TIDMZTF
RNS Number : 9827I
Zotefoams PLC
07 April 2020
Zotefoams plc
Preliminary Results (unaudited) for the Year Ended 31 December
2019
7 April 2020 - Zotefoams plc ("Zotefoams" or "the Company" or
"the Group"), a world leader in cellular material technology, today
announces its unaudited preliminary results for the financial year
ended 31 December 2019.
Continued strategic progress
Financial highlights
-- Group revenue broadly in line with previous year at GBP80.86m
(2018: GBP81.04m)
-- Growth in HPP and MEL offset challenging market conditions
which impacted Polyolefin Foam sales in the second half of
the year
* HPP sales up 20% to GBP26.48m (2018: 22.01m)
* MEL revenue increased by 59% to GBP3.10m (2018:
GBP1.95m)
* Polyolefin Foams sales declined by 10% to GBP51.36m
(2018: GBP57.16)
-- Gross profit margin robust at 35.4% (2018: 35.8%) with positive
mix offsetting higher depreciation and operating costs from
new strategic assets
-- Profit before tax and exceptional item* of GBP8.76m (2018:
GBP10.81m)
-- Profit before tax broadly in line with previous year, at GBP9.81m
(2018: GBP9.86m)
-- Basic EPS before exceptional item* down 20% to 14.91p (2018:
18.66p)
-- EPS up 1% to 17.10p (2018: 16.96p)
Strategic and operational highlights
-- Higher margin HPP sales now account for 33% of Group revenue
(2018: 27%) and 53% of consolidated segment profit (2018:
43%)
-- Return to growth for MuCell Extrusion LLC and significant
new opportunity created with ReZorce(R) mono-material barrier
packaging
-- Sales entity established in India to capitalise on the potential
for T-FIT(R) technical insulation products
-- Capacity increases completed in the UK (commissioned Q4 2019)
and the USA (commissioned in Q1 2020), both on time and to
budget and capacity increase in Poland on time and to budget,
with commissioning anticipated in H2 2020 subject to current
COVID-19 uncertainty
-- Launch of AZOTE(R) Adapt, an entirely new category of polyolefin
foams
-- In light of the unprecedented macroeconomic uncertainty at
the current time, the Group is focused on cash and cost management:
* Seeking appropriate cost reduction measures in the
business
* Deferring capital expenditure
* Suspension of dividend in the short term
* Relaxation of leverage covenant and sufficient
liquidity to provide flexibility to navigate through
current uncertainties.
Commenting on the year, David Stirling, Group CEO, said:
Zotefoams has a clear purpose and an organic growth strategy to
generate sustainable long-term value. Despite the difficult trading
conditions in our Polyolefin Foams business in the latter part of
2019, we have remained focused on delivery of this strategy and the
continued demonstrable progress in HPP and MEL underline the scale
of opportunities available to the Group. The strategic capacity
investments to support our long-term growth expectations are on
track and while market demand and the unprecedented macroeconomic
uncertainty will affect the pace of ramp-up in utilisation in the
near term, these assets provide a platform for significantly
enhanced returns over the medium term.
Outlook
On 24 March 2020 we made the statement below.
The challenging market conditions experienced in the latter part
of 2019, particularly within our Polyolefin Foams business, have
yet to improve noticeably. Adding to this, the outbreak of the
COVID-19 virus is causing additional disruption.
Based largely on the expected demand profile for HPP products
across a number of markets, the Board anticipates a stronger
performance during the second half of the year. We are, however,
mindful that the further spread of the virus, and responses to
this, have created significant uncertainty in the near term with
likely adverse trading impacts on operations and demand
patterns.
In light of these exceptional circumstances, Zotefoams is
currently focused on cash, including cost and capital management,
and maintaining core operational capability across our business. We
have a diverse customer base and strong competitive position, with
our proprietary product portfolio focused on long term structural
growth applications. This enables Zotefoams to continue to develop
attractive new markets for its products and underpins the Board's
confidence in the Group's future prospects.
As expected, since 24 March 2020 market conditions have remained
challenging, with high levels of customer uncertainty, subdued
market demand and rapid response times expected by customers. Using
recently commissioned Group capacity, Zotefoams has aggressively
targeted market share in discrete segments, the benefit of which is
slowly being realised. We have also implemented strict cost and
capital control throughout the business and are considering all
elements of government support across our operating sites around
the world. As a result of the measures the Group is taking, we
believe we have sufficient liquidity to navigate through this
uncertain period.
* Exceptional item represents a credit of GBP1.05m from a
Defined Pension Scheme litigation award (2018: GBP0.95m charge
related to the legal ruling around guaranteed minimum
pensions).
Enquiries:
Zotefoams plc +44 (0) 208 664 1600
David Stirling, Group
CEO
Gary McGrath, Group CFO
IFC Advisory (Financial
PR & IR) +44 (0) 203 934 6630
Graham Herring
Zach Cohen
About Zotefoams plc
Zotefoams plc (LSE - ZTF) is a world leader in cellular
materials technology. Utilising a variety of unique manufacturing
processes, including environmentally friendly nitrogen expansion
for lightweight AZOTE(R) polyolefin and ZOTEK(R) high-performance
foams, Zotefoams sells to diverse markets worldwide. Zotefoams uses
its own cellular materials to manufacture T-FIT(R) advanced
insulation for demanding industrial markets. In addition, Zotefoams
owns and licenses patented microcellular foam technology, developed
specifically for extrusion applications, from a base in
Massachusetts, USA to customers worldwide.
Zotefoams is headquartered in Croydon, UK, with additional
manufacturing sites in Kentucky and Oklahoma, USA (foam products
manufacture and conversion), Massachusetts, USA (MuCell Extrusion)
and Jiangsu Province, China (T-FIT(R)). A third foam-manufacturing
site, in Poland, is planned to begin operations in 2020.
www.zotefoams.com
AZOTE(R), ZOTEK(R), T-FIT(R), ReZorce(R) are registered
trademarks of Zotefoams plc
An introduction from our Chair
Making good strategic progress
Overview
In a year which ended with a very challenging demand
environment, we have made good strategic progress. We continued to
deliver strong growth in our High-Performance Products (HPP)
business, improved our revenue base and opportunities for future
growth in MuCell Extrusion LLC (MEL) and all capacity expansion
investments to support our medium-term growth ambitions completed
as planned or are on track to do so. In our Polyolefin Foams
business, following a good start to the year, market demand,
particularly in continental Europe, deteriorated rapidly in the
second half of the year. This situation was exacerbated by
significant customer de-stocking and while cost actions were taken,
the Group's overall financial performance was weaker than the
previous year as a result.
Performance
In 2019, Group revenue was GBP80.86m, broadly in line with 2018
(GBP81.04m). Operating profit before exceptional item was down 21%
at GBP9.10m (2018: GBP11.57m) and operating profit was down 4% at
GBP10.15m (2018: GBP10.62m). Basic earnings per share before
exceptional item was down 20% at 14.91p (2018: 18.66p) and basic
earnings per share was up 1% at 17.10p (2018: 16.96p).
HPP is our fastest growing business unit and sales grew 20%, in
line with our strategic targets. MEL, while still small, grew sales
by 59%, driven by increased equipment revenue. The Polyolefin Foams
business, which is the largest part of the business and whose
volumes provide significant cost absorption to drive profitability,
declined 10% amid macroeconomic and geo-political uncertainty.
Being a manufacturing exporter, the Group is subject to foreign
currency volatility, which it seeks to mitigate through hedging of
its net operating cash flows and using foreign currency denominated
debt to offset the Company's exposure on its third party net assets
as well as its intercompany loans and trading positions. While not
affecting the cash profitability of the business, the impact of
foreign exchange translation losses in 2019 of GBP0.47m (2018:
gains of GBP0.99m) represented a significant adverse swing from the
prior period.
The equity raise and refinancing of 2018 have provided Zotefoams
with funds to complete our major capacity investment programme and
finance the additional working capital required for growth. The
timing of the cyclical downturn in Polyolefin Foams, exacerbated by
the unprecedented economic uncertainty from COVID-19, at the same
time as these capacity investments complete, has adversely impacted
returns on capital and will result in peak debt levels and debt
leverage (net debt to EBITDA) being higher than previously
anticipated. We believe the Group has sufficient liquidity and
expect to remain within revised covenant levels.
Delivering our strategy
The Board reviews strategic plans throughout the year and this
forms the basis for our decision-making. We have a clear and
consistent long-term strategy for organic growth, based around the
three long-term megatrends of regulation, environment and
demographics, all of which drive demand for our products. We use
our unique technology to deliver stakeholder value by creating a
portfolio of differentiated products which provide demonstrable
benefits to our customers. Our strategic objective is to achieve
annual growth in our Polyolefin Foams business of at least twice
global GDP and develop HPP and MEL businesses that offer enhanced
growth rates and margins, while growing operating margins and our
return on capital over the investment cycle. During 2019, we have
materially grown our HPP and MEL businesses in line with our
strategy and have further developed our pipeline of opportunities
to sustain high rates of growth. We have also maintained our focus
on completing our capital expansion programme, expected to provide
the capacity to support demand through our strategic plan period.
We successfully completed our investment in the USA and the UK and
expect to commission our Polish manufacturing facility in H2
2020.
The Board is very aware of the current plastics debate and the
importance of sustainability with respect to driving desired
outcomes for all stakeholders in the future. Zotefoams' products
are used almost exclusively for permanent solutions and often form
part of our customers' sustainability agenda. They are seldom used
for single-use purposes which, understandably in certain
applications, is causing most public concern. We believe that
plastics, used appropriately, remain the optimal solution both
functionally and environmentally for our customers' needs. We also
recognise the importance of continuous improvement around product
development and operating efficiency to reduce the Group's
environmental impact.
Governance and the Board
The Board sets out to deliver the highest standards of corporate
governance and has remained abreast of developing governance
standards. We have continued to prioritise a safe working
environment for our staff across all global locations and have
improved the visibility and quality of safety performance data
across the business. We continue to support and empower our
employees and are meeting our commitment to enhancing the employee
voice in the boardroom through the appointment of Mr Carling as
Board representative for workforce engagement. With the help of a
diverse group of employee representatives and seeking to represent
the interests of all stakeholder groups, we have articulated the
purpose of Zotefoams to be "Optimal material solutions for the
benefit of society". We feel this perfectly encapsulates all three
business units and reflects our alignment with the megatrends of
environment, regulation and demographics. The Board considers that
it has fully applied all the principles and provisions of the UK
Corporate Governance Code during 2019.
During the year there were no changes to the experienced and
engaged Board who have continued to provide challenge, support and
guidance to the Executive Directors on the delivery of our
strategy. Board succession planning is key to preserving this
position and to that end we are pleased to be appointing Catherine
Wall and Alison Fielding to the Board with effect from 14 May 2020.
Both will bring highly relevant skill and experience to the Board.
Mrs Fielding will replace Mrs Bromfield as Chair of the
Remuneration Committee, who will leave the Board on 13 May 2020.
Mrs Bromfield has served Zotefoams since 2014 and departs with our
sincerest thanks for her wise counsel and leadership of the
Remuneration Committee and her valuable strategic and cultural
insights.
