Zotefoams Regulatory News (ZTF)

Zotefoams plc

Preliminary Results (unaudited) for the Year Ended 31 December 2022

21 March 2023 - 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 2022.

"Strong sales growth and much improved margins generate record revenues and profits ahead of initial expectations."

1 This is a reported number under UK adopted IAS and is after the deduction of amortisation of acquired intangibles amounting to £0.258m in 2022 and £0.232m in 2021

2 Leverage is that defined under the bank facility, with net debt at the end of the period divided by the preceding 12 months' EBITDA, adjusted for the impact of IFRS2 and IFRS16

3 Final dividend is subject to approval at the May 2023 Annual General Meeting

Results highlights

Strategic progress

David Stirling, Group CEO, said:

"2023 has started well, with demand for our AZOTE® polyolefin foam products in line with the previous year but with higher revenue from price increases implemented over the past twelve months. Sales of high-performance products are showing strong growth in the first few months, mainly due to the timing of shipments compared to the prior period. Sales across both businesses continue to benefit from a stronger US dollar. 

"The environment for input costs is less acute, with both energy and polyolefin polymer prices reduced from the peaks seen last year but remaining well above their long-term average. Prices for energy and energy-intensive commodities such as nitrogen remain uncertain, with forward-market pricing at a significant risk premium to spot. We are closely monitoring input costs and our pricing in the polyolefin foams business in particular.

"Whilst uncertainty persists, we currently expect that, for the year as a whole, polyolefin foams volumes will be at a similar level to last year, with more challenging conditions in the UK and continental Europe offset by growth in North America and other geographies. Our High-Performance Products business should see further growth in footwear and continued strong growth in both our ZOTEK® F and T-FIT® insulation products. Within our MEL business unit, focus has progressed to commercialisation trials for ReZorce cartons.

"Overall, the Board remains confident about the future prospects for our business".

Enquiries:

About Zotefoams plc

Zotefoams plc (LSE - ZTF) is a world leader in cellular materials technology delivering optimal material solutions for the benefit of society. Utilising a variety of unique manufacturing processes, including environmentally friendly nitrogen expansion for lightweight AZOTE® polyolefin and ZOTEK® high-performance foams, Zotefoams sells to diverse markets worldwide. Zotefoams uses its own cellular materials to manufacture T-FIT® advanced insulation for demanding industrial markets. Zotefoams also owns and licenses patented microcellular foam technology to reduce plastic use in extrusion applications and for ReZorce® mono-material recyclable barrier packaging.

Zotefoams is headquartered in Croydon, UK, with additional manufacturing sites in Kentucky, USA and Brzeg, Poland (foam manufacture), Oklahoma, USA (foam products manufacture and conversion), Massachusetts, USA, Stilling, Denmark (microcellular foam technology) and Jiangsu Province, China (T-FIT).

www.zotefoams.com

AZOTE®, ZOTEK®, ReZorce® and T-FIT® are registered trademarks of Zotefoams plc.

Zotefoams plc

An introduction from our Chair

Strong sales growth and improved margins generate record profits alongside continued strategic delivery

Performance and results

2022 saw the Group record a second year of strong sales growth, up 26% on 2021 following a 22% increase in the previous year. This was driven by effective pricing actions in Polyolefin Foams, a stronger US dollar and significant High-Performance Products (HPP) volume increases across Footwear, ZOTEK® F (primarily aviation) and T-FIT® insulation. A focused programme of price increases was implemented in Polyolefin Foams to recover margin loss from the severe input cost inflation that had materially impacted 2021 margins and that continued in 2022. Group revenue for the year was £127.4m (2021: £100.8m) and operating profit was 71% above the previous year at £13.9m (2021: £8.1m), a record for the Group, with operating margins expanding from 8.1% to 10.9% despite a significant increase in MuCell losses as we continue to invest in the ReZorce® circular packaging opportunity. Basic earnings per share was up 129% at 20.61p (2021: 9.01p). The balance sheet remains strong, with leverage significantly reduced during the year and ending at 1.2x (2021: 2.1x), the lowest it has been since 2018 when the Group embarked on its now complete capacity expansion programme.

Strategic progress

Our strategy is focused on delivering strong and sustainable organic growth and improved operational efficiencies. 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. We seek to improve operating margins and returns through the investment cycle. We are also pursuing a transformative opportunity at MuCell Extrusion LLC with ReZorce, a mono-material barrier packaging solution which can be used for beverage and food packaging, uses recycled materials and is easy to recycle again (is "circular") using existing waste collection and recycling infrastructure.

We have made good strategic progress this year. Our largest business unit, Polyolefin Foams, converted the increased volumes of 2021 into improved margins in 2022. 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 our HPP business, we delivered another year of strong growth in Footwear and worked closely with our partner to develop further long-term opportunities. Additionally, the start of a post pandemic recovery in aviation resulted in demand for ZOTEK® F technical foams growing strongly, with T-FIT® insulation products also developing well as the brand continues to gain traction. The long-term growth outlook for these HPP markets remains compelling. We also made significant progress at MuCell Extrusion LLC with ReZorce mono-material barrier packaging, investing significantly in its development, running scale-up trials and commencing the search for a strategic investor to allow full realisation of the technology's potential. Whilst acknowledging that we are still at an early stage of commercial development, this remains a high-reward opportunity and we expect to update stakeholders on progress during 2023.

Dividend

The Board is proposing a final dividend of 4.62p (2021: 4.40p) which, if approved by shareholders, would make a total dividend for the year of 6.80p (2021: 6.50p), an increase of 5%. This reflects the Board's continued confidence in the Group's future and is in line with its progressive dividend policy, recognising the importance to our shareholders of the dividend as part of their overall return. If approved, the final dividend will be paid on 2 June 2023 to shareholders on the register on 5 May 2023.

