![](data:image/svg+xml;base64,PD94bWwgdmVyc2lvbj0iMS4wIiBlbmNvZGluZz0iVVRGLTgiIHN0YW5kYWxvbmU9Im5vIj8+CjwhRE9DVFlQRSBzdmcgUFVCTElDICItLy9XM0MvL0RURCBTVkcgMS4xLy9FTiIKImh0dHA6Ly93d3cudzMub3JnL0dyYXBoaWNzL1NWRy8xLjEvRFREL3N2ZzExLmR0ZCI+Cjxzdmcgdmlld0JveD0iMCAwIDkwOSAxMjg2IiB2ZXJzaW9uPSIxLjEiIHhtbG5zPSJodHRwOi8vd3d3LnczLm9yZy8yMDAwL3N2ZyIgeG1sbnM6eGxpbms9Imh0dHA6Ly93d3cudzMub3JnLzE5OTkveGxpbmsiPgo8ZGVmcz4KPC9kZWZzPgo8L3N2Zz4=)
30
Zotefoams plc
Annual Report 2022
food and drink, require their packaging to
provide a barrier to oxygen and moisture
and this is typically delivered through a
combination of different materials in the same
pack. It is very effective and cost-efficient
and therefore widespread, however, often
extremely difficult to recycle and almost never
circular. We have proven that our ReZorce
packaging system can provide the required
barrier properties, is easily recycled using
common infrastructure available today and
can be made using a high proportion of
recycled raw materials. Overall, this solution
offers a lower carbon footprint for commonly
packaged foodstuffs, in some cases
a reduction of more than 50%. Our
go-to-market plans are moving from technical
development into pre-market trials and
the main challenge now is to prove the
“downstream” solution of turning ReZorce
sheet into specific packaging formats, ideally
using existing infrastructure.
Revenue from our MEL business unit grew
23% to £2.8m (2021: £2.3m), while the
segment loss widened to £1.6m (2021: £0.5m)
before amortisation of acquired intangibles, a
direct result of the non-capitalised investment
to develop ReZorce technology. In addition to
this, we capitalised £1.4m (2021: £1.0m) of
operating costs and invested £0.8m (2021:
£0.9m) in tangible fixed assets. This included
the acquisition of a full-scale extrusion line and
carton filling and packing line as well as some
ancillary equipment in Denmark, which now
operates as a development centre within the
MEL division, with scope to scale up for initial
market launch.
The market opportunity for lower carbon
footprint packaging is vast. Cartons and
pouches together generate revenues in
excess of $40bn p.a. We recognise that
launching products into this market, which
requires us to overcome significant market
and technical hurdles, is best done with
a strategic investor to mitigate the risk,
ideally through a combination of their own
experience and financial investment. Late in
2022, we appointed a USA-based adviser
to facilitate the interactions with potential
partners, and this engagement is progressing.
Capacity and investment
Zotefoams’ manufacturing process comprises
three main stages: extrusion of a polymer
sheet, high-pressure gassing of this
sheet with nitrogen and final expansion
in a lower-pressure environment. The
infrastructure around these processes is
complex and costly and, therefore, ideally
supports multiple production vessels.
Most products can be made on multiple
production lines, although some of our older
assets are not capable of making all products
we sell today. Our UK site manufactures all
HPP products and sends partly finished
polyolefin products for the final expansion
process to Poland, which is closer to many
customers, reducing overall transport costs
and emissions. Our site in Kentucky, USA is
well-placed geographically for its customer
base and operates largely independently of
the other two foam manufacturing locations.
Following the high levels of capital invested
prior to 2021, the majority of investment in
foams manufacturing over the past two y
ears has been to improve efficiency, replace
aging equipment and address bottlenecks
in production processes. The foams business
has sufficient capacity, with minimal
incremental investment, to deliver our growth
plans for the foreseeable future. Our facilities
in the USA and Poland have the flexibility for
investment to support longer-term growth.
Zotefoams also invested £2.3m (2021: £1.9m)
in developing the ReZorce mono-material
barrier packaging technology, which is
explained in more detail above.
Measuring strategic progress
The markets in which we operate are driven
by global trends – environment, regulation
and demographics – which we believe offer
the potential for high rates of market growth
as well as opportunity for our disruptive
technology solutions. We assess progress
on six separate metrics:
1.
We expect our HPP business unit to offer
higher growth rates and better margins
than Polyolefin Foams. Sales in our HPP
business unit, which offers unique
disruptive products and solutions,
now account for 43% (2021: 42%) of
Group revenues and recorded growth
of 29% (16% in constant currency). The
unique benefits offered by these products,
combined with market recovery in aviation,
offer good growth prospects. Margins
in the period were 28% (2021: 21%),
significantly better than the margins in
our Polyolefin Foams business unit
2.
Sales of our highly differentiated AZOTE
polyolefin foam products increased by 25%
(22% in constant currency), against our
target rate of twice global GDP growth.
While headline growth was significant,
it was not underpinned by increased
volumes, which declined by 1%. 2022
was a year in which some traditionally
large polyolefin market segments,
automotive in particular, declined,
while other areas grew considerably
3.
Group operating margin increased to
10.9% (2021: 8.1%). Price rises were
implemented to recover input cost inflation,
which was the primary reason for the
reduced operating margin in 2021, and
foreign exchange rates were favourable in
this period and unfavourable in the previous
period. The increased operating loss
in MEL was a direct result of planned
increased investment to deliver the
objectives of ReZorce barrier packaging.
Excluding MEL, operating margin
was 12.7% (2021: 9.0%), or 11.2% in
constant currency
4.
Group return on capital improved to 10.1%
(2021: 6.1%), largely as a result of increased
profitability of the Polyolefin Foams and
HPP business units, partly offset by the
increased losses of MEL as noted above.
The Group’s average capital employed
increased only slightly by 2%, with capital
expenditure below depreciation and
amortisation and little movement in total
working capital. Inventories were level and
increased receivables offset increased
payables, linked to higher selling prices and
higher input costs and variable-pay-related
accruals respectively, and both were
impacted by the stronger US dollar
exchange rate
5.
Our approach to environmental
sustainability and climate change has been
clarified and improved in our business. The
business now uses fully sustainable (from
renewables) electricity where available.
We have made significant progress in
waste reduction and 85% of revenues
are in applications considered “green”,
as described in our ESG report, see page
53. In March 2022, we incorporated clearly
defined ESG targets, which have a small
impact on interest margin, in our bank
refinancing arrangements and these are
supplemented by internal targets in relation
to other ESG metrics
6.
MEL has potentially disruptive technology to
improve sustainability, primarily in consumer
packaging. We intend to invest within
the Group’s risk appetite to develop and
commercialise this technology, which at this
time is focused on ReZorce mono-material
barrier packaging. This approach
recognises that there is a high “option
value” for success associated with this
higher risk profile. We have made good
progress in ReZorce development,
acquired complementary know-how and
assets in a new entity in Denmark and
begun the process to find the right strategic
investor to accelerate commercialisation.
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, with health and safety an
agenda item at every Board and Executive
Committee meeting.
The main safety metric in our business is
reportable lost time incidents and, regrettably,
we had two such incidents during the year
(2021: nil) from which both individuals made
Group CEO’s review
Continued