People
Our people are key to our success. During the year we have
welcomed the first group of employees who will help ensure the
success of our Poland manufacturing location, as well as the first
group of employees to our new Indian organisation who will help
achieve our ambitious growth targets in our T-FIT(R) technical
insulation business. Having the right people at Zotefoams, who
understand and promote our culture, act at all times with
integrity, safety-consciousness and dedication and possess the
right knowledge and skills, is critical to our future success. I
would like to welcome the new employees who have joined us around
the world during the past 12 months and extend my thanks, once
again, to all our hard-working employees and their supportive
families who have helped the Group continue to make good strategic
progress while managing the challenges faced by our Polyolefin
Foams business unit.
Dividend
The Board has a progressive dividend policy, recognising the
importance to our shareholders of the dividend as part of their
overall return. However, as described above, the extraordinary
uncertainty posed by the COVID-19 outbreak means that we are
focused on minimising cash outflows and strengthening our financial
position in the short term. As such, the Board believes it is
prudent not to recommend a final dividend for the year ended 31
December 2019 (2018: 4.15p). The Board will keep this situation
under review and will determine the timing for resumption of
dividends as economic conditions stabilise.
Summary
In 2019, Zotefoams delivered good strategic progress in the face
of very challenging macroeconomic conditions. Looking ahead, while
the ongoing impact of the COVID-19 virus is generating significant
uncertainty, we continue to benefit from an attractive product
portfolio, strong competitive positions in our markets, and a broad
range of growth opportunities which maintain our optimism in the
future prospects of the business, our commitment to the Group's
strategy, and the investments which underpin it.
Steve Good
Chair
7 April 2020
Group CEO's review
Good strategic progress in a weaker demand environment
United Continental North Rest of
2019 Kingdom Europe America the World Total
------------------------ --------- ----------- --------- ---------- ---------
Change % (2)% (13)% 3% 19% 0%
Group revenue (GBP'000) GBP12,875 GBP25,503 GBP22,010 GBP20,472 GBP80,860
% of Group revenue 16% 32% 27% 25% 100%
------------------------ --------- ----------- --------- ---------- ---------
2018
Group revenue (GBP'000) GBP13,137 GBP29,342 GBP21,340 GBP17,218 GBP81,037
% of Group revenue 17% 36% 26% 21% 100%
------------------------ --------- ----------- --------- ---------- ---------
Zotefoams takes a long-term approach to delivering organic
growth through investment in our product portfolio, unique
technology, people and processes. Our strategy is focused around
key market trends in an increasingly global business. In 2019, we
delivered good growth from our HPP and MEL business units, while
Polyolefin Foams sales decreased by 10%, reflecting much lower
levels of demand in key Western Europe and North American markets
in the second half of the year. As a predominantly UK-based
exporter, the impact of movements in foreign exchange rates can
also be material, particularly the non-cash impact of translation
differences, which negatively impacted profit before tax in the
period by GBP0.47m (2018: benefit of GBP0.99m). Group revenue was
at a similar level to 2018, GBP80.86m (2018: GBP81.04m), while
profit for the year before income tax and exceptional item declined
by 19% to GBP8.76m (2018: GBP10.81m). Adjusting for the
aforementioned FX movement, profit for the year before income tax
and exceptional item declined by 6% to GBP9.23m (2018:
GBP9.82m).
Strategy update
Zotefoams' strategy is to invest in flexible assets with unique
capability, to initially fill these assets with relatively lower
margin business where required, then pursue longer-term mix
enrichment strategies to generate higher returns and margins. This
is more difficult to achieve during a short-term cyclical downturn,
but we expect benefits from an initial improvement in utilisation
once the macroeconomic environment improves, followed by further
enhancement in return from increasing proportions of higher margin
business.
As the world around us changes we regularly re-test our
strategy. The significant decline in the demand for polyolefin
foams during the second half of 2019, we believe, is largely
cyclical and exacerbated by inventory reductions through the supply
chain. Since 2017, we have made significant, long-term investments
in further capacity for our unique manufacturing process. These
have been recently commissioned, or are in the latter stages of
commissioning, and the fall in demand for polyolefin foams means
that some of these assets are currently under-utilised. We believe
we have the product portfolio and underlying market potential to
grow to planned levels of utilisation and that our existing
strategy will deliver stakeholder value over the coming years.
Investing in long-term assets at the appropriate time in the right
places is one of the core challenges to implementing our strategy,
alongside allocation of resource across a portfolio of products and
markets, development of an organisation with flexible, talented
people and a culture to support growth.
Zotefoams remains well positioned competitively and
environmentally. Our core materials offer improved product
performance using less material than competitors, and MEL licenses
technology specifically to reduce polymer content. The emergence of
what we see as a strongly negative public perception of plastic is
now becoming more nuanced beyond the environmental impact of
ill-considered, single-use plastic, used predominantly in consumer
packaging. Zotefoams' current markets are not immediately impacted
by this, as products using our foams are primarily integral
components in larger systems or products (such as cars, planes,
footwear, medical parts) or used in the long-term storage of items.
They are very rarely used in consumer disposable items. Our foams
save weight and fuel in cars, trains and aircraft, save energy by
insulating, and provide protection to people and goods. Our
products help our customers reduce emissions, lower energy usage,
improve fuel efficiency and comply with increasingly stringent
safety regulations. In common with other businesses, we seek to
minimise the use of natural resources through measures such as
reducing energy and polymer usage, which benefits the environment
and reduces our costs. In the medium term, we anticipate our
technology being used to meet the growing demand for improved
sustainability, with foams which include recycled or
renewable-content polymers.
The markets in which we operate are driven by global trends -
demographic, environmental and regulatory - which we believe offer
potential for high rates of market growth as well as opportunity
for our disruptive technology solutions.
We measure strategic progress on four metrics, all before
exceptional items:
1. Our HPP and MEL Business Units, which offer these unique,
disruptive products and solutions, together now account for 37%
(2018: 30%) of Group revenues. HPP and MEL increased combined sales
by 23% to GBP29.57m (2018: GBP23.95m), which is a pleasing
performance. The unique benefits offered by these products combined
with a focus on selling into structural growth niches means that we
expect strong further growth in these product lines in the
future.
2. Sales of our highly differentiated AZOTE(R) polyolefin foam
products declined by 10% (2018: growth of 8%), against our target
rate of twice global GDP growth. Decreasing demand in the main
markets of Western Europe and North America, specifically in the
second half of the year, significantly impacted our sales in the
Polyolefin Foams Business Unit. Reductions in inventory levels of
customers, which contributed to the sharp decline in the second
half of 2019, would normally be expected to reverse as underlying
demand improves, although the uncertainty in the current economic
environment is likely to contribute to lower levels of inventory at
customers for the foreseeable future.
3. Group operating margins before exceptional item were 11.3%
(2018: 14.3%). Despite the flat sales performance, gross margins
remained robust, with the structural mix benefit of continued
growth in HPP being offset slightly by increased depreciation from
new assets. Continued investment in sales teams globally, to ensure
we have the commercial platform to maximise the opportunity from a
growing product range, led to a significant increase in
distribution costs, and adverse foreign exchange translation
movements increased administration costs. We expect future sales
growth to improve operating margins, although recent investments
add to fixed depreciation and production overheads, which will now
take longer to absorb in this weaker demand environment for
polyolefin foams. We also expect licensing revenues at MEL to
increase, which will have a positive impact on profit margins, and
are optimistic about opportunities from our recently launched
ReZorce(R) technology in the medium term.
4. Group return on capital, which excludes large asset
investments not yet commissioned, declined to 10.5% (2018: 16.5%).
The Group has invested in a large capacity enhancement programme
over recent years, including significant expenditure in the
supporting infrastructure that will be sufficient to support
further capacity at much lower incremental cost. The committed
large-scale increases in capacity ends with the commissioning of
our Poland facility, at which point the Group will be well invested
to support future growth, and capital spending will return to more
normal, lower levels, broadly in line with depreciation. The net
assets of the business will have increased significantly and
improvements in the return on capital over the coming years will
largely arise from planned profitable sales growth which will
gradually deliver improved utilisation of this additional
investment.
We believe Zotefoams' investments are consistent with our strong
portfolio of business opportunities and will support strong organic
growth in line with our stated strategic intent.
People and embedding our culture to deliver
The top priority for Zotefoams is ensuring the health and safety
of employees and site visitors. The Board tolerance for risk is set
accordingly and health and safety is an agenda item at every Board
and Executive Committee meeting. We recognise that culture, and
specifically the behaviour of all employees, has a significant
impact on safety risk and performance. Management therefore has a
clear priority to ensure that safety behaviour and culture are
continuously improved across our business and we will not be
satisfied until we achieve our goal of no-one getting hurt while
working at Zotefoams. In 2019, the number of reportable lost time
incidents across the Group reduced to 1 (2018: 4).
Following a few years of rapidly increasing headcount to support
new business and initiatives, 2019 was a year of consolidation.
Developing our organisational capability and culture globally is
something which has, over the past few years, been essential for
delivering our strategy. We have made significant investments over
the past five years in increasing and developing our workforce
which, by the end of 2019, numbered 445 people (2018: 443), an
increase of 33% since 2015 (334 people). In 2019, 84% of our
revenues came from outside the UK and our non-UK headcount
comprises 33% of our global workforce. Continuing to manage non-UK
based employee growth, such as in our Poland facility, as we scale
up our international operations, ensuring governance and building a
strong culture remain a primary focus for management. Zotefoams'
culture is based around our four brand values: pioneering,
reliable, responsible and trustworthy. It also strives for further
development as a learning organisation, where lessons from failure
may be the first step forward, where employees understand how we
all contribute to the business and where we celebrate success and
value the contributions of others. Within this structure, business
units and brand leaders have significant autonomy to operate in a
dynamic environment.
Key investments
To match Zotefoams' growth ambition and attractive pipeline of
opportunities we require sufficient capacity to meet projected
demand for our products. A key challenge we face is that our
capacity investments, which involve significant infrastructure and
bespoke machinery, take time to bring on stream and are costly. The
first increment of capacity on any site requires disproportionately
high investment in infrastructure, but subsequent investment on the
site can then be made more cost-effectively and quickly. As foams
are bulky and can be expensive to transport over long distances,
the manufacturing location also plays a major part in any
investment decision as customers want optimised transport and swift
service.
Since 2014 we have invested GBP53.4m in growth capital,
including two high-pressure autoclaves and matched extrusion
capacity in Kentucky, USA, two high-temperature, low-pressure
autoclaves in the UK, again with associated extrusion capacity, and
our new facility in Poland. This Poland facility is planned to be
available for production during the second half of 2020, albeit at
lower utilisation rates than initially anticipated in the early
stages of operation given the current challenging polyolefin foams
market. Since 2017, we will have increased Group capacity by
approximately 60% and, with investment in latest generation
technology, significantly improved the capability of our assets to
produce the full range of Zotefoams' innovative products. This is
particularly important to support the fast growing HPP Business
Unit, which is currently supplied from our UK site and, as this
business grows, will utilise more of the available capacity on
site. The Poland site is ideally placed to support and grow the
Polyolefin Foams business in Europe.
