationship with the Chief Executive Officer which sets the tone for Board interaction and discussions. 26 Accrol Group Holdings plc / Annual Report and Accounts 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 Group 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 is undertaken by the Executive 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 2 previous Annual General Meetings. Strategic Report Financial Statements Remuneration Committee The Remuneration Committee comprises Steve Hammett, Peter Cheung and Joanne Lake. The Committee has Terms of Reference that are reviewed at least annually. 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 Group’s performance, business model and strategy. In doing so, the following issues have been addressed: The role of the Committee is to: • Set the remuneration policy for all Executive Directors and the Chairman. • 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. • 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. • Review of key strategic risks – the Audit Committee conducts a review of the key strategic risks every 6 months. The review highlights 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 any other key considerations such as the accounting for the IPO. • Going Concern – the conclusion of the review of the going concern assessment is included below. 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 are reviewed at least annually. The Board is confident that the collective experience of the Audit Committee enables them to continue 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 Group’s expense if required. 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. • 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 attend a number of these meetings. The Audit Committee also meets with the external audit partner without the Executives present. The role of the Committee is 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. • 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. 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 reports 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 reviews the inherent risks, including the key risks and the system of control necessary to manage such risks. The Audit Committee reviews the effectiveness of the Group’s procedures in managing risk. The business risks and controls to mitigate the risks are formally reviewed by the Audit Committee and the Board at least twice a year. The Board are satisfied that this process identifies, evaluates and manages 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. Accrol Group Holdings plc / Annual Report and Accounts 27 Governance Annual General Meeting This year’s Annual General Meeting 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 Financial Statements. 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 Annual General Meeting, a copy of the Annual General Meeting presentation and details of the poll results will be posted on the Group’s website after the meeting. Richard Almond Company Secretary 10 July 2017 Corporate Governance Statement continued • The Group has set appropriate levels of authorisation which must be adhered to as the Group concludes its business. • 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 forseeable 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 and financial covenants. With regard to the Group’s financial position, it had cash and cash equivalents at the year end of £3.9m (2016: £2.5m). Net debt was £19.0m (2016: £60.6m). 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. Remuneration The level of remuneration of the Directors is set out in the Remuneration Report on page 30. Relations with shareholders The Board appreciates that effective communication with the Group’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 Group’s strategy, reputation and performance. The Executive Directors have overall responsibility for ensuring effective communication and the Group 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 advisers 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 Group’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. 28 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Remuneration Committee STATEMENT FROM THE CHAIRMAN OF THE REMUNERATION COMMITTEE Steve Hammett 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 2017. This report includes my statement, the Annual Report on remuneration for the year and sets out our Directors’ remuneration policy which has been in place since the Group’s Admission onto AIM on 10 June 2016. 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. Our Directors’ remuneration policy In the current financial year, the remuneration policy has not altered from that described in our previous Annual Report when we undertook a forward-looking and thorough 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. Accrol Group Holdings plc / Annual Report and Accounts 29 Governance Remuneration Committee continued The policy is set out in the following pages, with a summary of key principles provided below: In addition to these key areas, the Board will also consider complementary acquisitions. • 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. It is intended that our remuneration policy reflects, and is aligned to, the Company’s long-term strategy and facilitates the achievement of the objectives set out above. During the previous financial year, the Board considered and approved the implementation of an annual bonus plan and management incentive plan to incentivise key management to generate growth in line with our long-term strategies. There have been no revisions to these plans in the current financial year. Further details on these are set out in the remuneration policy section of this report. The remainder of this report is split out into the following 2 sections: • Annual Report on remuneration providing details of the payments made to Directors in the year ending 30 April 2017, pages 30 to 31. • Directors’ remuneration policy setting out the Company’s remuneration policy, pages 31 to 33. Steve Hammett Chairman of the Remuneration Committee 10 July 2017 Annual remuneration report for 2017 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. Where the Executive Chairman’s remuneration is reviewed, he will not be present for these considerations. 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. In the current financial year, the Remuneration Committee has met nil times as the Committee met twice just prior to the commencement of this financial year and in preparation for the IPO. Directors’ remuneration The tables below set out the total remuneration for Executive and Non-Executive Directors for the financial year ending 30 April 2017 and 30 April 2016. Executive Directors Majid Hussain(1) Jawid Hussain(1) John Flanagan(1) Gary Earle(1) Colin Platt(1) James Flude(2) Steve Crossley Peter Cheung(3) 30 Accrol Group Holdings plc / Annual Report and Accounts Benefits in kind £ Share based payments £ Post employment benefits £ Total remuneration 2017 £ Total remuneration 2016 £ – – – – – 860 1,236 1,404 – – – – – 65,333 65,333 65,333 – – – – – 20,445 – 11,138 9,584 12,323 11,353 21,958 10,666 266,638 305,131 166,642 84,000 108,000 102,180 204,804 96,000 114,000 – – Salaries £ 9,584 12,323 11,353 21,958 10,666 180,000 238,562 88,767 Strategic Report Financial Statements Non-Executive Directors Name Peter Cheung(2)(3) Steve Hammett(4) Joanne Lake(4) Total fees 2017 £ 62,000 35,507 37,282 Total fees 2016 £ 72,000 – – (1) On 10 June 2016, Majid Hussain, Jawid Hussain, John Flanagan, Gary Earle and Colin Platt resigned as Directors of the Company as part of the Admission process. (2) 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 expired on 10 June 2017. There are no performance conditions or other conditions attaching to these shares which are fully vested to the individuals. (3) At the time of Admission, Peter Cheung took on an Executive Chairman role. It is expected that he will continue this role for a short period post-Admission before moving back into a Non-Executive role. (4) Steve Hammett and Joanne Lake became Non-Executive Directors on 10 June 2016, Remuneration policy The remuneration policy has been applied 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; • operate a remuneration policy that is a mix of fixed and variable pay. Variable pay is both short term and long term; • align Directors’ interests with those of the Company; • have a pay for performance approach; and • provide a market competitive level of remuneration to enable the Company to attract and retain high-performing individuals, to support the ongoing success of the Company. As part of this an annual bonus plan has been introduced which took effect from the start of this financial year. The Company has also adopted a 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. Remuneration policy summary – Executive Directors Purpose and link to strategy Base salary Operation 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. 