Zotefoams (LSE:ZTF) — Interim results for the six months to 30 June 2020

0:03 Good afternoon, ladies and gentlemen, and welcome to the ZOTEFOAMS Investor Presentation relating to the interim results for the six months ending the 06/30/2020. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time via the Q and A tab situated on the right hand corner of your screen. The 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. I'd like to also remind you that this presentation is being recorded.

0:34 Before we begin, we would like to submit the following poll. And I'd now like to hand over to David Sterling, CEO and Gary McGrath, CFO of ZOTEFOAMS. Good afternoon. Good afternoon, everyone. Thank you for joining the presentation. Will take you through the first overview slides, pass over to Gary, talk about financial, then come back to you to give a bit more details about some of the markets and business units and investment program along with our outlook. So where we'd like to start is on slide four, and you can see we have titled it COVID nineteen really just to give you an overview of what's been happening in the business.

1:22 A first half which really has been challenging in common with many companies on the market. We saw a slowdown in particularly in Continental Europe in the second half of twenty nineteen, And that really continued those conditions continued through the first quarter of twenty twenty. And just seeing some interesting signs of recovery when COVID hit and really the very high levels of uncertainty hit the market, which meant that, you know, demand really fell to to low levels.

2:08 And customers not really taking it, having any confidence in in their markets, reducing inventory, and not destocking. By them, this meant rapid response times required by us. At the same time, when we've been asked to, you know, implement social distancing in our factories, people working from home, etcetera. So very frantic time for the management team, and I think we have performed very well at that point by initially closing our factories, assess the the situation while living from from inventory, putting appropriate social distancing measures in the factories.

2:56 We've got very good IT systems, so a lot of our staff able to work from home. The factories have sufficient space that we can operate with good social distancing, and those that needed to be in the factories came back to work within about a week. We closed down over Easter. That was quite a quiet period for demand anyway.

3:20 And that effective operational response combined with the kind of robust inbound supply chains meant that we were in a position to supply the markets. Although, the markets were operating with with that very low level of of demand. At that point, we basically looked around and said, okay. What we're gonna do, we're gonna sell. And, you know, we've been very active in a number of markets. I think the one in particular that you you probably heard of already is we were specified in one of our large UK customers, UK Government PPE contracts, and that really started in June and which we expect to continue through pretty much the end of this year, which is giving us an increase in demand going forward.

4:16 So as we think about the business now, we run through the the first half results in a moment. But actually, given the circumstances to come out with a with a profit to generate more operating cash than previous years, to have all our factories opening, to have the outlook for a record second half of managing all that within debt facility levels. I am pleased pleased that that's where we are. And we are looking at a record second half. We've got a high degree of confidence in that because we have although we have a fairly subdued underlying marketplace, certain things that we've been working on in the business, the PPE contracts, step up to higher levels of demand in the footwear business and that strong momentum in our technical installation TFA business means that we feel confident about the second half.

5:22 And and there are other things as well, but those happen to be the ones we pick out as as being most meaningful. And our facility in Poland, which we've been investing in over the last few years, should be available from q four if we decide to commission it and respond to an acceleration recovery beyond that I've just described. So that's kind of where we are. Happy to take questions on all that at the end, but just to talk about liquidity and our financial performance. I'll pass over to Gary at this point. Thanks, David. Yeah. I went through a statement, which is titled strong balance sheet foundations for return to growth, the KPIs here, we feel, help explain what we mean by that.

6:13 At the end of June, our net debt under bank definitions was GBP 35,400,000, leaving us with a liquidity headroom of around GBP 19,000,000. The accountants among you, the bank definition differs from the IFRS definitions simply by the recent introduction of IFRS 16, which are leases, which is a difference of about 1,000,000. So the balance sheet shows 1,000,000 more debt than the bank definitions, the bank definitions that drive our liquidity headroom. That movement is about 4,500,000 debt movement driven by 2,000,000 operating activity. That's the ink that's an operating cash inflow of six. So you see fourth bullet offset by 7,400,000 of CapEx, a little bit of interest, gave us a 2,000,000 outflow.

7:03 We have elements of our debt in foreign currency, mainly USD, that we translated that gave another movement. And then there's a movement actually, 4,000,000, 5,000,000 of the net debt movement, but liquidity is actually about three quarters of an inch, a million more, and that's because we're also paying off one of our debt elements in equal quarterly installments. But that 19,000,000 of headroom, we believe, gives us sufficient and ample headroom to continue in the stress testing that we perform at the prelims that was communicated in the annual report was revisited. And even then, actually, back in the prelims' time, that liquidity headroom was always viewed as sufficient.

