Resilient in a
changing world
Zotefoams plc
Annual Report 2020
Zotefoams plc
Annual Report 2020
In June 2020, Zotefoams’ largest UK customer secured
a government contract under the ‘make’ initiative to
supply visors for frontline workers battling the COVID-19
pandemic. The material specified for the headband was
Plastazote
®
LD33 from our AZOTE
®
polyolefin foams
range – long recognised for its suitability for medical
and skin-contact applications.
Over 26 weeks between June and November,
Zotefoams supplied over 750,000 sheets of material,
achieving record output at our UK manufacturing plant
in several successive months. This was supplemented
with material extruded and nitrogen-saturated in our
USA facility and expanded in the UK.
Zotefoams was instrumental in assembling a
consortium of UK fabricators to meet the demanding
project timelines. Some 1,200 truckloads of material
were produced for the project to create over 71 million
reusable visors, with all post-fabrication waste
recycled into applications such as carpet underlay and
sports flooring. Among the many remarkable aspects
of this project, the skills, responsiveness and dedication
of the Zotefoams team stood out.
Resilient.
Agile. Focused
on delivery.
Chris Endres
Polyolen Sales Manager, UK
The effort and the hours put in by all involved was
astonishing and I doubt it will ever be surpassed.
I’m really proud of the efforts that we put in as a team,
firstly to help our customer win the contract and then
to deliver on such an extraordinary scale. It was also
wonderful to see so many of our UK customers join
forces in this incredible effort.
AZOTE
®
Naveed Khan
Process Quality Manager, UK
I interpreted our customer requirements into
a specification covering product, packaging and
processing conditions. We updated our processes to
fast-track product made in both the UK and the USA
through Inspection, so that we could successfully
supply the product to the end-user in a very
short timeframe.
Andy Millward
Production Manager, UK
It was remarkable how quickly Zotefoams geared
up for this project, with new staff, new processes
and a concerted effort to maximise output while
maintaining a COVID-19 safe working environment.
The team’s enthusiasm for the project was wonderful
to see: knowing that our materials were going straight
to the frontline of the fight against the pandemic was
extraordinarily motivating.
Martin Ernoult
Forklift Operator, UK
It was my job to unload frozen slabs coming in
from the USA. Often processing two trucks per day,
I would offload, check and then load the stock into
our freezers. It was an essential part of the overall
process to ensure the slabs were correctly put away,
in batch order, ready for use.
Liz Papadolambakis
Customer Service Manager, UK
When the last truckload of material left our site, I sat
back and thought: "Wow, this is the end of a massive
undertaking, and we have managed to get it through
the plant and dispatched on time." It was a sense
of relief and pride that we had performed so well.
This was a demonstration of team effort at its best, and
it brought out so many great qualities in our colleagues.
Francis Rigault
Forklift Operator, UK
I loaded the lorries for the early shift –
it was essential that they left in a timely manner due to
the increased number of daily loads. My contribution
was to get as many lorries loaded as possible before
our regular day began, sometimes three or four lorries
ahead of the rest. I am so proud that we were doing
this for the benefit of the NHS.
Benito Sala
Managing Director (Europe), UK
When the customer first discussed their contract with us,
we worked with them to determine the maximum we could
do together to help address the national PPE shortage.
We increased headcount in our production team by over
25% and effectively doubled output for the duration of the
contract, breaking production records at our UK site. It was
so impressive to see the entire organisation committed to
delivering against a single, hugely important goal.
+25%
increased headcount in our production team
Craig McElwee
Supplier Chain Manager, USA
The involvement of the USA plant was essential to
deliver the volume of product within the required
timescale. It was certainly a challenge and I’m grateful
to all colleagues involved; it was great to work with so
many dedicated people. At a personal level, I’m proud
to have supported the efforts to reduce the spread
of COVID -19.
Andrew Martin
Manufacturing Coordinator
and Training Lead, USA
I was very excited to be a part of the first exportation of
gassed materials from the Walton plant. 2020 proved to be
a tough year and the teamwork,effort and dedication it took
to accomplish this was incredible.Thank you to all parties
involved and I am thankful to have been able to help through
the enduring times of the COVID-19 pandemic.
1
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
Financial highlights
Group revenue
£82.7m
Change
+2%
2019
£80.9m
Operating profit before
exceptional item
£9.1m
Change
nil
2019
£9.1m
Profit before tax and
exceptional item
£8.3m
Change
-5%
2019
£8.8m
Basic earnings per share
before exceptional item
14.87p
Change
nil
2019
14.91p
Total dividend
for the year
6.30p
Change
+210%
2019
2.03p
Gross margin
33.6%
Change
-180 basis points
2019
35.4%
Operating
profit
£9.1m
Change
-10%
2019
£10.2m
Profit
before tax
£8.3m
Change
-15%
2019
£9.8m
Basic earnings
per share
14.87p
Change
-13%
2019
17.10p
Return on capital
employed
9.0%
Change
-150 basis points
2019
10.5%
Contents
Strategic Report
Group at a glance
6
A unique manufacturing process
8
Our business model
10
Our external context
14
Our strategic objectives
16
Our brands in action
18
An introduction from our Chair
22
Group CEO’s review
24
Group CFO’s review
28
Risk management and principal risks
33
Viability statement
43
Environmental, social and
44
governance (ESG) report
Our people
54
s172(1) statement
58
Governance
Board of Directors
60
Corporate governance
62
The Board and its Committees
63
Audit Committee report
66
Nomination Committee report
69
Directors’ Remuneration report
70
Directors’ report
81
Statement of Directors’ responsibilities
83
Financial Statements
Independent auditor’s report
84
Consolidated income statement
89
Consolidated statement of
90
comprehensive income
Consolidated statement of financial position
91
Company statement of financial position
92
Consolidated statement of cash flows
93
Company statement of cash flows
94
Consolidated statement of changes in equity
95
Company statement of changes in equity
96
Notes
97
Five-year trading summary
135
Notice of the 2021 Annual General Meeting
136
Company information
140
Financial calendar
140
Learn more
zotefoams.com
Zotefoams plc
Annual Report 2020
Over the course of 2020, our partnership with
Nike has continued to strengthen on many levels
A record-breaking
partnership
ZOTEK
®
A new running boom
The growing global medal tally for Nike distance running
athletes combined with the increased popularity of running
during the COVID-19 pandemic has seen surging demand
for shoes featuring the Nike ZoomX foam, notably the
Vaporfly NEXT% and Alphafly NEXT%. Produced from
Zotefoams’ ZOTEK
®
thermoplastic elastomer (TPE)
foams, ZoomX delivers strong energy return and
supremecushioning.
Extending the range
H2 2020 saw our highest ever volumes of material
produced for Nike as the Group responded to
increased demand as ZoomX foams were introduced on
new footwear products scheduled for introduction in 2021.
2
Zotefoams plc
Annual Report 2020
Making strides in environmental footprint
A midsole made from our material already contains less
polymer per unit of volume than any other, thanks to the
unique Zotefoams three-stage manufacturing process.
Butwith sustainability a priority for both Nike and
Zotefoams, we are working together to ensure the
carbonfootprint ofZoomX is as impressive as its
record-breaking performance.
Three years into our exclusive
partnership with Nike, we are proud
to be associated with this global
revolution in both elite and amateur
running performance and excited
by what the future holds”
David Stirling, Group CEO
“
3
Strategic Report
/
Governance
/
Financial Statements
Images © Nike
Zotefoams plc
Annual Report 2020
Our 2020
In this extraordinary year, our operational
resilience and adaptability, supported by
significant recent investments, proved
morevaluable than ever before
January
X
MuCell
Extrusion
strategy review
by Board
March
X
COVID-19: Implement safe
working procedures and working
from home where possible
X
China T-FIT
®
business facility reopens
andremains open while following
Government requirements
X
Bank approves extended leverage
covenant from 3.0x to 4.0x
X
Claimed UK Government
financial support
X
Dividend suspended
X
USA: Commissioned second
high-pressure autoclave and
thirdextruder
April
X
Marketing campaign to promote
suitability of Plastazote
®
products
for PPE attracts highest online
audience of the year
February
X
Begin to hire local
staff for Poland plant
“
Poland was a clear choice from the outset;
it is a manufacturing powerhouse, with the
sixth highest demand for plastics in Europe”
David Stirling, Zotefoams Group CEO
June
X
Increased sales to footwear
segment to support product
launches by our customer
May
X
Largest UK customer places initial
order for Plastazote
®
foam to service
acontract with the NHS
X
Croydon site leads UK manufacturers
in qualifying for new ISO 45001
OHS standard
4
Read more
page 2
Image © Nike
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
October
X
Dividends resumed
X
Launch of ZOTEK
®
F XR,
disruptive foam technology
offering weight savings of up to
70% in aircraft interior applications
July
X
AZOTE
®
sales volumes
over 10% ahead of
previous monthly record
August
X
Repayment of
UK Government
financial support
September
X
EU customer survey results
inform objective setting for 2021
X
Started using US facility to bolster
the UK’s capacity to meet growing
demand
X
T-FIT
investment in the USA with the
hiring of first commercial employees
November
X
ReZorce
®
sub-committee holds
first meeting to consider strategy
for focusing ReZorce
in right
marketwith right resource
andinvestment support
“
Recognising the need to provide
our investors and other stakeholders
with information relating to our ESG
performance, we have adopted the
Sustainable Accounting Standards
Board framework”
“
Between June and November,
Zotefoams achieved record output
atourUK manufacturing plant in
severalsuccessive months”
December
X
Met the objective of developing a
foam using at least 20% recycled
content, sufficient for market and
commercial evaluation
X
GO1 training system launched
See people section
X
Poland commissioning
See strategic section
X
Brexit comms to EU customers
See strategic section
X
Launched ZOTEK
®
T range,
leveraging investment in
developmentof athletic shoe
foamsfor non-footwear applications
5
0
5
10
15
20
25
30
Revenue by industry
%
Product
protection
Transportation
Sports
and leisure
Building and
construction
Industrial
Medical
Other
2020
2019
2019
2020
Polyolefin Foams HPP MEL
Revenue by business unit
£m
0 £18 £36 £54 £72
£90
2019
2020
Polyolefin Foams HPP MEL
Revenue by business unit
£m
0 £18 £36 £54 £72 £90
6
Zotefoams plc
Annual Report 2020
Group at a glance
Four strong, distinctive brands
Premium durable foams
Uniformly dense foam sheets with a
consistent cell structure. These foam
sheets and blocks are manufactured
from common polymers using our
unique nitrogen-expansion process.
Key markets served
Automotive
Aviation
Building and construction
Industrial
Marine
Military
Product protection
Sports and leisure
Key market drivers
Light
weighting
Durability
Reduced
toxicity
Fire
safety
Energy
saving
Read more
page 18
POLYOLEFIN
FOAMS
AZOTE
®
North America
Local manufacturing
presence in Kentucky
forthe Polyolefin
Foams business,
cutting operation in
Oklahoma to service
the construction
market, and
headquarters
ofMuCell Extrusion
LLC (MEL), based
inMassachusetts,
licensing technology
globally. Local
representation forour
High-Performance
Products (HPP)
business.