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 To attract and retain the right individuals and level of talent required to support achievement of both short- and long-term value creation. 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. Accrol Group Holdings plc / Annual Report and Accounts 31 Governance Remuneration Committee continued Purpose and link to strategy Operation Pension To attract and retain the right individuals and level of talent required to support achievement of both short- and long-term value creation. Annual Bonus Plan To incentivise delivery of the Group’s annual financial and strategic goals. 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. 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 – payout 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 – payout 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. Management Incentive Plan (“MIP”) To incentivise the delivery of key performance measures over the long term. The MIP is a one-off award in connection with the Admission; there is no intention to make ongoing annual awards. To retain key executives and ultimately increase their share ownership in the Company, thus aligning their interests with those of shareholders. 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 3-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 shares 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 4 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). 32 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Termination of employment Each Executive Director has a service agreement which may be terminated by either party serving 12 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 table – Non-Executive Directors Purpose and link to strategy Non-Executive Directors’ fees Operation 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. Accrol Group Holdings plc / Annual Report and Accounts 33 Governance Directors’ Report The Directors present their report together with the audited consolidated financial statements, along with the Auditor’s Report for the year ended 30 April 2017. As a consequence, the Directors believe that the Company is in a strong financial position to continue in operational existence for the foreseeable future. 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 Ordinary and Deferred shares only. 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 and up to the date of approving the Annual Report and Financial Statements 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 29 to 33. Details of the Directors’ interests in the share capital of the Company are set out on page 35. 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. This third party indemnity was in place during the financial year and also at the date of approval of the financial statements. 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 2017, the Directors have approved and paid an interim dividend of 2p per share (2016: £nil). The Directors intend to approve a final dividend of 4p per share which is subject to approval at the Annual General meeting on 22 September 2017. Financial instruments Details of the Group’s financial risk management objectives and policies are disclosed in Note 18 to the financial statements. Admission to AIM 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. 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. 34 Accrol Group Holdings plc / Annual Report and Accounts 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 24 to 28, and forms part of this report by reference. Health and safety The Group is committed to providing a safe working environment for all employees. Group polices are reviewed regularly to ensure that policies relating to training, risk assessment and accident management are appropriate. Health and safety issues are reported at all Operations and Board meetings. Charitable and political donations Charitable donations of £24,390 (2016: £35,230) 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. In the current year we have improved and formalised our communications to all employees. These communications ensure that all have an awareness of the major economic and financial factors that impact upon the performance of the business. We are currently undertaking our first employee engagement survey which will help shape our future strategy with regards to employee involvement. Share capital The details of the issued share capital at the beginning of the financial 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 1 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. As a condition of the Placing agreement, each of the Directors and the pre-Admission shareholders undertook 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. Strategic Report Financial Statements 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 4 and 6, 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. Accordingly, they have continued to adopt the going concern basis in preparing the Group and Company financial statements. Disclosure of information to the auditors Each of the persons who is a Director at the date of approval of this Annual Report confirms that: (a) So far as each Director is aware, there is no relevant audit information of which the Company’s Auditors are unaware. (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 Auditors are 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 Accrol Group Holdings plc (formerly Accrol Group Holdings Limited), Delta Building, Roman Road, Lancashire, BB1 2LD on 22 September 2017 at 2pm. On behalf of the Board of Directors Steve Crossley Chief Executive Officer 10 July 2017 James Flude Chief Financial Officer 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. 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. Directors’ interests The interests in the shares of the Company of those Directors serving at 30 April 2017, and as at the date of approving of these financial statements, all of which are beneficial, in the share capital of the Company were as follows: Number of £.001 Ordinary shares As at 30 April 2017 611,683 100,000 244,680 25,000 % of issued share capital As at 30 April 2017 0.66% 0.11% 0.26% 0.03% Class of share As at 30 April 2017 Ordinary Ordinary Ordinary Ordinary Peter Cheung Steve Crossley James Flude Joanne Lake Substantial shareholders As at 30 April 2017, 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 Number of shares Percentage Majid Hussain Wajid Hussain Mozam Hussain NorthEdge Capital Miton Asset Management plc Schroder Investment Management Majedie Asset Management Limited Ruffer LLP (for its discretionary clients of the Ruffer Group) Premier Fund Managers Limited Axa Investment Managers SA 4,652,590 4,652,590 4,646,621 13,987,377 10,075,698 6,847,693 5,730,265 4,409,200 3,600,000 2,850,000 5.0% 5.0% 5.0% 15.0% 10.8% 7.4% 6.2% 4.7% 3.9% 3.1% As at 7 July 2017, 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 plc Majedie Asset Management Limited Schroder Investment Management Ruffer LLP (for its discretionary clients of the Ruffer Group) Hargreave Hale Premier Fund Managers Limited Axa Investment Managers SA 4,652,590 4,652,590 4,646,621 13,987,377 10,075,698 5,730,265 5,153,508 3,626,400 3,200,766 3,082,000 2,850,000 5.0% 5.0% 5.0% 15.0% 10.8% 6.2% 5.5% 3.9% 3.4% 3.3% 3.1% Accrol Group Holdings plc / Annual Report and Accounts 35 Governance Statement of Directors’ Responsibilities in Respect of the Financial Statements Each of the Directors, whose names and functions are listed in the Directors’ Report confirm that, to the best of their knowledge: • the Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; • the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and • the Directors’ Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces. In the case of each Director in office at the date the Directors’ Report is approved: • so far as the Director is aware, there is no relevant audit information of which the Group and Company’s auditors are unaware; and • they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group and Company’s auditors are aware of that information. Signed on behalf of the Board of Directors Steve Crossley Chief Executive Officer 10 July 2017 James Flude Chief Financial Officer The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law). 