Our people

We know that our people are key to the Group's success and 2022 was another year that highlighted their importance. While in most regions the impacts of the pandemic have receded, this was not the case everywhere, with our China staff particularly impacted by shutdown and significant travel restrictions. Elsewhere, reduced restrictions have enabled the return of direct interactions between teams in different locations after at least two years of forced separation, and we see how important and valuable this is for the individuals themselves and the Group as a whole. The spiralling cost environment has placed challenges on our staff both from a work and a personal perspective and, with regard to the latter, we implemented a number of mitigating initiatives. High levels of business activity and a need to respond quickly requires resilient and committed staff, and we have again experienced this in our people, who have been outstanding and have ensured that the needs of customers continue to be met.

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 twelve months. 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

Our purpose is to provide optimal material solutions for the benefit of society, reflecting our belief that, used appropriately, plastics are frequently the best solution for the sophisticated, long-term applications typically delivered by our customers. The Board is focused on the importance of sustainability and 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. Good progress was made in 2022 towards our sustainability targets.

The Board and Chair succession

There were no changes to the experienced and engaged Board during the year. By the time of the Annual General Meeting (AGM) in May 2023, however, I will have been on the Zotefoams Board for almost nine years and it will be time for me to step down. Doug Robertson, our Senior Independent Director, has led a process to find my successor and in early January 2023 we appointed Dr Lynn Drummond as a Non-Executive Director and Chair Designate. I am delighted to welcome Lynn to the Board; she will take over as Chair after our AGM. On a personal note, it has been a pleasure to serve on the Zotefoams Board and be part of the exciting transformation and significant progress that the business has made since I joined in 2014. I am confident this success will continue.

Governance

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. I thank all employees at Zotefoams for their efforts throughout the year to identify and remove risks and keep each other safe. 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 J Carling, Independent Non-Executive Director, 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 2022, with the exception of Provision 38 in respect of the Company's pension contribution for the Group CEO.

Looking to the future

Zotefoams is well positioned with well invested, differentiated assets and a clear strategy for delivering profitable organic growth through the cycle. We have committed, capable and passionate people and a strong pipeline of new opportunities, and while we remain mindful of the uncertain external environment, with high inflation, higher interest rates, the continued war in Eastern Europe and remaining concerns over COVID-19 and its variants, we are confident about our future prospects for growth, margin improvement and cash generation.

S P Good

Chair

21 March 2023

Group CEO's review

Record revenue and profit with investment to capitalise on identified trends and generate sustainable growth

* Rest of the world comprises China: £30.0m (2021: £28.4m) and other countries: £22.2m (2021: £13.4m)

Overview

In 2022, Zotefoams grew significantly, delivering record revenue, profit and earnings. The year was characterised by a continuation of trends seen in 2021: input-cost inflation in energy, in particular, polymer and other manufacturing costs as well as labour. Our effective response, to increase prices where appropriate, was the main reason for increased revenue which also benefitted from an improved sales mix and more favourable currency rates, both of which aided profitability.

We continue to invest in our business, focused primarily on three clear macro-trends: demographics, where an increasing population is evermore urban and aging; regulation, often around the safety of people; and environment, where optimising the use of scarce resources has become a global necessity. Sustainability, along with health and safety, is embedded in everything we do and, in 2022, we directed increased levels of investment to the development of new products and markets for our T-FIT® technical insulation products and to the reduction of waste and Scope 1 and 2 emissions from operations. We also invested significantly in our ReZorce® mono-material barrier technology, which is now transitioning from technical development to pre-market trials.

Group revenue increased 26% to £127.4m (2021: £100.8m), with operating profit of £13.9m (2021: £8.1m) 71% above last year and 20% above our previous best year (2018: £11.6m). Underlying growth in our business was approximately 5% from an improved mix of products, while pricing actions and exchange rate movements, principally a stronger US dollar, contributed approximately a 21% increase in revenue. Overall volumes were at similar levels to 2021, with another year of growth in footwear products and T-FIT insulation, continued recovery in aviation and a good performance in polyolefin foams in North America being offset by a decline in polyolefin products in continental Europe. Profit before tax increased 74% to £12.2m, (2021: £7.0m), with margin improvements in our Polyolefin Foams and HPP business units, while losses in our Mucell Extrusion LLC business unit (MEL) increased as we continue our investment in the ReZorce opportunity. See the CFO review for the impacts of currency on performance and profitability.

Strategic update and progress

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.

The investments we have made over the past five years have delivered increased capacity which, following the main economic effects of COVID-19, is now beginning to be used productively and is demonstrated in 2022 by very good profit growth and an ability to deliver strong operating cashflow and reduced leverage.

Our extrusion technology business, MEL, is demonstrating good progress in the development of new, sustainable packaging technology through the ReZorce mono-material barrier solution and is moving to commercialisation trials. To help accelerate the opportunity, we acquired the net assets of Refour ApS (Skandeborg, Denmark) for £0.3m in October and took on key members of the Refour team. We are now seeking the right strategic investor to work with us on this sustainable packaging opportunity.

Sustainability

Zotefoams products are typically sold into markets where they are used multiple times, often for many years, and can be recycled at the end of life. They often form a positive element of our customer's own sustainability agendas. In our foam manufacturing facilities, we have reduced waste while increasing the proportion of waste recycled, and have developed high-functioning foams with 30% recycled material content. The core markets for our products are where a "best in class" foam delivers our stated purpose: optimal material solutions for the benefit of society. Our products deliver performance and longevity in industrial applications and consumer durables such as footwear, medical devices, insulation for planes, cleanrooms, construction and cars, as well as military and marine uses. In 2022, 85% of our revenue was from products which are considered "green" based on a resource efficiency definition where, during manufacture or use, they provide a substantial increase in the efficiency of resources. This includes all sales from MEL, which provides solutions for increasing the efficiency of resource usage by reducing polymer consumption.

Within MEL, we continue to invest in our ReZorce mono-material barrier packaging opportunity. The premise of our MuCell® technology is the reduction of plastic in society and the exciting ReZorce solution, using this technology, is a truly circular answer to very challenging targets set by governments and brands in reducing their carbon footprint and increasing the use of recycled materials. See MEL below for more details.

Good progress was made in 2022 towards our sustainability targets. An in-depth analysis of the transitional risks arising from climate change provided useful data relating to the short, medium and long-term impacts on the Group, which are currently assessed as low risk. We continue to strive to develop disclosures aligned with our shareholders' and stakeholders' expectations and have been upgraded from an A score to an AA score (the second highest rating achievable) by MSCI. We also made our first report to CDP in 2022.

