Zotefoams Regulatory News (ZTF)

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

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

Strategic progress

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".

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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

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

· 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 StirlingGroup 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

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.

* 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:

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

* 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)

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

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

Consolidated statement of comprehensive income

For the year ended 31 December 2021

Consolidated statement of financial position

As at 31 December 2021

Consolidated statement of cash flows

For the year ended 31 December 2021

Consolidated statement of changes in equity

For the year ended 31 December 2021

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®".

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.

3. Dividends and earnings per share

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".

4. 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.

5. Interest-bearing loans and borrowings

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

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 Group has complied with these covenants throughout the financial year.

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:

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.