Zotefoams plc
Preliminary Results (unaudited) for the Year Ended 31 December 2023
19 March 2024 - Zotefoams plc ("Zotefoams" or "the Company" or "the Group"), a world leader in cellular material technology, today announces its unaudited preliminary results for the year ended 31 December 2023.
"Record profit alongside significant investment in our ReZorce® recyclable packaging solution."
Financial Highlights
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| Foams4 |
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| Group |
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| | 2023 | 2022 | Change |
| 2023 | 2022 | Change |
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| Revenue (£m) | 125.7 | 124.6 | 1% | | 127.0 | 127.4 | 0% |
| Gross margin (%) | 33.9% | 31.0% | 290 ppt | | 32.3% | 30.4% | 190 ppt |
| Operating profit1 (£m) | 19.5 | 15.8 | 23% | | 15.1 | 13.9 | 9% |
| Operating margin (%) | 15.5% | 12.7% | 280 ppt | | 11.9% | 10.9% | 100 ppt |
| Profit before tax1 (£m) | 17.2 | 14.1 | 22% | | 12.8 | 12.2 | 5% |
| Basic EPS1 (p) | | | | | 19.0 | 20.6 | (8%) |
| Net debt (£m) | | | | | 31.6 | 27.8 | (13%) |
| Leverage ratio2 | | | | | 1.2 | 1.2 | 0% |
| Final dividend3 (p) | | | | | 4.90 | 4.62 | 6% |
1 This is a reported number under UK adopted IAS and is after the deduction of amortisation of acquired intangibles amounting to £0.257m in 2023 and £0.258m in 2022
2 Leverage is that defined under the bank facility, with net debt at the end of the period divided by the preceding 12 months' EBITDA, adjusted for the impact of IFRS2 and IFRS16
3 Final dividend is subject to approval at the May 2024 Annual General Meeting
4 Polyolefin Foams and HPP Business Units only. This excludes MuCell Extrusion LLC (MEL) which is incurring operating losses as it invests in ReZorce mono-material barrier packaging
Strategic Progress
| · | Good progress in both of the Group's business areas, reflecting different stages of development |
| · | Foams business |
| | - Record profit, strongly ahead of previous year |
| | - Margin growth through mix enrichment, efficiency and cost control |
| | - Exclusivity agreement with Nike extended to December 2029, first sales into basketball category |
| | - Planned capital investment in North America to support further organic growth |
| · | MEL/ReZorce® mono-material barrier packaging |
| | - Joint development agreement with a world-leading packager of beverages |
| | - Multi award-winning development, with significant technical and commercial progress in the year |
| | - Preparing for market trial by filling the first ReZorce cartons with fruit juice on commercial-scale equipment |
| | - Key milestones in Q2 will enable determination of optimal path to realise value |
Results highlights
| · | Group revenue of £127.0m, in line with record Group revenue in prior year |
| · | Record profits and continued improvement in profit margins |
| | - Gross margin up 190 ppt to 32.3% (33.9% excl. MEL) |
| | - Operating margin up 280 ppt to 15.5% excl. MEL and 100 ppt to 11.9% incl. MEL |
| | - Segment margin in Polyolefin Foams up from 7% to 11% |
| | - Profit before tax excl. MEL up 22% to a record £17.2m |
| | - Profit before tax up 5% to £12.8m after continued investment drives progress in our ReZorce technology |
| · | Strong cash generation reinvested in growth |
| | - £6.3m of inventory investment to optimise capacity and in expectation of HPP growth |
| | - £5.5m cash outflow in MEL to drive the ReZorce opportunity |
| | - Net debt at £31.6m while year-end leverage ratio unchanged at 1.2x |
David Stirling, Group CEO, said:
"We have made a positive start to 2024, with overall sales ahead of the previous year's record first quarter. Sales of HPP products have, thus far, been strongly ahead of the prior year, with expectations for continued strength in H1 2024 and more muted growth after this, mainly linked to in-year footwear demand patterns and underlying improvements in the markets for aviation and T-FIT insulation products. To date, sales of polyolefin foams are below the comparative period in the prior year, with European customers particularly impacted by weaker industrial demand, partially offset by more robust conditions in North America. We are cautiously optimistic about the underlying demand environment for polyolefin foams later in the year, supported by a business focus on application-specific initiatives to increase market share. Currently, polymer and energy input prices remain relatively stable and therefore, other than in non-footwear HPP where prices have increased based on raw material price inflation experienced in 2023, we do not anticipate any uplift in selling prices this coming year. Improved asset utilisation, product mix and operational efficiency are our key drivers of margin enhancement. In our MEL business unit, we continue to make good progress against the commercialisation objectives we have set for ReZorce, with some important milestones expected to be reached in Q2. Investment to support this will continue during 2024 as we determine the optimal pathway to realising the opportunity presented by this technology. As a result, and while we remain mindful of the uncertain economic backdrop, 2024 is expected to be another year of good progress for Zotefoams".
Enquiries:
| Zotefoams plc | +44 (0) 208 664 1600 |
| David Stirling, Group CEO | |
| Gary McGrath, Group CFO | |
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| IFC Advisory (Financial PR & IR) | +44 (0) 203 934 6630 |
| Graham Herring Tim Metcalfe Zach Cohen
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About Zotefoams plc
Zotefoams plc (LSE - ZTF) is a world leader in cellular materials technology delivering optimal material solutions for the benefit of society. Utilising a variety of unique manufacturing processes, including environmentally friendly nitrogen expansion for lightweight AZOTE® polyolefin and ZOTEK® high-performance foams, Zotefoams sells to diverse markets worldwide. Zotefoams uses its own cellular materials to manufacture T-FIT® advanced insulation for demanding industrial markets. Zotefoams also owns and licenses patented microcellular foam technology to reduce plastic use in extrusion applications and for ReZorce® mono-material recyclable barrier packaging.
Zotefoams is headquartered in Croydon, UK, with additional manufacturing sites in Kentucky, USA and Brzeg, Poland (foam manufacture), Oklahoma, USA (foam products manufacture and conversion), Massachusetts, USA, Stilling, Denmark (microcellular foam technology) and Jiangsu Province, China (T-FIT).
AZOTE®, ZOTEK®, ReZorce® and T-FIT® are registered trademarks of Zotefoams plc
Chair's statement
Lynn Drummond
Chair
A year of stepping up
Dear shareholders
2023 was a year of stepping up at Zotefoams, marked by a significant increase in the profitability of our foams business. We further solidified our partnership with Nike through an extension of our exclusivity agreement and additionally, we heightened our commitment to sustainability with increased investment in our ReZorce® mono-material barrier technology, which is now progressing to the market trial phase.
Record profits
I am pleased to report that the Group achieved record profits for the year, exceeding market expectations with a profit before tax of £12.8m (2022: £12.2m) on revenues at a similar level to the prior year. As we continue to deliver successfully on our established autoclave technology strategy, following significant capital investment across the UK, USA and Poland, we are aware of the importance of differentiating between this business, comprising the Polyolefin Foams and High-Performance Products business units, and our high risk but potentially high reward MuCell Extrusion (MEL) business unit, now primarily dedicated to the development of the highly innovative ReZorce technology. In 2023, our autoclave technology businesses generated an impressive profit before tax increase of 22% to £17.2m (2022: £14.1m) on revenues up 1%. Conversely, increased investment in the ReZorce opportunity generated a loss of £4.4m (2022: £1.9m), on lower revenues from the equipment/royalty part of the business, as we head into the market testing phase following positive progress in the development of our award-winning technology.
Board composition
2023 saw two changes in the composition of the Board. I joined Zotefoams in early January and became Chair in May 2023, replacing Steve Good, who stepped down after nine years on the Zotefoams Board. In September 2023, Malcolm Swift joined the Board and took on the Chair of the Remuneration Committee, replacing Alison Fielding, who departed on the same date. I would like to offer my personal thanks to both colleagues for their valuable support to me, as well as my thanks on behalf of everyone connected to Zotefoams for their contributions to the Group. In November 2023, we announced the planned retirement of David Stirling, our Group CEO, after 26 years as a Board member and 23 years leading the business. David will leave behind him a growth business with a clear strategy, strength in depth and exciting opportunities. The recruitment process for David's replacement is at an advanced stage and we look forward to updating shareholders on this important evolution for the Group.
Dividend
The Board is proposing a final dividend of 4.90p (2022: 4.62p) which, if approved by shareholders, would make a total dividend for the year of 7.18p (2022: 6.80p), an increase of 5.6%. This reflects the Board's continued confidence in the Group's future and is in line with its progressive dividend policy, recognising the importance to our shareholders of the dividend as part of their overall return. If approved, the final dividend will be paid on 3 June 2024 to shareholders on the register on 3 May 2024.
Our people
Central to the Group's success is our talented, diverse and collaborative team. The Board recognises that it is this which makes Zotefoams a safe, great, enjoyable and fulfilling place to work. With travel restrictions no longer in place across all our geographies, we see how important and valuable direct interaction is and how diversity of thought and the sharing or our knowledge and expertise across locations accelerates realisation of our Group strategy. We have been very mindful of the impact of the ongoing high-cost environment on our staff and took appropriate pay decisions during the year.
Having the right people at Zotefoams, who understand and promote our culture, act at all times with integrity, safety-consciousness and dedication and possess the right knowledge and skills, continues to be critical to our future success. For the first time as Chair, I warmly welcome our new employees, extend my gratitude to our colleagues who have helped them integrate and thank all our hard-working people and their supportive families who have helped the Group continue to make good strategic progress.
Sustainability
Our purpose is to provide optimal material solutions for the benefit of society, reflecting our belief that, used appropriately, plastics are frequently the best solution for the sophisticated, long-term applications typically delivered by our customers. The Board is focused on the importance of sustainability and our strategy incorporates the consideration of climate change in terms of financial and operational impacts. Further progress was made in 2023 towards our sustainability targets.
Acting responsibly
The Board leads an ongoing programme to ensure the highest standards of corporate governance and integrity across the Group and has remained abreast of developing governance standards. The Board's interactions and communications with executive management continue to be excellent and, as a result, the Board is well-placed to challenge, guide and support executive management in the delivery of the growth strategy. We continue to pay particular attention to the provision of a safe working environment for our staff across all global locations and to the empowerment of our employees. The Board also acknowledges the benefits of diversity, including that of gender and ethnicity, and is committed to setting an appropriate tone from the top in all diversity and inclusion matters.
Looking to the future
Zotefoams is well positioned for the future with well invested, differentiated assets, committed capable and passionate people, and a clear strategy for delivering profitable organic growth in a sustainable way. While we are mindful of ongoing macroeconomic and geopolitical headwinds, we remain confident about our future prospects for growth, margin improvement, ROCE and cash generation.
