Zotefoams (LSE:ZTF) — Preliminary Results for the Year Ended 31 December 2021

0:01 Good afternoon, ladies and gentlemen, and welcome to the ZOTEFOAMS PLC Preliminary Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just

0:19 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 we'll publish those responses where it's appropriate to do so. Before we begin, we would like to submit the following poll. And if you would give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand over, if I may, to David Sterling, CEO. Good afternoon. Good afternoon. Thanks, Mark. So as Mark said, if we have any questions, we will address those at the end. It's easier, I think. We do have a fairly full presentation, Gary and I. So we are gonna give them the time. We're gonna run through the presentation fairly quickly and save time for some questions later.

1:08 So this year, 2022, a hundred year well, 2021 is a hundred year anniversary actually of ZOTEFOAMS invention of the process that we use to make foam. And it's it's very, you know, great anniversary to be having. Just that that's kinda explains our hundred year slide on the on the title deck. As we move through, remind everyone that we think about our business in three main areas, polyolefins, high performance products, and mucel. Polyolefins are made from low density polyethylene and derivatives, and that sold mainly locally, regionally around the areas we manufacture in in Western And Central Europe and North America with a little bit of sales into Asia.

2:01 To a wide variety of applications, mainly industrial types of applications. And very, very little goes into what you might think of as as single use or disposable. And and where that does happen, it's not through our choices. It's through customer choice, but often that's medical industries where, you know, single use is is designed in. Our high performance products are made from materials that are typically difficult to form other processes. We make materials from fluoropolymers which don't burn, elastomers which are kind of stretchy and bouncy amongst other things.

2:47 And the main markets there are in footwear, where we have an exclusive deal with Nike, who use the pro product for high performance running, and in aviation and installation for clean rooms and biotech. The other part of our we we just sold under the TFEIF brand, by the way, the insulation products. And Mucil is our technology which is used to put bubbles or or foam in continuous processes. I'll come to talk about that later. It's a very small but interesting part of our group at the moment. Our strategy is really one of organic growth. We focus on certain markets. We try to do very well in those markets and leverage our unique technology.

3:36 So having said that, you know, where do we end up in 2021? Top line, we delivered a record well over the the sales last year, a 100,000,000 sales. Our profit, as you can see, has been is is actually down and that will cover that later on the reasons for that. But earnings is gonna follow profit with a slight adjustment to the tax charge. And we're pretty financially robust. We generate a lot of cash and our gearing ratio

4:14 is about the same as last time and crucially after a refinancing fairly recently. So we've got banks behind us and and quite a lot of headroom. And if we look at that revenue in a little bit more detail, we see that polyolefin forms, which is the kind of legacy where the business has come from, sales up 10% to record 56,000,000, slightly impacted by currency, mainly the dollar. And that's a that's a recovery in a lot of markets, perhaps other than aviation automotive, which are still gets stalled last year. And it's on a base of 2020, which included a lot of PPE product. We we made materials for the UK government PPE program in 2020.

5:10 So the the comparative is actually pretty strong there. And if we remove that PPE comparative, we saw sales increasing by well over 30%. Our high performance products sales were up 41%, 47% in constant currency. Again, it's mainly a dollar denominated business, but, you know, very, very strong growth in footwear and that that deal with Nike really delivering there. And new sell sales are on a very small base, 32%. Our profit margins have really been impacted due to mainly the polyolefin side, the significant and unpredictable and quick inflation environment that we've seen in raw materials.

6:00 Gary will cover that a bit later, but effectively, we put prices up in second quarter of twenty twenty one on polyolefins at around the time raw materials started to rise. And the the the pricing on raw materials went a lot higher and stayed a lot higher for longer than we thought. And although we've put in additional price increases through, those are really hitting January this year and and April this year. And so the lag effect on on recovering that inflation is what's dampened the margins there in polyolefin rather than anything, you know, different structurally. So that's that's the kind of highlights.

6:49 And just to cover, you know, the the kind of strategy outlook. We we are a plastics processor. We sell into a lot of areas where we believe that the foams are actually the best material solution. And our customers think that we we've got very good demand pool and a lot of sustainability structural growth. We think about sustainability, we think about organic growth and that very strong robust recovery in the polyolefins business kind of demonstrates that and it's it's fairly wide ranging not just by market, but but by geography as well. We've commissioned a new manufacturing site in Poland, which is the third major full manufacturing site.

7:40 As yet, it's not fully utilized and it's carrying a big infrastructure overhead because it's the first tranche of capacity on that site in Southwest Poland, quite close to German border. But it gives us a lot of ability to serve into the the German and Central European market and and gives us a lot of room for growth there. We've made good progress in new cell development with a resource packaging and we've we've kind of repositioned ourselves fairly slightly on sustainability. I don't think it's anything that we haven't been doing before, but just building it in in a bit more robust way to how we conduct business both internally and externally, I think will be beneficial in the long term.

8:30 So strategically, we've made good progress. And then where does that leave us? It leaves us with geographical spread, business spread, and industry spread, which you can see is I think I would characterize as as more representative of the underlying demand for our business than than than last year, which was very much actually last year 2020, which was very much influenced by COVID. So we can see that, you know, strong footwear growth coming through in sports and leisure. We can see product protection. We can see the the the other areas in there geographically fairly widely spread.

9:19 And again, I would say that probably the two markets which are not back where demand is not where we'd expect is aviation and automotive both in transportation. So we're seeing that in aggregate, so 10% of our our sales. I think in a more normal year, that could be 50 or or or even 80% higher, maybe even double. It would be a more normal, you know, part of the mix at this point. So still a few market headwinds there, but but a very very good position, you know, in the sales line. And what I'd like to do now is turn over to Gary, give talk us through the financial review and the cost margins.

