Earnings Call: H2 2021

Mar 22, 2022

Good afternoon, ladies and gentlemen, and welcome to the Zotefoams Plc Preliminary Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Please simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company review all questions submitted today and will publish those responses where it is appropriate to do so. Before we begin, we would like to submit the following poll, and if you would give that your kind attention, I am sure the company would be most grateful. I would now like to hand over, if I may, to David Stirling, CEO. Good afternoon. Good afternoon. Thanks, Mark. As Mark said, if we have any questions, we will address those at the end. It is easier, I think. We do have a fairly full presentation, Gary and I, so given the time, we are going to run through the presentation fairly quickly and save time for some questions later. This year, 2022, well, 2021 is the 100-year anniversary actually of Zotefoams' invention of the process that we use to make foam. It is a very great anniversary to be having. That kind of explains our 100-year slide on the title deck. As we move through, remind everyone that we think about our business in three main areas, polyolefins, high-performance products, and MuCell. Polyolefins are made from low-density polyethylene and derivatives and sold mainly locally, regionally, around the areas we manufacture in Western and Central Europe and in North America, with a little bit of sales into Asia, to a wide variety of applications. Mainly industrial types of applications, and very little goes into what you might think of as single use or disposable. Where that does happen, it is not through our choice, it is through customer choice, but often that is in medical industries where single use is designed in. Our high-performance products are made from materials that are typically difficult to foam by other processes. We make materials from fluoropolymers which do not burn, elastomers which are kind of stretchy and bouncy, amongst other things. The main markets there are in footwear, where we have an exclusive deal with Nike, who use the products for high-performance running and in aviation and insulation for clean rooms and biotech. Which are sold under the T-FIT brand, by the way, the insulation products. MuCell is a technology which is used to put bubbles or foam in continuous processes. I will come to talk about that later. It is a very small but interesting part of our group at the moment. Our strategy is really one of organic growth. We focus on certain markets. We try to do very well in those markets and leverage our unique technology. Having said that, where do we end up, in 2021? Top line, we delivered a record well over the sales last year, GBP 100 million sales. Our profit, as you can see, is actually down, and we will cover that later on, the reasons for that. Earnings has kind of followed profit, with a slight adjustment for the tax charge. We are pretty financially robust. We generate a lot of cash and our gearing ratio is about the same as last time, and crucially after a refinancing fairly recently. We have got banks behind us and quite a lot of headroom. If we look at that revenue in a little bit more detail, we see that polyolefin foams, which is the kind of legacy where the business has come from. Sales are up 10% to a record GBP 56 million. Slightly impacted by currency, mainly the dollar. That is a recovery in a lot of markets, perhaps other than aviation and automotive, which are still kind of stalled last year. It is on a base of 2020, which included a lot of PPE product. We made materials for the U.K. government PPE program in 2020. So the comparative was actually pretty strong there. If we remove that PPE comparative, we saw sales increasing by well over 30%. Our high-performance products sales were up 41%, 47% constant currency. Again, it is mainly a dollar-denominated business, but very strong growth in footwear and that deal with Nike really delivering there. MuCell sales are up on a very small base, 32%. Our profit margins have really been impacted due to, mainly on the polyolefin side, the significant and unpredictable and quick inflation environment that we have seen in raw materials. Gary will cover that a bit later. Effectively, we put prices up in second quarter of 2021 on polyolefins at around the time raw materials started to rise. The pricing on raw materials went a lot higher and stayed a lot higher for longer than we thought. Although we have put in additional price increases through, those are really hitting January this year and April this year. So the lag effect on recovering that inflation is what has dampened the margins there in polyolefin, rather than anything different structurally. So that is the kind of highlights. Just to cover the kind of strategy outlook. We are a plastics processor. We sell into a lot of areas where we believe that the foams are actually the best material solution. Our customers think that we have got very good demand pool and a lot of sustainability structural growth. We think about sustainability, we think about organic growth. That very strong, robust recovery in the polyolefins business kind of demonstrates that, and it is fairly wide-ranging, not just by market, but by geography as well. We have commissioned a new manufacturing site in Poland, which is the third major foam manufacturing site. As yet, it is not fully utilized, and it is carrying a big infrastructure overhead because it is the first tranche of capacity on that site in Southwest Poland, quite close to the German border. It gives us a lot of ability to serve into the German and Central European market and gives us a lot of room for growth there. We have made good progress in new sales development with our ReZorce packaging, and we have kind of repositioned ourselves very slightly on sustainability. I don't think it's anything that we hadn't been doing before, but just building it in a bit more robust way to how we conduct business both internally and externally, I think will be beneficial in the long term. Strategically, we've made good progress. Where does that leave us? It leaves us with a geographical spread, business spread, and industry spread, which you can see is, I think I would characterize as more representative of the underlying demand for our business than last year, 2020, which was very much influenced by COVID. We can see that strong footwear growth coming through in sports and leisure. We can see product protection. We can see the other areas in there, geographically, fairly widely spread. Again, I would say that probably the two markets which demand is not where we'd expect is aviation and automotive, both in transportation. We're seeing that in aggregate of 10% of our sales. I think in a more normal year, that could be 50% or even 80% higher, maybe even double, would be a more normal part of the mix at this point. Still a few market headwinds there, but a very good position in the sales line. What I'd