Lynn Drummond
Chair
19 March 2024
Group CEO Review
David Stirling
Group CEO
Zotefoams has delivered record profits through pricing, product mix and cost control in a year of significant investment in our ReZorce® recyclable packaging solution.
| 2023 | United | Continental Europe | North | Rest of | Total |
| Change % | (13)% | 0% | (7)% | 6% | 0% |
| Group revenue (£000's) | 11,879 | 32,514 | 27,195 | 55,387 | 126,975 |
| % of Group revenue | 9% | 26% | 21% | 44% | 100% |
| 2022 | | | | | |
| Group revenue (£000's) | 13,702 | 32,374 | 29,127 | 52,166 | 127,369 |
| % of Group revenue | 11% | 25% | 23% | 41% | 100% |
* Rest of the world comprises China: £27.1m (2022: £30.0m) and other countries: £28.3m (2022: £22.2m)
Overview
The business today has two distinct elements: the manufacturing and sale of specialist foams, which is well-established, profitable and growing; and ReZorce, which is currently a development project moving into market testing, with enormous potential and higher associated risk.
Group revenue of £127.0m was at a similar level to the previous year (2022: £127.4m), with lower demand from industrial and construction markets, particularly in Europe and Asia, offset by growth in footwear, medical and, to a lesser extent, the aviation and automotive markets.
Input costs, in particular polyolefin raw materials and energy, declined from the record-high prices experienced in 2022, allowing our margins to recover as sales prices aligned with these input costs throughout the period.
Our business strategy remains focused on the long-term opportunity for differentiated, market-leading foams and related products. This is underpinned by three main beneficial macro-trends: demographics, where the global population is more urban and ageing; regulation, often around the safety of people; and environmental sustainability. Sustainability, along with health and safety, is embedded within everything we do.
Fundamental to our success and goal of driving improving profitability is product-mix enrichment and high levels of asset utilisation over the investment and business cycles. We therefore invest in a portfolio of opportunities across products, markets, geographies and aligned technologies which have a spread of risk and return.
In 2023, we increased investment in ReZorce mono-material barrier packaging technology. Our focus is a market trial of beverage cartons made from ReZorce substrate and filled with juice using commercially available packaging equipment. We have made substantial progress, with the filling trials scheduled to begin imminently. There is strong commercial interest in ReZorce carton, primarily due to its sustainability credentials.
Strategic update and progress
Zotefoams invests in assets and technology with the capability to support the organic growth opportunities afforded by its diverse and often unique products. As global markets evolve, we identify business trends and emerging technologies, assessing their impact on our own business and its potential for growth. Our market knowledge, experience and customer reach afford us insights into the emerging needs of many industries. Zotefoams has the capability to design and manufacture foams with specific attributes to meet these needs, and therefore our portfolio of technologies, products and customers will evolve over time, often in partnership along the supply chain. This translates into an improving product mix, while in-year capacity utilisation is more dependent on our own investment timing and the economic cycle's impact on our customers.
The volatility seen in demand and input prices over the past few years was alleviated somewhat in 2023, allowing better engagement with customers and alignment of our product range with their developing requirements in a higher priced environment. This "right product, right price" approach was particularly evident in our Polyolefin Foams business, where many customers realigned their purchasing decisions and the mix of products changed, resulting in lower volumes and higher profitability.
Our extrusion technology business, MEL, is now substantially focused on ReZorce mono-material barrier packaging, a recyclable and circular solution for beverage cartons. The team's initial focus is on the market for liquid-containing cartons. This is an enormous market globally, offering retailers and consumers an efficient and convenient solution for packing liquids such as fruit juice, milk and increasingly other products such as dairy alternatives, water, soup and even household cleaning products. We believe the ReZorce solution offers a better alternative to current technologies: one which has a lower carbon footprint, clear recyclability credentials and which will use a high proportion of recycled materials in its manufacture. Our technical ability to meet the packaging requirements of sterility, low oxygen and moisture transmission and packaging functionality has existed for some time now. Investment in 2023 has primarily been focused on our ability to deliver this solution all the way to the retailer and in July, a strategic co-operation agreement was signed with a world-leading packager of beverages to facilitate this. At the time of writing this report we are preparing to fill 150,000 cartons, which will then be subject to stringent sterility testing in preparation for a market trial mid-year. Given the scale of the opportunity, we will be seeking a strategic investing partner for ReZorce, a process which the Board believes is best timed around this market trial. Key milestones such as this trial will enable us to determine the optimal path to realise value.
Sustainability
Zotefoams' products are typically sold into markets where they are used multiple times, often for many years, and can be recycled at the end of life. Their insulation, longevity and light weight often form a positive element of our customers' own sustainability agendas. In 2023, there was a notable trend towards lighter foams in certain markets in our Polyolefin Foams business, using less material, being less expensive to manufacture and offering lower cost to our customers.
Targets are in place to manage our own Scope 1 and 2 emissions through the reduction of energy consumption, material used in manufacturing processes and waste. We met these internal targets for 2023, reducing energy consumption and waste while increasing the proportion of remaining waste recycled, often into new foams. The core markets for our products are frequently where a "best in class" foam delivers our stated purpose: optimal material solutions for the benefit of society. Examples are performance and longevity in industrial applications and consumer durables such as footwear, medical devices, insulation for planes, cleanrooms, construction and cars, as well as military and marine uses. We follow the guidance provided by IAO 14021:2016 when making environmental claims and, where appropriate, have products certified by independent organisations when making claims such as those related to recycled content. We have not yet set a net zero target, however we are committed to specifically reviewing this during our 2024 Board strategy session.
In 2023, 85% of our revenue was from products which are considered "green" based on a resource efficiency definition where, during manufacture or use, they provide a substantial increase in the efficiency of resources. This includes all sales from MEL, which provides solutions for increasing the efficiency of resource usage by reducing polymer consumption. There were no sales for the ReZorce product during the year, due to its stage of development, but its considerable potential as a sustainable packaging solution is discussed in depth in the MEL section below.
Polyolefin foams
Segment revenue £67.6m; Change (4%); 2022 £70.1m
Segment profit margin 11.1%; 2022 7.0%
Segment profit £7.5m; Change 53%; 2022 £4.9m
In 2023, the Polyolefin Foams business delivered much improved profitability against a backdrop of lower sales volumes, improved pricing, lower polymer costs and better cost management.
Sales declined 4%, with a 7% volume drop partially offset by a 3% average price improvement. Volumes globally were impacted by slower industrial markets generally, although we experienced growth in some of our smaller, more specialist segments, such as medical and aviation. All regions were impacted by lower demand, particularly in the latter part of the year. Pricing improvement was primarily a result of the full-year impact of price increases implemented part-way through 2022. These benefited margins, as did some changes in product mix, often to lower-cost products which can deliver cost savings to customers while being less expensive to manufacture.
Regionally, demand patterns were relatively consistent, with differences more apparent in the specific applications for our foams. With high transportation costs due to their bulk, most polyolefin foams are sold in Europe (62% of segment sales, 2022: 62%) and North America (32% of segment sales, 2022: 31%) as these are efficiently served by our local manufacturing capability in these regions. Polyolefin foams are widely used in industrial and multiple-use consumer applications due to their robustness and durability. The main market segments are multiple-use packaging and protection, often in the context of long-term storage solutions, construction, sport and leisure, automotive, aviation, marine, military and healthcare. The segments that performed relatively better during the year were generally those still in recovery from previous years, for example automotive, where improved demand in 2023 was in comparison to a 2022 that had represented the lowest level for many years.
Our input costs are predominantly polymers, labour and energy, with nitrogen, which we use as our environmentally friendly blowing agent to expand the foams, largely linked to the energy price.
The main polymers used in our Polyolefin Foams business are low-density polyethylene (LDPE) and other similar polyolefins. During the year, the price of LDPE in Europe was trending around its long-term average, which was around 30% lower than the high prices experienced in 2022. LDPE pricing is related to the pricing of its feedstock, ethylene, and the regional supply vs demand balance. Overall, depressed industrial markets led to an oversupply situation and, alongside lower ethylene feedstock costs, this caused a fall in the polymer price in Europe, more marked in the second half of the year. Generally, this high correlation between industrial demand and polymer pricing provides a natural hedge to volume increases or declines in the polyolefins business.
Average prices for energy and nitrogen, which have a much higher impact on polyolefin foams than on the products within our HPP business unit, increased by an average of around 8% compared to 2022 although there has been a marked decrease in the volatility of pricing. We hedge energy costs by fixing prices on a proportion of our expected usage up to 12 months in advance.
We manufacture polyolefin foams in three facilities, with full-process manufacture in the UK and USA and foam expansion, fabrication and logistics in Poland. An increasing proportion of European business is served through our Polish facility, which is now operating 24 hours, five days per week.
Segment profit margin has grown to 11% of sales (2022: 7%) through improved efficiency and pricing more aligned to input costs. We have delivered cost improvements, most notably through waste reduction, including internal recycling of polymer waste and logistics cost improvements alongside incremental gains from continuous improvement in our UK facility. In the USA, our factory has built on the efficiency gains delivered in 2022, seeing gains in right-first-time quality and many other aligned metrics such as waste. Globally, there is scope over time for further improvement, primarily through improved asset utilisation, operational efficiency and mix enrichment.
HPP (ZOTEK AND T-FIT)
Segment revenue £58.1m Change 7% 2022 £54.4m
Segment profit margin 26.5% 2022 28.1%
Segment profit £15.4m Change 1% 2022 £15.3m
Sales in our HPP business unit grew 7% to £58.1m (2022: £54.4m). The main product groups are Footwear, ZOTEK® fluoropolymer foams and T-FIT® technical insulation. Overall volumes were 12% ahead of 2022, with a slight adverse impact from currency and product mix. In Footwear, where we have extended our exclusive arrangement with Nike, our materials are primarily used in midsoles for running shoes but, in a new development during the year, first sales were made into their basketball segment. In 2023, sales grew 7% to £45.3m (2022: £42.1m). This exclusive arrangement allows Zotefoams to work closely with Nike on foam innovation related to their specific needs as well as better align on supply chain, production efficiency, scrap reduction and cost. Currently, there is almost zero waste in this production process, with most scrap re-incorporated into products within the Footwear supply chain. Pricing to Nike, covered in our exclusive agreement which, in June 2023 was extended to 31 December 2029, reflects our material input costs, production costs and efficiencies and foreign exchange rates.
Other than footwear products, we offer a range of foamed sheet materials to technically demanding applications globally under the ZOTEK® brand. The main market is aviation, where insulation and fire performance at minimal weight is paramount, driven by safety and sustainability. Other markets include space, healthcare, packaging, military and personal protection. Zotefoams offers a variety of foams with specific properties, delivered through a combination of raw material selection and our unique foaming technology. Sales volumes of ZOTEK F materials increased 9%, translating into a 6% value increase to £6.5m (2022: £6.2m). We experienced high input cost inflation in the most common materials used, although this had relatively little profit impact in the year as previously purchased inventory was consumed. Pricing adjustments have been made, mostly effective from 2024, and we recognise some associated risk due to these higher prices.
ZOTEK foam sheet sales accounted for 11% (2022: 11%) of HPP segment sales.
T-FIT insulation is made using Zotefoams' own HPP products and is designed for clean processing environments such as in pharmaceutical, biotech and food and drink manufacture. Sales grew 1% to £5.9m (2022: £5.8m), and 6% in constant currency. In China, one of the main markets, we delivered sales growth in food processing but activity in the biotech and pharmaceutical sector was slower, and we experienced a lower success rate on some targeted larger projects. In India, sales grew strongly, with good progress across our portfolio. Outside these geographies, we are looking to improve our performance with investment in staff and a renewed focus on our sales processes. We manufacture common T-FIT insulation manufacturing products locally, either at Zotefoams facilities or outsourced to trusted partners, to support North American and European business, while our facility in China supplies all other markets as well as the complete range of product dimensions globally.