7:51 Where we had a where there was a slight risk and we performed a severe but plausible assessment at the prelims was on our leverage ratio,

8:03 which was which is net debt to EBITDA, which was at three x, and we actually increased it, thanks to the support of the banks to four x for the twelve months to June thirty of this year. We didn't need it. We came quite close, so it was wise to increase to 4x. But as you can see, we came in below 3x at 2.6. That then will revert to 3x at the year end, and we will go on to explain why we feel we are comfortable there and that actually the leverage ratio should continue to fall having reached our peak debt levels and getting close to completing our CapEx capacity expansion program. I mentioned the operating cash inflow. We are a cash generative business. That GBP 6,000,000 this half actually compares to GBP 5,200,000 for the equivalent period last year, which, given the circumstances of this half year demonstrates the robustness of our business, I hope.

9:08 We announced back in April certain cost and capital management measures around operating cost, CapEx, partly of our own volitions, slowing down certain CapEx in The UK, also as a result of borders going up, particularly in Poland, where we have that final CapEx investment and slowing that down as a result of suppliers not being able to get into the country. But they were successful and helped us generate that profit that we're reporting of GBP 2,700,000 reported, 2,800,000 adjusted, having this presentation coming up. We did take on some government support, but in furlough around the furloughs, we only actually took we only actually took £100,000 worth of furlough furlough support.

9:55 That has all been repaid in July, and everyone is now back at work who were on furlough. The only other form of government support we did take was deferral of the HMRC's payroll taxes, PAYE taxes. That was for a few months, three months, and that amounted to £1,200,000 That was also all fully repaid early July. So going forward, we have £3,400,000 of CapEx remaining on the £23,000,000 capacity expansion program in Poland. And indeed, that GBP 3,400,000 will bring the end of our recent capacity expansion program in The U. S, in The UK and in Poland to an end, which is some GBP 80,000,000, and this is the final phase of it.

10:42 After that, we do expect then these previously higher capital expense levels to reduce back to something more along the lines of depreciation rates. We expect the leverage ratio to fall aligned with the EBITDA growth, and we'll talk about the second half expectations moving on into next year. We expect that to drive that ratio lower as well as the lower capital expense levels, as I just mentioned. And the results of that, the combination of that is that they gave the Board confidence to reinstate the interim dividend, having deferred it back in postponed it, sorry, back in

11:23 March. And that is an interim dividend of 2.03p, which is the same as that of the previous year.

11:34 Pass on to David. Thanks, Carrie. Before we get into talk about the the results in detail, it's I think with such a wide audience, useful to talk about how we see the business and and the strategy. We consider the business in three main business units, polyolefin, high performance products, and and MEL, new cell extrusion. Two of those come from our unique autoclave technology where we're making foams or in the case of TIFF insulation, we're using our own materials, own foams to make a product. At MuCell, we are licensing the technology. This presentation will be available on our website, so if you want to go back and remind yourself of the key markets and the drivers of some of our business, it's all going to be there. But, I think just to give you a sense of this is what the business is and this is where are when we're describing the business, we think about the business in these key business units.

12:40 As far as our strategy, we are looking at an organic growth strategy. And we can do consider partnerships or acquisitions, but the reality is that over the past few years we really have focused on organic growth. We focus on certain markets where we think we've got better technology and to create those differentiated products and become a market leader. So that that is the strategy. It's organic growth in it because of, excuse me, where we sit by creating this value added raw material, this form with unique properties, it can go into a very wide variety of areas.

13:29 And those areas, I think, are described here. I think the slides are perhaps in better order. And we we think about this is $20.19 revenue by industry in in product protection, transportation, sports, building construction, industrial, etcetera. You see a very wide range of different segments. We've tried to group things together like aviation and and automotive and rail, for example. Product protection is a huge variety of of things ranging from tool control to high end, industrial packaging, etcetera. Sports and leisure tends to be at the moment, it's a lot of footwear, swimming pool, floats, etcetera.

14:19 And if we look at revenue by geography, we can see again a fairly balanced split between Europe, North America, UK, and the rest of the world. So that spread and that both geographic and industrial allows us if one area is not performing well to kind of focus on others and and seek out opportunities. And if we look at the first the first six months of this year, we can see the impact of COVID with revenue down 18%. We did manage to keep our margin stable, pretty much, but, we've got gross margin just hovering around 35. A little bit of benefit from raw material prices being lower.

15:09 We've improved our, we've improved our, efficiencies within the factories, better yield on raw materials, less scrap, etcetera. But effectively, we've got fixed costs in some areas that, you know, are unable to be diluted on lower revenue and that impacted our margin a little bit at the gross level and that despite saving almost 1,000,000 on sales and general admin costs compared to last year, our adjusted profit showed the impact of those lower sales at 2,800,000. Still profitable, still giving an EPS for the half year of 4.73. And we are looking at, you know, those key areas for growth that I described earlier.

16:00 They generated good momentum late in the second quarter. They are expected to continue to operate at these higher levels and that underpins the significant growth in the second half. So we are pleased to reinstate the interim dividend. I know a lot of people on the call today, these calls, really appreciate dividend. As a shareholder, I do too. And, you know, pleased that we have repaid the government money, we've reinstated the dividend, and we are running the business with no one currently on furlough and, you know, good, strong operational controls to make sure that we can continue to to operate in the face of the sort of COVID situation.