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 Company and of the profit or loss of the Group and Company for that period. In preparing the financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements; • make judgements and accounting estimates that are reasonable and prudent; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The Directors are also responsible for safeguarding the assets of the Group and Company 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. The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company’s performance, business model and strategy. 36 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Independent Auditor’s Report to the Members of Accrol Group Holdings plc (formerly Accrol Group Holdings Limited) For year ended 30 April 2017 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 2017 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. 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 2017; • 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. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ Responsibilities, 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: 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. • whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; 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. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • 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; and • the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In addition, in light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors’ Report. We have nothing to report in this respect. 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. • 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. With respect to the Strategic Report and Directors’ Report, we consider whether those reports include the disclosures required by applicable legal requirements. Other matter We have reported separately on the company financial statements of Accrol Group Holdings plc for the year ended 30 April 2017. 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. Hazel Macnamara (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Manchester 10 July 2017 Accrol Group Holdings plc / Annual Report and Accounts 37 Governance Consolidated Income Statement For year ended 30 April 2017 Continuing operations Revenue – Cost of sales before gain on derivative financial instruments – Gain on derivative financial instruments Cost of sales Gross profit Administration expenses Distribution costs Operating profit Analysed as: – Adjusted EBITDA1 – Depreciation – Amortisation – Gain on derivative financial instruments – Exceptional items Operating profit Finance costs Analysed as: – Finance costs on pre-IPO debt structure – Finance costs on post-IPO debt structure Finance costs Profit before tax Tax charge Profit for the year attributable to equity shareholders Consolidated Statement of Comprehensive Income For the year ended 30 April 2017 Profit for the year attributable to equity shareholders Other comprehensive (expense)/income for the year Revaluation of derivative financial instruments2 Tax relating to components of other comprehensive income Total comprehensive income attributable to equity shareholders Earnings per share Basic and diluted Adjusted Note 2017 £’000 2016 £’000 4 135,053 118,219 (97,374) – (84,996) 1,266 (97,374) (83,730) 37,679 (15,698) (11,453) 34,489 (13,138) (9,431) 5 10,528 11,920 10 11 5 8 8 9 16,061 (1,910) (2,042) – (1,581) 10,528 (1,129) 15,038 (1,831) (2,060) 1,266 (493) 11,920 (4,941) (478) (651) (4,456) (485) (1,129) (4,941) 9,399 (2,023) 6,979 (1,274) 7,376 5,705 2017 £’000 7,376 (2,868) 545 2016 £’000 5,705 – – 5,053 5,705 £ 0.09 0.12 £ 576.26 680.20 6 25 The notes on pages 42 to 61 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. Note 2: Items that could potentially be reclassified subsequently to profit and loss. 38 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Consolidated Statement of Financial Position As at 30 April 2017 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 Deferred tax asset Derivative financial instruments Total current assets Total assets Non-current liabilities Borrowings Deferred tax liabilities Derivative financial instruments Total non-current liabilities Current liabilities Borrowings Trade and other payables Income taxes payable Derivative financial instruments Total current liabilities Total liabilities Net assets Capital and reserves Share capital Share premium Hedging reserve Capital redemption reserve Retained earnings Total equity shareholders’ funds The financial statements on page 38 to 41 were approved by the Board of Directors on 10 July 2017. Signed on behalf of the Board of Directors Steve Crossley Chief Executive Officer James Flude Chief Financial Officer Company Registration Number 09019496 Note 2017 £’000 2016 £’000 10 11 12 13 14 17 16 9 17 16 15 17 20 26,914 29,742 56,656 14,358 24,670 3,867 545 841 24,407 31,744 56,151 9,361 21,277 2,456 – – 44,281 33,094 100,937 89,245 13,146 4,336 474 50,919 4,478 – 17,956 55,397 9,709 18,840 920 3,235 12,193 15,454 909 190 32,704 28,746 50,660 84,143 50,277 5,102 93 41,597 (2,323) 27 10,883 50,277 13 84 – – 5,005 5,102 Accrol Group Holdings plc / Annual Report and Accounts 39 Governance Consolidated Statement of Changes in Equity For year ended 30 April 2017 Note Share capital £’000 10 Share premium £’000 Hedging reserve £’000 Capital redemption reserve £’000 50 34 34 – – 84 – – – – (64) 43,285 – (1,708) – – 41,513 – – – – – – – (2,868) 545 (2,323) – – – – – – – 41,597 (2,323) – – – – – – – – – – – – 27 – – – 27 27 (Accumulated losses)/ retained earnings £’000 (700) – – 5,705 5,705 5,005 7,376 – – 7,376 – – – 166 (1,860) 196 Total equity £’000 (640) 37 37 5,705 5,705 5,102 7,376 (2,868) 545 5,053 – 43,328 – (1,542) (1,860) 196 (1,498) 40,122 10,883 50,277 3 3 – – 13 – – – – 64 43 (27) – – – 80 93 Balance at 1 May 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 and at 1 May 2016 Comprehensive income/(expense) Profit for the year Revaluation of derivative financial instruments Tax relating to components of other comprehensive income Total comprehensive income Transactions with owners recognised directly in equity Bonus issue of shares Proceeds from shares issued Buy-back of Deferred shares for consideration of £1 Transaction costs Dividends Share-based payments Total transactions recognised directly in equity Balance at 30 April 2017 20 20 20 40 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Consolidated Cash Flow Statement For the year ended 30 April 2017 Cash flows from operating activities Operating profit Adjustment for: Depreciation Amortisation (Gain) on derivative financial instruments Grant income Exceptional items Share-based payments Profit on disposal of property, plant and equipment Operating cash flows before movements in working capital (Increase)/decrease in inventories Increase in trade and other receivables Increase/(decrease) 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 Net cash flows used in investing activities Cash flows from financing activities Proceeds of issue of Ordinary shares Cost of raising finance Increase in amounts due to factors Repayment of capital element of finance leases Repayment of bank loans Receipt of new bank loans Repayment of shareholder loans/loan notes Drawdown of shareholder loans/loan notes Dividend paid to Ordinary shareholders 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 Notes 2017 £’000 2016 £’000 10,528 11,920 5,10 5,11 1,910 2,042 – (212) 1,016 196 (26) 15,454 (4,997) (3,224) 6,431 13,664 (2,149) (4,131) 1,831 2,060 (1,266) (61) – – (22) 14,462 20 (1,975) (1,433) 11,074 (1,460) (4,918) 7,384 4,696 (4,417) 56 (4,361) 43,328 (1,971) 2,038 (10,737) (3,900) 12,730 (41,240) – (1,860) (683) 48 (635) 37 – 1,656 (3,082) (1,200) – – 249 – (1,612) (2,340) 1,411 2,456 3,867 1,721 735 2,456 14 14 Accrol Group Holdings plc / Annual Report and Accounts 41 Governance Notes to the Consolidated Financial Information For the year ended 30 April 2017 1. General information Accrol Group Holdings plc (formerly Accrol Group Holdings Limited), (the “Company”) was incorporated in England 30 April 2014 with company number 09019496. It is a public company limited by shares and it is domiciled in England in the United Kingdom. The registered address of the Company is the Delta Building, Roman Road, Blackburn, Lancashire, BB1 2LD. 