T-FIT sales represent 10% (2022: 11%) of HPP segment sales.
Segment profit increased to £15.4m (2022: £15.3m), a segment profit margin of 26.5% (2022: 28.1%). Segment margin is slightly lower than the previous year due to product mix changes and foreign exchange rate movements.
MEL/ReZorce
Aligned with a world-leading packager of beverages and a retailer with leading-edge sustainability ambition, we are preparing to fill the first ReZorce cartons with fruit juice on commercial-scale equipment.
Over the past two years, substantially all the activity in our MEL business unit has been focused on the very significant opportunity in sustainable barrier packaging. We have developed the ReZorce mono-material barrier packaging technology to meet the needs of brands and retailers seeking a more sustainable solution to food packaging that requires protection from moisture and/or oxygen (hence the term "barrier packaging"). Current barrier packaging systems require a combination of different materials in the same pack. The carton format of these systems is very effective and cost-efficient and therefore widespread; however, it is often extremely difficult to recycle and almost never circular. We have proven that our ReZorce packaging system can provide the required barrier properties, is easily recycled using common infrastructure available today and can be made using a high proportion of recycled raw materials. Overall, this solution offers a lower carbon footprint for commonly packaged foodstuffs, in some cases a reduction of more than 50%, as well as lower water and energy consumption, factors that are increasingly important to the global sustainability agenda.
During 2023, our focus has been to move from technical possibility to market reality. Many innovations fail at this stage as implementation requires large investment or change to adopt the new solution. With this in mind, we have worked closely with existing industry players and in July 2023 signed a development agreement with a world-leading packager of beverages. Throughout the entire development process, we have considered the likely barriers to implementation and have assembled a team of industry experts with experience in downstream processes and commercial norms to deliver our technology solution and related intellectual property development. This team is augmented by a US-based strategic adviser with dedicated packaging expertise.
Revenue from our MEL business unit declined 56% to £1.2m (2022: £2.8m), with reduced equipment sales and reduced royalties affected by the Group's focus on realising the ReZorce initiative, while the segment loss widened to £4.1m (2022: £1.6m) before amortisation of acquired intangibles, a direct result of the non-capitalised investment to develop ReZorce technology. In addition to this, we capitalised £2.8m (2022: £2.2m).
Capacity and investment
Zotefoams' manufacturing process comprises three main stages: extrusion of a polymer sheet, high-pressure gassing of this sheet with nitrogen and final expansion in a lower-pressure environment. The infrastructure around these processes is complex and costly and, therefore, ideally supports multiple production vessels. Most products can be made on multiple production lines, although some of our older assets are less flexible.
In the UK, most investment is focused on cost reduction and efficiency, linked to sustainability, as well as on the replacement of older assets with upgraded equipment. The UK site manufactures all HPP products and sends partly finished polyolefin products for the final expansion process to Poland, which is closer to many customers, reducing overall transport costs and emissions.
In the USA, we see good potential to increase sales and have therefore approved the purchase of a second low-pressure autoclave, used for foam expansion, which will increase capacity and reduce reliance on the current vessel which was installed in 2000. Linked to this capacity increase, we are upgrading some associated systems and increasing warehousing space. The total cost of these investments is c. £10m, funded from existing cash resources and expected to be incurred primarily during 2024-25.
Our facilities in the USA and Poland have the flexibility for further investment to support longer-term growth.
Zotefoams is also investing in the development of the ReZorce mono-material barrier packaging technology, which is explained in more detail above.
Measuring strategic progress
Zotefoams products are sold into a wide variety of applications globally. These markets are driven by global trends - environment, regulation and demographics - which we believe offer the potential for high rates of market growth as well as an opportunity for our disruptive technology solutions.
We assess progress on six separate metrics. The first two metrics have been updated, to better reflect the focus of our management team and align with the business strategy:
| 1. | We intend, over time, to deliver an improved mix of products. By this we mean improved profitability, and a reasonable proxy is average selling price per m3 of foam, which is typically higher for HPP products. Adding downstream processing such as T-FIT insulation products enhances our margin, as does the cutting processes we perform for multiple customers globally. These downstream operations are capital-light and leverage our investment in foaming technology. We adjust our HPP volumes to calculate a "capacity equivalent" to reflect the often-extended processing times of these products. The adjusted average selling price during 2023 improved by 2.7% compared with the prior year.
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| 2. | We seek to run at high-capacity utilisation to optimise the returns from our assets. Asset utilisation in the year improved by 2.6%, and is calculated using the adjusted production volume, with the same mix adjustment factors as used in the selling price calculation. Adjusted production volumes, against which we calculate asset utilisation, were 4% higher than adjusted sales volumes as we increased inventory during the final quarter of the year in anticipation of strong demand in the first few months of 2024. Efficiency gains in manufacturing during the year added 2% to the effective capacity of the Group.
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| 3. | Group operating margin increased to 11.9% (2022: 10.9%). In constant currency, the operating margin was 12.1%. The full-year impact of price increases from 2022 and lower input costs were augmented by improved efficiencies within manufacturing, offset somewhat by an increase in technical, sales and administration costs, some associated with the increased investment in ReZorce. Excluding MEL/ReZorce, operating margin was 15.5% (2022: 12.7%) or 15.7% in constant currency.
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| 4. | Group return on capital employed improved to 10.3% (2022: 10.1%), with increased profitability of the Polyolefin Foams and HPP business units offset by the increased losses of MEL as noted above. Excluding MEL/ReZorce, return on capital employed was 14.2% (2022: 12.0%). Working capital at the year-end accounted for 45% of net assets (2022: 38%), with this significant increase due primarily to investment in inventory in anticipation of demand in Q1 2024 and higher raw material prices for certain HPP products.
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| 5. | Our approach to environmental sustainability and climate change is paramount to our business. Led by the Board and with an executive steering committee, sustainability is embedded in decision making Group-wide. A detailed ESG report is included within the Annual Report and further information is available at www.zotefoams.com. Targets are linked to our bank financing arrangements, and these are supplemented by internal targets in relation to other ESG metrics. We have not yet set a "net zero" target as we believe that detailed measurement of Scope 3 emissions reduction using our products is complex and ever-changing, when compared to the best-available alternative technology, while the validity of offsetting arrangements are increasingly being challenged. However, we are committed to specifically reviewing this during our annual Board strategy session and the Executive team, through our Group Sustainability Steering Committee, is evaluating the approach to net zero.
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| 6. | MEL has potentially disruptive technology to improve sustainability, primarily in consumer packaging. We intend to invest within the Group's risk appetite to develop and commercialise this technology, which at this time is focused on ReZorce mono-material barrier packaging specifically for beverage cartons. With initial market trials imminent, we are turning our focus to full-scale commercialisation and engagement with potential strategic partners to facilitate this.
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People
Our top priority is ensuring the health and safety of employees and site visitors. The Board tolerance for risk is set accordingly, with health and safety an agenda item at every Board and Executive Committee meeting. We monitor both leading and lagging indicators to improve safety performance and behaviours across the Group. At Board level, the main safety metric in our business is reportable lost time incidents and, regrettably, we had one such incident during the year (2022: 2). In line with our policy, a full follow-up and analysis with corrective actions was reviewed by the Board. Other metrics, which record less severe incidents and absences, have now been significantly below industry benchmarks for six years, representing the time elapsed since we began using this form of measurement, with measured incidents around one third of the rate of comparable companies.
Employee engagement is another priority and is delivered through clear communication of our strategy, objectives and progress, which includes interactive sessions and staff surveys to facilitate feedback. Employee engagement activities included Group CEO "all-staff briefings" across all regions with a Q&A session.
On behalf of the Board and my executive colleagues, I would like to thank all Zotefoams employees and their families for their support over the past year.
Forward-looking statements
Forward-looking statements have been made by the Directors in good faith using information available up until the date they approved these preliminary results.
Current trading and outlook
"We have made a positive start to 2024, with overall sales ahead of the previous year's record first quarter. Sales of HPP products have, thus far, been strongly ahead of the prior year, with expectations for continued strength in H1 2024 and more muted growth after this, mainly linked to in-year footwear demand patterns and underlying improvements in the markets for aviation and T-FIT insulation products. To date, sales of polyolefin foams are below the comparative period in the prior year, with European customers particularly impacted by weaker industrial demand, partially offset by more robust conditions in North America. We are cautiously optimistic about the underlying demand environment for polyolefin foams later in the year, supported by a business focus on application-specific initiatives to increase market share. Currently, polymer and energy input prices remain relatively stable and therefore, other than in non-footwear HPP where prices have increased based on raw material price inflation experienced in 2023, we do not anticipate any uplift in selling prices this coming year. Improved asset utilisation, product mix and operational efficiency are our key drivers of margin enhancement. In our MEL business unit, we continue to make good progress against the commercialisation objectives we have set for ReZorce, with some important milestones expected to be reached in Q2. Investment to support this will continue during 2024 as we determine the optimal pathway to realising the opportunity presented by this technology. As a result, and while we remain mindful of the uncertain economic backdrop, 2024 is expected to be another year of good progress for Zotefoams".
D B Stirling
Group CEO
19 March 2024
Group CFO's review
Gary McGrath
Group CFO
A significant increase in profitability within the foams business, as we fill our new capacity and enrich our product mix. This is offset by increased costs in our ReZorce® mono-material barrier packaging solution as we reach late-stage development and market testing
| Summary Group P&L | | | | | |
| ||||
| Zotefoams Group | | Foams business units only | | | | |||||
| | 2023 | 2022 | Change (%) | | 2023 | 2022 | Change (%) |
| ||
| Net revenue | 127.0 | 127.4 | 0 | | 125.7 | 124.6 | 1 |
| ||
| Gross profit | 41.1 | 38.7 | 6 | | 42.5 | 38.6 | 10 |
| ||
| Distribution and administrative costs | (25.9) | (24.8) | (5) | | (23.1) | (22.8) | (1) |
| ||
| Operating profit | 15.11 | 13.9 | 9 | | 19.5 | 15.8 | 23 |
| ||
| Finance costs | (2.3) | (1.8) | (34) | | (2.3) | (1.8) | (34) |
| ||
| Profit before tax | 12.8 | 12.2 | 5 | | 17.2 | 14.1 | 22 |
| ||
| Tax | (3.6) | (2.2) | (62) |
| ||||||
| EPS | 19.00 | 20.61 | (8) |
| ||||||
1Adjusted for rounding
Overview
Group revenue was broadly similar year-on-year at £127.0m (2022: £127.4m), with £0.5m favourable currency impact. Margin management in the Polyolefin foams business and a challenging H2 2023 environment took revenue 4% and volumes 7% below the previous year, while HPP revenue grew 7% on 12% volume growth. Excluding MuCell Extrusion LLC (MEL), Group revenue grew 1% to £125.7m (2022: £124.6m).
