REG - Zotefoams PLC - Preliminary Results
22/03/2022 07:00
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RNS Number : 5191F Zotefoams PLC 22 March 2022
Preliminary Results (unaudited) for the Year Ended 31 December 2021
22 March 2022 - 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 2021.
"Strong sales growth impacted by significant and unpredictable cost
inflation."
Financial highlights
2021 2020 Change
Revenue £100.8m £82.7m 22%
Gross margin 26.4% 33.6% (720)bps
Operating profit £8.1m £9.1m (11)%
Profit before tax £7.0m £8.3m (16)%
Taxation £2.6m £1.1m (131)%
Basic EPS 9.01p 14.87p (39)%
Cash generated from operations £12.8m £13.0m (2)%
Net debt £34.3m £35.6m 4%
Leverage ratio(1) 2.1x 2.1x -
Final dividend(2) 4.40p 4.27p 3%
( )
(1 )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
(2 )Final dividend is subject to approval at the May 2022 AGM
Results highlights
• Exceeded £100m sales for the first time in the Group's history and delivered
strong growth across all business units:
- Polyolefin Foams sales up 10% to a record £56.2m (2020: £50.9m) and 15% in
constant currency
- HPP sales up 41% to £42.3m (2020: £30.0m) and 47% in constant currency
- MuCell Extrusion sales up 32% to £2.29m (2020: £1.73m) and 39% in constant
currency
• Excluding the one-off PPE contract of the prior year, Polyolefin Foams sales
up 36%
• Profit margins impacted by:
- Significant and unpredictable cost inflation with a lag on sales price
increases
- Unfavourable currency movements
• Basic EPS reduced by 39% due to lower profit and a non-recurring significant
increase in the deferred tax charge mostly reflecting the planned increase in
UK corporation tax
• Robust cash generation performance maintained, with net debt down 4% and
year-end leverage ratio remaining at 2.1x
Strategic progress
• Rapid recovery in Polyolefin Foams demonstrates structural growth prospects in
this important business unit, underpinned by the megatrends of environment,
regulation and demographics and facilitated by the Group's well-invested
global capacity
• Poland manufacturing plant commissioned in February 2021
• Another excellent year of HPP growth in footwear products and worked closely
with our partner to develop further long-term opportunities
• Significant progress at MuCell Extrusion in developing the ReZorce(®)
mono-material barrier packaging solution, which offers society a truly
circular option using existing recycling infrastructure
David Stirling, Group CEO, said:
"Geopolitical risks are currently much higher than normal. Whilst these have
limited direct impact on our operations currently, we are mindful of the risk
that they may lead to more significant indirect impacts, especially in supply
chain, inflation and demand, rendering forward looking statements particularly
uncertain.
"Currently, we are experiencing good demand across our business consistent
with our expectations. Prices for polyolefin foams were increased in January
and, in some products and geographies, we have additional increases notified
to take effect in the second quarter. The inflationary environment for our
input costs remains highly unsettled, with pricing of raw materials, freight
and energy in particular expected to be volatile for the remainder of the
year, at least, and accentuated by current events in Eastern Europe. Our sales
prices and margins are therefore being closely managed. Our operational
performance also continues to be challenged by an unpredictable supply chain
and the ongoing challenges presented by COVID-19 and its variants. We continue
to work hard to manage the impacts of these as effectively as possible,
however inefficiencies are to be expected.
"We expect modest volume growth in our Polyolefin Foams business during the
year, with a similar product mix to 2021 and a strong benefit from price
increases improving margins, subject to managing cost inflation appropriately.
In our HPP business unit, both T-FIT insulation and ZOTEK foams for aviation
are expected to grow strongly as market conditions improve, particularly in
the second half of the year, while demand for footwear products is expected to
remain at similar levels to 2021.
"ReZorce barrier packaging represents a potentially very significant
opportunity for Zotefoams but depends on achieving a number of developmental
milestones, the outcome and timing of which are difficult to predict. We are
therefore conducting frequent reviews of progress but currently expect that,
working with partners, we will be able to successfully develop and
commercialise the technology. We will update stakeholders when appropriate.
"Overall, the Board remains confident about the future prospects for our
business".
Enquiries:
Zotefoams plc +44 (0) 208 664 1600
David Stirling, Group CEO
Gary McGrath, Group CFO
IFC Advisory (Financial PR & IR) +44 (0) 203 934 6630
Graham Herring
Tim Metcalfe
Zach Cohen
About Zotefoams plc
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 (MuCell
Extrusion) and Jiangsu Province, China (T-FIT).
www.zotefoams.com (http://www.zotefoams.com/)
AZOTE(®), ZOTEK(®), ReZorce(®) and T-FIT(®) are registered trademarks
of Zotefoams plc.
An introduction from our Chair
In the second year of the pandemic, a strong market recovery has been
accompanied by inflationary challenges as we continue to deliver strategic
progress
Performance
In 2021, revenue growth was strong as polyolefin foams demand rebounded from
the impacts of COVID-19 in the previous year and our Footwear business grew
significantly as expected. Significant and unpredictable input cost inflation
throughout the year suppressed margins, alongside unfavourable currency
movements, as higher selling prices to recover these higher costs were
retrospectively implemented and were therefore not sufficient to recover the
full impact of continuing cost increases. Group revenue was 22% up on the
previous year at £100.8m (2020: £82.7m). Operating profit was 11% below the
previous year at £8.1m (2020: £9.1m). Basic earnings per share was down 39%
at 9.01p (2020: 14.87p). Excluding a £1.0m deferred tax charge resulting from
the UK government's announced change in UK Corporation Tax rate from 19% to
25% in 2023, basic earnings per share was down 25% at 11.1p. At the end of the
year, the balance sheet remained strong, with leverage at 2.1x (2020: 2.1x)
and well within covenants, and liquidity headroom of £13.4m (2020: £19.2m)
after £6.5m of capital repayments.
Strategic progress
Our strategy is built around a focus on sustainable organic growth. Zotefoams
has a portfolio of differentiated products based on unique and environmentally
friendly technology and intellectual property. We work with our partners to
optimise our materials for their needs and have developed a portfolio of
high-performance products that further enrich our product mix, adding more
value for customers and to our business. Alongside this, we have established a
diversified international manufacturing footprint to ensure there is
sufficient capacity to meet growing demand across a range of attractive end
markets. In another challenging year, we have made good further progress with
this strategy. Our largest market segment, Polyolefin Foams, recovered in 2021
with volumes growing 39% after excluding the one-off PPE sales of 2020. We
continue to see structural growth prospects in this important business unit,
underpinned by the megatrends of environment, regulation and demographics and
facilitated by our new global capacity. In this regard, we commissioned our
Poland manufacturing facility in February 2021, marking the final phase of a
multi-year capacity improvement commitment adding 60% capacity to pre-2018
levels. In our High-Performance Products (HPP) business, we delivered another
excellent year of growth in footwear and worked closely with our partner to
develop further long-term opportunities. Also in HPP, structural high-growth
opportunities in T-FIT(®) insulation products and ZOTEK(®) technical foams
for aviation both remained severely impacted by COVID-19 restrictions, growing
by a modest 11% and declining 10% respectively. The long-term growth outlook
for these markets remains compelling and we expect to see recovery in the
short to medium term. We also made significant progress at MuCell Extrusion
LLC, continuing the development of the ReZorce(®) mono-material barrier
packaging solution which offers society a truly circular option using existing
recycling infrastructure. We built an experienced team and installed and
commissioned both our pilot line in the USA and a sterile carton packaging
machine to test the sheet's capability to be formed into a carton and sealed
to the required industry standards. We have secured support to trial the
technology with leading, recognised industry players, and progressed the route
to market options. We expect to update stakeholders on the progress of this
high-reward, high-risk opportunity during 2022.
Dividend
The Board is proposing a final dividend of 4.40p (2020: 4.27p) which, if
approved by shareholders, would make a total dividend for the year of 6.50p
(2020: 6.30p), an increase of 3.0%. This reflects the Board's continued
confidence in the Group's future and is 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 1
June 2022 to shareholders on the register on 6 May 2022.
Our people
We know that our people are key to our success and 2021 has once again
showcased their importance. They have faced a continuation of the pandemic,
Brexit and severe supply chain challenges combined with high levels of
business activity and a need to respond quickly. Their resilience and
commitment have been outstanding and have ensured that the needs of customers
were met in the most difficult of circumstances.
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. I would like to welcome the new employees who have joined us around
the world during the past 12 months and give a special mention to our
colleagues who have started up our newest manufacturing facility in Poland. I
would also like to thank those who have helped all our new colleagues
integrate successfully and thank, once again, all our hard-working employees
and their supportive families who have helped the Group continue to make good
strategic progress during these very challenging times.