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. The Company’s subsidiaries are listed in Note 22, 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. Basis of preparation 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, IFRS Interpretation Committee (‘IFR IC’) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. 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 profit or loss. The consolidated financial statements are presented in pounds Sterling and all values are rounded to the nearest thousand pounds, except where otherwise indicated. 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): 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. 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; • IAS 16 and IAS 38 amendments – Clarification of Acceptable • rights arising from other contractual arrangements; and 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. • 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 3 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. 42 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements 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. 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 statement of financial position 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: • Leasehold land and Buildings • Plant and Machinery • Motor vehicles straight line over term of lease 10% straight line, 40% residual value 30% straight line • Fixtures, fittings and office 25% reducing balance equipment 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. Accrol Group Holdings plc / Annual Report and Accounts 43 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 2. Summary of significant accounting policies continued 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. Customer relationships, customer order books and other Customer relationships are shown at fair value as part of acquisition accounting. 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. 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 and cash flow hedges The Group holds derivative financial instruments to hedge its foreign currency exposures. These derivatives, classified as cash flow hedges, are initially recognised at fair value and then re- measured at fair value at the end of each reporting date. Hedging instruments are documented at inception and effectiveness is tested throughout their duration. Changes in the value of cash flow hedges are recognised in other comprehensive income and any ineffective portion is immediately recognised in the statement of comprehensive income. Amounts deferred in other comprehensive income are recognised in the statement of comprehensive income in the same period in which the hedged items affect profit. Customer order books relate to orders 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. 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. The other intangible asset relates to a Management Services Agreement between Accrol Papers Limited and Accrol Group Holdings Plc (formerly Accrol Group Holdings Limited). This agreement has an infinite life and therefore is not amortised. 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. 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. Share-based payments The Group may issue equity-settled share-based payments in the Parent Company to certain employees in exchange for services rendered. These awards are measured at fair value on the date of the grant using an option pricing model and expensed in the statement of comprehensive income on a straight-line basis over the vesting period after making an allowance for the number of shares that it is estimated will not vest. The level of vesting is reviewed and adjusted annually. 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. 44 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements 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 3 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 1 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. 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. 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. 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. 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. Critical accounting estimates and judgements in applying the entity’s accounting policies Goodwill and intangible asset 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. 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. Accounting for IPO The successful completion of the IPO has resulted in a significant change in the Group’s financing structure, both in terms of equity and debt and has had a significant impact upon the Group financial statements. Accounting for the IPO and, in particular, for the transaction fees incurred requires an element of judgement as costs determined to be directly related to the IPO are deducted from the share premium account. Non directly related are expensed as incurred. Accrol Group Holdings plc / Annual Report and Accounts 45 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 4. Revenue The analysis of geographical area of destination of the Group’s revenue is set out below: United Kingdom Europe Total 2017 £’000 2016 £’000 132,184 2,869 118,041 178 135,053 118,219 Major customers In 2017 there were 4 major customers that individually accounted for at least 10% of total revenues (2016: 4 customers). The revenues relating to these customers in 2017 were £31,597,000, £14,532,000, £13,981,000, £12,602,000 (2016: £25,369,000, £14,300,000, £13,769,000 and £12,375,000). 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 on disposal of property, plant and equipment Operating lease rentals Net foreign exchange losses/(gains) Grants income Auditors’ remuneration Inventories recognised as expenses Exceptional items Professional fees relating to the AIM flotation Early settlement charges on finance leases Acquisition deal fees Consultancy fees Other The exceptional items are described below: 2017 £’000 11,857 1,910 2,042 (26) 1,957 27 (212) 311 75,947 208 454 352 567 – 1,581 2016 £’000 9,927 1,831 2,060 (22) 1,946 (1,332) (61) 59 66,807 – – – 334 159 493 Year ended 30 April 2017 Professional fees of £208,000 incurred as part of the IPO process have been classified as exceptional as they do not directly relate to the raising of the equity for the AIM flotation so cannot be charged against share premium. In addition, part of the funds raised in the IPO were used to reduce the debt in the business with the majority of the finance leases being repaid which attracted an early redemption charge of £454,000. Fees totalling £352,000 relating to the acquisition of the Accrol Group in July 2014 by Accrol Group Holdings Limited, were also required to be written-off as part of the accounting for the IPO. Consultancy costs totalling £567,000 were incurred as part of the restructuring. These related mainly to the Hussain family consultancy, manufacturing consultancy and human resourcing consultancy. 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. 46 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Auditor’s remuneration Audit services – Company Audit services – Rest of Group Non-audit services: Tax compliance services Tax advisory services Advice upon IPO 2017 £’000 13 53 11 9 225 311 2016 £’000 7 29 10 13 – 59 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 for the year attributable to shareholders Basic weighted average number of shares1 Dilutive share options Diluted weighted average number of shares Basic earnings per share Diluted earnings per share 2017 £’000 7,376 2016 £’000 5,705 Number Number 85,113,194 9,900 Number Number 1,321,025 86,434,219 £ 0.09 0.09 – – £ 576.26 576.26 Note 1: In the year ended 30 April 2016 and 2017, the basic weighted average number of shares was calculated by excluding the D class of shares (see Note 20) as this class is subject to a dividend cap that does not materially impact upon the profit due to the remaining Ordinary equity shareholders. The share option scheme in operation post flotation is dependent upon share price movements and could therefore result in future dilution of earnings per share. 