Operating profit for the year grew 9% to £15.1m and profit before tax (PBT) increased 5% to a Group record of £12.8m, after higher interest charges. The underlying foams business, comprising the Polyolefin Foams and High-Performance Foams business units, achieved a significant increase in PBT of 22% to £17.2m (2022: £14.1m), while MEL losses increased to £4.4m (2022: £1.9m).
Basic earnings per share fell 8% to 19.00p as a result of the higher tax charge of £3.6m (2022: £2.2m), which reflects the increase in corporation tax in the UK that took effect from 1 April 2023 and the mix of profits across Group entities. Currency movements negatively impacted PBT by £0.5m.
Return on capital employed (ROCE, see below for definition) increased to 10.3% (2022: 10.1%). Excluding MEL, which is generating losses as the Group invests in ReZorce, but with continued investment contingent on progress and expected outcome, ROCE increased to 14.2% (2022: 12.0%).
The Group's balance sheet at 31 December 2023 remains strong, with the leverage multiple (calculated as a multiple of net debt to EBITDA using definitions under the bank facility agreement, see section "Debt facility") unchanged at 1.2x (31 December 2022: 1.2x) and financial headroom of £19.4m (31 December 2022: £22.9m). This is after a £1.7m (7%) increase in EBITDA to £24.7m (2022: £23.0m), increased investment in working capital of £11.1m (2022: £0.3m), see "cash flow" below, capital expenditure of £8.5m (2022: £7.1m) and total dividends of £3.4m (2022: £3.2m).
Revenue performance
Polyolefin Foams business unit sales fell 4% to £67.6m (2022: £70.1m) and at constant currency, by 5% to £66.7m. This reflects a drive to maintain margins through close collaboration with customers and identify the right product for the right application, including promotion of the Group's recycled EcoZote® foam range. European revenues grew 2% and US revenues were unchanged, while the UK declined 18% as key customers reduced inventory. HPP sales increased 7% to £58.1m (2022: £54.4m) and by 8%, to £58.6m, at constant currency. Footwear is the largest application within HPP and revenue in this market grew a further 7% to £45.3m (2022: £42.1m), resulting in this business division accounting for 36% of Group sales (2022: 33%). ZOTEK F fluoropolymer foam sales closed the year 6% up at £6.5m (2022: £6.2m), still significantly below the 2019 peak of £10.0m as the recovery in aviation continues. T-FIT advanced insulation sales growth stalled at £5.9m (2022: £5.8m), with a downturn in demand in China following the withdrawal of support for the pharmaceutical industry by the country's government fully offset by very strong growth in India. MEL sales fell sharply during the year, by £1.6m to £1.2m (2022: £2.8m), with reduced equipment sales and reduced royalties impacted by the Group's focus on realising the ReZorce mono-material barrier packaging initiative.
Revenue by segment (£m)
| | 2023 Reported | 2023 Adjusted1 | 2022 Reported | Net change % | |
| | Reported | Adjusted | |||
| Polyolefin Foams | 67.6 | 66.7 | 70.1 | (4) | (5) |
| UK | 10.9 | 10.9 | 13.2 | (18) | (18) |
| Europe | 30.7 | 30.0 | 30.2 | 2 | (1) |
| USA | 22.5 | 22.4 | 22.4 | 0 | 0 |
| Rest of the world | 3.5 | 3.4 | 4.3 | (17) | (19) |
| HPP | 58.1 | 58.6 | 54.4 | 7 | 8 |
| Footwear | 45.3 | 45.3 | 42.1 | 7 | 7 |
| ZOTEK® F | 6.5 | 6.7 | 6.2 | 6 | 9 |
| T-FIT® | 5.9 | 6.1 | 5.8 | 1 | 6 |
| Other | 0.4 | 0.5 | 0.3 | - | - |
| Group excluding MEL | 125.7 | 125.3 | 124.6 | 1 | 1 |
| MEL | 1.2 | 1.3 | 2.8 | (56) | (54) |
| Group | 127.02 | 126.6 | 127.4 | 0 | (1) |
1 Constant currency, adjusting 2023 values to 2022 rates. See exchange rates table.
2 Adjusted for rounding.
| Revenue by market (%) | | |
| | 2023 | 2022 |
| Sports and leisure | 39 | 37 |
| Product protection | 22 | 23 |
| Building and construction | 12 | 13 |
| Transportation* | 11 | 12 |
| Industrial | 5 | 6 |
| Medical | 6 | 5 |
| Other | 5 | 4 |
* Within the transportation segment, aviation represented 6.4% (2022: 7.6%) and automotive 5.0% (2022: 4.8%) of Group revenue.
Gross profit
Gross margin increased to 32.3% (2022: 30.4%), representing an increase of £2.3m in absolute terms to £41.1m. Excluding MEL, gross margin was 33.9% (2022: 31.0%), or a £4.0m increase in absolute terms.
The Polyolefin Foams business unit in the UK and Europe focused on maintaining the operating margins it was achieving by the end of the previous year, which came after a number of price increases had been implemented to offset the rapid cost inflation experienced across most inputs. While raw material costs reverted to more normal levels during 2023, the inflationary effects of almost every other input cost, including labour, offset much of the benefit. Energy costs held at historic high levels, amounting to £8.0m in the year (2022: £7.3m), after having been £4.8m in 2021. Labour costs rose significantly, with the annual pay increase in the UK, the largest employer across the Group, being 7% to help alleviate the cost-of-living crisis. Margin management for the business unit included working closely with our customers to find the optimal product at the optimal price point for the customer's need. The US business focused on and succeeded in identifying and implementing operational efficiencies, with the support of a stronger local team and increased collaboration with the UK-based team.
| Distribution and administrative costs breakdown | |||
| | 2023 | 2022 | Change (%) |
| Distribution costs | 7.9 | 8.0 | 1 |
| Administrative costs excluding hedging movements | 17.7 | 15.0 | (19) |
| Hedging movements | 0.3 | 1.8 | 84 |
| Administrative costs | 18.0 | 16.8 | (7) |
| Distribution and administrative costs | 25.9 | 24.8 | (5) |
Distribution and administrative costs
The Group has a clear expansion strategy, founded on proprietary cellular materials technology linked to longer-term demand growth in our chosen markets. Organic growth with a portfolio of unique and highly differentiated products requires that we invest in, and prioritise, technical, sales-focused and administrative resources to create, execute and manage this growth.
Included within distribution costs in the consolidated income statement are sales, marketing and warehousing expenses. These costs decreased by £0.1m, or 1%, to £7.9m (2022: £8.0m) during the year, with lower offsite warehousing costs offsetting inflationary costs such as labour. Included within administrative expenses are technical development, finance, information systems and administration costs as well as the impact of foreign exchange hedges maturing in the period and non-cash foreign exchange translation expenses. These costs increased in 2023 by £1.2m, or 7%, to £18.0m (2022: £16.8m). However, after stripping out foreign exchange effects, which generated a movement of £0.3m (2022: £1.8m), these administrative costs increased by 19%, or £2.7m, to £17.7m (2022: £15.0m), with £0.9m of the increase related to the Group's investment in its ReZorce technology and the majority of the rest related to labour additions and cost increases. See "Currency review" below for further information and context around foreign exchange movements.
The business unit results do not include central plc costs, which are not considered to be segment specific. Neither do they include hedging movements. In 2023, central plc costs were £3.1m (2022: £2.5m).
Operating profit
Operating profit was £15.1m, 9% above 2022 (£13.9m) and the operating margin increased to 11.9% from 10.9%. Operating profit of the foams business alone, excluding MEL, was £19.5m, 23% above 2022 (£15.8m) and the operating margin increased to 15.5% from 12.7%.
Finance costs
Gross finance costs for the year increased 40% to £2.5m (2022: £1.8m) and include £0.1m (2022: £0.1m) of interest on the Defined Benefit Pension Scheme obligation. This increase reflects the rise during the year in US dollar and euro base rates, which are the currencies in which the Group's debt obligations are held, while the prior year comparative included £0.3m related to unamortised costs of the previous banking facility, replaced in March 2022. Net finance costs, after finance income, increased 34% to £2.3m (2022: £1.8m).
Profit before tax
Profit before tax increased 5% to £12.8m (2022: £12.2m). The foams business increased 22% to £17.2m (2022: £14.1m), while the MEL loss increased to £4.4m (2022: £1.9m).
Profit by segment (£m)
| | 2023 Reported | 2023 Adjusted* | 2022 Reported | Net change % | |
| | Reported | Adjusted | |||
| Polyolefin Foams | 7.5 | 7.0 | 4.9 | 52 | 42 |
| HPP | 15.4 | 16.1 | 15.3 | 1 | 5 |
| MEL | (4.4) | (4.3) | (1.9) | (130) | (127) |
| Subtotal Business units | 18.5 | 18.8 | 18.3 | 1 | 2 |
| Central costs | (3.1) | (3.1) | (2.5) | (22) | (22) |
| Hedging | (0.3) | - | (1.8) | - | - |
| Finance costs | (2.3) | (2.3) | (1.8) | (34) | (32) |
| Subtotal Other | (5.7) | (5.4) | (6.1) | (7) | (12) |
| Group excluding MEL | 17.2 | 17.7 | 14.1 | 22 | 25 |
| Group | 12.8 | 13.4 | 12.2 | 5 | 9 |
* Constant currency, adjusting 2023 values to 2022 rates. See exchange rates table above.
Currency review
Exchange rates
Zotefoams transacts significantly in US dollars and euros. The exchange rates used to translate the key flows and balances were:
| | 2023 | 2022 | ||
| Average | Closing | Average | Closing | |
| Euro/sterling | 1.150 | 1.150 | 1.173 | 1.129 |
| US dollar/sterling | 1.243 | 1.271 | 1.238 | 1.204 |
While movements in foreign exchange rates can have a significant impact on Group results, the impact in 2023 was limited. During the year, the sterling average exchange rate year-on-year against the US dollar strengthened by 0.4% and the sterling average exchange rate against the euro weakened by 2.0%. The sterling spot rate against the US dollar from 31 December 2022 to 31 December 2023 strengthened by 5.6%, while the sterling spot rate against the euro from 31 December 2022 to 31 December 2023 strengthened by 1.9 %.
Zotefoams is a predominantly UK-based exporter which invoices in local currency with the exception of Asia, where all business is invoiced in US dollars. In 2023, approximately 92% of sales (2022: approximately 90%) were denominated in currencies other than sterling, mostly US dollars or euros. While operating costs at the Croydon, UK, site are incurred in sterling, the main raw materials for polyolefin foams used for production in the UK are euro-denominated and US subsidiary production and operating costs, most other subsidiaries' staff and operating costs and some HPP raw materials are US dollar-denominated. Poland operating costs are incurred in zloty. The Group uses forward exchange contracts to hedge up to 80% of its forecast net cash flows over the following twelve months that are subject to US dollar and euro transaction risk.
The Group recorded a gain on forward exchange contracts in the year of £0.2m (2022 loss: £2.9m).
