Zotefoams (LSE:ZTF) — Interim Results for six months to 30th June 2021

0:02 Good afternoon, ladies and gentlemen, and welcome to the ZOTEFOAMS PLC Interim Results Presentation for the six months of 06/30/2021. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated on the right hand corner of your screen. Just click Q and A, type in your question, and press send. Company may not be in a position to answer every question it receives during the meeting itself. However, the company review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your investor meet company dashboard, and you'll be notified

0:33 once they're ready for your review. I'd also like to remind you this presentation is being recorded. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to David Sterling, CEO and Gary McGrath, CFO of ZOTEFOAMS PLC. Good afternoon, guys. Good afternoon. Welcome to our presentation. I think Gary and I are you can see we're here. You can see what we look like. I think we're going to go on to the video off to maximize the bandwidth and audio experience and talk through the slides. So

1:11 so firstly, I I would like to say that as we just think about our business, remind people that we we run two basic technologies, autoclave technology and extrusion technology. And the autoclave technology is mostly what we'll be talking about today. That's 98% of our business. And we think about that in two different divisions, polyolefin, which is using common commonly available polymers and creating high performance or higher performance materials from those, and what we call a high performance products division. And those are using more advanced polymers, with attributes such as energy return for footwear or chemical resistance, fire resistance, etcetera for aviation.

2:07 So those two businesses use our autoclave technology, and essentially, our capacity is interchangeable between the two. Our strategy is that we ultimately are looking at higher levels of organic growth. We're not looking at acquisitions, etcetera. We're using our unique technology to create these, enhanced materials where we focus on particular markets where we believe we've got the highest advantage to our customers and therefore to us by our materials. And, that's led us into areas like aviation, clean room installation, etcetera.

2:52 And our the other part of our strategy is to use the assets effectively and efficiency efficiently. So therefore, high asset utilization levels fill the assets with the polyolefin foams, and over time, with higher growth rates than high performance foams, these have higher selling prices, higher margins, the use capacity more efficiently per unit of revenue, and over time mix enrich through higher growth levels to our HPP forms division. For the six months ended June 2021, we can see revenue up 39% to 48,000,000. If we compare that to last year, that 39% in constant currency, we would have grown a bit further to 50.7.

3:46 And also importantly, given the odds comparative in 2020 with COVID, were fourteen percent of the comparative period in 2019.

3:58 Our high performance products division has led the charge, with sales up 66%, a record almost 20,000,000 in the period. Although the other divisions such as polyolefin foam was up 24%, and mucel up 50%, also performed very well.

4:19 Actually, it's been quite difficult operating environment. We've seen significant supply chain disruptions, Brexit disruptions, COVID, raw material availability, and pricing challenges, as well as freight difficulties and pricing challenges. So all these things have given us gross margin pressures in the period, as well as planned commissioning of our Poland facility, has come online in the first quarter this year and is our third major operating facility for full manufacture. So despite all these things, our growth in sales has overcome these gross margin pressures, giving us an adjusted operating profit up 47% to 4,800,000 and PBT up to 4,100,000.

5:19 If we had again constant currency, profit would have been up 93% in the period. We've also improved our leverage ratio, which is important to consider how financially stable the business is. And with debt, similar levels to last year, our leverage has decreased due to the better operating performance of the business and now is below two times. And importantly for a lot of people, me included, interim dividend up 3.4% to 2.1p per share. By geography, you can see quite decent swings in our business, actually, but those are more marked by what's happening in the different markets or industries rather than geographies.

6:16 So you can see rest of world, a very big increase. That's where our footwear products go and a decent amount of our TFA insulation.

6:28 Europe, we've seen a strong recovery in general industrial markets. UK is actually lower than last year. Two reasons for that. We had some government PPE contract last year, which started in June, and therefore, keeps into the comparative number, and that's no longer there this year. It was like a one off six month contract. Also UK not quite growing at the same rate. The underlying growth not quite the same rate as the recovery seen in other markets. And The US heavily influenced by aviation business, which, you know, North America and Boeing in particular is our largest aviation customer base.

7:15 And that that's obviously an area where almost uniquely, sales are down compared to the first half last year. It wasn't badly hit by COVID initially, the aviation business, and then really got hit very, very badly, and it's not expected for us at least to start recovering till fourth quarter this year.

7:42 If we move on to the financial review, I'll let Gary cover the details of that before giving a bit more color on these business units and our strategy progress. Thanks, David. Yes, so as David mentioned, revenue up to $48,200,000 for the six months versus 34.6 the prior period, which is a 39% increase. And indeed, we had currency headwinds of 2,600,000, which would have taken us to 50.7, which would have been a 47% increase. And also, last year was a bit of an unusual year. If look back to the year before, H1 revenue in 2019 was $42,300,000 So we're actually back up and above that period by 14%.