Sustainability
The Board is focused on the importance of sustainability and the evolving
debate around the use of plastics by society. It considers both in relation
to the future desired outcomes for all stakeholders. Accordingly, our strategy
incorporates the consideration of climate change in terms of financial and
operational impacts. Zotefoams' products are used almost exclusively for
permanent solutions and often form a positive element of our customers' own
sustainability agenda. They are seldom deployed for single-use purposes which,
understandably in certain applications, has caused most public concern. The
premise of our MuCell(®) technology is the reduction of plastic in society
and our exciting ReZorce mono-material barrier packaging solution, using this
technology, is a fully circular solution to very challenging targets set by
governments and brands in reducing their carbon footprint and increasing the
use of recycled materials. We believe that plastics, used appropriately,
remain the optimal solution both functionally and environmentally for
our customers' needs and for society. We also recognise the importance of
continuous improvement around product development and operating efficiency to
reduce the Group's environmental impact. Sustainability and climate change are
recognised as a principal risk at Zotefoams and both the strategic and
operational impacts of sustainability are being embedded within
decision-making processes throughout the Group. This year, we made good
progress refining our sustainability strategy, based on our purpose of
providing "optimal material solutions for the benefit of society". Following
our adoption of the SASB framework in 2020, the business has set clear targets
aimed at optimising the use of raw materials, minimising waste and improving
recyclability and we have delivered our first response to the Task Force on
Climate-Related Financial Disclosures (TCFD).
Governance and the Board
There were no changes to the experienced and engaged Board during the year.
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. During the year, we
continued to pay particular attention to the provision of a safe working
environment for our staff across all global locations and maintained the
improved visibility and quality of safety performance data across the business
and I thank all employees at Zotefoams for their efforts in achieving an
improved performance this year. We continue to support and empower our
employees and are meeting our commitment to enhancing the employee voice
in the boardroom through the position of Jonathan Carling, Independent NED,
as Board representative for workforce engagement. 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.
The Board considers that it has fully applied all the principles and
provisions of the UK Corporate Governance Code during 2021.
Looking to the future
Zotefoams is well positioned with well invested, differentiated assets and a
clear strategy for organic growth. We have committed, capable and passionate
people and a strong pipeline of new opportunities, including ReZorce, and
whilst we remain mindful of the uncertain external environment, made further
unpredictable with current events in Eastern Europe, and the ongoing
challenges that COVID-19 and its variants bring, we are confident about our
future prospects for growth and margin improvement.
S P Good
Chair
22 March 2022
CEO Review
Record sales exceeding £100m but profitability dampened by a lag in
recovering unpredictable cost inflation
2021 United Continental Europe North Rest of Total
Kingdom
America
the World
Change % (44%) 58% 13% 49% 22%
Group revenue (£000's) 10,768 28,200 19,959 41,823 100,750
% of Group revenue 11% 28% 20% 41% 100%
2020
Group revenue (£000's) 19,106 17,856 17,629 28,061 82,652
% of Group revenue 23% 22% 21% 34% 100%
· Rest of the World comprises China: £28.4m (2020: £13.9m) and
other countries: £13.4m (2020: £14.2m)
In 2021, Zotefoams achieved a significant milestone by delivering £100m of
sales in the centenary year of the invention of the nitrogen gas process that
we use today. This milestone was achieved in turbulent times with pandemic
restrictions, large swings in product mix and a very difficult supply chain
environment.
In addition to this strong sales performance, we have made good progress on
two notable initiatives, with the commissioning of our £23m capacity
expansion in Poland to budget and at the expected time as well as the
commissioning of our ReZorce(®) mono-material barrier packaging development
centre in Massachusetts, USA. Also noteworthy, and based on our demonstrable
focus on safety across the Zotefoams Group, was the fact that we had no major
reportable accidents for the first time in many years.
We now see Zotefoams as an established, well-invested foam technology business
with a good portfolio of continuing growth opportunities alongside ReZorce,
which is a promising and disruptive new platform offering significant
potential.
The economic environment has been very challenging, with significant and often
unexpected cost increases from suppliers together with headwinds from
unfavourable currency movements. In particular, prices for our main raw
material, low density polyethylene ("LDPE"), which is a commodity polymer,
increased very sharply in the second quarter of the year shortly after we had
implemented price increases to our customers. This, along with the additional
overhead needed to manage our business, including costs related to our new
facility in Poland, has reduced margins in the short term. As further
inflationary pressures have emerged, we have implemented a series of price
increases across our business, although these pressures often result in a
temporary margin squeeze as, in most cases, inflationary shocks from our
supply chain, such as in freight, are not forewarned and are therefore
impossible to predict or pass on immediately. Over the course of the business
cycle, we intend to recover in full these higher input costs.
Zotefoams' contribution to a low carbon future, and sustainability more
generally, is a key consideration in how we plan and operate our business. We
utilise unique technology to make what we consider to be "best in class" foams
for a variety of uses aligned to global environmental, regulatory and
demographic trends. We firmly believe that plastic, our main raw material, is
the optimal material for the applications for which our products are used.
These are predominantly not single use and often function for many years as
industrial and consumer durables in applications as varied as medical
devices, footwear, cleanroom insulation, cars, aircraft and marine buoyancy.
Zotefoams' stated business purpose is "optimal material solutions for the
benefit of society" and, when considering our product range, markets,
operations and investments, this is the guiding principle when choosing
between various courses of action.
The principal drivers of short-term profitability for our business are the
ability to manage prices in line with our cost base, operating efficiency,
high asset utilisation and an improved product mix. We anticipate a higher
proportion of sales from our more technical ZOTEK(®) HPP foams and T-FIT(®)
insulation products to be the key drivers of returns in the medium term.
Group revenue increased by 22% to £100.8m (2020: £82.7m), with operating
profit of £8.1m (2020: £9.1m), 11% below last year mainly due to
inflationary cost pressures not being fully recovered in the period. A
stronger pound, relative to the US dollar in particular, also negatively
impacted sales and profitability by an estimated £4.1m and £0.5m
respectively. In 2020, revenue included a "one time" PPE contract in the UK
worth £9.6m for Polyolefin Foams. Excluding this contract, Group revenue
increased by £27.7m, or 36%, of which £14.9m was an increase in Polyolefin
Foams with strong market recovery and £12.2m was Footwear. Other movements
were relatively minor, with T-FIT insulation products and MuCell Extrusion LLC
("MEL") revenues both growing by over 10% from small bases and sales of ZOTEK
F foams declining due to weak aerospace market conditions and associated
customer destocking.
Strategy update
Zotefoams' strategy remains unchanged: to invest in flexible assets and
technology with the capability to support the organic growth opportunities
afforded by our diverse, and often unique, products. The results of this
investment, in development and/or capacity, typically take time to be realised
fully and this can create a short-term headwind for margins. However, we are
confident that our investment decisions are aligned to longer term growth
trends and that our differentiated and diverse products generate good levels
of demand with pricing power over the economic cycle.
Over the past couple of years, we have curtailed investment in some areas to
manage our costs and cash at a time of extreme uncertainty, but have
continued to invest in Footwear products, T-FIT insulation and ReZorce
mono-material barrier technology. In 2021, we saw the benefits of this in
Footwear sales and delivered good progress against technical milestones in
ReZorce. The ability to develop our T-FIT business unfortunately continued to
be heavily impacted by pandemic restrictions and the sales growth here was not
as substantial as expected, although we do not believe this diminishes its
longer-term prospects.
Sustainability is a key consideration in developing and implementing our
strategy. Our core materials offer improved product performance in durable
solutions while using less material than competitors do. Recyclability of
waste material into foams has been proven but is not yet common in the markets
in which we currently operate. MEL licenses technology specifically to reduce
polymer content and ReZorce offers a fully recyclable, circular, barrier
packaging solution. The strongly negative public perception of plastic is
becoming more nuanced beyond the environmental impact of ill-considered,
single-use, plastic used predominantly in consumer packaging. Zotefoams'
current markets are not immediately impacted by this, as products using our
foams are primarily integrated components in larger systems or products (such
as cars, planes, footwear and medical parts) or used in the long-term storage
of items. They are very rarely used in consumer disposable items. Our foams
save weight and fuel in cars, trains and aircraft, save energy by insulating
and provide protection to people and goods. Our products help our customers
reduce emissions, lower energy usage, improve fuel efficiency and comply with
increasingly stringent safety regulations. In common with other businesses, we
seek to minimise the use of natural resources through measures such as
reducing energy and polymer usage, which benefits the environment and reduces
our costs. We believe Zotefoams has demonstrable credibility in reducing the
carbon footprint of our customers, but the world is changing rapidly with
different competitive solutions and a redefinition of requirements driven by
preferences and regulation. We therefore continue to develop both our product
range and technology to anticipate and react to these changes.
Capacity and investment
Zotefoams is well invested in capacity to manufacture foams and our facilities
in the USA and Poland have been developed with a base infrastructure to allow
future capacity increases at lower incremental costs. In making these
investments, we took account of the potential growth rates of various products
across different geographies. Simplistically, our polyolefin foams markets are
substantially regional, benefitting from a local manufacturing presence which
allows swift and efficient distribution to our customers, while our HPP
products are technically more complex and expensive and customers are more
able to plan further ahead, with transport being a significantly lower
proportion of the cost to the customer. Our UK facility, which has the highest
capacity, therefore supplies all HPP products along with AZOTE(®) polyolefin
foam products, some of which ship to Asia and the Middle East, while our
facilities in the USA and Poland are today only supplying their local markets
with polyolefin foams.