10:10 Okay. Thanks, David. So looking at the abbreviated income statement first, David mentioned the sales line and the 22% growth was actually 27% if you if we'd stuck with the same currency rates as the prior year. Gross gross profit came down 1,200,000, and the and the margin fell, as you can see, to 26% from 33. If we'd actually extrapolated that same 33.6% onto this year, onto twenty twenty one's income, we would have generated another 7,300,000 profit. And that really is very much explained away by the gross margin impacts. David's mentioned the polyolefin foams. I have a slide coming up that goes into a little bit more detail on that.

10:57 And we saw that really through the whole of the year escalating very quickly through the first half and then remaining stubbornly high. Freight costs, didn't really see until the second half and more towards q q four. We ship a lot around the world. I have a comment section on on a slide coming up. But we ship a lot, and we've seen prices move from some $3,000 a container up to 12,000. And when you're shipping that between The US, UK The US, UK or UK, China, you know, it does have an impact. Energy,

11:30 we we hedge, and we're pretty much hedged for most of the year. But so we started to see that movement in q four, and it's really 2022 that we're starting to see the bigger impact on energy. Sterling, about £2,000,000 at the gross margin level was the impact on that seven that I referenced relating to to primarily The US Dollar impact about an average rate of about 7% above twenty twenty's rate. And we brought Poland Poland on commissioned in February 21. That's about 1,000,000 plus of of additional operating cost at the gross margin level. PBT was down to 7,200,000 adjusted, some 1,400,000 below the prior year, and that includes 500,000 of of of currency adverse impact.

12:22 If you as you as you move towards the EPS number, the primary additional driver is the is the is the tax rate. And and what really happened there is partly, of course, a lot well, initially, a lower profit rate, but very much offset by the change in deferred tax charge that we took in the year and almost very a large part of it, very much one off. It primarily relate primarily relates to the corporation tax change that's happening in 2023, moving from 19% to 25. And the fact that when the government you when the the government substantively enacts the terminology used, which it did in May 21, we then have to all businesses have to then apply that rate when they're looking at future changes at the deferred tax, which is which is specific to differences in the balance in the way we treat cost between tax and and p and l and the future impact of that. So that was about a million pound of impact. In addition to that, we're very prudent in the in the way we treat losses in overseas subsidiaries. We have losses carried forward in The US.

13:32 Is part of that part of that tax group. And and we don't recognize even though we expect to be able to use them going forward. We don't use them because we haven't got a history of using them in the past. So once that starts to flip, we would move into recognizing them and and start seeing a release in future years. But for this year, we didn't, and that was about a $0.4400000 deferred tax charge. That's what drives the EPS number down to nine thirty one. And we did pay we are we are proposing a a final dividend, which is 3% up in line with our progressive policy on dividends. Looking at the looking at the balance sheet.

14:18 This is the first time that the balance sheet hasn't moved significantly in the last six or so years. We've been on a on a on a significant capacity expansion program. We've invested about £70,000,000 over the last seven years our assets in both The UK, US, and or in The UK, US, and Poland. And and that's about 75% of our total capital spread spend. That has effectively come to an end with the commissioning of of Poland. Working capital has moved up really in line with with business activity. 82,000,000 to 100,000,000 sales means that you have greater greater receivables. We also had a little bit of an uptick in in inventory related to the fact that the Vietnam plants that take our footwear products were shut for a period of two to three months back in q four, and that led to the supply chain slowing down and us having to hold stuff that we would ordinarily have have made and immediately got on boats and and shipped out. So that's since depleted, but it was certainly relevant at the year end.

15:31 The mentioned the deferred tax liability or the charge, which links into the liability. And post employment benefits down, and that's really partly a result of the performance of the of the assets that we have as well as the the higher discount rate with corporate bond yields. The result was a leverage was that leverage remains at 2.1 as per with last year, and that's against a a leverage covenant of three. ROCE lots of ample headroom, one £13,000,000. ROCE down at 6%, obviously, not something that we are comfortable with, down from nine from 9%, which is also a low number in 2020. The 9% actually included a distant did not include Poland.

16:20 Our definition of of Roqui excludes major assets under construction. So those 23,000,000 of assets were brought in in 2021, and that that mostly explains the the the movement down. We've put a lot of assets in. We under you know, when we made those decisions, we knew that would have a have a have a dilutive impact on ROCE in the short term, but the additional capacity and capability gives us the ability to continue to grow our HPP portfolio, and and we expect that to come good in due course. Just a quick comment really on financing. Because as at December 31, we had a we had a particular specific financing arrangement. That financing arrangement expires in May 23.

17:09 So at the time of signing the accounts, we would be one year, one month away. That is considered a little bit risky for for the auditors to sign off ongoing concern, so we decided to pull ahead the refinancing and actually close that out this this month or a week ago. And the and the the and the impact of that the result of that is that we've actually it was a pretty a very hotly contested event. We got a very good competitive pricing. We we we were we decided to remain with Handelsbank in the NatWest And and actually on, you know, terms which are ratcheted based on based on leverage was slightly more favorable than terms that we already felt were very good four years ago. We've switched our our our we've switched the full switched to a 50,000,000 multicurrency RCF. Previously, it was, actually 57, but term loan RCF, split, so it's given us more flexibility.

18:07 And the leverage covenant, we've lifted to three and a half, from three. It's not because we expect to use it, but clearly, you know, these are significant turbulent times and just having the the comfort. If you can get it, go for it. Right? And and we got it, but it's certainly nothing that we anticipate targeting. But, you know, it it it made sense to push for it, and we were successful in getting it. We've retained an accordion of 25,000,000. Should there be something out there we need or we see in the coming years that is that that that that would necessitate that? So we've already got kind of preapproval to for that side of size of funds. And very importantly, this entire deal was linked is linked to ESG. We haven't we haven't stated what the terms are yet and the specific targets. We will be doing a lot more of that.