like to do now is turn over to Gary to talk us through the financial review and the cost margins. Okay. Thanks, David. Looking at the abbreviated income statement first, David mentioned the sales line, and the 22% growth was actually 27% if we'd stuck with the same currency rates as the prior year. Gross profit came down GBP 1.2 million and the margin fell, as you can see, to 26% from 33%. If we'd actually extrapolated that same 33.6% onto this year, onto 2021's income, we would have generated another GBP 7.3 million profit. That really is very much explained away by the gross margin impacts. David's mentioned the polyolefin foams. I have a slide coming up that goes into a little bit more detail on that. We saw that really through the whole of the year, escalating very quickly through the first half and then remaining stubbornly high. Freight cost, we didn't really see until the second half and more towards Q4. We ship a lot around the world. I have a comment, little section on a slide coming up. We ship a lot, and we've seen prices move from some $3,000 a container up to $12,000. When you're shipping that between the U.S., U.K., or U.K., China, it does have an impact. Energy, we hedge, and we pretty much hedged for most of the year. We started to see that movement in Q4, and it's really 2022 that we're starting to see the bigger impact on energy. Sterling, about GBP 2 million at the gross margin level, was the impact on that seven that I referenced, relating to primarily the U.S. dollar impact, about an average rate of about 7% above 2020's rate. We brought Poland on, commissioned in February 2021. That's about GBP 1 million plus of additional operating cost at the gross margin level. PBT was down to GBP 7.2 million adjusted, some GBP 1.4 million below the prior year, and that includes half a million of currency adverse impact. As you move towards the EPS number, the primary additional driver is the tax rate. What really happened there is partly, well, initially a lower profit rate, but very much offset by the change in deferred tax charge that we took in the year, and a large part of it, very much a one-off. It primarily relates to the corporation tax change that is happening in 2023 with 19% to 25%. The fact that when the government substantively enacts the terminology used, which it did in May 2021, all businesses have to then apply that rate when they are looking at future changes at the deferred tax, which is specific to differences in the way we treat cost between tax and P&L and the future impact of that. So that was about a GBP 1 million of impact. In addition to that, we are very prudent in the way we treat losses in overseas subsidiaries. We have losses carried forward in the U.S. MuCell is part of that tax group. We do not recognize, even though we expect to be able to use them going forward, we do not use them because we have not got a history of using them in the past. So once that starts to flip, we would move into recognizing them and start seeing a release in future years. But for this year we did not, and that was about a GBP 0.4 million deferred tax charge. That is what drives the EPS number down to 9.31. We are proposing a final dividend, which is 3% up in line with our progressive policy on dividends. Looking at the balance sheet. This is the first time the balance sheet has not moved significantly in the last six or so years. We have been on a significant capacity expansion program. We have invested about GBP 70 million over the last seven years in our assets in the U.K., U.S., and Poland. That is about 75% of our total capital spend. That has effectively come to an end with the commissioning of Poland. Working capital has moved up really in line with business activity. GBP 82 million to GBP 100 million sales means that you have greater receivables. We also had a little bit of an uptick in inventory related to the fact that the Vietnam plants that take our footwear products were shut for a period of two to three months back in Q4. That led to the supply chains slowing down and us having to hold stuff that we would ordinarily have made and immediately got on boats and shipped out. So that since depleted, but it was certainly relevant at the year-end. Mentioned the deferred tax liability or the charge which links into the liability. Post-employment benefits down, and that is really partly a result of the performance of the assets that we have as well as the higher discount rate with corporate bond yields. The result was that leverage remains at 2.1 as with last year, and that is against a leverage covenant of three. Lots of ample headroom, GBP 13 million. ROCE down at 6%, obviously, not something that we are comfortable with. Down from 9%, which was also a low number in 2020. The 9% actually did not include Poland. Our definition of ROCE excludes major assets under construction. So those 23 million of assets were brought in in 2021, and that mostly explains the movement down. We've put a lot of assets in. When we made those decisions, we knew that would have a dilutive impact on ROCE in the short term, but the additional capacity and capability gives us the ability to continue to grow our HPP portfolio, and we expect that to come good in due course. Just a quick comment really on financing, because as at 31st of December, we had a particular specific financing arrangement. That financing arrangement expires in May 2023. At the time of signing the accounts, we would be one year, one month away. That is considered a little bit risky for the auditors to sign off ongoing concern, so we decided to pull ahead the refinancing and actually close that out this month or a week ago. The result of that is that we've actually. It was a very hotly contested event. We got a very good competitive pricing. We decided to remain with Handelsbanken and NatWest and actually on terms which are ratcheted based on leverage, was slightly more favorable than terms that we already felt were very good four years ago. We've switched to a GBP 50 million multi-currency RCF. Previously it was actually 57, but term loan RCF split. So it's given us more flexibility. And the leverage covenant we've lifted to three and a half from three. That's not because we expect to use it, but clearly, there's a significant turbulent times and just having the comfort if you can get it, go for it. And we got it, but it's certainly nothing that we anticipate targeting. But it made sense to push for it, and we were successful in getting it. We've retained an accordion of GBP 25 million should there be something out there we need, or we see in the coming years that would necessitate that. So we've already got pre-approval for that size of funds. And very importantly, this entire deal is linked to ESG. We haven't stated what the terms are yet and the specific targets. We will be doing a lot more of that. But I think part of the competitive nature of this deal was that we had an ESG element, which is very much core to Zotefoams. It is part of