Zotefoams PLC Interim Results (9774W)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Zotefoams Plc	LSE:ZTF	London	Ordinary Share	GB0009896605	ORD 5P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	-5.00	-1.33%	370.00	371.00	380.00	380.00	375.00	375.00	8,688	16:35:27

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Plastics Foam Products	126.98M	9.24M	0.1892	20.03	185.13M

Zotefoams (LSE:ZTF)
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From Apr 2019 to Apr 2024

TIDMZTF

RNS Number : 9774W

Zotefoams PLC

07 August 2018

Tuesday 7 August 2018

Zotefoams plc

Interim Report for the Six Months Ended 30 June 2018

Continuing strong organic sales growth

Capacity investment projects on track

Zotefoams plc ("Zotefoams", or "the Group" or "the Company"), a world leader in cellular material technology, today announces its interim results for the six months ended 30 June 2018.

Highlights

-- Record Group Revenue of GBP37.89m, up 12% on prior year (2017: GBP33.84m) and 17% in constant currency:

o 4% increase in Polyolefin Foams supported by new USA capacity

o 82% growth in High Performance Products ("HPP"), which now represents 24% (2017: 15%) of Group sales

o MuCell Extrusion sales of GBP0.86m (2017: GBP1.96m) with 20% underlying growth excluding the large, one-off capital equipment sale in 2017

   --      Profit before tax and exceptional item up 21% to GBP4.60m (2017: GBP3.81m) 
   --      Profit before tax up 64% to GBP4.60m (2017: GBP2.81m) 
   --      Successful bank refinancing and GBP20.6m equity raise (before expenses) completed in May 
   --      Three major capital projects to expand capacity to support growth are on schedule 
   --      Interim dividend increased by 3.1% to 1.97 pence 
   --      The Group continues to trade in line with Board expectations

Financial highlights

 
                                        Six months   Six months   Change 
                                           ended 30     ended 30 
                                          June 2018    June 2017 
                                               GBPm         GBPm        % 
    Group Revenue                             37.89        33.84       12 
    Gross Profit                              12.92        12.02        7 
    Gross Profit margin                       34.1%        35.5%      (4) 
    Adjusted1 Operating Profit                 5.17         4.26       21 
    Operating Profit pre exceptional 
     item                                      5.02         4.10       22 
    Operating Profit                           5.02         3.10       62 
     Adjusted1 Profit before tax               4.75         3.97       20 
    Profit before tax pre exceptional 
     item                                      4.60         3.81       21 
    Profit before tax                          4.60         2.81       64 
    Basic EPS (p) pre exceptional 
     item                                      8.07         7.04       15 
    Basic EPS (p)                              8.07         5.20       55 
     Interim dividend (p)                      1.97         1.91        3

(1) Before amortisation of acquired intangible assets GBP0.15m; (2017 GBP0.16m) and exceptional items GBPnil; 2017: GBP1.0m)

Commenting on the results, David Stirling, Group CEO, said:

"Zotefoams' ambition is to be the world leader in cellular materials technology in our chosen markets and, in the period, we have delivered strong organic growth and accelerated our investment plans to realise this ambition.

In the first half of 2018 we also commissioned the initial phase of capacity expansion in Kentucky, USA, which allowed us to increase sales volumes in what remains a capacity constrained environment. Sales of higher value High Performance Products have grown very strongly and now represent 24% (2017: 15%) of Group sales. We enter the second half of the year with a strong order book, a differentiated product portfolio and continued growth expectations across all business units.

The Group continues to trade in line with the Board's expectations and the Board remains confident in the future prospects for the business".

Enquiries:

 
 Zotefoams plc                +44 (0) 208 664 1600 
 David Stirling, Group CEO 
 Gary McGrath, Group CFO 
 
 IFC Advisory                 +44 (0) 203 934 6630 
 Graham Herring 
  Miles Nolan 
  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 MuCell(R) 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) are registered trademarks of Zotefoams plc

MuCell(R) is a registered trademark of Trexel Inc.

