Zotefoams strong H1 with increased profit expectations for the full year

Zotefoams plc (LON:ZTF), a world leader in cellular materials technology, today announced its interim results for the six months ended 30 June 2022.

Results highlights

Group revenue of £59.0m, 23% above the prior year comparative (HY 2021: £48.2m)-High-Performance Products (HPP) sales up 21% to £23.7m (HY 2021: £19.6m)-Polyolefin foams sales up 26% to £34.3m (HY 2021: £27.3m)
On a constant currency basis, Group revenue was 21% ahead of the prior year comparative at £57.9m
Effective pricing has supported gross margins, despite significant cost inflation
Profit before tax (PBT) increased 42% to £5.7m (HY 2021: £4.0m)
-FX tailwinds benefitted PBT by £1.0m
Basic earnings per share increased 44% to 9.42p (HY 2021: 6.52p)
Interim dividend increased by 4% to 2.18p per share (HY 2021: 2.10p per share), reflecting strong growth and confidence in the Group’s prospects 

Strategic highlights

Strong performance and current order book in most polyolefin foam markets and territories provides good momentum leading into H2
-In Poland, our third major manufacturing site has increased production and is increasingly servicing key European customers directly
Aviation sales increasing as market recovers and continued good demand in footwear products
Key patent granted in the USA for ReZorce® recyclable packaging technology

Financial summary

Six months ended 30 June 2022Six months ended 30 June 2021Change
Group revenue (£m)5948.223%
Gross margin (%)28.928.9
Operating profit (£m)*6.64.741%
Profit before tax (£m)*5.7442%
Basic EPS (p)*9.426.5244%
Cash generated from operations (£m)5.25.6-8%
Interim dividend (p)2.182.14%
Leverage ratio (multiple)21.9– 
Net debt (£m)3835.6-7%

*Unadjusted for £0.12m of amortisation on acquired intangibles

Commenting on the results and the outlook, David Stirling, Zotefoams Group CEO, said:

“We have delivered robust volume growth across both the HPP and Polyolefin Foam businesses in H1 2022. Alongside this, several rounds of price increases have been implemented across products and markets to catch up with persistent and unpredictable input cost inflation. As a result, we have been able to report stable gross margins, which has enabled strong first half operating profit growth.

“Order books and demand momentum across key markets coming through the half year underpin our expectation for year-on-year sales growth in H2 2022, which will also benefit from better pricing, support from more favourable exchange rates and better product mix.

“Input inflation, other than energy pricing, has moderated and supply chains are operating more normally, however, there is a heightened level of risk associated with macroeconomic factors and the demand environment.

“Whilst remaining mindful of these risks we now expect full year underlying profit to be ahead of current market consensus expectations.

“Overall, I am pleased with the recent performance and current positioning of our business.”

Results overview

Group revenue in the period increased 23% to £59.0m (HY 2021: £48.2m), with pricing and product mix driving the majority of growth. Sales volumes increased by 4% with good demand across most regions and markets. On a constant currency basis, Group revenue was up 20% to £57.9m.

Gross profit increased 23% to £17.1m (HY 2021: £13.9m), with gross margin unchanged at 28.9% (HY 2021: 28.9%). The Group implemented a number of price increases during the period to offset the cost increases, most notably the continuing high raw material prices and the surge in energy prices.

Operating profit for the period increased by 41% to £6.6m (HY 2021: £4.7m). Profit before tax increased 42% to £5.7m (HY 2021: £4.0m) and basic earnings per share increased 44% to 9.42p (HY 2021: 6.52p). Operating profit benefitted from a £1.0m favourable currency movement.

Cash generated from operations was £5.2m (HY 2021: £5.6m), with period end working capital higher than normal due to timing of receivables after strong sales in May and June. Closing net debt increased in the first six months of the year by £3.7m to £38.0m (31 December 2021: £34.3m) and leverage (net borrowings to EBITDA, see section “Net debt and covenants” for definition) at the end of the period was 2.0x (31 December 2021: 2.1x).