Our capacity management decision-making requires us to consider the three
major manufacturing processes to make a foam: extrusion, high-pressure gassing
and low-pressure foam expansion. Extrusion is the lowest cost per unit of
capacity and high-pressure gassing is the highest cost and most complex
process, incorporating much of our proprietary technology. We can separate
these three processes, for example in Poland, where its low-pressure foaming
capacity receives intermediate "pre-gassed" sheets from the UK or the USA to
expand into foams and thereby reduce the transport carbon consumption and
cost. Additionally, our extruders tend to be set up for specific polymer
types, while high and low-pressure autoclaves can be used for all polymer
types, with our newer vessels offering complete flexibility to manufacture all
products. We consider capacity on a global basis with many factors influencing
the decision around which products to manufacture in which locations,
including customer service, sustainability and profit optimisation. Future
investment at our three main foam productions sites is planned to remove
production bottlenecks, improve operating and carbon efficiency and upgrade
infrastructure to improve our risk profile.
Outside of our autoclave technology, other planned investments relate to
T-FIT, which requires a relatively low capital cost to convert sheets of foam
into insulation products, and the ReZorce opportunity, which is addressed
separately below.
Polyolefin Foams
Segment revenue £56.2m Change +10% (2020: £50.9m)
Segment profit margin 1.2% (2020: 9.5%)
Segment profit £0.7m Change (86)% (2020: £4.8m)
In 2021, sales of Polyolefin Foams grew by 10% to a record £56.2m (2020:
£50.9m) and account for 56% of Group revenue (2020: 62%). In constant
currency, sales increased by 15%. As expected, there was no repeat of the 2020
sales of £9.6m for personal protective equipment ("PPE") for the UK National
Health Service. Overall, sales volume grew by 6%, price increases delivered 4%
sales growth in the period and sales mix improved by 5%, offset by adverse
currency movements of 5%.
Volumes improved by 39%, when excluding PPE from the 2020 comparative and
after very sharp falls across most industrial sectors in 2020, and were 13%
ahead of 2019. Overall, we experienced a broad-based recovery in most markets
by geography and by application segment, with the notable exceptions of
aviation and automotive which remained well below previous levels of activity.
Geographically, those areas which experienced the sharpest falls in demand in
2020 typically grew fastest in 2021. We increased prices late in the second
quarter, with the consequence that these price rises only contributed
partially to full year revenues.
Input costs for polyolefin foams are primarily raw materials and, to a lesser
extent, energy and operational costs such as labour. Freight costs, whether
paid by Zotefoams or by customers, can also be a significant factor. Prices
for the main raw material, low density polyethylene ("LDPE"), increased
rapidly and significantly from the relative lows experienced in the second and
third quarters of 2020. The average price paid during 2021 was around 80%
higher than the previous year and 50% higher than the long-run, pre-pandemic
average. When we were implementing price increases during 2021, we initially
predicted that this peak would correct towards the long-run average relatively
quickly and that relatively modest increases in pricing would recover general
inflationary pressures plus the catch-up from the relative lows of polymer
pricing in the previous period. At that time in the second quarter of 2021,
ethylene, the main feedstock for LDPE which normally accounts for 70-80% of
the LDPE price, was priced around its long-run average and LDPE premium
pricing was driven by a capacity shortage of polymer processing in Europe.
Since then, demand for polymer has remained high and ethylene prices have
risen considerably, leading to unprecedented levels of LDPE pricing. Input
costs for other materials and services have also increased markedly,
particularly later in the year with respect to energy and products which are
energy intensive. As a result, input costs during 2021 were only partially
recovered through pricing adjustments, impacting our margins in Polyolefin
Foams significantly.
In the final quarter of 2021, we implemented further pricing increases
effective early January 2022 in most markets and in January notified some
customers of a further price increase from April. In setting prices
historically, we have typically tried to absorb the short-term variability in
polymer and freight prices and act on inflation which is more "permanent" such
as employment costs or, as in the past, commodity costs which have undergone a
structural change in pricing. Cost increases in polymer, freight, energy and
other raw materials were substantially more impactful than expected and our
2022 price increases have reflected this. Whether these materials and services
have undergone a structural change in pricing remains too early to call at
this time.
Segment profit declined to £0.7m (2020: £4.8m), representing a margin of 1%
(2020: 10%), with the variance being accounted for almost entirely by the
timing and level of pricing not recovering increases in raw material and other
input costs in the period. Segment margin benefitted from an increase in
volumes offset by manufacturing yield inefficiencies, predominantly in the
USA, where on-site support would normally have come from UK technical staff,
and adverse foreign exchange rates of around £0.6m (partially offset by
hedges recorded centrally).
HPP
Segment revenue £42.3m Change +41% (2020: £30.0m)
Segment profit margin 20.6% (2020: 26.3%)
Segment profit £8.7m Change +10% (2020: £7.9m)
HPP comprises ZOTEK(®) technical foams, which include foams for footwear
where we have an exclusive relationship with Nike, and T-FIT(®) insulation
products. These products are typically unique or highly differentiated and
designed to deliver specific performance attributes, such as energy
management, excellent fire resistance or high-temperature performance to meet
the exacting needs of industries such as sports equipment, aviation,
automotive, biotech and pharmaceutical.
The HPP Business Unit sales increased by 41% to £42.3m (2020: £30.0m) and
accounted for 42% of Group sales in 2021 (2020: 36%). In constant currency,
sales increased by 47%. Within this business unit there are currently three
main end-use applications: footwear, aviation and technical insulation.
Footwear grew strongly as expected, following on from the strong second half
in 2020 and, with sales of £33.9m, now accounts for 34% (2020: 26%) of Group
revenue. This strong performance came despite well-publicised shutdowns of
Nike partner factories in Vietnam in the second half of the year due to
COVID-19 restrictions, which negatively impacted the manufacturing of some
shoe models. We have an exclusive and close relationship with Nike which
aligns our activities to their business priorities on performance,
sustainability and value in premium running shoes. This also gives good
visibility around Nike's intentions for the future, with demand planning being
a critical part of our cooperation. Sales of ZOTEK F fluoropolymer foams,
primarily for aviation applications, reduced again in 2021, by 10%, following
a large decline in 2020. Sales of £4.2m (2020: £4.6m) are now 58% below
their peak of 2019, due to the impact of continued supply chain contraction
primarily linked to Boeing's ongoing reduction in manufacturing of certain
aircraft models. Demand for aircraft interior products, mainly linked to
airlines, saw some modest growth from a low base in the previous year. As
demand for air travel returns, we are focusing on the development of
applications that use our materials within the cabin and which support the
drive to make aviation lighter and thus less fuel consuming. Furthermore, our
technical and business development focus over the past few years has extended
beyond aviation, with an emphasis on other areas of opportunity such as
battery insulation for electric vehicles and other technical insulation
applications, where feedback from customer trials in these markets is
encouraging. These initiatives, and the fact that our products remain
specified on existing aviation manufacturing applications, give us good
grounds for optimism later in 2022 and beyond. T-FIT insulation products grew
by 11% in the year, which was a second year significantly below our
expectations mainly due, again, to COVID-19 impacts particularly in India,
where sales grew modestly, and Europe, where sales declined for the second
consecutive year. In China, where we manufacture most of our T-FIT products,
sales grew strongly towards the end of the year and the country now accounts
for 52% of T-FIT sales. We remain optimistic about T-FIT insulation but need
to recognise that our ability to create demand for this technical product
range at this stage of development relies on sales teams meeting customers.
Over time we will further develop our T-FIT branding and leverage customers
who clearly have a positive experience of our products, thereby transitioning
from the current high-contact sales model to an increasingly experienced team
focused on specific development opportunities.
Segment profit increased by 10% to £8.7m (2020: £7.9m) and by 25% to £9.9m
in constant currency. The main difference between sales growth of 41% and the
lower percentage increase in segment profit, in addition to adverse currency
movements which are hedged centrally, was the cost of servicing customers,
particularly in respect of higher freight costs late in the year, investment
in T-FIT selling costs relative to the growth in sales and a higher allocation
of depreciation to this segment. Segment margin declined to 21% (2020: 26%).
MEL
Segment revenue £2.3m Change +32% (2020: £1.7m)
Segment loss before amortisation £0.5m Change +58% (2020: £1.2m)
Segment loss after amortisation £0.7m Change +52% (2020: £1.4m)
The MuCell Extrusion LLC business model is to develop and license or sell
intellectual property (IP) and related machinery. The focus of MEL's business
has evolved to create unique properties in plastic rather than merely reduce
the plastic content of an article. Specifically, we have been working to
develop and commercialise mono-material barrier technology, branded
ReZorce(®), for packaging of food and drink in a container which is
recyclable and uses recycled content in its manufacture - a true circular
economy product.
The core MuCell(®) technology can reduce polymer content, and cost, in
existing packaging by around 15% by injecting inert gas to displace plastic
with microcellular bubbles. This requires the packaging manufacturer and brand
to align both technically and commercially on the improved solution, which has
proved difficult as packaging producers are often remunerated on a "cost plus"
basis. The ReZorce technology is a completely new solution, offering brands
the ability to significantly reduce their carbon footprint and also help meet
their pledges on both recycling and use of recycled content in their
packaging, putting sustainability at the heart of our MEL development agenda.