United Kingdom
Group headquarters
and main factory,
manufacturing
polyolefin foams and
high-performance
products for
saleglobally.
Continental Europe
Significant market
forpolyolefin foams.
Local manufacturing
presence in Brzeg,
south west Poland,
since February 2021,
initially servicing the
Polyolefin Foams
business. Sufficient
land has been
purchased to allow
larger-scale operations
in the future.
Rest of the world
T-FIT
®
technical
insulation
manufacturing in
China for sales of
insulation products
globally. Local
representation for our
HPP business. Joint
venture with INOAC
Corporation for
AZOTE
®
polyolefin
foams sales in Asia.
Commercial operation
in India.
Revenue by geography %
Driving zero emissions for
urban buses in China
Read more
page 18
Zotefoams produces a wide range of innovative products that
are critical components in a world of everyday applications
Rest of
the world
34%
(2019: 25%)
Continental
Europe
22%
(2019: 32%)
United
Kingdom
23%
(2019: 16%)
North
America
21%
(2019: 27%)
AUTOCLAVE TECHNOLOGY
7
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
AUTOCLAVE TECHNOLOGY
Lightweight technical foams
Foams which offer superior
technical properties such as energy
management, durability, heat and/or
fire resistance, ZOTEK
®
foams are
manufactured from engineering
polymers using our unique
nitrogen-expansion process.
Key markets served
Athletic footwear
Automotive
Aviation
Construction
Product protection
Key market drivers
Light
weighting
Durability
Personal
safety
High-
technology
insulation
Sports
and leisure
Fire
safety
Read more
page 19
HPP
ZOTEK
®
Technical insulation for industry
A range of insulation products
manufactured from Zotefoams’
own ZOTEK
®
block foam materials.
T-FIT
®
insulation products are
purpose-designed to perform
indemanding environments.
Key markets served
Food and personal care manufacturing
High-temperature processing environments
Pharmaceutical, biotech and
semiconductor cleanrooms
Key market drivers
Ageing
population
Demographic
changes
Energy
saving
Reduced
toxicity
Read more
page 20
HPP
T-FIT
®
Innovative and accessible
technology for greener,
lower-cost plastic products
This pioneering technology
injectsgas into plastics during the
manufacturing process to create
micro-bubbles and is licensed to
customers manufacturing plastic
parts. The end-product uses
15–20% less material. Recently
developed ReZorce
®
recyclable
mono-material barrier solutions
usethis technology.
Key markets served
Automotive
Consumer packaging
Key market drivers
Environmental
benefit
Lower cost
Read more
page 21
MEL
MuCell
®
EXTRUSION TECHNOLOGY
Improving the safety and
sustainability of air travel with
our newest lightweight foam
Read more
page 19
T-FIT
®
helps to deliver dairy
products safety in India
Read more
page 20
Pilot facility set to speed time
tomarket for ReZorce
®
barrier
technology
Read more
page 21
8
Zotefoams plc
Annual Report 2020
A unique manufacturing process
The Zotefoams difference
Zotefoams manufactures a wide range of crosslinked,
lightweight block foams using variations of our unique
nitrogen-expansion manufacturing process. This affords an
exclusive combination of beneficial characteristics – uniformity,
purity, low toxicity and durability – that differentiates Zotefoams’
materials from all other foams. Our core autoclave process is
capital-intensive, with a long investment cycle, andrepresents
a considerable barrier to entry for potential competitors
Operating at temperatures up to 250ºC,
thisenvironmentally friendly technology is
extremely flexible, allowing us to foam a wide
range of polymers. The combination of foaming
process and polymer performance delivers
properties such as excellent fire resistance,
high-temperature stability, toughness and
insulation, which are prized in a wide range
of demanding applications.
Stage 2
Nitrogen
saturation
Slabs are loaded into a
high-pressure autoclave. The
material is heated above its melting
point and pressurised with pure
nitrogen gas. Over a long period of
time, the nitrogen gas diffuses into
the slabs. Arapid depressurisation
destabilises the absorbed nitrogen
nucleating cells in the slab. The slabs
are then cooled under pressure in
the autoclave, locking the nitrogen
in the unexpanded slabs, prior
tothembeing unloaded.
9
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
Stage 1
Extrusion and
crosslinking
Stage 3
Expansion
Polymer and any additives (colours,
fireretardants, conductive agents) are
extruded into a continuous solid plate.
The plate passes through an oven
which activates the crosslinking
process. Itthen cools and is cut
into slabs.
The nitrogen-charged slabs are
loaded into a large lower-pressure
autoclave and, under moderate
pressure, are heated to above their
melting point. When the pressure
isreduced, the nitrogen expands
turning the slabs into larger foam
sheets. This expansion process
isunconstrained, so uniform in
eachdimension.
See our process in action
"http://www.zotefoams.com/technology/">
10
Zotefoams plc
Annual Report 2020
The high levels of know-how and capital
required to use autoclaves is a difficult barrier
for new entrants to overcome. Patents on
ourbasic process expired some years ago,
although we are able to obtain patents for
products manufactured by that process, in
particular in our High-Performance Products
(HPP) business. This, and the fact that our
process allows us to produce materials that
cannot be made by any other method,
delivers a meaningful and sustainable
competitive advantage.
Foam has high distribution costs relative
toprice, particularly for our polyolefin foam
product range. It is more economic and
sustainable to expand the foam closer to
customers and we have invested in regional
manufacturing capacity in Poland to be
closer to certain markets.
Our business model
Leveraging unique technology with an
innovation-led portfolio of advanced products
Our route to increased profitability includes
running our unique machinery as near to
full capacity as possible – and filling new
capacity as quickly as possible – and then
mix-enriching our product portfolio. We
produce two distinct product portfolios which
combine to make our model work: polyolefin
foams and high-performance products.
Polyolefin foams (typically branded as
AZOTE
®
) are based on polymers that are
alsofoamed by many of our competitors,
compete primarily through the superior foam
properties created by our technology, are
produced in large volumes and are sold
toawide variety of customers who then
incorporate the foam into many different
products. High-performance products
(typically branded as ZOTEK
®
), meanwhile,
are made of more costly and specialised
polymers that very few competitors
canfoam, are currently produced in
relativelylower volumes and are sold
atahigher priceto a smaller number
ofcustomers. These customers then
usethistechnologically advanced foam
forhighlyspecific applications.
While the superior performance of our
foams creates demand globally, most of our
polyolefin foam customers are regional – for
us that means the UK, mainland Europe and
North America and reflects the geographic
locations of our manufacturing plants. This
isin part driven by distribution costs and by
the importance of good service levels. By
contrast, distribution costs make up a far
smaller proportion of the value of our HPP
portfolio, so do not constrain global reach,
and the complexity and higher value make
it more effective to produce the HPP range
from the more established UK site.
Over time we expect to increase profitability
through mix enrichment. Our core process
allows us to produce a range of both
polyolefin and HPP foams. With the higher
margins achievable from HPP and more
technical polyolefin foams, we prioritise these
products in our production decision-making.
However, the markets for polyolefin foams,
with many segments ranging from those
higher margin, specified, technical foams
to the highly competitive foams with low
switching costs, afford us the flexibility to
make full use of any significant availability of
capacity while still generating good margins
and providing highly valued solutions to our
customers. Supporting a broad product
portfolio therefore remains critical to
ourlong-term success. Currently, the
Polyolefin Foams Business Unit utilises
mostof our capacity.
We partner with a network of customers
around the globe that fabricates our
polyolefin foams and promote them in their
geographic markets. Some specialise in
specific sectors, while others specialise in
foam fabrication capabilities for general
markets. Our aim is always to be the material
of choice for our partners. Our block foams
are sold, and often specified, into a broad
range of industries, such as automotive,
aerospace, product protection, industrial
parts, marine, building and construction
andsports and leisure.
The AZOTE portfolio is typically viewed
as ‘best-in-class’ for performance, often
measured by weight, purity and durability,
and can be efficiently fabricated into complex
shapes. We provide our customers with
products that offer improved performance
per unit weight over competitive solutions.
They are lighter, made with less raw material
and their durability means they need
replacing less often. This makes them a
product of choice in thermal insulation,
transportation or when protecting goods
intransit where light weight helps reduce
fueland energy consumption. Zotefoams
products are predominantly found in
permanent solutions. Our Plastazote
®
andEvazote
®
polyolefin foam brands are
heldin high regard in the industry and offer
premium performance in the portfolio
ofafoam fabricator.
At our block foam manufacturing sites in
theUK, the USA and Poland, we operate
proprietary technology to produce foams
from a variety of different polymers. Our
manufacturing process almost always
involves three sequential steps – extrusion,
nitrogen saturation and expansion.
Zotefoams’ differential advantage is the use
of autoclaves, developed from a century of
experience, using a nitrogen-based process.
All of our assets are flexible – we can use
each of them to make many product grades.
For more information on our process,
please see
page 8
2.
Making the best
use of our assets
1.
Starting with
a core process
3.
Working with our
partners and enriching
the product mix
How our business works
11
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
A significant portion of technical, sales and
marketing expenditure is allocated for the
development of our HPP portfolio, sold under
the ZOTEK
®
and T-FIT
®
brand names. Close
and direct collaboration with customers, and
a focus on the ultimate end-users, is crucial to
the success of this business unit. We have a long
history of investing in R&D, which enables us to
innovate and meet the needs of customers with
technically demanding requirements seeking
solutions that consume fewer resources,
operating in sectors such as footwear and
aviation. These businesses are more global
in nature and we have strong management
alignment to the product range and certain
key markets.
Developing products to demanding technical
specifications, and promoting these globally,
can mean that a new HPP product makes losses
at first. However, once a product’s specifications
have been finalised and orders are secured,
theopportunities are longer term and cash
generation potential is high. Our HPP Business
Unit margins reflect a portfolio of products and
applications at different stages of the lifecycle
and we see considerable opportunity to grow
and to enrich our product mix over the
mediumterm.
Our HPP portfolio comprises innovative
and versatile raw materials which, like our
polyolefin foams, lend themselves to being
fabricated into complex parts by our
customers. The unique and advanced
properties of these foams often allow
designers and industry both to meet stringent
regulations, for example around safety or
environment, and to offer better products,
often by substituting non-foam products or
replacing multiple products. For example, our
foam is now used by the aviation industry for
ducting, where it acts as both the structure
and the insulation, visual window surrounds,
where it also acts as the seal, as well as ‘soft
touch’ materials within the cabin.
This area of the business is more readily
defensible because of the unique
performance advantages inherent in our
advanced technology, the patents we hold
and the highly specified markets we serve.
These factors also enable us to sell at a
higher price, with a better margin. Ultimately,
expanding our HPP portfolio is critical to
ourpast, present and future growth.
In some cases, however, we are able to move
even further up the value chain, and ultimately
provide finished parts directly to customers.
The best example of this is our T-FIT technical
insulation business. We take a ‘direct to
market’ approach to sell this clean insulation.