8:33 Gross profit was 1,900,000 up, 16% on the prior year prior period. But the key really is the is the the fact there's a lot of moving parts and the gross profit margin was down to 28.9% from 34.8% in the previous period. And David touched upon that in one of the previous slides. The real the four main areas really start with the cost inflation in our polyolefin foam raw materials, LDPE, primarily. And that really has moved to take the beginning of the year through to the end of June, up up basically two x. And if you look at the average of the last five years, we're effectively now around 60% above that. We see that as timing.

9:19 We we expect that to reverse. We have taken some price rises in the period. They they were implemented from the beginning of May, but we we expect those costs to to come down, probably not this year, but we would imagine and anticipate them coming down to a more normalized average rate in 2022. In terms of significance, the next one would be what would actually be weaker USD. HPP sales are almost entirely invoiced in in dollars, and we don't have much of a hedge against it because we manufacture those products in The UK. So we have sterling costs. We have we have some raw materials in USD, but others in in euro as well. So quite exposed. And as we've grown the HPP and grown footwear, that exposure has increased, and we took that in this period. In fact, total underlying PBT, as David mentioned, was 1,200,000 impacted by FX.

10:17 On top of that, we also have freight freight costs. It's not it's prices have gone up both into Europe and road as well as out to to to Asia in terms of containers. And Brexit really hasn't helped either with bit of bit of COVID, bit of Brexit haven't helped with the efficiencies, and inefficiencies lead to increased costs. Be it using example, if we if if there's some delays that that slow us down a bit, we find ourselves having to air freight occasional products, which isn't isn't cheap when you're air freighting foam. And then finally, we have started our our third manufacturing facility, as David mentioned. Poland started up towards the end of February. Those costs hit the p and l together, operating cost plus depreciation. And and their cost, didn't have in the previous period.

11:05 And and when we and and looking back two years, we're probably or three years when we when we started investing in this plant, had we known COVID was coming, we probably wouldn't have have taken the step right then. So it's still it's the costs aren't really but aren't being absorbed by extra capacity at the moment, but we anticipate that to start in, you know, in the future. What does that mean for adjust well, first of all, adjusted operating profit. Let me just remind you what adjusted means for us. It's not very much. It's a £120,000 of amortization of acquired intangibles in 2021 and 150,000 in 2020. We add that back to the reported numbers. So those numbers, 4,800,000 at the half year this year versus 3,200,000 last, up 47%.

11:55 And that's actually a 9.9% margin, an improvement against prior year, which demonstrates the operational gearing we get from additional sales. The the actual costs in there, distribution, administrative costs, distribution costs up a little bit, up to 3,600,000 from 3.2, pretty much as you'd imagine with high levels of activity leading to higher levels of shipping,

12:20 more costly shipping, and storage costs, and and little bit more marketing and and sales spend. On the on the admin side, costs were actually in line with last year at 5,700,000. But if you actually strip away a credit some FX credits, the hedging, the net hedging benefits that we took through the period, admin costs are actually up about 600,000, but offset by the 600,000 to be back in line with what they were last year. Profit before tax, 4.1, adjusted up 47 on on prior year. The tax charge is pretty much in line with the effective tax rate, under under the accounting standards. We use the estimate we use the estimate of the weighted average annual income tax for the year. So that's pretty much 21, and it was pretty much around 19% last year.

13:09 The result of that is an adjusted profit after tax of 3.3, up 44% on the prior year, which translates into a 6.71p earnings per share, up 42% on the 4.73p of 2020. And an interim dividend is approved was was approved by the board at 2.10p, as David mentioned, which is 3.4% above last year's period. If we now turn to the balance sheet, let me just start with the top right, the net debt reconciliation. Net debt is pretty stable. It's 35.6. It is the same number as the preview as the end of December last year, just a little bit down on on June 20. Couple of moving parts within there.

13:55 This time last year, there's there's quite a bit of uncertainty around a whole bunch of stuff, so we made sure we drew down a little bit more cash than we needed just to be comfortable. That has has has worked its way back through this year. We're back to a level at 6.7, which is roundabout right. We we feel comfortable holding. We have a facility that required us to repay 5,000,000, at the end of June twenty twenty one of our long term loans. You can see a movement in the long term loan. We offset that by drawing down our RCF, to maintain the same level of debt. That translates into into a a a good covenant position. We primarily report in our leverage covenant. That's the one that really really seems to matter for us given that the the other covenant EBITDA to net net finance charges, we're we're we're way above the the minimum.

14:46 But that leverage covenant came down from to 1.86 below two, which and we were just slightly above that the year at the end of the year last year, and we were at 2.6 the previous year. And if you recall last year, with all all the COVID uncertainty around, we did actually increase that covenant to four x for the twelve months to '20 to June 2020. So we were still we were way below the four, but we were also comfortably below the three, last year, but in the right direction, coming down. Let's look at the balance sheet, pull out a couple of key items. Tangible assets has been pretty, pretty key area of the balance sheet over the past five years as we as we've invested and increased our capacity. Not a lot of movement this year. That reflects the fact that additions were effectively canceled out in in the first half by depreciation, and the reason for the movement is more movements in FX in the period.

