Zotefoams plc

Preliminary Results (unaudited) for the Year Ended 31 December 2020

23 March 2021 - Zotefoams plc ("Zotefoams" or "the Company" or "the Group"), a world leader in cellular material technology, today announces its unaudited preliminary results for the year ended 31 December 2020.

"Solid operating profits and effective cash management, with record second-half sales, demonstrates resilience and flexibility."

Financial highlights

¹ Exceptional item in 2019 of £1.1m relating to a pension credit following a legal claim against the previous pension advisors

² Leverage is that defined under the bank facility, with net debt at the end of the period divided by the preceding 12 months' EBITDA before exceptional items, adjusted for the impact of IFRS2 and IFRS16.

³ Final dividend is subject to approval at the Company's AGM

Results highlights

Strategic progress

David Stirling, Group CEO, said:

"I am pleased with how Zotefoams has performed in 2020, given the COVID-19 impact on economies and supply chains globally. This performance has been a result of decisive actions taken by our management teams in prioritising staff welfare while ensuring our facilities operated as required by our customers. Overall, I believe our strategy is sound and the ability to realign our business, to adapt to a rapidly changing environment, to manage our cost base and investment profile demonstrates the flexibility of our product range, capacity and people. 

"We are experiencing a strong start to 2021, consistent with our growth expectations, across the business as a whole. Our Polyolefin Foams Business Unit is trading very strongly, buoyed by restocking in some markets and the restarting of some previously delayed projects. We do not anticipate any significant sales from PPE programmes this year, which materially supported 2020's second half trading. In our HPP Business Unit, demand for footwear products continues at similar levels to the strong performance seen in the second half of last year, while COVID-related factors continue to impact aviation and the rate of growth in T-FIT^® insulation products.

"The operational environment is currently impacted by Brexit-related changes and global trade imbalances, making it more difficult and expensive to plan transportation, although we anticipate that this will ease with time. We expect to recover inflationary pressure, particularly in raw material pricing, through price increases in the second quarter.

"Zotefoams demonstrated resilience and flexibility under very difficult macroeconomic conditions in 2020, while continuing to make good strategic progress and adding to its broad range of exciting business opportunities. We expect to deliver significant growth this year; however, our cost base will increase, reflecting a return to more normalised levels of spending, the new Poland facility coming on stream and selective investment to support our best growth projects. The year has started strongly and, while we are cautious on our short-term outlook given the on-going COVID-19 and logistics challenges, the Board remains confident about the future prospects for our business."

Enquiries:

About Zotefoams plc

Zotefoams plc (LSE - ZTF) is a world leader in cellular materials technology delivering optimal material solutions for the benefit of society. Utilising a variety of unique manufacturing processes, including environmentally friendly nitrogen expansion for lightweight AZOTE^® polyolefin and ZOTEK^® high-performance foams, Zotefoams sells to diverse markets worldwide. Zotefoams uses its own cellular materials to manufacture T-FIT^® advanced insulation for demanding industrial markets. Zotefoams also owns and licenses patented microcellular foam technology to reduce plastic use in extrusion applications and for ReZorce^® mono-material recyclable barrier packaging.

Zotefoams is headquartered in Croydon, UK, with additional manufacturing sites in Kentucky, USA and Brzeg, Poland (foam manufacture), Oklahoma, USA (foam products manufacture and conversion), Massachusetts, USA (MuCell Extrusion) and Jiangsu Province, China (T-FIT).

www.zotefoams.com

AZOTE^®, ZOTEK^®, ReZorce^® and T-FIT^® are registered trademarks of Zotefoams plc.

An introduction from our Chair
Resilience and flexibility

The response to the pandemic has demonstrated an effective strategy delivered by a dedicated workforce and leveraging a differentiated technology

Overview

While 2020 was of course dominated by the impact of the COVID-19 pandemic, Zotefoams demonstrated its resilience and flexibility in successfully responding to the significant market, operational and workplace challenges posed. COVID-secure working procedures were introduced at each of its sites. Financial performance was robust, with a strong second half recovery leading to revenue growth for the year as a whole and we continued to make good strategic progress despite these considerable challenges. It has been an immense effort and, on behalf of the Board, I would like to record my sincere gratitude to the leadership team and all their colleagues across the Group who have worked safely, flexibly and tirelessly to support all of our stakeholders during the year.

Strategic progress

In an extremely challenging year, we have nevertheless made good strategic progress. In our High-Performance Products (HPP) business we delivered excellent growth in footwear and made significant headway in T-FIT^® insulation, particularly in China, moderated by COVID-19 related disruptions in Europe and India. We commissioned our Poland manufacturing facility in February 2021, which was the final part of a multi-year capacity improvement programme adding 60% capacity to pre-2018 levels. As visibility improved in H2 2020, we recommenced investment into the commercial and product development initiatives that will enable us to develop our pipeline of opportunities and accelerate future growth. We also took decisive steps to assess and develop market entry plans for ReZorce^® mono-material barrier packaging solutions in key application areas to capitalise on the significant opportunities which exist for this technology.

The major market impact of COVID-19 was felt in our ZOTEK^® F foams business, which mostly supplies the aviation industry. Sales more than halved this year; however, through a combination of new application areas and recovery, we expect this business to return to pre-pandemic growth rates in the medium term. We demonstrated the resilience of our Polyolefin Foams business, supporting a new personal protective equipment (PPE) application which offset reduced demand in industrial markets brought on by the pandemic. We continue to see structural growth prospects in this important business unit, underpinned by the megatrends of environment, regulation and demographics and facilitated by our new global capacity.

Results

Group revenue was £82.7m, 2% above the previous year (2019: £80.9m). Operating profit before exceptional item was in line with the previous year at £9.1m (2019: £9.1m), with statutory operating profit down 10% at £9.1m (2019: £10.2m). Basic earnings per share before exceptional item was in line with the previous year at 14.87p (2019: 14.91p) and basic earnings per share was down 13% at 14.87p (2019: 17.10p).

The combination of our rapid response to the pandemic and the successful execution of both new and existing opportunities in H2 2020 has demonstrated the financial resilience of Zotefoams' business. We ended the year with a strong balance sheet and leverage down to 2.1x from its peak level of 2.6x at the mid-year, well within our covenants.

Dividend

The Board has a progressive dividend policy, recognising the importance to our shareholders of the dividend as part of their overall return. Given the extraordinary uncertainty at the time of the COVID-19 outbreak, however, the Board did not recommend a final dividend for the year ended 31 December 2019. As the ongoing impact of the pandemic and our responses to mitigate it became clearer, a more confident assessment of the Group's financial position and future was taken at the half year end and resulted in the payment of an interim dividend in October 2020 of 2.03p (2019: 2.03p). The small amount of UK government financial support received in the first half of the year was fully repaid in early August 2020. The Board remains confident in the Group's future and is proposing a final dividend of 4.27p (2019: nil) which, if approved, will be paid on 1 June 2021 to shareholders on the register on 7 May 2021.