The Board remains confident in the cash generation of the business and an interim dividend of 2.18p per share has been approved by the Board (HY 2021: 2.10p per share).

Business unit review


Zotefoams’ speciality materials are used in a wide variety of applications globally. Our main markets are footwear, where we have an exclusive agreement to supply Nike, product protection and transportation, which includes aviation and aerospace, automotive and rail. Building and construction is the only other market segment traditionally representing over 10% of sales, while we also supply to medical, industrial and other markets.

In the first half of 2022 we delivered 23% revenue growth, with pricing initiatives and product mix being the most significant factors. Sales volumes increased by 4%, while favourable foreign exchange rates accounted for 2% of the growth.

Our footwear business grew by 20% compared with H1 2021 and accounted for 33% of Group sales (HY 2021: 34%). Demand in most other markets remained strong, with notable improvement in aviation and insulation products and a noticeable exception being automotive. By geography, all regions delivered sales growth, led by price increases.

Polyolefin Foams

Polyolefin Foams represented 58% of Group revenue (HY 2021: 57%), with sales increasing 26% to £34.3m (HY 2021: £27.3m) and sales volumes increasing 4%. On a constant currency basis, sales were £34.4m. Price increases in the UK and Europe, including a price surcharge aligned to input costs, increased average sales prices by 20%. Product mix suffered a temporary adverse impact in the period as a result of supply constraints in certain additives that are required for many of our more technical, higher-value products.

In Continental Europe (46% of segment sales) sales increased 23% and volumes increased 6% versus the comparative period, with all markets other than automotive performing strongly. In the UK (17% of segment sales), sales increased 9% but volumes declined 6% the latter partly due to timing in availability of higher-value products. In North America (31% of segment sales), sales increased 47% and volumes increased 13%, with record sales performance and order book and an improved product mix. In Asia, where volumes are significantly lower (6% of sales) and the product mix is biased to higher-value products, sales grew 10% but volumes fell 12%, the latter again linked to availability of these products in the period.

Segment profit increased by 28% to £1.7m (HY 2021: £1.3m), yielding a segment profit margin of 5% (HY 2021: 5%) and is an increase from the 1% margin achieved for full year 2021. On a constant currency basis, segment profit was £1.9m. While this improvement in profitability is welcome, the segment profit remains low due to three main factors. Firstly, inflationary costs, primarily in raw materials and energy, have been passed on as price increases, but with a timing lag. We believe that our market pricing now reflects the current level of costs we face, other than possible further energy price increases in the second half, therefore future margins should reflect the full benefit of our price increases. Secondly, we have invested in additional capacity which comes with margin dilution in the short term. This primarily relates to the incremental costs associated with our Poland facility, which is currently operating as planned at lower utilisation levels but is already providing valuable global capacity to the AZOTE business unit and improved customer service to mainland Europe customers. Finally, our North American facility has recorded strong sales growth and is enjoying record order books, but performance efficiency has suffered without direct support from the UK during COVID travel restrictions. This is now being resolved and, combined with the benefit of continuous operational improvements in the UK facility, will benefit margins over the medium term.

The relationship between our prices and input costs is obviously of particular importance. Generally, we are able to pass on increased costs if these are commensurate with the inflation being experienced. Historically, we have not typically utilised short-term dynamic pricing in response to either rising or falling raw material costs, with minor variations being absorbed over a cycle of annual price increases. However, recent cost inflation has not been typical, with very high prices for our major raw materials, particularly low-density polyethylene (“LDPE”), as well as other input costs. In the UK and Europe, Zotefoams implemented price increases effective January 2022 and April 2022 and then introduced a price surcharge in May. In the USA, we implemented price increases in January 2022 and May 2022. In both cases, we also introduced speciality materials surcharges. The intent of these price increases is to recover the higher costs but not to recover previous percentage margin levels, nor position at the peak pricing levels experienced. Finding the balance between price rises and potential demand destruction in the current environment represents an ongoing challenge. We expect our sales prices to hold when polymer prices return to more normal levels, while surcharges are positioned to be more flexible and relate closely to increases or decreases in the main costs we face.