While this is a departure from our typical
model of contributing to, rather than
producing, the finished product, we are able
and ready to make similar moves in response
to unmet demand when it complements our
global network of fabrication partners.
In a 'steady state', our business is strongly cash
generative, but we have significant opportunity
to grow and have therefore chosen to re-invest
to take advantage of profitable opportunities.
Over the past five years, we have increased
capacity significantly in anticipation of projected
demand. While our mix enrichment strategy
favours our HPP portfolio, and investment in the
UK has focused on increasing our capacity to
deliver on these opportunities, the knock-on
impact of HPP growth is a reduction in available
UK capacity to service our highly valued and
profitable Polyolefin Foams business. The larger
part of this capacity expansion has consequently
been outside the UK, to allow us to meet our
growth expectations in polyolefin foams while
increasing our service levels and reducing
transport-related emissions through closer
proximity to our customers. And as one would
expect, our new facilities use state-of-the-art
technology with improved energy efficiency.
Allthis allows us to pursue more opportunities
than before in terms of new products and
solutions, many of which will then help to
growthe business further.
4.
Developing our
HPP portfolio
5.
Adding more value
for customers, and to
our business
6.
Capacity to meet
growing demand
Image © Nike
12
Zotefoams plc
Annual Report 2020
Our business model
Continued
Diversity of
products and
customers
Growing global
reach
Three further competitive advantages are
alsoimportant contributors to our success
Beginning from a single site in the UK,
we now have major manufacturing sites
operating in the USA and Poland,
serving regional and international
customers. Proximity to major
manufacturing centres is a significant
advantage in our markets. Having three
sites provides the flexibility to expand to
serve regional markets, while retaining
high-capacity utilisation across the
Group, and serve markets that are
growing at different rates with different
products. In recent years, we have
established a T-FIT subsidiary in China,
which fabricates products manufactured
in the UK, and a T-FIT sales subsidiary
inIndia. We have also established a
subsidiary in Oklahoma, USA, cutting
AZOTE parts for a valued customer
located adjacent to our facility.
We sell to customers from a wide
variety of different sectors, so we have
a more limited exposure to a downturn
in any particular industry. We have also
demonstrated the ability to quickly meet
a change indemand, as with our work
on producing foam for PPE during
theCOVID-19 pandemic.
Our sustainable
competitive advantages
As described on page 10 in ‘How our business works’,
oursustainable competitive advantages include
High-value,
unique assets
Technical know-how
Established
market position
Valued brands
Our place in a lower-
carbon economy
There are four aspects of our
business that will enable us to thrive
within a lower-carbon economy.
Over time, we plan to build on these
advantages, such that we can continue
to grow, reduce our carbon footprint
and help our customers become
more sustainable.
For more information about our
ESG approach,
see pages 44 to 53.
our ESG approach,
page x.
1. Our nitrogen-based process
Our core high-pressure autoclave foaming
process uses nitrogen as the foaming agent,
borrowed from the atmosphere during the
production process, so there is limited further
environmental impact beyond the use of energy
and raw plastic. At the same time, this process
is becoming more efficient as we invest in
newer, more efficient autoclaves.
2. Efficient use of raw material
We are proud that our unique technology
delivers foam products with better performance
per unit of weight, which allows us to offer
high-quality solutions made with less material.
Furthermore, not only do we use less material
to produce our foams, but the integrity and
durability of our products also mean they
need replacing less often.
3. Our products’ role in
avoiding emissions
Our products are typically used in a way which,
in the round, reduces emissions and conserves
scarce resources. For example, our foams are
used for thermal insulation, they protect products
in transit that have a high carbon footprint and
they often replace heavier and more wasteful
alternative materials.
4. New product development
As the demand grows for products that actively
help us move to a less wasteful, lower-carbon
future, we are already responding, with more
to come. For example, ReZorce
®
is a 100%
recyclable mono-barrier packaging solution
which has been designed to replace difficult-to-
recycle tubes, laminated paper, pouches
and cartons.
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Critical resources
and relationships
In order for us to continue as a viable and
successful business, we are aware of the need
to secure access to, and/or invest in, our key
resources and relationships, which include:
X
Raw material
X
Stable business environment
X
Plant and equipment
X
Intellectual property, including patents
X
Well-trained people and their capacity
toinnovate (read more about our people
on page 54)
X
Relationships with channel partners
X
Relationships with HPP clients
X
Ability to move goods between
manufacturing sites and customers
X
Financial resources
Our MuCell Extrusion business
MuCell Extrusion LLC (MEL) licenses a patented
process that creates micro-bubbles in the core
of plastic parts or products by injecting gas into
them as they are manufactured. This produces
afoamed core, bound by a solid skin into one
integral material, that seems indistinguishable
from a solid product. Products using MuCell
®
technology can be designed to perform like
solidplastic, but will typically use 15–20% less
material, realising both cost and environmental
benefits by using inert carbon dioxide or nitrogen
gas and reducing the plastic content at source.
Most customers are in the fast-moving
consumer goods (FMCG) or food packaging
industries, where value is created from making
asmall saving in plastic content, which is
multiplied across many millions of parts
annually,and where the current environment
isincreasingly driving them towards more
sustainable solutions. MEL shares in the
customers’ benefits by receiving a licence
feeforIP and/or royalty on parts made.
Recently, a variation of this technology has
been used to create ReZorce
®
, a recyclable,
mono-material barrier packaging solution and
anindustry first. In 2020, we focused efforts
onhow ReZorce can best be deployed in the
aseptic beverage carton market, where some
of the most intractable challenges to achieving
recycling and recyclability in post-consumer
waste exist, due to the multi-material nature of
current solutions. Our new pilot facility (see page
21) will help customers expedite time to market
for ReZorce, ahead of impending legislation.
Stable finances
enabling organic
growth
Our stable finances enable us to invest
in new opportunities as they appear,
giving us a significant competitive edge.
We have the resources available to
move into new polymers, or to displace
competition by superior performance.
We have grown organically for many
years and we believe that much
more is possible.
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Our external context
Our response to short-
and long-term trends
We deliver stakeholder value by using unique technology
to create a portfolio of differentiated products. We focus
resources primarily on markets where we are, or have the
potential to be, a market leader. We intend to develop
our business through sustained high levels of organic growth
and, where appropriate, through partnerships or acquisitions
We have built a clear long-term strategy for
growth based around three long-term global
megatrends that are driving demand for
ourproducts.
Understanding these market trends informs
ourstrategy and product development, as well
as the allocation of our resources. Given the
diversity of applications for foam, it is not
possible to track every use for our materials, and
a new idea or application may come from a foam
converter, an end-user or from within Zotefoams.
We therefore actively monitor these and maintain
flexibility to react to a wide variety of possibilities.
As the world around us changes, we regularly
re-test our strategy. We believe our existing
strategy continues to serve us well and
continuesto enable us to grow strongly.
Sometimes, as has happened during
thepandemic, short-term factors distort
longer-term trends. With clarity ofpurpose
andan understanding of the fundamental
driversof our business environment, we
willmake adjustments to our short-term
approach, such as limiting expenses and
capitalexpenditure, while ensuring that
ourlonger-term goals remain achievable.
Environment
Optimising the use of scarce resources has
become a universal driver. Lightweighting
isfundamental to reducing fuel usage and
controlling emissions for the aviation and
automotive industries. High-quality insulation
conserves thermal energy.
MuCell
®
technology uses less material to make
everyday items and saves costs. Our ReZorce
®
mono-material technology can be used to create
barrier packaging, for items such as juices,
toothpaste, food and dried goods, which can
berecycled using common kerbside collections.
Much of our AZOTE
®
foam is used in permanent
packaging or packaging that is designed to be
reused, while foams used in transportation are
normally specified to the lightest weight for the
required physical performance. Zotefoams’
products typically use less plastic than
competitive solutions due to the cell structure
offoam made in our autoclave process, giving
usboth a cost and environmental advantage.
Zotefoams versus other materials: typical
like-for-like performance using less polymer
ReZorce
®
is a better solution with lower
environmental impact
Zotefoams
Crosslinked
Non-crosslinked
+10–15%
>15%
Based on an independently conducted Life Cycle Assessment, comparing the
environmental impact of ReZorce with widely used multi-material alternative,
liquidpackaging board
lower Global
Warming Potential
less water
less energy
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Demographics
Better healthcare has created a population
boom, especially in older age groups, while
globally, discretionary spending power is rising
rapidly. Demand for healthcare products is
accelerating. Wealthier and more discerning
consumers are driving growth rates in other
industries such as food and drink, sports
equipment and transportation.
Transport, medical and sports and leisure
applications account for around 57% of sales
directly, while our T-FIT
®
insulation products
–demand for which is currently linked to
semiconductor, pharmaceutical and biotech
manufacturing – account for a further 4%
ofsales.
Regulation
Regulatory pressures, primarily to safeguard
consumers, are driving upstandards worldwide.
These standards in turn create demand for both
safer products and protective equipment.
Regulatory requirements mainly cover the
performance of end-use products, although
thereare specific tests for fire performance
andtoxicity limits in foams for certain industries
and jurisdictions. Zotefoams provides specifically
tested materials for semi-conductor,
pharmaceutical and biotech manufacture
and automotive, aircraft and rail insulation
and provides validated materials for medical
transportation and devices, and military storage
and personnel protection. Our technical team
isclosely involved in developing new materials
tomeet and anticipate standards and we are
currently working on projects for automotive
batteries, high-tech composites, foams from
recycled materials and foams which can be
more easilyrecycled. We sell AZOTE
®
grades
forautomotive, medical and packaging designed
tominimise emissions and/or meet specific
purity requirements. Around 43% of Zotefoams’
revenue from foams in 2020 came from products
with specific properties tested to customer
requirements, although not all of this was
demonstrably for regulation compliance.
Life expectancy, 2019
Life expectancy, 1950 to 2019
Plastazote
®
from our AZOTE
®
polyolefin foams
range is the most frequently cited thermoplastic
foam in medical literature due to its purity
and hypoallergenic characteristics. It meets
ISO10993 standards for evaluating the
biocompatibility of medical devices and is the
material of choice for skin contact applications.
1950 1960 1970 1980 1990 2000 2010 2019
50 years
55 years
60 years
65 years
70 years
World
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Our strategic objectives
Our four-part plan to deliver growing returns
We measure progress against four strategic objectives:
Increase our operating
margins, before
exceptional items.
Improve our return
oncapital (over our
investment cycle).
Zotefoams targets improved operating margins through a
continuous focus on the efficient use of its assets and mix
enrichment across its product range by developing applications
which most effectively leverage its unique technology. This applies
not only to our High-Performance Products business but also
to our Polyolefin Foams business. Zotefoams adopts amedium-
to long-term view, balancing immediate operating margin gain with
the investments required in infrastructure and capacity (and their
consequent impact on short-term margin), tomaximise future
growth. Higher operating margins generate higher returns
to shareholders.