Polyolefin Foams

In 2022, sales in Polyolefin Foams grew by 25% to £70.1m (2021: £56.2m). Overall volumes were 1% below the previous year, with low and mid-single-digit percentage growth in the UK and North America respectively, while volumes declined 5% in continental Europe, our largest market and there were mixed outcomes in other geographies.

Polyolefin foams are widely used in industrial and multiple-use consumer applications due to their robustness and durability. The main market segments are multiple-use packaging and protection, often used in long-term storage solutions, construction, sport and leisure, automotive, aviation, marine, military and healthcare. Customers for some specific applications were negatively impacted by supply chain disruption, such as automotive, where demand declined to the lowest level for many years, while most markets were negatively impacted by high inflation of materials and energy costs as well as labour shortages. Growth in other areas, such as construction and print solutions, came from new applications which have been developed over the past few years and, in the case of those in continental Europe, benefitted from the proximity of certain customers to our facility in Poland.

Average selling prices increased 24%, which was primarily a result of price increases but also a consequence of an improved mix and some net foreign exchange benefit, with a stronger US dollar but weaker euro. In most areas, multiple price increases have been implemented since Q2 2021 following input cost inflation and, in 2022, we benefitted from the full-year impact of price increases implemented in 2021 plus further increases in 2022, some of which were implemented as a surcharge which remained in place throughout the year. In European markets, energy, polymer and nitrogen pricing remain volatile but may have overshot their long-run sustainable level.

The intent of these price increases is to recover the higher costs we are experiencing but not to recover previous percentage margin levels, nor position our pricing based on peak input costs. Finding the balance between price adjustments and potential demand destruction in the current environment remains an ongoing focus.

The main polymers used in our Polyolefin Foams business unit are low-density polyethylene (LDPE) and other similar polyolefins. LDPE pricing has been extremely volatile since reaching a long-time trough in early 2020 that was linked to lower demand through the COVID-related economic slowdown. Since then, it has risen rapidly due to a combination of factors, peaking in Europe in May 2022 and recently trending lower but above its long-term average. Current polymer pricing levels are in part due to high energy costs, which are also indirectly impacting the costs of nitrogen and freight as well as having a direct impact on Zotefoams. Direct costs of energy and nitrogen, which have a much higher impact on our Polyolefin Foams business unit than on HPP, increased by over 50% in the period.

In our UK and Poland facilities, good progress has been made on waste reduction and energy efficiency and in Europe we commercially launched new materials incorporating 30% recycled polymer following market testing during development. In our Kentucky, USA facility, manufacturing yield efficiency improved over the course of the year from the low levels experienced in 2021, with specific actions planned for 2023 to continue this progress.

Segment profit margin has grown to 7% of sales, significantly better than last year but with scope over time for further improvement primarily through improved asset utilisation, operational efficiency and mix enrichment.

High-Performance Products

Sales in our High-Performance Products ("HPP") business unit grew by 29% to £54.5m (2021: £42.3m). The main product groups are footwear, ZOTEK® fluoropolymer foams and T-FIT® technical insulation. Overall volumes were 12% ahead of 2021.

In footwear, where we have an exclusive arrangement with Nike, our materials are primarily used in midsoles for running shoes. In 2022, sales grew by 25% to £42.2m (2021: £33.9m). Since partnering with Nike in 2016, our business has grown significantly through the use of Zotefoams materials on more shoe models as well as through the growth experienced by Nike in the premium running segment. We have continued to develop new and innovative foams and improved our production efficiency, reducing cost, scrap and waste, most of which is now reincorporated into products within the footwear supply chain. Pricing to Nike recovers cost inflation, albeit with a lag, through our contractual terms. Footwear products accounted for 77% (2021: 80%) of HPP segment sales.

Other HPP foams are mainly used in aviation applications, where our ZOTEK F materials offer unrivalled performance at very low weight. Outside aviation our foams, including those made from nylon and elastomers, are used in healthcare, packaging, military and personal protection. Sales volumes of ZOTEK F materials increased by 17% and value increased by 48% to £6.2m (2021: £4.2m) with a beneficial product mix from the improving aviation market and the benefit of a stronger US dollar. Input-cost inflation in these materials was less severe than in polyolefin foams and our pricing reflected this. These applications accounted for 11% (2021: 12%) of HPP segment sales.

T-FIT insulation is made using Zotefoams' own HPP products and designed for the most demanding internal environments, such as in pharmaceutical, biotech and food and drink processing. Sales grew by 48% to £5.8m (2021: £3.9m). Our main markets are China and India, where more new factories are being built, although there is also an increase in construction activity in both Europe and North America. Most of our T-FIT conversion from foams to tubes, which is low capital-intensity, takes place in China but we have recently begun manufacturing in Poland and have an outsourced manufacturing partner to serve the North American market. T-FIT sales represent 11% (2021: 9%) of HPP segment sales.

Segment profit increased to £15.3m (2021: £8.7m), a segment profit margin of 28.1% (2021: 20.6%). The segment margin recovered from a relatively low point in the previous year, seeing the benefit of an improved product mix from higher aviation revenue and a stronger US dollar in which almost all HPP revenue is invoiced. We have expectations of further growth in our HPP business and continue to focus our investment in new product development and sales resources for T-FIT insulation, in line with these expectations.

MuCell Extrusion (MEL)

*Amortisation of acquired intangibles: 2022: £258k, 2021: £232k.

MuCell® extrusion technology centres around combining high-pressure gas with polymer, allowing a typical reduction of 15% of the material required. Our business model, until recently, has been to manufacture and sell equipment and license technology, with future income being a royalty stream based on the polymer savings from existing products. Most of our customers are making consumer packaging where our technology delivers a lower cost and lower environmental footprint. 