Both the USA and Poland sites have been constructed with the
option for further investment. For example, the Poland site could
double its capacity for polyolefin foams with cost-effective
investment on approximately an 18-month lead time. This gives
Zotefoams the ability to react to increases in demand for all
products, with an increase in HPP foams supplied via the UK and
increasing supply to European customers from Poland.
COVID-19
While our China-based customers and our own relatively small
processing facility for T-FIT(R) technical insulation in China
returned to work at the beginning of March, following an extended
closure post Chinese New Year, the global outbreak of COVID-19 is a
constantly developing situation. We are not in a position at this
stage to speculate on the duration nor its future impact on the
broader global customer base of the Group; however, we have put
appropriate measures in place as we continue to monitor
developments. The health and safety of our colleagues, their
families and our business partners remain our primary concern and
public health measures advised by governments are being followed in
support of their efforts to contain the spread of the virus. The
supply chain is being proactively managed as are operating costs
and the timing of capital expenditure. We believe the Group has
sufficient liquidity and expect to remain within revised covenant
levels.
Forward-looking statements
Forward-looking statements have been made by the Directors in
good faith using information available up until the date they
approved these financial statements. These forward-looking
statements should be considered with caution, given the
unprecedented uncertainty surrounding the impacts of the COVID-19
virus on economic trends and business risks.
Current trading and outlook
On 24 March 2020 we made the statement below.
The challenging market conditions experienced in the latter part
of 2019, particularly within our Polyolefin Foams business, have
yet to improve noticeably. Adding to this, the outbreak of the
COVID-19 virus is causing additional disruption.
Based largely on the expected demand profile for HPP products
across a number of markets, the Board anticipates a stronger
performance during the second half of the year. We are, however,
mindful that the further spread of the virus, and responses to
this, have created significant uncertainty in the near term with
likely adverse trading impacts on operations and demand
patterns.
In light of these exceptional circumstances, Zotefoams is
currently focused on cash, including cost and capital management,
and maintaining core operational capability across our business. We
have a diverse customer base and strong competitive position, with
our proprietary product portfolio focused on long term structural
growth applications. This enables Zotefoams to continue to develop
attractive new markets for its products and underpins the Board's
confidence in the Group's future prospects.
As expected, since 24 March 2020 market conditions have remained
challenging, with high levels of customer uncertainty, subdued
market demand and rapid response times expected by customers. Using
recently commissioned Group capacity, Zotefoams has aggressively
targeted market share in discrete segments, the benefit of which is
slowly being realised. We have also implemented strict cost and
capital control throughout the business and are considering all
elements of government support across our operating sites around
the world. As a result of the measures the Group is taking, we
believe we have sufficient liquidity to navigate through this
uncertain period.
POLYOLEFIN FOAMS
AZOTE(R)
Group revenue: GBP51.36m. 2018: GBP57.16m. Change: -10%
Segment profit margin: 2018: 17%
14%.
Segment profit: GBP7.30m. 2018: GBP9.45m. Change: -23%
Sales in Polyolefin Foams declined by 10% to GBP51.36m (2018:
GBP57.16m). Sales volume fell by 14%, while improvements in product
mix combined with the benefit of modestly better exchange rates to
moderate this fall. Segment profit declined to GBP7.30m (2018:
GBP9.45m), with improvement activities unable to overcome the lower
absorption levels of fixed manufacturing costs, distribution and
administration costs arising from the lower activity level.
Included within manufacturing costs is additional depreciation,
consistent with our investment in capacity, which increased
allocated costs by GBP0.5m.
Zotefoams uses a commodity polymer, mostly low-density
polyethylene (LDPE) and, utilising unique autoclave technology,
creates AZOTE(R) polyolefin foams. These foams are more consistent,
lighter and possess higher purity than foams manufactured using
traditional chemical foaming technology. These attributes make our
foams ideal for multiple use or permanent product protection,
lightweight parts in aircraft, cars and trains, construction
applications and medical equipment.
The commercial focus of our AZOTE(R) Business Unit is to grow
revenues through closer collaboration with end users and channel
partners, to continually enhance our product range and deliver
capacity and efficiency improvements from production.
In the second half of the year, market conditions for polyolefin
foams in the UK and continental Europe deteriorated rapidly,
leading to a 15% decline in sales to these markets for the full
year, while sales in North America and Asia were relatively flat.
Supply chain destocking contributed to the fall in demand,
particularly in continental Europe. Customers for AZOTE(R) foams
are remarkably diverse, both geographically and in their use of our
foams, and in the second half we saw a broad decline in demand
across all major applications, such as product protection,
industrial and transportation (which includes automotive, rail and
aviation).
During the year, we delivered improvements in material and
energy usage in the UK and USA facilities, as well as improved
cycle times to increase efficiency and free up capacity, which will
improve business flexibility in the future. These improvements,
combined with an improved sales mix and active management of costs,
including labour, in the second half, were critical in reducing the
profit impact of the fall in sales in a highly operationally geared
business.
HIGH-PERFORMANCE PRODUCTS
ZOTEK(R) T-FIT(R)
2018: GBP22.01m
Group revenue: GBP26.48m. . Change: +20%
Segment profit margin:
24% . 2018: 26%
Segment profit: GBP6.43m. 2018: GBP5.81m. Change: +11%
HPP comprises ZOTEK(R) technical foams and T-FIT(R) insulation
products. Sales increased by 20% to GBP26.48m (2018: GBP22.01m) and
segment profit increased by 11% to GBP6.43m (2018: GBP5.81m). HPP
is a portfolio of products, where our unique autoclave technology
is applied to a variety of high-performance polymers to create
foams with specific attributes. These attributes, such as energy
management, excellent fire resistance, high-temperature performance
etc, are designed to meet the exacting needs of industries such as
sports equipment, aviation, automotive, biotech and pharmaceutical.
We see excellent opportunities to continue the growth experienced
to date and we allocate resource and development priority
accordingly.
The HPP Business Unit accounted for 33% of Group sales in 2019
(2018: 27%), with the two largest applications being footwear and
aviation. All major applications and products grew in the period
with the strongest performance coming from fluoropolymer foams,
which are largely used in aviation and in our T-FIT(R) technical
insulation range. Around half of HPP sales revenue is derived from
footwear products where, beginning in 2017, we have an exclusive
relationship with Nike.
We continue to work under an exclusive agreement with Nike,
where we believe we are able to optimise existing products and to
develop new materials to prove Zotefoams' wider capability as a
unique technology in this exciting market. With additional
equipment now commissioned in the UK, we have the capacity to meet
the planned demand increases for our product range that we
anticipate in the second half of 2020.
Sales of ZOTEK(R) F fluoropolymer foams increased by 28%
compared with 2018. Pleasingly, this was achieved despite the
backdrop of a more difficult aviation market due to the
well-publicised slowdown in demand from Boeing. Growth came from a
combination of new applications as well as increased penetration of
existing applications for aviation customers.
We have invested significantly in the sales resource and
manufacturing support for T-FIT(R) advanced insulation. In 2019,
sales increased by 33%, including a very strong performance from
India where we set up a sales office. These products are sold
mainly into biotech and pharmaceutical markets, with further
opportunity for strong growth in food, dairy and general process
industries.
Segment margin has been impacted somewhat by the allocation of
additional fixed manufacturing costs, primarily depreciation, from
newer assets and a lower absorption of such costs by the Polyolefin
Foams Business Unit as a result of that business unit's lower
volumes during the year. Further investment has also been made in
sales and administration costs, primarily for T-FIT(R) products,
increasing the losses in this product line but with a view to
accelerating growth, as well as in technical development costs
primarily related to second generation footwear products.
MEL
MuCell(R)
Group revenue: GBP3.10m. 2018: GBP1.95m. Change: +59%
Segment loss before amortisation:
GBP1.27m. 2018: GBP1.63m. Change : +22%
Segment loss after amortisation:
GBP1.55m. 2018: GBP1.89m. Change: +18%
MuCell Extrusion LLC (MEL) licenses microcellular foam
technology and sells related machinery. Sales increased by 59% to
GBP3.10m (2018: GBP1.95m) and segment loss, before amortisation,
declined to GBP1.27m (2018: loss of GBP1.63m).
MEL's business model is to develop and license intellectual
property (IP). MuCell(R) technology offers the potential to reduce
the plastic content of an article by around 15% by injecting inert
gas to displace plastic with microcellular bubbles. Using similar
technology, the team at MEL recently developed mono-material
barrier packaging technology, which we have branded ReZorce(R).
While MuCell(R) technology can be used with most common plastics,
ReZorce(R) technology is specifically designed for high-density
polyethylene ("HDPE"). In both cases, MEL will sell equipment to
augment an existing extrusion line and, when the licensee is in
production, MEL will collect a share of the value created as a
licence fee and/or royalty payment. Occasionally, MEL will source
an entire extrusion line at the request of the customer, who
considers this a better way to leverage fully the MuCell(R)
technology, in which case it also charges a small margin on the
entire contract.
2019 was a year of good strategic progress for MEL. Revenue
increased, driven by increased equipment sales, losses reduced and
we developed and filed patents around the mono-material barrier
technology. This improvement is on the back of 2018 where the
business was restructured mid-year to improve clarity over the
development of new accounts, delivery of machinery and financial
management.
Late in 2019 we began the construction of a $1m pilot production
line for MEL to develop customer applications on a commercial
scale. One of the major barriers to developing our technology in
the past has been the inability to run large-scale commercial
trials on customers' equipment, something outside the control of
MEL and often linked to the high utilisation rates of the
customers' production lines. The pilot line, which is expected to
be commissioned in the second quarter of 2020, addresses these
issues and will be available for customer trials prioritised for
the development of ReZorce(R) mono-material barrier packaging.
David Stirling
Group CEO
7 April 2020
Group CFO's review
Macroeconomic challenges delay financial progress
Overview
Following H1 growth in all business units and continued strong
performance from both our HPP and MEL businesses through H2,
Zotefoams experienced difficult H2 trading conditions within its
Polyolefin Foams business.
Group revenue for the year was GBP80.86m (2018: GBP81.04m), in
line with the previous year but 3% down in constant currency. HPP
had another very strong year, growing 20% (constant currency: 15%)
from GBP22.01m to GBP26.48m and MEL saw a pleasing growth rate of
59% (constant currency: 56%), up from GBP1.95m to GBP3.10m. The
Polyolefin Foams business was impacted in H2 by a cyclical decline
in demand, including inventory depletion across all geographies,
resulting in a 10% decline in revenue (constant currency: 12%) from
GBP57.2m to GBP51.4m. This was after the business unit reported H1
performance up 3% vs H1 2018 (constant currency: up 1%).
Operating profit before exceptional item was GBP9.10m (2018:
GBP11.57m), down 21%, while operating profit was GBP10.15m (2018:
GBP10.62m), down 4%. Excluding FX translation losses, operating
profit before exceptional item was down 10% at GBP9.57m (2018:
GBP10.58m), and operating profit was up 10% at GBP10.62m (2018:
GBP9.63m). Underlying performance was impacted by the rapid decline
in polyolefin foam sales in the latter part of the year and the
resulting adverse operational gearing impact. Once the cyclical
downturn became clear we managed certain costs lower in line with
the lower scale of operations but refrained from taking measures
which would have materially impacted our expected future growth
prospects once the macroeconomic environment improves. Given the
uniqueness of our business, a well-trained and experienced
workforce is important and cannot be replaced easily.