There are considerable challenges to developing the complete "end-to-end"
solution, but we have made good progress in creating a sheet material which
meets the required oxygen and moisture barrier properties and has a range of
stiffnesses to allow it to be used in both carton and pouches, two of the most
common barrier packaging formats for food and drink. We believe there is a
significant market pull for this technology, as current barrier packaging is
typically made from combinations of materials and is therefore difficult to
recycle and often uses low or no recycled content.
Given the market opportunity and multiple challenges to commercialise, we are
investing in a phased manner, with future investment and the preferred
business model to be determined following the outcomes of the current phase of
technical development and market assessment. At this time, we are focusing on
the beverage carton market, which we estimate to be in excess of £7.5bn
revenues from the sale of packaging materials which ReZorce could replace,
although work is also progressing on pouches and other opportunities in the
background. Internally, we have established a pilot line to develop and
manufacture ReZorce sheet and commissioned a sterile carton packaging machine
to test the sheet's capability to be formed into a carton and sealed to the
required industry standards. This has proved successful on a limited basis,
looking at one carton format and, relative to the most modern machinery,
running very slow processing speeds. As we move to commercial trials, planned
for the second quarter this year, the technology will be exposed to much more
demanding conditions including high-speed processing. If these trials are
successful, we will have passed a significant milestone in creating value from
ReZorce cartons and will consider a number of business models which can
deliver value to our stakeholders.
Revenue from the MEL business unit increased by 32% to £2.3m (2020: £1.7m),
although both periods were heavily impacted by the inability of our staff to
travel and develop business. Sales in constant currency increased by 37%.
Segment loss for the year was £0.7m (2020: loss of £1.4m), representing a
negative margin of 30% (2020: negative margin 83%), which reflects the switch
in business focus to developing the ReZorce material and the capitalisation of
certain staff and other costs in accordance with IAS38. Overall ReZorce
capital expenditure was £1.9m, of which £0.8m was the capitalisation of
intangible assets, mainly related to people and IP development costs.
Measuring strategic progress
The markets in which we operate are driven by global trends - environment,
regulation and demographics - which we believe offer the potential for high
rates of market growth as well as opportunity for our disruptive technology
solutions. Having previously measured strategic progress on four metrics, we
have this year decided to separate MEL from HPP and have added sustainability
as a separate strategic objective:
1. We intend our HPP Business Unit to offer higher growth rates and better
margins than Polyolefin Foams. Sales in our HPP Business Unit, which offers
unique disruptive products and solutions, now account for 42% (2020: 36%) of
Group revenues with growth of 41% (47% in constant currency). The unique
benefits offered by these products, combined with market recovery in aviation,
offer good growth prospects. Margins in the period were 21% (2020: 26%), while
margins in our Polyolefin Foams business unit were 1% (2020: 10%).
2. Sales of our highly differentiated AZOTE polyolefin foam products increased
by 10% (15% in constant currency), against our target rate of twice global
GDP growth. The market disruption and UK government PPE contract in the second
half of 2020 distorts the underlying growth of this business unit and, against
2019, which is a better comparative, sales grew by 9% (14% in constant
currency).
3. Group operating margin was 8.1% (2020: 11.0%). Increased input costs, not
fully recovered in the period, were the primary reason for the reduced
operating margin, which was also impacted by unfavourable foreign exchange
rates, manufacturing yield inefficiencies and the additional costs of
servicing customers particularly late in the year. We anticipate margin
recovery as the prices we charge our customers increase more quickly than
input costs in 2022 and as we experience growth in higher margin areas such as
aviation and T-FIT products.
4. Group return on capital declined to 6.1% (2020: 9.0%), largely as a result
of the lower profitability of the Polyolefin Foams business unit and an
increased capital base which includes the commissioning of the Poland
manufacturing facility. The Group has invested in a large capacity enhancement
programme over recent years, including significant expenditure in the
supporting infrastructure that will be sufficient to support further capacity,
if needed, at much lower incremental cost. There is currently no further
commitment to large-scale increases in capacity and the Group is well
invested to support future growth. Capital spending is planned to return to
more normal, lower levels, broadly in line with depreciation. The net assets
of the business have increased significantly and profit and margin recovery
and higher asset utilisation from increased sales will be an important factor
in delivering material improvements in the return on capital over the coming
years.
5. In 2021, we introduced material sustainability targets arising from our
SASB assessment, provided fuller disclosures compliant with the Task Force on
Climate-Related Financial Disclosures guidance (TCFD) and ran customer focus
groups on sustainability to generate data to guide strategy. In line with our
commitment to using electricity from renewable sources wherever feasible, we
switched to a fully sustainable energy source in the UK in 2021. In March
2022, we incorporated clearly defined ESG targets in our bank refinancing
arrangements.
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. This approach recognises
that there is a high "option value" for success and at this time our business
model remains flexible to deliver this value in the best way for our
stakeholders.
People
The top priority for Zotefoams 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. The behaviour of all employees is now the major factor driving our
improved performance and lower risk profile and, in 2021, there were no major
reportable injuries in the Group (2020: 1).
For the past two years, managing the business during COVID-19 has required us
to adapt to different ways of working, including staff working from home and
the adoption of new safety protocols across all Group sites. During this
period, our employees have demonstrated flexibility and resilience and
embraced the challenges of rapidly changing business priorities caused by the
external environment. This has not been easy, particularly for newer employees
unfamiliar with the company or their colleagues and also for people working on
new initiatives. Clear communication of our strategy, objectives, progress and
approach to different challenges, as well as a common culture, are
particularly important to ensure cohesion in these difficult times.
I would like to extend my thanks to my colleagues and to their families for
their support given.
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 financial
statements. These forward-looking statements should be considered in light of
the continuing uncertainty surrounding the impacts of the COVID-19 virus and
the geopolitical environment, currently most impacted by the events in Eastern
Europe, on economic trends and business.
Current trading and outlook
Geopolitical risks are currently much higher than normal. Whilst these have
limited direct impact on our operations currently, we are mindful of the risk
that they may lead to more significant indirect impacts, especially in supply
chain, inflation and demand, rendering forward looking statements particularly
uncertain.
Currently, we are experiencing good demand across our business consistent with
our expectations. Prices for polyolefin foams were increased in January and,
in some products and geographies, we have additional increases notified to
take effect in the second quarter. The inflationary environment for our input
costs remains highly unsettled, with pricing of raw materials, freight and
energy in particular expected to be volatile for the remainder of the year, at
least, and accentuated by current events in Eastern Europe. Our sales prices
and margins are therefore being closely managed. Our operational performance
also continues to be challenged by an unpredictable supply chain and the
ongoing challenges presented by COVID-19 and its variants. We continue to work
hard to manage the impacts of these as effectively as possible, however
inefficiencies are to be expected.
We expect modest volume growth in our Polyolefin Foams business during the
year, with a similar product mix to 2021 and a strong benefit from price
increases improving margins, subject to managing cost inflation appropriately.
In our HPP business unit, both T-FIT insulation and ZOTEK foams for aviation
are expected to grow strongly as market conditions improve, particularly in
the second half of the year, while demand for footwear products is expected to
remain at similar levels to 2021.
ReZorce barrier packaging represents a potentially very significant
opportunity for Zotefoams but depends on achieving a number of developmental
milestones, the outcome and timing of which are difficult to predict. We are
therefore conducting frequent reviews of progress but currently expect that,
working with partners, we will be able to successfully develop and
commercialise the technology. We will update stakeholders when appropriate.
Overall, the Board remains confident about the future prospects for our
business.
D B Stirling
Group CEO
22 March 2022
Group CFO's review
2021 was a mixed year for Zotefoams, with significant revenue growth generated
from footwear and polyolefin foams markets accompanied by significant cost
escalation across production input costs, freight and certain critical
overheads
Group revenue Profit before tax
£100.8m £7.0m
Change +22% Change -16%
2020 £82.7m 2020 £8.1m
Net debt Leverage
£34.3m 2.1x
Change +4% Change nil
2020 £35.6m 2020 2.1x
Overview
Group revenue for the year increased by 22% to £100.8m (2020: £82.7m), with
another strong year in Footwear leading to growth of 41% in High-Performance
Products (HPP) and Polyolefin Foams growing 10%, or 36% excluding the one-off
PPE sales in 2020, as many end markets recovered and supply chains refilled.
MuCell Extrusion LLC (MEL) sales grew 32%, albeit from a smaller base. In
constant currency, Group revenue increased by 27% to £104.9m, an adverse
currency impact of £4.1m.
Operating profit declined 11% to £8.1m (2020: £9.1m). Input costs rose
rapidly and unpredictably and were not fully offset by price increases in the
year. Average raw material costs for our key raw material low density
polyethylene (LDPE) more than doubled, along with significant increases in
freight, energy and operating costs from our newly commissioned Poland
facility. This led to a gross margin decline of £1.2m to £26.6m (2020:
£27.8m), and a gross margin percentage of 26.4% (2020: 33.6%). Net finance
costs were £1.1m (2020: £0.9m), resulting in profit before tax of £7.0m
(2020: £8.1m). The taxation charge was £2.6m (2020: £1.1m) and includes a
£1.0m deferred tax accrual related to the UK government's announced increase
in the Corporation Tax rate from 19% to 25%, a further £1.0m deferred tax
charge related to a prior year tax credit and current year overseas losses
prudently not recognised as an asset. Basic earnings per share was 9.01p
(2020: 14.87p), down 39%. In constant currency, profit before tax was £7.5m,
an adverse impact of £0.5m.