Over the past few years, we have worked further to extend this gas-injection capability to new applications. This has led to the creation of a new platform technology, branded ReZorce®, which is mono-material barrier packaging. Certain products, such as food and drink, require their packaging to provide a barrier to oxygen and moisture and this is typically delivered through a combination of different materials in the same pack. It is very effective and cost efficient and therefore widespread, however, often extremely difficult to recycle and almost never circular. We have proven that our ReZorce packaging system can provide the required barrier properties, is easily recycled using common infrastructure available today and can be made using a high proportion of recycled raw materials. Overall, this solution offers a lower carbon footprint for commonly packaged foodstuffs, in some cases a reduction of more than 50%. Our go-to-market plans are moving from technical development into pre-market trials and the main challenge now is to prove the "downstream" solution of turning ReZorce sheet into specific packaging formats, ideally using existing infrastructure. 

Revenue from our MEL business unit grew 23% to £2.8m (2021: £2.3m), while the segment loss widened to £1.6m (2021: £0.5m) before amortisation of acquired intangibles, a direct result of the non-capitalised investment to develop ReZorce technology. In addition to this, we capitalised £1.4m (2021: £1.0m) of operating costs and invested £0.8m (2021: £0.9m) in tangible fixed assets. This included the acquisition of a full-scale extrusion line and carton filling and packing line as well as some ancillary equipment in Denmark, which now operates as a development centre within the MEL division with scope to scale up for initial market launch.

The market opportunity for lower carbon footprint packaging is vast. Cartons and pouches together generate revenues in excess of $40bn per annum. We recognise that launching products into this market, which requires us to overcome significant market and technical hurdles, is best done with a strategic investor to mitigate the risk, ideally through a combination of their own experience and financial investment. Late in 2022, we appointed a USA-based advisor to facilitate the interactions with potential partners and this engagement is progressing.

Capacity and investment

Zotefoams' manufacturing process comprises three main stages: extrusion of a polymer sheet, high-pressure gassing of this sheet with nitrogen and final expansion in a lower-pressure environment. The infrastructure around these processes is complex and costly and, therefore, ideally supports multiple production vessels.

Most products can be made on multiple production lines, although some of our older assets are not capable of making all products we sell today. Our UK site manufactures all HPP products and sends partly finished polyolefin products for the final expansion process to Poland, which is closer to many customers, reducing overall transport costs and emissions. Our site in Kentucky, USA is well-placed geographically for its customer base and operates largely independently of the other two foam manufacturing locations. 

Following the high levels of capital invested prior to 2021, the majority of investment in foams manufacturing over the past two years has been to improve efficiency, replace aging equipment and address bottlenecks in production processes. The foams business has sufficient capacity, with minimal incremental investment, to deliver our growth plans for the foreseeable future. Our facilities in the USA and Poland have the flexibility for investment to support longer term growth.

Zotefoams also invested £2.3m (2021: £1.9m) in developing the ReZorce mono-material barrier packaging technology, which is explained in more detail above.

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. We assess progress on six separate metrics:

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 main safety metric in our business is reportable lost time incidents and, regrettably, we had two such incidents during the year (2021: nil) from which both individuals made a full recovery. In line with our policy, a full follow-up and analysis with corrective actions was reviewed by the Board. Other metrics, which record less severe incidents and absences, showed significant improvement over the prior year and are significantly below industry benchmarks, with measured incidents around one third of the rate of comparable companies.

With eight physical locations globally and many more people working, at least some of their time, from home, we work hard to ensure cohesion through a common culture and clear communication of our strategy, objectives, progress and challenges. Employee engagement activities included Group CEO "all-staff briefings", which include a Q&A session, as well as employee surveys.

I would like to extend my thanks to my colleagues and to their families for their support over the past year.

During 2022, Zotefoams employed an average of 518 people, 4% more than in 2021. Of these, approximately two thirds worked in production, with 15% in distribution and marketing and the remainder in administration, including finance, HR and IT, and technical or quality positions.

Forward-looking statements

Forward-looking statements have been made by the Directors in good faith using information available up until the date they approved these preliminary results. 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

2023 has started well, with demand for our AZOTE polyolefin foam products in line with the previous year but with higher revenue from price increases implemented over the past twelve months. Sales of high-performance products are showing strong growth in the first few months, mainly due to the timing of shipments compared to the prior period. Sales across both businesses continue to benefit from a stronger US dollar. 

The environment for input costs is less acute, with both energy and polyolefin polymer prices reduced from the peaks seen last year but remaining well above their long-term average. Prices for energy and energy-intensive commodities such as nitrogen remain uncertain, with forward-market pricing at a significant risk premium to spot. We are closely monitoring input costs and our pricing in the polyolefin foams business in particular.

Whilst uncertainty persists, we currently expect that, for the year as a whole, polyolefin foams volumes will be at a similar level to last year, with more challenging conditions in the UK and continental Europe offset by growth in North America and other geographies. Our High-Performance Products business should see further growth in footwear and continued strong growth in both our ZOTEK F and T-FIT insulation products. Within our MEL business unit, focus has progressed to commercialisation trials for ReZorce cartons.

Overall, the Board remains confident about the future prospects for our business.

D B Stirling

Group CEO

21 March 2023

Group CFO's review

2022 was a strong year for Zotefoams, with high revenue growth generated from HPP volumes and polyolefin price increases leading to significantly improved margins despite continued cost inflation. Strong cash generation, coupled with favourable FX movements, saw leverage fall to its lowest point since 2018

Overview

Group revenue for the year increased 26% to £127.4m (2021: £100.8m). High-Performance Products (HPP) sales increased 29%, with good volume growth in Footwear, ZOTEK® fluoropolymers and T-FIT® technical insulation and a foreign currency tailwind, while Polyolefin Foams sales rose 25%, led by price increases, experiencing growth in all geographical markets and major application groupings with the notable exception of automotive. MuCell Extrusion LLC (MEL) sales grew 23%, despite the ongoing refocus of resources on our ReZorce® mono-material barrier packaging opportunity. In constant currency, Group revenue grew 19% to £119.8m, with an additional favourable currency impact in the year of £7.6m, the result of the US dollar averaging 10% higher against sterling.