18:53 But but I think part of the competitive nature of the of this deal was that was that we had an ESG element, which is very which is very much core to ZOTEFOAMS. So so it's part of what we're doing anyway. So to help explain and help demonstrate the significance of of ESG to us, we felt it was a good thing to do to get it into the current loan facility. If we just cash flow really, in a nutshell, is EBITDA was pretty much in line. Cash generated from operations pretty much in line with last year. I explained the working capital. CapEx way down from previous years. It was 13 last year, seven year seven this year, and actually two of that was resource.

19:39 And, yeah, net debt down at 1,300,000. So we're still very cash generative, and the CapEx is really has very very much returned to a steady state more in line with our depreciation charge. Just touching upon some of the key cost factors in LDPE. David spoke about the the growth in LDPE, which is very much related to the AZOTE business, not our HPP business. You can see the from January 20 or or towards January 21, the rapid increase, which is what we've experienced, which is some doubling of of the of the price. It's about 60% above the average price of the past five years. So so, you know, we would ordinarily expect that to come down to historical averages. The current environment makes it obviously very difficult to predict if that's gonna happen and when that's when that's gonna happen. And indeed, at the beginning of the year, we were we were very much expecting these prices to come down in q two. But, you know, clearly, events in in Eastern Europe and so on have have changed the environment somewhat. And and, actually, we saw prices go up last month for the first time in a few months.

20:47 The purpose of this chart is also to show the spread. The the LDP price is really is a mixture of both both the ethylene price as well as the the margin taken by the producers. And what we've seen is that, as you can see, that spike you see the the line, the spread has actually increased quite significantly. And if you come and if you take a look at when we when we were considering price right rises back in March, April, our view was that that the that the the ethylene price was actually fairly normal. It was the it was the spread, the margin that was being taken that was that was that was unusually high, and we expected that to return. So consequently, we put the prices in at a certain point expecting that to to to to to stabilize and reduce going forward. Once it got to the interims, we saw that the ethylene price actually was still the same, but the but the but the spread had actually increased further.

21:40 And then that took us by surprise. Again, believing that was that was not sustainable, we chose not to to make any any any further adjustments to price because the impact that has on our customers and the belief that it would revert. It didn't happen, and that's really what led to then our decision, you know, from the January 1 to put prices up further. And indeed, we're putting prices up again in in April. I think and and and now we've actually you know, even into into the New Year, we're seeing the same thing. And and what we've come to realize is that actually, you know, ordinarily, we would expect ordinarily, Europe is a is a is a market that's quite short in in supply and so often brings in product from Middle East and and Asia. And we think one of the reasons these these these margins are staying particularly high is is because of because of the COVID impacts and the supply chain issues.

22:31 It is not possible to ship in products to relieve the market, to to to to relieve demand and and and put and take the pressure off. And the consequence of the of the lack of availability of supply plus the pricing of freight is meaning that these prices are staying stubbornly high. Whether or not when that changes, we don't know, but we're certainly tracking it, and we are prepared to make further price movements in the coming months to reflect that if these prices remain.

23:05 Energy is a energy, three plants. 75% of it is The UK. Last year, we were hedged in The UK for most of it. We're less hedged through 2022 When we've come to to hedging at the beginning of the year, the the prices were so high pre pre Eastern Europe events that we felt they had to come down. They haven't. So at the moment, we're probably looking at an increase in in total cost as a percentage of sales of some two to 3% on on the

23:36 hedged with what we have. If that continues throughout the year and into next year, we would see a slight further increase in that cost. But, again, it's something that we're tracking, following, and considering how we incorporate that into pricing. And finally, freight and currency. Freight, really, the the the purpose of that box there is really to say we've got we we do we are exposed. We do ship a lot of product around the world. We ship semi product semi finished product from The UK to The US, from The US to Poland, from UK to Poland. And, also, our T fit business involves shipping finished finished, high performance products foam from The UK out to China and then into then then distributing internationally. In addition, we're seeing you know, what we're seeing this year, 2022, in respect of raw materials and whip is it is the first the first increases in raw material for the HPP business, which we believe is is very much related to freight costs and energy costs.

24:37 And finally, far as the FX is concerned, if you actually look at the beginning and the end of the year, they were pretty this is the dollar, which is the the which is the the currency we're most exposed to. The the the rates were pretty much the same at the beginning of the year and the end of the year. But the story between '21 and '22 '21 and '20 in terms of the the the evolution of that trend through the year is very different. And the consequence is that an ad that on average rates, we had about 7% higher, FX rates on dollar than we did in the previous year, and that's been, something that that clearly has been a headwind for us, partly hedged, but nevertheless an impact. On that, I'll pass back to David. Thanks, Gary. So let's move on to just covering the kind of markets and some of the different business segments.

25:31 So really, think we've got a bit more detail on the following slides, but just to remind you, probably looking for them about 55 of sales, HPP 42, and and you sell new cell 3% or sorry, 2%. Let me talk about is polyolefin foams first. We are seeing a 10% rise in revenues That's delivered by about 4% on price. Price went up in second quarter of the year. So if we look at an annualized, that would be a bit higher than that, close to 6% price increase. The volumes grew by 6%.

26:18 Our product mix improved by 5%, mainly because we're comparing with 2020 where we had about 20% of our polyolefin foam sales were to the lower price PPE market. And although it was lower price, it was also a single product that we ran very simply and continuously through our factory. So the margins were actually pretty good on that because of our operating efficiencies, offset by a 5% negative currency movement. Where we see the growth is is really in all areas. You know, North America performed well. Continental Europe had a a very strong recovery from a low position in 2020.