16:50 Gary, if you can take us through the financial review now. Yeah. Sure. This slide, guess, highlights the prime you know, what we would consider to be the primary focus for the midyear twenty twenty, which is about the financial position, about the balance sheet strength. And so consequently, some of it is just a summary of what I covered in the liquidity element of the previous slide I covered, so I won't repeat in too much depth. But the point is, first of all, cash generated from operations, 6,000,000 above that of last year before we look at before we consider the CapEx spend, most of which was on the committed Poland capacity expansion. We did see working capital increase by just under GBP 3,000,000.

17:37 6,000,000 of that is actually related more to future the future growth expectation around the record six month of record sales number for the second half that we're seeing. And that really relates to building up our polyolefin foams inventory ready to support and drive the sales of the p of the of that PPA opportunity. It relates to footwear, polymers being being built ready for the second half and further push into into the the Nike opportunities. It all also includes some some of the aviation grade products that that is a very unique product, and elements of it is made for us specifically. We have to give quite the advanced warning to our suppliers to what we need and when we need it. And once it comes to a certain point, it's we

18:33 need to take it. And the shift in aviation, the downturn in aviation aviation that we saw in Q2 was too late to take on to defer some of that inventory. So we've got a little bit more than we would normally expect at the end of June. That will take a little bit longer to use for the aviation business, but it will be used. So it's just a short term impact. But all that really reflects the future growth plan. Even on receivables, the there was actually GBP 3,000,000 of that of our receivable movement was actually related to uplifting the U. S. Dollar denominated balances. So without that, we actually saw GBP 4,000,000 decline in receivables, partly, as you would expect, related to the lower sales comparative against last year, but also related to very, very tight and effective creditor or receivable management.

19:34 And in fact, the month of June percentage of overdues was the lowest. I've been with the company almost four years. It's the lowest I've received an overdue percentage that I have reported on since I've been here, and that really reflects some really hard work by the team. But also, I think, the nature of the business and our customer relationship where we do provide a unique product that customers do need and do understand the importance of continuing to pay their debts. So liquidity headroom I mentioned before, 19,000,000, which we believe to be sufficient to for for moving forward. And the two covenants that we run, I'll I'll start with the second because that's almost the one that's not really important.

20:22 It's it's important. I actually got the number wrong. It's the EBITDA to net finance charges ratio is actually 30 x June 20. I apologize for that. We have a covenant of four. So we're way, way above that. We really don't consider that ever to be a or hadn't considered that to be a problem for us. The one that was more of a challenge, as I mentioned, was leverage covenant. As I mentioned before, we came out at 2.6%. Expect that to drop further in the second half. We easily met the covenant before June. We are confident that we will meet the covenant of three at the end of this year. And why are we confident? Because of the EBITDA increase from the second half revenues, because of the cash generation linked with lower capital spend compared to what we've maybe more in the more recent history been spending.

21:14 And so we have confidence moving forward. Moving on to the more detail, just abbreviated accounts, the income statement followed by the balance sheet and cash flows. Group revenue down 18%, as David has mentioned, 23% drop in polyolefins against a fairly tough comparative last year and 7% down on HPP, partly really related to phasing as much as anything else. As David said, we were able to maintain a pretty stable gross margin of just under 35%. Again, yes, raw material benefits did did did support this. But but probably more importantly, where the it was was the ability to variabilize what we would normally expect to see as fixed cost. So direct labor is a is a reasonable amount of of fixed cost within our operation.

22:11 And, we do run an element of that fixed cost, let's say, via agency staff and overtime. And so when you do have reductions in capacity or reductions in demand like we've experienced, we're able to remove those agency costs or agency staff, take out some of the overtime and effectively have a variable element to our fix. And that's what helped keep that gross margin aligned. When you move down to adjusted operating profits, GBP 3,300,000, down clearly on the previous year because of the sales, but an additional GBP 1,000,000 of savings generated through SG and A. We announced back in April that we were taking a really close look at all costs that we could, but also the consequences of COVID helped us in some way. Clearly, there were no there was little traveling. There were no marketing costs, trade fairs, consulting fees because we weren't having people coming on-site.

23:13 All that sort of thing helped us helped us manage costs. We we did not need to, as we've said before, there wasn't a lot of furlough benefit, and we did not need to consider any forward redundancy through this period, and neither do we expect that to continue. Adjusted profit before tax at GBP 2,800,000 adjusted, so reported GBP 2,700,000. Our tax rate, standard around generally around the 19%. It was a little bit lower this time last year as a result of previous corrections to prior year estimates. And as David mentioned before, EPS coming out adjusted at 4.73 against a comparative 8.78 into a dividend being paid of 2,030,000,000 If I move on to the

24:10 balance sheet or statement of financial position, the primary movement on the asset side is, as you would expect, the tangible assets with the investments in our capital expansion programs. That number was that's a June comparative. It was $90,000,000 at December. And then you've got the additional impact of the CapEx in this half. So it's been a considerable movement over the last few years coming to an end by the end of this year. Net working capital, I'll just is was in was not too much up on last year, up to 8%. And in fact, December 'nineteen number was £35,000,000 But there's a little bit of movement, as I mentioned before, a company I talked about the inventory movement increase, and I talked about the receivables movement down.