15:43 Working capital has gone up. It's almost entirely related to to to business activity. And across across the the areas, probably pull out receivables as being an area that I'm particularly happy with. We've had twelve months with our overdues below 1%, and we actually ended June with overdues at point 2%. So that demonstrates, a, the our effectiveness at collecting, but also the quality of our customers and the, I'll give you the the importance of us our products to our customers. Payable is very much a relation, very much related to, raw material purchasing. That's the majority of our payables number and therefore reflects, for the most part, business activity. Post employment bank benefits, you can see going down by 2,800,000, and that's almost entirely related due to the you know, in the period, there was a significant increase in long dated corporate bond yields.

16:38 We we we connect with our actuaries twice a year, getting that getting that gets an update at the half year. That's the that's the number we've we've we've put into our balance sheet. As I said, net debt, therefore, pretty unmoved at 35,660,000. If I move on to just cash flow, just tie up tie up any loose end here. Cash generated from operations, healthy, strong we remain cash generative, 5,600,000, just below the previous period. And you can see the reflection of the end of the capacity of the committed capacity expansion programs resulting in purchase of PPE below the prior year at $3,000,000 versus $7,000,000 the period before.

17:28 And this time last year, we had suspended the final dividend for 2019. And this year well, back in the interims last year, we reinstated dividends with the interim. And obviously, we continue now and we paid dividend in the end of May for $2,100,000 for the 2020 full year. And then finally, just a chart I thought worth bringing together just to sort of demonstrate the main headwinds that we've been seeing in the first half half year, which I've referred to and David's referred to already, polymer and FX. And, ordinarily, I present this chart. We have we have it in the back because we we always get asked about how polymer prices developed, and it's normally a bit of a bit of a boring story to tell because there isn't much movement.

18:15 But you can see there's been quite a significant movement in the last twelve months from peak to trough going for around 80¢ a kilo up to up to just touching 2. Now it's over two x. The the orange line is the average five year. So you can see we are, you know, we are facing, some significant headwinds there at the moment, some of which we've offset with pricing, which David's mentioned. But we do believe this is this is this is temporary. We expect these numbers we're we're starting the visibility we have would suggest that supply and demand will will will start to balance again towards the end of the year, subject, of course, to any unexpected outages and so on. But we expect that to settle down. Not the price has certainly stayed stable for the last two two, three months, and our expectation would be that will start coming down. The way this runs into our costing leads to a bit of a delay, so we don't expect any p and l benefit this year, but our anticipation would be that we would see that at the beginning of next.

19:12 And then you look at the GPPUSD rate, the dots really show the show the difference in average average rate for the first half versus the equivalent period last year. That's about 88% impact. And as I mentioned, that's a 2,600,000 revenue impact, 1.2 after after with cost, which go the other way plus the hedging. I don't show euros here. Euro is actually naturally hedged with us. We invoice all of our Euro customers in Euros, but we purchase into Croydon all our raw materials in Euro. So it acts as an effective an effective hedge. On that, I'm finished. I'll pass you back to David. Thanks, Gary.

19:59 So just diving into various markets quickly. I see I see questions coming up. I think what we'll do is wait until those till the end to take those, I think.

20:14 Thinking about markets, I think we have covered what's happening in some of the main geographical and segment markets, but what we are what we are seeing is that an overwhelming kind of resurgence of general industrial demand augmented a little bit by inventory build from very low levels at some customers. I don't think inventory is yet built to the level that is consistent with this level of industrial activity. I think there may be a bit more to go, but I don't think we'll see much of it in the second half. I think there's still nervousness around in some of the markets that we want to keep the powder dry a little bit and keep the cash in the bank.

21:04 Footwear in particular has performed extremely well. We'll cover that in detail when we come to our HPP. There's no one third of group revenue. Aviation is other than automotive, which has not really performed very well, aviation is the only market which is significantly down other than PPE, which was, in 2020, was a contract that kind of was about 10,000,000 over 80,000,000 sales and won't repeat. Aviation is the main norm sort of historically strong market that's that's down significantly. And it's falling from about in 2019, it was well over 4,000,000 sales in the first half and it's now about 1,200,000.

21:54 So a very steep fall in that, which is normally a good high margin business and growing very well. And that is spread mainly in HPP and and somewhat in our polyolefin market. As I said, the PPE demand is gonna be negligible this year. First half of the year, it was 5% of sales. By the full year, it was well over 12% of sales. So very, very strong business there last year. And I think there were a lot of questions asked about what's gonna happen to your business now that that's gone or disappearing. Are you gonna be left with a big hole? Well, we're not. We're busy. The markets have recovered well. And, you know, I think that the that that geographical growth that we've seen is really driven by the various markets that we're driving into globally.

22:53 The other thing I want to talk about just when we talk about this sort of high level markets, etcetera, is our resource technology. So, you know, that is an important factor for our future growth. We're putting a decent amount of money in that and a decent amount of CapEx on our balance sheet as well planned for the year. So you can see a bit of a mix when polyolefin foams, know, getting to be a smaller part of our business, mostly because of the growth in HPP is outstripping polyolefin foams. I would remind you, 20 odd percent increase in sales in the year. Moving on to polyolefin forms in a bit more detail.