Sustainability

The Board is very focused on the growing importance of sustainability and the evolving debate around the use of plastics by society. It considers both in relation to the future desired outcomes for all stakeholders. Accordingly, our strategy incorporates the consideration of climate change in terms of financial and operational impacts. Zotefoams' products are used almost exclusively for permanent solutions and often form a positive element of our customers' own sustainability agenda. They are seldom used for single-use purposes which, understandably in certain applications, has caused most public concern. Our MuCell technology is focused on the reduction of plastic in society, lowering carbon footprint and improving recyclability of packaging. 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. The Board has elevated sustainability and climate change to be a new principal risk at Zotefoams and the Group executive has been tasked with ensuring that both the strategic and operational impact of sustainability is embedded within decision making processes throughout the Group.

Governance and the Board

The Board leads an ongoing programme to ensure the highest standards of corporate governance and integrity across the Group and has remained abreast of developing governance standards. The Board's interactions and communications with executive management continue to be excellent and as a result the Board is well placed to challenge, guide and support executive management in the delivery of the growth strategy. Due to COVID-19 there has been a considerable increase in our interactions as a Board, which have mainly taken place virtually in 2020. This year, we have paid particular attention to the provision of a safe working environment for our staff across all global locations and have maintained the improved 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 position of J Carling as Board representative for workforce engagement.

The process to refresh the non-executive membership of the Board was completed in 2020. On 14 May 2020, we appointed C Wall and A Fielding to the Board, with A Fielding assuming the role of Chair of the Remuneration Committee. These changes have brought highly relevant skillsets and experiences to the Board and both new Board members have quickly amassed good knowledge of the business and its strategy, despite the obstacles presented by COVID-19. A Bromfield retired from the Board on 13 May 2020 after 6 years of invaluable service; we wish her well.

The Board considers that it has fully applied all the principles and provisions of the UK Corporate Governance Code during 2020.

Our people

We have always understood that our people are key to our success. This year, the most difficult of years, has reinforced this. Their contribution to the Group's success through their dedication to each other, their adaptability to change, their steadfastness during an uncertain H1 2020 and tireless commitment in a very busy and demanding H2, has been inspiring. As the results show, the leadership team responded swiftly and very capably to the COVID-19 challenges, resolutely tackling short term issues while not losing sight of the long term. It has been a great team effort and I want to thank all of our employees for their considerable efforts during the year. 

The future

In 2020, Zotefoams delivered a strong response to the COVID-19 crisis, with good operating results and strategic progress in the face of very challenging macroeconomic conditions. Looking ahead, while the COVID-19 pandemic creates an uncertain environment, we continue to benefit from a highly talented and committed workforce, an attractive product portfolio and strong competitive positions in our markets. We recently completed our investment programme to significantly increase manufacturing capacity and, with a broad range of exciting business opportunities, we remain confident about our future prospects.

S P Good

Chair

22 March 2021

Group CEO's review

Solid operating profits and cash management following record second-half sales

Zotefoams remains well positioned competitively and environmentally. Our core materials offer improved product performance using less material and MuCell Extrusion (MEL) licenses technology specifically to reduce polymer usage

I am pleased at how Zotefoams has performed in 2020 given the COVID-19 impact on economies and supply chains globally. This performance has been as a result of decisive actions taken by our management teams in prioritising staff welfare while ensuring our facilities operated as required by our customers. We had to contend with high levels of uncertainty regarding the impacts of COVID-19 and the demand environment, particularly during the second quarter, requiring us to manage costs and conserve cash to protect our business. We also worked closely with customers to re-agree priorities where practical which, in the main, reflected lower levels of demand and requirements for much shorter lead times. However, due to the wide variety of applications using our foams, we had some notable successes in the second half including supplying a significant volume of our Plastazote^® polyolefin foams for a UK-government personal protective equipment (PPE) contract and, as anticipated, increasing sales of our ZOTEK^® HPP foams to Nike under our exclusive agreement for footwear. 

Zotefoams' stated business purpose is "Optimal Materials for the Benefit of Society" and we utilise unique technology to make what we consider to be "best in class" foams for a variety of uses aligned to global environmental, regulatory and demographic trends. We firmly believe that plastic, our main raw material, is the optimal material for the applications for which our products are used. These are predominantly not single-use and often function for many years as industrial and consumer durables in applications as varied as medical devices, footwear, clean-room insulation, cars, aircraft and marine buoyancy.

Over the past five years, Zotefoams has invested significant capital in global capacity to grow our business. Our recently opened facility in Poland, the completion of which was delayed to 2021 to better match anticipated demand and conserve cash, completes this investment programme. The timing to achieve our planned return on these investments has inevitably been extended by the current economic climate and growing sales to improve asset utilisation is our priority in the short term. An improved product mix, with a higher proportion of sales from our more technical ZOTEK HPP foams and T-FIT^® insulation products, is expected to be the main driver of improved profitability and returns in the medium term. 

Group revenue increased by 2% to £82.7m (2019: £80.9m) with operating profit of £9.1m at a similar level to last year (2019: £9.1m excluding the 2019 exceptional item related to the recovery of pensions costs). Strong HPP footwear growth and sales for PPE in Polyolefin Foams offset the broader COVID-19 related downturn in most other markets. Profit before tax declined by 5% to £8.3m (2019: £8.8m excluding the aforementioned 2019 exceptional item), with less bank interest being capitalised in 2020 as debt financed a lower level of capacity-enhancement projects still under construction.

Net cash inflow from operations increased 10% to £13.0m (2019: £11.8m). Excluding the exceptional item of 2019, net cash inflow from operations increased 21%.

Strategy update

Zotefoams' strategy is to invest in flexible assets with the capability to support the growth opportunities afforded by our diverse, and often unique, products. As mentioned above, the timing of capacity available from our investment programme has unfortunately coincided with lower levels of current economic activity. However, we are working hard to increase market share and we expect benefits from an initial improvement in utilisation as the macroeconomic environment improves, with further enhancement from increasing proportions of higher margin business where we have a strong business development pipeline.

Overall, we believe our strategy is sound and the ability to realign our business, to adapt to a rapidly changing environment and to manage our cost base and investment profile demonstrates the flexibility of our product range, capacity and people. 

While we rightly curtailed investment in some areas to manage our costs and cash at a time of extreme uncertainty, we also continued and even accelerated efforts in other areas. Footwear products, T-FIT insulation and ReZorce^® mono-material barrier technology, which is part of our MEL business unit, have all benefited from increased investment and all offer excellent potential over, in order of sequence, the short to more medium-term.