Zotefoams also faces translation risk. Zotefoams plc, the parent company, holds the Group's multi-currency borrowings facility and has provided intercompany loans and intercompany trading facilities to the USA and Poland to support the Group's recent capacity expansion projects. This translation exposure is mitigated, where possible, through an offset with same-currency liabilities, primarily through borrowing in the relevant currency. Every month, these foreign currency-denominated intercompany net positions, despite being cash neutral, require to be translated by Zotefoams plc on a mark to market basis and the movement taken to the Company income statement. The Group also has a fast-growing HPP business, which is mostly invoiced from the UK in US dollars, which adds to its exposure to foreign currency-denominated net assets and is accounted for in the same way as above. While FX exposure is partly mitigated by the forward currency contracts, risk remains based on the amount of forecast exposure not hedged, in line with Group policy, and the fact that there is a timing difference between the recording of accounts receivable and cash received. This timing difference is managed by further hedging activities, but their effectiveness is subject to the accuracy of forecasting cash receipts. The Group recorded a translation loss in the year of £0.5m (2022 gain: £1.0m).
Currency movements during the year positively impacted Group revenue by £0.5m (2022: £7.6m positive impact). They negatively impacted operating costs by £0.7m (2022: £3.2m negative impact), resulting in a net negative impact of £0.2m (2022: positive impact £4.3m) before hedging. After deducting the net hedging loss of £0.3m (2022: loss of £1.8m), the currency net negative impact on profit before tax for the year was £0.5m (2022: positive impact £2.5m).
We recognise that one of our principal risks is our exposure to foreign currency fluctuations, particularly the US dollar, which we will aim to manage through hedging strategies. Based on 2023 and with respect to transaction risk, it is estimated that for every one percentage point movement in the US dollar/sterling rate, profit moves by £0.6m unhedged and £0.2m hedged. In the year, it is assumed that the transaction risk from euro/sterling movements continues to be substantially naturally hedged, with the risk arising on sales revenues offset by the opportunity on costs, primarily related to raw material purchases and certain further processing costs.
The Group does not currently hedge for the translation of its foreign subsidiaries' assets or liabilities. The foreign currency hedging policy is kept under regular review and is formally approved by the Board on an annual basis.
Taxation charge and earnings per share
The tax charge for the year is £3.6m (2022: £2.2m). The effective tax rate for the year is 28.0% (2022: 18.1%) and the Group's weighted average corporate tax rate for the year is 24.8% (2022: 19.5%). The tax charge reflects the increase in the UK corporation tax rate to 25% that took force on 1 April 2023 and the Group's prudent approach to not recognising tax losses in its US subsidiaries (that are driven by MEL).
Impacted by the tax charge and despite increased PBT, basic earnings per share was 19.00p (2022: 20.61p), a decrease of 8%. Diluted earnings per share was 18.55p (2022: 20.20p).
ReZorce
The ReZorce technology being developed by MEL offers brand owners the ability to significantly reduce their carbon footprint and also help meet their pledges on both recycling and the use of recycled content in their packaging, putting sustainability at the heart of our MEL development agenda. During the year, Zotefoams continued its investment in this opportunity. In line with IAS 38 'Intangible assets', £2.5m (2022: £1.4m) was invested in labour and other directly attributable costs and capitalised. The Group also invested £0.3m (2022: £0.8m) during the year to purchase and develop equipment, which has been recorded under tangible assets. In total, capitalised investment in ReZorce amounted to £2.8m during 2023 (2022: £2.2m), and the net book value at 31 December 2023 of amounts capitalised over the life of the project amounts to £6.8m (2022: £4.7m). In addition to the investment capitalised and driven by the focus on ReZorce and developments and progress made during the year, MEL reported a loss before tax of £4.4m (2022: £1.9m). The total cash outflow from MEL in the year amounted to £5.5m (2022: £3.9m).
The Board does not currently consider any of these assets to be impaired, given the progress made in technical development, the signing of a joint development agreement with a global packaging company and the contributions this is making to progress, the preparations under way for an imminent in-store trial at a recognised supermarket chain in northern Europe, the assessed size of the commercial opportunities, and the Board's continuing commitment to the initiative.
Capital allocation
The discipline with which a company allocates capital is a key determinant of growth and sustained financial returns. The Board is actively engaged in this process. Zotefoams focuses on achievable sustainable profit growth by investing and developing its business in the following ways:
Capital expenditure in foam manufacturing
Given the capital-intensive nature of the Zotefoams business, long lead times for key equipment and the importance of operational gearing, investment decisions require significant planning and are made with a clear assessment of strategic fit, risk, risk appetite, sustainability credentials and expected returns. Confidence in the Group's developing portfolio of HPP opportunities is a significant consideration in determining the timing of certain investments, while the strategic importance of maintaining growth in the profitable Polyolefin Foams business, the Group's largest volume product range, informs the decision to increase total Group capacity versus relying solely on mix enrichment. Outside significant capacity-related investments, the Group also invests to maintain its capital-intensive assets, mindful of the risk of operational disruption and opportunities to improve energy efficiency and further reduce health and safety risk, particularly at the older UK facility. The annual and five-year capital requirements planning outcomes, as well as progress against them, are reviewed by the Board and individual projects of a certain expenditure level require Board approval beyond that given in the normal annual Budget cycle.
Zotefoams targets improvements in the Group's return on capital over the investment cycle, while recognising the short-term impact on the return of sizeable capital investments during their construction and early operations phases, where they initially run at lower utilisation and mix optimisation levels. When Zotefoams embarks on investment in a major expansion or new location, such as the installation of extrusion and high-pressure capability at our existing Kentucky, USA site, which we commissioned in 2018, or the most recent investment in foam manufacturing at the Poland site, commissioned in 2021, we take into account the importance of scale and dilution of heavy infrastructure cost over a (future) second or third line. As such, the first step is invariably more dilutive to capital return than any subsequent investments.
Research and development
Zotefoams is an innovator in advanced technical foams and pursues a strategy to continuously develop a portfolio of products that leverages its unique technology. Dedicated teams actively pursue raw material and new product development opportunities that further the technical performance and sustainability attributes of the product portfolio. Performance is reviewed at quarterly risk and opportunity steering committees which include the Executive team, and the Director of Technology and Development engages frequently with the Board.
The Group is currently pursuing, and investing significantly behind, a transformative mono-material barrier packaging solution through its MEL business unit, branded as ReZorce. In this pre-revenue development phase, overall capital returns are diluted as a result of both the operating profit charge as well as the capital investments made, but the initiative offers significant potential if the technology is adopted.
Working capital
The business requires investment in working capital to achieve high levels of customer service and targeted margins. Customer payment terms reflect the competitive environment of each of the geographical and industrial markets in which the Group plays, as well as historical terms with long-term customers who have been integral to growth over the past 1-2 decades. Inventory levels reflect the value of the raw materials, the length of the supply chain and the volume of inventory required to achieve targeted customer satisfaction levels. Growing beyond the space-restricted site in the UK, as well as growing HPP at a faster rate than Polyolefin Foams and where supply chains are longer, technical testing is required, the customer is often more strategic, and raw material purchase costs are significantly higher, is increasing the investment required in inventory. The Group's main suppliers are either large multinational polymer manufacturers or energy companies, where the ability to negotiate credit terms is limited. The Board receives monthly financial updates, which include performance on working capital against the annual budget and the quarterly forecasts, both of which are reviewed and approved by the Board.
Dividend
The Board has a progressive dividend policy, recognising the importance to our shareholders of the dividend as part of their overall return while ensuring sufficient capital and liquidity to pursue its growth ambition. A minimum earnings cover of 2x is targeted. The Board regularly reviews this policy as the Group grows and capital expenditure demands a lower share of the cash generated.
Non-organic growth
The Group's strategy focuses on leveraging its unique technology, filling assets and enriching the product sales mix. While it is open to non-organic opportunities, it has not pursued them in the past. This may change with the availability of capital from a growing business with reducing debt, the long lead-time associated with major capacity expansion, and the ambition to maintain a rate of growth that generates high shareholder returns.
Recent investment in capacity
Starting in 2015 with a programme to add the first and second stages of the Zotefoams manufacturing process into the USA, continuing with the addition of HPP capacity in the UK to support the Footwear opportunities and ending with the commissioning of the Brzeg, Poland, manufacturing facility in 2021, Zotefoams experienced a period of high capital investment. Over this period, we invested £91.4m in property, plant and equipment, of which £67.1m, or 73%, was directed to growth. With this programme complete, and over the medium term, the Group expects to return to levels of capital expenditure more in line with depreciation.
Return on capital employed (ROCE)
Zotefoams defines the return on capital employed (ROCE), which is a non-IFRS measure, as operating profit before exceptional items divided by the average sum of its equity, net debt and other non-current liabilities. This measure excludes acquired intangible assets and their amortisation costs. We also exclude significant capacity investments under construction until they enter production. We do not attempt to adjust for the first phase inefficiencies as mentioned above.
In 2023, the Group's ROCE increased to 10.3% (2022: 10.1%), mostly reflecting improved profitability in the year. Excluding MEL, which is incurring significant discretionary losses as we invest in a significant opportunity that could generate very high future returns, ROCE increased to 14.2% (2022: 12.0%). Before the increase in the capital base that resulted from our investments in the UK, USA and Poland, the additional operating costs arising from their operation, and the start of investment in ReZorce, ROCE was 16.5% (2018). Business growth, with this increased capacity matched by improved utilisation and mix enrichment, is expected to improve ROCE beyond that previously achieved, excluding the outcome of the ReZorce project which it is not possible to quantify at the current stage of its development.
Dividend
The Directors are proposing a final dividend of 4.90p (2022: 4.62p), which would be payable on 3 June 2024 to shareholders on the Company register at the close of business on 3 May 2024. The ex-dividend date will be 2 May 2024. Taken with the interim dividend of 2.28p (2022: 2.18p), this would bring the total dividend for the year to 7.18p (2022: 6.80p) and would represent a dividend cover of 2.6 times (2022: 3.0 times).
Cash flow
Summary cash flow
| | 2023 | 2022 |
| Profit before tax | 12.8 | 12.2 |
| Depreciation and amortisation | 8.2 | 8.2 |
| Other | 3.1 | 3.7 |
| Net cash from operations before provisions and investment in working capital | 24.1 | 24.1 |
| Employee defined benefit contributions | (0.9) | (0.8) |
| Working capital movement | (11.1) | (0.3) |
| Receivables | (3.8) | (4.8) |
| Inventory | (6.3) | 0.4 |
| Payables | (1.0) | 4.1 |
| Cash generated from operations | 12.1 | 23.0 |
| Interest paid | (2.1) | (1.3) |
| Taxation paid | (2.2) | (0.7) |
| Investments in intangible assets | (2.7) | (1.7) |
| Investments in tangible assets | (5.8) | (5.4) |
| Dividends | (3.4) | (3.2) |
| Movement in finance obligations | 0.4 | (7.8) |
| Lease payments | (0.8) | (0.4) |
| Other | 0.1 | - |
| Movement in cash and cash equivalents | (4.2) | 2.5 |
The Group is by its nature highly cash generative and, this year, net cash from operations before investment in working capital and provisions was £24.1m, in line with the previous year (2022: £24.1m). This includes an additional £1.4m tax charge as well as the increased loss in MEL of £2.5m as we progress to in-store trials in H1 2024. Out of this, £11.1m (2022: £0.3m) was reinvested in working capital. Trade and other receivables increased £3.8m (2022: increased £4.8m), reflecting increased sales in November and December against the previous year and the year-end timing of certain sizeable Footwear customer receipts. Inventories increased £6.3m (2022: decreased £0.4m), with £2.2m reflecting a strategic build of footwear and European polyolefin foam to capitalise on available capacity in H2 2023 and in anticipation of high levels of capacity utilisation in 2024. It also reflected a significant increase in ZOTEK® F inventory value as a result of a near doubling of unit purchase price during the year. Trade and other payables decreased £1.0m (2022: increased £4.1m) reflecting general payment timings. Zotefoams recognises the importance of its supplier relationships and has improved its performance with respect to honouring agreed payment terms. As a result of the above, cash generated from operations was significantly lower than the previous year at £12.1m (2022: £23.0m).