High-Performance Products (“HPP”)

HPP represented 40% of Group revenue in the period (HY 2021: 41%), with sales increasing 21% to £23.7m (HY 2021: £19.6m). On a constant currency basis, sales were £22.6m, representing 15% growth. Sales volumes in HPP were 9% higher than the comparative period.  Sales of our largest application, footwear, continued to show growth in the period, increasing 18% in the period to £19.5m (HY 2021: £16.5m). ZOTEK® F technical foams, which are mainly used in aviation, grew by 69% to £1.9m (HY 2021: £1.1m). This remains significantly below the pre-pandemic years (HY 2020: £3.5m and HY 2019: £4.2m) but is an encouraging trend and we expect this momentum to continue. T-FIT® advanced insulation, which is mainly used for cleanrooms in pharmaceutical, biotech and semiconductor manufacturing, grew 8% in the period under very difficult conditions, particularly in China, one of our main markets, which has adopted a zero-tolerance approach to COVID-19 and where our local processing plant was closed for five weeks during Q2 2022. As we develop the T-FIT brand, supported by clear evidence of the performance and value to the customer across a range of installations, we are seeing increased interest in the product range and expected growth to accelerate in H2 2022, provided Asia avoids further COVID disruption. 

The segment profit in HPP reflects a mix of products and markets at different stages of development. Within this portfolio foams used for footwear and aviation have both reached a scale that makes them profitable. T-FIT technical insulation, which has attractive underlying margin potential, has a mixture of profitable lines and earlier stage products and the Group has continued to invest in operational and sales capability, mainly in China and India, but more recently in the USA and Poland. We intend to continue with this investment, which we believe offers good potential to support our long-term ambition.

Segment profit in HPP increased by 66% to £6.5m (HY 2021: £3.9m), yielding a segment profit margin of 27% (HY 2021: 20%). On a constant currency basis, segment profit was £5.3m, yielding a profit margin of 23%. Most HPP sales are in USD while costs are in a mixture of GBP, USD and Euro, therefore the benefit of the stronger dollar and weaker euro was greater on the HPP segment than in Polyolefin Foams. Raw materials and other inflationary pressures were less marked in HPP than in AZOTE, partly as a result of larger inventory holdings in HPP, with correspondingly lower pricing adjustments in HPP foams or T-FIT insulation products being made.   

MuCell Extrusion LLC (“MEL”)

MEL, which licenses microcellular foam technology and sells related machinery, accounted for 2% (HY 2021: 3%) of Group revenue in the period with sales of £1.1m (HY 2021: £1.3m).

We continue to divert many of our existing resources away from our traditional MEL licensing business model and towards the business opportunity offered by our ReZorce® barrier materials products. Moreover, as we have previously communicated, we have invested additional resources to deliver this opportunity. ReZorce is a mono-material, and hence fully recyclable, barrier packaging solution for consumer products which offers the possibility to replace difficult-to-recycle cartons and pouches with a system that can not only be easily recycled but also uses recycled material to deliver a circular packaging solution. ReZorce, therefore, offers a potential improvement in carbon footprint and recyclability to a global industry.

While considerable challenges, and therefore risks, remain in developing the complete “end-to-end” solution, there have been some notable developments since our last update such as the granting of a key patent in the USA and trials at low volume on a commercial production line proving our ability to make and fill a carton based on our technology. Higher output trials are planned and we now intend to investigate potential partnerships to support the journey through development and commercialisation, given the size of the opportunity and expertise required.

During the period, we invested £0.6m in operating costs (HY 2021: £0.3m) to continue the development of ReZorce, while a further £0.9m of capex was incurred, split £0.7m (HY 2021: £0.2m,) intangible development costs and £0.2m (HY 2021: £0.5m) tangible assets. Since the inception of this initiative, the Group has capitalised a total of £3.3m (HY 2021: £1.2m).