Results overview

In the first six months of 2018 Group revenue increased by 12% to a record GBP37.89m (2017: GBP33.84m). In constant currency, growth was 17%, with particularly strong sales performance in our HPP business and continued good progress in Polyolefin Foams.

Gross profit increased by 7% to GBP12.92m (2017: GBP12.02m) with improved volumes, a strong positive mix impact from our HPP business growth and price increases in polyolefin foams across the UK and Europe. Our gross margin percentage moved from 35.5% in 2017 to 34.1%, reflecting unfavourable foreign exchange movements and higher overhead and non-optimal running costs as we started up polyolefin capacity in the USA.

In H1 2018 profit before tax and exceptional item grew by 21% to GBP4.60m (2017: GBP3.81m), while profit before tax was up 64% to GBP4.60m (2017: GBP2.81m). In H1 2017 the Group reported an exceptional item in relation to the breakage of salary linkage of its Defined Benefit Pension Scheme, amounting to GBP1.0m.

Basic earnings per share before exceptional item increased to 8.07p (2017: 7.04p) and includes the two-month impact of the equity raise completed in May 2018. The Directors have decided to increase the interim dividend to 1.97p per share (2017: 1.91p), an increase of 3.1%, reflecting the Board's continued confidence in the Group's future.

Financial and operational review

High-Performance Products ('HPP')

HPP sales almost doubled in constant currency, to GBP9.70m (2017: GBP4.98m). This increase was predominantly a result of very strong growth in footwear products as our foam becomes established in more shoe models. Footwear is now the largest market within HPP. We also saw strong growth in ZOTEK(R) F fluoropolymer foams, against a weaker comparative which had been adversely affected by an aviation customer destocking. ZOTEK(R) N nylon foam and our T-FIT(R) insulation products reported small absolute declines in revenue, although these were timing-related, and we remain excited about the long-term growth prospects of these products. In reporting currency sales of GBP9.04m were 82% above the previous year (2017: GBP4.98m).

The segment profit in HPP is an aggregate of products and markets at different stages of development. Within this portfolio ZOTEK(R) PEBA and ZOTEK(R) F foams, mainly used for footwear and aviation respectively, have both reached a scale such that they are now profitable, and we are focusing on cycle time and material efficiency in advance of additional equipment commissioning to increase capacity for these products scheduled in H1 2019. T-FIT(R) insulation has a mixture of profitable lines and earlier stage products, with investment in operational capability in China and sales teams globally. We intend to continue with both this investment and that in nylon foam, both of which we believe offer good potential to support our long-term ambition. Segment profit in HPP increased by 158% to GBP1.68m (2017: GBP0.65m), delivering a 19% segment profit margin for the period (2017: 13%).

Polyolefin Foams

In constant currency, sales in Polyolefin Foams increased by 7% to GBP29.4m (2017: GBP27.5m), with volumes 3% ahead of 2017. This sales increase was tempered as we operated at capacity during the period, as HPP took a higher allocation of UK capacity and our USA facility ramped up output in the second quarter. As a consequence of this, some capacity allocation decisions were required across the product range and in most geographical markets. In continental Europe, our largest market, sales increased by 12% with transportation and industrial sales particularly strong. In the UK revenue grew 3% while in North America, which was most impacted by capacity allocation, sales increased 2%. Sales in other geographies, representing 7% of Polyolefin Foams revenue, were relatively flat due to our allocation policies. In reporting currency, Polyolefin Foams sales increased 4% to GBP27.98m (2017: GBP26.90m).

Segment profit in Polyolefin Foams, before exceptional items, declined by 21% to GBP4.55m (2017: GBP5.73m), as the benefit of increased sales volume, better average sales prices and lower average input costs for our main raw material, low density polyethylene ('LDPE'), was more than offset by additional depreciation and operating costs in the recently commissioned USA capacity expansion. While the additional costs of operating this facility were expected, a slower than planned ramp-up of capacity resulted in less favourable operating leverage, additional shipping costs from the UK to support North American customers and higher than normal scrap levels. This situation is largely resolved at this time and we are continuing to work through a sales backlog and deliver operational efficiency improvements, the last of which will come on line late in Q4. This delivered a segment profit margin of 16% (2017: 21%).