At 31 December 2021, net debt was £34.3m (2020: £35.6m) and leverage (net
debt to EBITDA, using definitions under the bank facility agreement, see
section 'Debt facility') was 2.1x (2020: 2.1x). Net debt declined by £1.3m
after net cash flows generated from operating activities of £10.9m (2020:
£11.4m) were consumed mostly by capital expenditure of £7.0m (2020: £13.3m)
and dividends of £3.1m (2020: £1.0m).
Revenue performance
Polyolefin Foams business unit sales grew 10% to £56.2m (2020: £50.9m). In
constant currency, sales grew 15% to £58.3m. Excluding £9.6m of PPE-related
sales in H2 2020, which were a unique contract secured by the Group's largest
UK customer with the UK government during the depths of the pandemic, annual
sales of polyolefin foams increased 36%. This reflected the strong and rapid
recovery in global demand following the sharp decline in activity from Q2
2020, coupled with restocking which, in most cases, was complete by the end of
the year. All regions experienced very strong sales growth: the UK (ex PPE)
increased 13%, Europe increased 58%, the USA increased 13% and the Rest of the
world increased 49%, while most industrial markets recovered except aviation
and automotive.
HPP sales increased 41% to £42.3m (2020: £30.0m). In constant currency,
sales grew 47% to £44.1m. Footwear is the largest application currently
within HPP and revenue in this market grew 56% versus 2020, after growing 68%
in 2020, maintaining the run rate achieved in H2 2020. Sales were boosted by
the delayed 2020 Olympic games but hindered later in the year by an eight-week
shut down of operations at one of the Group's key customers in Vietnam.
ZOTEK(®) F fluoropolymer foam sales ended the year 10% down versus 2020,
impacted by the continuing depression of the airline industry, although we
began to see some signs of recovery in Q4 2021. T-FIT(®) advanced insulation
sales continued to face challenges from COVID-19, particularly in Europe and
India, which limited growth to 11% (2020: 4%), with a strong performance in
China offset by a decline in Europe.
MEL sales growth was affected by the current strategy to focus on existing
customers and redirect resources to the ReZorce(®) mono-material barrier
packaging initiative. Despite this, sales grew by 32% to £2.3m (2020:
£1.7m), with negligible impact in absolute terms from currency.
Revenue by market (%)
2021 2020
Sports and leisure 37 29
Product protection 26 21
Building and construction 11 12
Transportation 10 12
Industrial 7 7
Medical 5 16*
Other 4 3
* 11.6% of this 16% was a result of the PPE sales
Within the transportation segment, aviation represented 4.5% (2020: 6.5%) and
automotive 5.8% (2020: 5.5%) of Group revenue. These two markets remain well
below their pre-pandemic levels and in 2019 were 15.0% and 7.0% respectively.
Gross profit
Gross margin decreased to 26.4% (2020: 33.6%), representing a reduction of
£1.2m in absolute terms from £27.8m to £26.6m. While sales price increases
were implemented in the Polyolefin Foams business in Q2:2021, costs for
related raw materials continued to escalate and more than doubled through H1
2021, remaining close to their peak for the rest of the year. Zotefoams'
approach has previously been to adjust prices only when longer-term structural
changes in input pricing are evident, absorbing the advantages and
disadvantages of short-term price movements while longer term shifts are
passed on through pricing to customers. The unpredictable and significant
increase in LDPE prices throughout 2021 meant that costs were not fully
recovered during the period. Pricing actions implemented during 2022 are
planned to allow gross margins in the medium term to recover and the
drop-through effect on underlying profit to increase materially. In addition
to these raw material price increases, freight availability pushed logistics
charges up, most notably in H2 2021, and utilities increased significantly in
Q4 despite some protection during this period from energy hedges. In February
2021, the Group commissioned its third major foam manufacturing site in
Poland, which increased overhead costs, including depreciation of £0.7m and
an equivalent level of other fixed overhead as expected, and delivers
additional, global, operating capability that is not yet fully utilised. The
increased strength of sterling against the US dollar, in particular, also
impacted gross margin by £2.0m, with the offsetting impacts of the Group's
hedging strategy appearing under distribution and administrative costs below,
in line accounting standards.
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 actively in, and reprioritise where needed,
technical, sales-focused and administrative resources to create, execute and
manage this growth. After a large part of 2020 was spent managing
the uncertainties of COVID-19, with operating cost investment into these
growth drivers postponed and discretionary spend tightly controlled, a return
to investment in this area commenced in the latter part of 2020 and continued
in 2021. During the year, the average number of Group employee roles not
directly related to production amounted to 191, an increase of seven over the
previous year.
Included within distribution costs in the consolidated income statement are
sales, marketing and warehousing expenses. These costs increased by £0.5m,
or 8%, to £7.3m (2020: £6.8m) during the year, mostly reflecting a recovery
of some of the expenditure held back during 2020 and increased sales activity.
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 reduced in 2021 by £0.8m, or 6%, to
£11.1m (2020: £11.9m). However, after removing foreign exchange movements,
these administrative costs increased by £0.7m, mostly representing increased
support costs in Asia, Poland and at MEL, together with higher recruitment
costs after a quiet 2020. See Currency review 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 2021, central plc costs were £1.8m (2020: £1.9m).
Operating profit
Operating profit was £8.1m, 11% below 2020 (£9.1m).
Finance costs
The total interest charge for the year increased to £1.1m (2020: £0.9m) and
includes £0.1m (2020: £0.2m) of interest on the DB Scheme pension
obligation. The Group capitalised £nil (2020: £0.6m) of interest
in relation to the financing of its capacity enhancement projects still
under construction, a reduction following the commissioning of the Poland
plant at the beginning of February 2021, at which point interest
capitalisation in the Group ceased.
Profit before tax
Profit before tax decreased by 16% to £7.0m (2020: £8.3m).
Currency review
Exchange rates
Zotefoams transacts significantly in US dollars and euros. The exchange rates
used to translate the key flows and balances were:
2021 2020
GBP to USD - average 1.376 1.284
GBP to USD - year-end spot 1.351 1.366
GBP to euro - average 1.163 1.125
GBP to euro - year-end spot 1.192 1.111
Movements in foreign exchange rates can have a significant impact on results.
During the year, the sterling average exchange rate year-on-year against the
US dollar strengthened by 7% and the sterling average exchange rate against
the euro strengthened by 3%. The sterling spot rate against the US dollar
from 31 December 2020 to 31 December 2021 weakened marginally by 1%, rising
steadily by 4% to the mid-year before steadily falling back, while the
sterling spot rate against the euro from 31 December 2020 to 31 December 2021
strengthened by 7%, with most of the gain being achieved by mid-year.
Zotefoams is a predominantly UK-based exporter which invoices mostly in local
currency. In 2021, approximately 90% of sales (2020: approximately 79%) were
denominated in currencies other than sterling, mostly US dollars or euros.
Most operating costs are incurred in sterling, other than the main raw
materials for polyolefin foams used for production in the UK, which
are euro-denominated, US subsidiary production and operating costs, most
other subsidiaries' staff and operating costs and some HPP raw materials,
which are US dollar-denominated. Poland operating costs are incurred in Zloty.
The Group therefore uses forward exchange contracts to hedge its foreign
currency transaction risk to US dollar and the euro. The Group generated a net
gain on forward exchange contracts of £1.3m (2020 loss: £0.1m).
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 capacity expansion projects. It also has a growing
Footwear business, which is invoiced from the UK in US dollars, adding to
its exposure to foreign currency denominated net assets. 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. This
treatment also applies to the non-sterling accounts receivable balances held
on the Company's balance sheet, the impact of which should reverse through
forward currency contracts but is subject to the timing difference between the
recording of accounts receivable and cash received. In the year, the Group
recorded a translation loss in the income statement of £0.1m (2020 loss:
£0.2m).
Currency movements during the year negatively impacted Group revenue by £4.1m
(2020: £0.1m negative impact). They positively impacted operating costs by
£2.4m (2020: £0.1m negative impact), resulting in a net negative impact of
£1.7m (2020: negative impact £0.2m) before hedging. After deducting the
hedging gain of £1.2m (2020: charge of £0.3m), the net currency negative
impact for the year was £0.5m (2020: negative impact £0.6m).
We expect growth to come mainly from outside the UK and recognise that one of
our principal risks is our exposure to foreign currency fluctuations,
particularly the US dollar, which we will manage through hedging strategies.
Based on 2021, it is estimated that, with respect to transaction risk and for
every one percentage point movement in the US dollar/sterling rate, profit
moves by £0.24m unhedged and £0.08m hedged. In the year, it is assumed that
the transaction risk from euro/sterling movements continues to
be substantially naturally hedged, with sales revenues offset by 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.
Currency impact on business segments in 2021
Currency had a £4.1m negative impact on the Group's sales performance
Segment revenue £m
2021 2021 2020 Net change %
Reported
Reported
Adjusted (*)
Reported Adjusted
Polyolefin Foams 56.2 58.4 50.9 10 15
HPP 42.3 44.1 30.0 41 47
MEL 2.3 2.4 1.8 32 37
Group 100.8 104.9 82.7 22 27
* Constant currency, adjusting 2021 values to 2020 rates. See exchange rates
table above.