7. Employee costs Employee costs during the year amounted to: Wages and salaries Social security costs Other pension costs Cost of employee share schemes (Note 23) The average number of employees (including the Executive Directors) during the year were: Production Administration 2017 £’000 2016 £’000 10,748 801 112 196 11,857 9,171 684 72 – 9,927 Number Number 462 46 508 431 29 460 Accrol Group Holdings plc / Annual Report and Accounts 47 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 8. Finance costs Finance costs on pre-IPO debt structure Shareholder loans Finance lease interest Amortisation of finance fees Finance costs on post-IPO debt structure Bank loans and overdrafts Finance lease interest Interest on factoring facility Amortisation of finance fees 2017 £’000 478 – – 478 368 80 160 43 651 2016 £’000 4,099 214 143 4,456 158 144 183 – 485 Total finance costs 1,129 4,941 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 2017 £’000 2,165 2,165 (163) 21 (142) 2016 £’000 1,780 1,780 (31) (475) (506) 2,023 1,274 The tax charge for the year is higher (2016: lower) than the effective rate of Corporation Tax in the UK of 19.92% (2016: 20%). The differences are explained below: Profit before income tax Effective rate At the effective income tax rate Expenses not deductible for tax purposes Change in rate Total tax charge During the year the Group recognised the following deferred tax (assets)/liabilities: 30 April 2015 Credit/(charge) in year Change in deferred tax rate 30 April 2016 Credit/(charge) in year Change in deferred tax rate Credit to equity 30 April 2017 48 Accrol Group Holdings plc / Annual Report and Accounts 2017 £’000 9,399 19.92% 1,872 130 21 2,023 Other £’000 (326) 254 7 (65) 65 – – – 2016 £’000 6,979 20% 1,396 353 (475) 1,274 Total £’000 4,984 (31) (475) 4,478 (163) 21 (545) 3,791 Accelerated capital allowances £’000 Derivative financial instruments £’000 Intangibles £’000 1,576 127 (176) 1,527 186 (18) – 3,734 (412) (306) 3,016 (414) 39 – 1,695 2,641 – – – – – – (545) (545) Strategic Report Financial Statements During the year the Group recognised the following deferred tax (assets)/liabilities: Deferred tax assets Deferred tax liabilities 2017 £’000 (545) 4,336 3,791 2016 £’000 – 4,478 4,478 The deferred tax asset was recognised on the loss on cash flow hedges and the credit has been taken to the hedging reserve. Deferred tax expected to be settled within 12 months of the reporting date is approximately £58,000 (2016: £186,000). The Finance Act 2016 reduced the main rate of corporation tax to 20% from 1 April 2016 and to 19% from 1 April 2017. A future rate reduction to 18% from 1 April 2020, was substantively enacted on 26 October 2015. A further change to reduce the rate from 1 April 2020 from 18% to 17% was announced on 16 March 2016. This change was substantively enacted as part of the Finance Bill 2016 on 15 September 2016. Therefore, the rate of 20% (2016: 20%) 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 2017 (2016: 18%) 10. Property, plant and equipment Leasehold land & buildings £’000 Fixtures & fittings £’000 Plant and machinery £’000 Motor vehicles £’000 Assets under construction £’000 Cost At 30 April 2015 Transfer Additions Disposals At 30 April 2016 Additions Disposals At 30 April 2017 Accumulated depreciation At 30 April 2015 Charge Disposals At 30 April 2016 Charge Disposals At 30 April 2017 Net book value At 30 April 2017 At 30 April 2016 156 – – – 156 – – 156 39 10 – 49 10 – 59 532 – 173 – 705 344 – 19,013 4,417 162 (49) 23,543 684 – 1,049 24,227 86 119 – 205 140 – 345 1,335 1,626 (23) 2,938 1,739 (18) 4,659 97 107 704 500 19,568 20,605 133 – 37 (35) 135 46 (138) 43 51 76 (35) 92 21 (90) 23 20 43 Total £’000 24,251 – 3,524 (84) 27,691 4,447 (138) 4,417 (4,417) 3,152 – 3,152 3,373 – 6,525 32,000 – – – – – – – 1,511 1,831 (58) 3,284 1,910 (108) 5,086 6,525 26,914 3,152 24,407 The net book value of tangible fixed assets includes an amount of £538,000 (2016: £16,052,000) in respect of plant and machinery assets held under finance leases and £nil (2016: £3,152,000) in respect of assets under construction held under finance leases. Accrol Group Holdings plc / Annual Report and Accounts 49 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 11. Intangible assets Cost 30 April 2015 Additions At 30 April 2016 Additions At 30 April 2017 Amortisation 30 April 2015 Charge At 30 April 2016 Charge At 30 April 2017 Net book value At 30 April 2017 At 30 April 2016 Goodwill £’000 Customer lists £’000 Order book £’000 Other £’000 Total £’000 14,982 – 14,982 – 20,427 – 20,427 – 14,982 20,427 – – – – – 1,623 2,042 3,665 2,042 5,707 14,982 14,720 14,982 16,762 86 – 86 – 86 68 18 86 – 86 – – – – – 40 40 – – – – – 35,495 – 35,495 40 35,535 1,691 2,060 3,751 2,042 5,793 40 – 29,742 31,744 The balance for goodwill, customer relationships and order book arose on the Group’s acquisition of Accrol Holdings Limited and are attributed to the sole cash-generating unit (CGU). The intangible addition during the year, relates to a Management Services Agreement between Accrol Papers Limited and Accrol Group Holdings Plc which provides a mechanism for a recharge of salary costs between the 2 entities. 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 5-year period. Cash flows beyond this period are extrapolated using the estimated growth rates stated in the key assumptions. The key assumptions used in the value in use calculations are a pre-tax discount rate of 13% (2016: 16%) and a long-term growth rate of 2% (2016: 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. The values reflect both past experience and external sources of information. 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 headroom over the carrying value, consequently only significant adverse changes in these key assumptions would cause the Group to recognise an impairment loss. 12. Inventories Raw materials Finished goods and goods for resale There are £nil provisions held against inventories (2016: £nil). 2017 £’000 9,090 5,268 14,358 2016 £’000 6,996 2,365 9,361 50 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements 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 1 month Between 1 and 2 months Between 2 and 3 months Between 3 and 6 months 2017 £’000 23,751 (85) 23,666 1,004 2016 £’000 20,793 (85) 20,708 569 24,670 21,277 2017 £’000 14,048 8,267 988 448 2016 £’000 12,831 7,120 383 459 23,751 20,793 Trade and other receivables which are less than 3 months past due are not considered impaired unless specific information indicates otherwise. Trade and other receivables greater than 3 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 6 months past due. Included in the Group’s trade receivables balance are debtors which are past due at the reporting date for which the Group has not provided as there has not been a significant change in the credit quality and the amounts are considered recoverable. 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 Provisions made for receivables impairment 2017 £’000 (85) – (85) 2016 £’000 (62) (23) (85) 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. 14. Cash and cash equivalents Cash and cash equivalents 2017 £’000 2016 £’000 3,867 2,456 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 1 day and 1 month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. Accrol Group Holdings plc / Annual Report and Accounts 51 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 15. Trade and other payables Trade payables Social security and other taxes Accruals and deferred income Deferred government grant income Trade payables are non-interest bearing and are paid on average within 30 days at 30 April 2017 (2016: 29 days). 