27:08 And The UK, absent the PPE, showed a small increase. And as well as, you know, the Asian market, which was not a big market for diesel, but grew nicely compared to to 2020. So and across different applications, I think almost all the areas performed well other than aviation and automotive, which I've mentioned before. Those really are, you know, they're they're not a huge part of our overall business, but within polyolefin forms, they're they're, you know, probably around seven or or 8%, something like that of of sales. So interesting, but that's not in itself gonna drive drive, you know, growth or or or make a big change in the in the number.

28:07 The really interesting thing is, as we can see, unfortunately, is the segment profit down. This is before currency hedging, so slightly better than that with a constant currency. But, you know, just not an acceptable margin at all. And if we look at why that is, as Gary's explained, it was that sudden and, unpredictable and very high increase in raw material costs. We have put it through prices in January and April on polyolefin foams, which would recover these margins back up to a more normal level. But bearing in mind, we are shooting a kind of moving target with the first couple of months of the year, raw material prices coming down and then going back up again, as well as as well as other factors in the business. So it's it's an area where, you know, we need to be aware that in the short term, we can actually recover margins quite well. You know, we've got prices, our customers, you know, are not gonna move immediately somewhere else.

29:22 But immediately is the key point. Often what happens is that, you know, new projects that they've got, they go looking for alternatives or or, you know, they price themselves out of demand with their customers. And so you can see that, you know, six months or more after a price rise, if you get it wrong, you can see demand falling off. And I think that's something we we try to be very careful about that when we put prices through as much as possible, those prices are designed to stay. So if we do see a reversal in polymer cost, then the prices that we have put through should stick and margins should benefit not only from the price increase, but the falling away in in polymer.

30:16 So that's something we're keeping a very close eye on. We're already mulling over a third price increase this year, and almost certainly that that will happen. So, you know, something that we're we're much more active in managing inflation

30:35 and taking, let let's say, a more pessimistic view that the inflation will not, you know, polar prices, energy freight, which all are factors which can go up and down, will not really reverse in the future or at least in the short term. So if we come on to HPP, we are looking at, you know, again, remaining about 42% of group revenue, and sales up 41%. That had really driven by footwear. It probably would have been more if raw material if I'm sorry, if the situation in Vietnam had remained stable the whole year.

31:27 But if you recall in the back end of 2021, Vietnam as a country was basically closed down because of COVID, ports were closed, etcetera. So our supply chain into at least part of the Nike business was disrupted there. It's not something that we expect necessarily to catch up this year. That's just, you know, kind of the way it is. They re reposition some of the other products. And but I I think an astonishingly good growth in footwear, and footwear is now up at 34,000,000. The balance of the HPP business is really aviation or T fit.

32:14 Majority of it. There are other things in there, but and the aviation business is something that's was, you know, the engine for growth before footwear in HPP. We were in excess of 10,000,000, very high margins. And last year, twenty twenty one, that was only around 4,000,000 of sales. We didn't lose any business or programs, but what has happened is the build rates in planes and the inventory reduction in the system has just meant that demand through to our level is is severely curtailed. So we are seeing that come back this year, probably not to the levels that it was at peak, but somewhere in between.

33:00 And, you know, TFEIF, which is our technical insulation business, is something which is, you know, we believe it's got really good potential, but it's still very much a technical sale. And so when you've got a technical sale, you need your sales guys to be out, talk to people, etcetera. And movement restrictions due to COVID, particularly in India, which we had quite good momentum on growth, has really stopped us getting out there and and engaging with customers. So that's been, you know, that's been tough. And even though we have delivered 11% growth in TFA, I think we could have done a lot better there. So, you know, in all cases, I think, you know, very, very pleased with the overall HPP sales growth. And if we look at the margins, you know, we can see that margins are down in part again because of currency.

34:00 Margins would have been 25%. But the the raw material inflation that we saw in in polyolefin films hasn't really, to the same extent, impacted HPP. They're more technical materials, they tend to be more stable. Price increases do occur, but largely, we have mechanisms to pass those on through pricing to the likes of Nike. And those mechanisms do operate with a bit of a lag as is normal, but the the mechanisms are working and therefore the margins, you know, over the cycle should should be fairly stable there. Talking about t oh, sorry. MuCell next.

34:49 MuCell technology, we think about in two separate business streams, MuCell one point o, where the technology is really designed to reduce the polymer content of of common plastic parts, and we would take a share of of any savings. And that technology is aimed at existing products. If you're making a yogurt pot, make a yogurt pot with less plastic. Pretty obvious. If you look at the other side of the business resource, we've taken our technology and created completely unique attributes and and therefore an opportunity to to build a unique product range around resource, and that uniqueness is around how we use layers of foam and solid material to create enhanced barrier properties.

35:42 So oxygen and moisture barrier, which you need in consumer packaging. And we're talking about that as a very big opportunity. We're looking at a number of different areas. They don't come on to talk about that in a minute, but the reality is that with NewCell, again, for the last two years, it's a bit like a key fit. We need to get into the customer's fast facilities, the factories to to convert their yogurt pot making line to to something which can use foam. We haven't been able to do that. And so the business development efforts there are really, you know, been really curtailed. And, you know, we do we do have business. We have existing licensees.

36:31 We have existing relationships. We sell equipment. So that's continued. But we've really pivoted a lot of our people and focus across to developing the resource technology. And that's why, you know, although the sales number has moved a little bit, the bottom line result seems to have improved a lot. Part of that is because we're capitalizing as required. We have no choice. Some of the development work that people are doing on new products, the new product line resource. Okay. If we look at, you know, our kind of sustainability position, I'll start with resource because it is probably the biggest opportunity we have in the businesses because it's a completely new technology in a in getting to market that we need to develop or we need to replace existing incumbents is, you know, relatively high risk of success. We've got a lot to do to to deliver that.