Tax and earnings per share
The effective tax rate for the year is 37.6% (2020: 13.7%),
which is significantly above the Group's weighted average corporate tax rate
for the year of 19.0% (2020: 19.7%). This resulted in a tax charge of £2.6m
in the year (2020: £1.1m). The higher effective tax rate for the year arises
primarily from an increase in the deferred tax charge of £1.0m, that results
from the expected future change in UK Corporation Tax rates to 25% from the
current 19% and which was substantively enacted on 14 May 2021, a prudent
approach to recognising overseas tax losses as a deferred income tax asset,
amounting to £0.4m (2020: a credit of £0.1m), no adjustments in the current
year to the prior year UK Corporation Tax charge (2020: a credit of £0.4m)
and a lower profit before tax of £7.0m (2020: £8.3m). Net income tax paid
during the year was £1.1m (2020: £1.1m).
Basic earnings per share was 9.01p (2020: 14.87p), a reduction of 39%. Without
the deferred tax charge as a result of the expected future change in UK
Corporation Tax rates, earnings per share was 11.1p, a reduction of 25%.
ReZorce
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 use of recycled content in their
packaging, putting sustainability at the heart of our MEL development agenda.
During the year, Zotefoams significantly increased its investment in this
opportunity. Labour amounting to £0.4m was redirected from MEL to ReZorce and
capitalised. One half of this, as well as expenditure of £0.6m representing
additional, directly attributable costs, was capitalised in line with IAS 38
"Capitalisation of Development Costs". The Group also invested £0.9m of
capital and used the other £0.2m of MEL labour resource to complete the
commissioning of its pilot line and implement sterile carton packaging, the
combined sum of which has been recorded as tangible assets. In total,
investment in ReZorce amounts to £1.9m during 2021 and £2.4m cumulatively,
which will be amortised in line with Group policies, if successful, or be
fully impaired, if not, in line with accounting standards.
Investments
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 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.
Zotefoams targets improvements in the Group's return on capital over the
investment cycle, while recognising the short-term impact on this return
during construction and operating initially at lower utilisation 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 or the most recent investment in foam manufacturing at the
Poland site, 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.
Zotefoams defines the return on capital employed (ROCE) 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 2021, the Group's return on capital employed decreased to 6.1% (2020:
9.0%). The main cause of this movement in the year is the commissioning of the
Poland manufacturing site at the beginning of February 2021, which was
previously adjusted for as a consequence of it being a significant capacity
investment under construction in line with the Group's definition of ROCE, and
reduced operating profit. The main cause of a reduction in ROCE since 2018 is
the increase in the capital base following the completion of our investments
in the UK, USA and Poland and the additional operating costs arising from
their operation, which is expected during this stage of the investment cycle.
However, business growth as a result of this increased capacity and improved
utilisation is expected to improve ROCE beyond that previously achieved.
The Group's recent committed capacity expansion programme is now complete.
Investment in growth (£m)
2015 2016 2017 2018 2019 2020 2021 Total
Growth capital 6.1 6.9 7.8 12.8 19.8 10.3 3.4 67.1
Capitalised interest - - - - 0.9 0.6 0.0 1.5
Maintenance capital 2.6 5.2 3.6 3.0 3.7 2.1 2.6 22.8
Total investment in property, plant and equipment 8.7 12.1 11.4 15.8 24.4 13.0 6.0 91.4
Dividend
The Board has a progressive dividend policy, recognising the importance to our
shareholders of the dividend as part of their overall return. The Directors
are proposing a final dividend of 4.40p (2020: 4.27p), which would be payable
on 1 June 2022 to shareholders on the Company register at the close of
business on 6 May 2022. Taken with the interim dividend of 2.10p (2020:
2.03p), this would bring the total dividend for the year to 6.50p (2020:
6.30p) and would represent a dividend cover of 1.4 times (2020: 2.4 times).
This multiple is lower than that of 2020 as a result of the short-term
inflationary impact on margins as well as the higher tax charge for the year,
in part driven by the non-recurring deferred tax charge arising from the UK
Corporation Tax increase to 25% in 2023.
Cash flow
The Group continues to be highly cash generative with net cash from operations
before investment in working capital and provisions of £16.5m, up 3% on the
previous year (2020: £16.1m). Of this, £3.0m (2020: £2.4m) was re-invested
in working capital. Trade and other receivables increased by £1.6m (2020:
reduced £1.2m), reflecting greatly increased sales. Overdue balances remained
on average below 0.5%. Inventories increased by £2.8m (2020: increased
£4.5m), with the movement being driven by an increase in footwear raw
material reflecting the Vietnam shutdown close to the year end and a build-up
of finished goods inventory in Poland now that it is operational. The change
in mix also impacts the value of inventory, with HPP raw materials being
significantly more expensive than their polyolefin counterparts and their
uniqueness requiring higher inventory levels to mitigate supply chain risks.
Trade and other payables increased £1.5m (2020: increased £1.0m), supporting
higher business activity. 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 in line with the previous year at £12.8m (2020: £13.0m).
During the year, the Group paid interest of £0.8m, none of which was
capitalised (2020: paid interest of £1.1m, of which it capitalised £0.6m on
qualifying assets under IAS 23 "Capitalisation of Borrowing Costs"). The
interest paid has been split between operating activities of £0.8m (2020:
£0.5m) and investing activities of £nil (2020: £0.6m) to reflect the
Group's utilisation of the interest paid. Taxation paid during the year
amounted to £1.1m (2020: £1.1m).
Zotefoams' property, plant and equipment capital expenditure reduced in 2021,
as expected, following several years of capacity expansion, with total
expenditure including capitalised interest of £6.0m (2020: £13.0m). The
primary focus on this year's expenditure was investments in the Poland plant
to allow for its commissioning in February 2021, assembling a pilot line and
trial system for the MEL ReZorce opportunity, and improvements to the Croydon
plant. A small amount of capital investment is outstanding in Poland, delayed
from 2021, and the level of expenditure on ReZorce during 2022 will be
dependent on key milestones during the year. Other than this, we expect
capital expenditure to be at levels more in line with the Group's depreciation
charge. The Group also invested £1.1m (2020: £0.3m) in intangible assets,
almost entirely related to MEL patents and capitalised development costs for
the ReZorce opportunity at MEL.
After dividends paid in the year amounting to £3.1m (2020: £1.0m) and lease
payments of £0.5m (2020: £0.4m), closing net debt was £34.3m (2020:
£35.6m). At the year end, the Group remains comfortably within its bank
facility covenants, with a ratio of EBITDA to net finance charges of 16 (2020:
24), against a covenant minimum of 4, and net debt to EBITDA (leverage) of
2.1x (2020: 2.1x), against a covenant of 3.0x. See 'debt facility' below for
definition of leverage and information on the Group's renewal of its
refinancing arrangements in March 2022. We expect to remain within covenant
levels going forward.
Debt facility
At 31 December 2021, the Group's gross finance facilities were £47.3m (2020:
£53.8m), comprising a multi-currency term loan of £20.0m (2020: £25.0m), a
multi-currency revolving credit facility of £25.0m (2020: £25.0m) and a
remaining balance of £2.3m (2020: £3.8m) of a further £7.5m sterling
annually renewable term loan, repayable in equal quarterly instalments.
The bank facility in place at 31 December 2021 is for a five-year period
and expires in May 2023. 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 £13.4m (2020: £19.2m). The facility is
subject to two covenants which are tested semi-annually: net debt to EBITDA
(leverage) and EBITDA to net finance charges.
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-terms 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 covenant definition
Net debt to EBITDA ratio (Leverage)
£m 2021 2020 £m 2021 2020
Profit after tax 4.4 7.2 Net debt per IFRS 34.3 35.6
Adjusted for: IFRS 16 leases (1.1) (1.4)
Depreciation and amortisation 7.6 6.7 Finance leases pre 1 January 2019 0.0 0.1
Finance costs 1.1 0.8 Roundings 0.0 (0.1)
Finance income 0.0 0.0 Nebt debt per bank 33.2 34.2
Share of result from join venture 0.0 0.0
Equity-settled share-based payments 0.4 0.3
Taxation 2.6 1.1
Roundings 0.0 0.1
EBITDA 16.1 16.2 Leverage per bank 2.1x 2.1x
EBITDA to net finance charges ratio
£m 2021 2020 £m 2021 2020
EBITDA, as above 16.1 16.2 Finance costs 1.1 0.8
Finance income 0.0 0.0
Share of result from joint venture 0.0 0.0
EBITDA to net finance charges 16.1x 23.7x Net finance charges 1.1 0.8
With the Group's debt facility arrangement expiring 13 months from the date of
signing of the financial statements, the Group has undergone a renewal tender
process and selected Handelsbanken and NatWest, the incumbents, to continue as
its lenders. Under the terms of the new facility, completed in March 2022, the
Group's gross finance facility comprises a £50m multi-currency revolving
credit facility with a £25m accordion, on a 4+1 tenor, and with an interest
rate ratchet on slightly improved terms to the previous facility and including
a small element related to the achievement of sustainability targets. The
finance cost and leverage covenants remain in place, with the former remaining
at 4:1 and the latter increasing to 3.5:1 from 3.0:1. Unamortised costs of
£0.3m relating to the previous facility will be charged to income in the
first half of 2022.