Sustainability remains a key consideration in developing and implementing our strategy. Our core materials offer improved product performance in durable solutions using less material than competitors. MEL licenses technology specifically to reduce polymer content and has now developed a fully recyclable, circular, barrier packaging solution which we have trademarked ReZorce. 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 integrated components in larger systems or products (such as cars, planes, footwear and medical parts) or used in the long-term storage of items. They are very rarely used in consumer disposable items. Our foams save weight and fuel in cars, trains and aircraft, save energy by insulating and provide protection to people and goods. Our products help our customers reduce emissions, lower energy usage, improve fuel efficiency and comply with increasingly stringent safety regulations. In common with other businesses, we seek to minimise the use of natural resources through measures such as reducing energy and polymer usage, which benefits the environment and reduces our costs.

We believe Zotefoams has demonstrable credibility in reducing the carbon footprint of our customers, but the world is changing rapidly with different competitive solutions and redefinition of requirements driven by preferences and regulation. We therefore continue to develop both our product range and technology to anticipate and react to these changes. We recognise the risk of not meeting our stakeholder expectations on sustainability and have reflected this in our key risks and uncertainties as a consequence.

Capacity and investment

In the past six years, Zotefoams has invested £65.2m to increase our global capacity by approximately 60% from 2017, culminating in the completion of our facility in Poland in early 2021. A virtual tour of this facility can be found on the Group's website. Based on our assessment of the opportunities afforded by the underlying market for our products as well as an attractive pipeline of opportunities, primarily within our HPP business unit, we are now well-invested to deliver accelerated growth. When determining our investment strategy we need to consider that our capacity investments, which involve significant infrastructure and bespoke machinery, take time to complete 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 markets continue to recover, we will see returns move towards our target levels and we consider that our Poland facility is well placed geographically, giving confidence to our European customer base for polyolefin foams post Brexit. Both the USA and Poland sites have the option for further investment, allowing cost-effective capacity increases on approximately an 18-month lead time. Although there is no current expectation of major investment to increase capacity, Zotefoams has the ability to react to structural increases in demand for all its products.

POLYOLEFIN FOAMS, AZOTE^®

Segment revenue £50.9m Change (1)% (2019: £51.4m)

Segment profit margin 9.5% (2019: 14.2%)

Segment profit £4.8m Change (34)% (2019: £7.3m)

Sales in Polyolefin Foams were broadly stable, although within this there were significant variations by product and segment year-on-year. Sales to our traditional polyolefin foam markets (excluding PPE) fell by approximately 20%, with the largest falls being experienced in aviation, automotive and in product protection linked to trade shows and exhibitions. Geographically, Japan and continental Europe, Germany in particular, were noticeably weaker while overall sales to both the UK and North American markets fell by around 11%, although sales in our North American construction segment, served by our facility in Tulsa, OK, increased by 15%. 

Offsetting the general market weakness were sales to our largest UK customer for a UK government PPE contract for the NHS which represented almost 19% of AZOTE revenues in 2020. This business was substantially delivered between June and November and accounted for almost 24% of AZOTE volume sold in the year. The specific foam involved was a light-density variant of our Plastazote range which has been used and cited in medical applications for many years, helping our customer fast-track approval for their design.

Segment profit declined to £4.8m (2019: £7.3m), mainly as a result of additional costs associated with the full-year operation of new equipment in the UK and USA, costs substantially related to the higher volumes of polyolefin foams and additional administration costs, mostly committed to in 2019, around human resources, finance, audit and IT. Our expectations are that additional costs related to the Poland plant will burden segment profit margin in the short term before higher plant utilisation rates allow recovery in the medium term.  

During the year, customers of our Polyolefin Foams business operated with low inventory levels and an expectation of rapid and flexible response times from Zotefoams. By supporting peak levels of PPE demand with supply from our USA facility, we had sufficient capacity to meet other customer needs from our UK facility. Our new facility in Poland now brings further agility and capability in continental Europe to support customers' growth. 

In the latter part of the year, we experienced early, although inconsistent, signs of recovery in demand. With low levels of inventory in many sectors of the market, such an improvement in demand, combined with the risk of supply disruptions linked to Brexit, would normally have led to inventory increases through the supply chain. While this was discussed with many customers, increases in their inventory were typically not implemented due to their priority of conserving cash in an environment of continued economic uncertainty.

During the year, we continued to enhance our AZOTE product portfolio, albeit at a slower pace than in previous years due to our focus on short-term cash management. We developed recycled foams containing internal process scrap, we improved our technical capability to produce different densities of our Adapt product range, which will mainly be made in Poland, and we worked closely with large customers in automotive and retail to develop application-specific AZOTE products to meet their particular needs. All these developments are set to broaden Zotefoams' product range further and offer good opportunities to grow market share by aligning closely with market trends and customer needs. 

HPP

Segment revenue £30.0m Change +13% (2019: £26.5m)
Segment profit margin 26.3% (2019: 24.3%)
Segment profit £7.9m Change +23% (2019: £6.4m)

HPP comprises ZOTEK^® technical foams, which include foams for footwear where we have an exclusive relationship with Nike, and T-FIT^® insulation products. These products are typically unique or highly differentiated and designed to deliver specific performance attributes, such as energy management, excellent fire resistance or high-temperature performance to meet the exacting needs of industries such as sports equipment, aviation, automotive, biotech and pharmaceutical.

The HPP Business Unit accounted for 36% of Group sales in 2020 (2019: 33%).

Within this business unit there are currently three main end-use applications: footwear, aviation and technical insulation. Footwear grew strongly as expected, particularly in the second half, and now accounts for 26% (2019: 16%) of Group revenue. This growth follows close collaboration with Nike as product innovation from Zotefoams is used on an increasing number of running shoe models. We continue to work closely with Nike globally to ensure Zotefoams' development efforts are clearly aligned with Nike's priorities. Sales of ZOTEK F fluoropolymer foams, primarily for aviation applications, reduced by 54% as Boeing, Airbus and airlines (where we supply foams for interiors) significantly curtailed their activities due to COVID-19. The supply chain for aviation typically has more inventory than other markets and customers reducing inventory levels exacerbated the decline in demand for Zotefoams materials in the short term. T-FIT insulation products grew by 4% in the year, which was significantly below our expectations and does not yet reflect the strong uptick in interest and customer engagement we are seeing. COVID-19 impacts were significant in holding back the rate of growth in 2020 and resulted in substantial regional variability. We grew our business in China by 60%; India, which had been expected to perform well, was relatively flat with many projects deferred; and sales in the EU, previously our largest market, declined by 40%. As the disruption of the pandemic reduces, we would expect T-FIT insulation demand to respond strongly, underpinned by our clearly differentiated offering and the accelerating structural growth drivers in the cleantech, biotech and food safety sectors. 

During 2020, as well as continuing our close co-operation on footwear, we also continued technical and market development of our unique ZOTEK foams range, mainly focused on the aviation and automotive industries. Both are undergoing significant disruption with travel patterns changing and sustainability pressures. Zotefoams believes that its range of lightweight, insulating and fire-retardant materials are ideally placed to help these industries meet their challenges and capture new business. We have therefore prioritised developing new foams focused on aviation applications, despite the low current demand from this industry. We have also put significant focus on market opportunities in ground transportation, and e-vehicles in particular, using both our existing product range and customer-specific product variants. Current signs are positive on both these development approaches, which form an integral part of our Group-wide portfolio of opportunities.   