37:40 But we know the technology works. We know it gives the barrier properties. We know it gives a better life cycle, a better sustainability, you know, carbon footprint than the alternatives. And we know that there's a lot of people out there like it. We're winning awards for all kinds of things. The the brands are very interested. Retailers like supermarkets very interested for their own brand labels. But we still are not there in terms of the ability to make a juice carton or a milk carton or something like that on industrial equipment. We know that our sheet gives the required properties. We know it can be made into a box or carton, but can it be done at high speed?

38:31 Can it be done consistently with the ceiling and the sterility required to go into, you know, multi multi million packaging business where, you know, failure is just not an option. So there's a fair amount of work to do on that, but we're making good progress. And as I said, we've got a lot of brands and retailers, etcetera, interested. We've got a very small number of people we're working with to prove the technology. And the reason we're working with a small number of people is everyone basically uses the same equipment, the same type of equipment to make the sheet into carton and fill it and and put a cap on. And so once we've proven on one line, it transfers very readily to others.

39:19 And that we'd rather work with a small number of people, go deep than try to, you know, keep a lot of people happy and and not move very fast. And so that's, you know, that's something that we've got planned for upcoming months, those trials on potential customers lines. And and that would be the first kind of stage of value inflection that, yeah, we've done it on somebody's line. The next stage would be someone's using it in the market. Hopefully, a a fairly small but visible brand to to to say it's commercialized. And if we can do that, then the ability to generate value from it dramatically changes. People are looking at you know, we'd sign up.

40:07 We we we could invest on the back of it. We could partner with people. We could license the technology. We could sell it on the basis that it was already successful. So quite a quite a large, you know, potential opportunity and number of ways to to create value if we can get through the next step next stages. It is a sustainability play, you know, that's why people are interested and, you know, we are we are over time, really. If we look at the the the sustainability for the rest of the business, you know, we really are aligned to or we have a business aligned to what what's called the SESP, TCFD, which are frameworks to think about and report sustainability.

41:06 We're looking at the internal scrap and energy use and all that sort of thing as as we have for years anyway, but probably with a bit of renewed focus. And then in terms of positioning our product, making sure that our customers know that, hey, this is the carbon footprint of our product compared to our competitors. Here's how you recycle it. Here's how you deal with end of life. Here's how you deal with the scrap. That scrap is being taken and made into other products. We can see that. We're actually making products now that use our internal scrap and trying to blend that back into our core product range for polyolefins as well as as for footwear products. So a real focus on that to to to not just take a sustainability box, but, you know, save cost and deliver to our customers the the sustainability positioning that they need to sell the product on.

42:11 So it's important. And broadly, we're doing that on four levels. One is to show, look, it's a nitrogen based product, no chemicals in there, you know, here's our efficiencies, etcetera. We use raw material very efficiently. The forms that we make use are lighter than other people using less material for the same performance. Often our forms are used to lightweight or insulate, so you're avoiding emissions or or minimizing emissions. And, you know, any new product, we're thinking about the market positioning and how that stacks up. Is it moving us overall into a better position from a corporate sustainability position?

42:58 And resource is a classic example of that, but certainly not not the only one. And so, you know, I guess I'd just like to wrap up with key messages. I think a strong very strong top line performance. The growth 22% or or 27% in constant currency, really phenomenal. Very, very pleased. We need to do better at managing costs and margins, we're on that right now as you've heard. And good progress resource, good progress to commission a polling facility, which was built and commissioned really under COVID.

43:44 Let's not forget that. It's not trivial at all for that size of facility. We're currently seeing very good demand across the business. We've got price rises going through, which will improve margins. We are cautious about the the the macro environment and inflation, you know. I think it's incumbent on us to do that and make sure that, you know, we understand that and we understand the effects of it in in our business and the, know, the customer's business. You know, COVID is is by no means gone yet, particularly in Asia. You know, we've had that parts of Shanghai closed down, which, you know, stopped some of our people travelling, but no direct impact really from from COVID on us for for quite a while, but it's it's something that we're very aware of.

44:38 And I think finally on resource, it represents a great opportunity. We're probably not be in a position to to start selling product or monetize it this year, but as we go through the year and we hit milestones or value inflection points, then definitely the the word is coming out. So with with that, I'd like to, you know, stop the presentation. I've seen some questions come in. So I'll just try to pick up those and Yeah. No no problem, David. Thank you very much. Let me just jump in. Just give you a few moments. As you can see, you've received quite a few. So I'll let you have a few seconds just to to kinda take a look through those. But thank you to both yourself and to Gary for your update this afternoon. Please do continue to submit your questions, ladies and gentlemen, using the q and a tab. It's just situated on the right hand corner of your screen. Just type in your questions and press send. Just want David and Gary take a few moments to review those questions submitted already. I'd like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investment company dashboard, and we'll send you an email when that's ready for your review.

45:45 Gary Sorry. Gary and David, I haven't given you a lot of time to review those questions. But if I could ask you just to read out those questions and give us a answer as appropriate, that'd be great. I'll Gary, what I'll do is I'll I'll just run through those and read them out. And if I think you you pick one up, then I'll throw at you. How about that? So first question from from Neil W. Good to see sustainability being considered. Can you outline actions you're taking to reduce scope one and two emissions? Those are effectively internal. And how do you aim to influence reductions in your scope three emissions? Are you that's the emissions that our customers have as a result of using our product? And explain your strategy towards product end of life. So firstly, scope one and two, you know, I think it's a continuation really of a lot of work we've been doing over the past few years to make sure that, you know, we understand that the products we buy, what the carbon emissions are from those, and how we can minimize those through choice of supplier or supply chain.