Zotefoams uses unique and capital-intensive assets. We
understand the importance of generating a good return on these
assets to provide our shareholders with strong returns andmaintain
their support when funding is required to drive longer-term capital
projects. As Zotefoams’ business grows, wehave invested in large
capital programmes which have changed the shape of our balance
sheet. In order for return on capital to provide a meaningful
measurement, major capacity and infrastructure investments, which
are expected to require considerable capitalover a number of years
before being commissioned asproduction assets, are excluded
fromthe calculation untilthepoint of commissioning.
Grow sales in our
AZOTE
®
Polyolefin
Foamsbusiness in excess
of twice the rate of GDP
global growth.
Zotefoams is a capital-intensive business with high operational
gearing. The Polyolefin Foams business is the largest user of
capacity and its volumes are important for theabsorptionof fixed
costs. AZOTE
®
foams provide unique solutionsto a broad spread
ofcustomers across many industries, serving as a valuable mitigant
against industry and customer risk. Demand for improved resource
efficiency, regulation and global demographics underpins our growth
potential in this profitable business unit.
2
Develop an HPP
portfolioand MEL
customer base to deliver
enhanced margins.
HPP and MEL offer higher growth rates and the potential
for higher margins than AZOTE
®
foams. High-performance
products use the same asset base as the Polyolefin Foams
business and leverage our uniqueness by providing customers
with solutions based on foams that can only be manufactured
using our technology. They offer larger-scale opportunities than
our polyolefin foams and higher drop-through operating margins.
MEL reduces plastics use at source using patented high-pressure
gas technology at customers’ facilities and operates on a royalty
basis over a period in excess of ten years. Using similar technology,
the team at MEL has developed mono-material barrier packaging
technology, which we have branded ReZorce
®
. Using significant
recycled plastic content and being readily recyclable, the
potentialmarket is large and facing significant pressure
toimprovesustainability rapidly.
1
3
4
Why?
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In 2020, sales of AZOTE polyolefin foams were broadly stable,
although within this there were significant variations by product
andsegment year-on-year. The general market weakness from
COVID-19 was offset by sales to our largest UK customer for a UK
Government PPE contract for the NHS, which represented almost
19% of AZOTE
®
revenues in 2020. In the latter part of the year,
weexperienced 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, but these were generally not
implemented due to the customers’ priority of conserving cash
inanenvironment of continued economic uncertainty.
We are confident that growing AZOTE sales at twice therate of
GDPgrowth is achievable and that the impacts of the pandemic
willrecede. The key drivers of thisbusiness – use of materials,
lightweight, insulation etc – remain as relevant as ever and we are
developing our product range and geographical reach accordingly.
During 2020, 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
bemade in Poland, and we worked closely with large customers
inautomotive and retail to develop application-specific AZOTE
products to meet their particular needs. All these developments
areset to broaden further Zotefoams’ product range and offer
goodopportunities to grow market share by aligning closely with
market trends and customer needs.
In 2020, sales in these segments increased by 8% and accounted for
39% (2019: 37%) of Group revenue. The expected growth in Footwear
resulted in it, alone, accounting for 26% (2019: 16%) of Group revenue,
while ZOTEK
®
F fluoropolymer foams, primarily for aviation applications,
reduced by 54% as Boeing, Airbus and airlines (which use our foams
forinterior applications) significantly curtailed their activities due to
COVID-19. T-FIT
®
insulation products grew by 4%, with COVID-19
significantly holding back the rate of growth in the year. The profit margin
of the HPP Business Unit was 26% (2019: 24%), compared with a 10%
margin in AZOTE foams (2019: 14%). MEL’s development strategy was
negatively impacted by COVID-19, with an inability of our staff to travel to
customer sites and considerable reductions in discretionary expenditure
by potential customers leading to a 64% fall in revenue from equipment
sales. Revenue from licence 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. The reduced expenditure
of the business as a result of these absent development opportunities
led to a loss in line with that of the previous year.
We see opportunity to continue strong growth in HPP and MEL
with the potential to enhance Group margins. The rate of margin
enhancement will depend on both the capacity utilisation of the
Group and the relative level of investment in early stage and
high-growth opportunities within our HPP and MEL portfolios,
aswellas the speed of recovery from the pandemic in markets
suchasaviation. We have worked closely with external consultants
and packaging industry experts to help validate and evaluate the
ReZorce opportunity and strategy, and have commenced the next
phase of a go-to-market evaluation strategy which is expected to
besubstantially complete during the third quarter. The licensing
business of MEL, which is aimed at reducing customers’
consumption of plastic volumes, will continue to support
existinglicensees and current projects.
In 2020, in aggregate, segment margins decreased to 13.7% from
15.1%. This decline in margin, despite stable Group revenue, results
mainly from a less favourable sales mix and increased manufacturing
and depreciation overhead from new UK and US capacity. After
central costs, which include corporate, finance and IT, mainly relating
to the corporate governance of an increasingly complex organisation,
as well as net foreign exchange movements, Group operating margin
before exceptional item declined slightly to 11.0% (2019: 11.3%).
In 2020, the return on capital declined to 9.0% (2019: 10.5%).
Operating profit was the same level as the previous year, while the
capital base included recently commissioned assets in the UK and
USA. The investment in the Group’s ongoing expansion project in
Poland was excluded from thecalculation, inline withthe Group’s
definition of return oncapital.
Sales growth improves operating margins as asset utilisation
increases, although in the short term this will be offset by additional
depreciation and operating costs ofthe Poland facility, given the
time lag between making capacity available and achieving targeted
utilisation rates. Operating margin will also be impacted by a return
to normalised levels of spending in certain areas, after tight cost
control in 2020 related to COVID-19, and increased operating
costinvestment in high opportunity areas such as those in T-FIT
®
technical insulation. However, as we utilise our assets through the
investment cycle, we expect margins to grow, supported by the
strong margin Polyolefin Foams business, the enhanced-margin,
faster-growing HPP business and the possibilities offered by MEL.
The Group has committed to a large capacity expansion
programme over recent years, which has ended in February
2021with the commissioning of the Poland manufacturing site. The
balance sheet, which includes new capacity as well assupporting
infrastructure which will not directly generate returns, has increased
significantly. We approved these projects, acknowledging and
accepting the dilution of return in capital over the shorter term but
recognising the importance ofadequately investing in the capacity
needed for anticipated future growth and the corresponding
improvement in return oncapital that should accompany it.
Next year, and beyondThis year
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Our brands in action
Innovating to help our customers
meet new challenges
Driving zero emissions through
electric buses in China
AZOTE
®
AZOTE
®
polyolen foams
aremanufactured using
ourunique, high-pressure
process. This process
differentiates Zotefoams
fromcompetitors that
manufacture similar
foamsusing low-density
polyethylene(LDPE), which
isour main rawmaterial.
Zotefoams produces foams that are more
consistent, lighter weight and possess higher
purity compared with foams manufactured using
chemical technology. These superior attributes
are valued globally in many uses with examples
as diverse as aerospace, sports equipment and
medical packaging. Underlying growth of many
of these segments is driven by global trends in
regulation, environment and demographics,
including resource efficiency.
The main geographical markets for our AZOTE
®
foams are the UK, other European countries and
North America as, beyond this, distribution costs
limit the market opportunity. We do sell outside
these areas, mainly in Japan and China, into
more niche, technical applications and further
development of these geographies remains a
longer-term goal.
Context
Announced in 2018, the Chinese government’s
Blue Sky Plan aims to cut air pollution in urban
areas and includes commitments such as the
aggressive rollout of clean energy vehicles and
electric vehicle (EV) charging infrastructure.
Chengdu FlexTech Environment Protection
Technology Co Ltd, a specialist in fitting
outand converting buses, is supporting
customers, including Sichuan Bus Group,
asthey switch from fossil fuel to clean
energyvehicles. The company recognised
lightweighting as a priority in the move to
electric vehicles and that the weight of the glass
fibre boards historically used for bus bodywork
insulation would be an obstacle in this regard.
What we did
Having decided to replace glass fibre
boardswith a lighter foam insulation,
FlexTechevaluated materials from several
suppliers. Zotefoams’ Plastazote
®
LD24
FRflame-retarded low density polyethylene
foam from the AZOTE
®
polyolefin foams range
was selected for both bus bodywork and also
EV car battery insulation, on the basis that it
proved lighter and stronger thanthe
alternatives.
AZOTE FR grades are a popular choice
forthermal and acoustic insulation in public
transportation applications due to their
compliance with UL94 HF1 flammability, DIN
5510-2 flame retardance and EN45545 fire
resistance in railway vehicles standards, on their
own or in combination with other materials.
Results
Weight saving is paramount in EV applications
to preserve battery charge and increase
range. In this application, Plastazote reduced
weight by 90% compared with the previous
glass fibre board solution and its flexibility
makes for quicker and easier installation
inconfined spaces.
Case Study
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Improving the safety and
sustainability of air travel with
our newest lightweight foam
ZOTEK
®
ZOTEK
®
products use
Zotefoams’ unique autoclave
technology applied to
high-end polymers such
aspolyvinylidene uoride
(PVDF) uoropolymer, nylon
orthermoplastic elastomers
(TPE). Combining the original
polymer properties with our
foaming process creates
trulyunique materials.
ZOTEK
®
F fluoropolymer foams are
inherently fire- and chemical-resistant and are
mainly used in aerospace applications. ZOTEK
®
N nylon foams are designed to operate at very
high temperatures and are finding uses in a wide
variety of mainly industrial applications. There
isa considerable level of interest currently in
ZOTEK
®
N as a lightweight thermoplastic
composite material for transportation, designed
to reduce weight and meet environmental
targets for fuel economy. ZOTEK
®
TPE
foams, which delivered the largest contribution
to HPPgrowth for the second year in a row, have
excellent kinetic energy management properties
and arebeing sold primarily in sportsand leisure
applications. Historically, salesof ZOTEK
®
foamshave grown due to morestringent
regulation in the aviation markets,while
recentgrowth is being led bydevelopments
inthe footwear market.
Context
Although the reduced number of flights due to
COVID-19 has temporarily curtailed air travel,
the long-term forecast is for passenger – and
therefore flight – numbers to increase. Airlines
and aircraft manufacturers are united in their
commitment to facilitating the benefits of air
travel while reducing its environmental impact.
Along with cleaner engine technology,
reducing fuel usage through lightweighting
iscentral to this strategy.
What we did
In 2020, Zotefoams launched ZOTEK
®
F XR,
anextra-rigid grade complementing the
flexible, semi-rigid and rigid materials already
in the ZOTEK
®
F OSU range and extending
Zotefoams’ scope of application in aircraft
interiors thanks to its semi-structural
properties. ZOTEK F revolutionised aircraft
interiors through its unique blend of safety,
versatility and weight reduction; ZOTEK
FXRlooks set to do the same, reducing
weight by as much as 70% on a like-for-like
basis compared with the solid thermoplastics
traditionally used in applications such as
theinterior of seat pods, stowage lockers,
rigid armrests and tray tables.