Zotefoams is in the final stages of an extensive strategic
capacity expansion programme. Our range of differentiated products
requires a unique technology which is capital intensive, has long
lead times and needs high levels of utilisation to leverage strong
returns. Timely investment is essential to meet our anticipated
organic growth opportunities. In 2019, the Group invested a total
of GBP25.3m, after investing GBP16.1m in the previous year. The
final major capacity expansion project, a new manufacturing
facility in Poland, is on track for completion later in 2020 at a
total cost of approximately GBP23m. A sizeable part of the Group's
investments during this capacity expansion period has been directed
towards generating the necessary infrastructure to run the
equipment, infrastructure which will be leverageable to support
future growth. This will moderate achievable returns on capital in
the medium term but provides high return opportunities as
incremental capacity is required to support further growth
opportunities at the same locations.
At 31 December 2019, net debt was GBP31.90m, (2018: GBP12.96m)
and leverage (net debt to EBITDA) was 2.0x (2018: 0.7x). Under the
definition of the bank facility agreement net debt, which adjusts
for the impact of IFRS 2 and IFRS 16, was GBP30.69m (2018:
GBP12.96m) and leverage was 2.0x (2018: 0.7x). While net cash
inflows from operating activities were GBP9.35m (2018: GBP4.49m),
the aforementioned investment programme required the Group to draw
down on its debt facilities, as expected.
Group revenue
Group revenue was at a similar level to the previous year, at
GBP80.86m (2018: GBP81.04m).
Polyolefin Foams sales decreased 10% versus 2018, with a decline
of 22% in H2 following an increase of 3% in H1, reflecting the
significant adverse change in demand conditions across a range of
our markets together with significant de-stocking by customers.
Regionally, all geographies were impacted as well as most sectors
within these geographies, with the UK down 12% and Europe, the
largest market for the business unit, down 16% (constant currency:
-16%). A North American slowdown in manufacturing demand was also
evident late in the year, with full-year sales ending up in line
with the previous year (constant currency: -5%). The single largest
impact globally came from German automotive, which was also the
earliest to show weakness.
HPP sales increased 20%. Footwear is the largest application
currently within HPP and revenue in this market grew 13% (constant
currency: +7%), benefiting from the full year impact of sales
programmes initiated late Q1 2018. ZOTEK(R) F fluoropolymer foams
delivered strong growth of 28% (constant currency: +23%) and
T-FIT(R) advanced insulation grew 33% (constant currency: +31%),
albeit from a lower base. During the year, Zotefoams established a
subsidiary in India, primarily to support T-FIT(R) sales, and sales
from this country surpassed $1m.
MEL sales increased 59% (constant currency: 52%), again from a
relatively low base, with equipment sales driving growth.
Revenue by market
(%) 2019 2018
-------------------------- ---- ----
Product protection 29 30
-------------------------- ---- ----
Transportation 22 22
-------------------------- ---- ----
Sports and leisure 20 19
-------------------------- ---- ----
Building and construction 12 12
-------------------------- ---- ----
Industrial 9 9
-------------------------- ---- ----
Medical 6 6
-------------------------- ---- ----
Other 2 2
-------------------------- ---- ----
Within the transportation segment, aviation represented 15%
(2018: 13%) and automotive 7% (2018: 9%) of Group revenue.
Gross margin
Gross margin remained stable at 35.4% (2018: 35.8%). The
increased proportion of sales from HPP had a positive benefit on
gross margin, in line with strategy, but the lower plant
utilisation rates following the Polyolefin Foams downturn, coupled
with full-year depreciation charges from the Group's new US assets,
amounting to an additional GBP0.5m, and additional operating cost
from the Group's investment in its international operations,
amounting to GBP0.8m, offset this benefit. Zotefoams' strategy is
to fill these assets, with relatively lower margin business where
required, then pursue longer-term mix enrichment strategies to
generate higher returns and margins.
Distribution and administrative costs
The Group continues to pursue its expansion strategy, founded on
proprietary cellular materials technology linked to longer-term
demand growth in our chosen markets. Organic growth with a
portfolio of unique and highly differentiated products requires
that we invest actively in, and reprioritise where needed,
technical, sales-focused and administration resources to create,
execute and manage this growth.
Included within distribution costs in the consolidated income
statement are sales and marketing, and warehousing expenses. These
costs increased by 11% to GBP8.00m (2018: GBP7.19m) during the
year, mostly reflecting investment in sales capability in the China
and India locations of the T-FIT(R) Business Unit, as well as the
full-year impact of sales capability in other ZOTEK(R) business
units. Included within administrative expenses before exceptional
item are technical development, finance, information systems and
administration costs as well as the impact of foreign exchange
hedges maturing in the period and non-cash foreign exchange
translation expenses. These costs increased by 12% to GBP11.50m in
2019 (2018: GBP10.24m); however, they include a combined net loss
from foreign exchange hedging contracts and foreign exchange
translation of GBP1.41m (2018: net gain GBP0.82m). See Currency
review for further information and context. Without these foreign
currency factors, administrative expenses before exceptional item
were down GBP0.98m, reflecting reduced variable pay awards and H2
cost management.
The Business Unit results do not include central plc costs,
which are not considered to be segment specific. In 2019, central
plc costs were GBP1.68m (2018: GBP2.62m).
Finance costs
The total interest charge for the year was GBP0.46m (2018:
GBP0.75m) and includes GBP0.20m (2018: GBP0.14m) of interest on the
Company's Defined Benefit Scheme (the "DB Scheme") pension
obligation. It also includes GBP0.03m (2018: nil) related to the
impact of IFRS 16. The Group capitalised GBP0.93m (2018: GBP0.03m)
of interest in relation to the financing of its capacity
enhancement projects still under construction. Capitalised interest
in 2018 was significantly lower as a result of a lower net debt
level following the equity raise of GBP20.00m (after directly
attributable costs) in May of that period.
Profit before tax
Profit before tax and exceptional item decreased by 19% to
GBP8.76m (2018: GBP10.81m). Profit before tax was similar to the
previous year at GBP9.81m (2018: GBP9.86m).
Exceptional item
During the year, the Company was successful in a claim against
the previous advisers to the DB Scheme following legal advice that
the linkage to future increases in salary had not been properly
broken. The Company was awarded GBP1.05m, including GBP0.11m of
expenses, following mediation and has recorded this as an operating
exceptional item in the income statement.
In the previous year, the Company recognised an additional
liability in respect of a legal ruling around guaranteed minimum
pensions. This represented a charge of GBP0.95m, including GBP0.01m
of expenses, and was considered an operating exceptional item in
the income statement.
Currency review
Zotefoams is a predominantly UK-based exporter. In most cases,
we invoice in local currency. In 2019, approximately 87% of sales
were denominated in currencies other than sterling, mostly US
dollars or euros. Most operating costs are incurred in sterling,
other than the main raw materials for polyolefin foams used for
production in the UK, which are euro-denominated, and US subsidiary
production, operating cost, other subsidiaries staff, operational
cost and some HPP raw materials, which are US
dollar-denominated.
Movements in foreign exchange rates can have a significant
impact on results. The Group therefore uses forward exchange
contracts to hedge its foreign currency transaction risk and hedges
its exposure to foreign currency denominated assets, where
possible, by offsetting them with same-currency liabilities,
primarily through borrowing in the relevant currency. These foreign
currency denominated assets, which are translated on a mark to
market basis every month and the movement taken to the income
statement, include loans made by the Company to, and intercompany
trading balances with, its overseas subsidiaries, the effect of
which is cash neutral. They also include non-sterling accounts
receivable, held on the Company's statement of financial position,
the impact of which should reverse through forward currency
contracts, but are subject to the timing difference between
accounts receivable recording and cash received. The Group does not
currently hedge for the translation of its foreign subsidiaries'
assets or liabilities. This policy is kept under regular review and
is formally approved by the Board on an annual basis.
During the year, the sterling average exchange rate against the
US dollar weakened by 4.6%, while the sterling average exchange
rate against the euro strengthened by 0.9%. The sterling spot rate
against the US dollar from December 2018 to December 2019
strengthened by 3.2% and the sterling spot rate against the euro
from December 2018 to December 2019 strengthened by 5.3%. Net
revenues benefited from GBP2.06m of currency effect, which were
offset by GBP0.93m of operating costs to yield a net benefit before
hedging of GBP1.13m. The Group generated a net loss on forward
contracts of GBP0.94m (2018 loss: GBP0.18m), resulting in a
positive net transactional foreign currency impact of GBP0.19m in
the year (2018: negative impact of GBP1.12m), a year-on-year
positive swing of GBP1.31m.
In addition, the Group recorded a translation loss of GBP0.47m
(2018 gain: GBP0.99m), representing a year-on-year negative swing
of GBP1.46m, and resulting in a total net FX impact on the income
statement year-on-year of GBP0.1m. The Group's borrowings facility
is held by Zotefoams plc, the parent company, which has provided
intercompany funds to the USA and Poland to complete the Group's
capacity expansion projects. Together with a growing footwear
business, which is invoiced in US dollars, the net exposure to
foreign currency denominated net assets has increased.
The combined income statement impact in the year of
transactional and translational foreign currency movements was a
charge of GBP1.41m (2018: gain of GBP0.82m).
We expect future growth to come mainly from outside the UK and
recognise that one of our key risks is our exposure to foreign
currency fluctuations, particularly in the US dollar. While this
exposure will increase as the Group grows faster outside of the UK,
we are mitigating this transaction risk short term through hedging
activities and longer term through investment in overseas operating
locations. We recognise, however, that inherent risk will remain.
Based on 2019, it is estimated that, with respect to transaction
risk and for every one percentage point movement in the USD/GBP
rate, profit moves by GBP0.26m unhedged and GBP0.02m hedged. In the
year, it is assumed that the transaction exposure from
euro/sterling movements continue to be substantially naturally
hedged, with sales revenues offset by costs, primarily related to
raw material purchases and certain further processing costs.
The translation movements of foreign currency denominated net
assets in the Company's statement of financial position are, to the
extent possible, hedged firstly through drawing down debt in the
relevant currency. This debt has steadily grown through the year,
helping to reduce exposure. With the Group's capacity investments
close to completion, intercompany debt and intercompany trading
accounts will peak and begin to fall as cash flows from those
subsidiaries are used to pay back these positions.
Currency impact on business segments in 2019
Group revenue GBPm
Net change %
----------------- --------- ---------- --------- ------------------
2019 2019 2018
Reported Adjusted* Reported Reported Adjusted
----------------- --------- ---------- --------- -------- --------
Polyolefin Foams 51.36 50.48 57.16 (10) (12)
HPP 26.48 25.37 22.01 20 15
MEL 3.10 3.03 1.95 59 56
Eliminations (0.08) (0.08) (0.07) - -
Group 80.86 78.80 81.04 0 (3)
----------------- --------- ---------- --------- -------- --------
* Constant currency, adjusting 2019 values to 2018 rates.