During the year, the Group paid interest on its borrowings of £2.1m (2022: £1.3m), reflecting increased base rates on similar average debt levels across much of the year. Net taxation paid during the year, net of refunds, amounted to £2.2m (2022: £0.7m), reflecting higher profits at the Company alongside an increased corporation tax rate, and compared against a 2022 tax credit of £0.8m from a tax computation refund and capital allowance recovery from previous years.
Zotefoams' property, plant and equipment capital expenditure remained at a lower level than in recent history, as expected, following several years of capacity expansion, with total expenditure of £5.8m (2022: £5.4m). Expenditure was split across several categories, the most significant being 41% on essential replacement and 26% on capacity expansion. ESG initiatives were a key component of capital expenditure in the year with 65% of expenditure offering benefits through improved energy efficiency, safety or reduced waste. Geographically, 68% was directed to our Croydon, UK plant and 18% to our Walton, USA plant.
The Group also invested £2.7m (2022: £1.7m) in intangible assets, almost entirely related to MEL patents and capitalised development costs for ReZorce. The combined investment of £8.5m (2022: £7.1m), is in line with the Group's combined depreciation and amortisation charge (2023: £8.2m).
After dividends paid in the year amounting to £3.4m (2022: £3.2m) and lease payments of £0.8m (2022: £0.5m), closing net debt rose 14% to £31.6m (2022: £27.8m). At the year end, the Group remains comfortably within its bank facility covenants, with a multiple of EBITDA to net finance charges of 11.2 (2022: 13.7), against a covenant minimum of 4 (2022: 4), and net debt to EBITDA (leverage) multiple of 1.2 (2022: 1.2), against a covenant of 3.5 (2022: 3.5). See "Debt facility" for a definition of leverage and information on the Group's bank facility arrangements.
Debt facility
The Group's gross finance facilities with Handelsbanken and NatWest comprise a £50.0m multi-currency revolving credit facility with a £25.0m accordion, a renewal date of March 2027, an interest rate ratchet and includes a small element related to the achievement of sustainability targets. The facility has two covenants: a finance cost covenant with a multiple of 4.0 and a leverage covenant with a multiple of 3.5.
At 31 December 2023, headroom, which we define as the combination of amount undrawn on the facility and cash and cash equivalents disclosed on the Statement of Financial Position, amounted to £19.4m (2022: £22.9m).
Zotefoams defines EBITDA as profit for the year before tax, adjusted for depreciation and amortisation, net finance costs, the share of profit/loss from its joint venture and equity-settled share-based payments.
Net debt comprises short- and long-term loans less cash and cash equivalents and is adjusted from IFRS by the impacts of IFRS 2 and IFRS 16 under the bank facility definition.
Group banking covenants definition
Net debt to EBITDA ratio (Leverage)
| £m | 2023 | 2022 | | £m | 2023 | 2022 |
| Profit after tax | 9.2 | 10.0 | | Net debt per IFRS | 31.6 | 27.8 |
| Adjusted for: | | | | IFRS 16 leases | (1.3) | (1.0) |
| Depreciation and amortisation | 8.2 | 8.2 | | Finance leases pre-1 January 2019 | - | - |
| Finance costs | 2.5 | 1.8 | | Roundings | (0.1) | - |
| Finance income | (0.2) | (0.1) | | Net debt per bank | 30.2 | 26.8 |
| Share of result from joint venture | - | - | | | | |
| Equity-settled share-based payments | 1.3 | 0.8 | | | | |
| Taxation | 3.6 | 2.2 | | | | |
| Roundings | 0.1 | 0.1 | | | | |
| EBITDA | 24.7 | 23.0 | | Leverage per bank | 1.2 | 1.2 |
EBITDA to net finance charges ratio
| £m | 2023 | 2022 | | £m | 2023 | 2022 |
| EBITDA, as above | 24.7 | 23.0 | | Finance costs | 2.5 | 1.8 |
| | | | | Finance income | (0.2) | (0.1) |
| | | | | Share of result from joint venture | - | - |
| EBITDA to net finance charges | 11.2 | 13.7 | | Net finance charges | 2.3 | 1.7 |
Post-employment benefits
The Company operates a UK-registered trust-based defined benefit pension scheme, ("DB Scheme"), that provides defined benefits. Pension benefits are linked to the members' final pensionable salaries and service at their retirement (or date of leaving if earlier). The DB Scheme was closed to new members in 2001, as was the link to future accrual of salary in 2005. Inconsistencies in the way the DB Scheme's link to future accrual of salary was closed in 2005 were rectified in 2019. There are three categories of pension scheme members:
· deferred members with salary linkage: current employees of the Company who have not consented to the break in their salary linkage;
· deferred members: former and current employees of the Company not yet in receipt of pension; and
· pensioner members: in receipt of pension.
The last full actuarial valuation of the ("DB Scheme") took place as at 5 April 2020. On a Statutory Funding Objective basis, a deficit was calculated for the DB Scheme of £7.7m (previous triennial valuation: £4.2m). As a result, the Company agreed with the Trustees to make contributions to the DB Scheme of £643,200 p.a, beginning 1 July 2021, to meet the shortfall by 31 October 2026 (previously 31 October 2026), up from £492,000 p.a. previously. In addition, the Company pays the ongoing DB Scheme expenses of £216,000 per annum (previously £180,000 p.a.) to cover death-in-service insurance premiums, the expenses of administering the DB Scheme and Pension Protection Fund levies associated with the Scheme.
In line with the requirement to have a triennial valuation, a formal actuarial valuation is being carried out for the Trustees as at 5 April 2023 and, once finalised, the contributions may change.
The defined benefit obligation is valued by projecting the best estimate of the future benefit from the outlay of monies (allowing for future salary increases for deferred members with salary linkage, revaluation to retirement for deferred members and annual pension increases for all members) and then discounting to the balance sheet date. The majority of benefits receive increases linked to inflation (subject to a cap of no more than 5% p.a.). The valuation method used is known as the Projected Unit Method. The approximate overall duration of the Scheme's defined benefit obligation as at 31 December 2023 was around 12 years. The net IAS 19 deficit on the DB Scheme decreased by £0.6m to £2.7m as at 31 December 2023 (2022: £3.3m) and represents 2.3% (2022: 3.0%) of consolidated net assets. The value of the defined benefit obligation at the year-end increased by £0.4m from £26.1m in 2022 to £26.5m in 2023 but was more than offset by the actual investment return achieved on the assets, which grew £1.0m from £22.8m in 2022 to £23.8m in 2023. Zotefoams does not consider its pension scheme to be a key risk to its ability to achieve its strategic objectives due to the immaterial share of net assets that the deficit represents. Mitigation of further risk is expected to come from our growth expectations and the continued focus by the Trustees on a lower-risk strategy to meet the DB Scheme's deficit.
Going concern
The Directors believe that the Group is well placed to manage its business risks and, after making enquiries including a review of forecasts and predictions, taking account of reasonably possible changes in trading performance and its available debt facilities, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next twelve months following the date of approval of the financial statements. The Directors have also continued to draw upon the experiences of 2020 and the Group's success in reacting to the challenges of COVID-19 through its safety protocols and cost and cash management, all of which could be replicated in a similar scenario.
After due consideration of the range and likelihood of potential outcomes, the Directors continue to adopt the going concern basis of accounting in preparing the Annual Report.
Financial risk management
The main financial risks of the Group relate to funding and liquidity, credit, interest rate fluctuations and currency exposures.