what we're doing anyway. So to help explain and help demonstrate the significance of ESG to us, we felt it was a good thing to do to get it into the current loan facility. Cash flow really, in a nutshell, is, EBITDA was pretty much in line. Cash generated from operations, pretty much in line with last year. I explained the working capital. CapEx way down from previous years. It was 13 last year, seven this year, and actually two of that was ReZorce. And net debt down at GBP 1.3 million. So we're still very cash generative, and the CapEx has very much returned to a steady state, more in line with our depreciation charge. Just touching upon some of the key cost factors in LDPE. David spoke about the growth in LDPE, which is very much related to the AZOTE business, not our HPP business. You can see from January 2020 or towards January 2021, the rapid increase, which is what we've experienced, which is some doubling of the price. It's about 60% above the average price of the past five years. We would ordinarily expect that to come down to historical averages. The current environment makes it obviously very difficult to predict if that's going to happen and when that's going to happen. Indeed, at the beginning of the year, we were very much expecting these prices to come down in Q2. But clearly events in Eastern Europe and so on have changed the environment somewhat. Actually, we saw prices go up last month for the first time in a few months. The purpose of this chart is also to show the spread. The LDPE price is a mixture of both the ethylene price as well as the margin taken by the producers. What we've seen is that as you can see, that spike, you can see the line, the spread has actually increased quite significantly. If you take a look at when we were considering price rises back in March, April, our view was that the ethylene price was actually fairly normal. It was the spread, the margin that was being taken that was unusually high, and we expected that to return. Consequently, we put the prices in at a certain point, expecting that to stabilize and reduce going forward. Once it got to the interims, we saw that the ethylene price actually was still the same, but the spread had actually increased further. That took us by surprise. Again, believing that was not sustainable, we chose not to make any further adjustments to price because of the impact that has on our customers and the belief that it would revert. It didn't happen, and that's really what led to our decision from the 1st of January to put prices up further. Indeed, we're putting prices up again in April. Now we've actually, even into the new year, we're seeing the same thing. What we've come to realize is that actually, ordinarily we would expect, ordinarily Europe is a market that's quite short in supply, and so often brings in product from Middle East and Asia. We think one of the reasons these margins are staying particularly high is because of the COVID impacts and the supply chain issues. It is not possible to ship in products to relieve the market to relieve demand and take the pressure off. The consequence of the lack of availability of supply, plus the pricing of freight is meaning that these prices are staying stubbornly high. When that changes, we don't know, but we're certainly tracking it, and we are prepared to make further price movements in the coming months to reflect that if these prices remain. Energy three plants, 75% of it is the U.K. Last year we were hedged in the U.K. for most of it. We're less hedged through 2022 because when we've come to hedging at the beginning of the year, the prices were so high pre-Eastern Europe events that we felt they had to come down. They haven't. At the moment, we're probably looking at an increase in total cost as a percentage of sales of some 2%-3% hedged with what we have. If that continues throughout the year and into next year, we would see a slight further increase in that cost. Again, it's something that we're tracking, following and considering how we incorporate that into pricing. Finally, freight and currency. Freight, really the purpose of that box there is really to say we are exposed. We do ship a lot of product around the world. We ship semi-finished product from the U.K. to the U.S., from the U.S. to Poland, from U.K. to Poland. Also our T-FIT business involves shipping finished high performance products foam from the U.K. out to China and then distributing internationally. In addition, what we're seeing this year, 2022, in respect of raw materials and WIP is it is the first increases in raw material for the HPP business, which we believe is very much related to freight costs and energy costs. Finally, as far as the FX is concerned, if you actually look at the beginning and the end of the year, they were pretty set. This is the dollar, which is the currency we're most exposed to. The rates were pretty much the same at the beginning of the year and the end of the year. But the story between 2021 and 2020 in terms of the evolution of that trend through the year is very different, and the consequence is that on average rates, we had about 7% higher FX rates on dollar than we did in the previous year. That's been something that clearly has been a headwind for us, partly hedged, but nevertheless an impact. On that, I will pass back to David. Thanks, Gary. Let's move on to just covering the kind of markets and some of the different business segments. Really, I think we've got a bit more detail on the following slides, but just to remind you, polyolefin foams at about 55% of sales, HPP 42% and MuCell 3%, or sorry, 2%. Let me talk about AZOTE polyolefin foams first. We are seeing a 10% rise in revenues. That's delivered by about 4% on price. Price went up in the second quarter of the year. If we look at an annualized, it would be a bit higher than that, close to 6% price increase. The volumes grew by 6%. Our product mix improved by 5%, mainly because we're comparing with 2020, where we had about 20% of our polyolefin foam sales were to the lower price PPE market. Although it was lower price, it was also a single product that we ran very simply and continuously through our factory. The margins were actually pretty good on that because of our operating efficiencies, offset by a 5% negative currency movement. We see the growth really in all areas. North America performed well. Continental Europe had a very strong recovery from a low position in 2020. The U.K., absent the PPE, showed a small increase, as well as the Asian market which was not a big market for AZOTE but grew nicely compared to 2020. Across different applications, I think almost all the areas that perform well other than aviation and automotive, which I mentioned before, those really are they are not a huge part of our overall business. But within polyolefin foams, they are probably around 7% or 8%, something like that, of sales. Interesting, but that is not in itself going to drive growth or make a big change in the number. The