Results
Adient Aerospace was the first company
to deploy ZOTEK F XR in a commercial
application, replacing 3mm thick solid
thermoplastic in a seat backshell liner with the
same thickness of ZOTEK F XR. The foam is
vacuum-formed to create the required shape
and bonded with a luxury non-woven fabric
for a premium finish. Besides reducing
component weight, ZOTEK F XR also exhibits
exceptionally low heat release andsmoke
density in aviation industry testingprotocols.
Case Study
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T-FIT
®
helps to deliver dairy
products safety in India
T-FIT
®
The T-FIT
®
insulation story
began with end-users looking
for a solution to insulate
pipes in pharmaceutical and
biotechnology cleanrooms.
T-FIT
®
Clean was developed
as a unique thermal insulation
system designed for these
demanding, highly controlled
production environments.
Based on the unique technology owned by
Zotefoams and following the success of T-FIT
Clean insulation, Zotefoams is expanding the
T-FIT range to address the requirements of the
food, dairy, personal care and general process
industries. These are products that are inherently
pure and free of chemical residues and meet
leading fire certification standards. Demonstrably
resistant to growth of mould and bacteria, the full
range of T-FIT insulation products manufactured
by Zotefoams is durable, moisture-resistant
andeasy to install and clean.
T-FIT
®
Hygiene is designed for large-scale,
aseptic, food processing. Production areas
are built to exacting standards, where the
specification is for a pure, pollutant- and
fibre-free thermal insulation with the capability
to withstand the steam purging process typical
in this sector. T-FIT Hygiene can ensure air
conditioning, air filtration and other process
equipment continue to operate at optimum
levelsof performance.
Unique in both its material (Nylon PA6) and its
foam insulation class, T-FIT
®
Process is the high
temperature addition to the T-FIT range and
operates at temperatures up to 160°C with
spikes, for cleaning in place, up to 205°C. Aimed
at the utility and general processing industries
around the world, T-FIT Process will assist
project and process engineers in their quest
for ever more durable and heat-resistant
insulation solutions.
Context
Karnataka Cooperative Milk Producers’
Federation Limited (KMF) is the second largest
dairy cooperative in India. Its ‘Nandini’ brand
is a household name and market leader in
fresh and pasteurised milk products. KMF
was using traditional polyurethane foam and
nitrile rubber pipe insulation in certain places.
This was underperforming, resulting in cracks
from thermal fatigue allowing condensation
ingress, creating a risk of bacterial and
fungalgrowth and the potential for
cross-contamination. This was raised as a
non-conformity in an external compliance
audit relating to the Food Safety and
Standards Authority of India.
What we did
The T-FIT team in India worked with the
customer to implement T-FIT
®
Hygiene and
T-FIT
®
Process. T-FIT Hygiene was retrofitted
to the chiller and ice cream filling lines to
prevent the condensation that had proved so
problematic previously. The exceptional
material properties of T-FIT Hygiene are
tailored to demanding FMCG applications.
T-FIT Process was applied to steam and CIP
lines; its high temperature credentials ensure
that it can withstand temperature spikes
associated with the steamflushing necessary
to prevent cross-contamination and maintain
the tasteand quality of products.
Results
The adoption of T-FIT
®
technical insulation in
the production and process areas significantly
reduced the accumulation of condensation,
minimising the risk of bacterial and fungal
growth. Areas are now condensation-free,
resolving the audit non-conformity and
ensuring products are safe for public
consumption. Additional tangible benefits
have also been realised, including a more
durable insulation solution, significant energy
savings and reduced maintenance costs.
Case Study
Our brands in action
Continued
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Pilot facility set to speed time
to market for ReZorce
®
MuCell
®
MEL licenses microcellular
foam technology and sells
related machinery. MEL’s
business model is to develop
and license IP and share in
thesavings or benets of
thelicensee through a royalty
and/or licence fee. Recently,
a variation of this technology
has been used to create
ReZorce
®
, a recyclable,
mono-material barrier
packaging solution.
MEL 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. MEL technology can be
used with most common plastics and reduces
material consumption with no negative impact
on recycling. The primary target market for MEL
is consumer packaging, where production
volumes are high and developments are scalable
across geographic and product markets.
MEL continues to evolve its product offering and
intellectual property (IP). As the business begins
to achieve commercial scale, our staff become
more specialist and our knowledge deepens.
MEL staff integrate with the customers in
product design, to make the best use of our
technological capability, and with this depth
ofknowledge comes improved customer
satisfaction and also more opportunity
forfurtherIP.
Typically, barrier packaging used to prevent
foodand beverage being spoiled by oxygen
ormoisture has been made using laminate
structures, often combining materials such as
plastic, card and metals. These multi-material
structures are not designed for recycling, are
often incinerated and are not considered part of
the circular economy.With ReZorce, packaging
can be recycled using common methods
globally, with no need for specialised systems,
and turned into plastic which can be used again
and again for similar packaging.
Context
ReZorce
®
recyclable mono-material barrier
packaging is the exciting evolution of MuCell
®
microcellular foaming technology and, for
foodbrand owners and retailers using aseptic
beverage cartons, the means to achieve
impending legislative targets for recycling
andrecyclability that cannot be met by
currentcomposite materials.
ReZorce offers barrier properties that meet
orexceed all food industry standards and
iscompatible with existing manufacturing,
packaging and post-consumer recycling
infrastructure, ensuring easy transition.
Arecent Life Cycle Analysis has demonstrated
that producing a one-litre ReZorce carton
uses 11 times less water and five times
lessenergy than a composite carton
equivalent and has a 50% lower global
warming potential.
Strategic progress
The biggest obstacle to food and beverage
manufacturers seeking to adopt ReZorce
®
is
securing time to run trials on their production
lines, since food and beverage production
operations are typically 24/7/365. Trialling
newmaterials and processes comes at
theexpense of production and profit.
Zotefoams has invested $1m in a pilot
extrusion facility and is now investing in
pasteurisation and in a typical form, fill, seal
cartoning machine similar to those of potential
customers. Based in Leominster, MA, USA,
the facility is close to MuCell Extrusion LLC.
Results
The pilot facility will enable fast-track trials
ofReZorce by interested parties, cutting lead
times from months to a matter of weeks and
enabling deployment of the technology ahead
of legislative deadlines.
Case Study
22
Zotefoams plc
Annual Report 2020
An introduction from our Chair
Resilience and flexibility
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
wereintroduced 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.
Basic earnings per share
before exceptional item
14.87p
Change
nil
2019
14.91p
Earnings per share
14.87p
Change
-13%
2019
17.10p
Total dividend
for the year
6.30p
Change
+210%
2019
2.03p
The response to the pandemic has
demonstrated an effective strategy
delivered by a dedicated workforce and
leveraging a differentiated technology
23
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
plastic in society, lowering carbon footprint
andimproving recyclability of packaging.
Webelieve that plastics, used appropriately,
remain the optimal solution bothfunctionally
andenvironmentally for ourcustomers’ 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, see page 37, and the
Group executive has been tasked with ensuring
that both the strategic and operational impact
ofsustainability is embedded within
decision-making processes throughout the
Group. Moredetails are also included under
Strategy update in the Group CEO's review
onpage 24 and in the Environment, social
andgovernance report on page 44.
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 inthe boardroom
through the position of JCarling 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 CWall
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 six years of invaluable service;
we wish her well.
The Board considers that ithas fully applied
all the principles and provisions of the UK
Corporate Governance Code during 2020.
Moreinformation is provided in the Corporate
Governance report on page 62.
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
their 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
greatteam effort and I want to thank all of
ouremployees 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
anuncertain 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
7 April 2021
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 : 17.10 p).
The combination of our rapid response to
thepandemic 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
tomitigate it became clearer, a more confident
assessment of the Group’s financial position
andfuture 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.
Itconsiders 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 incertain applications,
has caused most public concern. Our MuCell
®
technology is focused on the reduction of
24
Zotefoams plc
Annual Report 2020
Group CEO’s review
Solid operating profits and cash management
following record second-half sales
2020
United
Kingdom
Continental
Europe
North
America
Rest of
the world
Total
Change %
48%
(30)% (20)%
37%2%
Group revenue (£’000)
19,106
17,856
17,629
28,061
82,652
% of Group revenue
23%
22%
21%
34%
100%
2019
Group revenue (£’000)
12,875
25,503
22,010
20,472
80,860
% of Group revenue
16%
32%
27%
25%
100%
protective equipment (PPE) contract and, as
anticipated, increasing sales of our ZOTEK
®
HPPfoams to Nike under our exclusive
agreement for footwear.
Zotefoams’ stated business purpose is
“optimal material solutions 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
asmedical 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
moretechnical ZOTEK HPP foams and T-FIT
®
insulation products, is expected to be the main
driver of improved profitability and returns in
themedium 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
thebroader COVID-19 related downturn in
mostother markets. Profit before tax declined
by5%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).
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
wehave a strong business development pipeline.
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
leadtimes. However, due to the wide variety
ofapplications 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
Zotefoams remains well positioned competitively
and environmentally. Ourcore materials offer
improved product performance using less
material and MuCell Extrusion (MEL) licenses
technology specifically to reduce polymer usage
25
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Financial Statements
Overall, we believe our strategy is sound and
the ability to realign our business, to adapt to
arapidly 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
ofextreme 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
tomore 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 astrongly negative public
perception of plastic isnow becoming more
nuanced beyond the environmental impact
ofill-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, see page 37.
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
thatour capacity investments, which involve
significant infrastructure and bespoke
machinery, take timeto complete and are costly.
The firstincrement of capacity on any site
requiresdisproportionately high investment in
infrastructure, but subsequent investment on
thesite 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
havethe 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
hasthe ability to react to structural increases
indemand for all its products.
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
indemand, 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
ofconserving cash in an environment of
continued economic uncertainty.
During the year, we continued to enhance
ourAZOTE product portfolio, albeit at a slower
pace than in previous years due to our focus
onshort-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,
andwe worked closely with large customers
inautomotive 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.
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 product protection linked to
trade shows and exhibitions. Geographically,
Japan and continental Europe, Germany in
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
POLYOLEFIN
FOAMS
AZOTE
®
26
Zotefoams plc
Annual Report 2020
Group CEO’s review
Continued
MuCell Extrusion LLC licenses microcellular
foam technology and sells relatedmachinery.
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
theyear. 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 licence 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
intravel 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
alsodeliberately 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
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
inholding back the rate of growth in 2020
andresulted in substantial regional variability.
Wegrew 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
cooperation 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
lowcurrent demand from this industry. We
havealso 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.
Segment revenue
£30.0m
Change
+13%
2019
£26.5m
Segment revenue
£1.8m
Change
-41%
2019
£3.1m
Segment profit margin
26.3%
2019
24.3%
Segment loss before
amortisation
£1.2m
Change
+7%
2019
£1.3m
Segment profit
£7.9m
Change
+23%
2019
£6.4m
Segment loss after
amortisation
£1.4m
Change
+6%
2019
£1.5m
HPP
T-FIT
®
ZOTEK
®
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
orhigh-temperature performance to meet the
exacting needs of industries such as sports
equipment, aviation, automotive, biotech
andpharmaceutical.
The HPP Business Unit accounted for
36% of Group sales in 2020 (2019: 33%).