23:40 I think the biggest factor here you can see the segment profit falling despite the sales going up. And that's as a result, as we said, mainly of raw material and also the pooling facility costs being fully loaded onto our polyolefin foam's business, which currently is operating at very low utilization rates, and we expect that to increase over the coming years, but certainly better in the second half than it is in the first. We have put up price increases. We have put through price increases from May 1. Specifically, those are not designed to recover pricing from our customer based on peak raw material pricing.

24:32 The important that that's important because I know from many years' experience when the customers perceive that you are pricing based on a raw material peak, they watch raw materials like a hawk and come back, and your sales guys spend a long time just talking about pricing and arguing with the customer rather than developing business. And it you know, the customer's an important decision maker in in which forms to use. And if they feel that they're being taken advantage of, they will find ways to make life difficult for you or or substitute your product out. So we've taken the view that we are putting prices up, but not at peak raw material.

25:17 Customers are well aware of this, and we believe it will position us very well for the future, both customer relations and actually, as as as importantly, keeping or or enhancing our margin as prices stick over the long term. Now this strategy does require that the raw material prices squeeze our margin as bearable in the short term, and it is, in our opinion. You know, we're still looking despite this to come in at market expectations of profit. And it also requires that the raw material price does come back down to more close to the long term average in a reasonable time.

26:08 We've got good reasons to believe this. Again, I've been in the market for twenty five years almost, and a lot of the signals that we're seeing in the near markets like Iran, Turkey, etcetera, prices are coming down quite rapidly, and that usually flows into Western Europe. We can see additional capacity coming on in Western Europe. And the margins that the polymer producers are making over their raw material input costs are at very, very high levels. So all of those things tell me that the polymer price rise will not be sustained. We could get a demand shock. I think that's unlikely on on the increased demand.

26:55 There could be supply chain disruption, you know, with plant outages shortening the the supply, that's possible. But I think we've already seen quite a lot of that. And typically, when margins are high, the raw material producers are very, very quick to get the plants up and running. When margins are tight, they tend to be a bit more slow to manage the plants up from low levels capacity. So we're in a situation now that I think the raw material prices have plateaued. We're seeing peak pricing. Expect it will be a plateau for a few months before coming off towards the back end of this year. And as Gary explained, we wouldn't see much impact in our P and L at this point.

27:45 On the top line and margins, I think the only other thing is that the product mix in the second half is expected to be better than the first half with a bit more aviation sales and the price increases coming through, and that would somewhat offset the raw materials inflation and

28:09 cost escalation relating to supply chain, freight and Brexit difficulties. There's not much of a currency impact in polyolefin foams. We buy almost all our raw materials in euros, and by the time we figure out where we sell it and the price relative to selling price, etcetera, There's not much exposure there. So that's that that's something that we expect to not impact in the field either. Looking at our high performance products, I'll start with, you know, we sell footwear, we sell t fit, we sell aviation. Almost all are substantially dollar priced or Chinese yuan or, which are dollar linked, really.

28:58 So the exposure to the GBP dollar is much higher there. Even though we buy a lot of raw materials in dollars, it's still quite an exposure. And that's something which knocked a significant amount. Our profit would have been, rather than 3,900,000 profit for the segment, would have been 5.5. So it's really impacted our our margin. We would have doubled our margin on 66% increase in sales there. The sales increase has come largely from footwear. Very strong growth, a 147%. And Tfit, which was up 30%, actually slightly behind their expectations, to be honest.

29:45 We could have done a bit more in Tfit had the Indian market in particular not gone into lockdown such a strict lockdown due to COVID. But still, nonetheless, a decent performance there. And as I said, aviation sales going backwards, you know, down to just over 1,000,000 in the HPP division for for the year, which is a quarter of what we're doing two years ago. We do expect that to come back. We expect that we already see the order book for the second half much stronger than the first half. And I don't think we'll quite get back to the levels of pre COVID in the second half, but certainly good progress from where we are now.

30:37 We do continue to invest in selling distribution costs, and there's been a bit of a opening up of of our wallet on that, mainly compared to the previous period where we had very tight cost controls in place to manage cash. So good progress on on HPP. And in New Cell, the the story is really mainly about resource, the technology from UCELL where we license our IP to people looking to save polymer costs on consumer packaging. That's that business. Has been very difficult over the last eighteen months because in order for our technology to be implemented, we need to be in the customer's facility with control of their machines, etcetera, and putting our equipment on.

31:31 And firstly, nobody really wants our people in their facilities under COVID. Secondly, they've been conserving cash that have not been going forward with some of these projects. And thirdly, it's been very difficult for our engineers to travel. And so that business has been substantially impacted, the ability to operate. And what we've done is we've pivoted a lot of our people and focus onto our recently developed technology called resource. And I'll talk about that in a couple of slides time, but the important thing financially is that our MuSL one point o business, if you like, the existing contracts we have with customers continue to generate royalties.