25:02 That so there's a mix movement within that net working capital number, but fairly in line with December year end. There has been a movement in the retirement benefit obligation. We don't do a detailed review, but we consult our actuaries. And the feedback was the long dated corporate bond yields reduced, which has an impact on that net liability offset by some asset gains. The consequence was a £2,000,000 or £1,300,000 movement on that position. Net debt moving up in line with previous what I previously mentioned, at least with net assets of 92%. Maybe just if you look at the bottom corner, the net debt reconciliation, just just to quickly reference the the the short term, long term nature of our debt.

25:57 We did take out a five year facility back in in in May 2018, so we're two years, a little over two years through that. The short term element relates anything RCF. So our the facilities we took out were £25,000,000 multicurrency term loan, which is fully drawn down, 25,000,000 of multicurrency RCF, and and 7,500,000 of a of a GBP five year loan. That one is the one that pays back annually and quarterly equal installments. So the short term element relates to any any of the RCF we pulled down. It relates to the that that that 7,500,000 that's paying down, as I mentioned, because that's reviewed annually.

26:42 It also relates to 5,000,000 of the long term sorry, 5,000,000 of the term loan because in one year's time, as at thirtieth of June next next year, a £5,000,000 installment is due to be repaid. So that switches then to short term as at this particular balance sheet date. Looking at the cash flow, I've mentioned before, if you look at the cash we use generated from operations, 6,000,000. So despite a difficult first half, it was higher than the generation from the equivalent period last year. Some people's eyes may be attracted to the net exchange differences number, which is quite high. That reflects the way we have drawn we have borrowed money and are lending money. So we draw any I have drawn down 47,000,000 of the Cape of the of the the loans.

27:38 Much of that is in either dollars or euros. That gets translated. And that track the translation of that since December is the 2.5. However, with those loans that I've drawn down, I have lent out to The US or to Poland to to to finance the construction of the plant. And that number is translated as well, but that shows through receivables. And if you recall, referred to FX on the receivables earlier. So that is effectively offsetting that. So when you get to your net cash generated from operations, that element that impact is eliminated. So once you take off the GBP 7,750,000 of investing activities, which, as I say, is very much reaching the end, we had just GBP 3,400,000 of the Poland plant out of GBP 23,000,000 to complete.

28:32 You end up at cash flows from financing activities of GBP 7,400,000 and net movement in cash is fine. A bit of a higher movement in proceeds from borrowings back in May. You know, there was a lot of uncertainty around it felt wise to draw down on some of our debt just to have a healthier cash position. That that wasn't needed, fortunately, but we wanted to have it in our ownership versus we need to get it from the banks. That's why we have a pretty high 12,000,000 position on the balance sheet in cash. We don't feel we need that going forward. That will partly partly be paid back so that we we run back down to a more normalized cash position going forward.

29:18 And with that, I will pass back to change slide and pass back to David. Alright. Thanks, Gary. Pop into the commercial overview, just to remind you, we're talking about the three different segments, of the business. I think I've covered really the the markets and programs earlier on, and we talked about the segments. This is just the highlights of polyolefin, HPP and mu cell, which are can be picked up in a second. Polyolefin foams were down 23%. We had a strong comparative at the first half of twenty nineteen, but even then, it was it was a difficult period.

30:06 We see the PPE sales really only starting in June, so made somewhat of difference to the segment revenue. But some of our major areas like automotive, protection, etcetera, marine, are all down 30% or more. And that's that's end user market demand. As far as we can tell, we've probably even picked up some market share in in these businesses.

30:38 So this is this is what we're seeing at the demand level rather than the just ZOTEFOAMS sales. The profit, we have generated a profit in the polyolefin segment at 9%. It's it's obviously well below last year and and I think last year 16% is probably the level roughly we would aim for over a normal cycle. We're definitely not seeing a normal business cycle today. So but we have we have improved operational efficiencies. We've got lower polymer cost, but really not on these revenues sufficient to offset the fixed cost in the business. We're trying a lot of different channels, new products to develop the business, etcetera, as well as other applications outside PPE.

31:34 Again, as far as I can tell, we are actually picking up market share. We've not seen huge amount of benefit from it in in the first half, but certainly, can see programs starting in in North America that I know have been picked up from from competition over the coming months. And certainly, we're regaining business in in Europe that, you know, competitors have made inroads to in the past. So it feels like, you know, a lot of self help here in quite difficult markets. We have a question about can we give details on on the PPE contract. I'm afraid we can, not not in in any significant detail. What I can say is it's a government contract.