46:54 Scope two is really about our internal emissions and, you know, so the the biggest thing we can do there is produce product more effectively, reduce waste so that we're not, you know, running machines to produce scrap, even the scrap cost themselves. We're investing in better heating controls, like our gas boiler control systems have been upgraded significantly, reducing gas consumption. So a wide variety of things there. And, you know, one of them is is around process control. So, you know, map, like, managing and measuring every kilogram of material we buy and and kilogram of material we sell and really understanding, you know, what's the difference, where does the scrap come from, and trying to, you know, minimize that. And where we have got scrap to repurpose that through grinding it up and putting it back into a different product and selling that. So we're we're using that rather than dumping that, and that's something that's that's kind of ongoing process.

48:08 And then with our customers, you know, really educating them about, you know, what's the difference between using our product and someone else's. If you can use our product and it's 20% lighter, that's using 20% less raw material. What why is that important? Well, what does that do to your carbon footprint? Okay. So one kilogram of of foam is, you know, roughly two kilograms of carbon. So if you're thinking about your downstream and and and selling onto your customer, you know, hey. If you start with the ZOTEFOAMS product, you're using less you're you're starting with less of a carbon footprint.

48:53 Okay? So is that beneficial? We've been helping people calculate, you know, sustainability savings like, you know, insulation. You put our insulation on, here's your energy saving. Okay? That's obviously, you know, pretty straightforward kind of calculation, but when it becomes complicated is that we don't know all the alternatives they've got, insulation b, c, d. And so therefore, what we have to do is we have to show them how to use ours and our methodologies, and if they want to compare it with someone else, then fine. We find that largely, very largely, we come out very positively in these types of comparison.

49:41 So it's a journey, and, you know, you mentioned the end of life. Basically, we and all of our customers, pretty much all the scrap is produced in our process and our customer process is repurposed in some way. Where the difficulty is in end of life is, I don't know, if you have a training shoe or a bit of a plane or something, how do you collect that and get it back to a recycling facility, separated out from the rest of the plane and the rest of the shoe, it's difficult. But that's that's a problem that's being, let's say, addressed by those customers, by Nike and Boeing or whoever, not necessarily by us.

50:33 But if we've got that end of life product, we can advise on how to how to deal with it. You know? So I hope that's a a fairly full answer. The next question is gosh. I don't know if I'm gonna be answer answer this one. Why do you think your share price does not reflect the achievements you have made to date record revenue, Poland, US, Nike, unique technology, etcetera. Surely, disconnect may entice unwanted corporate interest. Well, I mean, I think that there's a very uncertain world out there and and the share price, you know, can be volatile. So, you know, I think any director always thinks share price is a bit low.

51:21 But one thing I can assure you of is the board is very, very well aware of the technology we have, the opportunities we have, you know, the strategic plan, and if somebody rules around the corner and says, well, I see your starting price is this. How about a small premium to buy you? The starting share price is certainly not the only factor. It's always a factor, but, you know, we're really looking at the the the business from a long term view and what can we deliver. So I don't think there's any intent to to to let somebody sneak ZOTEFOAMS in terms of some corporate interest based on a share price at any particular time.

52:12 So and, you know, we we you know, so Gavin L, seems you're afraid of your customers' reason for the late price rises. And I've got one other I saw one other oh, yes. It's from you as well, Gavin. Why don't that surcharge on your price when you can move? So I think we're we're largely talking about a polyolefin forms business here. And I think we have to understand probably or explain to you better two dynamics that perhaps are, you know, a bit more detailed.

52:59 The first one is that typically our customers in polyolefin foams have hundreds if not thousands of customers for their products. And so if we give them a price increase and they have to pass it on, they are talking to hundreds of thousands of customers. And that can be very difficult for them. And particularly, if it's a price surcharge that goes up and down, it can be very, very difficult for them to manage. They absolutely lose it. They want stability of pricing so they can get on with doing their business. So and typically, foam to them is a very, very large part of their input cost.

53:47 So it's it's highly material. And I I don't think I would say that we are afraid of our customers, but we do recognize that, you know, there are a number of factors to making a profitable business in in ZOTEFOAMS. We have high fixed costs and therefore, obviously, you need a settlement of volume or utilization of your asset to be profitable. And if you destroy demand by, you know, price increases which are which are too high and our customers lose business, then that's not in anyone's best interest. So it's to try and get the balance there. We can always put up prices in the short term, pass it in the back because our margins will be fine, you know.

54:37 We the customers will just suck up in the short term, but what happens is that they or their customers will look for alternative solutions going forward. And, you know, that's where price elasticity comes in. It doesn't come in on day one. It comes in on, you know, day 200, and you see that projects that you would normally have been on don't exist anymore or or they've been redesigned with something else. And so I think if if we all know where inflation is and it's at a stable level, we put our prices up, everyone's in the same position, and, you know, market demand overall may move, but, you know, we know where we are.

55:25 It's when the inflation is volatile. Sometimes it's up, sometimes it's down. You know, polymer prices, energy, these are classic examples where, you know, we don't think that the prices today reflect long term trends. And so, you know, we we want to have that relationship with our customers to balance the the the short term and the long term. Having said all of that, I think we got it wrong last year. I think we waited too long to put prices through, and we believed along with everyone else that the inflation would be transitory over a very short time, not kind of transitory over a a medium term.

56:14 And, you know, we revised that opinion and and we are looking at, you know, price increases this year, which are less price, permanent increases. We're also looking at some sort of surcharge in in in some areas, but I I know that's gonna be very unpopular with the customers. So we that that's up for debate at the moment. We're engaging with customers on that. Okay. So I hope that covers both of those questions, Gavin. I think our next question is from Chris. Does your agreement with Nike have any cost pass through?