32:24 We do continue to have some equipment sales, and with some of our costs now positioned across the resource, some of which get capitalized or required to be capitalized, you can see that MuSell moved into a sort of breakeven position in in the year or in the period rather.

32:49 Strategic progress. This broad based recovery, I think, gives us very good momentum into the second half. Poland being commissioned under COVID, the guys have done a fantastic job there. It's been very difficult. It'd be difficult enough to commission a plant of our complexity in normal circumstances, but doing it where the very small management team on-site had to do everything themselves and and sort of fly by wire from The UK. The fact that it's up and running on time has very good quality output, we're past the quality audits, etcetera, of customers. Very, very positive from and and although it's a short term drag on the depreciation overhead costs in Poland, it definitely gives us a lot of opportunity for growth in the future.

33:46 Footwear, a notable success. Not only if we have strong order book, but good visibility. The one thing I would say in the second half is that a decent amount of our footwear business goes to Vietnam for processing. Vietnam is currently under lockdown, pretty strict, and, that's gonna take the shine off our footwear business in the second half. It's something we believe that, you know, would have perhaps given us more upside confidence in the numbers in the second half if that hadn't been the case, but it's just part of dealing with the current environment. So we can't ship to to those footwear manufacturers and they can't ship on to Nike. So yet to see whether demand in through other manufacturers based in China will change.

34:39 But at the moment, we're just anticipating a bit of a stop start situation in Vietnam, which will interrupt our our supplies to to fit there in the second half. Good growth from TFEIF, disruption mainly in India impacting us, and that's ongoing. China, a little bit of disruption with COVID causing rolling lockdowns in certain cities, but our teams have a good order pipeline and are pretty confident in the demand coming through at the second half of the year. And the resource technology progressing as planned. So it's been a busy six months. And if we look at what we've what we've been investing in in the past few years capacity wise, pretty much those large scale restructuring, big capacity investments are are already complete.

35:40 Croydon, where we're investing to support our footwear business, which has obviously been very successful, and The UK US and Poland to support general business growth. The major investment's now complete. And in Boston or near Boston, Leominster, Massachusetts, we're putting our pilot line, which you can see in the bottom right here, to develop and showcase our mu cell resource technology. And that technology is something which I'm really excited about. It's a it's a solution to today's problem, which is beverage cartons that you see in front of you.

36:27 Familiar to most people, you'll see them on the shelves in supermarkets. You'll see you you take them home. They'll either be in your cupboard if it's any septic, non chilled product, or in the fridge. But, basically, these are cartons used to transport juice, milk, that sort of thing. And in order to keep the products fresh, they require barrier properties. So that means oxygen and moisture can transmit through the package into the product or out of the product. And so to do that, today, there are about 300,000,000,000 cartons a year manufactured using paperboard, plastic, and sometimes aluminium.

37:19 And because they're made from these multiple materials, they're very difficult to recycle. So if you put that in your recycling bin in The UK, there's about one in five chance it'll actually get recycled and four in five chance it'll end up in landfill or incinerated. And when they are talking about recycling, they are talking about stripping the fiber out and using it for something like toilet roll and and perhaps the plastic and aluminum to use in low level building supplies. So it's not what the packaging brands, the retailers are looking for. They're looking for something which can be recycled back into packaging, supporting the circular economy.

38:07 We have that solution using a 100% polymer solution, which can be recycled in the same way as a plastic milk carton. We can incorporate high levels of recycled content in it, And we've already approached a number of brands and retailers, high levels of interest. And at the moment, we have a sort of level of interest of over a billion cartons. And that's a fairly significant business. If we were to manufacture material for a billion cartons, it would be a business approaching, not quite, but approaching the size of ZOTEFOAMS today. And bearing in mind that the the market is 300,000,000,000 cartons a year, it's a very significant opportunity.

38:58 We have a solution which is a 100% recyclable, can use recycled materials, and has half the carbon footprint of the existing solution. And so the next steps for us are to to fully validate this. That's why we've got a pilot line in in Boston. And once it's been fully validated to our satisfaction, including turning things into cartons, putting juice in them, testing sterile, etcetera. Then the next step is to go to a full scale production trial with a partner, and we are lining those up. We have partners in juice, in dairy, and in alcohol.

39:47 And also, the technology can be used for pouches. So we have a a pouch that's typically used for, like, squeezable foods or or dry goods like granola or something. We have partners in that as well. Slightly different recycling challenge for for those current packs. Again, generally not widely recycled where ours should be and we've proven it can be. So very, very exciting development, but it's a kind of watch this space thing at the moment because until we've completed our validation and then in market trials, I think we know we're very excited about it, but there's a lot of work to do here. And then finally, just to kind of make sure everyone understands the position of sustainability because, you know, ZOTEFOAMS, if you look at it one way, is a manufacturer of plastic foams and plastics are are bad as as everyone knows.

40:54 Well, that's not quite the story, is it? Because where we see consumer and societal pushback against plastic is inappropriate use, particularly of single use disposable plastics. And particularly when those are done in a way that they are overused and not recyclable. So there's a real move to use the optimal materials. Most of our business today is making foams which are lighter, use less material, and therefore save weight on aircraft. They provide insulation for for for many kinds of industrial applications.