32:21 It is a is a decent business for us.

32:27 It is likely to or expected to be pretty much at least what we can what we're we're told at the moment is that that that the shipments for us would be completed by the end of November with a a busy third quarter and then a bit of a tail off towards the end of the year. So it's keeping us busy right now. It's certainly something we're very pleased to have, and we've got good visibility on it. But it's something also that our customer is expecting to augment, hopefully, because they've put a whole load of assets down and they've created products and supply chains to supply these types of products.

33:16 And I think their first reaction is let's make sure that that's in place and operating successfully for the NHS. And now they're looking to grow the business outside the NHS, so into retail, into other government departments, etcetera, as well as outside outside The UK. So wish them all the success with that. We are trying to help on that and but it's not part of our core assumptions. And someone's asking, is there a possibility of PPE to other countries?

33:53 It's quite interesting. We have seen certainly early in the COVID situation, we were probably quoting and sampling, you know, 16 or maybe even 20 different people looking at different systems using foam. It seems like most other countries have gone down slightly different routes of masks rather than visors. So I wouldn't say no, and it's a continually developing

34:26 marketplace, but it is something where it's not been the uptake has has has has moved towards masks rather than visor systems that we are involved in. And that ZOTEFOAMS foams, I think, are an excellent product for the visor systems because they're lightweight, they're comfortable, they can be cleaned, they can be sterilized unlike a lot of the other foams that have been used out there. So we're promoting the benefits of those, but really we have no practical applications in in masks that I can tell at the moment. And one final question. Do we have a confirmed terms for the pipe for for the PPE contract? We have the the customer has confirmed terms with the government.

35:17 It's their contract. We are specified in that, so we we get pulled through on that. But that's not for me to to comment on. That's that's one of our customers' positions, I'm afraid. So we will, you know, continue to promote ZOTEFOAMS materials into these wide variety of of applications. I think our job is to to make sure that we support our customers and and help them as much as possible to to to recover and grow grow new business. It feels like there's a lot of people jostling for position. It's a very dynamic market right now, but not against a huge demand backdrop.

36:02 And that's something that as far mowing, comes to an end across different jurisdictions, different countries in Europe and and beyond, we may see some, you know, changes in supply chains and and and, customers and suppliers in there. So being monitored with, you know, with a lot of scrutiny by us about how it's developing. But certainly, we are seeing some areas like automotive starting to to to start up again. We're seeing some of these like aviation really, you know, just living off inventory. And I think I would see that right through the supply chain in Azure, I think the auto so the aviation business is probably the only area which is any inventory of any significance at all. Most of our customers, most of the end users have really reduced the inventory to conserve cash, to maintain flexibility.

37:03 And actually, as Gary noted, we are putting in inventory because we see that if there is a recovery, that inventory pipeline is going to need to be filled quite quickly. And that's something that I've seen three or four times in my twenty two years at ZOTEFOAMS, where economy restarts, confidence comes back and the inventory pipeline makes this huge sucking sound and everyone expects to be serviced, you know, as a priority in three days and obviously that that can happen. So we need to make sure that we are aware and and ready for that even though it's not a central assumption that we're talking about in the second half of the moment. Moving on to high performance products.

37:53 We have seen, sales down 7%, relatively flat position in footwear as as expected, but aviation's our second biggest market within HPP And aviation really was stopped completely almost in in the second quarter, so down significantly. And expected to remain subdued really in in aviation going forward. I think we have seen growth in T FIT. So overall, the segment revenue didn't move too much on the top line. We were able to maintain the profitability of the segment as as we curb some of the development costs. In particular, you know, we do a lot of travel, we do a lot of trade shows to try and, you know, develop the new applications in the product.

38:47 And that's that's been curtailed, is meant that the cost sides have been reduced and and keeping the profit the same level despite the lower sales. We are still continuing to invest though. I mean, I think we've got quite a lot of things going on in the business. And I think in today's environment, it's a bit more difficult to start new things, new applications or to engage with engineers, etcetera, around the globe. Not impossible, but difficult. But it's pretty easy to maintain focus on the things that are already moving. You know, give them support, send them samples, do things in the factories, etcetera, online.

39:37 So we are working with a lot of different, opportunities in things like space. We're both in in government programs and commercial programs. We saw some benefit of that in in the first half and expect it to accelerate. We're seeing quite a lot of interest in things like automotive both for cabin installation, particularly in e vehicles for noise and thermal, as well as e vehicle batteries. Nylon foams are particularly of interest because of the high temperature performance. But they're also very good energy absorbers, so things like, you know, ballistics protection, sports impact protection, etcetera. A whole lot of programs for for nylon foams in in these types of things.