Exchange rates
Zotefoams transacts significantly in euros and US dollars. The
exchange rates used to translate the key flows and balances
were:
2019 2018
---------------------------- ---- ----
GBP to euro - average 0.88 0.88
GBP to euro - year-end spot 0.85 0.90
GBP to USD - average 0.79 0.75
GBP to USD - year-end spot 0.76 0.78
---------------------------- ---- ----
Tax and earnings per share
The effective tax rate for the year, before exceptional item, is
18.20% (2018: 18.54%), which is in line with the Group's weighted
average corporate tax rate for the year of 18.72% (2018: 17.99%).
The effective tax rate for the year is 16.25% (2018: 20.32%), the
decline being due to larger 2017 R&D expense reclaims than
calculated in the estimated tax charge for that period. Net income
tax paid during the year was GBP2.33m (2018: GBP2.14m).
Basic earnings per share before exceptional item was 14.91p
(2018: 18.66p), a decrease of 20%. Basic earnings per share was
17.10p (2018: 16.96p), an increase of 1%. In May 2018, the Group
increased its share capital by 8.8% (3,886,792 shares) to
48,301,234 shares through a placing, and the dilutive impact of
this is 1.32p on basic earnings per share before exceptional item
(2018: 1.03p) and 0.71p on basic earnings per share (2018:
0.93p).
Dividend
The Board has a progressive dividend policy, recognising the
importance to our shareholders of the dividend as part of their
overall return. However, as described within these preliminary
results, the extraordinary uncertainty posed by the COVID-19
outbreak means that we are focused on minimising cash outflows and
strengthening our financial position in the short term. As such,
the Board believes it prudent not to recommend a final dividend for
the year ended 31 December 2019 (2018: 4.15p). The Board will keep
this situation under review and will determine the timing for
resumption of dividends as economic conditions stabilise.
Investments
Zotefoams' strategy is focused primarily on organic growth. Over
the past five years, Zotefoams has invested GBP72.4m in property,
plant and equipment, including capitalised interest, 75% of which
has been to increase capacity in its unique technology. In 2020,
the new manufacturing facility in Poland will be completed, at
which point the scale of growth capital will significantly reduce.
With infrastructure in place in the USA and Poland for incremental
capacity expansion at significantly lower cost, cash flow and
return on capital employed will improve quickly as revenue
grows.
2015 2016 2017 2018 2019 Total
------------------------------ ---- ---- ---- ---- ---- -----
Growth capital 6.1 6.9 7.8 12.8 19.8 53.4
Capitalised interest - - - - 0.9 0.9
Maintenance capital 2.6 5.2 3.6 3.0 3.7 18.1
------------------------------ ---- ---- ---- ---- ---- -----
Total investment in property,
plant and equipment 8.7 12.1 11.4 15.8 24.4 72.4
------------------------------ ---- ---- ---- ---- ---- -----
Given the capital-intensive nature of the Zotefoams business,
long lead times for key equipment and the importance of operational
gearing, investment decisions require significant planning and are
made with a clear assessment of strategic fit, risk and risk
appetite. Confidence in the Group's developing portfolio of HPP
opportunities is a significant consideration in determining the
timing of certain investments, while the strategic importance of
maintaining growth in the profitable Polyolefin Foams business, the
Group's largest volume product range, informs the decision to
increase total Group capacity versus relying solely on mix
enrichment.
Investment decisions target improvements in the Group's return
on capital over the investment cycle, while recognising the
short-term impact on this return during construction and operating
initially at lower utilisation levels. When Zotefoams embarks on
investment in a major expansion or new location, such as
installation of extrusion and high-pressure capability at our
existing Kentucky, US site, or the current investment in foam
manufacturing at the Poland site, we take into account the
importance of scale and dilution of heavy infrastructure cost over
a (future) second or third line. As such, the first step is
invariably more dilutive to capital return than any subsequent
investments.
Zotefoams defines the return on capital employed (ROCE) as
operating profit before exceptional items divided by the average
sum of its equity, net debt and other non-current liabilities. This
measure excludes acquired intangible assets and their amortisation
costs. We also exclude significant capacity investments under
construction until they enter production. We do not attempt to
adjust for the first phase inefficiencies as mentioned above. In
2019, the return on capital employed decreased to 10.5% (2018:
16.5%). The cause of this movement is reduced operating profit
resulting from a reduction in polyolefin foam sales and consequent
reduced rate of asset utilisation, at the same time as an
increasing capital base from the full year impact of the first
production line and infrastructure in the USA. If the capacity
investments still under construction were also included, the return
on capital employed reduced to 8.1% from 12.8% in 2018.
Zotefoams is reaching the end of this significant investment
programme. Completing the Poland investment, with a 2020 estimated
expenditure of GBP7.3m and an expected start-up date in late 2020,
both subject to current COVID-19 uncertainty, is the final stage of
this programme, after which we expect capital investment to return
to lower levels more in line with the depreciation charge.
Cash flow and net debt
Net cash inflow from operations before investment in working
capital decreased 12% to GBP15.39m (2018: GBP17.48m). Without the
award of GBP1.05m following successful litigation specific to the
DB Scheme, see Post-employment benefits below, net cash inflow from
operations before investment in working capital decreased 18% to
GBP14.34m, reflecting the downturn in the Polyolefin Foams business
but still demonstrating the strong cash-generative nature of the
business. GBP1.94m (2018: GBP9.75m) of this was re-invested in
working capital. Trade and other receivables reduced GBP2.66m
(2018: increased GBP6.36m), reflecting a more stabilised position
for the HPP footwear business following the very strong final
quarter of the previous year, and the lower level of Polyolefin
Foams activity in Q4. Inventories increased GBP0.89m, with
increased HPP raw material, in preparation for 2020 growth, being
offset by the underlying lower level of Polyolefin Foams activity,
with its shorter lead times. HPP raw materials are significantly
more expensive than their polyolefin counterparts and their
uniqueness requires a different approach to minimum holding
quantities. Trade and other payables decreased GBP3.72m (2018:
increased GBP0.37m), related to the timing of raw material
purchases. Zotefoams recognises the importance of its supplier
relationships and continues to honour agreed payment terms. As a
result of the above, cash generated from operations was GBP11.77m
(2018: GBP7.11m), up 66%.
Zotefoams continued to invest significantly in property, plant
and equipment during the year, with a net cash outflow of
GBP23.47m, following investments of GBP15.80m, GBP11.39m, GBP12.14m
and GBP8.70m in 2017, 2016, 2015 and 2014 respectively. The 2019
expenditure was mostly on completing the second high-pressure
autoclave project, with accompanying extruder, in the USA,
completing the two high-temperature, low-pressure autoclaves and
infrastructure in the UK, and making significant progress towards
completion of the Group's final, major, capacity expansion project,
a new manufacturing facility in Poland. In addition, interest of
GBP0.93m was capitalised, specific to these assets under
construction. The Group also invested GBP0.91m (2018: GBP0.29m) in
intangible assets, mostly related to the upgrade of the Group's
Microsoft AX ERP system to the latest version.
After dividends paid in the year amounting to GBP2.97m (2018:
GBP2.71m) and the inclusion of GBP1.21m (2018: GBPnil) of lease
liabilities in accordance with IFRS 16, closing net debt was
GBP31.90m (2018: GBP12.96m). Under the definition of the bank
facility agreement, which adjusts for the impact of IFRS 2 and IFRS
16, net debt was GBP30.69m (2018: GBP12.96m). At the year end, the
Group remains comfortably within its bank facility covenants, with
a ratio of EBITDA to net finance charges of 73 (2018: 29), versus a
covenant minimum of 4 and net debt to EBITDA (leverage) of 2.0x
(2018: 0.7x), against a covenant of 3.0x. While liquidity headroom
remains sufficient under the bank facility, the coincidence in
timing of the performance downturn in Polyolefin Foams, the
completion of the Group's capacity expansion projects and the
unprecedented economic uncertainty from COVID-19 has placed a
degree of risk around the Group's ability to remain within its
leverage covenant. As a result, the Group's banks have amended the
leverage covenant from 3.0x to 4.0x for the 12 months to 30 June
2020. We expect to remain within revised covenant levels, subject
to a severe but plausible scenario the Group has modelled, and
which is described in the Going concern section below.
Post-employment benefits
As previously reported, the Company provided GBP1.27m in its
2017 income statement for potential additional liabilities in its
DB Scheme following legal advice received by the pension trustees
and a calculation by the actuaries. This was based on the legal
opinion that the DB Scheme was properly closed to future accrual of
service in 2005, but the linkage with future increases in salary
had not been broken. The Company recorded this as an operating
exceptional item in the income statement, together with a GBP0.03m
accrual to take steps to break this link. The action to break the
link was completed in 2018.
During the current year, the Company was successful in a claim
against the advisers of both the Company and the Trustees, and was
awarded GBP1.05m following mediation, which it has recorded as an
exceptional item in the income statement. After deduction of costs
incurred by the Company, the net award of GBP0.94m was transferred
into the DB Scheme to help fund its deficit.
In the previous year, the Company sought advice from the
Actuaries of the Trustees in relation to a High Court ruling in
October 2018 relating to the equalisation of pensions for males and
females and the impact on schemes with guaranteed minimum pensions
rights. It was determined that the Company, as sponsoring employer
of the DB Scheme, may have an additional liability of an estimated
GBP0.95m and this liability was recorded as an exceptional item in
the 2018 income statement.
A full actuarial valuation of the DB Scheme was completed as at
5 April 2017, in line with the requirement to have a triennial
valuation. The outcome, on a Statutory Funding Objective basis,
calculated a deficit for the Pension Scheme of GBP4.18m. As a
result, the Company agreed with the Trustees to make contributions
to the DB Scheme of GBP43,300 per month to meet the shortfall by 31
October 2026, up from GBP41,000 per month previously. In addition,
the Company pays the ongoing DB Scheme expenses of GBP15,000 per
month (previously GBP10,600 per month) to cover death-in-service
insurance premiums, the expenses of administering the Scheme and
Pension Protection Fund levies.
The net IAS19 deficit on the DB Scheme decreased by GBP1.15m to
GBP6.93m as at 31 December 2019 (2018: GBP8.08m). The main factors
contributing to the decrease in the deficit are the additional
contributions paid into the DB Scheme following the mediation
settlement with its former advisers, the actual investment return
achieved on the assets being higher than required to match the
expected increase in the defined benefit obligation over the year,
partly offset by a change in assumptions, primarily a lower
discount rate following falls in corporate bond yields over the
year.
Zotefoams does not consider its pension scheme to be a key risk
to its ability to achieve its strategic objectives. Mitigation of
further risk is expected to come from our growth expectations and a
refocus by the pension Trustees on a lower-risk strategy to meet
the DB Scheme's deficit shortfall.
Going concern
At 31 December 2019, the Group's financing arrangements amounted
to GBP55.2m, comprising a multi-currency term loan of GBP25m, a
multi-currency revolving credit facility of GBP25m, and a remaining
balance of GBP5.2m of a further GBP7.5m sterling annually renewable
term loan, repayable in equal quarterly instalments. The bank
facility is for a five-year period and expires in May 2023. At the
date of the statement of financial position, GBP17.7m was undrawn
on the facility.