really interesting thing is, as we can see, unfortunately, is the segment profit down. This is before currency hedging, so slightly better than that with a constant currency. But just not an acceptable margin at all. If we look at why that is, as Gary explained, it was that sudden and unpredictable and very high increase in raw material costs. We have put it through prices in January and April on polyolefin foams, which would recover these margins back up to a more normal level. But bearing in mind, we are shooting at a kind of moving target with the first couple of months of the year, raw material prices coming down and then going back up again, as well as other factors in the business. It is an area where we need to be aware that in the short term, we can actually recover margins quite well. We have put up prices, our customers are not going to move immediately to someone else. But the immediately is the key point. Often what happens is that new projects that they have got, they go looking for alternatives or they price themselves out of demand with their customers. You can see that six months or more after a price rise, if you get it wrong, you can see demand falling off. I think that is something we try to be very careful about, that when we put prices through as much as possible, those prices are designed to stay. If we do see a reversal in polymer cost, then the prices that we have put through should stick, and margins should benefit not only from the price increase, but the falling away in polymer. That is something we are keeping a very close eye on. We are already mulling over a third price increase this year, and almost certainly that will happen. Something that we are much more active in managing inflation, and taking, let us say, a more pessimistic view that the inflation will not, polymer prices, energy, freight, which all are factors which can go up and down, will not really reverse in the future or at least in the short term. If we come on to HPP, we are looking at, again, I remind you, about 42% of group revenue, and sales up 41%. That is really driven by footwear. It probably would've been more if the situation in Vietnam had remained stable the whole year. If you recall, in the back end of 2021, Vietnam, as a country, was basically closed down because of COVID. The ports were closed, et cetera. Our supply chain into at least part of the Nike business was disrupted there. It is not something that we expect necessarily to catch up this year. That is just kind of the way it is. They repositioned some of the other products. I think an astonishingly good growth in footwear, and footwear is now up at GBP 34 million. The balance of the HPP business is really aviation or T-FIT, majority of it. There are other things in there. The aviation business is something that was the engine for growth before footwear in HPP. We were in excess of GBP 10 million at very high margins. Last year, 2021, that was only around GBP 4 million of sales. We did not lose any business or programs, but what has happened is the build rates in planes and the inventory reduction in the system has just meant that demand through to our level is severely curtailed. We are seeing that come back this year, probably not to the levels that it was at peak, but somewhere in between. T-FIT, which is our technical insulation business, is something which we believe has got really good potential, but it is still very much a technical sell. When you have got a technical sell, you need your sales guys to be out talking to people, et cetera. Movement restrictions due to COVID, particularly in India, which we had quite good momentum on growth, has really stopped us getting out there and engaging with customers. That has been tough. Even though we have delivered 11% growth in T-FIT, I think we could have done a lot better there. In all cases, I think, very, very pleased with the overall HPP sales growth. If we look at the margins, we can see that margins are down, in part, again, because of currency. Margins would have been 25%. The raw material inflation that we saw in polyolefin foams has not really, to the same extent, impacted HPP. They are more technical materials, they tend to be more stable. Price increases do occur, but largely, we have mechanisms to pass those on through pricing to the likes of Nike. Those mechanisms do operate with a bit of a lag, as is normal, but the mechanisms are working, and therefore, the margins over the cycle should be fairly stable there. Talking about, sorry, MuCell next. The MuCell technology, we think about in two separate business streams. MuCell 1.0, where the technology is really designed to reduce the polymer content of common plastic parts, and we would take a share of any savings. That technology is aimed at existing products. If you are making a yogurt pot, make a yogurt pot with less plastic. Pretty obvious. If you look at the other side of the business, ReZorce, we have taken our technology and created completely unique attributes and therefore an opportunity to build a unique product range around ReZorce. That uniqueness is around how we use layers of foam and solid material to create enhanced barrier properties. Oxygen and moisture barrier, which you need in consumer packaging. We are talking about that as a very big opportunity. We are looking at a number of different areas there. I'll come on to talk about that in a minute. The reality is that with MuCell, again, for the last two years, it's a bit like T-FIT. We need to get into the customers' facilities, the factories, to convert their yogurt pot-making line to something which can use foam. We haven't been able to do that. The business development efforts there have been really curtailed. We do have business. We have existing licensees. We have existing relationships where we sell equipment. That's continued, but we've really pivoted a lot of our people and focus across to developing the ReZorce technology. That's why although the sales number has moved a little bit, the bottom line result seems to have improved a lot. Part of that is because we're capitalizing as required, we have no choice, some of the development work that our people are doing on new products, the new product line ReZorce. If we look at our kind of sustainability position, I'll start with ReZorce because it is probably the biggest opportunity we have in the business. Because it's a completely new technology and going into a market that we need to develop or we need to replace existing incumbents, it is relatively high risk of success. We've got a lot to do to deliver that. But we know the technology works. We know it gives the barrier properties. We know it gives a better life cycle, a better sustainability, carbon footprint than the alternatives. We know that there's a lot of people out there like it. We're winning awards for all kinds of things. The brands are very interested. Retailers like supermarkets, very interested for their own brand labels. But we still are not