Operating profit increased 71% to £13.9m (2021: £8.1m). Raw material costs rose further in H1 2022 before receding slightly from their peak early in the second half of the year; however, energy prices began to surge from early in the year, led by concerns related to Russian supply as the impacts of the war in Ukraine unfolded. Other key input costs, such as nitrogen, also increased significantly. Multiple rounds of price increases in Polyolefin Foams, together with smaller increases in HPP, where polymer prices were more stable, were implemented early in the year to recover margins. Gross margin increased 46% to £38.7m (2021: £26.6m), also supported by a favourable US dollar exchange rate, and the gross margin percentage improved by 400 basis points to 30.4% (2021: 26.4%). Distribution and administrative costs increased 35% to £24.8m (2021: £18.4m), with £3.0m of the movement related to hedging differences year-on-year and much of the remaining increase related to higher performance-related bonus and stock option costs reflective of the strong results. Net finance costs were £1.8m (2021: £1.1m), following increases in dollar and euro base rates as well as a £0.3m write-down of refinancing costs from the Group's previous bank facility. Profit before tax increased 74% to £12.2m (2021: £7.0m). After deducting taxation of £2.2m (2021: £2.6m), which reflects a return to a normalised charge after a previous year which included a £1.0m deferred tax accrual related to the increase in the Corporation Tax rate from 19% to 25% and a £1.0m deferred tax charge related to an earlier year tax credit, basic earnings per share was up 129% at 20.61p (2021: 9.01p). In constant currency, profit before tax was £9.7m with an additional favourable currency impact of £2.5m.

The Group reports a strong balance sheet at 31 December 2022, with net debt down £6.5m to £27.8m (31 December 2021: £34.3m) and the leverage multiple (net debt to EBITDA, using definitions under the bank facility agreement, see section 'Debt facility') falling to 1.2 (31 December 2021: 2.1). This was realised after a £6.9m (43%) increase in EBITDA to £23.0m (2021: £16.1m), strong cash generation with net cash flows generated from operations of £23.0m (2021: £12.8m), capital expenditure of £7.0m (2021: £7.0m), and total dividends of £3.2m (2021: £3.1m).

Revenue performance

Revenue by segment £m

1 Constant currency, adjusting 2022 values to 2021 rates. See exchange rates table.

2 Adjusted for rounding.

Within the transportation segment, aviation represented 7.6% (2021: 4.5%) and automotive 4.8% (2021: 5.8%) of Group revenue. These two markets remain well below their pre-pandemic levels and in 2019 were 15.0% and 7.0% respectively.

Polyolefin Foams business unit sales grew 25% to £70.1m (2021: £56.2m). In constant currency, sales grew 21% to £68.1m. This reflects a consolidation of the volume growth achieved in 2021, mix enrichment and a number of price increases in H1 2022 to help recover margins following the significant cost inflation of 2021 which continued into 2022. The UK and USA regions experienced very strong sales growth, up 30% and 39% respectively, while Europe increased 14% and the Rest of the world increased 23%. All application markets performed well, except for automotive, which continued to suffer from industry-specific challenges and mostly impacted Europe.

HPP sales increased 29% to £54.4m (2021: £42.3m). In constant currency, sales grew 16% to £49.1m. Footwear is the largest application within HPP and revenue in this market grew a further 25% to £42.1m (2021: £33.9m), with Zotefoams products on more shoe platforms, resulting in this business division accounting for 33% of Group sales (2021: 34%). ZOTEK F fluoropolymer foam sales closed the year 48% up at £6.2m (2021: £4.2m), still £4.8m below our 2019 peak of £10.0m, signalling the start of a recovery in the aviation industry after two years impacted by COVID-19. T-FIT advanced insulation sales also grew 48% to £5.8m (2021: £3.9m), with strong growth in China despite continued challenges from the country's strict COVID-19 controls during the year, which included a five-week shutdown of our local facility in H1 2022. 

MEL sales growth remains constrained 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 23% to £2.8m (2021: £2.3m), with negligible impact in absolute terms from currency.

Gross profit

Gross margin increased to 30.4% (2021: 26.4%), representing an increase of £12.1m in absolute terms from £26.6m to £38.7m. Multiple sales price increases were implemented in the Polyolefin Foams business in H1 2022 to help recover lost margins resulting mostly from raw material increases in 2021 and, additionally in 2022, from escalating energy (with fewer hedges due to the high forward pricing quotes), nitrogen and people costs. Energy costs increased from £4.8m in 2021 to £7.3m in 2022. Smaller price increases were implemented in HPP to offset rising material costs of these speciality polymers, while increased volumes in the business unit also drove operational gearing. Freight availability and pricing improved in the year. The reduced strength in sterling, mostly compared to the US dollar and in particular in HPP, where most sales are denominated in US dollars, significantly benefitted gross margin by £4.9m, with some of the impact offset by the Group's hedging strategy, the outcome of which appears below under administrative costs in line with 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.

Included within distribution costs in the consolidated income statement are sales, marketing and warehousing expenses. These costs increased by £0.7m, or 10%, to £8.0m (2021: £7.3m) during the year, mostly reflecting increased marketing spend, HPP hirings for planned future growth and increased sales activity, offset by optimisation of the UK site to reduce offsite warehousing costs. Included within administrative expenses are technical development, finance, information systems and administration costs as well as the impact of foreign exchange hedges maturing in the period and non-cash foreign exchange translation expenses. These costs increased in 2022 by £5.7m, or 51%, to £16.8m (2021: £11.1m). However, after stripping out foreign exchange movements, which generated a movement of £3.0m, these administrative costs increased by 22%, or £2.7m, to £15.0m (2021: £12.3m), mostly related to £1.8m of additional bonus and stock option costs reflecting the significant improvement in performance in the year, while also reflecting increased investment in finance and IT in the UK and staff outside the UK. See 'Currency review', below for further information and context around foreign exchange movements.

The business unit results do not include central plc costs, which are not considered to be segment specific. Neither do they include hedging movements. In 2022, central plc costs were £2.5m (2021: £1.8m), the growth mostly due to bonus and stock option charges following a strong year.

Operating profit

Operating profit was £13.9m, 71% above 2021 (£8.1m). The operating margin increased from 8.1% to 10.9%.