MuCell Extrusion LLC ('MEL')

MEL licenses microcellular foam technology and sells related machinery. Sales in the period were GBP0.86m (2017: GBP1.96m) with 2017 benefiting from the shipment of a full extrusion line to a customer in Japan, representing MEL's largest individual equipment order. Excluding the extruder shipment from 2017, in constant currency total sales increased by 20%, with licence and royalty fees also increasing by 20%. We continue to make progress in developing our technology and selling equipment to convert additional licensee lines but at a pace which has not been in line with the longer-term goals of the Zotefoams Group. A recent review has resulted in a more focused organisational structure with clarity on the required engineering and support staff to deliver to the potential of the technology.

MEL reported a segment loss after amortisation costs of GBP0.78m (2017: loss GBP0.87m, which included a one-off charge of GBP0.31m arising from inventory adjustments).

Currency review

As a predominantly UK-based exporter, Zotefoams has over 80% of its sales denominated in US dollars and euros. With most costs incurred in sterling, other than the main raw materials processed at the Croydon, UK, plant, which are in euros, and the operating costs of the Group's US and Chinese activities, which are in US dollars, movements in foreign exchange rates can have a significant impact on the Group's results. The average Euro rate was 1.14:GBP1 for the first six months of 2018 (equivalent 2017 rate 1.16:GBP1) and the average US dollar rate was 1.38:GBP1 (equivalent 2017 rate 1.27:GBP1).

The period-end exchange rates and the movement between the period opening and closing rates generated a combined forward contract and non-cash translation gain of GBP0.67m (2017: loss of GBP0.27m), offsetting movements related to trading activity, which is included in administration expenses.

Investment in organisation

The Group continues to pursue its expansion strategy, founded on proprietary cellular-materials technology with an increasing portfolio of differentiated products.

Organic growth with unique products requires the Group to actively invest in manufacturing, processing and engineering capability to deliver the new capacity coming on-stream around the world. Within cost of sales, these costs increased by GBP1.5m in H1 2018 vs the previous period.

This organic growth also requires investment in, and reprioritisation of technical, sales-focused and administration resources to create, execute and manage this growth. Included within distribution and administrative expenses in the Group's Income Statement are sales and marketing, warehousing, 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, excluding the impact of foreign exchange hedges and translation, increased by a further GBP0.92m to GBP8.56m in H1 2018 (2017: GBP7.65m). The Group expects this investment to continue as it progresses its strategy of mix enrichment and completes its ongoing capital investments.

Group financing

In May 2018 the Group completed a debt refinancing to enable it to continue to grow capacity and meet its expected demand growth securing increased facilities of GBP57.5m (up 64% from previous facilities of approximately GBP35m) at improved pricing. The Facility comprises a GBP25 million multi-currency term loan, a GBP25 million multi-currency revolving credit facility and a further GBP7.5 million sterling annually renewable term loan. The negotiated facility also includes a GBP25 million accordion feature to provide additional flexibility to pursue further investment opportunities in the future.

Simultaneously, the Group successfully raised GBP20.6m (before expenses) of equity through a placing, with proceeds intended for investment in a new Central European foam manufacturing facility.

Tax and cash flow

Zotefoams' estimated average annual tax rate used for the period to 31 December 2018 is 21.41% (31 December 2017: 20.40%), which is above the UK corporation tax rate for the period of 19% due to differences in tax rates across jurisdictions. Cash used in operations was GBP0.63m (2017: generated from operations GBP5.80m), impacted by net investment in working capital in the period of GBP7.82m, mainly growth, mix and timing related. Capital expenditure was GBP5.75m (2017: GBP4.96m), primarily related to completing the capacity expansion project in Kentucky, USA as well as investing in high-temperature low-pressure vessels at the Croydon, UK, manufacturing facility.