there in terms of the ability to make a juice carton or a milk carton or something like that on industrial equipment. We know that our sheet gives the required properties. We know it can be made into a box or a carton, but can it be done at high speed? Can it be done consistently with the sealing and the sterility required to go into multi-multi-million packaging business where failure is just not an option? There's a fair amount of work to do on that, but we're making good progress. As I said, we've got a lot of brands and retailers, et cetera, interested. We've got a very small number of people we're working with to prove the technology. The reason we're working with a small number of people is everyone basically uses the same equipment, the same type of equipment to make the sheet into a carton and fill it and put a cap on. Once we've proven on one line, it transfers very readily to others. We'd rather work with a small number of people and go deep than try to keep a lot of people happy and not move very fast. That's something that we've got planned for upcoming months, those trials on potential customers' lines. That would be the first kind of stage of value inflection that, yeah, we've done it on somebody's line. The next stage would be someone's using it in the market, hopefully a fairly small but visible brand to say it's commercialized. If we can do that, then the ability to generate value from it dramatically changes. People are looking at would sign up. We could invest on the back of it. We could partner with people. We could license the technology. We could sell it on the basis that it was already successful. So quite a large potential opportunity and number of ways to create value if we can get through the next stages. It is a sustainability play. That is why people are interested. We are over time, really. If we look at the sustainability for the rest of the business, we really are aligned to or we have our business aligned to what is called the SASB, TCFD, which are frameworks to think about and report sustainability. We are looking at the internal scrap and energy use and all that sort of thing as we have for years anyway, but probably with a bit of a renewed focus. Then in terms of positioning our product, making sure that our customers know that, hey, this is the carbon footprint of our product compared to our competitors. Here is how you recycle it. Here is how you deal with the end of life. Here is how you deal with the scrap. That scrap is being taken and made into other products. We can see that. We are actually making products now that use our internal scrap and trying to blend that back into our core product range for polyolefins as well as for footwear products. So a real focus on that to not just tick a sustainability box, but save cost and deliver to our customers the sustainability positioning that they need to sell the product on. So it is important. Broadly, we are doing that on four levels. One is to show, look, it is a nitrogen-based product, no chemicals in there, and here are our efficiencies, et cetera. We use raw material very efficiently. The foams that we make use are lighter than other people using less material for the same performance. Often our foams are used to lightweight or insulate, so you are avoiding emissions or minimizing emissions. Any new product, we are thinking about the market positioning and how that stacks up. Is it moving us overall into a better position from a corporate sustainability position? ReZorce is a classic example of that, but certainly not the only one. I guess I would just like to wrap up with the key messages. I think a very strong top-line performance of growth 22% or 27% constant currency, really phenomenal. Very, very pleased. We need to do better at managing costs and margins, and we are on that right now, as you have heard. Good progress on ReZorce, good progress to commission a foaming facility, which was built and commissioned really under COVID. Let us not forget that. It is not trivial at all for that size of facility. We are currently seeing very good demand across the business. We have got price rises going through, which will improve margins. We are cautious about the macro environment and inflation. I think it is incumbent on us to do that and make sure that we understand that and we understand the effects of it in our business and the customer's business. COVID is by no means gone yet, particularly in Asia. We have had parts of Shanghai close down, which stopped some of our people traveling, but no direct impact really from COVID on us for quite a while. It is something that we are very aware of. I think finally on ReZorce, it represents a great opportunity. We have probably not been in a position to start selling product or monetize it this year. As we go through the year and we hit milestones or value inflection points, then definitely the word is coming out. With that, I would like to stop the presentation. I have seen some questions come in, so I will just try to pick up those. Yeah. No problem, David. Thank you very much. Let me just jump in, just give you a few moments. As you can see, you have received quite a few, so I will let you have a few seconds just to kind of take a look through those. Thank you to both yourself and to Gary for your update this afternoon. Please do continue to submit your questions, ladies and gentlemen, using the Q&A tab that is just situated on the right-hand corner of your screen. Just type in your questions and press send. Just while David and Gary take a few moments to review those questions submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor Meet Company dashboard, and we will send you an email when that is ready for your review. Gary and David, I have not given you a lot of time to review those questions, but if I could ask you just to read out those questions and give a response where it is appropriate, that would be great. Well, Gary, what I will do is I will just run through those and read them out, and if I think you will pick one up, then I will throw it at you. How about that? First question from Neil W. "Good to see sustainability being considered. Can you outline actions you are taking to reduce scope one and two emissions?" Those are effectively internal. "How do you aim to influence reductions in your scope three emissions?" That is the emissions that our customers have as a result of using our product. And explain your strategy towards product end of life." Firstly, scope 1 and 2, I think is a continuation really of a lot of work we've been doing over the past few years to make sure that we understand that the products we buy, what the carbon emissions are from those, and how we can minimize those, through choice of supplier or supply chain. Scope 2 is really about our internal emissions. The biggest thing we can do there is produce product more effectively, reduce waste so that we are not running machines to produce scrap. You got the scrap costs themselves. We are investing