41:43 They save weight in cars. They use less material. They protect goods in in transit, etcetera. And all of these things, we can see the benefit of our materials being saving carbon compared to other solutions. And so we feel we're pretty well placed. And and this has grown up over years because, you know, quite frankly, if you look back ten years ago, you know, we didn't make a conscious effort to to promote into long term solutions, but we were just too expensive to go to the short term ones. There were other solutions that were cheaper, and so we we never got into those markets.

42:29 And, of course, now it's a blessing because we have, you know, demonstrable track record and performance in many markets where the forms are used as part of a solution, improving efficiency in the supply chain, etcetera, and and that's a good place to be. And in common with many other manufacturers, we are, you know, looking at our own carbon footprint, not just how do we sell, but how do we manufacture. Product development to use recycled materials in our own scrap, improving operating efficiency, and I've seen some really interesting things we've done on on, you know, gas efficiency, etcetera. We know by in The UK and then when it's available globally, a 100% green energy from renewable resources.

43:23 And so these sorts of things, we we have been doing for a while, and we've adopted the SESP and the TCFD disclosure routes in our reporting framework, and we will be able to kind of clarify a lot of what we've been doing in the next annual report. So I just wanted to to make sure people could have understood that. And then just finally, key messages, you know, trading performance, dividend up, pulling plant commissioned. We're dealing in a tricky economic and supply chain environment, but managing it well.

44:11 We do see further positive sales momentum. As I said, analysts have put penciling in £99,000,000 for sales in the full year, which gives us about a 6% growth first half to second half. We are obviously targeting, you know, we want to get a 100 it's a 100 year anniversary. We want to get a 100,000,000 sales, but let's see how we do in that. Gross margin will remain under pressure, but with the additional sales, we should see a better bottom line in the second half. And as we get normality returning, particularly in raw material prices, we should probably see a bit of a benefit going into 2022. We do, of course, consider that there are supply chain risks. Vietnam closing down very suddenly, obviously, you know, illustrates that perfectly, and supply chain and operational disruptions remain.

45:08 But we've proved adept at managing these environments and positioning our business well, so I think we take confidence from that, that the full year outlook is is positive. So if I close off there and maybe pick up some of the questions, Paul, do you want me just to pick them up or do you Yeah. I was I was gonna say thank you to both of you for the presentation. Let's hope we get to a 100 on a 100. Ladies and gentlemen, do please continue to submit your questions, using that q and a tab situated on the right hand corner of the screen. But the team will just take a few moments to review those questions already submitted. And just to remind you that a recording of the presentation along with a copy of the slides and the published q and a can be accessed via your investment company dashboard. And also that, just a quick reminder, your feedback is important to the company. And immediately after the end of the presentation, you'll be redirected for that opportunity to provide your feedback.

46:01 David, yes, and Gary as well, please. If you could just click on that q and a tab, and where appropriate to do so, if you could read out the question and just give you a response, that'd be fantastic. Yeah. If I just take it from the top then, a question from Simon c, what trends are you seeing from your clients in the various markets you operate in as far as order flow and set of future orders. We've got pretty good visibility in the second half. The one area that we don't have visibility in is TFEIF insulation, and that's just the nature of the business. We provide quotes to insulate things like clean rooms and biotech facilities, And they they sort of sit on them right to the end, and then they place the order and tell us to get the thing there yesterday.

46:50 But we've got pretty good confidence to understand what quotes are likely to come through. Other than that, I think we we've got pretty good order coverage through through most of the rest of the year fairly widely across the business. So we're not quite at the know, we do expect further orders to come in, of course, between now and and the end of December, but it feels like a pretty good position. Edward R, where do we see long term gross margins or operating profit margins? Well, I I think my initial reaction today is polyolefin forms are gonna be an awful lot better. We've taken a significant headwind on the polymer cost. And if that polymer cost doesn't reverse back to long term average levels, then, you know, our prices will go up and I think competitive prices will go up, the margin will rebut, the the the market will rebase.

47:51 So I do see that that happening, you know, through margin expansion through the the polymer price going down. I think some of the inefficiencies that we've been bearing right across the business because of supply chain disruptions, Gary mentioned freight costs, mentioned air freight, and things like that, those will those will reverse as well. Our HPP margin is currently at 20%. We see subject to currency decent upside scope in that. TIFF can be a very profitable part of that business. We're investing quite heavily in it at the moment, so that's that's depressing margins a little bit there.

48:39 So so mid twenties there, pushing up to thirties maybe possible depending on how much we invest in new products. And obviously, resource new sell at the moment is is a drag on margins. We're not making any profits there, and we are investing money. So I think we we do see considerable scope to upgrade the margins across the business. Next question. Has there been any improvement in freight costs from George L? No, George. There there hasn't really. And if not, how long do you expect this to continue? Certainly, the rest of this year, I think it's probably gonna be probably towards the back end of of next year before the global trade supply balance reestablishes itself, you know, I think the global trade patterns are very different than they were pre pandemic.