57:00 The answer is yes. Simple. There is a lag because we need to understand what those costs are, but effectively, Nike is repriced automatically. Another question. Might being a dollar reporting PLC help? Gary, you want to It wouldn't help me and my team. That's for sure. That's a lot of work. But no. I mean, it's certainly something that that is, you know, deep at the back of my mind. The fact is at the moment, three quarters of our operating cost is UK or is UK or euro. Right? All of our polymer into The UK is euro.

57:46 The The UK plant, which is the lion's share of the business, is is sterling cost base. So you'd really just be switching to another problem. And and so at the moment, with the scale we're at, I don't believe that's necessarily the answer. K. Thanks, Gary. Question from Matthew r. Can you comment at all on the development milestones we should look out for resource and the sky size of the market opportunity? So size of the market opportunity first, I I think cartons today, just the material going into cartons, about $10,000,000,000.

58:33 Pouches, similar or maybe a bit higher for barrier pouches. So huge market. And and the market size, by the time you get to that, those sort of quantums, the market size is irrelevant. You know, I I think you you feel that, okay. What do I need to do to get in there and and and grow? And the milestones for us are, you know, take that sheet that we've developed and put it through a commercial filling machine, make sure it's sealed properly, reasonably high speeds and high volumes. So we need to do, you know, 5,000, 30,000, a 100,000 units over a couple of days to make sure that, you know, they're sterile, they seal properly, etcetera.

59:24 And then after that, the next milestone is get someone a brand probably to to use it and to to give us, you know, some volume to so that we can say it's in market. So those are those are critical milestones. And if we can do those, then we have a very interesting business. So question from Michael. How much further do you see the footwear segment of HPP growing? Obviously, aviation is coming back, but are there any new scalable HPP applications you feel may drive revenue, examples would be great. So footwear first.

1:00:15 So we we've kinda signaled that we expect footwear this year to be similar ish to last year. That's mainly because Nike running can work on a two year cycle. But I think realistically, we are probably with the running guys, you know, we've got limited options for growth, I would say, with our current positioning and technology. You know, there's only so many high priced running shoes that we can be in. And if you look at the lower priced ones, they are, you know, they're not gonna benefit. The the way they sell them is not based on performance.

1:01:00 The way our products are designed is based on performance. It doesn't fit. Okay? So, you know, we we may get some like for like growth in that market, but it's unlikely to be, you know, very high. Having said that, there are other segments within Nike that we are working on, you know. So we've been developing phones for for other parts other than premium running. We haven't said to anyone that that's been successful yet. If it's successful and I think we will be, but, you know, that's up to Nike, not me. If we're successful, then we'd expect to see that in 2023 earliest, really. Not not much this year. So but, you know, there is there is quite a, you know, a potentially quite sizable market there that we could access within other segments other than premium running at Nike.

1:02:07 It says, obviously, aviation is coming back. Yes. It is. I think this year would be as, you know, high as the peak year, but maybe kind of halfway in between. So good growth expected this year. And are there any other new scalable applications? Yeah. We're we're we're always working on these. We've probably got a portfolio of a dozen or so, you know, 7 figure applications. If we look at the probabilities for those, you know, all of those could generate nothing. That's just the reality of of that type of business. But if I look at the ones which are which look promising, I'd I'd say that, you know, e vehicle battery installation is one that we've got an awful lot of, you know, interest in at the moment. It is a very technical solution.

1:03:10 It is something that there are a lot of competing solutions out there, but we're getting a lot of interest from more than one person and the kind of triangulating into something that looks like our phone is the best solution. So that could be something which which really has legs over the next few years. And and as usual with these things, I've seen that's that's what I think and I'll I'll have a meeting on Friday and someone will tell me that's that's dead and another part of the portfolio was taken off. But that that's why we we we think about our technology as kind of flexible based on common assets and common skills come people because we are a full we're part of a solution. We're not the solution.

1:04:00 And so we need to be able to work with other people and work to their agenda. So but but, yes, I would probably go for e vehicle battery installation if I had to pick one. Another question from Gavin at resource. Does the packaging industry want you to succeed or just using it to bash Tetra Pak? Gosh. I think a bit of both. I think the the the the the brands, you know, and the retailers are the guys that really want to bring up lower carbon footprint solution. The packaging industry, you know, I I think some people may win, some people may lose if we're successful.

1:04:55 But I think, obviously, people like Tetra Pak, you know, if we start crunching into their market share, I don't I I think they're they're perceived as being, you know, quite dominating and and and things like that sometimes. So I think there'll be people that are very pleased to move away from them. I I don't think there's much love for Tetra Pak in their customer base, but it's still, you know, out there. People are commercial animals, so that it's not a reason to move because you don't like somebody. But that that's that's the the feedback we're getting. So the the next question from Andrew, are the potential customers with whom you're trying to resource existing customers or new customers?

1:05:47 New customers. They are specifically in the consumer packaging industry for cartons or pouches. So new new customers. Peter w, please may I ask, to what extent raw material prices have been affected by genuine supply issues as opposed to speculation? I asked this question because it looks from some of the graphs that the OEM or middleman margins increased versus prior year. Is this genuine reason of profiting? So so that that spread that we that we show is the cost of taking ethylene, the raw material for polyethylene, and turning it into the plastic.

1:06:36 So that's what they charge. And on average, over the past six or seven years, it's been around about 250, maybe €300 a ton. And it's, you know, it's substantially more than that. It's up, you know, at the peak that peak, it was up at €900 a ton they were charging. So absolutely, you know, profiteering levels based on but that's that's typical of a a kind of commodity supply demand imbalance. You get, you know, whether it's copper or aluminum or oil or something, the prices sometimes just spike up and come right down.

1:07:23 What we're seeing there is that there's a shortage of capacity to turn ethylene into polyethylene. And as Gary explained, not, you know, not helped by the fact that the normal market forces would bring some polymer in from The Middle East. But because the freight's very expensive and the freight's not working very well, that's really jammed up and and is allowing that very high level of polymer pricing. So, you know, typically, when you're making super normal margins, it doesn't persist. But there is a raw material input cost, the ethylene, which is, you know, based on oil or gas, which is obviously something we need to keep an eye on at the moment as well.