MEL
MuCell
®
ReZorce
®
27
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Financial Statements
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
othermulti-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,
willcontinue 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
ofour 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
onfour 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
onselling into structural growth niches,
meansthat we expect strong further
growthinthese product lines in the future.
2.
Sales of our highly differentiated AZOTE
polyolefin foam products declined by 1%,
against our target rate oftwice 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
tocontinue to invest for our future as well
asincrease 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
in2021 and the Group iswell invested to
support future growth. Capital spending
isplanned 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
indelivering 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.
Werecognise 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
andwe will not be satisfied until we achieve
ourgoal of no one getting hurt while working
atZotefoams.
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
asnormal. 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-isolating 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: one). 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,
acrossthe business as a whole. Our Polyolefin
Foams Business Unit is trading very strongly,
buoyed byrestocking in some markets and the
restarting of some previously delayed projects.
We donotanticipate any significant sales from
PPEprogrammes this year, which materially
supported 2020’s second half trading. In
ourHPP 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
inthe second quarter.
Zotefoams demonstrated resilience and flexibility
under very difficult macroeconomic conditions
in2020, while continuing to make good strategic
progress and adding to its broad range of
exciting business opportunities. We expect
todeliver significant growth this year; however,
our cost base will increase, reflecting a return
tomore 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
ongoing COVID-19 and logistics challenges,
the Board remains confident about the future
prospects for our business.
D B Stirling
Group CEO
7 April 2021
28
Zotefoams plc
Annual Report 2020
Group CFO’s review
Resilient performance and
astrong 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
theUK 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
tradingenvironment, 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
down10% at £9.1m (2019: £10.2m) following
aprevious year pension credit of £1.1m
recordedas 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), the Group’s
investment programme was the main driver
behind the Group requiring to draw downonits
debt facilities, as expected. Under the definition
of the bank facility agreement, which adjusts
netdebt 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
£82.7m
Change
+2%
2019
£80.9m
Operating profit before
exceptional item
£9.1m
Change
0%
2019
£9.1m
Operating profit
£9.1m
Change
-10%
2019
£10.2m
29
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
toits 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
theuncertainties 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
thefull year impact of staff additions during 2019.
Included within distribution costs in the
consolidated income statement are warehousing
and sales and marketing expenses. These
costsdecreased 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 inthe 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
HRfunctions, 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
wasa reduction in the combined loss from
foreignexchange hedging contracts and foreign
exchange translation movements to £0.3m
(2019: net loss £1.4m). SeeCurrency review
forfurther information andcontext.
The business unit results are shown on pages
25to 27 in this Strategic Report. They do
notinclude 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 Company’s
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
£1.1m, 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 DB Scheme
pension obligation. The Group capitalised
£0.6m(2019: £0.9m) of interest inrelation
tothefinancing of itscapacity enhancement
projects still under construction, a reduction
following completion of the USA and UK
projectsin 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
asignificant 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
from31 December 2019 to31 December 2020
strengthened by 4% and the sterling spot rate
against the euro from 31 December 2019 to
31December 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 foamsused for production in the UK,
which areeuro-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 tohedge 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, theparent 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
theUK in US dollars, adding to itsexposure
toforeign 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
tomarket 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 statementof £0.2m (2019 loss: £0.5m).
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
welargely consider to be a one-off opportunity,
annual sales of polyolefin foams decreased
20%,reflecting the significant adverse change
indemand conditions across arange 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 Rest of the world 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
inEurope 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.
Revenue by market (%)
2020
2019
Product protection
21
29
Transportation
12
22
Sports and leisure
29
20
Building and construction
12
12
Industrial
7
9
Medical
16
6
Other
3
2
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,
theshare of footwear sales increased, average
LDPE polymer prices declined and the UK site
was successful in flexing direct labour costs
inH1 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
30
Zotefoams plc
Annual Report 2020
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
principalrisks 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 thosesubsidiaries are used to pay back
thesepositions, 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
on2020, it is estimated that, with respect to
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 bythe
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
theinterim dividend of 2.03p (2019: 2.03p),
thiswould bring the total dividend for the year
to6.30p 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
tothe 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
ofBorrowing Costs”. The interest paid has
beensplit 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.
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. Inthe year, it is assumed that the
transaction risk fromeuro/sterling movements
continues to besubstantially naturally hedged,
with sales revenues offset by costs, primarily
related to rawmaterial purchases andcertain
further processing costs.
The Group does not currently hedge for the
translation of its foreign subsidiaries’ assets or
liabilities. The foreign currency hedging policy
iskept 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%),
whichisbelow the Group’s weighted average
corporate tax rate for the year of 19.7%
(2019:18.7%). Theeffective tax rate for
theyearis 13.7% (2019:16.2%). The lower
effective tax rate for theyear arises primarily
froman adjustment foroverpayments made in
previous years andresearch and development
tax credits. Netincome 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
advisers on the 2019 figure.
Currency impact on business segments in 2020
Currency had negligible impact on the Group’s performance
Segment revenue £m
2020
Reported
2020
Adjusted
*
2019
Reported
Net change %
Reported
Adjusted
Polyolefin Foams
50.9 50.9
51.4
(1) (1)
HPP
30.0
30.2
26.5
13
14
MEL
1.8 1.8
3.1
(44) (44)
Eliminations
(0.1) (0.1)
(0.1)
– –
Group
82.7
82.8
80.9
2 2
* 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:
2020
2019
GBP to euro – average
0.88
0.88
GBP to euro – year-end spot
0.90
0.85
GBP to USD – average
0.78
0.79
GBP to USD – year-end spot
0.73
0.76
Group CFO’s review
Continued
31
Zotefoams plc
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Strategic Report
/ Governance
/
Financial Statements
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
in2019, 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
andUSA plants. A small amount of capital
investment is outstanding in Poland, to
becompleted 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. TheGroup alsoinvested £0.3m (2019:
£0.9m)in intangible assets, with the higher 2019
amount relating toan upgrade of the Group’s
Microsoft AX ERPsystem to the latestversion.
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 ofthe bank facility agreement, which
adjusts for the impact of IFRS 2 and IFRS 16,
netdebt 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
clearassessment of strategic fit, risk, risk
appetite and expected returns. Confidence
inthe Group’s developing portfolio of HPP
opportunities is asignificant consideration in
determining thetiming of certain investments,
while the strategic importance of maintaining
growth inthe profitable Polyolefin Foams
business, the Group’s largest volume product
range, informs the decision to increase total
Groupcapacity versus relying solely
onmixenrichment.
Zotefoams targets improvements inthe
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 oninvestment in
a major expansion or new location, such as
installation of extrusion andhigh-pressure
capability at our existing Kentucky, USA site
or the most recent investment infoam
manufacturing at the Poland site, wetake into
account the importance of scale and dilution
of heavy infrastructure cost over a(future)
second or third line. As such, the first step
isinvariably more dilutive to capital return
thanany subsequent investments.
Zotefoams defines the return on capital
employed (ROCE) as operating profit before
exceptional items divided by the average sum
ofits 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
to7.1%, from 8.1% in 2019.
Investing in growth (£m)
2015
2016
2017
2018
2019
2020
Total
Growth capital
6.1
6.9
7.8
12.8
19.8
10.3
63.7
Capitalised interest
– – – –
0.9
0.6
1.5
Maintenance capital
2.6
5.2
3.6 3.0
3.7
2.1
20.2
Total investment in property,
plant and equipment
8.7
12.1 11.4
15.8
24.4
13.0
85.4
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 DB Scheme of £4.2m. As a result, the
Company agreed with the Trustees to make
contributions to the DB Scheme of £43,300
permonth to meet the shortfall by 31 October
2026, up from£41,000 per month previously.
Inaddition, the Company pays the ongoing
DBScheme expenses of £15,000 per month
(previously £10,600 per month) to cover
death-in-service insurance premiums, the
expenses of administering the DB Scheme
andPension Protection Fund levies.
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
insalary had not been broken. The Company
recorded this as an operating exceptional item
inthe 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 boththe Company and
the Trustees and was awarded £1.1m following
mediation, which it recorded as an exceptional
item in the income statement. After deduction
ofcosts incurred by the Company, the net award
of £0.9m was transferred into the DB Scheme
tohelp fund its deficit.
32
Zotefoams plc
Annual Report 2020
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 itsstrategic
objectives. Mitigation of further risk is expected
to come from our growth expectations and the
refocus by the Trustees on a lower-risk strategy
to meet the DB Scheme’s deficit shortfall.
Going concern
The Group’s business activities, together with
the factors likely to affect its future development,
performance and position, are set out in the
Strategic Report on pages 1 to 59 and the
section entitled ‘Risk management and principal
risks’ on pages 33 to 42. These also describe
the financial position of the Group, its cash flows
and liquidity position. In addition, note 22 to
thefinancial statements includes the Group’s
objectives, policies and processes for managing
its capital, its financial risk management
objectives, details of its financial instruments
andhedging activities, borrowing facilities and
itsexposure to credit risk and liquidity risk.
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. Thebank facility is
forafive-year period andexpires in May 2023.
Atthe date ofthestatementof financial position,
£10.7mwasundrawn 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
andconsidering the existing banking facilities,
have areasonable 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
costand cash management, all of which
couldbe 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
tofunding and liquidity, credit, interest
ratefluctuations and currency exposures.
Themanagement of these risks is
documentedinnote 22.
G C McGrath
Group CFO
7 April 2021
Group CFO’s review
Continued
33
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
Risk management and principal risks
Managing our risks to achieve our
strategic objectives
Zotefoams’ risk management process is designed to improve the likelihood of
achieving its strategic objectives, keep its employees safe, protect the interests
of its shareholders and key stakeholders and enhance the quality of its
decision-making. The Group is committed to conducting business in line with
all applicable laws and regulations and in a manner consistent with its values
Risk management framework
Board
Executive Committee
Audit Committee
Ensures that risk is managed across
the business
Inputs into the Board’s process for setting risk appetite
Implements strategy in line with the
Group’s risk appetite
Manages opportunities and the resulting risks arising
Leads operational management’s approach to risk
Inputs its assessment of risk and opportunities into the
Internal Controls Committee
Reviews and assesses the effective functioning of, and proposed amendments to, the Group’s risk management framework
Reviews the outputs and the effectiveness of all functional steering committees
and takes action where outputs do not achieve the desired effect
Reviews the context within which Zotefoams operates and the effect of risks
and opportunities on management systems and strategic direction
Assesses and ensures mitigation actions identified at functional steering committees are planned, implemented and effective
Reviews, updates and submits the Group’s principal risks and uncertainties to the Board
Reviews and approves the Zotefoams business continuity plan
Monitors and reviews the effectiveness of the Group’s risk
management framework
Defines the Group’s appetite for risk
Assesses the Group’s principal risks
and opportunities
Internal Controls Committee
Functional Steering Committees
Operational management
Employees
Members of functional steering committees
Create an environment where risk management is
embraced and the responsibility for risk management is
accepted by all employees
Implement and maintain risk management processes
Health and Safety
Environment
HR and Training
Supplier Management
Contract Control
IT
Quality
New Product Development
Marketing Communications
Planning and Capacity
Capital Planning
Credit
Foreign Exchange
Fire Protection
Maintenance
Zotefoams Inc Executive, plus
functional sub-committees
MEL Executive, plus
functional sub-committees
Chaired by, and including, Executive Committee members
Provide a regular forum for active monitoring of key business risks as they relate to the achievement of the Group’s strategic
objectives, the controls and activities in place to mitigate them, the key actions required and their timings
Report bi-annually to the Internal Control Committee on successful adherence to their terms of reference specific to
risk and raise any failures in the effectiveness of existing processes
Steering committees exist for:
Active in the day-to-day management of risk
34
Zotefoams plc
Annual Report 2020
Risk appetite
Zotefoams is a business with good opportunities
for growth. Reflecting the uniqueness of our
technology, its capital intensity and the
importance of matching capacity with our
demand expectations, we plan for the future
over five years and convert these plans into
financial targets. To achieve more ambitious
targets, we understand we must be willing
toaccept higher levels of risk. We seek an
appropriately balanced outcome, where we
consider the level of reward commensurate
withthe likelihood of success. We recognise
theimportance of taking these risks within clear
boundaries as recommended by the Executive
team and approved by the Board. We challenge,
reassess and reaffirm these boundaries regularly
and, for key decisions, on a case-by-case basis.