49:38 And the the free industry is, particularly international shipping free, is is is realigning. We may see free costs to and from Europe coming down more quickly as as more people get better at navigating the Brexit paperwork. But what we have seen is a a limited supply of continental European drivers willing to come into The UK. They just can't be bothered with the paperwork. It's just too onerous and and takes up too much time. So that that's something that we're hoping we'll we will get better at and that will maybe get some more short term relief in that particular freight cost. Edward, what type of operational gearing should the business deliver and what levels of plant utilization are you achieving?

50:32 Well, it depends on product mix, Edward. I think if we look at some of our, you know, very more high margin products like aviation, t fit, the operational gearing there is is much much higher than, for example, the lower quartile polyolefin business. So, you know, I I think in the very, very short term, you know, operational gearing, we should get, you know, 50% of of the the last the last pound of sales in any any financial year is probably gonna drop through, you know, 50% or more to the bottom line. But it depends how we think about the medium term and investment. We are very much an organic growth story.

51:27 We see a lot of places for our technology to grow. And so we are, you know, investing in in in quite a lot in long term development of the future. So we try and we try and balance that. We're not trying to squeak across the line this year with a slightly better profit number at the expense of, you know, next year at all or the year after even. So we do we do invest a decent amount of our operation expected operational drop through in in in reinvesting in the business. Ryan, HPP has grown very well. How much more revenue could you put through your current capacity before additional CapEx is required?

52:14 Again, that that's a similar question to or similar answer to Edward, which is about is about what products we look at. I think we did an exercise a few years ago which looked at T FIT because the the amount of sales per unit of capacity on T FIT is is very, very high. And I think we calculated that if the whole business was was turned over to making TFEIF, we could make £250,000,000 profit a year, which I've got to say is appealing to me and a few other people. But obviously, T fit isn't that big a market yet, And, you know, other things would happen if you start to make that amount of profit as competitors look over your shoulder, etcetera. But I think the point is that we have some very profitable businesses in our in our stable.

53:18 And over time, what we want to do is mix and rich, replace that lower quartile AZOTE business with higher quartile HPP growth business, and over time, that that mix enriching will drop through in the margin. That's essentially the strategy. Next question, Edward. What's the annual maintenance CapEx spend? It's about if we include replacement IT, it's about two thirds of depreciation, Gary. Is that about right? The specific maintenance. I mean, our total our total CapEx is generally the the objective is to is effectively depreciation rates, which is about 9,000,000.

54:03 Obviously, the last five years, we've been as high as 20,000,000 in 2019 because of the expansion CapEx. So so yeah. It depends what the what what what is specifically being asked there with maintenance CapEx. But I'd say better is just to look at it. Our objective is to replace is to spend at levels that replace depreciation subject to us identifying new opportunities that might require, you know, like a like a a resource that might ultimately require a bit more at a particular point in time. Okay. Okay. Glenn, as retail market settle, can you see a follow-up on two two deals in 2022? I I'm not so sure it's about retail markets.

54:50 You know, the shoe industry goes through various cycles depending on when you launch products, etcetera. And, you know, I think we see broadly similar levels of of sales for the footwear market in 2022 as as this year. Maybe maybe slightly lower due to kind of product cycles. If we end up having a disruption in Vietnam, maybe those sales will appear next year as as they play catch up a bit. So, no, we don't see any significant drop off at the moment. Christie, looking back at FY 1618, operating margins were 14%. What's our given that HPP should have enhanced this, what are your medium term aspirations?

55:44 Well, there's a lot happened since 1618. We've invested enough loading capacity for growth. Obviously, COVID's come along. The dollar's very different. So all of these things we need to kind of think about. But I think getting operating margins back to 14% is definitely possible where we're sort of, you know, nine or 10% right now, but in constant currency, you know, that would have been pretty close to that 14% if if the dollar had been where it was last year. So, yeah. I I I think that's, you know, that that's definitely possible.

56:37 Medium term aspirations, as HPP grows, we we continue to believe that HPP will grow more quickly than than AZOTE. And as it becomes a higher percentage of our our capacity utilization, the margin should stretch to closer to the HPP business unit margins, as I said, currently at 20%. And in constant currency, last year, it would have been 26%. So there is a there is a kind of view that, you know, pre overhead costs, central costs that those margins are definitely achievable. So somewhere between the two, I think.

57:26 And how quickly we get there depends quite a lot on how we how much we continue to reinvest. I could get the margins there an awful lot quicker if I didn't reinvest, but that's not our strategy. We are taking some some fairly decent cost positions and looking at long term opportunities. And I think when we talk about resource, for example, that's that's a good example of that. Glen saying, if the carton business is successful, are you going to have to invest in new equipment? And how large investment can you be see being required? So here's the the the equipment required to make the carton technology is not the same as the the block foams.

58:13 So it's extrusion equipment. So if we go into depends on our business model. If we're going to making sheet, then we would need to invest. That investment depends an awful lot on on, you know, exactly how much we want to do in the supply chain. But, you know, we figured out that the market global market's about 300,000,000,000 cartons. We can one facility that we would put up with four extruders would potentially give us seven or 800,000,000 cartons a year, depending whether we're one liter, 250 mil or whatever, but an average mix.