Finance costs

The total interest charge for the year increased to £1.8m (2021: £1.1m) and includes £0.1m (2021: £0.1m) of interest on the Defined Benefit Scheme pension obligation. This increase reflects the rise during the year in US dollar and euro base rates, which are the currencies in which the Group's debt obligations are held, as well as £0.3m related to unamortised costs related to the previous banking facility which was replaced in March 2022.

Profit before tax

Profit before tax increased 74% to £12.2m (2021: £7.0m).

Currency review

Exchange rates

Zotefoams transacts significantly in US dollars and euros. The exchange rates used to translate the key flows and balances were:

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 weakened by 10% and the sterling average exchange rate against the euro strengthened by 1%. The sterling spot rate against the US dollar from 31 December 2021 to 31 December 2022 weakened by 11%, while the sterling spot rate against the euro from 31 December 2021 to 31 December 2022 weakened by 5%.

Zotefoams is a predominantly UK-based exporter which invoices mostly in local currency. In 2022, approximately 90% of sales (2021: approximately 90%) 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 all US dollar-denominated. Poland operating costs are incurred in zloty. The Group uses forward exchange contracts to hedge two-thirds of its forecast net cashflows over the following twelve months that are subject to US dollar and euro transaction risk. The Group recorded a loss on forward exchange contracts in the year of £2.9m (2021 gain: £1.3m).

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. This translation exposure is mitigated, where possible, through an offset with same-currency liabilities, primarily through borrowing in the relevant currency. Every month, these foreign currency-denominated intercompany net positions, despite being cash neutral, require to be translated by Zotefoams plc on a mark to market basis and the movement taken to the Company income statement. The Group also has a fast-growing HPP business, which is mostly invoiced from the UK in US dollars, which adds to its exposure to foreign currency denominated net assets and is accounted for in the same way as above. While FX exposure is partly mitigated by the forward currency contracts, risk remains based on the amount of forecast exposure not hedged, in line with Group policy, and the fact that there is a timing difference between the recording of accounts receivable and cash received. This timing difference is tackled by further hedging activities, but their effectiveness is subject to the accuracy of forecasting cash receipts. The Group recorded a translation gain in the year of £1.0m (2021 loss: £0.1m).

Currency movements during the year positively impacted Group revenue by £7.6m (2021: £4.1m negative impact). They negatively impacted operating costs by £3.2m (2021: £2.4m positive impact), resulting in a net positive impact of £4.3m (2021: negative impact £1.7m) before hedging. After deducting the net hedging loss of £1.8m (2021: gain of £1.2m), the net currency positive impact for the year was £2.5m (2021: negative impact £0.5m).

We expect growth to be denominated in currency other than sterling and recognise that one of our principal risks is our exposure to foreign currency fluctuations, particularly the US dollar, which we will aim to manage through hedging strategies. Based on 2022 and with respect to transaction risk, it is estimated that for every one percentage point movement in the US dollar/sterling rate, profit moves by £0.4m unhedged and £0.1m hedged. In the year, it is assumed that the transaction risk from euro/sterling movements continues to be substantially naturally hedged, with the risk arising on sales revenues offset by that on costs, primarily related to raw material purchases and certain further processing costs.

The Group does not currently hedge for the translation of its foreign subsidiaries' assets or liabilities. The foreign currency hedging policy is kept under regular review and is formally approved by the Board on an annual basis.

Currency impact on business segment profitability in 2022

Currency had a £7.6m positive impact on the Group's sales performance. See above.

Segment profit £m

* Constant currency, adjusting 2022 values to 2021 rates. See exchange rates table above.

Taxation charge and earnings per share

The tax charge for the year is £2.2m (2021: £2.6m). The effective tax rate for the year is 18.1% (2021: 37.6%), which is a return to a rate similar to the Group's weighted average corporate tax rate for the year of 19.5% (2021: 19.0%). In the previous year, the higher effective tax rate for the year arose primarily from an increase in the deferred tax charge of £1.0m that followed the substantive enactment of a decision to increase UK Corporation Tax rates to 25% in 2023, a prudent approach to recognising overseas tax losses as a deferred income tax asset amounting to £0.4m and a lower profit before tax for the year of £7.0m.

Basic earnings per share was 20.61p (2021: 9.01p), an increase of 129%. Diluted earnings per share was 20.20p (2021: 8.87p).

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 the use of recycled content in their packaging, putting sustainability at the heart of our MEL development agenda. During the year, Zotefoams continued its investment in this opportunity. In line with IAS 38 "Capitalisation of Development Costs", labour amounting to £0.4m (2021: £0.4m) was redirected from MEL to ReZorce and capitalised, and a further £1.0m (2021: £0.6m) was invested in additional, directly attributable costs, and capitalised. The Group also invested £0.8m (2021: £0.9m) during the year to purchase and develop equipment, which has been recorded under tangible assets. This amount includes the acquisition of the net assets of Refour ApS (Skandeborg, Denmark) for £0.3m, which, together with key members of the Refour team, is expected to accelerate the development of ReZorce across a wide variety of applications. In total, capitalised investment in ReZorce amounted to £2.2m during 2022 (2021: £1.9m) and is £4.7m cumulatively over the life of the project, which will be amortised in line with Group policies, if successful, or be fully impaired, if not, in line with accounting standards. The Board does not currently consider any of these assets to be impaired, given the progress made in development, the commercial opportunities that exist, the current search for a strategic investor and the Board's continuing commitment to the initiative. MEL also reported a loss before tax of £1.9m (2021: £0.7m), the movement driven by our focus on the ReZorce opportunity.

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, sustainability credentials and expected returns. Confidence in the Group's developing portfolio of HPP opportunities is a significant consideration in determining the timing of certain investments, while the strategic importance of maintaining growth in the profitable Polyolefin Foams business, the Group's largest volume product range, informs the decision to increase total Group capacity versus relying solely on mix enrichment. Outside of significant capacity-related investments, the Group also invests to maintain its capital-intensive assets, mindful of opportunities to improve energy efficiency and further reduce health and safety risk, particularly at the older UK facility.