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 1 year Between 1 and 2 years Between 2 and 5 years After 5 years The following amounts remain undrawn and available: Revolving credit facility Factoring facility 2017 £’000 14,892 1,558 1,576 814 2016 £’000 7,868 1,947 4,613 1,026 18,840 15,454 2017 £’000 2016 £’000 12,778 368 – 2,600 7,232 41,087 13,146 50,919 – 9,523 186 9,709 9,709 185 13,183 – 1,103 7,485 3,605 12,193 12,294 4,164 5,768 41,240 23,077 63,466 2017 £’000 3,000 13,043 16,043 2016 £’000 – 9,879 9,879 The Group’s bank borrowings are secured by way of fixed and floating charge over the Group’s assets. HSBC Revolving Credit Facility agreement (‘Bank facility’) At 30 April 2016, the Group had borrowings under a committed bank loan facility of £4m provided by HSBC plc, a factoring facility of £20m 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 52 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements 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 (formerly Accrol Group Holdings Limited), 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. 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) interest cover; and b) leverage. The covenants in relation to the Factoring facility cover the following: a) debt dilution; b) disputed debt; and c) tangible net worth. The Group has been in compliance with all of the covenants during the year under review. Breach of the covenants would render any outstanding borrowings subject to immediate settlement. Finance fees Finance fees are not included in the Loan Maturity Analysis table. As at 30 April 2017, finance fees relating to the arrangement of the Revolving Credit Facility have been capitalised and are being amortised. As at the 30 April 2016, the finance fees were incurred upon the arrangement of the shareholder loans by the Group’s lenders. The finance fees after amortisation are as follows: Finance fees 2017 £’000 222 2016 £’000 354 17. Financial instruments Derivative financial instruments Derivative financial instruments represent the Group’s forward foreign exchange contracts. The assets and liabilities representing the valuations of the forward foreign exchange contracts at the year end are: Foreign currency contracts Current assets Current liabilities Non-current liabilities 2017 £’000 841 (3,235) (474) (2,868) 2016 £’000 – (190) – (190) 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 year 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. Accrol Group Holdings plc / Annual Report and Accounts 53 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 17. Financial instruments continued 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 Derivative financial instruments Financial liabilities Current Borrowings Trade and other payables Derivative financial instruments Non-current Borrowings Derivative financial instruments Fair values and Carrying values 2017 £’000 2016 £’000 23,666 3,867 841 20,708 2,456 – 9,709 18,840 3,235 12,193 15,454 190 13,146 474 50,919 – 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 2017 £’000 22,855 (3,867) 2016 £’000 63,112 (2,456) 18,988 60,656 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. 54 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements (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 – (loss) USD – (loss)/gain 2017 £’000 (79) (844) (923) 2016 £’000 – 135 135 (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 2017 £’000 94 2016 £’000 56 (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 summarises the maturity profile of the Group’s financial liabilities: As at 30 April 2017 Borrowings Trade and other payables Derivative financial instruments Total financial liabilities As at 30 April 2016 Borrowings Trade and other payables Derivative financial instruments Total financial liabilities Due within 1 year £’000 Due between 1 and 2 years £’000 Due between 2 and 5 years £’000 Due in more than 5 years £’000 9,709 18,840 3,235 31,784 185 – 474 659 13,183 – – 13,183 – – – – Due within 1 year £’000 Due between 1 and 2 years £’000 Due between 2 and 5 years £’000 Due in more than 5 years £’000 12,295 15,454 190 27,939 4,163 – – 4,163 5,768 – – 41,240 – – 5,768 41,240 79,110 Total £’000 23,077 18,840 3,709 45,626 Total £’000 63,466 15,454 190 (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. Accrol Group Holdings plc / Annual Report and Accounts 55 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 19. Commitments and contingencies Operating lease commitments The Group has entered into leases on commercial real estate. These leases have an average life of 9 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-cancellable operating leases as at the year end, analysed by the period in which they fall due, are as follows: Within 1 year Between 1 and 2 years Between 2 and 5 years Greater than 5 years 2017 £’000 2,821 3,614 10,879 17,191 2016 £’000 1,740 1,740 5,220 6,516 34,505 15,216 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: 2017 £’000 198 192 190 580 (29) 551 2017 £’000 184 184 183 551 2017 £’000 – 2016 £’000 3,989 3,228 4,617 11,834 (997) 10,837 2016 £’000 3,605 2,963 4,269 10,837 2016 £’000 – Within 1 year Between 1 and 2 years Between 2 and 5 years Future finance charges Present value The present value of finance lease liabilities is as follows: Within 1 year Between 1 and 2 years Between 2 and 5 years Capital commitments Contracted for but not provided 56 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements 20. Share capital and reserves Called up, allotted and fully paid Ordinary shares of £0.001 each 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: Ordinary shares of £0.001 each 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: 31 May 2016 Issue of A Ordinary shares of £1 each Issue of B Ordinary shares of £1 each 1 June 2016 Bonus issue of shares 5:1 Bonus issue of A Ordinary shares of £1 each Bonus issue of B Ordinary shares of £1 each Bonus issue of C Ordinary shares of £1 each Bonus issue of D Ordinary shares of £1 each Subdivision of shares Subdivided A Ordinary shares of £0.001 each Subdivided B Ordinary shares of £0.001 each Subdivided C Ordinary shares of £0.001 each Subdivided D Ordinary shares of £0.001 each Re-organisation of shares into one class Ordinary shares of one class of £0.001 each Deferred shares of one class of £0.001 each 10 June 2016 Issue of Ordinary shares of £0.001 each 11 July 2016 Purchase of Deferred shares of £0.001 each 2017 £ 93,012 – – – – 93,012 2017 Number 93,012,002 – – – – 2016 £ – 4,625 4,625 650 2,860 12,760 2016 Number – 4,625 4,625 650 2,860 Number 50 50 23,375 23,375 3,250 14,300 28,050,000 28,050,000 3,900,000 17,160,000 49,683,858 27,476,142 43,328,144 27,476,142 On 1 June 2016, a 5:1 bonus issue of shares occurred and subsequent to this, all shares were subdivided into shares of £0.001 each. On the same day, all shares were re-organised into one class of share and then were reassigned to either Ordinary or Deferred class. On 10 June 2016, further Ordinary shares of £0.001 were issued. On 11 July 2016, all Deferred shares were purchased by Accrol Group Holdings plc (formerly Accrol Group Holdings Limited) for £1. Each holder of the £0.001 Ordinary shares are entitled to vote at general meetings of the Company. Every holder of an Ordinary share shall have one vote for each Ordinary share held. Accrol Group Holdings plc / Annual Report and Accounts 57 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 21. Dividends Amounts recognised as distributions to the owners of the Parent in the year: Interim dividend for the year ended 30 April 2017 of 2 pence (2016: £nil) per share Total distributions to the owners of the Parent in the year Proposed final dividend for the year ended 30 April 2017 of 4 pence (2016: £nil) per share 2017 £’000 2016 £’000 1,860 1,860 3,720 – – – The proposed final dividend is subject to approval of the shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. It will be recognised in the shareholders’ equity in the year ending 30 April 2018. 