in better heating controls. Our gas boiler control systems have been upgraded, significantly reducing gas consumption. So a wide variety of things there. One of them is around process control. Managing and measuring every kilogram of material we buy and kilogram of material we sell and really understanding what is the difference, where does the scrap come from, and trying to minimize that. And where we have got scrap, to repurpose that through regrinding it up and putting it back into a different product, and selling that. So we are using that rather than dumping that. And that is something that is kind of ongoing process. And then with our customers, really educating them about what is the difference between using our product and someone else's. If you can use our product and it is 20% lighter, that is using 20% less raw material. Why is that important? Well, what does that do to your carbon footprint? One kilogram of foam is roughly 2 kilograms of carbon. So if you are thinking about your downstream and selling on to your customer. Hey, if you start with a Zotefoams product, you are starting with less of a carbon footprint. Is that beneficial? We have been helping people calculate sustainability savings like insulation. You put our insulation on, here is your energy saving. That is obviously pretty straightforward kind of calculation. But where it becomes complicated is that we do not know all the alternatives they have got, insulation B, C, D, and so therefore, what we have to do is we have to show them how to use ours and our methodologies, and if they want to compare it with someone else, then fine. We find that very largely, we come out very positively in these types of comparison. So it is a journey. And you mentioned end of life. Basically, we and all of our customers, pretty much all the scrap that is produced in our process, in our customer process is repurposed in some way. Where the difficulty is in end of life is, I do not know if you have a training shoe or a bit of a plane or something, how do you collect that and get it back to a recycling facility, separated out from the rest of the plane or the rest of the shoe? It is difficult. But that is a problem that is being, let us say, addressed by those customers, by Nike and Boeing or whoever, not necessarily by us. But if we have got that end-of-life product, we can advise on how to deal with it. So, hope that is a fairly full answer. The next question is, gosh, I do not know if I am going to be able to answer this one. Why do you think your share price does not reflect the achievements you have made to date? Record revenue, Poland, U.S., Nike, unique technology, et cetera. Surely the disconnect may entice unwanted corporate interest. Well, I think there is a very uncertain world out there, and the share price can be volatile. I think any director always thinks the share price is a bit low. But one thing I can assure you of is the board is very, very well aware of the technology we have, the opportunities we have, the strategic plan. If somebody rolls around the corner and says, "Well, I see your starting price is this. How about a small premium to buy you?" The starting share price is certainly not the only factor. It is always a factor, but we are really looking at the business from a long-term view and what can we deliver. I do not think there is any intent to let somebody sneak Zotefoams in terms of some corporate interest based on a share price at any particular time. Gavin L, "Seems you are afraid of your customers. Reason for the late price rises." I saw one other. Oh, yeah, it is from you as well, Gavin. "Why not put a surcharge on your price when you can remove?" I think we are largely talking about our polyolefin foams business here. I think we have to understand probably or explain to you better two dynamics that perhaps are a bit more detailed. The first one is that typically our customers in polyolefin foams have hundreds if not thousands of customers for their products. If we give them a price increase, and they have to pass it on, they are talking to hundreds of thousands of customers. That can be very difficult for them. Particularly if it is a price surcharge that goes up and down, it can be very, very difficult for them to manage. They absolutely loathe it. They want stability of pricing so they can get on with doing their business. Typically, foam to them is a very, very large part of their input cost. So it is highly material. I do not think I would say that we are afraid of our customers, but we do recognize that there are a number of factors to making a profitable business in Zotefoams. We have high fixed costs, and therefore, obviously, you need a certain amount of volume or utilization of your asset to be profitable. If you destroy demand by price increases which are too high, and our customers lose business, then that is not in anyone's best interest. So it is to try and get the balance there. We can always put up prices in the short term, pat ourself on the back because our margins will be fine. The customers will just suck it up in the short term. But what happens is that they or their customers will look for alternative solutions going forward. That is where price elasticity comes in. It does not come in on day one, it comes in on day 200. You see that projects that you would normally have been on do not exist anymore, or they have been redesigned with something else. I think if we all know where inflation is, and it is at a stable level, we put our prices up, everyone is in the same position and market demand overall may move, but we know where we are. It is when the inflation is volatile. Sometimes it is up, sometimes it is down. Polymer prices, energy, these are classic examples where we do not think that the prices today reflect long-term trends. We want to have that relationship with our customers to balance the short term and the long term. Having said all of that, I think we got it wrong last year. I think we waited too long to put the prices through and we believed, along with everyone else, that the inflation would be transitory over a very short time, not kind of transitory over a medium term. We have revised that opinion and we are looking at price increases this year, which are list price permanent increases. We are also looking at some sort of surcharge in some areas, but I know that is going to be very unpopular with the customers, so that is up for debate at the moment. We are engaging with customers on that. I hope that covers both of those questions, Gavin L. I think our next question is from Chris. Does your agreement with Nike have any cost pass-through?" The answer is yes, simple. There is a lag, because we need to understand what those costs are. But effectively, Nike is repriced automatically. Another question, "Might being a dollar reporting PLC help?" Gary McGrath, you want to- It would not help me and my team, that is for sure. That is a lot of work. No, it is certainly something that is deep