After the net cash inflow of GBP20.08m from the May equity raise, net debt (cash less bank overdrafts and other bank borrowings) decreased by GBP10.82m from GBP17.96m (December 2017) to GBP7.14m.

Pensions

A full actuarial valuation of the Defined Benefit Pension Scheme (DB Scheme) as at 5 April 2017, in line with the requirement to have a triennial valuation, was completed during the period and calculated a deficit for the DB Scheme, on a Statutory Funding Objective basis, of GBP4.18m (up from the previous deficit of GBP2.50m). As a result, the Company has agreed with the Trustees to make contributions to the DB Scheme of GBP43,300 per month until October 2026 to eliminate this deficit, up from GBP41,000 per month previously. In addition, the Company will pay the ongoing DB Scheme expenses of GBP15,000 per month (previously GBP10,600).

In the previous period, following legal advice received by the pension trustees and an estimate calculated by the actuaries, the Company provided GBP1m for potential additional liabilities, which was treated as an exceptional item. In the period to June 2018 the process of obtaining informed consent from members of the DB Scheme, to close the scheme effectively, was completed. 70% of the affected members of the scheme consented and a majority of these members are in the higher salary bands, resulting in a low risk of material exposure.

Capital expenditure

Zotefoams is investing significantly in capacity to support future growth. In March 2018 the Group successfully commissioned its full process capability in Kentucky, USA, which cost a total of approximately $33m, including a second high-pressure autoclave for future commissioning, and increases global capacity by approximately 20%. In March 2018 the Group announced the investment of $9m to proceed with the commissioning of that second autoclave, with an expected commissioning date of late 2019. Furthermore, the Group has been investing, since December 2017, in additional high-temperature, low-pressure capacity at its Croydon, UK, plant, expected to come on stream during 2019, with a total investment cost of approximately GBP12m which, although capable of expanding all foams produced by Zotefoams, is targeted at the fast-growing HPP business. And most recently, in May 2018, the Group raised new equity and debt to support investment in a new foam manufacturing plant in Poland, expected to become operational in 2020 and to cost approximately GBP23m to cover land, buildings and the first phase of capacity. All capital projects remain on target for their scheduled completion dates.

Employees and talent management

Talent management continues to be very important to Zotefoams as it grows and evolves, both in the UK and overseas. The opportunities we have, in new products, markets and geographies, require that we identify and develop the right people to define and deliver to our potential. Over the past six months we have continued to recruit to meet the needs of our business.

On behalf of the Board, we would like to thank all our employees for their continued contribution to Zotefoams in the period.

Dividend

Reflecting the Board's continued confidence in the Group's future, the Directors have increased the interim dividend by 3.1%% to 1.97 pence per share (2017: 1.91 pence). The dividend will be paid on 11 October 2018 to shareholders on the Company's register at the close of business on 14 September 2018.

Principal risks and uncertainties

Zotefoams' business and share price may be affected by a number of risks, not all of which are within its control. The process Zotefoams has in place for identifying, assessing and managing risks is set out in the Risk Statement and Principal Risks section on pages 23 to 29 of the 2017 Annual Report. The specific principal risks (which could impact Zotefoams' sales, profits and reputation) and relevant mitigating factors, as currently identified by Zotefoams' risk management process, have not changed significantly since the publication of the last Annual Report and detailed explanations of these can be found in the 2017 Annual Report. Broadly, these risks include operational disruption, operational execution, technology change and competitor activity, people, operational span of control, supply chain disruption, foreign exchange, macro-economic factors, financing, commercial, pension and operational cyber threats.