59:02 So you can see that, you know, I mean, that facility may be £30,000,000. But that would give you a business which was, you know, not far off the size of ZOTEFOAMS today. So it's a very big market. It's a very big question. The more successful we are, the more we would need to invest. I think, however, we haven't yet decided to invest. We haven't yet decided our business model. We've got a lot to prove there. And, obviously, at higher levels of investment, we have to consider the risk appetite of the shareholders and the board and also the the the execution strategy, which may need, you know, different partners and different parts of supply chain. So I wouldn't get too worried that we're gonna rush off and and spend, you know, tens of millions of pounds on on the equipment for resource at the moment.

1:00:03 And and if we do, we will have a jolly good story to back it up and customers lined up for it. Okay. Next question. Ed toward r, how long for validation studies of resource and to establish full scale production plan? To do the the first stage pilot validation and initial sterility test, etcetera, we are estimating fourth quarter this year, and we're hopeful to get on commercial lines for full scale pilots late first quarter next year. It may take a little bit of time after that for results to come through in in terms of knowing we're successful.

1:00:58 If we're unsuccessful, you'll know pretty quickly at that point because it doesn't mean that you can't get there. It just means that particular trial wouldn't be successful. So that's the sort of time scale for for validation on cartons. Next question, have your house brokers changed the full year forecast? I don't believe so, Henry. No. No. They've kept the forecast the same. Do you see the space travel industry as a growth sector, Glenn? Yes. It is. We are on, as far as I'm aware, all major space programs. Our high performance ZOTEFOAMS which is a similar grade used in aviation, is heavily used in interiors, seating, etcetera, because it's it passes the flammability and toxicity standards required.

1:01:53 And it's it's nice and comfortable for interiors as well. So is it gonna be huge business? It could be decent. It depends how quickly they scale up to to to, you know, decent levels of activity. And at the moment, I believe that if every time a module goes up, they put a completely new interior in. They don't reuse the seats. I think if you're paying a $250,000 per trip, I think you get to keep the seat. I'm not sure about that, but that's, I believe, what's happening. Next question from Gavin. How are you planning to build up Polish revenue? Well, the mere fact of having a facility in Poland allows us to access quite a fast growing segment of the market in Central Europe. So not just Poland, Czech Republic, Hungary, Romania, certain parts of Germany where it's quite difficult to service that market from from The UK has opened up.

1:02:58 But, ultimately, you know, what we're gonna see is some business transfer probably from The UK that we're currently doing in The UK over to Poland as The UK facility, you know, has higher levels of HPP phones coming through. So our capacity gets more utilized for that and that Poland supports the polyolefin phones, which are much more of a geographical base. But I I think rather than thinking of Poland as a standalone facility, it's more accurate to think of it as part of our global capacity footprint. And, you know, we could we could fill Poland tomorrow by transferring other business in there, and everyone knows that wouldn't help the overall profitability of the group. So I think, you know, what what you see in Poland is that last tranche of capacity that is getting filled up group wide.

1:03:55 And I would I would remind people that it only started up a few months ago under COVID. We haven't had any of our engineers there, our quality people, etcetera. So we want to build a reasonable pace and make sure that we've got good quality and customer service out of that plant before we try and load it too heavily, you know, learn to walk before you can run sort of thing. And as I said earlier, the guy's done a fantastic job in getting where we are today. I've got a great deal of confidence in them. So hopefully, get over and see them soon, pulling them, coming, come off the red list a few days ago. I think that's all the questions. Yeah. Thank thank you very much, Peter. You you've you've covered every single one off, David. So thank you very much, and Gary as well. If there are any further questions that do come through, of course, the company will be able to review all questions submitted today. Just on that note, David, if I may just ask you just for a few final words as we turn back to that key message slide before we redirect the attendees to give you some feedback.

1:04:58 Yes. Key message is I think we we have traded well. It is a difficult environment, so we need to keep our wits about us and not be too dogmatic about what we're doing. But, you know, we do see a recovery in the markets and it's all about operational execution, making sure our supply chains are robust, making sure we overcome, you know, when we see bumps in it, that we overcome those. So we have to get further sales momentum coming through in the second half. We are watching our cost base very closely and managing the supply chain challenges. But I think we've got a good portfolio. We've proved that the management team and the and the facilities can pivot between different business types and different markets depending where the action is and where the problems are.

1:05:53 And so we do feel very confident about about the long term future. In the short term, we're we're we're doing what we said we'd do. That's fantastic. David, Gary, thanks again for updating investors today. Could I please ask investors not to close this session as you'll be automatically redirected for the opportunity to provide your feedback in order that the management can better understand your views and expectations? So let me take a few moments to complete and is greatly valued by the company. On behalf of the management team of ZOTEFOAMS PLC, we'd very much like to thank you for attending today's presentation. That now concludes today's session. Thank you, and good afternoon.