As a manufacturing company, the health
andsafety of our employees will always
beparamount, which translates into an
extremely low tolerance for risk in this area.
Key changes in the year
COVID-19
Zotefoams has been swift and proactive in its
response to COVID-19. Since March, Board
engagement was increased to every second
week while the Executive team met weekly.
Overseen by the Board, the team’s immediate
concern was to prioritise the health and safety
ofour workforce and the immediate needs of
ourcustomers, implementing comprehensive
site pandemic response measures across all
locations, keeping them fluid to reflect changing
developments and ensuring they followed or
exceeded local government policies at all times.
These measures have helped ensure operations
continue safely, as has ensuring technology
isavailable to all staff working from home.
Zotefoams also specifically focused actions on
managing cash flow, controlling costs and the
quantum and timing of its capital expenditures,
and successfully ensuring the Group remained
robust with sufficient liquidity. An important
action early in the year was to increase the
leverage ratio covenant with its banks for
the30June 2020 reporting period, given
thevery high uncertainty prevailing at the
timeand the debt level of the Group as it
completed its significant programme of
capacityexpansion investment.
Zotefoams recognises that COVID-19 is likely to
change the global economic, social, political and
business landscape for the foreseeable future,
and in some cases permanently. The Board has
reviewed the Group’s principal risks to reflect the
impact of the pandemic. It has determined that
risk definitions have not required change as the
pandemic has not changed the longer-term
nature of each risk. Consideration has also been
given to whether COVID-19 should be treated as
an individual risk, but the Board concluded that
the pandemic risk was best reflected within each
existing principal risk rather than as a new
stand-alone item.
At the time of writing this Annual Report,
COVID-19 remains an evolving situation, with
new variants of the virus, but with hope for a
return to a less constrained environment as
vaccination levels reduce the impact of COVID
viruses globally. The Group thus recognises the
importance of continuing to be agile in managing
the risk but takes comfort from its successful
management through the crisis and the
resilience of its business model thus far.
Brexit
Following over four years of uncertainty since
the Brexit referendum of June 2016, some
clarity was achieved at the end of 2020 with a
free-trade agreement which has no import or
export tariffs on trade with the EU. The Group
has previously viewed the risk to its business
around labour mobility to be low. The Group
considers the risk of operational disruption
mitigated for the most part, with further
mitigation coming from the recent
commissioning of its Poland facility and its
Authorised Operator Status providing a fast track
for shipments in and out of mainland Europe.
Sustainability and climate change
Sustainability and climate change has been
determined by the Board to be a new principal
risk category at Zotefoams. Increased focus
onthis important issue, and our response to it,
could significantly change our relationship with
existing and potential employees, customers,
investors and any other stakeholders. Our
purpose, providing “optimal material solutions for
the benefit of society”, encompasses our beliefs
that our products, when used appropriately,
remain the optimal solution both functionally
andenvironmentally for many of our customers’
needs. We view the transition to a lower carbon
economy as an opportunity to demonstrate our
competitive advantage through the nature of
ourexisting business and our proactive
pursuitofopportunities with outstanding
sustainability credentials.
Other developments during the year
X
Zotefoams prepares an annual strategic
plan over a five-year period. The Board and
Executive team risk-assessed this plan during
the two-day annual strategic review
in October.
X
Risk discussions remained highly prominent
at Board meetings and regular updates were
held during the year as the Board discussed,
considered and assessed the results of its
responses to the COVID-19 pandemic,
as well as the development and execution
of objectives and activities.
X
The Executive team, who are also members
of the functional steering committees, met
twice during the year specifically to review
and update the Group’s principal risks
anduncertainties.
X
The Group reviewed its key policies, including
anti-bribery and corruption, competition,
ethics, whistleblowing and share dealing,
to make sure they remain relevant and are
operating effectively.
X
GO1, a multi-lingual online training platform,
was launched at the end of the year, with
the purpose of providing both governance
and self-improvement training to all Group
employees.
X
Zotefoams implemented a cyber security
awareness testing programme across all staff
in the UK, starting in July followed by monthly
testing, with training programmes for those
employees failing the test. During the period,
the failure rate fell from 16% to 3%.
X
Zotefoams successfully gained the Cyber
Essentials Plus certification in 2018 following
a full independent assessment of our IT
systems. During the year, we have ensured
maintenance of standards in line with
the accreditation and passed the annual
re-audit by the accredited bodies. The
Cyber Essentials Scheme is part of the
UK Government’s National Cyber Security
Strategy, with the primary aim of making the
UK a safer place to conduct business online.
It encourages businesses and organisations
to implement digital protection against
common cyber-attacks, while allowing them
to demonstrate an increased awareness
ofcyber security.
Risk management and principal risks
Continued
35
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
Key to links to the strategy
2
Grow sales
in our AZOTE
®
Polyolefin Foams
business in
excess of twice
the rate of global
GDP growth.
3
Increase
our operating
margins, before
exceptional
items.
4
Improve
our return on
capital (over
our investment
cycle).
1
Develop an HPP
portfolio and
MEL customer
base to deliver
enhanced
margins.
Read more on
pages 16 and 17.
X
In May 2020, the Company successfully
transitioned to the new Occupational Health
and Safety Management System ISO 45001:
2018, led by significant focus and effort from
adedicated Health and Safety team on our
UK site, supported by the Executive team
andimpacting all UK-based employees.
As with previous years, accreditation and
systems audits were conducted during 2020
and the Company received no significant non-
conformities. As a result, all the Company’s
product accreditations remain.
X
The Group continues to use an external
adviser to perform its financial internal audit
services. During the year, based onthe
Group’s internal risk assessments, our
Internal Auditor Grant Thornton LLP
completed an audit on the purchase to pay
process at Zotefoams plc, withoutcomes
and improvement plans presented to the
Audit Committee.
Principal risks and uncertainties
X
The details of our principal risks and
uncertainties and the key mitigating activities
can be found on pages 36 to 42. We are
disclosing those risks and uncertainties
that we believe have the greatest impact in
achieving our strategic objectives. The Group
is exposed toawide range of risks in addition
to those listed, and these are managed
through the risk management framework
shown on page 33. This framework enables
us to monitor for any increase in likelihood
or impact and ensure that we have the
appropriate mitigations in place.
X
Zotefoams’ risk profile will evolve as the
businessgrows at its targeted pace,
although we expect these principal risks and
uncertainties to remain broadly consistent.
As noted above, we have determined
Sustainability and Climate Change to be a
new principal risk. Having assessed the inputs
from our risk framework mechanism during
the current year, we have concluded that there
are no further changes to our assessment.
36
Zotefoams plc
Annual Report 2020
Risk management and principal risks
Continued
Operational disruption
Strategy
Risk trend
Description and context
What is the risk?
The performance of our business will be
impacted if we are unable to run our equipment
and manufacture and distribute products at rates
at least equivalent to those currently achieved.
The potential impacts of operational disruption
are: i) sizeable financial consequences related
tomissed sales and the high operational gearing
nature of the business; ii) the commercial and
longer-term consequences of not delivering to
strategic customers dependent on our products;
and iii) the reputational damage that might
impact future chances to acquire new business.
Material influencing factors
X
The Croydon, UK site manufactures the
majority of Zotefoams’ polyolefin foams
and, given their complexity, all of its high-
performance products. It operates at high
utilisation rates. A major incident specific to
safety, health and the environment, including
high absenteeism resulting from a pandemic
such as COVID-19, or a significant operational
disruption from either failure of critical
equipment or the IT systems that drive them,
could shut down the plant for a period oftime.
X
We do what others do not, making us
unique andproviding significant opportunities.
However, this uniqueness also means that
certain of our engineering components
and raw materials aresourced from single
suppliers. Disruption in those supplies, either
on a temporary or more permanent basis,
could affect production and supply to the
Group’s customers, with the knock-on
impact, in certain defined circumstances,
of contractual commercial consequences
resulting in possible customerclaims.
Mitigating actions
Safety, Health and Environment policies
We have extensive Safety, Health and
Environment (SHE) policies and procedures
inplace which are in line with best practice. The
reporting of incidents, including ‘near misses’
anddamage to plant or equipment not resulting
inpersonal injury, is mandatory in order to track
issues and to prevent recurrences. Regular
internal and external audits are performed,
andquarterly reports are submitted to, and
discussed by, the Board.
COVID-19 response
We have adapted our on-site health and safety
measures in line with the changing governance
guidance in each of our global facilities. The
nature of our business operations allows for
social distancing without major disruption, while
all relevant measures specific to face protection,
cleanliness, permitted gatherings and visitors
to site are reviewed on a regular basis to ensure
the highest standards of safety and business
continuity. All staff able to work from home
currently do so, supported by modern
technology and careful appraisal of their
working environments. We have limited travel in
line with World Health Organization advice. All
manufacturing sites have remained operational,
other than as specifically noted elsewhere,
throughout the pandemic.
The supply chain has been proactively managed.
We have alternative supply sources for LDPE
indifferent countries and we have experienced
aprioritisation by local governments on the
continuity of industries such as the polymer
suppliers during the current pandemic, providing
further comfort should there ever be a repeat.
Our ZOTEK
®
core materials are always closely
managed due to their uniqueness, and
collaboration remained strong and effective
through the year.
We controlled operating costs tightly and
the timing of discretionary capital expenditure
effectively. The Board also considered it prudent
to suspend the 2019 final dividend. The small
levels of government support the Group took
in Q2 2020 were fully reimbursed in August
2020. Cash collections from customers
remained strong throughout the period.
Ourleverage ratio (net debt to EBITDA) at
31December is now 2.1x, down from the peak
atmid-year of 2.6x, as operating performance
improved and capital expenditure declined.