Current trading and prospects

In our AZOTE(R) Polyolefin Foams business the additional capacity from our Kentucky facility will allow us to deliver against a strong order book through to the end of 2018. In HPP we anticipate sales to increase further with demand for all product lines expected to be higher than first half shipments. In MEL we expect sales to be higher than in the first half as there is a normal seasonality in this business and underlying growth, although with both MEL and T-FIT(R) there is a higher than normal timing risk to revenue linked to customer project completions. Foreign exchange rates are currently at similar levels to those experienced in the second half of 2017 and therefore we anticipate no significant transactional impact for the remainder of the year. Indications are that pricing of Low Density Polyethylene ("LDPE"), our major raw material, will remain at a similar level to the first six months of this year.

Outlook

We enter the second half of the year with a strong order book, a differentiated product portfolio, continued good growth expectations across all business units, and progressing as expected with our capacity expansion projects in the USA, UK and Poland.

The Group continues to trade in line with the Board's expectations and the Board remains confident in the future prospects for the business.

   S P Good                      D B Stirling 
   Chairman                      Group CEO 
   6 August 2018               6 August 2018

ZOTEK(R), AZOTE(R) and T-FIT(R) are registered trademarks of Zotefoams plc. MuCell(R) is a registered trademark of Trexel Inc.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors confirm that these condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting' as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

-- an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

   --      material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The Directors of Zotefoams plc are listed in the Zotefoams plc Annual Report for 31 December 2017, with the exception of the following change in the period: Mr Richard Clowes retired on 16 May 2018. A list of current Directors is maintained on the Zotefoams plc website: www.zotefoams.com

By order of the Board:

 
 S P Good        G C McGrath 
 Chairman        Group CFO 
 6 August 2018   6 August 2018

CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT FOR THE SIX MONTHSED 30 JUNE 2018

 
                                                    Six months ended        Year ended 
                                               -------------------------- 
                                                  30-Jun-18     30-Jun-17    31-Dec-17 
                                                (Unaudited)   (Unaudited)    (Audited) 
                                        Notes       GBP'000       GBP'000      GBP'000 
 Revenue                                    6        37,888        33,842       70,146 
 Cost of sales                                     (24,972)      (21,826)     (44,659) 
-------------------------------------  ------  ------------  ------------  ----------- 
 Gross profit                                        12,916        12,016       25,487 
 Distribution costs                                 (3,432)       (2,603)      (5,754) 
 Administrative expenses before 
  exceptional item                                  (4,460)       (5,313)     (10,359) 
 Exceptional item                                         -       (1,000)      (1,265) 
 Administrative expenses after 
  exceptional item                                  (4,460)       (6,313)     (11,624) 
-------------------------------------  ------  ------------  ------------  ----------- 
 Operating profit                                     5,024         3,100        8,109 
-------------------------------------  ------  ------------  ------------  ----------- 
 Operating profit before exceptional 
  item                                                5,024         4,100        9,374 
-------------------------------------  ------  ------------  ------------  ----------- 
 Finance costs                                        (419)         (287)        (508) 
 Share of loss from joint venture                       (3)           (6)         (53) 
-------------------------------------  ------  ------------  ------------  ----------- 
 Profit before income tax                             4,602         2,807        7,548 
 Profit before income tax and exceptional 
  item                                                4,602         3,807        8,813 
 Income tax expense                         7         (983)         (530)      (1,540) 
-------------------------------------  ------  ------------  ------------  ----------- 
 Profit for the period/year                           3,619         2,277        6,008 
 Profit for the period/year 
  before exceptional item                             3,619         3,084        7,033 
-------------------------------------  ------  ------------  ------------  ----------- 
 Profit attributable to: 
 Owners of the Parent                                 3,619         2,277        6,008 
-------------------------------------  ------  ------------  ------------  ----------- 
                                                      3,619         2,277        6,008 
 Earnings per share attributable 
  to the equity holders of the 
  parent during the period/year 
  (expressed in pence per share) 
 Basic earnings per share                  10          8.07          5.20        13.70 
-------------------------------------  ------  ------------  ------------  ----------- 
 Diluted earnings per share                10          7.94          5.11        13.52 
-------------------------------------  ------  ------------  ------------  -----------