G C McGrath
Group CFO
19 March 2024
Consolidated income statement
For the year ended 31 December 2023
| | Note | 2023 | 2022 £'000 |
| Revenue | 2 | 126,975 | 127,369 |
| Cost of sales | | (85,920) | (88,639) |
| Gross profit | | 41,055 | 38,730 |
| Distribution costs | | (7,927) | (8,037) |
| Administrative expenses | | (17,993) | (16,762) |
| Operating profit | | 15,135 | 13,931 |
| Finance costs | | (2,540) | (1,814) |
| Finance Income | | 191 | 56 |
| Share of profit/(loss) from joint venture | | 54 | 50 |
| Profit before income tax | | 12,840 | 12,223 |
| Income tax expense | | (3,598) | (2,217) |
| Profit for the year | | 9,242 | 10,006 |
| Profit attributable to: | |
| |
| Equity holders of the Company | | 9,242 | 10,006 |
| | | 9,242 | 10,006 |
| Earnings per share: | |
|
|
| Basic (p) | | 19.00 | 20.61 |
| Diluted (p) | | 18.55 | 20.20 |
Consolidated statement of comprehensive income
For the year ended 31 December 2023
| | | 2023 | 2022 £'000 |
| Profit for the year | | 9,242 | 10,006 |
| Other comprehensive income | |
| |
| Items that will not be reclassified to profit or loss | |
| |
| Actuarial (losses)/gains on defined benefit pension schemes | | (88) | 584 |
| Tax relating to items that will not be reclassified | | 22 | (146) |
| Total items that will not be reclassified to profit or loss | | (66) | 438 |
| Items that may be reclassified subsequently to profit or loss | |
|
|
| Foreign exchange translation (losses)/gains on investment in foreign subsidiaries | | (1,885) | 3,681 |
| Change in fair value of hedging instruments | | 1,712 | (3,025) |
| Hedging (losses)/gains reclassified to profit or loss | | (192) | 2,865 |
| Tax relating to items that may be reclassified | | (575) | 185 |
| Total items that may be reclassified subsequently to profit or loss | | (940) | 3,706 |
| Other comprehensive income for the year, net of tax | | (1,006) | 4,144 |
| Total comprehensive income for the year | | 8,236 | 14,150 |
| Total comprehensive income attributable to: | |
| |
| Equity holders of the Company | | 8,236 | 14,150 |
| Total comprehensive income for the year | | 8,236 | 14,150 |
Consolidated statement of financial position
As at 31 December 2023
| | Note | 2023 | 2022 |
| Non-current assets | |
| |
| Property, plant and equipment | 3 | 91,743 | 94,295 |
| Right-of-use assets | | 1,272 | 939 |
| Intangible assets | | 9,418 | 7,774 |
| Investment in joint venture | | 207 | 153 |
| Trade and other receivables | | 70 | 122 |
| Deferred tax assets | | 435 | 410 |
| Total non-current assets | | 103,145 | 103,693 |
| Current assets | |
| |
| Inventories | | 31,904 | 26,139 |
| Trade and other receivables | | 33,002 | 29,447 |
| Derivative financial instruments | | 1,264 | 486 |
| Cash and cash equivalents | | 6,294 | 10,594 |
| Total current assets | | 72,464 | 66,666 |
| Total assets | | 175,609 | 170,359 |
| Current liabilities | |
| |
| Trade and other payables | | (12,953) | (13,500) |
| Derivative financial instruments | | (28) | (1,550) |
| Current tax liability | | (1,078) | (226) |
| Lease liabilities | | (507) | (509) |
| Interest-bearing loans and borrowings | 4 | (36,527) | (37,446) |
| Total current liabilities | | (51,093) | (53,231) |
| Non-current liabilities | |
| |
| Lease liabilities | | (827) | (454) |
| Deferred tax liabilities | | (5,270) | (3,846) |
| Post-employment benefits | | (2,656) | (3,290) |
| Total non-current liabilities | | (8,753) | (7,590) |
| Total liabilities | | (59,846) | (60,821) |
| Total net assets | | 115,763 | 109,538 |
| Equity | |
| |
| Issued share capital | 5 | 2,442 | 2,431 |
| Share premium | 5 | 44,178 | 44,178 |
| Own shares held | | (12) | (5) |
| Capital redemption reserve | | 15 | 15 |
| Translation reserve | | 4,024 | 5,909 |
| Hedging reserve | | 660 | (285) |
| Retained earnings | | 64,456 | 57,295 |
| Total equity | | 115,763 | 109,538 |
Consolidated statement of cash flows
For the year ended 31 December 2023
| | | 2023 | 2022 |
| Cash flows from operating activities | |
| |
| Profit for the year | | 9,242 | 10,006 |
| Adjustments for: | |
| |
| Depreciation and amortisation | | 8,217 | 8,245 |
| Loss on disposal of assets | | 4 | 283 |
| Finance costs | | 2,349 | 1,758 |
| Share of profit from joint venture | | (54) | (50) |
| Net exchange differences | | (641) | 871 |
| Equity-settled share-based payments | | 1,335 | 809 |
| Taxation | | 3,598 | 2,217 |
| Operating profit before changes in working capital and provisions | | 24,050 | 24,139 |
| Increase in trade and other receivables | | (3,774) | (4,818) |
| (Increase)/decrease in inventories | | (6,279) | 401 |
| (Decrease)/increase in trade and other payables | | (1,027) | 4,119 |
| Employee defined benefit contributions | | (859) | (859) |
| Cash generated from operations | | 12,111 | 22,982 |
| Interest paid | | (2,082) | (1,255) |
| Income taxes paid, net of refunds | | (2,248) | (659) |
| Net cash flows generated from operating activities | | 7,781 | 21,068 |
| Cash flows from investing activities | |
| |
| Interest received | | 191 | 56 |
| Purchases of intangibles | | (2,739) | (1,724) |
| Purchases of property, plant and equipment | | (5,744) | (5,368) |
| Net cash used in investing activities | | (8,292) | (7,036) |
| Cash flows from financing activities | |
| |
| Repayment of borrowings | | (1,231) | (50,883) |
| Proceeds from borrowings | | 1,609 | 43,044 |
| Payment of principal portion of lease liabilities | | (753) | (499) |
| Dividends paid to equity holders of the Company | | (3,350) | (3,188) |
| Net cash used in from financing activities | | (3,725) | (11,526) |
| Net (decrease)/increase in cash and cash equivalents | | (4,236) | 2,506 |
| Cash and cash equivalents at 1 January | | 10,594 | 8,055 |
| Exchange (losses)/gains on cash and cash equivalents | | (64) | 33 |
| Cash and cash equivalents at 31 December | | 6,294 | 10,594 |
Consolidated statement of changes in equity
For the year ended 31 December 2023
| | | Share capital | Share premium | Own shares held | Capital redemption reserve | Translation reserve | Hedging reserve | Retained earnings | Total equity |
| | | £`000 | £`000 | £`000 | £`000 | £`000 | £`000 | £`000 | £`000 |
| | | | | | | | | | |
| Balance as at 1 January 2022 |
| 2,431 | 44,178 | (10) | 15 | 2,228 | (310) | 49,243 | 97,775 |
| Profit for the year | | - | - | - | - | - | - | 10,006 | 10,006 |
| Other Comprehensive Income for the year | | | | | | | | | |
| Foreign exchange translation gains on investment in subsidiaries | | - | - | - | - | 3,681 | - | - | 3,681 |
| Change in fair value of hedging instruments recognised in other comprehensive income | | - | - | - | - | - | (3,025) | - | (3,025) |
| Reclassification to income statement - administrative expenses | | - | - | - | - | - | 2,865 | - | 2,865 |
| Tax relating to effective portion of changes in fair value of cash flow hedges, net of recycling | | - | - | - | - | - | 185 | - | 185 |
| Actuarial gain on defined benefit pension scheme | | - | - | - | - | - | - | 584 | 584 |
| Tax relating to actuarial gain on defined benefit pension scheme | | - | - | - | - | - | - | (146) | (146) |
| Total comprehensive income for the year | | - | - | - | - | 3,681 | 25 | 10,444 | 14,150 |
| Transactions with owners of the Parent: | | | | | | | | | |
| Options exercised | | - | - | 5 | - | - | - | (5) | - |
| Equity-settled share-based payments net of tax | | - | - | - | - | - | - | 801 | 801 |
| Dividends paid | 6 | - | - | - | - | - | - | (3,188) | (3,188) |
| Total transactions with owners of the Parent | | - | - | 5 | - | - | - | (2,392) | (2,387) |
| Balance as at 31 December 2022 | | 2,431 | 44,178 | (5) | 15 | 5,909 | (285) | 57,295 | 109,538 |
| | | | | | | | | | |
| Balance as at 1 January 2023 |
| 2,431 | 44,178 | (5) | 15 | 5,909 | (285) | 57,295 | 109,538 |
| Profit for the year | | - | - | - | - | - | - | 9,242 | 9,242 |
| Other Comprehensive Income for the year | | | | | | | | | |
| Foreign exchange translation losses on investment in subsidiaries | | - | - | - | - | (1,885) | - | - | (1,885) |
| Change in fair value of hedging instruments recognised in other comprehensive income | | - | - | - | - | - | 1,712 | - | 1,712 |
| Reclassification to income statement - administrative expenses | | - | - | - | - | - | (192) | - | (192) |
| Tax relating to effective portion of changes in fair value of cash flow hedges, net of recycling | | - | - | - | - | - | (575) | - | (575) |
| Actuarial loss on defined benefit pension scheme | | - | - | - | - | - | - | (88) | (88) |
| Tax relating to actuarial loss on defined benefit pension scheme | | - | - | - | - | - | - | 22 | 22 |
| Total comprehensive income for the year | | - | - | - | - | (1,885) | 945 | 9,176 | 8,236 |
| Transactions with owners of the Parent: | | | | | | | | | |
| Options exercised | | - | - | 4 | - | - | - | (4) | - |
| Proceeds of shares issued, net of expenses | | 11 | - | (11) | - | - | - | - | - |
| Equity-settled share-based payments net of tax | | - | - | - | - | - | - | 1,339 | 1,339 |
| Dividends paid | 6 | - | - | - | - | - | - | (3,350) | (3,350) |
| Total transactions with owners of the Parent | | 11 | - | (7) | - | - | - | (2,015) | (2,011) |
| Balance as at 31 December 2023 |
| 2,442 | 44,178 | (12) | 15 | 4,024 | 660 | 64,456 | 115,763 |
1. General overview and accounting policies
Basis of preparation
Zotefoams plc (the 'Company') is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK. The registered office of the Company is 675 Mitcham Road, Croydon CR9 3AL.
The preliminary results (unaudited) (referred to as the 'preliminary results') include the results of the Company and its subsidiaries (together referred to as the 'Group'). The preliminary results of the Group have been prepared on the basis of the accounting policies set out in the statutory financial statements for the year ended 31 December 2022. Whilst the financial information included in this announcement has been computed in accordance with the recognition and measurement requirements of UK adopted international accounting standards ("UK adopted IAS") and as applied in accordance with the provisions of the Companies Act 2006, this announcement does not itself contain sufficient disclosures to comply with UK adopted IAS.
The information for the year ended 31 December 2023 does not constitute statutory accounts for the purposes of section 435 of the Companies Act 2006. A copy of the accounts for the year ended 31 December 2022 was delivered to the Registrar of Companies. The auditors' report on those accounts was not qualified and did not contain statements under section 498(2) or 498(3) of the Companies Act 2006. The audit of the statutory accounts for the year ended 31 December 2023 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the Directors in these 'preliminary results' and will be delivered to the Registrar of Companies following the Company's annual general meeting.
The preliminary results are prepared on the historical cost basis except for derivative financial instruments which are stated at their fair value. The same accounting policies, presentation and methods of computation are followed in the 'preliminary results' as were applied in the Group's 2022 annual audited financial statements.
2. Segment reporting
The Group's operating segments are reported in a manner consistent with the internal reporting provided to and regularly reviewed by the Group Chief Executive Officer, David Stirling, who is considered to be the 'chief operating decision maker' for the purpose of evaluating segment performance and allocating resources. The Group Chief Executive Officer primarily uses a measure of profit for the year (before exceptional items) to assess the performance of the operating segments.