Post-employment benefits
The last full actuarial valuation of the DB Scheme took place as at 5 April
2020, in line with the requirement to have a triennial valuation. 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
per annum, beginning 1 July 2021, to meet the shortfall by 31 October 2026
(previously 31 October 2026), up from £492,000 per annum previously.
In addition, the Company pays the ongoing DB Scheme expenses of £216,000
per annum (previously £180,000 per annum) to cover death-in-service insurance
premiums, the expenses of administering the DB Scheme and Pension Protection
Fund levies.
The net IAS19 deficit on the DB Scheme decreased by £4.2m to £4.7m as at 31
December 2021 (2020: £8.9m). The main factors leading to the improvement were
the strong investment performance over the year and changes in assumptions, in
particular the use of a higher discount rate following an increase in
corporate bond yields over the year, which has placed a lower value on the
defined benefit obligation. The deficit is the net total of £34.1m (2020:
£31.9m) of assets and £38.8m (2020: £40.8m) of liabilities and represents
4.8% (2020: 9.4%) of consolidated net assets. Zotefoams does not consider its
pension scheme to be a key risk to its ability to achieve its strategic
objectives. Mitigation of further risk is expected to come from our growth
expectations and the refocus by the Trustees on a lower-risk strategy to meet
the DB Scheme's deficit shortfall.
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 considering the renewal and terms of the new debt facility,
have a reasonable expectation that the Group has adequate resources to
continue in operational existence for the next 12 months following the date of
approval of the financial statements. The Directors have also drawn 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
these preliminary results.
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
22 March 2022
Consolidated income statement
For the year ended 31 December 2021
2021 2020
Note £'000 £'000
Revenue 2 100,750 82,652
Cost of sales (74,184) (54,874)
Gross profit 26,566 27,778
Distribution costs (7,316) (6,793)
Administrative expenses (11,117) (11,876)
Operating profit 8,133 9,109
Finance costs (1,116) (872)
Finance income 11 26
Share of (loss) / profit from joint venture (20) 38
Profit before income tax 7,008 8,301
Income tax expense (2,632) (1,138)
Profit for the year 4,376 7,163
Profit attributable to:
Equity holders of the Company 4,376 7,163
4,376 7,163
Earnings per share:
Basic (p) 9.01 14.87
Diluted (p) 8.87 14.63
Consolidated statement of comprehensive income
For the year ended 31 December 2021
2021 2020
£'000 £'000
Profit for the year 4,376 7,163
Other comprehensive income
Items that will not be reclassified to profit or loss
Actuarial losses on defined benefit pension schemes 3,517 (2,460)
Tax relating to items that will not be reclassified (444) 467
Total items that will not be reclassified to profit or loss 3,073 (1,993)
Items that may be reclassified subsequently to profit or loss
Foreign exchange translation losses on investment in foreign subsidiaries (96) (583)
Change in fair value of hedging instruments (344) 952
Hedging (losses)/gains reclassified to profit or loss (1,251) 82
Tax relating to items that may be reclassified 376 (256)
Total items that may be reclassified subsequently to profit or loss (1,315) 195
Other comprehensive income for the year, net of tax 1,758 (1,798)
Total comprehensive income for the year 6,134 5,365
Total comprehensive income attributable to:
Equity holders of the Company 6,134 5,365
Total comprehensive income for the year 6,134 5,365
Consolidated statement of financial position
As at 31 December 2021
2021 2020
Notes £'000 £'000
Non-current assets
Property, plant and equipment 6 91,401 92,925
Right-of-use assets 1,104 1,397
Intangible assets 6,224 5,888
Investment in joint venture 163 183
Trade and other receivables 11 54
Deferred tax assets 492 509
Total non-current assets 99,395 100,956
Current assets
Inventories 25,954 23,033
Trade and other receivables 24,338 22,150
Derivative financial instruments 173 1,580
Cash and cash equivalents 8,055 8,503
Total current assets 58,520 55,266
Total assets 157,915 156,222
Current liabilities
Trade and other payables (9,242) (7,851)
Derivative financial instruments (600) (53)
Current tax liability (83) (101)
Lease liabilities (486) (420)
Interest-bearing loans and borrowings 5 (26,564) (23,430)
Total current liabilities (36,975) (31,855)
Non-current liabilities
Lease liabilities (643) (986)
Interest-bearing loans and borrowings 5 (14,710) (19,263)
Deferred tax liabilities (3,155) (891)
Post-employment benefits (4,657) (8,851)
Total non-current liabilities (23,165) (29,991)
Total liabilities (60,140) (61,846)
Total net assets 97,775 94,376
Equity
Issued share capital 4 2,431 2,431
Share premium 4 44,178 44,178
Own shares held (10) (23)
Capital redemption reserve 15 15
Translation reserve 2,228 2,324
Hedging reserve (310) 909
Retained earnings 49,243 44,542
Total equity 97,775 94,376
Consolidated statement of cash flows
For the year ended 31 December 2021
2021 2020
Note £'000 £'000
Cash flows from operating activities
Profit for the year 4,376 7,163
Adjustments for:
Depreciation and amortisation 7,624 6,746
Disposal of assets 6 53 40
Finance costs 1,105 846
Share of profit from joint venture 20 (38)
Net exchange differences 376 (133)
Equity-settled share-based payments 360 300
Taxation 2,632 1,138
Operating profit before changes in working capital and provisions 16,546 16,062
(Increase) / decrease in trade and other receivables (1,636) 1,199
Increase in inventories (2,843) (4,536)
Increase in trade and other payables 1,506 980
Employee defined benefit contributions (779) (700)
Cash generated from operations 12,794 13,005
Interest paid (789) (456)
Income taxes paid, net of refunds (1,087) (1,113)
Net cash flows generated from operating activities 10,918 11,436
Cash flows from investing activities
Interest received 11 26
Interest paid (32) (604)
Purchases of intangibles (1,069) (346)
Proceeds on disposal of property, plant and equipment 88 -
Purchases of property, plant and equipment (6,002) (12,363)
Net cash used in investing activities (7,004) (13,287)
Cash flows from financing activities
Proceeds from options exercised and issue of share capital 40 -
Repayment of borrowings (7,739) (8,053)
Proceeds from borrowings 6,974 13,180
Principal elements of lease payments (543) (433)
Dividends paid to equity holders of the Company (3,074) (977)
Net cash (used in)/ generated from financing activities (4,342) 3,717
Net (decrease)/ increase in cash and cash equivalents (428) 1,866
Cash and cash equivalents at 1 January 8,503 6,656
Exchange losses on cash and cash equivalents (20) (19)
Cash and cash equivalents at 31 December 8,055 8,503
Consolidated statement of changes in equity
For the year ended 31 December 2021
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 2020 2,415 44,178 (9) 15 2,907 131 40,003 89,640
Profit for the year - - - - - - 7,163 7,163
Other Comprehensive Income for the year
Foreign exchange translation losses on investment in subsidiaries - - - - (583) - - (583)
Change in fair value of hedging instruments recognised in other comprehensive - - - - - 952 - 952
income
Reclassification to income statement - administrative expenses - - - - - 82 - 82
Tax relating to effective portion of changes in fair value of cash flow - - - - - (256) - (256)
hedges, net of recycling
Actuarial loss on defined benefit pension scheme - - - - - - (2,460) (2,460)
Tax relating to actuarial loss on defined benefit pension scheme - - - - - - 467 467
Total comprehensive income for the year - - - - (583) 778 5,170 (1,798)
Transactions with owners of the Parent:
Options exercised - - 2 - - - (2) -
Proceeds of shares issued, net of expenses 16 - (16) - - - - -
Equity-settled share-based payments net of tax - - - - - - 348 348
Dividends paid 3 - - - - - - (977) (977)
Total transactions with owners of the Parent 16 - (14) - - - (631) (629)
Balance as at 31 December 2020 2,431 44,178 (23) 15 2,324 909 44,542 94,376
Balance as at 1 January 2021 2,431 44,178 (23) 15 2,324 909 44,542 94,376
Profit for the year - - - - - - 4,376 4,376
Other Comprehensive Income for the year
Foreign exchange translation losses on investment in subsidiaries - - - - (96) - - (96)
Change in fair value of hedging instruments recognised in other comprehensive - - - - - (344) - (344)
income
Reclassification to income statement - administrative expenses - - - - - (1,251) - (1,251)
Tax relating to effective portion of changes in fair value of cash flow - - - - - 376 - 376
hedges, net of recycling
Actuarial gain on defined benefit pension scheme - - - - - - 3,517 3,517
Tax relating to actuarial loss on defined benefit pension scheme - - - - - - (444) (444)
Total comprehensive income for the year - - - - (96) (1,219) 7,449 6,134
Transactions with owners of the Parent:
Options exercised - - 13 - - - 27 40
Equity-settled share-based payments net of tax - - - - - - 299 299
Dividends paid 3 - - - - - - (3,074) (3,074)
Total transactions with owners of the Parent - - 13 - - - (2,748) (2,735)
Balance as at 31 December 2021 2,431 44,178 (10) 15 2,228 (310) 49,243 97,775
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 2020. Whilst the financial
information included in this announcement has been computed in accordance with
the recognition and measurement requirements of international accounting
standards in conformity with the requirements of the Companies Act 2006 and
international financial reporting standards, this announcement does not itself
contain sufficient disclosures to comply with IFRS.