MEL reported a segment loss after amortisation costs of £0.6m (HY 2021: loss £0.1m), with breakeven in the core business of MEL as growth investment was diverted to ReZorce and licence income increased. The carrying value of MEL at 30 June 2022 includes intangible assets of £6.3m (31 December 2021: £5.1m), which mostly comprises goodwill and technology that arose on the acquisition of MEL in a previous accounting period and capitalised development costs relating to ReZorce. While MEL has historically been loss making, we consider that no impairment is needed at this stage based on the size and potential of the opportunity that the ReZorce technology offers. In this regard, the carrying value is supported by the Board’s ongoing commitment to funding the project and the progress made to date and expected in the second half of the year.

Environmental, Social and Governance (‘ESG’)

The Board understands that embedding ESG in our business creates sustainable long-term value for stakeholders. Zotefoams’ purpose, to provide “Optimal material solutions for the benefit of society” reflects our belief that plastics, when used appropriately, are frequently the best solution for the sophisticated, long-term applications typically delivered by our customers.  We are making good progress on our ESG plans including reducing energy and polymer usage, minimising waste and developing new products which use recycled materials.  A full ESG report was published in March 2022 setting out the Group’s ESG management framework and goals. This will be updated in March 2023.

Employees and talent management

Hiring and retaining employees with the right skills and managing and further developing these talented people, is very important to Zotefoams as it grows and evolves globally. We have a wide scope of opportunities and need to identify and develop the right people to define and deliver our potential. While direct engagement with certain overseas operations has increased as the effects of COVID-19 subside, others remain difficult to visit and renders the continued use of technology essential to training, alignment and management. We currently employ 572 people globally (HY 2021: 551 people), 42% (HY 2021: 35%) of whom are outside the UK.

On behalf of the Board, we would like to thank all our employees for their continued contributions and commitment to Zotefoams, as well as their ongoing flexibility during these challenging times. We would also like to thank Dan Catalano, President of our USA operation until his retirement in May 2022, for his 18 years of service to the Zotefoams Group and his contributions to the growth of our US business, including his successful oversight of the recent capacity investment in the facility. We wish him well in his retirement.

Financial review

Currency review

As a predominantly UK-based exporter, over 80% of Zotefoams’ sales are denominated in US dollars and euros. Most costs are incurred in sterling, other than the main raw materials processed at the Croydon, UK site, which are in euros, and the operating costs of the Group’s North American activities, which are in US dollars. As a result, movements in foreign exchange rates can have a significant impact on the Group’s results. The Group also incurs operating costs at the Poland facility in Polish zloty and operating costs at its China T-FIT processing plant in Chinese yuan but any fluctuations here are immaterial to the Group.

The exchange rates used to translate the key flows and balances were:

6 months to 30 Jun 226 months to 30 Jun 2112 months to 31 Dec 21
Euro to GBP – period average1.1891.1521.163
Euro to GBP – period-end spot1.1631.1641.192
USD to GBP – period average1.3001.3881.376
USD to GBP – period-end spot1.2131.3841.351

The Group uses forward exchange contracts to hedge its foreign currency transaction risk and hedges its exposure to foreign currency denominated assets, where possible, by offsetting them with same-currency liabilities, primarily through borrowing in the relevant currency. These foreign currency denominated assets, which are translated on a mark to market basis every month with the movement being taken to the income statement, include loans made by the Company to, and intercompany trading balances with, its overseas subsidiaries, the effect of which is cash neutral, and non-sterling accounts receivable held on the Company’s balance sheet. The Group does not currently hedge for the translation of its foreign subsidiaries’ assets or liabilities. This policy is kept under regular review and is formally approved by the Board on an annual basis.

In the period, net FX movements had a positive impact on sales and profitability. Reported net sales were £1.1m above those adjusted on a constant currency basis (HY 2021: £2.6m below). The net profit effect of this on the Group, prior to any hedging activity, was a gain of approximately £1.0m (HY 2021 loss: £1.8m). Offsetting this, and included in administrative expenses, was a loss of £0.9m (HY 2021 gain: £1.0m) from transactional hedging via forward exchange contracts. We also recorded a translation gain, mostly related to the translation of USD-denominated footwear receivables, of £0.9m (HY 2021 loss: £0.4m). The combined favourable impact of movements in foreign currency on profitability in the period was £1.0m (2021: adverse effect £1.2m).