The Group manufactures and sells high-performance foams and licenses related technology for specialist markets worldwide. The Group's activities are categorised as follows:
| · | Polyolefin Foams: these foams are made from olefinic homopolymer and copolymer resin. The most common resin used is polyethylene.
|
| · | High-Performance Products (HPP): these foams exhibit high performance on certain key properties, such as improved chemical, flammability, temperature, or energy management performance. Revenue in the segment is currently mainly derived from products manufactured from three main polymer types: polyvinylidene fluoride (PVDF) fluoropolymer, polyamide (nylon) and thermoplastic elastomers. Foams are sold under the brand name ZOTEK®, while technical insulation products manufactured from certain materials are branded as T-FIT®.
|
| · | MuCell Extrusion LLC (MEL): licenses microcellular foam technology and sells related machinery. It is also currently developing a fully circular solution for mono-material barrier packaging, which it has branded ReZorce®. |
| | Polyolefin Foams | | HPP | | MEL | | Consolidated | ||||
| 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 | | 2023 | 2022 | |
| Group revenue | 67,596 | 70,123 | | 58,132 | 54,439 | | 1,247 | 2,807 | | 126,975 | 127,369 |
| Segment profit/(loss) pre-amortisation of acquired intangibles | 7,455 | 4,883 | | 15,418 | 15,321 | | (4,098) | (1,634) | | 18,775 | 18,570 |
| Amortisation of acquired intangible assets | - | - | | - | - | | (257) | (258) | | (257) | (258) |
| Segment profit/(loss) | 7,455 | 4,883 | | 15,418 | 15,321 | | (4,355) | (1,892) | | 18,518 | 18,312 |
| Foreign exchange losses | - | - | | - | - | | - | - | | (296) | (1,844) |
| Unallocated central costs | - | - | | - | - | | - | - | | (3,087) | (2,537) |
| Operating profit |
| | |
| | |
| | | 15,135 | 13,931 |
| Financing costs | - | - | | - | - | | - | - | | (2,540) | (1,814) |
| Financing income | - | - | | - | - | | - | - | | 191 | 56 |
| Share of profit from joint venture | 54 | 50 | | - | - | | - | - | | 54 | 50 |
| Taxation | - | - | | - | - | | - | - | | (3,598) | (2,217) |
| Profit for the year |
| | |
| | |
| | | 9,242 | 10,006 |
| Segments assets | 110,374 | 116,426 | | 50,456 | 40,358 | | 14,344 | 13,165 | | 175,174 | 169,949 |
| Unallocated assets | - | - | | - | - | | - | - | | 435 | 410 |
| Total assets |
| | |
| | |
| | | 175,609 | 170,359 |
| Segment liabilities | (37,631) | (39,814) | | (14,363) | (15,508) | | (1,504) | (1,427) | | (53,498) | (56,749) |
| Unallocated liabilities | - | - | | - | - | | - | - | | (6,348) | (4,072) |
| Total liabilities |
| | |
| | |
| | | (59,846) | (60,821) |
| Depreciation of PPE | 5,189 | 5,422 | | 1,122 | 1,079 | | 532 | 369 | | 6,843 | 6,870 |
| Depreciation of right-of-use assets | 422 | 306 | | 92 | 70 | | 204 | 156 | | 718 | 532 |
| Amortisation | 223 | 386 | | 101 | 144 | | 332 | 312 | | 656 | 842 |
| Capital expenditure: |
| | |
| | |
| | |
| |
| Property, plant and equipment (PPE) | 4,619 | 3,584 | | 1,421 | 888 | | 343 | 785 | | 6,383 | 5,257 |
| Intangible assets | 118 | 112 | | 56 | 43 | | 2,565 | 1,569 | | 2,739 | 1,724 |
Geographical segments
Polyolefin Foams, HPP and MEL are managed on a worldwide basis but operate from UK, USA, European and Asian locations. In presenting information on the basis of geographical segments, segmental revenue is based on the geographical location of customers. Segment assets are based on the geographical location of assets.
| | United | Continental Europe | North | Rest of | Total |
| For the year ended 31 December 2023 |
|
|
|
|
|
| Group revenue from external customers | 11,879 | 32,514 | 27,195 | 55,387 | 126,975 |
| Non-current assets | 42,745 | 19,815 | 39,697 | 246 | 102,503 |
| Capital expenditure - PPE | 4,393 | 524 | 1,464 | 2 | 6,383 |
| For the year ended 31 December 2022 | | | | | |
| Group revenue from external customers | 13,702 | 32,374 | 29,127 | 52,166 | 127,369 |
| Non-current assets | 41,951 | 20,943 | 39,869 | 367 | 103,130 |
| Capital expenditure - PPE | 3,057 | 559 | 1,618 | 23 | 5,257 |
3. Property, plant and equipment
Group
| | Land and buildings | Plant and equipment | Fixtures and fittings | Under construction | Total |
| | £'000 | £'000 | £'000 | £'000 | £'000 |
| Cost | | | | | |
| Balance at 01 January 2022 | 45,776 | 110,791 | 3,871 | 4,466 | 164,904 |
| Additions | 13 | 441 | 37 | 4,766 | 5,257 |
| Transfers | 346 | 5,699 | 196 | (6,241) | - |
| Disposals | (535) | (3,336) | (683) | - | (4,554) |
| Effect of movement in foreign exchange | 1,798 | 4,996 | 141 | 57 | 6,992 |
| At 31 December 2022 | 47,398 | 118,591 | 3,562 | 3,048 | 172,599 |
| At 1 January 2023 | 47,398 | 118,591 | 3,562 | 3,048 | 172,599 |
| Additions | 8 | 77 | 93 | 6,205 | 6,383 |
| Disposals | - | (941) | (194) | (44) | (1,179) |
| Effect of movement in foreign exchange | (793) | (2,451) | (73) | (91) | (3,408) |
| At 31 December 2023 | 46,613 | 115,276 | 3,388 | 9,118 | 174,395 |
| Accumulated depreciation | | | | | |
| Balance at 01 January 2022 | 14,160 | 56,361 | 2,982 | - | 73,503 |
| Depreciation charge | 1,374 | 5,176 | 320 | - | 6,870 |
| Disposals | (521) | (3,139) | (680) | - | (4,340) |
| Effect of movement in foreign exchange | 640 | 1,521 | 110 | - | 2,271 |
| At 31 December 2022 | 15,653 | 59,919 | 2,732 | - | 78,304 |
| At 1 January 2023 | 15,653 | 59,919 | 2,732 | - | 78,304 |
| Depreciation charge | 1,737 | 4,862 | 244 | - | 6,843 |
| Disposals | - | (984) | (191) | - | (1,175) |
| Effect of movement in foreign exchange | (331) | (925) | (64) | - | (1,320) |
| At 31 December 2023 | 17,059 | 62,872 | 2,721 | - | 82,652 |
| Net book value | | | | | |
| At 1 January 2022 | 31,616 | 54,430 | 889 | 4,466 | 91,401 |
| At 31 December 2022 and 1 January 2023 | 31,745 | 58,672 | 830 | 3,048 | 94,295 |
| At 31 December 2023 | 29,554 | 52,404 | 667 | 9,118 | 91,743 |
4. Interest-bearing loans and borrowings
| | | Group | | Company | ||
| 2023 | 2022 | | 2023 | 2022 | ||
| Current bank borrowings | | 36,527 | 37,446 | | 36,527 | 37,446 |
In March 2022, the Group completed a debt refinancing and selected Handelsbanken and NatWest, the incumbents, to continue as its lenders. Under the terms of the new facility, secured against the property, plant and equipment and trade receivables, the Group's gross finance facility consists of a £50m multi-currency revolving credit facility with a £25m accordion. With a 4+1 tenor, the extending year option was taken up in January 2023.
At the end of the financial year, the Group has utilised £36.5m (31 December 2022: £37.4m) of its multi-currency revolving credit facility of £50m. The total amount of £36.5m, repayable on the last day of each loan interest period, which is of either a three- or six-month duration, is net of £0.4m origination fees paid up front and being amortised over four years. The Group has headroom of £19.4m, being £6.3m cash and cash equivalents, and the undrawn facility of £13.1m, being the facility of £50m less the drawn-down balance of £36.5m, less the £0.4m origination fees.
The interest rates on the debt facility ranged between 3.70% and 6.60% in 2023 (2022: between 1.60% and 6.00%).
5. Issued share capital
Issued, allotted and fully paid ordinary shares of 5p each:
| | Number of shares | Par value | Share premium | Total |
| | | £'000 | £'000 | £'000 |
| At 1 January 2022 and 31 December 2022 | 48,621,234 | 2,431 | 44,178 | 46,609 |
| Share issue to Employee Benefit Trust | 225,000 | 11 | - | 11 |
| At 31 December 2023 | 48,846,234 | 2,442 | 44,178 | 46,620 |
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled, on a poll, to one vote per share at meetings of the Company.
6. Dividends and earnings per share
| | 2023 | 2022 |
| £'000 | £'000 | |
| Prior year final dividend of 4.62p (2022: 4.40p) per 5.0p ordinary share | 2,243 | 2,131 |
| Interim dividend of 2.28p (2022: 2.18p) per 5.0p ordinary share | 1,107 | 1,057 |
| Dividends paid during the year | 3,350 | 3,188 |
The proposed final dividend for the year ended 31 December 2023 of 4.90p per share (2022: 4.62p) is subject to approval by shareholders at the AGM and has not been recognised as a liability in these financial statements. The proposed dividend, which would be payable on 3 June 2024 to shareholders on the Company register at the close of business on 3 May 2024, would amount to £2,382k if paid to shareholders who are on the Company register as at 31 December 2023
Earnings per ordinary share
Earnings per ordinary share is calculated by dividing consolidated profit after tax attributable to equity holders of the Company of £9,242k (2022: £10,006k) by the weighted average number of shares in issue during the year and excluding own shares held by the EBT which are administered by independent trustees. The number of shares held in the trust at 31 December 2023 was 244,286 (2022: 107,130). Distribution of shares from the trust is at the discretion of the trustees. Diluted earnings per ordinary share adjusts for the potential dilutive effect of share option schemes in accordance with IAS 33 "Earnings per Share".
| | 2023 | 2022 |
| Weighted average number of ordinary shares in issue | 48,643,755 | 48,551,379 |
| Adjustments for share options | 1,161,180 | 987,750 |
| Diluted number of ordinary shares issued | 49,804,935 | 49,539,129 |
7. Financial instruments and financial risk management
Capital management
The Group's objectives when managing capital are to safeguard its 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 the capital structure, the Group can adjust the amount of dividends paid to shareholders, issue new shares or redeem existing ones or borrow funds from financial institutions.
The Group monitors capital on the basis of the following leverage ratio: net borrowings divided by EBITDA (as per bank facility agreement).
Loan covenants
Under the terms of its borrowing facilities, the Group is required to comply with the following financial covenants:
| · | The ratio of net borrowings on the last day of the relevant period to earnings before interest, tax, depreciation and amortisation, share of profit/(loss) from joint venture, equity-settled share-based payments and exceptional items (EBITDA) shall not exceed 3.50:1.00 (until 9 March 2022, 3.00:1.00, under the terms of the previous debt facility).
|
| · | The ratio of EBITDA to net finance charges in respect of the relevant period shall not be less than 4.00:1.00. |
The Group has complied with these covenants throughout the financial year.
| | As at | As at |
| Net borrowings | 30,233 | 26,852 |
| EBITDA | 24,687 | 22,985 |
| Net borrowings/EBITDA | 1.22 | 1.17 |
| Net finance charges | 2,212 | 1,682 |
| EBITDA/Net finance charges | 11.16 | 13.67 |
Net borrowings comprise current and non-current interest-bearing loans and borrowings of £36,527k and cash and cash equivalents of £6,294k.
EBITDA comprises:
| | | 2023 | 2022 |
| Profit for the year | | 9,242 | 10,006 |
| Depreciation and amortisation | | 8,217 | 8,245 |
| Finance costs | | 2,349 | 1,758 |
| Share of profit from joint venture | | (54) | (50) |
| Equity-settled share-based payments | | 1,335 | 809 |
| Taxation | | 3,598 | 2,217 |
| | | 24,687 | 22,985 |
Net finance charges comprise interest income of £191k and finance costs expensed of £2,403k, which excludes pension interest.
The Group's objective is to maintain leverage below the Board's appetite of 2.0. However, it is prepared to accepted increases in this ratio at times of sizeable, capacity-related, capital expenditure to support continued growth. Subject to short-term macro-economic and geopolitical volatility, this is always expected to reduce quickly back below the Board's appetite, and to significantly lower levels, as capacity utilisation improves.
The bank covenant definition does not include the impact of IFRS 16 "Leases", which would have moved the ratio from 1.22 to 1.28.
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