The facility is subject to two covenants, which are tested
semi-annually: net debt to EBITDA (leverage) and EBITDA to net
finance charges. In recognition of the current macroeconomic
uncertainty, the Group's banks have amended the leverage covenant
from 3.0x to 4.0x for the 12 months to 30 June 2020.
The Directors believe that the Group is well placed to manage
its business risks and, after making enquiries including a review
of forecasts and predictions, taking account of reasonably possible
changes in trading performances and considering the existing
banking facilities, including the available liquidity and increase
in leverage covenant from 3.0x to 4.0x, have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the next 12 months following the date of
approval of the financial statements.
The uncertainty as to the future impact on the Group of the
current COVID-19 outbreak has been considered as part of the
Group's adoption of the going concern basis. Our China-based
customers and our own relatively small processing facility for
T-FIT(R) technical insulation in China returned to work at the
beginning of March 2020. Across the Group, public health measures
advised by governments are being followed in support of their
efforts to contain the spread of the virus, and the supply chain is
being proactively managed as are operating costs and the timing of
capital expenditure. The Board has also resolved not to recommend a
final dividend for the year ended 2019 and will consider future
dividends as and when conditions normalise.
The Board has considered a downside scenario that reflects the
current unprecedented uncertainty in the global economy and which
we consider to be severe but plausible. The results of this
scenario show that there is sufficient liquidity in the business
for a period of at least 12 months from the date of approval of
these financial statements but shows the potential for a covenant
breach during the test period. The scenario considered Group
revenue 20% below 2019 for the 12 months to 31 December 2020, and
25% below 2019 for the 12 months to 30 June 2021. It applied
foreign exchange rates of $1.30: GBP1 and EUR1.15: GBP1. Set
against this were mitigating actions including tight management of
headcount, significantly reduced capital expenditure, reduced
SG&A expenditure and suspension of dividends. This severe but
plausible scenario indicates a material uncertainty which may cast
significant doubt over the Company's and Group's ability to
continue as a going concern without further mitigating actions. The
Company and Consolidated Financial Statements do not include the
adjustments that would result if the Company and Group were unable
to continue as a going concern.
After due consideration of the range and likelihood of potential
outcomes, the Directors continue to adopt the going concern basis
of accounting in preparing the financial statements.
Events after the reporting period
In early 2020, the emergence and spread of a new coronavirus,
now known as COVID-19, is affecting business and economic activity
around the world. The Group considers this outbreak to be a
non-adjusting post balance sheet event as at 31 December 2019.
Given the spread of the virus, the range of potential negative
outcomes for the global economy are difficult to predict at this
point in time. Zotefoams is monitoring the COVID-19 outbreak
developments closely and abiding by the advice and requirements of
local governments. We have also been implementing a range of
contingency plans to mitigate the potential adverse impacts.
Gary McGrath
Group CFO
7 April 2020
Consolidated income statement
For the year ended 31 December 2019
2019 2018
Note GBP'000 GBP'000
Revenue 2 80,860 81,037
Cost of sales (52,270) (52,034)
-------------------------------------------- ----- ---------------- ------------------------
Gross profit 28,590 29,003
Distribution costs (8,008) (7,193)
Administrative expenses before exceptional
item (11,481) (10,236)
Exceptional item 3 1,050 (950)
Total administrative expenses (10,431) (11,186)
-------------------------------------------- ----- ---------------- ------------------------
Operating profit 10,151 10,624
-------------------------------------------- ----- ---------------- ------------------------
Operating profit before exceptional
item 9,101 11,574
-------------------------------------------- ----- ---------------- ------------------------
Finance costs (462) (753)
Finance income 50 -
Share of profit / (loss) from joint
venture 72 (16)
-------------------------------------------- ----- ---------------- ------------------------
Profit before income tax 9,811 9,855
Profit before income tax and exceptional
item 8,761 10,805
Income tax expense (1,594) (2,003)
-------------------------------------------- ----- ---------------- ------------------------
Profit for the year 8,217 7,852
Profit for the year before exceptional
item 7,167 8,641
-------------------------------------------- ----- ---------------- ------------------------
Profit attributable to:
Equity holders of the Company 8,217 7,852
-------------------------------------------- ----- ---------------- ------------------------
8,217 7,852
Earnings per share:
Basic (p) 4 17.10 16.96
-------------------------------------------- ----- ---------------- ------------------------
Diluted (p) 4 16.84 16.69
-------------------------------------------- ----- ---------------- ------------------------
Consolidated statement of comprehensive income
For the year ended 31 December 2019
2019 2018
Note GBP'000 GBP'000
---------------------------------------------------
Profit for the year 8,217 7,852
----------------------------------------------------------- -------- --------
Other comprehensive (expense)/income
Items that will not be reclassified to
profit or loss
Actuarial losses on defined benefit pension
schemes (319) (1,449)
Tax relating to items that will not be
reclassified 54 246
----------------------------------------------------------- --------
Total items that will not be reclassified
to profit or loss (265) (1,203)
----------------------------------------------------------- -------- --------
Items that may be reclassified subsequently
to profit or loss
Foreign exchange translation (losses)/gains
on investment in foreign subsidiaries (1,146) 1,442
Change in fair value of hedging instruments (349) (1,467)
Hedging gains reclassified to profit or
loss 939 920
Tax relating to items that may be reclassified (101) 93
Total items that may be reclassified subsequently
to profit or loss (657) 988
----------------------------------------------------------- -------- --------
Other comprehensive expense for the year,
net of tax (922) (215)
----------------------------------------------------------- -------- --------
Total comprehensive income for the year 7,295 7,637
----------------------------------------------------------- -------- --------
Total comprehensive income attributable
to:
Equity holders of the Company 7,295 7,637
-----------------------------------------------------------
Total comprehensive income for the year 7,295 7,637
----------------------------------------------------------- -------- --------
Consolidated statement of financial position
As at 31 December 2019
2019 2018
Notes GBP'000 GBP'000
--------------------------------------- ------ --------- --------------------
Non-current assets
Property, plant and equipment 7 85,652 67,607
Right-of-use assets 1,207 -
Intangible assets 6,614 6,515
Investments in joint venture 145 73
Trade and other receivables 166 439
Deferred tax assets 327 923
---------------------------------------
Total non-current assets 94,111 75,557
--------------------------------------- ------ --------- --------------------
Current assets
Inventories 18,604 17,894
Trade and other receivables 23,315 26,371
Derivative financial instruments 332 6
Cash and cash equivalents 6,656 7,073
--------------------------------------- ------ --------- --------------------
Total current assets 48,907 51,344
--------------------------------------- ------ --------- --------------------
Total assets 143,018 126,901
--------------------------------------- ------ --------- --------------------
Current liabilities
Trade and other payables (6,831) (11,328)
Derivative financial instruments (134) (399)
Current tax liability (261) (1,978)
Lease liabilities (369) -
Interest-bearing loans and borrowings 6 (15,717) (14,500)
Total current liabilities (23,312) (28,205)
--------------------------------------- ------ --------- --------------------
Non-current liabilities
Lease liabilities (836) -
Interest-bearing loans and borrowings 6 (21,630) (5,537)
Deferred tax liabilities (674) -
Post-employment benefits (6,926) (8,078)
--------------------------------------- ------ --------- --------------------
Total non-current liabilities (30,066) (13,615)
--------------------------------------- ------ --------- --------------------
Total liabilities (53,378) (41,820)
--------------------------------------- ------ --------- --------------------
Total net assets 89,640 85,081
--------------------------------------- ------ --------- --------------------
Equity
Issued share capital 5 2,415 2,415
Share premium 5 44,178 44,178
Own shares held (9) (21)
Capital redemption reserve 15 15
Translation reserve 2,907 4,053
Hedging reserve 131 (358)
Retained earnings 40,003 34,799
--------------------------------------- ------ --------- --------------------
Total equity 89,640 85,081
--------------------------------------- ------ --------- --------------------
Consolidated statement of cash flows
For the year ended 31 December 2019
2019 2018
Note GBP'000 GBP'000
---------------------------------------------- ----- -------------------- --------------------
Cash flows from operating activities
Profit for the year 8,217 7,852
Adjustments for:
Depreciation and amortisation 5,769 5,082
Disposal of assets 77 -
Finance costs 412 753
Share of (profit)/loss from joint venture (72) 16
Net exchange differences (999) -
Employee defined benefit service charges - 950
Equity-settled share-based payments 391 822
Taxation 1,594 2,003
---------------------------------------------- ----- -------------------- --------------------
Operating profit before changes in working
capital and provisions 15,389 17,478
Decrease/(increase) in trade and other
receivables 2,659 (6,361)
Increase in inventories (883) (3,751)
(Decrease)/increase in trade and other
payables (3,720) 366
Employee defined benefit contributions (1,674) (619)
---------------------------------------------- ----- -------------------- --------------------
Cash generated from operations 11,771 7,113
Interest paid (88) (485)
Income taxes paid, net of refunds (2,334) (2,136)
---------------------------------------------- ----- -------------------- --------------------
Net cash flows generated from operating
activities 9,349 4,492
---------------------------------------------- ----- -------------------- --------------------
Cash flows from investing activities
Interest received 50 -
Interest paid (933) (31)
Purchases of intangibles (914) (294)
Proceeds on disposal of property, plant
and equipment - 3
Purchases of property, plant and equipment (23,473) (15,796)
Net cash used in investing activities (25,270) (16,118)
---------------------------------------------- ----- -------------------- --------------------
Cash flows from financing activities
Proceeds from options exercised and issue
of share capital 92 31
Proceeds of share issue, net of expenses - 20,078
Repayment of borrowings (3,829) (45,055)
Proceeds from borrowings 22,578 44,576
Principal elements of lease payments (343) -
Dividends paid to equity holders of the
Company 4 (2,973) (2,707)
---------------------------------------------- ----- -------------------- --------------------
Net cash generated from financing activities 15,525 16,923
---------------------------------------------- ----- -------------------- --------------------
Net (decrease)/increase in cash and cash
equivalents (396) 5,297
Cash and cash equivalents as 1 January 7,073 1,810
Exchange losses on cash and cash equivalents (21) (34)
---------------------------------------------- ----- -------------------- --------------------
Cash and cash equivalents at 31 December 6,656 7,073
---------------------------------------------- ----- -------------------- --------------------
Consolidated statement of changes in equity
For the year ended 31 December 2019
Own Capital
Share Share shares redemption Translation Hedging Retained Total
capital premium held reserve reserve reserve earnings equity
GBP`000 GBP`000 GBP`000 GBP`000 GBP`000 GBP`000 GBP`000 GBP`000
Balance as at 1
January
2018 Note 2,221 24,340 (26) 15 2,611 96 29,833 59,090
---------------------- ----- -------- -------- -------- ----------- ------------ --------- --------- --------
Foreign exchange
translation
gains on investment
in
subsidiaries - - - - 1,442 - - 1,442
Change in fair value
of
hedging instruments
recognised
in other
comprehensive
income - - - - - (1,467) - (1,467)
Reclassification to
income
statement -
administrative
expenses - - - - - 920 - 920
Tax relating to
effective
portion of changes
in fair
value of cash flow
hedges,
net of recycling - - - - - 93 - 93
Actuarial loss on
defined
benefit pension
scheme - - - - - - (1,449) (1,449)
Tax relating to
actuarial
loss on defined
benefit
pension scheme - - - - - - 246 246
Profit for the year - - - - - 7,852 7,852
Total comprehensive
income/(expenditure)
for the year - - - - 1,442 (454) 6,649 7,637
---------------------- ----- -------- -------- -------- ----------- ------------ --------- --------- --------
Transactions with
owners
of the Parent:
Options exercised - - 5 - - - 26 31
Proceeds from shares
issued,
net of expenses 194 19,838 - - - - 20,032
Equity-settled
share-based
payments net of tax - - - - - - 998 998
Dividends paid 4 - - - - - - (2,707) (2,707)
Total transactions
with
owners of the Parent 194 19,838 5 - - - (1,683) 18,354
---------------------- ----- -------- -------- -------- ----------- ------------ --------- --------- --------
Balance as at 31
December
2018 2,415 44,178 (21) 15 4,053 (358) 34,799 85,081
---------------------- ----- -------- -------- -------- ----------- ------------ --------- --------- --------
Balance as at 1
January
2019 2,415 44,178 (21) 15 4,053 (358) 34,799 85,081
---------------------- ----- -------- -------- -------- ----------- ------------ --------- --------- --------
Foreign exchange
translation
losses on investment
in
subsidiaries - - - - (1,146) - - (1,146)
Change in fair value
of
hedging instruments
recognised
in other
comprehensive
income - - - - - (349) - (349)
Reclassification to
income
statement -
administrative
expenses - - - - - 939 - 939
Tax relating to
effective
portion of changes
in fair
value of cash flow
hedges,
net of recycling - - - - - (101) - (101)
Actuarial loss on
defined
benefit pension
scheme - - - - - - (319) (319)
Tax relating to
actuarial
loss on defined
benefit
pension scheme - - - - - - 54 54
Profit for the year - - - - - - 8,217 8,217
Total comprehensive
income/(expenditure)
for the year - - - - (1,146) 489 7,952 7,295
---------------------- ----- -------- -------- -------- ----------- ------------ --------- --------- --------
Transactions with
owners
of the Parent:
Options exercised - - 12 - - - 80 92
Equity-settled
share-based
payments net of tax - - - - - - 145 145
Dividends paid 4 - - - - - - (2,973) (2,973)
Total transactions
with
owners of the Parent - - 12 - - - (2,748) (2,736)
---------------------- ----- -------- -------- -------- ----------- ------------ --------- --------- --------
Balance as at 31
December
2019 2,415 44,178 (9) 15 2,907 131 40,003 89,640
---------------------- ----- -------- -------- -------- ----------- ------------ --------- --------- --------
1. General overview and accounting policies
Basis of preparation
Zotefoams plc (the 'Company') is a public limited company, which
is listed on the London Stock Exchange and incorporated and
domiciled in England. The registered office of the Company is 675
Mitcham Road, Croydon CR9 3AL.