MEL MuCell^® ReZorce^®

Segment revenue £1.8m Change (41)% (2019: £3.1m)

Segment loss before amortisation £1.2m Change +7% (2019: £1.3m)

Segment loss after amortisation £1.4m Change +6% (2019: £1.5m)

MuCell Extrusion LLC licenses microcellular foam technology and sells related machinery. MEL's business model is to develop and license intellectual property (IP). MuCell 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, in 2019 the team at MEL developed mono-material barrier packaging technology, which we have branded ReZorce^®.

MEL's development strategy was significantly negatively impacted by COVID-19 during the year. An inability of our staff to travel to customer sites and considerable reductions in discretionary expenditure by potential customers led to a 64% fall in revenue from equipment sales. Revenue from license fees, which we had expected to increase, remained relatively stable year-on-year as a result of mixed customer fortunes in the difficult economic environment. Overall, activity at MEL retrenched from the beginning of the pandemic, with a reduction in travel and development reducing costs to such an extent that the segment loss after amortisation was slightly below 2019. 

Progress on our ReZorce pilot line was also deliberately slowed in the short term, in common with much Group capital expenditure. It is currently in its commissioning phase and forms a significant element of our intention to accelerate development of the ReZorce barrier technology. We have worked closely with external consultants and packaging industry experts to help validate and evaluate the ReZorce opportunity and strategy. As a result of this work, we have commenced the next phase of a go-to-market evaluation strategy focusing primarily on the beverage packaging market, currently dominated by Tetrapak along with other multi-material carton solution providers. This phase of evaluation is likely to be substantially complete during the third quarter and involves pivoting a substantial portion of our MEL team over the coming months to be almost exclusively dedicated to ReZorce. The licensing business of MEL, which is aimed at reducing customers' consumption of plastic volumes, will continue to support existing licensees and current projects but will not actively seek new customers at this time, other than in a few cases where we have a readily implementable solution. We currently expect the operating result impact of this pivot to be broadly neutral over the year as we believe the planned activities and additional costs associated with this very specific targeted validation programme meet the criteria for capitalisation. The potential market is large and facing significant pressure to improve sustainability rapidly. Our ReZorce product line can be made with significant recycled plastic content and, as it is classified as a mono-material, can be readily recycled to support a circular economy, putting sustainability at the heart of our MEL development agenda.

Measuring strategic progress

The markets in which we operate are driven by global trends - environment, regulation and demographics - 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. Sales in our HPP and MEL Business Units, which offer unique disruptive products and solutions, together now account for 39% (2019: 37%) of Group revenues with combined growth of 8%. 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 polyolefin foam products declined by 1%, against our target rate of twice global GDP growth. Supply for a UK government PPE contract in the second half approximately offset the weakness in most other markets during the year. In a year where global GDP shrank considerably and our home market suffered the worst drop in GDP for 300 years, I am pleased that our business showed such resilience. 

3. Group operating margin before exceptional item was 11.0% (2019: 11.3%). Higher capital spending over the past few years has increased our depreciation and reduced gross margin while asset utilisation remains lower than anticipated due to the global economic situation. The mix benefit of higher growth in our HPP products provides a structural driver for margins over time. During the year we did curtail certain operating costs and the negative impact of changes in foreign exchange rates was lower than in previous years. Overall, I am pleased that operating margin remained stable and we were able to continue to invest for our future as well as increase employment within the Group.

4. Group return on capital, which excludes large asset investments not yet commissioned, declined to 9.0% (2019: 10.5%). 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, if needed, at much lower incremental cost. The committed large-scale increases in capacity ended with the commissioning of our Poland facility early in 2021 and the Group is well invested to support future growth. Capital spending is planned to return to more normal, lower levels, broadly in line with depreciation. The net assets of the business have increased significantly and higher asset utilisation from increased sales will be an important factor in delivering improvements in the return on capital over the coming years. We believe Zotefoams' investments are consistent with our strong portfolio of business opportunities and support strong organic growth in line with our stated strategic intent.

People

The top priority for Zotefoams is ensuring the health and safety of employees and site visitors. The Board tolerance for risk is set accordingly 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.

During 2020, managing our workforce's wellbeing during COVID-19 was a significant challenge. Fortunately, most of our operations allow social distancing, non-production staff benefit from good IT systems and were able to work from home and, therefore, other than a few short breaks to assess the impact on our business and implement safe-working systems, our facilities were able to work substantially as normal. While we called upon the UK government's furlough scheme during H1 2020, the small amount of support we received was fully repaid in early Q3 2020 and no further support was sought. Furthermore, performance during the year and our expectations for the future rendered it unnecessary to make any pandemic-related job losses, restructurings or salary reductions and, additionally, we enhanced sick pay for those who were vulnerable and self-solating under COVID-19 guidelines.

The main safety metric across our business is reportable lost time incidents and, regrettably, we had one such incident at our Croydon facility during the year (2019: 1). In line with our policy, a full follow-up and analysis with corrective actions was reviewed by the Board.

At the end of 2020, the Zotefoams Group employed 474 people, an increase of 4% (2019: 454). Of these, 222 or 47% have been employed for less than two years. With such a high proportion of new employees to integrate, developing our organisational capability and culture globally is essential to delivering our strategy and in times of COVID social distancing this is particularly challenging. However, I believe we have a strong management team, clear direction and the right balance between control and autonomy to deliver our strong portfolio of opportunities in a challenging environment.

Forward-looking statements

Forward-looking statements have been made by the Directors in good faith using information available up until the date they approved these financial statements. These forward-looking statements should be considered in light of the continuing uncertainty surrounding the impacts of the COVID-19 virus on economic trends and business.

Current trading and outlook

We are experiencing a strong start to 2021, consistent with our growth expectations, across the business as a whole. Our Polyolefin Foams business unit is trading very strongly, buoyed by restocking in some markets and the restarting of some previously delayed projects. We do not anticipate any significant sales from PPE programmes this year, which materially supported 2020's second half trading. In our HPP business unit, demand for footwear products continues at similar levels to the strong performance seen in the second half of last year, while COVID-related factors continue to impact aviation and the rate of growth in T-FIT^® insulation products.

The operational environment is currently impacted by Brexit-related changes and global trade imbalances, making it more difficult and expensive to plan transportation, although we anticipate that this will ease with time. We expect to recover inflationary pressure, particularly in raw material pricing, through price increases in the second quarter.

Zotefoams demonstrated resilience and flexibility under very difficult macroeconomic conditions in 2020, while continuing to make good strategic progress and adding to its broad range of exciting business opportunities. We expect to deliver significant growth this year; however, our cost base will increase, reflecting a return to more normalised levels of spending, the new Poland facility coming on stream and selective investment to support our best growth projects. The year has started strongly and, while we are cautious on our short-term outlook given the on-going COVID-19 and logistics challenges, the Board remains confident about the future prospects for our business.