22. Related party disclosures (a) Identity of related parties The Company’s significant shareholders include NorthEdge Capital LP 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 were made. Post the AIM listing, Peter Cheung is now remunerated for his services via payroll. Nisiac Limited is a Company under the control of the Hussain family, to which payments for the consulting services of the Hussain family were 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 The registered address of all subsidiaries in the Group is the Delta Building, Roman Road, Blackburn, Lancashire, BB1 2LD. (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: NorthEdge Capital LP NorthEdge Capital – GP The Hussain family Alklar Limited Nisiac Limited Owed to related parties Opening balance Loans advanced during year Interest charged Purchases Repayments Owed to related parties Borrowings Trade & other payables Owed to related parties 2017 £’000 – – – – – – 44,560 – 478 2,003 (47,041) – – – – Holding % 100% 100% 100% 2016 £’000 21,704 460 22,126 270 – 44,560 44,262 249 4,099 1,898 (5,948) 44,560 41,240 3,320 44,560 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: 58 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Transactions NorthEdge Capital LP The Hussain family Phoenix Court Blackburn Limited Alklar Limited Nisiac Limited Total 2017 £’000 259 241 1,744 62 175 2,481 2016 £’000 2,129 2,050 1,740 78 – 5,997 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 in comparative periods carried interest at 10%. Payments to Phoenix Court Blackburn Limited are in respect of the provision of services. Payments to Nisiac Limited are in respect of the provision of consultancy services. (c) Directors’ emoluments Directors’ fees Salaries Share-based payments Post employment benefit 2017 £’000 62 649 196 32 939 2016 £’000 72 709 – – 781 During the year retirement benefits were accruing to nil Directors under defined contribution schemes (2016: nil). The aggregate amount of emoluments paid to the highest paid Director was £305,000 (2016: £204,000). (d) Key management personnel Key management personnel are considered to be the Executive and Non-Executive Directors of the Company. The remuneration of all Directors who have been identified as the key management personnel of the Group is set out above in aggregate for each of the categories specified in IAS 24 Related Party Disclosures: (e) Company transactions with its subsidiaries The Company received dividends from and charged management fees to its subsidiaries in the current year as summarised in the table below: Dividends received Management fees charged 2017 £’000 10,000 620 10,620 2016 £’000 – – – 23. Share-based payments The charge for share-based payments under IFRS 2 arises under the Management Incentive Plan (“MIP”). The total expense recognised for the year arising from share-based payment was £196,503 (2016: £nil). All of the total share-based payments expense arises from transactions accounted for as equity-settled share-based payment transactions. Movements in the number of share options outstanding and their relative weighted average exercise prices are as follows: At 1 May Granted Forfeited Exercised Expired At 30 April 2017 2016 Average exercise price in £ per share option Options (Number) Average exercise price in £ per share option Options (Number) – 1.30 – – – 1.30 – 3,052 – – – 3,052 – – – – – – – – – – – – Accrol Group Holdings plc / Annual Report and Accounts 59 Governance Notes to the Consolidated Financial Information continued For the year ended 30 April 2017 23. Share-based payments continued Out of the 3,052 outstanding options, (2016: nil), nil options (2016: nil) were exercisable. No options were exercised in 2017 (2016: nil). Share options outstanding at the end of the year have the following expiry date and exercise prices: Grant – vest 2016–19 Expiry date 10-Jun-23 Exercise price in £ per share option 1.30 Share options 2017 3,052 3,052 2016 0 0 The weighted average fair value of options granted during the period determined using the Black-Scholes-Merton model valuation was £217.5. The significant inputs into the model were the underlying equity value (taken to be the total market capitalisation of Accrol Group Holdings plc on Admission), the exercise price of an option (shown above), volatility of 26.95%, divided yield of 6%. The volatility is based on statistical analysis of the volatility of comparable companies over a 5-year period as the historical data is not available due to Accrol Group Holdings plc’s recent listing on AIM. See Note 7 for the total expense recognised in the income statement for share options granted to Directors and employees. 24. Events after the balance sheet date Details of the proposed final dividend are given in Note 21. There are no other significant events that have occurred after the balance sheet date. 25. Alternative performance measures The Group makes use of a number of alternative performance measures to assess business performance and provide additional useful information to shareholders about the underlying performance of the Group. 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 shares 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: Amortisation Gain on derivatives Exceptional items Tax effect of adjustments above Adjusted earnings attributable to shareholders Basic weighted average number of shares1 Dilutive share options Diluted weighted average number of shares Basic adjusted earnings per share Diluted adjusted earnings per share 2017 £’000 7,376 2,042 – 1,581 (524) 10,475 2016 £’000 5,705 2,060 (1,266) 493 (258) 6,734 Number Number 85,113,194 1,321,025 86,434,219 9,900 – – £ £ 0.12 0.12 680.20 680.20 Note 1: In the year ended 30 April 2016 and 2017, the basic weighted average number of shares was 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. 60 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Reconciliation from GAAP - defined reporting measures to the Group’s alternative performance measures Management use these measurements to better understand the underlying business of the Group. Consolidated income statement (a) Adjusted gross margin Revenue Gross profit Gross margin Revenue Gross profit Less: gain on derivative financial instruments Adjusted gross profit Adjusted gross margin (b) Adjusted EBITDA Operating profit Adjusted for: Depreciation Amortisation Gain on derivative financial instruments Exceptional items Adjusted EBITDA (c) Adjusted PBT and adjusted PAT Profit before tax Adjusted for: Amortisation Gain on derivative financial instruments Exceptional items Adjusted PBT Taxation Adjusted PAT 2017 £’000 2016 £’000 135,053 37,679 118,219 34,489 27.9% 29.2% 135,053 37,679 – 118,219 34,489 (1,266) 37,679 33,223 27.9% 28.1% 10,528 11,920 1,910 2,042 – 1,581 1,831 2,060 (1,266) 493 16,061 15,038 9,399 6,979 2,042 – 1,581 2,060 (1,266) 493 13,022 8,266 (2,023) 10,999 (1,274) 6,992 Accrol Group Holdings plc / Annual Report and Accounts 61 Governance Independent Auditor’s Report to the Members of Accrol Group Holdings plc 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 2017 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 2017; • 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. 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. 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. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • 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; and • the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. 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. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ Responsibilities, 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. 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. In addition, in light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors’ Report. We have nothing to report in this respect. 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. 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. 