40:32 And some of the materials that we've developed or or maybe they didn't make it into the next generation of footwear products, have got applications other way other places in our portfolio, other applications. So we have a pipeline of sort of newer materials coming out, being tested by people from other things. I think that's something just to talk a bit more about footwear because it is it is the biggest part of our our HPP and it is something we're flagging strongly for growth. We have an exclusive agreement with Nike for footwear, not for sportswear, but for footwear, other than medical and ski type footwear where they don't participate.

41:24 That allows us very close cooperation with Nike. We are effectively on an open group basis, so there's no debate over costings. We're very clear about how we work with them. And because of that exclusivity, they are able to put a lot of marketing dollars behind our products or behind their products which use our phones. And that's very beneficial for us. If we had been in a situation where we were supplying the same or similar materials to other sportswear companies and everyone's able to make the same set of claims, then no one's gonna put money behind it because their competitors can do the same and they have no advantage.

42:09 Whereas Nike know that with our materials, they have an exclusive pipeline. We're very close to them on development, new products, etcetera. And those new products going on new footwear models are what we are seeing coming through in the second half that will raise the the level of of demand for footwear going forward for the foreseeable future. And we have a pretty decent, visibility on that medium term pipeline within footwear. Moving on to Museo. Museo, we license technology for people who want to either reduce the plastic content of, typically packaging or we have developed some new technology, I was gonna say code name, trademark resource, to replace some packaging which is made from multiple different materials and therefore not recyclable.

43:20 So both of these are are, you know, aimed at mainly at the consumer packaging market. It is something where we are very close to the trends in the market. We are very aware of, you know, this war against plastic, in particular the single use plastic. But in many cases, plastic is the most effective packaging. It's the best CO2 performance, it's the best human impact performance, etcetera, as long as it can be recycled. And so we think that there are areas where plastic packaging, single use packaging will remain. That's where we're focusing our business and giving our customers' licenses the ability to use less plastic in the first place or to use a solution, the resource solution, which is completely recyclable.

44:15 Mucel has been hit a bit by COVID. You can't really see it in the revenue line. In fact, it's the only business unit which is up and its losses have narrowed, but I think that's because we've we've stopped spending quite so much on development and travel with the team because we couldn't. And that is not really a strategy, it's not really a plan from you, so we want to get out and develop that. We are continuing with the pilot line that's about 1,000,000 investment to give us the ability to make sample products for a whole lot of people that are interested. I had a comment earlier in the day saying, I don't see a new website resource or, you know, being being particularly marketed.

45:02 The reason for that is we have got a large, large number of people interested already. We don't want to engage with a whole lot of people until we've got the technology, you know, market ready. That pilot line is the last stage in getting, you know, the technology market ready, and I expect to be coming back, COVID notwithstanding, to talk about the the how the value creation strategy and and the execution strategy from UCEL and the resource technology at the prelims in March. So I have another couple of questions I'll just cap capture when I'm here. The this particular one is once PPE sales slow, what products do you envisage seeing through the vacuum?

45:51 I think it depends on on the state of the market. I think we've proved that, you know, our business development pipeline is is good. I think, you know, things like aviation going down, you know, we will see that coming back at some point. It can't get much lower than it is right now. I'll tell you that. We're not at the point where we're getting to returning things to us, we're not selling anything. So there's a lot of different parts of the market that we will see more life in. But we also have a whole different business development pipeline of other things. Because we sit quite far back in the supply chain, you know, we can't be sure of any particular one of them, but I will say in aggregate, I feel that that business development pipeline will generate growth for the ZOTEFOAMS business and and, know, it's you know, I I I think in the we we might have a a transition away from PPE into into other things, but, you know, we've got we've got good market knowledge, we've got good product portfolio and, you know, this business will will grow beyond PPE.

47:11 And as I said, I do expect PPE not not to go to zero. It's not my working assumption when I think about the business, but I I have high degree of confidence in the customers that are promoting these products that having a good product to push, they will get business from it. So I'm I'm very confident in them. They're a good company. Okay. So move to David, while you're on on the business, there was a question about Nylon. Did you wanna answer that one? Yeah. I thought I'd sort of covered covered some of the opportunities for Nylon. I think we're looking in quick technical areas, high temperature areas, which is in e, you know, e vehicle batteries.

48:08 We are looking at some, you know, and and ballistics impact protection for both the, you know, kind of body armor and sports are the two big ones. But we are also looking longer term at things like high-tech composites. A few years ago, we were working with Airbus to on a project to actually make the fuselage of the plane using nylon foam was slightly augmented by by some other things they were bringing. But, you know, those sorts of things can translate into high end auto and and marine and other things. And, you know, they are more fundamental programs that, you know, do take a long time that have in themselves as individual projects low probability of success. But when you put a lot of them together and and you've got a portfolio of them, I think and and people are all thinking about trying to do the same thing with what is effectively a very interesting material for that market, then some people will succeed in in getting it into applications where it works.

49:26 So it's quite difficult for me to articulate necessarily what the individual applications are, but but in aggregate, if you would like, the portfolio is moving the right way. And I would I would pick out the the impact protection and the battery installation as as key projects where we're putting a decent amount of resource in. One other question on I see on recycled material. So at the moment, we don't use any post consumer recycled material in extrusion.