D B Stirling

Group CEO

22 March 2021

Group CFO's review
Resilient performance and a strong balance sheet

Successful management of a difficult H1 2020 and a return to growth in H2 2020 demonstrates the strength of the Group's product offering

Overview

H1 2020 was a challenging period for Zotefoams as COVID-19 took hold across the world and reduced business activity. During this period, Zotefoams introduced and successfully implemented a range of cost and cash saving measures to protect the balance sheet while the impacts of the pandemic remained highly uncertain. In contrast, H2 2020 returned a record six-month sales performance for the Group, with successful delivery of AZOTE^® polyolefin foam to a key customer supplying the UK government with personal protective equipment (PPE) for the NHS and growth in footwear as expected. This allowed the Group in August to return the low amounts of government support it had received in Q2, reinstate a dividend and recommence operating cost investment in support of future growth. The Group ended the year in a strong financial position, as reflected by year-end leverage (net debt to EBITDA) close to 2x, having been 2.6x at 30 June 2020, and liquidity headroom of £19.2m.

Group revenue for the year increased by 2% to £82.7m (2019: £80.9m). High-Performance Products (HPP) had another very strong year, growing 13% to £30.0m (2019: £26.5m) and Polyolefin Foams held firm at £50.9m, just 1% below the previous year (2019: £51.4m), demonstrating resilience in a very difficult trading environment, while MuCell Extrusion LLC (MEL) sales fell to £1.8m (2019: £3.1m). Constant currency variances were immaterial across all business units. Operating profit before exceptional item was maintained at £9.1m (2019: £9.1m), while operating profit was down 10% at £9.1m (2019: £10.2m) following a previous year pension credit of £1.1m recorded as an exceptional item.

Zotefoams invested a further £6.9m during the year in its final major capacity expansion project, a new manufacturing facility in Poland. Delayed slightly by close cash management and travel restrictions imposed by COVID-19, the facility started up in February 2021, on budget.

At 31 December 2020, net debt under IFRS was £35.6m (2019: £31.9m) and leverage (net debt to EBITDA) was 2.2x (2019: 2.1x). While cash generated from operations increased by 10% to £13.0m (2019: £11.8m), or by 21% when excluding the 2019 exceptional item, the Group's investment programme was the main driver behind the Group requiring to draw down on its debt facilities, as expected. Under the definition of the bank facility agreement, which adjusts net debt for the impact of IFRS 2 and IFRS 16, leverage was 2.1x (2019: 2.0x) against a covenant of 3.0x, down from 2.6x at mid-year against a covenant of 4.0x.

Group revenue

Group revenue increased by 2% to £82.7m (2019: £80.9m).

Polyolefin Foams business unit sales decreased 1% versus 2019, with a year-on-year decline of 23% in H1 followed by an increase of 28% in H2. Excluding the PPE-related sales in H2, which we largely consider to be a one-off opportunity, annual sales of polyolefin foams decreased 20%, reflecting the significant adverse change in demand conditions across a range of our markets as a result of COVID-19. With the exception of the UK, where the PPE sales were made and where growth was 84% in the year, all regions were heavily impacted by the pandemic: Europe declined 27%, the USA declined 11% and the ROW declined 35%.

HPP sales increased 13%. Footwear is the largest application currently within HPP and revenue in this market grew 68% versus 2019, reflecting significant increases in the sales run rate in H2, as expected and previously communicated, following an increase in the number of shoe models using the Group's foam. After a solid H1, ZOTEK F fluoropolymer foam sales fell significantly in H2, primarily as a result of the well-publicised and visible impact of COVID-19 on the aviation industry. ZOTEK F sales ended the year 54% down versus 2019. T-FIT^® advanced insulation sales grew 4% (2019: 33%), with significant growth in China offset by much lower sales in Europe related to COVID-19.

MEL sales suffered heavily during 2020, the business being the most reliant on international travel and direct customer engagement to secure equipment sales and support installation of the technology. Despite firm royalty revenues, sales fell by 41% to £1.8m.

*  Within the transportation segment, aviation represented 6.5% (2019: 15%) and automotive 5.5% (2019: 7%) of Group revenue.

Gross margin

Gross margin decreased to 33.6% (2019: 35.4%). Group revenue grew in the period, the share of footwear sales increased, average LDPE polymer prices declined and the UK site was successful in flexing direct labour costs in H1 to match lower production volumes. However, this was more than offset by the mix effect of 7% higher polyolefin foam volumes at lower average prices to supply PPE equipment, the sharp decline in higher margin ZOTEK F sales and a £1.0m increase in Group depreciation and amortisation following completion of the UK and US capacity expansion projects. As the Group returns to its expected growth rates, the product mix improves, ZOTEK F sales recover, T-FIT technical insulation sales grow and capacity utilisation improves to leverage the recent investment programme, we expect to rebuild gross margins.

Distribution and administrative costs

The Group has a clear expansion strategy, founded on proprietary cellular materials technology linked to longer-term demand growth in our chosen markets. Organic growth with a portfolio of unique and highly differentiated products requires that we invest actively in, and reprioritise where needed, technical, sales-focused and administrative resources to create, execute and manage this growth. During the year, in order to manage the uncertainties of COVID-19, operating cost investment into these growth drivers was postponed, restarting later in the year. Marketing and travel costs fell to very low levels, discretionary spend was tightly controlled, new hires were delayed and, where possible, leavers were not immediately replaced. These measures helped offset the natural increase in costs as a result of the full year impact of staff additions during 2019.

Included within distribution costs in the consolidated income statement are warehousing and sales and marketing expenses. These costs decreased by 15% to £6.8m (2019: £8.0m) during the year, mostly reflecting reduced Group marketing spend, delayed hiring or replacement of sales personnel at Zotefoams USA and at MEL and lower travel-related expenditure. 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 in 2020 by £0.4m, or 3%, to £11.9m (2019: £11.5m). Expenditure unrelated to foreign exchange movements increased by £1.5m, reflecting the strengthening of the Finance and HR functions, most of the hiring or commitments having taken place in 2019, increased audit and tax charges, increased IT support costs, including full year costs of certain expenditure capitalised during the 2019 ERP system upgrade, and adminstrative costs in Poland. Offsetting this was a reduction in the combined loss from foreign exchange hedging contracts and foreign exchange translation movements to £0.3m (2019: net loss £1.4m).

The business unit results do not include central plc costs, which are not considered to be segment specific. In 2020, central plc costs were £1.9m (2019: £1.7m).

Exceptional item

In 2019, 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 £1.1m, including £0.1m of expenses, following mediation and recorded this as an operating exceptional item in the income statement.