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. With respect to the Strategic Report and Directors’ Report, we consider whether those reports include the disclosures required by applicable legal requirements. Other matter We have reported separately on the group financial statements of Accrol Group Holdings plc for the year ended 30 April 2017. We have no exceptions to report arising from this responsibility. Hazel Macnamara (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Manchester 10 July 2017 62 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Company Statement of Financial Position As at 30 April 2017 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 Capital redemption reserve Retained earnings – opening Profit for the year Total equity The financial statements on pages 63 to 65 were approved by the Board of Directors on 10 July 2017. Signed on behalf of the Board of Directors Steve Crossley Chief Executive Officer James Flude Chief Financial Officer Company Registration Number 09019496 Note 2017 £’000 2016 £’000 5 41,437 6 7 8 41,437 7,904 287 8,191 49,628 – – – 49,628 93 41,597 27 – 7,911 49,628 10 10 25 262 287 297 200 200 200 97 13 84 – – – 97 Accrol Group Holdings plc / Annual Report and Accounts 63 Governance Share premium £’000 Capital redemption reserve £’000 Retained earnings £’000 Total equity £’000 Note 8 8 Share capital £’000 10 3 3 – – 13 64 43 (27) – – 80 – – 50 34 34 – – 84 (64) 43,285 – (1,708) – 41,513 – – 93 41,597 – – – – – – – – 27 – – 27 – – 27 – – – – – – 60 37 37 – – 97 – – – – (1,860) – 43,328 – (1,708) (1,860) (1,860) 39,760 9,771 9,771 7,911 9,771 9,771 49,628 Company Statement of Changes in Equity For the year ended 30 April 2017 Balance at 1 May 2015 Transactions with owners Issue of Ordinary shares Total for transactions with owners Comprehensive income Result for the year Total comprehensive income Balance at 30 April 2016 and at 1 May 2016 Transactions with owners Bonus issue of Ordinary shares Proceeds from shares issued Buy-back of deferred share for consideration of £1 Transaction costs Dividends Total for transactions with owners Comprehensive income Profit for the year Total comprehensive income Balance at 30 April 2017 64 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Company Cash Flow Statement For the year ended 30 April 2017 Cash flows from operating activities Operating profit Adjustment for: Exceptional items Operating cash flows before movement in working capital (Increase)/decrease in trade and other receivables (Decrease)/increase in trade and other payables Cash generated from operations Net cash flows from operating activities Cash flows from financing activities Proceeds of issue of Ordinary shares Dividends paid to Ordinary shareholders 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 Note 2017 £’000 9,771 3 193 9,964 (7,879) (200) 1,885 1,885 – (1,860) (1,860) 25 262 287 2016 £’000 – – – 25 200 225 225 37 – 37 262 – 262 Accrol Group Holdings plc / Annual Report and Accounts 65 Governance Notes to the Company Financial Information For the year ended 30 April 2017 1. General information Accrol Group Holdings plc (formerly Accrol Group Holdings Limited), (the “Company”) was incorporated in England 30 April 2014 with company number 09019496. It is a public company limited by shares and it is domiciled in England in the United Kingdom. The registered address of the Company is the Delta Building, Roman Road, Blackburn, Lancashire, BB1 2LD The Company’s subsidiaries are listed in Note 22 to the consolidated financial statements, which together with the Company form the Accrol Group Holdings plc Group (the “Group”). The Company acts as a holding company for the remainder of the Accrol 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. Basis of preparation 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. The financial statements have been prepared on a going concern basis under the historical cost convention. 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. The retained profit of the Company is shown in the statement of changes in equity. 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 financial statements of the Company 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 Company. It is 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. 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. 66 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements 2. Summary of significant accounting policies continued 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. 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. Exceptional items Professional fees relating to the AIM flotation 2017 £’000 208 208 2016 £’000 – – Professional fees of £193,000 incurred as part of the IPO process have been classified as exceptional as they do not directly relate to the raising of the equity for the AIM flotation. 4. Directors’ emoluments Emoluments 2017 £’000 590 590 2016 £’000 – – Directors’ emoluments are recharged by Accrol Papers Limited. This arrangement has been in place since listing on AIM in June 2016. During the year, management recharges related to 3 Directors (2016: £nil). The Company does not have any employees (2016: nil), 5. Investments in subsidiaries Cost 30 April 2016 Additions in the year 30 April 2017 Group undertakings £’000 10 41,427 41,437 On 10 June 2017, the Company subscribed for 2,000 new shares in Accrol UK Limited for a consideration of £41,388,000. The Company’s subsidiary undertakings are shown in Note 22 to the consolidated financial statements. 6. Trade and other receivables Prepayments and accrued income Amounts owed by Group undertakings 2017 £’000 10 7,894 7,904 2016 £’000 25 – 25 Amounts owed by Group undertakings and falling due within 1 year are unsecured, interest free and repayable on demand. Accrol Group Holdings plc / Annual Report and Accounts 67 Governance Notes to the Company Financial Information continued For the year ended 30 April 2017 7. Trade and other payables Amounts owed to Group undertakings 2017 £’000 – – 2016 £’000 200 200 Amounts owed to Group undertakings and falling due within one year are unsecured, interest free and repayable on demand. 8. Issued capital and reserves Called up, allotted and fully paid Ordinary shares of £0.001 each 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: Ordinary shares of £0.001 each 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: 31 May 2016 Issue of A Ordinary shares of £1 each Issue of B Ordinary shares of £1 each 1 June 2016 Bonus issue of shares 5:1 Bonus issue of A Ordinary shares of £1 each Bonus issue of B Ordinary shares of £1 each Bonus issue of C Ordinary shares of £1 each Bonus issue of D Ordinary shares of £1 each Subdivision of shares Subdivided A Ordinary shares of £0.001 each Subdivided B Ordinary shares of £0.001 each Subdivided C Ordinary shares of £0.001 each Subdivided D Ordinary shares of £0.001 each Re-organisation of shares into one class Ordinary shares of one class of £0.001 each Deferred shares of one class of £0.001 each 10 June 2016 Issue of Ordinary shares of £0.001 each 11 July 2016 Purchase of Deferred shares of £0.001 each 2017 £ 93,012 – – – – 93,012 2016 £ – 4,625 4,625 650 2,860 12,760 Number Number 93,012,002 – – – – – 4,625 4,625 650 2,860 Number 50 50 23,375 23,375 3,250 14,300 28,050,000 28,050,000 3,900,000 17,160,000 49,683,858 27,476,142 43,328,144 27,476,142 On 1 June 2016, a 5:1 bonus issue of shares occurred and subsequent to this, all shares were subdivided into shares of £0.001 each. On the same day, all shares were re-organised into one class of share and then were reassigned to either Ordinary or Deferred class. 68 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements On 10 June 2016, further Ordinary shares of £0.001 were issued. On 11 July 2016, all Deferred shares were purchased by Accrol Group Holdings plc (formerly Accrol Group Holdings Limited) for £1. Each holder of the £0.001 Ordinary shares are entitled to vote at general meetings of the Company. Every holder of an Ordinary share shall have one vote for each Ordinary share held. 9. Dividend payable Amounts recognised as distributions to the owners of the Parent in the year: Interim dividend for the year ended 30 April 2017 of 2 pence (2016: nil pence) per share Total distributions to the owners of the Parent in the year Proposed final dividend for the year ended 30 April 2017 of 4 pence (2016: nil pence) per share 2017 £’000 2016 £’000 1,860 1,860 3,720 – – – The proposed final dividend is subject to approval of the shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. It will be recognised in the shareholders’ equity in the year ending 30 April 2018. 10. Dividend receivable The Company received dividends from its subsidiaries in the current year as summarised in the table below: Dividends received 2017 £’000 10,000 10,000 2016 £’000 – – Accrol Group Holdings plc / Annual Report and Accounts 69 Governance 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 09019496 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 adviser 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 70 Accrol Group Holdings plc / Annual Report and Accounts Strategic Report Financial Statements Notes Accrol Group Holdings plc / Annual Report and Accounts 71 Governance Notes 72 Accrol Group Holdings plc / Annual Report and Accounts FSC LOGO TO GO HERE A c c r o l G r o u p H o l d i n g s p l c / A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 7 Accrol Group Holdings plc Roman Road Blackburn Lancashire BB1 2LD www.accrol.co.uk
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