50:11 We are making some forms that are getting ready for launch using our own internal scrap. But given that we take the plastic and stretch it sort of 65 times so that, you know, the lightest foams we make are sort of 1.5% polymer, the product has to be very consistent, the raw material, and getting good level of consistency in post consumer materials isn't really possible at this time. I think once we see high levels of chemical recycling of common polymers, then the purity level, the consistency level will will will become high enough for us to look at it as, you know, a standard product.

51:03 But but right now, all you're doing when you add post consumer material to virgin material or or is is is produce is contaminate the good material. So, unfortunately, that is not something we are doing at the moment, but we are, as I said, doing it with internal scrap and things like that. And that's not just for polyolefin. We're looking at that for other materials as well, or our high performance products. Another question is we we spent a lot of cash in the last few years pulling, etcetera. Yeah. We have. We've had a three year plan to increase capacity that has resulted in an increase compared to where we ended up in 2017 of about 60% increase in group capacity.

51:59 All of the the latest investments are are kind of latest generation technology which can make any of our our phone products, and that's important. You know, if we look at growth opportunities in HPP, we've now got a much wider capital base to be able to do that. In polyolefin, we have full capacity in North America and and Poland to be able to serve, you know, well, with Poland's up and running to be able to serve local markets and that's important for polyolefin foams which, you know, do not travel very far because the transport costs are high relative to the price. It feels now that we are coming to the end of this planned capacity enhancement.

52:48 The pooling facility is designed for further expansion, but with a sort of 23,000,000 price tag, we really only have one production line in there. So we can double production capacity in pooling for about another 5,000,000. It's not something we're contemplating at the moment because of the state of the market, but we can do that fairly quickly and at relatively low capital cost when the time comes. So it feels like as capital spend falls, our cash generation, is good. We get capital back down to around depreciation levels, as Gary said earlier. We're very cash generative. We pay off our debt quite quickly and the gearing can drop quite quickly. So there's no expectation that, you know, we need any kind of rights issue at all. We flagged that pretty strongly at our prelim.

53:48 We it was quite interesting. We we we after our prelims, we we went out and we got feedback on on the prelims and pretty much all the existing shareholders said, yep, we trust you, you don't need any rights issues and all the people who are non shareholders were advising us to do a deeply discounted rights issue to shore up a balance sheet which they could obviously participate or not a rights issue, deeply discounted free issue, open issue that they could participate in. So I, you know, we smiled at that and moved on with no rights issue and I think right now it feels like the business is is well capitalized. We have good capacity, good assets, and, expect to pay down the debt. So we we should have seen peak debt, I think.

54:42 And then finally, just the key messages. I think we have got good response to COVID. We are adaptable. Our people are are are well taken care of. We're commercially effective. We can we can go where the where the action is. We have got structural growth in the business augmented by, you know, some of the the, you know, the PPE contract, etcetera. But, you know, we're bringing the dividend back. We can see that the markets are relatively subdued still, but, you know, we we focused on cost and capital management in the past six months. As Gary said, we generated 6,000,000, which is more than we did in the in in the 2019.

55:31 So we can manage the business in a in a slightly different way if we need to generate cash. We are looking to bring back some of the SG and A investment so that we've got the ability to grow further. As I said, we do see quite a good portfolio in in HPP and we want to make sure we put investment in to to optimize that. But even then, we expect to pass peak leverage and, you know, pay down the debt with visible drivers behind record second half sales or record six month sales in in the second half. That's really it from from me.

56:17 I think we've covered Thank you. Questions that came in on the q and a. So Yeah. Yeah. Of anything else. Nope. You you have addressed those, David. And ladies and gentlemen, please just I'm very mindful of time also, but do continue. If you've got any further questions, then please do submit them using the Q and A tab situated on the right hand corner of your screen. But just whilst the company just prepared to answer the pre submitted questions, I'd like to remind you that a copy recording of this presentation, along with a copy of the slides and published Q and A, can be accessed via your Investor Meet company dashboard. I'd also like to remind investors that feedback is incredibly important to the company. And immediately after the presentation has ended, you'll be redirected for opportunity to provide feedback in order that the company can better understand your views and expectations.

57:06 Gary and David, obviously, I know that you've gone through a number of those questions that have been submitted through the live event, and there may be a few more that do appear. The we'll we'll to we'll question. Through the presentation about when do you envisage reinstating the next dividend next and is the dividend likely to be reinstated in not too distant future. Hopefully, that clarity is there for those two questions. We have a question here. Due to the downturn in air travel and car manufacturer, what impact will this have on HPP sales and therefore profits for 2020? Is there any mitigation for this? HPP not particularly exposed to automotive.