Operating profit

Operating profit before exceptional item was £9.1m, in line with 2019 (£9.1m). Operating profit was £9.1m (2019: £10.2m).

Finance costs

The total interest charge for the year increased to £0.9m (2019: £0.5m) and includes £0.2m (2019: £0.2m) of interest on the Company's Defined Benefit Scheme (the "DB Scheme") pension obligation. The Group capitalised £0.6m (2019: £0.9m) of interest in relation to the financing of its capacity enhancement projects still under construction, a reduction following completion of the USA and UK projects in the previous year.

Profit before tax

Profit before tax and exceptional item decreased by 5% to £8.3m (2019: £8.8m). Profit before tax decreased by 15% to £8.3m (2019: £9.8m).

Currency review

Movements in foreign exchange rates can have a significant impact on results. During the year, while there continued to be a high level of volatility in exchange rates, the sterling average exchange rate year-on-year against the US dollar weakened by only 1% and the sterling average exchange rate against the euro did not move. The sterling spot rate against the US dollar from 31 December 2019 to 31 December 2020 strengthened by 4% and the sterling spot rate against the euro from 31 December 2019 to 31 December 2020 weakened by 6%.

Zotefoams is a predominantly UK-based exporter which invoices mostly in local currency. In 2020, approximately 79% of sales (2019: approximately 87%) were denominated in currencies other than sterling, mostly US dollars or euros. Most operating costs are incurred in sterling, other than the main raw materials for polyolefin foams used for production in the UK, which are euro-denominated, US subsidiary production and operating costs, other subsidiaries' staff and operating costs and some HPP raw materials, which are US dollar-denominated. The Group therefore uses forward exchange contracts to hedge its foreign currency transaction risk. The Group generated a net loss on forward exchange contracts of £0.1m (2019 loss: £0.9m).

Zotefoams also faces translation risk. Zotefoams plc, the parent company, holds the Group's multi-currency borrowings facility and has provided intercompany loans and intercompany trading facilities to the USA and Poland to support the Group's capacity expansion projects. It also has a growing footwear business, which is invoiced from the UK in US dollars, adding to its exposure to foreign currency denominated net assets. This translation exposure is mitigated, where possible, through an offset with same-currency liabilities, primarily through borrowing in the relevant currency. Every month, these foreign currency denominated intercompany net positions, despite being cash neutral, require to be translated by Zotefoams plc on a mark to market basis and the movement taken to the Company income statement. This treatment also applies to the non-sterling accounts receivable balances held on the Company's balance sheet, the impact of which should reverse through forward currency contracts, but is subject to the timing difference between the recording of accounts receivable and cash received. In the year, the Group recorded a translation loss in the income statement of £0.2m (2019 loss: £0.5m).

Currency movements during the year negatively impacted Group revenue by £0.1m (2019: £2.0m positive impact). They also negatively impacted operating costs by £0.1m (2019: £0.9m negative impact), resulting in a net negative impact of £0.2m (2019: benefit £1.1m) before hedging. The combined impact on the income statement of transactional and translational foreign currency movements was a charge of £0.3m (2019: charge of £1.4m), resulting in a net currency negative impact for the year of £0.6m (2019: negative impact £0.3m).

We expect growth to come mainly from outside the UK and recognise that one of our principal risks is our exposure to foreign currency fluctuations, particularly in the US dollar. With respect to transactional risk, the Group's faster growth outside the UK will increase exposure, but will continue to be mitigated through forward exchange contract hedging activities, which cover a defined portion of the anticipated exposure over a rolling 18-month period. With respect to translation risk, the Group's major committed capacity investments are now complete and intercompany debt and intercompany trading balances are expected to have peaked. They will begin to fall as cash flows from those subsidiaries are used to pay back these positions, all of which reduce exposure. Our investment in overseas operating locations will also contribute to an effective natural hedge against currency fluctuation. We recognise, however, that inherent risk will remain. Based on 2020, it is estimated that, with respect to transaction risk and for every one percentage point movement in the US dollar/sterling rate, profit moves by £0.25m unhedged and £0.08m hedged. In the year, it is assumed that the transaction risk from euro/sterling movements continues to be substantially naturally hedged, with sales revenues offset by costs, primarily related to raw material purchases and certain further processing costs.

The Group does not currently hedge for the translation of its foreign subsidiaries' assets or liabilities. The foreign currency hedging policy is kept under regular review and is formally approved by the Board on an annual basis.

Tax and earnings per share

The effective tax rate for the year before exceptional item is 13.7% (2019: 18.2%), which is below the Group's weighted average corporate tax rate for the year of 19.7% (2019: 18.7%). The effective tax rate for the year is 13.7% (2019: 16.2%). The lower effective tax rate for the year arises primarily from an adjustment for overpayments made in previous years and research and development tax credits. Net income tax paid during the year was £1.1m (2019: £2.3m).

Basic earnings per share before exceptional item was 14.87p (2019: 14.91p), in line with the previous year. Basic earnings per share was 14.87p (2019: 17.10p), a reduction of 13%, reflecting the impact of the successful litigation claim against the previous pension scheme advisors on the 2019 figure.

Currency impact on business segments in 2020

Currency had negligeable impact on the Group's performance

Group revenue £m

*  Constant currency, adjusting 2020 values to 2019 rates.

Exchange rates

Zotefoams transacts significantly in euros and US dollars. The exchange rates used to translate the key flows and balances were:

Dividend

The Board has a progressive dividend policy, recognising the importance to our shareholders of the dividend as part of their overall return. In August 2020, the Board announced its decision to reinstate a dividend, having fully repaid the small amount of Government support it had received. This followed its previous decision not to recommend a final dividend for 2019, ordinarily payable in May 2020, as a result of the extraordinary uncertainty posed by the COVID-19 outbreak at that time. With continuing confidence in the Group's future prospects and financial position, the Directors are now proposing a final dividend of 4.27p (2019: nil), which would be payable on 1 June 2021 to shareholders on the Company register at the close of business on 7 May 2021. Taken with the interim dividend of 2.03p (2019: 2.03p) this would bring the total dividend for the year to 6.30p and would represent a dividend cover of 2.4 times (2019: 8.4 times).

Cash flow, investment and net debt

Net cash inflow from operations before investment in working capital increased 4% to £16.1m (2019: £15.4m). Without the 2019 award of £1.1m following successful litigation specific to the DB Scheme, see Exceptional item above and Post-employment benefits below, net cash inflow from operations before investment in working capital increased 12%, demonstrating the strong cash-generative potential of the business. £2.4m (2019: £1.9m) of this was re-invested in working capital. Trade and other receivables reduced by £1.2m (2019: reduced £2.7m), reflecting strong cash recovery and a reduction in overdue balances to below 0.5%. Inventories increased by £4.5m (2019: increased £0.9m). Higher footwear demand, Brexit-related polyolefin foams contingency stock and T-FIT technical insulation inventory build for H1 2021 drive this increase. The change in mix also impacts value, with HPP raw materials being significantly more expensive than their polyolefin counterparts and their uniqueness requiring higher inventory levels. Trade and other payables increased £1.0m (2019: decreased £3.7m), with higher purchases to support anticipated Q1 2021 demand offset by more punctual supplier payments. Zotefoams recognises the importance of its supplier relationships and has improved its performance with respect to honouring agreed payment terms. As a result of the above, cash generated from operations was £13.0m (2019: £11.8m), up 10%.

