Zotefoams Regulatory News (ZTF)

Risk and potential impact

Mitigation actions

Operational

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Link to strategy: 1, 2, 3, 4

As the Group's operations are currently mainly on one site, a significant operational disruption or Safety, Health and Environmental ('SHE') incident could impact the Group's ability to manufacture and supply products. This could have sizeable financial and commercial consequences including, in certain defined circumstances, customer claims. It could also generate reputational risk.

The Group has extensive SHE policies and procedures in place, which are in line with best practice. In the UK the Company is certified to accredited standards OHSAS 18001 on Health and Safety and ISO 14001, the International Standard for Environment Management Systems.

Regular training is provided on SHE matters to the staff.

Pressure equipment used is operated under the Pressure Systems Safety Regulations 2000 and is subject to systematic internal and frequent external inspections in accordance with the Safety Assessment Federation.

The Group has extensive fire prevention systems in place and also has appropriate contingency plans in place in the event of the failure of certain major pieces of equipment.

Reporting of incidents, including near misses and damage to plant or equipment not resulting in personal injury, is mandatory in order to track issues and to prevent reoccurrences.

Insurance is in place to cover capital restatement and loss of profits in the event of operational disruption caused by certain events.

The Group is investing in its Kentucky, USA, site which, when completed, will give multi-site capability, subject to capacity, on many polyolefin products.

Operational

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Link to strategy: 1, 3, 4

The Group is extending its operations in Kentucky to cover the full block foam manufacturing process. This is a significant capital project, which is reliant on some specialist suppliers and needs to be managed to time and budget.

The extension of our facilities in Kentucky is replicating, where appropriate, machinery and processes already in operation in the UK. Existing managerial and engineering support in North America is being supplemented by external project expertise and resource from the Group's Croydon operations. Alternative suppliers were considered. Raw materials will be trialled in the UK first to reduce the commissioning risk.

Supply chain

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Link to strategy: 1, 2, 3, 4

Certain of the Group's raw materials and engineering components are sourced from single suppliers. Disruption in those supplies, either on a temporary or more permanent basis, could affect production and supply to the Group's customers and, in certain defined circumstances, have contractual commercial consequences which may result in customer claims.

Wherever possible, supplies are sourced from more than one supplier or location. However, this is not always possible due to the special nature of the raw materials and machinery used.

The Group continually monitors suppliers and is investing significantly in the search for, and testing and approval of, alternative suppliers of critical materials.

Technology

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Link to strategy: 1, 2, 3, 4

The Group's processes for the manufacture of its products are substantially unique to the Group. Whilst the principles behind the processes are not confidential, the precise know-how is. A competitor could match or improve upon the properties and economics of the Group's products.

Key to the success of the business of MuCell Extrusion LLC ('MEL') is the strength of its intellectual property and, on the back of that, its ability to grant commercial licences. The risks to MEL are that its intellectual property becomes dated or its patents expire or are successfully challenged.

There are high barriers of entry to the market. Significant capital investment is required for the autoclaves and related infrastructure.

The Group actively maintains its intellectual property. It patents its technology wherever it believes it is appropriate to do so. Where technology is not subject to patent, patents are no longer applicable or the technology is incapable of being patented, the Group guards its know-how.

The Group reduces its technology risk by entering into new markets. For example, the development of High-Performance Products ('HPP') and MEL, where the product offerings are unique and protected by patents and/or process know-how and capability, opens up new markets for the Group with potential significant and lasting differential advantages.

MEL actively maintains and updates its intellectual property portfolio. This is done by undertaking research and development to add new patents to the portfolio, further developing its know-how and obtaining licences of key third-party patents which are complementary to the existing portfolio.

MEL licences typically include a bundle of patents and know-how and therefore are not completely dependent on any particular patent.

Pension

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Link to strategy: 2, 4

The Company has a defined benefit pension scheme ('the Scheme') and any inability of the Scheme to meet its liabilities to its members could, ultimately, be the responsibility of the Company.

There have in recent times been a number of legal cases challenging the validity of previously closed defined benefit schemes, but as yet no clear case law.