Zotefoams targets improvements in the Group's return on capital over the investment cycle, while recognising the short-term impact on the return of sizeable capital investments during their construction and early operations phases, where they initially run at lower utilisation and mix optimisation levels. When Zotefoams embarks on investment in a major expansion or new location, such as the installation of extrusion and high-pressure capability at our existing Kentucky, USA site, which we commissioned in 2018, or the most recent investment in foam manufacturing at the Poland site, commissioned in 2021, we take into account the importance of scale and dilution of heavy infrastructure cost over a (future) second or third line. As such, the first step is invariably more dilutive to capital return than any subsequent investments.

Zotefoams is also pursuing a transformative mono-material barrier packaging solution through its MEL business unit, branded as ReZorce. In this pre-revenue development phase, overall capital returns are diluted as a result of both the operating profit charge as well as the capital investments made but the initiative offers significant potential if the technology is adopted.

Definition of ROCE and 2022 outcome

Zotefoams defines the return on capital employed (ROCE), which is a non IFRS measure, as operating profit before exceptional items divided by the average sum of its equity, net debt and other non-current liabilities. This measure excludes acquired intangible assets and their amortisation costs. We also exclude significant capacity investments under construction until they enter production. We do not attempt to adjust for the first phase inefficiencies as mentioned above.

In 2022, the Group's return on capital employed increased to 10.1% (2021: 6.1%), mostly reflecting improved profitability in the year. The main cause of a reduction in ROCE since 2018, when the Group generated a ROCE of 16.5%, 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. Business growth, with this increased capacity matched by improved utilisation and mix enrichment, is expected to improve ROCE beyond that previously achieved.

Investment in growth-generating tangible assets (£m)

1 Commissioning of USA first high pressure vessel, infrastructure and ancillaries

2 Commissioning of USA second high pressure vessel and UK high-temperature low-pressure autoclaves, infrastructure and ancillaries

3 Commissioning of Poland infrastructure and high-temperature low-pressure autoclave

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 4.62p (2021: 4.40p), which would be payable on 2 June 2023 to shareholders on the Company register at the close of business on 5 May 2023. The ex-dividend date will be 4 May 2023. Taken with the interim dividend of 2.18p (2021: 2.10p), this would bring the total dividend for the year to 6.80p (2021: 6.50p) and would represent a dividend cover of 3.7 times (2021: 1.4 times).

Cash flow 

The Group is highly cash generative, and this was a particularly strong year, with net cash from operations before investment in working capital and provisions of £24.1m, up 46% on the previous year (2021: £16.5m). Out of this, £0.3m (2021: £2.9m) was then re-invested in working capital. Trade and other receivables increased by £4.8m (2021: increased £1.6m), reflecting greatly increased sales in November and December versus the previous year and certain overdues in the USA which have since been recovered or are being effectively managed. Outside of the USA, our overdues continue to remain very low. Inventories decreased just £0.4m, (2021: increased £2.8m), with increased footwear raw materials required to match demand offset by a depletion of fluoropolymer inventory for ZOTEK F, which will be replenished in 2023, as demand improves post COVID-19. Trade and other payables increased £4.1m (2021: increased £1.5m), with a £1.4m increase due to higher purchase costs and timing of purchases, a further £1.6m related to the higher 2022 bonus accrual and approximately £0.7m related to utilities and insurance accruals. Zotefoams recognises the importance of its supplier relationships and has improved its performance with respect to honouring agreed payment terms. As a result of all of the above, cash generated from operations was significantly higher than the previous year at £23.0m (2021: £12.8m).

During the year, the Group paid interest on its borrowings of £1.3m (2021: £0.8m), reflecting increases in base rates. Net taxation paid during the year amounted to £0.7m (2021: £1.1m). The Company received a refund of £0.5m in relation to the 2020 tax computation and also recovered £0.3m following a review of its capital allowances on its 2019 building expenditure in Croydon.

Zotefoams' property, plant and equipment capital expenditure remained at a lower level than in recent history, as expected, following several years of capacity expansion, with total expenditure of £5.4m (2021: £6.0m). Expenditure was split broadly across all categories, the most significant being 29% on ESG initiatives, 21% on essential replacement and 16% on product development; geographically, 58% was directed to our Croydon, UK plant and 19% to our Walton, USA plant. Product development included the acquisition of the net assets of Refour ApS (Skandeborg, Denmark), amounting to £0.3m, to support the ReZorce opportunity in MEL. The Group also invested £1.7m (2021: £1.1m) in intangible assets, almost entirely related to MEL patents and capitalised development costs for ReZorce. The combined investment of £7.0m (2021: £7.0m) is slightly below what we expect to invest, on a normal basis, which is a level in line with the Group's combined depreciation and amortisation charge (2022: £8.2m, 2021: £7.6m).

After dividends paid in the year amounting to £3.2m (2021: £3.1m) and lease payments of £0.5m (2021: £0.5m), closing net debt fell to £27.8m (2021: £34.3m). At the year end, the Group remains comfortably within its bank facility covenants, with a multiple of EBITDA to net finance charges of 13.7 (2021: 16.1), against a covenant minimum of 4 (2021: 4), and net debt to EBITDA (leverage) multiple of 1.2 (2021: 2.1), against a covenant of 3.5 (2021: 3.0). See 'Debt facility' for a definition of leverage and information on the Group's renewal of its refinancing arrangements in March 2022.

Debt facility

At 31 December 2022, the Group's gross finance facilities were £50.0m (2021: £47.3m), consisting entirely of a multi-currency term loan. At 31 December 2021, the Group's gross finance facilities consisted of a multi-currency term loan of £20.0m, a multi-currency revolving credit facility of £25.0m and a remaining balance of £2.3m of a further £7.5m sterling annually renewable term loan, repayable in equal quarterly instalments. In March 2022, the Group completed a retender of its debt facility 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 now comprises a £50m multi-currency revolving credit facility with a £25m accordion, on a 4+1 tenor, 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 a multiple of 4 and the latter increasing to 3.5 from 3.0. In January 2023, the Group successfully extended the facility by a year in line with the term option, resulting in a revised end term date of March 2027.

At 31 December 2022, 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 £22.9m (2021: £13.4m).