1:08:17 John l, why do your contracts not for pass through clauses? Polyethylene, the the polyolefin foams are not sold under contract. We have price lists. We can put the prices up or not. People can move or not. That's typically not the way the market works. Our HPP products are pretty much old old sold with contracts, supply contracts, and they have past due clauses. So that's why. Another question from Peter. May I ask which customers and sectors are likely to find it most difficult to cope with price increases?

1:09:03 Have any customers voted with their feet and stop supply from from the company? Well, I think I think there are there are certain industries which are sort of more allergic to price increases than others, such as automotive. You know, you try to put the automotive prices up, and they're just like, no. We want a decrease. I think even the automotive guys have accepted that this is a a one way street and price have gone up. So and it's, you know, at some point, you just get to take it or leave it. You know, you if you don't know the price increase, we we are not gonna supply you. And has anyone voted with their feet?

1:09:49 Actually, very few. But as I explained earlier, the price elasticity, the propensity for people to change their decision based on your price today is, you know, people will not change the buying decision. What they will do is for new projects that they're working on, they will use another material if they can, or their customers will walk away. And so when you put your prices up, what you risk is a lovely period of four to six months, but everything looks okay, and then you've got no demand left as your customers you know, that's when you see the walk tight. And you don't always know that the new projects are not going to you until it's too late.

1:10:37 So, you know, we we are very well aware of that, and we're also very well aware that in today's market, you know, energy prices are going up affecting everyone or industrial producers. You know, polymer prices are going up, freight's going up, inflation is ramping. I don't believe that the industrial or any other economy can really have all these things happening and demand not be impacted. There there must be some level of demand drop off due to inflationary factors. And therefore, we in pricing have always got to think about the second half of the year.

1:11:29 Right? Can we keep enough people on board to make sure that if there's a market adjustment and demand overall drops off, that we are not, you know, overly impacted by that? Because, you know, there's no point in having a price increase. We could double the price and have no volume. You don't look very clever because you're not. And so it's always it's always a negotiation. And and when you're negotiating with the the your your customers, there is no better time to get information on how their business works or who their customers are or how they sell, you know, because they start giving you this information to, you know, help you understand why they can or can't take price increases on certain products or not. So it's a it's a very fair job time you can engage with people.

1:12:24 If you just turn around and say take it or leave it, you know, it's a big risk. So I think, as I said, you know, I think we we were we got it wrong last year. I think we were overly cautious. I think we're we're addressed that now, and and we're being more robust. And you know, and and, you know, specifically in a polyolefin. But we are also keeping a very close eye on what's happening to those input prices because, you know, that's still a a significant factor here. Okay. Question from Neil w. Poland has been operating for about a year now. What's the current capacity utilization rate?

1:13:11 We're slightly over 50%. We think about Poland as part of our group capacity. You know, we could fill Poland up today if we move some business from The UK. That doesn't help anyone. So what we're doing is we are, you know, growing that business gradually, making sure that as we go from one shift to two shifts, that the guys are properly trained, The customers are being transitioned at a sensible pace, and the product range they're making has been transitioned at a sensible pace. So pretty much on track from where we where we want to be on that. Next question is from David. To clarify, Unilever or Dove never materialize at scale.

1:13:59 And from memory, you needed more to to explain how. So if I can so you you know, leave a dog. We use new cell technology to reduce a a a dog bottle material content by about 15%. It was very successful. Technically, it was successful in the market. Nobody noticed the difference. You know, we've saved a bunch of polymer. But I I I it was one factor that hadn't actually been considered, which is that the way Unilever buy bottles is they buy it, and this is strange, raw material cost plus a margin.

1:14:56 Okay? And because we reduced the raw material content of the bottle, the bottle supplier's margin, the amount of profit they made went down. And instead of keeping the margin the same and paying the producer the same margin, Unilever insisted in, you know, material cost plus a percentage margin. So they give the producer 15% less margin for making those bottles. And that completely screwed up the whole rationale. So everyone was aligned from the chief exec, the sustainability people, you know, they're all writing about this now with the poor, and the procurement people didn't get on board with it. They made short term savings, and as a result, nobody ever wanted to do that again.

1:15:51 So ridiculous situation, you know, and I I don't quite know what to say about that really. But it you know, they've never really successfully rolled out because they didn't treat the suppliers properly. David, I might jump in at this point because I think we're we're now in twenty minutes through and you've taken the you know, you've been very generous with your time and answered every question from investors. So thank you to everybody who has submitted questions this afternoon. David, I know this is the first day of your roadshow, and I'm sure you've got a a full full set of meetings after this. So if I may just ask you for a few closing comments before I redirect investors on the call to give you their feedback. Alright.

1:16:36 Well, look, I think it's it's obviously a very interesting time for for the world and the business. We feel that we've got a lot going on. We've learned a lot over the last two years about our business, about flexibility, and our direction of travel. We think we're well positioned. We've got a few challenges to overcome, but we we know how we're gonna do that. And, you know, we're looking forward to, you know, you know, kind of sunny uplet sun sunlit uplands or something, whatever the phrase is. But I think we are optimistic about business, but we are kind of mindful of the economic situation right now, so we're not getting overly optimistic in in the very short term. But we've got a great portfolio of products, a good management team, and, you know, I I think we're we're we we got potential to perform very well.

1:17:36 So thanks for your support. That's great. David, Gary, thank you very much indeed for your time this afternoon and for updating investors. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback order the management team can really better understand your views and expectations. This might take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of ZOTEFOAMS PLC, we'd like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.