To minimise the risk to the Company of meeting the obligations under the Scheme, the Company took action to close the Scheme to new members in 2001 and closed it to future accrual of benefits in 2005. The Company is following the development of case law around the effective closure of defined benefit schemes. The Company will continuously work together with the Trustees to undertake de-risking activities to the Scheme, where feasible.

The next triennial actuarial valuation of the Scheme is at 5 April 2017. As a recovery plan for the Scheme for the previous valuation (5 April 2014), the Company agreed to make a contribution to the Scheme of £41,000 per month until April 2020 to reduce the deficit.

Foreign exchange

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Link to strategy: 1, 3, 4

The Group has significant exposure to foreign exchange fluctuations. This is both transactional and on the translation of foreign currency balances and the consolidation of its foreign subsidiaries.

The Group's operations are substantially based in the UK and, therefore, most of its manufacturing assets and costs are sterling denominated.

The Group's customers are normally invoiced in their local currencies. In 2016, approximately 80% of the Group's revenue was in currencies other than sterling. The Group, therefore, generates surpluses in US dollars and euros, which are converted into sterling.

The Group reduces its foreign exposure for transactional items by making purchases either in euros or US dollars. For example, there are US dollar costs associated with the Group's operations in Kentucky, USA, and with MEL. In addition, the majority of the Group's raw materials are purchased in euros and US dollars.

The Group is nearing completion of its significant capital investment in North America, which will reduce net exposure for transactional items on the US dollar by increasing the cost base in the USA, with local labour and raw material procurement.

The Group has a hedging policy, which is approved by the Board. The Group hedges a proportion of its exposure for transactional items to foreign exchange by using forward exchange contracts.

The Group, like most public companies, does not hedge for the translation of its foreign subsidiaries' assets or liabilities in the consolidation of its Group accounts.

Macro economics

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Link to strategy: 1, 2, 3, 4

Our markets are exposed to general economic and political changes, such as Brexit, which may impact the Group's performance and ability to meet its strategic objectives.

Some of the Group's markets can be cyclical. However, this risk is spread geographically and across a number of segments, which are expected to diversify further with the growth of HPP and MEL. The Group is operationally geared and its experience is that, in challenging circumstances, operational labour costs can be reduced, polymer prices generally fall with reduced economic demand giving a cost benefit and cash flow can be improved from both reducing working capital as well as slowing capital expenditure projects to help offset the effects of a downturn. The Group targets appropriate financial gearing to give it flexibility in a downturn.

The Group will monitor developments of Brexit and take appropriate commercial action when the situation becomes clearer.

Financing

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Link to strategy: 1, 2, 3, 4

The Group needs to have sufficient cash, or be able to draw on loan facilities, to finance its operations and growth.

The Group has strong cash generation from its operations. In 2017 the Group is committed to a number of capital projects, the largest of which is the remainder of the US expansion programme amounting to £8.4m.

The Group has, at 31 December 2016:

• a ten-year, $8m fixed rate loan;

• £0.7m of a £3.5m loan outstanding;

• a four-year, £8m reducing credit facility ('RCF') and a £2m overdraft facility; and

• since March 2017, the Group has increased the RCF by £2m to £10m.

The loans and RCF facility are secured against certain Group assets and are subject to covenants as described in note 21 of the Annual Report.

When considering investment projects the Group has regard to its ability to raise finance for the project and will not commit to a project until acceptable and appropriate finance is in place, or believed to be available.

Commercial

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Link to strategy: 1, 3, 4

Loss, insolvency or divergence of interest with a major customer.

The Group's largest customers are distributors and converters of foam. The Group has good knowledge of the end-customers of its major customers and, with some additional short-term work, would be able to bring or identify additional converter capacity, supply routes or channel partners to service these markets.

People

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Link to strategy: 1, 2, 3, 4

The failure to attract, develop or retain the right calibre of staff to deliver growing opportunities by product and geographic reach.

The impact of Brexit on the Group's ability to retain mainland European nationals.

The Group keeps under review its skill needs and labour requirements. The Group aims to provide its employees with varied and interesting work and to incentivise them appropriately.

The Group has a Global Talent Manager, whose remit is to ensure senior and emerging talent is appropriate for the Group's current and future needs.

The Group is following the developments of the UK's European Union exit negotiations closely and addressing its consequences on people.