The preliminary results (unaudited) (referred to as the
'preliminary results') include the results of the Company and its
subsidiaries (together referred to as the 'Group'). The preliminary
results of the Group have been prepared in accordance with
International Financial Reporting Standards (IFRS) and IFRS
Interpretations Committee (IFRS IC) interpretations as adopted by
the European Union and with the Companies Act 2006 applicable to
companies reporting under IFRS.
The information for the year ended 31 December 2019 does not
constitute statutory accounts for the purposes of section 435 of
the Companies Act 2006. A copy of the accounts for the year ended
31 December 2018 was delivered to the Registrar of Companies. The
auditors' report on those accounts was not qualified and did not
contain statements under section 498(2) or 498(3) of the Companies
Act 2006. The audit of the statutory accounts for the year ended 31
December 2019 is not yet complete. These accounts will be finalised
on the basis of the financial information presented by the
Directors in this 'preliminary results' and will be delivered to
the Registrar of Companies following the Company's annual general
meeting.
The preliminary results are prepared on the historical cost
basis except for derivative financial instruments which are stated
at their fair value. The same accounting policies, presentation and
methods of computation are followed in the 'preliminary results' as
were applied in the Group's 2018 annual audited financial
statements, with the exception of any changes arising from new IFRS
standards and amendments and IFRS IC interpretations as adopted by
the European Union effective from 1 January 2019 and related
presentational changes.
Going Concern
At 31 December 2019 the Group' s financing arrangements amounted
to GBP55.2m, comprising a multi-currency term loan of GBP25m, a
multi-currency revolving credit facility of GBP25m, and a remaining
balance of GBP5.2m of a further GBP7.5m sterling annually renewable
term loan repayable in equal quarterly instalments. The bank
facility is for a five-year period and expires in May 2023. At the
date of the statement of financial position, GBP17.7m was undrawn
on the facility.
The facility is subject to two covenants, which are tested
semi-annually: net debt to EBITDA (leverage) and EBITDA to net
finance charges. In recognition of the current macroeconomic
uncertainty, the Group's banks have amended the leverage covenant
from 3.0x to 4.0x for the 12 months to 30 June 2020.
The Directors believe that the Group is well placed to manage
its business risks and, after making enquiries including a review
of forecasts and predictions, taking account of reasonably possible
changes in trading performances and considering the existing
banking facilities, including the available liquidity and increase
in leverage covenant from 3.0x to 4.0x, have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the next 12 months following the date of
approval of the financial statements.
The uncertainty as to the future impact on the Group of the
current COVID-19 outbreak has been considered as part of the
Group's adoption of the going concern basis. Our China-based
customers and our own relatively small processing facility for
T-FIT(R) technical insulation in China returned to work at the
beginning of March. Across the Group, public health measures
advised by governments are being following in support of their
efforts to contain the spread of the virus, and the supply chain is
being proactively managed as are operating costs and the timing of
capital expenditure. The Board has also resolved not to recommend a
final dividend for the year ended 2019 and will consider future
dividends as and when conditions normalise.
The Board has considered a downside scenario that reflects the
current unprecedented uncertainty in the global economy and which
we consider to be severe but plausible. The results of this
scenario show that there is sufficient liquidity in the business
for a period of at least 12 months from the date of approval of
these financial statements but shows the potential for a covenant
breach during the test period. The scenario considered Group
revenue 20% below 2019 for the 12 months to 31 December 2020, and
25% below 2019 for the 12 months to 30 June 2021. It applied
foreign exchange rates of $1.30: GBP1 and EUR1.15: GBP1. Set
against this were mitigating actions including tight management of
headcount, significantly reduced capital expenditure, reduced
SG&A expenditure and suspension of dividends. This severe but
plausible scenario indicates a material uncertainty which may cast
significant doubt over the Company's and Group's ability to
continue as a going concern without further mitigating actions. The
Company and Consolidated Financial Statements do not include the
adjustments that would result if the Company and Group were unable
to continue as a going concern.
After due consideration of the range and likelihood of potential
outcomes, the Directors continue to adopt the going concern basis
of accounting in preparing the financial statements. However, the
Directors anticipate that the independent auditors' report will
contain an emphasis of matter in respect of a material uncertainty
in respect of going concern.
2. Segment reporting
The Group's operating segments are reported in a manner
consistent with the internal reporting provided to and regularly
reviewed by the Group Chief Executive Officer, David Stirling, who
is considered to be the 'chief operating decision maker' for the
purpose of evaluating segment performance and allocating resources.
The Group Chief Executive Officer primarily uses a measure of
profit for the year (before exceptional items) to assess the
performance of the operating segments.
The Group manufactures and sells high-performance foams and
licenses related technology for specialist markets worldwide. The
Group's activities are categorised as follows:
-- Polyolefin Foams: these foams are made from olefinic homopolymer
and copolymer resin. The most common resin used is polyethylene.
-- High-Performance Products ('HPP'): these foams exhibit high
performance on certain key properties, such as improved chemical,
flammability, temperature or energy management performance.
Turnover in the segment is currently mainly derived from products
manufactured from three main polymer types: PVDF fluoropolymer,
polyamide (nylon) and polyether block amide (PEBA). Foams are
sold under the brand name ZOTEK(R), while technical insulation
products manufactured from certain materials are branded as
T-FIT(R).
-- MuCell Extrusion LLC ('MEL'): licenses microcellular foam technology
and sells related machinery.
Polyolefin Foams HPP MEL Eliminations Consolidated
-------------------- ------------------ ------------------ ------------------ --------------------
2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- --------- --------- -------- -------- -------- -------- -------- -------- --------- ---------
Group revenue 51,363 57,158 26,477 22,009 3,097 1,945 (77) (75) 80,860 81,037
Segment
profit/(loss)
pre-amortisation 7,301 9,448 6,430 5,814 (1,270) (1,628) - - 12,461 13,634
Amortisation of
acquired intangible
assets - - - - (276) (262) - - (276) (262)
--------------------- --------- --------- -------- -------- -------- -------- -------- -------- --------- ---------
Segment
profit/(loss) 7,301 9,448 6,430 5,814 (1,546) (1,890) - - 12,185 13,372
Foreign exchange
(losses)/gains - - - - - - - - (1,405) 818
Unallocated central
costs - - - - - - - - (1,679) (2,616)
--------------------- --------- --------- -------- -------- -------- -------- -------- -------- --------- ---------
Operating profit
before exceptional
items 9,101 11,574
Financing costs - - - - - - - - (462) (753)
Financing income - - - - - - - - 50
Share of
profit/(loss) from
joint venture 72 (16) - - - - - - 72 (16)
Taxation (before
exceptional items) - - - - - - - - (1,594) (2,164)
--------------------- --------- --------- -------- -------- -------- -------- -------- -------- --------- ---------
Profit for the year
(before exceptional
items) 7,167 8,641
Segment assets 100,497 95,153 34,088 22,903 8,106 7,922 - - 142,691 125,978
Unallocated assets - - - - - - - - 327 923
--------------------- --------- --------- -------- -------- -------- -------- -------- -------- --------- ---------
Total assets 143,018 126,901
Segment liabilities
* (44,530) (37,604) (7,254) (1,791) (659) (447) - - (52,443) (39,842)
Unallocated
liabilities - - - - - - - - (935) (1,978)
--------------------- --------- --------- -------- -------- -------- -------- -------- -------- --------- ---------
Total liabilities (53,378) (41,820)
Depreciation of PPE 4,009 3,894 703 339 83 83 - - 4,795 4,316
Depreciation of
right-of-use assets 268 - 43 - - - - - 311 -
Amortisation 344 384 55 - 264 382 - - 663 766
Capital expenditure:
Property, plant and
equipment (PPE) 21,222 15,242 3,475 989 139 62 - - 24,836 16,293
Right of use assets 804 - 126 - - - - - 930 -
Intangible assets 611 17 97 243 206 34 - - 914 294
--------------------- --------- --------- -------- -------- -------- -------- -------- -------- --------- ---------
Geographical segments
Polyolefin Foams, HPP and MEL are managed on a worldwide basis
but operate from UK, US and Asian locations. In presenting
information on the basis of geographical segments, segmental
revenue is based on the geographical location of customers. Segment
assets are based on the geographical location of assets.