at the back of my mind. The fact is, at the moment, three-quarters of our operating cost is U.K. or euro, right? All of our polymer into the U.K. is euro. The U.K. plant, which is the lion's share of the business, is sterling cost base. So you would really just be switching to another problem. At the moment, with the scale we are at, I do not believe that is necessarily the answer. Okay. Thanks, Gary. Question from Matthew R, "Can you comment at all on the development milestones we should look out for ReZorce and the size of the market opportunity?" So, size of the market opportunity first, I think cartons today, just the material going into cartons, about $10 billion. Pouches, similar, maybe a bit higher for barrier pouches. So, huge market. The market size, by the time you get to that, those sort of quantums, the market size is irrelevant. I think you feel that, okay, what do I need to do to get in there and grow? The milestones for us are take that sheet that we have developed and put it through a commercial filling machine, make sure it is sealed properly at reasonably high speeds and high volumes. We need to do 5,000, 30,000, 100,000 units over a couple of days to make sure that they are sterile, they are sealed properly, et cetera. After that, the next milestone is get someone, a brand probably, to use it and to give us some volume so that we can say it is in market. Those are critical milestones. If we can do those, then we have a very interesting business. Question from Michael, "How much further do you see the footwear segment of HPP growing? Obviously, aviation is coming back, but are there any new scalable HPP applications you feel may drive revenue? Examples would be great." Footwear first. We have kind of signaled that we expect footwear this year to be similar-ish to last year. That is mainly because Nike Running kind of work on a 2-year cycle. But I think realistically, we are probably, with the running guys, we have got limited options for growth, I would say, with our current positioning and technology. There are only so many high-priced running shoes that we can be in, and if you look at the lower priced ones, they are not going to benefit. The way they sell them is not based on performance. The way our products are designed is based on performance. It does not fit. We may get some like for like growth in that market, but it is unlikely to be very high. Having said that, there are other segments within Nike that we are working on. We have been developing foams for other parts other than premium running. We have not said to anyone that is been successful yet. If it is successful, and I think we will be, but that is up to Nike, not me. If we are successful, then we would expect to see that in 2023 earliest, really. Not much this year. But there is a potentially quite sizable market there that we could access within other segments other than premium running at Nike. It says, "Obviously, aviation is coming back." Yes, it is. I think this year will not be as high as the peak year, but might be kind of halfway in between, so good growth expected this year. Are there any other new scalable applications? Yeah, we are always working on these. We have probably got a portfolio of a dozen or so, seven-figure applications. If we look at the probabilities for those, all of those could generate nothing. That is just the reality of that type of business. But if I look at the ones which look promising, I would say that e-vehicle battery insulation is one that we have got an awful lot of interest in at the moment. It is a very technical solution. It is something that there are a lot of competing solutions out there, but we are getting a lot of interest from more than one person, and they are kind of triangulating into something that looks like our foam is the best solution. So that could be something which really has legs over the next few years. As usual, with these things, I will say that is what I think, and I will have a meeting on Friday, and someone will tell me that is dead and another part of the portfolio is taking off. But that's why we think about our technology as kind of flexible based on common assets and common skills, common people, because we are a foam, we're part of a solution. We're not the solution. We need to be able to work with other people and work to their agenda. But yes, I would probably go for e-vehicle battery insulation if I had to pick one. Another question from Gavin L. Does the packaging industry want you to succeed or just using you to bash Tetra Pak? Gosh, I think a bit of both. I think the brands and the retailers are the guys that really want to bring a lower carbon footprint solution. The packaging industry, I think some people may win, some people may lose if we're successful. But I think obviously people like Tetra Pak, if we start crunching into their market share, I think they're perceived as being quite domineering and things like that sometimes. So I think there'll be people that are very pleased to move away from them. I don't think there's much love for Tetra Pak in their customer base. But it's still out there. People are commercial animals, so it's not a reason to move because you don't like somebody. But that's the feedback we're getting. The next question from Andrew. Are the potential customers with whom you're trying to ReZorce existing customers or new customers? New customers. They are specifically in the consumer packaging industry for cartons or pouches. So new customers. Peter W, please may I ask, to what extent raw material prices have been affected by genuine supply issues as opposed to speculation? I ask this question because it looks from some of the graphs that the OEM or middleman margin has increased versus prior years. Is this genuine reason or profiteering? That spread that we show is the cost of taking ethylene, the raw material for polyethylene, and turning it into the plastic. So that's what they charge. On average, over the past six or seven years, it's been around about EUR 250, maybe EUR 300 a tonne. It's substantially more than that. At the peak, that peak, it was up at EUR 900 a tonne they were charging. Absolutely, profiteering levels based on But that's typical of a kind of commodity supply-demand imbalance. Whether it's copper or aluminum or oil or something, the prices sometimes just spike up and come right down. What we're seeing there is that there's a shortage of capacity to turn ethylene into polyethylene. As Gary explained, not helped by the fact that the normal market forces would bring some polymer in from the Middle East. But because the freight's very expensive and the freight's not working very well, that's really jammed up and is allowing that very high level of polymer pricing. Typically, when you're making super normal margins, it doesn't persist. But there is a raw material input cost, the ethylene, which is based on oil or gas, which is obviously something we need to keep an eye on at the moment as well. John L, why