During the year, the Group paid interest of £1.1m, of which it capitalised £0.6m (2019: paid interest of £1.0m, of which it capitalised £0.9m) on qualifying assets under IAS 23 "Capitalisation of Borrowing Costs". The interest paid has been split between operating activities of £0.5m (2019: £0.1m) and investing activities of £0.6m (2019: £0.9m) to reflect the Group's utilisation of the interest paid. Taxation paid during the year amounted to £1.1m (2019: £2.3m), the reduction being a result of lower 2019 payments including those for Q3 and Q4 2018 and payments on account for Q1 and Q2 2019 based on higher profit expectations at the time.

Zotefoams' property, plant and equipment capital expenditure was largely focused on capacity expansion, with total expenditure including capitalised interest of £13.0m (2019: £24.4m). This follows investments of £72.4m in the previous five years. The 2020 expenditure was almost entirely related to projects begun in 2019, with other expenditure minimised or eliminated in line with tight cash control in the face of the COVID-19 pandemic. £6.9m of this year's capital expenditure was directed to the Poland manufacturing facility, which was commissioned in February 2021 and is now expanding products delivered from the UK and USA plants. A small amount of capital investment is outstanding in Poland, to be completed during 2021, and certain expenditure on our ReZorce^® barrier technology development is expected to be capitalised in line with accounting standards. Other than this, we expect capital expenditure to return to levels more in line with the Group's depreciation charge. The Group also invested £0.3m (2019: £0.9m) in intangible assets, with the higher 2019 amount relating to an upgrade of the Group's Microsoft AX ERP system to the latest version.

After dividends paid in the year amounting to £1.0m (2019: £3.0m), repayments of £1.5m (2019: £1.5m) in relation to the £7.5m sterling term loan, payable in equal quarterly instalments, and the inclusion of £1.4m (2019: £1.2m) of lease liabilities in accordance with IFRS 16, closing net debt was £35.6m (2019: £31.9m). Under the definition of the bank facility agreement, which adjusts for the impact of IFRS 2 and IFRS 16, net debt was £34.2m (2019: £30.7m). At the year end, the Group remains comfortably within its bank facility covenants, with a ratio of EBITDA to net finance charges of 24 (2019: 73), against a covenant minimum of 4, and net debt to EBITDA (leverage) of 2.1x (2019: 2.0x), against a covenant of 3.0x. We expect to remain within revised covenant levels going forward.

Investments

Given the capital-intensive nature of the Zotefoams business, long lead times for key equipment and the importance of operational gearing, investment decisions require significant planning and are made with a clear assessment of strategic fit, risk, risk appetite and expected returns. Confidence in the Group's developing portfolio of HPP opportunities is a significant consideration in determining the timing of certain investments, while the strategic importance of maintaining growth in the profitable Polyolefin Foams business, the Group's largest volume product range, informs the decision to increase total Group capacity versus relying solely on mix enrichment.

Zotefoams targets improvements in the Group's return on capital over the investment cycle, while recognising the short-term impact on this return during construction and operating initially at lower utilisation levels. When Zotefoams embarks on investment in a major expansion or new location, such as installation of extrusion and high-pressure capability at our existing Kentucky, US site or the most recent investment in foam manufacturing at the Poland site, we take into account the importance of scale and dilution of heavy infrastructure cost over a (future) second or third line. As such, the first step is invariably more dilutive to capital return than any subsequent investments.

Zotefoams defines the return on capital employed (ROCE) as operating profit before exceptional items divided by the average sum of its equity, net debt and other non-current liabilities. This measure excludes acquired intangible assets and their amortisation costs. We also exclude significant capacity investments under construction until they enter production. We do not attempt to adjust for the first phase inefficiencies as mentioned above. In 2020, the return on capital employed decreased to 9.0% (2019: 10.5%). The cause of this movement is two-fold. Impacting the numerator, operating profit was lower than previously anticipated, mainly as a result of well-publicised macroeconomic challenges related to COVID-19, which reduced asset utilisation. Impacting the denominator has been the increasing capital base following the completion of our investments in the UK and the USA. If the capacity investment still under construction, namely our Poland manufacturing facility, were also included, the return on capital employed reduced to 7.1% from 8.1% in 2019.

Investing in growth (£m)

Post-employment benefits

As previously reported, the Company provided £1.3m 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 small accrual to take steps to break this link. The action to break the link was completed in 2018. In 2019, the Company was successful in a claim against the advisers of both the Company and the Trustees and was awarded £1.1m following mediation, which it recorded as an exceptional item in the income statement. After deduction of costs incurred by the Company, the net award of £0.9m was transferred into the DB Scheme to help fund its deficit.

A full actuarial valuation of the DB Scheme is scheduled as at 5 April 2020, in line with the requirement to have a triennial valuation. As at the date of this report, the final outcome is still pending. The previous triennial valuation was completed as at 5 April 2017, on a Statutory Funding Objective basis, and calculated a deficit for the Pension Scheme of £4.2m. As a result, the Company agreed with the Trustees to make contributions to the DB Scheme of £43,300 per month to meet the shortfall by 31 October 2026, up from £41,000 per month previously. In addition, the Company pays the ongoing DB Scheme expenses of £15,000 per month (previously £10,600 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 increased by £1.9m to £8.9m as at 31 December 2020 (2019: £6.9m). The main factor contributing to this increase was the change in assumptions, which has significantly increased the value of the defined benefit obligation. This is primarily due to a lower discount rate following falls in corporate bond yields over the year. However, this was slightly offset by the actual investment return achieved on the assets being higher than expected. The deficit is the net total of £31.9m (2019: £29.6m) of assets and £40.8m (2019: £36.5m) of liabilities and represents 9.4% (2019: 7.7%) of total consolidated net assets. Zotefoams does not consider its pension scheme to be a key risk to its ability to achieve its strategic objectives. Mitigation of further risk is expected to come from our growth expectations and the refocus by the pension Trustees on a lower-risk strategy to meet the DB Scheme's deficit shortfall.

Going concern

At 31 December 2020, the Group's gross finance facilities were £53.8m (2019: £55.2m), comprising a multi-currency term loan of £25.0m, a multi-currency revolving credit facility of £25.0m and a remaining balance of £3.8m (2019: £5.2m) of a further £7.5m 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, £10.7m was undrawn on the facility (2019: £17.7m). At the same date, the Group also held £8.5m (2019: £6.7m) of cash and cash equivalents. The facility is subject to two covenants, which are tested semi-annually: net debt to EBITDA (leverage) and EBITDA to net finance charges.