Gross profit

Gross profit increased 23% in the period to £17.1m (HY 2021: £13.9m), benefitting from improved pricing, the operational gearing effect of higher sales volumes and £1.1m of favourable currency impact. Price increases in the period partially offset the cost inflation in, primarily, raw materials and energy, with a lag in implementation. Period-to-period, average low-density polyethylene prices (the primary raw material for AZOTE® foams) were 27% higher and energy prices were 50% higher. Since the beginning of the year, the contribution margin (sales less direct input costs and energy) has increased by six percentage points. The net impact of this was an unchanged gross profit margin of 28.9% (HY 2021: 28.9%).

We do not anticipate any meaningful relief from high polymer prices this year and expect energy costs to remain high and extremely unpredictable for the foreseeable future as a result of the prevailing geopolitical uncertainty.

Distribution and administrative costs

Included within distribution expenses in the Group’s income statement are sales, marketing, despatch and warehousing costs. These costs increased 3% to £3.7m (HY 2021: £3.6m), with increased sales activity offset by efficiency improvements in areas including offsite warehouse storage.

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. In the period, these costs increased 19% to £6.8m (HY 2021: £5.7m). Stripping out FX hedging movements, costs increased 9% to £6.9m (HY 2021: £6.3m. See currency review for further details of FX-related variances.

Finance Costs

Finance costs increased to £0.9m (HY 2021: £0.6m) and include £0.1m (HY 2021: £0.1m) of interest on the Company’s Defined Benefit Scheme pension obligation. The increase relates to £0.3m of unamortised costs from the previous banking facility, which was replaced in March 2022.

Taxation and earnings per share

Income tax expense for the period increased by 35% to £1.1m (HY 2021: £0.8m). The tax charge is recognised based on management’s estimate of the weighted average annual income tax rate expected for the full financial year. Zotefoams’ estimated average annual tax rate used for the period to 30 June 2022 is 19.88% (estimated average annual tax rate for the year used at 30 June 2021: 21.04%), which reflects the increase in profits of the legal entities within the UK.

Basic earnings per share was 9.62p (HY 2021: 6.52p) an increase of 44%.

Cash flow

Cash generated from operations was £5.2m (HY 2021: £5.6m). Included in this was a net increase in working capital in the period of £5.8m (HY 2021: net increase of £3.0m). Accounts receivable increased £9.6m in the period (HY 2021: increased £4.1m), reflecting very high May and June sales (average terms 70-90 days) as well as a short delay in cash receipt across the period end due to a delay in material transit to a large customer. Excluding footwear customers, whose size skews the statistic, overdues continued to be below 1%. Inventories increased £1.0m in the period (HY 2021: increased £3.9m) and accounts payable increased £4.7m (HY 2021: increased £5.0m), reflecting significantly higher levels of activity and materials pricing compared with the comparative period.

Capital expenditure in the period was £3.4m (HY 2021: £3.4m), of which £0.8m (HY 2021: £0.3m) related to intangibles arising from the capitalisation of ReZorce development costs. A final dividend of £2.1m (HY 2021: £2.1m) was paid during the period.

Net debt and covenants

Net debt (cash less bank borrowings and lease liabilities) increased by £3.7m from the start of the period to £38.0m (31 December 2021: £34.3m).

At 30 June 2022, the Group’s gross finance facilities were £50.0m, comprising a multi-currency term loan of £50.0m. At 31 December 2021, the Group’s gross finance facilities were £47.3m, comprising a multi-currency term loan of £20m, a multi-currency revolving credit facility of £25.0m and a remaining balance of £2.3m of a further £7.5m sterling annually renewable term loan that had been repayable in equal quarterly instalments. At the date of the Statement of Financial Position, 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 £12.3m (31 December 2021: £13.4m).

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