United Continental North Rest Total
Kingdom Europe America of the
world
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- --------- ------------ --------- -------- --------
For the year ended 31 December
2019
Group revenue from external
customers 12,875 25,503 22,010 20,472 80,860
Non-current assets 44,231 13,038 35,908 462 93,639
Capital expenditure - PPE 7,239 12,069 5,380 148 24,836
-------------------------------- --------- ------------ --------- -------- --------
For the year ended 31 December
2018
Group revenue from external
customers 13,137 29,342 21,340 17,218 81,037
Non-current assets 38,816 1,488 33,842 416 74,562
Capital expenditure - PPE 11,048 1,488 3,677 81 16,294
-------------------------------- --------- ------------ --------- -------- --------
3. Exceptional item
2019 2018
GBP'000 GBP'000
-----------------
Past service costs - 950
Settlement income relating to legal claim (1,050) -
------------------------------------------- ----------------- ----------------
During the year, the Company was successful in a claim against
the previous advisors to the Defined Benefit Pension Scheme (the
"DB Scheme"), following legal advice that the linkage to future
increases in salary had not been properly broken. The Company was
awarded GBP1,050k following mediation and has recorded this as an
operating exceptional item in the income statement. Of this amount,
GBP941k was repaid to the DB Scheme and GBP109k expenses reimbursed
to the Company.
During the prior year, following a High Court ruling regarding
GMP equalisation, the Company provided GBP940k for additional
liabilities in its DB scheme based on calculations by the Company's
actuaries and GBP10k for related expenses.
4. Dividends and earnings per share
2019 2018
-------------------------------------------
GBP'000 GBP'000
------------------------------------------- -------- --------
Prior year final dividend of 4.15p (2018:
4.02p) per 5.0p ordinary share 1,996 1,763
Interim dividend of 2.03p (2018: 1.97p)
per 5.0p ordinary share 977 944
------------------------------------------- -------- --------
Dividends paid during the year 2,973 2,707
------------------------------------------- -------- --------
The Board has a progressive dividend policy, recognising the
importance to our shareholders of the dividend as part of their
overall return. However, the extraordinary uncertainty posed by the
COVID-19 outbreak means that we are focused on minimising cash
outflows and strengthening our financial position in the short
term. As such, the Board believes it prudent not to recommend a
final dividend for the year ended 31 December 2019 (2018: 4.15p).
The Board will keep this situation under review and will determine
the timing for resumption of dividends as economic conditions
stabilise.
Earnings per ordinary share
Earnings per ordinary share is calculated by dividing
consolidated profit after tax attributable to equity holders of the
Company of GBP8,217k (2018: GBP7,852k) by the weighted average
number of shares in issue during the year, excluding own shares
held by the EBT, which are administered by independent trustees.
The number of shares held in the trust at 31 December 2019 was
178,395 (2018: 403,758). Distribution of shares from the trust is
at the discretion of the trustees. Diluted earnings per ordinary
share adjusts for the potential dilutive effect of share option
schemes in accordance with IAS 33 Earnings per Share.
2019 2018
GBP'000 GBP'000
-------------------------------------------- ----------- -----------
Weighted average number of ordinary shares
in issue 48,054,819 46,310,356
Adjustments for share options 752,321 722,503
-------------------------------------------- ----------- -----------
Diluted number of ordinary shares issued 48,807,140 47,032,859
-------------------------------------------- ----------- -----------
5. Issued share capital
Issued, allotted and fully paid ordinary shares of 5p each:
Number
of shares Par value Share premium Total
GBP'000 GBP'000 GBP'000
--------------------------------- ----------- ---------- -------------- --------
Opening balance 1 January
2018 44,414,442 2,221 24,340 26,561
Rights issue 3,886,792 194 20,406 20,600
--------------------------------- ----------- ---------- -------------- --------
48,301,234 2,415 44,746 47,161
Less: Transaction costs arising
on rights issue - - (568) (568)
--------------------------------- ----------- ---------- -------------- --------
Closing balance 31 December
2018 48,301,234 2,415 44,178 46,593
--------------------------------- ----------- ---------- -------------- --------
Closing balance 31 December
2019 48,301,234 2,415 44,178 46,593
--------------------------------- ----------- ---------- -------------- --------
The holders of ordinary shares are entitled to receive dividends
as declared from time to time and are entitled, on a poll, to one
vote per share at meetings of the Company.
6. Interest-bearing loans and borrowings
Group Company
-------------------------------- -------- -------- -------- --------
2019 2018 2019 2018
--------------------------------
GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- -------- -------- -------- --------
Current bank borrowings 15,717 14,500 15,717 14,500
Non-current bank borrowings 21,630 5,231 21,630 5,231
Non-current lease liabilities* - 306 - 306
--------------------------------- -------- -------- -------- --------
37,347 20,037 37,347 20,037
-------------------------------- -------- -------- -------- --------
In May 2018 the Group completed a debt refinancing to enable it
to continue to grow capacity and meet its expected demand growth.
These facilities are secured against the property, plant and
equipment and trade receivables of the Group. The facility
comprises a GBP25 million multi-currency term loan, repayable in
two equal instalments of GBP5m during year four and year five, with
the remainder at the end of year five, a GBP25 million
multi-currency revolving credit facility, repayable on demand and a
further GBP5.2 million sterling term loan, renewable annually and
repayable over five years in equal quarterly repayments over the
term. The negotiated facility also includes a GBP25 million
accordion feature to provide additional flexibility to pursue
further investment opportunities in the future.
At the end of the financial year, the Group has utilised
GBP21.9m ($29m) of the multi-currency term loan, GBP10.7m
(EUR12.5m) of the revolving facility and has an outstanding GBP5.2
m on the sterling term loan. The total amount of GBP37.8 m is gross
of GBP0.5m loan origination fees paid upfront, being amortised over
the period of the loan. The difference of GBP0.3m between the
undrawn amount of GBP17.7m and GBP17.4m (GBP55.2m - GBP37.8m) is
due to the different exchange rates used by the Group and the
bank.
7. Property, plant and equipment
Group
Land Plant Fixtures
and and and Leased Under
buildings equipment fittings machinery construction Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Cost
Balance at 1 January 2018 16,656 62,293 7,401 432 27,250 114,032
Additions - 1,670 155 - 14,468 16,293
Disposals (920) (4,062) (2,474) - - (7,456)
Reclassifications from
under construction 2,768 18,415 640 - (21,823) -
Transfers - - (2,469) - 2,469 -
Effect of movement in
foreign exchange 480 2,497 44 - 358 3,379
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Balance at 31 December
2018 18,984 80,813 3,297 432 22,722 126,248
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Balance at 1 January 2019 18,984 80,813 3,297 432 22,722 126,248
Adjustment for change
in accounting policy (note
27) - - - (432) - (432)
Additions 8 744 172 - 23,912 24,836
Disposals - (77) (16) - - (93)
Transfers 12,383 3,364 496 - (16,243) -
Effect of movement in
foreign exchange (300) (870) (34) - (859) (2,063)
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Balance at 31 December
2019 31,075 83,974 3,915 - 29,532 148,496
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Accumulated depreciation
Balance at 1 January 2018 11,048 44,697 4,122 49 - 59,916
Depreciation charge for
the year 611 3,229 399 77 - 4,316
Disposals (920) (4,059) (2,474) - - (7,453)
Effect of movement in
foreign exchange 222 1,574 66 - - 1,862
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Balance at 31 December
2018 10,961 45,441 2,113 126 - 58,641
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Balance at 1 January 2019 10,961 45,441 2,113 126 - 58,641
Adjustment for change
in accounting policy (note
27) - - - (126) - (126)
Depreciation charge for
the year 657 3,784 354 - - 4,795
Disposals - (8) (8) - - (16)
Effect of movement in
foreign exchange (147) (281) (22) - - (450)
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Balance at 31 December
2019 11,471 48,936 2,437 - - 62,844
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
Net book value
At 1 January 2018 5,608 17,596 3,279 383 27,250 54,116
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
At 31 December 2018 and
1 January 2019 8,023 35,372 1,184 306 22,722 67,607
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
At 31 December 2019 19,604 35,038 1,478 - 29,532 85,652
----------------------------- ----------- ----------- ---------- ----------- -------------- --------
8. Changes in Accounting Policies
This note explains the impact of the adoption of IFRS 16
"Leases" on the Group's financial statements.
The Group has adopted IFRS 16 "Leases" retrospectively from 1
January 2019 but has not restated comparatives for the 2018
financial year, as permitted under the specific transition
provisions in the standard. The reclassifications and the
adjustments arising from the new leasing rules are therefore
recognised in the opening statement of financial position on 1
January 2019.
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
'operating leases' under the principles of IAS 17 Leases. These
liabilities were measured at the present value of the remaining
lease payments, discounted using the lessee's banking borrowing
rate as a proxy to the incremental borrowing rate as at 1 January
2019. The weighted average lessee's incremental borrowing rate
applied to the lease liabilities on the 1 January 2019 was
2.8%.
For leases previously classified as finance leases the entity
recognised the carrying amount of the lease asset and lease
liability immediately before transition as the carrying amount of
the right of use asset and the lease liability at the date of
initial application. The measurement principles of IFRS 16 are only
applied after that date.
(i) Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the
following practical expedients permitted by the standard;
the use of a single discount rate to a portfolio of leases
- with reasonably similar characteristics;
- reliance on previous assessments on whether leases are onerous;
the accounting for operating leases with a remaining lease
term of less than 12 months as at January 2019 as short-term
- leases;
the exclusion of initial direct costs for the measurement
of the right-of-use asset at the date of initial application;
- and
the use of hindsight in determining the lease term where
the contract contains options to extend or terminate the
- lease.
The Group has also elected not to reassess whether a contract
is, or contains, a lease at the date of initial application.
Instead, for contracts entered into before the transition date the
Group relied on its assessment made by applying IAS 17 and IFRIC 4
"Determining whether an Arrangement contains a Lease".
(ii) Measurement of lease liabilities
2019
GBP'000
Operating lease commitments disclosed as at 31
December 2018 662
Discounted using the lessee's incremental borrowing
rate at the date of initial application 644
Add: finance lease liabilities recognised as at
31 December 2018 306
(Less): short term leases recognised on a straight-line
basis as expense (559)
(Less): low value leases recognised on a straight-line
basis as an expense (5)
Lease Liability recognised as at 1 January 2019 386
--------
of which are:
Current lease liabilities 131
Non-current lease liabilities 255
386
--------
(iii) Measurement of right-of-use assets
The right-of-use assets for property and equipment leases were
measured at the amount equal to the lease liability, adjusted by
the amount of any prepaid or accrued lease payments relating to
that lease recognised in the statement of financial positions as at
31 December 2018. There were no onerous lease contracts that would
have required an adjustment to the right-of-use assets at the date
of initial application.
(iv) Adjustments recognised in the statement of financial
position on 1 January 2019
The change in accounting policy affected the following items in
the statement of financial position on 1 January 2019:
- property, plant and equipment: decrease by GBP306k
- right-of-use assets: increase by GBP588k
- borrowings: decrease by GBP306k
- lease liabilities: increase by GBP588k
The net impact on retained earnings on 1 January 2019 was
GBPnil.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR SSUEFMESSEEL
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