Zotefoams defines EBITDA as profit for the year before tax, adjusted for depreciation and amortisation, net finance costs, the share of profit/loss from its joint venture and equity-settled share-based payments. Net debt comprises short and long-term loans less cash and cash equivalents and is adjusted from IFRS by the impacts of IFRS 2 and IFRS 16 under the bank facility definition.

Group banking covenants definition

Net debt to EBITDA ratio (Leverage)

EBITDA to net finance charges ratio

Post-employment benefits

The Company operates a UK registered trust-based pension scheme, the Zotefoams Pension Scheme (the Scheme), that provides defined benefits. Pension benefits are linked to the members' final pensionable salaries and service at their retirement (or date of leaving if earlier). The Scheme was closed to new members in 2001, as was the link to future accrual of salary in 2005. Inconsistencies in the way the Scheme's link to future accrual of salary was closed in 2005 were rectified in 2019. There are three categories of pension scheme members:

The last full actuarial valuation of the Defined Benefit Scheme ('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 IAS 19 deficit on the DB Scheme decreased by £1.4m to £3.3m as at 31 December 2022 (2021: £4.7m) and represents 3.0% (2021: 4.8%) of consolidated net assets. The main factor leading to the improvement was a change in the discount rate assumption to 4.80% (2021: 1.80%) following an increase in corporate bond yields over the year. The value of the defined benefit obligation at the year-end fell from £38.8m in 2021 to £26.1m in 2022, driven by this changed assumption. However, this was partially offset by the actual investment return achieved on the assets being lower than that required to match the expected increase in defined benefit obligations over the year (the market value of assets fell from £34.1m in 2021 to £22.8m in 2022) and higher than expected price inflation. Zotefoams does not consider its pension scheme to be a key risk to its ability to achieve its strategic objectives due to the immaterial share of net assets that the deficit represents. Mitigation of further risk is expected to come from our growth expectations and the continued focus by the Trustees on a lower-risk strategy to meet the DB Scheme's deficit 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 its available debt facilities, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next twelve months following the date of approval of the financial statements. The Directors have also continued to draw upon the experiences of 2020 and the Group's success in reacting to the challenges of COVID-19 through its safety protocols and cost and cash management, all of which could be replicated in a similar scenario.

After due consideration of the range and likelihood of potential outcomes, the Directors continue to adopt the going concern basis of accounting in preparing the 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

21 March 2023

Consolidated income statement

For the year ended 31 December 2022

Consolidated statement of comprehensive income

For the year ended 31 December 2022

Consolidated statement of financial position

As at 31 December 2022

Consolidated statement of cash flows

For the year ended 31 December 2022

Consolidated statement of changes in equity

For the year ended 31 December 2022

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 2021. Whilst the financial information included in this announcement has been computed in accordance with the recognition and measurement requirements of UK adopted international accounting standards ("UK adopted IAS") and as applied in accordance with the provisions of the Companies Act 2006, this announcement does not itself contain sufficient disclosures to comply with UK adopted IAS.

The information for the year ended 31 December 2022 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 2021 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 2022 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 2021 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:

1 Prior year amortisation of acquired intangibles amended from £194k reported in 2021 to £232k.

Geographical segments

Polyolefin Foams, HPP and MEL are managed on a worldwide basis but operate from UK, USA, European and Asian locations. In presenting information on the basis of geographical segments, segmental revenue is based on the geographical location of customers. Segment assets are based on the geographical location of assets.

3. Property, plant and equipment

Group

4. Interest-bearing loans and borrowings

In March 2022, the Group completed a debt refinancing and selected Handelsbanken and NatWest, the incumbents, to continue as its lenders. Under the terms of the new facility, secured against the property, plant and equipment and trade receivables, the Group's gross finance facility consists of a £50m multi-currency revolving credit facility with a £25m accordion. With a 4+1 tenor, the extending year option was taken up in January 2023.

At the end of the financial year, the Group has utilised £37.4m (31 December 2021: £41.3m) of its multi-currency revolving credit facility of £50m. The total amount of £37.4m, repayable on the last day of each loan interest period, which is of either a 3 or 6-month duration, is net of £0.5m origination fees paid up front and being amortised over 4 years. The Group has headroom of £22.9m, being £10.6m cash and cash equivalents and an undrawn facility of £12.3m, being the facility of £50m less the drawn down balance of £37.4m, less £0.3m of exchange rate differences between the Group and the banks.

The interest rates on the debt facility ranged between 1.60% and 6.00% in 2022 (2021: between 1.60% and 2.35%).

5. Issued share capital

Issued, allotted and fully paid ordinary shares of 5p each:

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled, on a poll, to one vote per share at meetings of the Company.

6. Dividends and earnings per share

The proposed final dividend for the year ended 31 December 2022 of 4.62p per share (2021: 4.40p) 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 £2,241k if paid to all shareholders on the Company register at the close of business on 2 June 2023.

Earnings per ordinary share

Earnings per ordinary share is calculated by dividing consolidated profit after tax attributable to equity holders of the Company of £10,006k (2021: £4,376k) by the weighted average number of shares in issue during the year and excluding own shares held by the EBT which are administered by independent trustees. The number of shares held in the trust at 31 December 2022 was 107,130 (2021: 196,888). 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'.

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 the bank facility agreement).

Loan covenants

Under the terms of its borrowing facilities, the Group is required to comply with the following financial covenants:

The Group has complied with these covenants throughout the financial year.

Net borrowings comprise current and non-current interest-bearing loans and borrowings of £37,446k and cash and cash equivalents of £10,594k.

EBITDA comprises:

Net finance charges comprise interest income of £56k and finance costs expensed of £1,738k, which excludes pension interest.

The Group's objective is to maintain leverage below the Board's appetite of 2.0. However, it is prepared to accept increases in this ratio at times of sizeable, capacity-related, capital expenditure to support continued growth. Subject to short-term macro-economic and geopolitical volatility, this is always expected to reduce quickly back below the Board's appetite, and to significantly lower levels, as capacity utilisation improves.

The bank covenant definition does not include the impact of IFRS 16 "Leases", which would have moved the ratio from 1.17 to 1.21.