The information for the year ended 31 December 2021 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 2020 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 2021 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 2020 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: PVDF
fluoropolymer, polyamide (nylon) and polyether block amide (PEBA). 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
2021 2020 2021 2020 2021 2020 2021 2020
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Group revenue 56,166 50,904 42,294 30,016 2,290 1,732 100,750 82,652
Segment profit/(loss) pre-amortisation 684 4,836 8,732 7,907 (494) (1,184) 8,922 11,559
Amortisation of acquired intangible assets - - - (194) (262) (194) (262)
Segment profit/(loss) 684 4,836 8,732 7,907 (688) (1,446) 8,728 11,297
Foreign exchange gains/(losses) - - - - - - 1,168 (300)
Unallocated central costs - - - - - - (1,763) (1,888)
Operating profit 8,133 9,109
Financing costs - - - - - - (1,116) (872)
Financing income - - - - - - 11 26
Share of (loss)/profit from joint venture (20) 38 - - - - (20) 38
Taxation - - - - - - (2,632) (1,138)
Profit for the year 4,376 7,163
Segment assets 107,613 106,792 40,189 41,046 9,601 7,875 157,403 155,713
Unallocated assets - - - - - - 492 509
Total assets 157,895 156,222
Segment liabilities (40,795) (46,676) (15,224) (13,234) (883) (944) (56,902) (60,854)
Unallocated liabilities - - - - - - (3,238) (992)
Total liabilities (60,140) (61,846)
Depreciation of PPE 4,780 4,478 1,052 813 133 115 5,965 5,406
Depreciation of right-of-use assets 302 307 90 43 133 36 525 414
Amortisation 640 494 289 55 194 279 1,123 926
Capital expenditure:
Property, plant and equipment (PPE) 4,543 9,928 743 3,475 1,160 447 6,446 12,776
Right of use assets 223 13 7 126 - 623 230 639
Intangible assets 98 89 34 97 918 235 1,050 346
Geographical segments
Polyolefin Foams, HPP and MEL are managed on a worldwide basis but operate
from UK, USA 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 Kingdom Continental Europe North America Rest of the world Total
£'000 £'000 £'000 £'000 £'000
For the year ended 31 December 2021
Group revenue from external customers 10,768 28,200 19,959 41,823 100,750
Non-current assets 42,944 19,830 35,521 445 98,740
Capital expenditure - PPE 2,776 798 2,391 31 5,996
For the year ended 31 December 2020
Group revenue from external customers 19,106 17,856 17,629 28,061 82,652
Non-current assets 44,343 21,050 34,351 520 100,264
Capital expenditure - PPE 4,090 7,095 1,423 168 12,776
3. Dividends and earnings per share
2021 2020
£'000 £'000
Prior year final dividend of 4.27p (2020: nil) per 5.0p ordinary share 2,058 -
Interim dividend of 2.10p (2020: 2.03p) per 5.0p ordinary share 1,016 977
Dividends paid during the year 3,074 977
The proposed final dividend for the year ended 31 December 2021 of 4.40p per
share (2021: 4.27p) is subject to approval by shareholders at the AGM and has
not been recognised as a liability in these financial statements. The proposed
dividend would amount to £2,130k if paid to all shareholders on the Company
register at the close of business on 31 May 2022.
Earnings per ordinary share
Earnings per ordinary share is calculated by dividing consolidated profit
after tax attributable to equity holders of the Company of £4,376k (2020:
£7,163k) by the weighted average number of shares in issue during the year
and which excludes own shares held by the EBT, which are administered by
independent trustees. The number of shares held in the trust at 31 December
2021 was 196,888 (2020: 459,201). 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".
2021 2020
Weighted average number of ordinary shares in issue 48,577,945 48,186,077
Adjustments for share options 755,954 779,660
Diluted number of ordinary shares issued 49,333,899 48,965,737
4. Issued share capital
Issued, allotted and fully paid ordinary shares of 5p each:
Number of shares Par value Share premium Total
£'000 £'000 £'000
Opening balance 1 January 2020 48,301,234 2,415 44,178 46,593
Share issue to Employee Benefit Trust 320,000 16 - 16
As at 31 December 2020 48,621,234 2,431 44,178 46,609
At 1 January 2021 and 31 December 2021 48,621,234 2,431 44,178 46,609
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.
5. Interest-bearing loans and borrowings
Group Company
2021 2020 2021 2020
£'000 £'000 £'000 £'000
Current bank borrowings 26,564 23,430 26,564 23,430
Non-current bank borrowings 14,710 19,263 14,710 19,263
41,274 42,693 41,274 42,693
In May 2018, the Group completed a debt refinancing to enable it to continue
to grow capacity and meet its expected demand growth. These facilities are
secured against the property, plant and equipment and trade receivables of the
Group. The total facility of £47.25m comprises a £20m multi-currency term
loan, with £5m repayable during year four and the remainder at the end of
year five, a £25m multi-currency revolving credit facility repayable on
demand and a further £2.25m sterling term loan renewable annually and
repayable over five years in equal quarterly repayments over the term. The
negotiated facility also includes a £25m accordion feature to provide
additional flexibility to pursue further investment opportunities in the
future.
At the end of the financial year, the Group has utilised £19.8m ($20.6m and
£4.5m) of the multi-currency term loan, £19.5m (€17.5m and $6.5m) of the
revolving facility and has an outstanding £2.25m on the sterling term loan.
The total amount of £41.3m above is net of £0.25m loan origination fees paid
upfront and being amortised over the period of the loan.
In March 2022, the Group completed a bank refinancing and selected
Handelsbanken and NatWest, the incumbents, to continue as its lenders. Under
the terms of the new facility, the Group's gross finance facility comprises a
£50m multi-currency revolving credit facility, with a £25m accordion, on a
4+1 tenor, and with an interest rate ratchet on slightly improved terms to the
previous facility and including a small element related to the achievement of
sustainability targets. The finance cost and leverage covenants remain in
place, with the former remaining at 4:1 and the latter increasing to 3.5:1
from 3.0:1.
6. 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 1 January 2020 31,075 83,974 3,915 29,532 148,496
Additions 159 720 115 11,782 12,776
Disposals - (51) (2) - (53)
Transfers 1,857 15,866 36 (17,759) -
Effect of movement in foreign exchange (298) (1,472) (33) 1,178 (625)
Balance at 31 December 2020 32,793 99,037 4,031 24,733 160,594
Balance at 1 January 2021 32,793 99,037 4,031 24,733 160,594
Additions 16 404 254 5,322 5,996
Disposals (88) (122) (133) - (343)
Transfers 13,346 11,239 (291) (24,774) (480)
Effect of movement in foreign exchange (291) 233 10 (815) (863)
Balance at 31 December 2021 45,776 110,791 3,871 4,466 164,904
Accumulated depreciation
Balance at 1 January 2020 11,471 48,936 2,437 - 62,844
Depreciation charge for the year 1,277 3,642 487 - 5,406
Disposals - (13) - - (13)
Effect of movement in foreign exchange (170) (370) (28) - (568)
Balance at 31 December 2020 12,578 52,195 2,896 - 67,669
Balance at 1 January 2021 12,578 52,195 2,896 - 67,669
Depreciation charge for the year 1,479 4,184 315 - 5,978
Disposals - (87) (114) - (201)
Transfers 51 (79) (125) - (153)
Effect of movement in foreign exchange 52 148 10 - 210
Balance at 31 December 2021 14,160 56,361 2,982 - 73,503
Net book value
At 1 January 2020 19,604 35,038 1,478 29,532 85,652
At 31 December 2020 and 1 January 2021 20,215 46,842 1,135 24,733 92,925
At 31 December 2021 31,616 54,430 889 4,466 91,401
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).
i) 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 3.00:1.00
• The ratio of EBITDA to Net Finance Charges is 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.
2021 2020
£'000 £'000
Net borrowings 33,219 34,190
EBITDA 16,117 16,155
Net borrowings/EBITDA 2.06 2.12
Net finance charges 1,002 681
EBITDA/Net finance charges 16.08 23.72
Net borrowings comprise current and non-current interest-bearing loans and
borrowings of £41,275k, and cash and cash equivalents of £8,055k. They do
not include the impact of IFRS 16 "Leases".
EBITDA comprises:
2021 2020
£'000 £'000
Profit for the year 4,376 7,163
Depreciation and amortisation 7,624 6,746
Finance costs 1,105 846
Share of profit from joint venture 20 (38)
Equity-settled share-based payments 360 300
Taxation 2,632 1,138
16,117 16,155
Net finance charges comprise interest income of £11k and finance costs
expensed of £1,013k
The Group's objective is to maintain leverage below the Board's appetite of
2.0. However, it has accepted an increase in this ratio, while remaining below
the covenant level, as the Group invested in its capacity expansion programme.
Subject to short-term macro-economic and geopolitical volatility as well as
any potential longer-term strategic investments, it is expected to reduce
quickly back below the Board's appetite as capacity utilisation improves.
The bank covenant definition does not include the impact of IFRS 16 "Leases",
which would have moved the ratio from 2.06 to 2.13.
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