57:54 Is, yes, and we've seen that in the first first half. We are seeing probably demand in the second half be higher than the first half in in automotive. But the automotive applications for HPP are really things that we're working on for 2021 and beyond. Aviation, we had expected before COVID that aviation was was gonna see decent growth in this year. That has now been revised. Obviously, we we don't see that. We see aviation business reducing. However, it's a bit more nuanced than that. I think what we see is the OEM business, the Boeing's, the Airbus's reducing by about 40% their their demand.

58:45 And that probably is gonna be that lower level is gonna be fed from inventory in the supply chain over the next few months. So it wouldn't be until the final quarter of this year, the earliest, that we would see a resumption of sales from ZOTEFOAMS to the Boeing's and Airbus channels. But we have been increasingly active in the aircraft interiors market. There's a lot of airlines who had stopped spending, the retired fleets, etcetera. They're now looking at making the interiors, you know, COVID proof or or easy to clean. We've got launched new products into them and there's a very high levels of interest there as well as the the sort of refurbishment market as airlines kind of swap planes to balance the fleets and, you know, refit the interior cabins, etcetera, which is is is now a very active well, there's a lot of activity going on.

59:48 There's not a lot of there's there's not a lot of investment yet, but there's a lot of people getting ready for this because that that's happening. So we expect that part of our aviation business to resume and be a lot more active before the OEM business. And then finally, I would say that the space business is something where we have, you know, kind of adjacency with the with what we do on the the airlines. When it comes to space, the technical performance of our phones, the fire performance, the light weight, the purity, very important when you're putting things up to up to space. You don't have any impurities in there, it'll get out.

1:00:37 All of which make us a material choice. So that, both for the commercial space programs and for the government space programs, we're seeing quite a lot of demand in that. So that will offset some of the commercial aviation downturn this year and hopefully be a good market for us going forward. Thank you. We've got a question here. Is there any way to accelerate the growth of mu cell technology, I. E. Through a JV with a bigger partner? There is. We we're looking at all kinds of ways to to create value or demonstrate the value of new cell, and that's certainly one of the things. But NewCell have a number of different technologies at different stages of development and having having bringing the right partner in at the right time when you're clear on your IP, you're clearing on your product offering, and it's about execution, I think, is important. So that's something we are considering.

1:01:41 And kind of, you know, as I said, I would come back to resell in the prelims in 2021 and and talk more extensively about that if we haven't done it before. Perfect. Just two final questions. The first one being, HPP is an extremely versatile business with uses across many different sectors and applications. Are there any new sectors where you see or applications where you see HPP being adopted? Well, I think the two big ones are in, you know, EV coal batteries and space. Space is a bit more advanced at the moment, but e vehicle batteries or e vehicles in general, I would say is very interesting.

1:02:28 I mean, we are picking up, you know, other parts of business elsewhere like, you know, using our our fluid polymers for fire door insulation in in government buildings and institutions, things like that in in North America. So, you know, there are all kinds of, like, lower level, perhaps not quite as as as eye catching opportunities where, you know, having 10 of those is is very nice indeed. And I don't want to go into the details of all of them, but there's there's there's a lot of activity happening in in in places that you wouldn't necessarily associate with these types of materials. So again, but we I would pick out the vehicle just something that we are particularly active in.

1:03:22 Thank you. And I think the final question which perhaps leads slightly onto it. Can you give a bit of detail about how your products are used by NASA and the European Space Agency? Is this an area for significant growth, which I think you've just touched on? But I think the answer is no and yes. I mean, unfortunately, almost all the government programs are covered by the regulations that mean that this might be the last time you ever talk to me. I disclose too much. So I would rather speak to the nice people of of IMC in in six months time, I hope, then that that answer that question more fully. Fine. Well well, thank you. I think I think there there may be one or two that are in that ream of live q and a. But as I said previously, obviously, we can review all these questions. And and if there are any gaps, obviously, we can look to fill those in where it's appropriate to do so.

1:04:17 I guess I'd just like to hand back to you, David and Gary, just to perhaps wrap up. Then I know that investor feedback is important and I'll instruct investors how to provide that. Thank you. Yeah. I think investor feedback really valued I I think we get pretty good feedback from institutions and it's been difficult to get good feedback from from investors outside the institutions traditionally. So, you know, things like what you think about the dividend, what you think about, you know, our our our general growth strategies, anything else really, very much welcomed. Thank you very much indeed. The share price has performed very well today. So I see that most people on the call are are currently shareholders.

1:05:07 So I I I hope that's a major Tuesday evening. Well, listen, thank you very much indeed, Gary and David, for updating investors today, obviously, as part of your roadshow. Could I ask investors please not to close this session as you'll be automatically redirected for the opportunity to provide feedback? If you access this meeting from our platform, the feedback page will appear. However, if you accessed it via the link sent to you by email, you'll be asked to log back in and submit your feedback. But I guess as the team have said, it would be fantastic if you could provide that. So on behalf of ZOTEFOAMS, an investment company, I'd like to thank you for attending today's presentation. And that now concludes today's session. Thank you.