The Directors believe that the Group is well placed to manage its business risks and, after making enquiries including a review of forecasts and predictions, taking account of reasonably possible changes in trading performance and considering the existing banking facilities, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months following the date of approval of the financial statements. The Directors have also drawn upon the experiences of 2020 and the Group's success in reacting to the challenges of COVID-19 through its safety protocols and cost and cash management, all of which could be replicated in a similar scenario.

After due consideration of the range and likelihood of potential outcomes, the Directors continue to adopt the going concern basis of accounting in preparing the Annual Report.

Financial risk management

The main financial risks of the Group relate to funding and liquidity, credit, interest rate fluctuations and currency exposures.

G C McGrath

Group CFO

22 March 2021

Consolidated income statement

For the year ended 31 December 2020

Consolidated statement of comprehensive income

For the year ended 31 December 2020

Consolidated statement of financial position

As at 31 December 2020

Consolidated statement of cash flows

For the year ended 31 December 2020

Consolidated statement of changes in equity

For the year ended 31 December 2020

1. General overview and accounting policies

Basis of preparation

Zotefoams plc (the 'Company') is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK. The registered office of the Company is 675 Mitcham Road, Croydon CR9 3AL.

The preliminary results (unaudited) (referred to as the 'preliminary results') include the results of the Company and its subsidiaries (together referred to as the 'Group'). The preliminary results of the Group have been prepared on the basis of the accounting policies set out in the statutory financial statements for the year ended 31 December 2019. Whilst the financial information included in this announcement has been computed in accordance with the recognition and measurement requirements of international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union, this announcement does not itself contain sufficient disclosures to comply with IFRS.

The information for the year ended 31 December 2020 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 2019 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 2020 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the Directors in these preliminary results and will be delivered to the Registrar of Companies following the Company's annual general meeting.

The preliminary results are prepared on the historical cost basis except for derivative financial instruments which are stated at their fair value. The same accounting policies, presentation and methods of computation are followed in the preliminary results as were applied in the Group's 2019 annual audited financial statements.

2. Segment reporting

The Group's operating segments are reported in a manner consistent with the internal reporting provided to and regularly reviewed by the Group Chief Executive Officer, David Stirling, who is considered to be the 'chief operating decision maker' for the purpose of evaluating segment performance and allocating resources. The Group Chief Executive Officer primarily uses a measure of profit for the year (before exceptional items) to assess the performance of the operating segments.

The Group manufactures and sells high-performance foams and licenses related technology for specialist markets worldwide. The Group's activities are categorised as follows:

Polyolefin Foams: these foams are made from olefinic homopolymer and copolymer resin. The most common resin used is polyethylene.

High-Performance Products ('HPP'): these foams exhibit high performance on certain key properties, such as improved chemical, flammability, temperature or energy management performance. Turnover in the segment is currently mainly derived from products manufactured from three main polymer types: PVDF fluoropolymer, polyamide (nylon) and thermoplastic elastomers. Foams are sold under the brand name ZOTEK^®, while technical insulation products manufactured from certain materials are branded as T-FIT^®.

MuCell Extrusion LLC ('MEL'): licenses microcellular foam technology and sells related machinery.

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.

3. Exceptional item

In the prior 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 £1,050k following mediation and has recorded this as an operating exceptional item in the income statement. Of this amount, £941k was repaid to the DB Scheme and £109k expenses reimbursed to the Company. 

4. Dividends and earnings per share

The proposed final dividend for the year ended 31 December 2020 of 4.27p per share (2019: nil) is subject to approval by shareholders at the AGM and has not been recognised as a liability in these financial statements. The proposed dividend would amount to £2,057k if paid to all shareholders on the Company register at the close of business on 7 May 2021.

Earnings per ordinary share

Earnings per ordinary share is calculated by dividing consolidated profit after tax attributable to equity holders of the Company of £7,163k (2019: £8,217k) 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 2020 was 459,201 (2019: 178,395). 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.

5. Issued share capital

Issued, allotted and fully paid ordinary shares of 5p each:

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled, on a poll, to one vote per share at meetings of the Company.

6. Interest-bearing loans and borrowings

In May 2018 the Group completed a debt refinancing to enable it to continue to grow capacity and meet its expected demand growth. These facilities are secured against the property, plant and equipment and trade receivables of the Group. The total facility of £53.8m comprises a £25m multi-currency term loan, repayable in two equal instalments of £5m during year four and year five, with the remainder at the end of year five, a £25m multi-currency revolving credit facility, repayable on demand and a further £3.8m sterling term loan, renewable annually and repayable over five years in equal quarterly repayments over the term. The negotiated facility also includes a £25m accordion feature to provide additional flexibility to pursue further investment opportunities in the future.

At the end of the financial year, the Group has utilised £25m ($27.3m and £4.5m) of the multi-currency term loan, £14.8m (€16.5m) of the revolving facility and has an outstanding £3.8m on the sterling term loan. The total amount of £42.7m above is net of £0.4m loan origination fees paid upfront, being amortised over the period of the loan.

7. Property, plant and equipment

Group

8. Financial instruments and financial risk management

Capital management

The Group's objectives, when managing capital, are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group can adjust the amount of dividends paid to shareholders, issue new shares, sell assets or manage investment expenditure to reduce debt.

The Group monitors capital on the basis of the following leverage ratio: Net Borrowings divided by previous twelve months EBITDA (as per bank facility agreement).

Loan Covenants

Under the terms of the major borrowing facilities, the Group is required to comply with the following financial covenants:

·      The ratio of Net Borrowings on the last day of the relevant period to Earnings before interest, tax, depreciation and amortisation, share of profit/(loss) from joint venture, equity-settled share-based payments and exceptional items (EBITDA) shall not exceed 3.00:1.00

·      The ratio of EBITDA to Net Finance Charges in respect of the relevant period shall not be less than 4.00:1.00

The Group has complied with these covenants throughout the financial year.

Net borrowings comprise of current and non-current interest-bearing loans and borrowings of £42,693k, as per note 6, and cash and cash equivalents of £8,503k.

EBITDA comprises of:

Net finance charges comprise of interest income of £26k and finance costs expensed of £707k.

The Group's objective is to maintain leverage below the Board's appetite of 2.0. However, it has accepted that this ratio will increase as the Group's capacity expansion programme completes, while remaining below the covenant level. This is expected to reduce quickly back below the Board's appetite as this new capacity gets utilised.

The bank covenant definition does not include the impact of IFRS 16 "Leases", which would have moved the ratio from 2.12 to 2.20.

9. Changes in Accounting Estimate

Following a review of the Group's assets, the Directors believe it appropriate to increase the estimated useful life of a number of items within plant and machinery from 15 years to 20 years. This change has resulted in a depreciation expense £881k lower than under the previous estimate. A similar impact is anticipated in future accounting periods.