do your contracts not have pass-through clauses? Polyethylene, the polyolefin foams are not sold under contract. We have price lists. We can put the prices up or not. People can move or not. That's typically not the way the market works. Our HPP products are pretty much all sold with supply contracts, and they have pass-through clauses. That's why. Another question from Peter W. He asks, "Which customers and sectors are likely to find it most difficult to cope with price increases? Have any customers voted with their feet and stopped supply from the company?" Well, I think there are certain industries which are more allergic to price increases than others, such as automotive. You try to put the automotive prices up, and they are just like, "No, we want a decrease." I think even the automotive guys have accepted that this is a one-way street and prices are going up. At some point, you just get to take it or leave it. If you do not have the price increase, we are not going to supply you. Has anybody voted with their feet? Actually, very few. But as I explained earlier, the price elasticity, the propensity for people to change their decision based on your price today is people will not change their buying decision. What they will do is for new projects that they are working on, they will use another material if they can, or their customers will walk away. When you put your prices up, what you risk is a lovely period of four to six months where everything looks okay, and then you have got no demand left as your customers, that is when you see they have walked out, and you do not always know that the new projects are not going to you until it is too late. We are very well aware of that, and we are also very well aware that in today's market, energy prices are going up, affecting everyone or industrial producers. Polymer prices are going up, freight is going up, inflation is rampant. I do not believe that the industrial or any other economy can really have all these things happening and demand not be impacted. There must be some level of demand drop-off due to inflationary factors. Therefore, we in pricing have always got to think about the second half of the year, right? Can we keep enough people on board to make sure that if there is a market adjustment and demand overall drops off, that we are not overly impacted by that? Because there is no point in having a price increase. We could double the price and have no volume, you do not look very clever because you are not. It is always a negotiation. When you are negotiating with your customers, there is no better time to get information on how their business works or who their customers are or how they sell, because they start giving you this information to help you understand why they can or cannot take price increases on certain products or not. So it is a very fertile time if you engage with people. If you just turn around and say, "Take it or leave it," it is a big risk. As I said, I think we got it wrong last year. I think we were overly cautious. I think we have addressed that now and we are being more robust specifically in our polyolefin. But we are also keeping a very close eye on what is happening to those input prices, because that is still a significant factor here. Okay. Question from Neil W. Poland has been operating for about a year now. What's the current capacity utilization rate? We're slightly over 50%. We think about Poland as part of our group capacity. We could fill Poland up today if we move some business from the U.K. That doesn't help anyone. What we're doing is we are growing that business gradually, making sure that as we go from one shift to two shifts, that the guys are properly trained, the customers are being transitioned at a sensible pace, and the product range they're making is being transitioned at a sensible pace. So pretty much on track, from where we want to be on that. Next question is from David. To clarify, Unilever Dove never materialized the scale. From memory, you needed more technicians to explain how. So Unilever Dove, we use MuCell technology to reduce a Dove bottle material content by about 15%. It was very successful. Technically, it was successful in the market. Nobody noticed the difference. Unilever saved a bunch of polymer. There was one factor that hadn't actually been considered, which is that the way Unilever buy bottles is they buy it, and this is strange, raw material cost plus a margin. Okay? Because we reduced the raw material content of the bottle, the bottle supplier's margin, the amount of profit they made went down. Instead of keeping the margin the same and paying the producer the same margin, Unilever insisted in material cost plus a percentage margin. So they gave the producer 15% less margin for making those bottles. That completely screwed up the whole rationale. Everyone was aligned from the chief exec, the sustainability people at Unilever all writing about this in the annual report, and the procurement people didn't get on board with it. They made short-term savings and as a result, nobody ever wanted to do that again. So ridiculous situation, and I don't quite know what to say about that, really. That Unilever never really successfully rolled out because they didn't treat the suppliers properly. David, I might jump in at this point because I think we're an hour and 20 minutes through and you've taken the- Of course. You've been very generous with your time and answered every question from investors. Thank you to everybody who has submitted questions this afternoon. David, I know this is the first day of your roadshow, and I am sure you've got a full set of meetings after this. If I may just ask you for a few closing comments before I redirect investors on the call to give you their feedback. All right. Well, look, I think it's obviously a very interesting time for the world and the business. We feel that we've got a lot going on. We've learned a lot over the last two years about our business, about flexibility and our direction of travel. We think we're well-positioned. We've got a few challenges to overcome, but we know how we're going to do that. We're looking forward to sunlit uplands or something, whatever the phrase is. I think we are optimistic about our business. We are kind of mindful of the economic situation right now, so we're not getting overly optimistic in the very short term. We've got a great portfolio of products, a good management team, and I think we've got potential to perform very well. So thanks for your support. That's great. David, Gary, thank you very much indeed for your time this afternoon and for updating investors. Could I please ask investors not to close this session as we'll now automatically redirect you for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This may take a few moments to complete, but I am sure will be greatly valued by the company. On behalf of the management team of Zotefoams Plc, we'd like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.