Insurance
The Group ensures that it has updated and
sufficient insurance in place to cover capital
restatement and loss of profits in theevent
of operational disruption caused by
unforeseen events.
Maintenance strategy
We ensure that our assets are well looked after
through a well-resourced maintenance team
and proactive maintenance investment, including
annual shutdowns and extensive fire prevention
systems. Our pressure equipment is operated
under prevailing regulations and is subject to
systematic internal and frequent external
inspections. Appropriate contingency plans
areinplace in the event of the failure of
certainmajor pieces of equipment.
Operations outside the UK
Zotefoams has completed a large investment
programme in manufacturing capability outside
the UK, adding 60% capacity to that with
whichit started 2018. The Kentucky, USA site
commissioned its first full manufacturing line
inApril 2018 and a second line became available
in March 2020. These lines provide polyolefin
foam capacity, in the first instance, but are
specified to provide capacity for HPP foams
if needed. We also started our third foam
manufacturing location in Poland, the first line
of which was commissioned in February 2021.
Seeking dual sources
Wherever possible, supplies are sourced from
more than one supplier or location. However, this
is not always possible due to the special nature
ofthe raw materials, particularly those used to
manufacture high-performance products, and
the machinery used. We continually monitor
suppliers and search for new ones, have
expanded our procurement department to
support this, have identified new component
suppliers in the USA asa result of our investment
activities at our Kentucky, USA plant and
continue to invest dedicated resources in
thesearch for, and testing andapproval of,
alternative suppliers of critical materials. We also
ensure we have sufficient levelsof safety stock to
mitigate short-term supply issues, which will be
further supported by the recent start-up of our
Poland plant, close to key European customers.
Investing in IT
We continue to invest in our IT systems and
department. We operate the latest version
oftheMicrosoft Dynamics AX ERP system.
Wehave multiple redundancy points limiting
failure of any one hardware or operating system,
up-to-date policies and procedures and
comprehensive documentation onallour
critical assets and core configurations. We
areaccredited to the Cyber Essentials Plus
certification, part of the UK Government’s
National Cyber Security Strategy, which requires
an annual, fully independent assessment of
our IT systems’ abilityto deal with common
cyber-attacks. Wealso train our employees on
a regular basistospotpotential cyber-attacks
through communication and online training. The
strong global IT set-up allowed a quick transition
to home working for many of the Group’s global
staff and was critical in our COVID-19 response.
Control Committees
X
Board
X
Executive Committee
X
Planning and Capacity Committee
X
Health and Safety Steering Committee
X
Environmental Steering Committee
X
Key Supplier Review Steering Committee
X
Contract Review Steering Committee
X
IT Steering Committee
37
Zotefoams plc
Annual Report 2020
Strategic Report
/ Governance
/
Financial Statements
Sustainability and climate change
Strategy
Risk trend
Description and context
What is the risk?
Zotefoams’ business model, strategy,
investments or operations are assessed by
stakeholders as having an unacceptable future
impact on the natural environment and on
national and international targets to tackle
climate change, with consequences ranging
from financial penalties and an inability to hire
the right staff, up to business viability.
Material influencing factors
X
Transitional risks relating to developments in
political and regulatory requirements around
the products that Zotefoams manufactures.
As businesses progress towards a net-zero
greenhouse gas target by 2050, there is
potential for abrupt government intervention
aimed at ensuring certain milestones are
met. This intervention may involve legal and
regulatory changes, including loss of financial
incentives, new taxation, compliance costs
relating to plastic products or enhanced
reporting expenditure, with resulting
financial impact.
X
Growing global concerns over waste
generated from the over-consumption,
misuse and over-packaging of consumer
goods. A lack of understanding that plastic
can be the optimal solution that best
benefitssociety when used appropriately (i.e.
optimally) could lead to consumers rejecting
end-products containing Zotefoams products.
Mitigating actions
Firm environmental footing
We consider Zotefoams to be well positioned
environmentally. Our core materials offer improved
product performance using less material than
competitors and MuCell technology reduces
polymer content and/or improves recycling.
Whilethere is understandable consumer
concernat the environmental impact of what we
consider ill-considered, single-use plastic, used
predominantly in consumer packaging, products
using our foams are primarily integral components
in larger systems or products 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 the
medium term, we anticipate our technology being
used to meet the growing demand for improved
sustainability, with foams which include recycled
or renewable content polymers. We recognise the
importance of reducing energy emissions in our
production processes and pursue continuous
improvement in our operations, supported by
investment in capital additions or replacements
which further this aim. This will be supported
byeffective reporting on our ESG performance,
see below.
Sustainability-focused developments
The ReZorce
®
range of fully recyclable
barrier packaging materials, currently under
development, offers a unique solution to the
2025 recycling targets imposed on FMCG and
retail businesses. We are improving our energy
intensity and material consumption and adapting
our product range to enter new markets where
the benefits of our products are clearly
understood and valued. We are establishing
a parallel carbon accounting emissions
methodology in 2021 to help us optimise
our management of carbon emissions.
Effective reporting on ESG performance
With an environmentally friendly technology
and material solutions focused on permanent
applications, Zotefoams is uniquely positioned
to help reduce customers’ carbon footprints or
increase material efficiency. Having recognised
the need to provide stakeholders with financially
material, decision-useful information relating
toour ESG performance, we have engaged in
aplan to adopt the Sustainability Accounting
Standards Board (SASB) framework and will
bereporting against it from 2021. Zotefoams
also publicly supports the Task Force on
Climate-related Financial Disclosures (TCFD)
guidance and has embarked on implementing
its recommendations.
Control Committees
X
Board
X
Executive Committee
X
Environmental Steering Committee
X
Key Supplier Review Steering Committee
X
Zotefoams Inc Executive Committee
X
MEL Executive Committee
X
IT Steering Committee
38
Zotefoams plc
Annual Report 2020
Risk management and principal risks
Continued
Global capacity management
Strategy
Risk trend
Description and context
What is the risk?
As we grow our business at the rate we target,
it iscritical that we create the required capacity
to match the anticipated demand. Failure to
execute well and in a timely manner will impact
both opportunity creation and the speed of
growth. We face material risks due to the
uncertainty ofmedium- to long-term demand,
the high capital costs and long construction
periods of our unique technology, the successful
execution of our investment projects, the risk
ofloss of an important customer and the ability
to finance these investments.
Material influencing factors
X
Zotefoams’ growth is founded upon its
unique offering, its relevance to the global
megatrends ofenvironment, regulation and
demographics, listed on pages 14 and 15,
and itsability to create new markets and new
applications. The nature of demand differs
between our Polyolefin Foams and HPP
Business Units. Polyolefin foam sales are very
diversified and more aligned with GDP, but are
boosted by the benefit of the aforementioned
megatrends. HPP sales are more aligned
with specific, often larger, opportunities
withthe end-user who also has a more direct
involvement in the growth trajectory. Together,
this can make the timing of growth difficult
to predict, but not having the right capacity
available at the right time may mean the
opportunity cannot be realised. We plan to
invest to maintain our range of performance
and price for polyolefin foam products as
webelieve this is the best approach to ensure
the future growth prospects of this profitable
business unit.
X
Our unique technology is highly capital
intensive with long lead times. The Croydon,
UK site is highly developed, with space
limitations restricting further investment,
meaning the next growth initiatives must
come from other sites and geographies
and may require sizeable infrastructural
investment, accurate risk assessment and
more time to implement. Foam is costly to
transport, therefore a geographical mismatch
of capacity and customers couldimpact sales
growth and/or margins.
X
The Group needs to have sufficient cash or be
able to draw on loan facilities or access capital
markets to finance this capacity expansion.
Funds for investment are required up to
a number of years before the assets start
generating cash, which increases debt
levels and leverage ratios.
Mitigating actions
New processes and longer-term planning
During the year, we have continued to refine our
monthly sales and operations planning process,
which generates high levels of cross-functional
engagement to ensure collaboration and
consistency in planning sales and production
overthe upcoming 24 months. We also meet
quarterly as a planning and capacity steering
committee, with a five-year view to reflect the
longer time horizons related to capacity planning.
Annually, our five-year strategic plan, which
includes capacity considerations to meet
projected sales growth, is rigorously tested
bythe Board. The last annual review meeting
took place in October 2020.
Current investment programme completed
We have been engaged in a significant
programme of capital investment, the latest
phase of which is almost complete with the
start-up of our Poland foam manufacturing
facility in February 2021. The first stage of this
programme was completed in the USA in2018,
comprising a high-pressure autoclave, ancillary
equipment and infrastructure for two further
lines. This was followed by the commissioning
ofa second high-pressure autoclave in
March2020. In the UK, two high-temperature,
low-pressure autoclaves, together with ancillary
equipment and infrastructure, were completed in
December 2019. The Poland facility, a greenfield
site sized to offer significant further capacity in
the future, will initially expand frozen sheets
manufactured by the UK and USA in its
high-temperature low-pressure autoclave.
Building on our experiences in
the USA, UK and Poland
The experiences gained through the recent
investments in the Kentucky, USA and Brzeg,
Poland sites, as well as the work performed
around high-temperature low-pressure vessels
in the UK, have provided a significant increase
in know-how, spread across more personnel,
which reduces uncertainty of future execution.
We have identified new suppliers of critical
equipment in the USA and mainland Europe,
which were previously single sourced in the UK.
In-house project management expertise has
been developed or enhanced through either
new hires or existing staff having been given
the opportunity to grow. We have engaged
and developed relationships with experienced
consultants to lead and/or work alongside us.
Sufficient funding to support investment
An equity raise and debt refinancing in 2018
provided us with sufficient headroom and
flexibility to complete our investments. As we go
forward, we will consider further opportunities as
they arise and draw upon similar funding options
as we consider necessary.
Control Committees
X
Board
X
Executive Committee
X
Planning and Capacity Steering Committee
X
Capital Planning Steering Committee
X
Zotefoams Inc Executive Committee
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/ Governance
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Financial Statements
Technology displacement
Strategy
Risk trend
Description and context
What is the risk?
The loss of our technological advantage could
increase competition and affect growth rates
and margins. Either our foam manufacturing
process or ourMuCell
®
technology could be
matched orbettered.
Material influencing factors
Our processes for the manufacture of our
products are unique to the Group. We are not
aware of anyone using autoclave technology to
make similar products in commercial quantities.
While the principles behind the processes are
notconfidential, the precise know-how is. Our
autoclave technology is flexible, allowing us to
manufacture foams from a range of polymers.
For a product with substantial growth
opportunities, or a product with a large
consolidated market, acompetitor could target
an alternative, more economic, process. Critical
to the success of MuCell Extrusion LLC (MEL)
isthe strength of its intellectual property and,
onthe back of that, its ability to grant commercial
licences. Its intellectual property could become
dated or its patents expire or be successfully
challenged or circumvented.
Mitigating actions
Reinforcing high barriers to entry
There are high barriers to entry for the
manufacturing of our unique foams. Significant
capital investment, know-how and time are
required to invest in autoclaves and related
infrastructure. High-performance products
aresignificantly more complex to manufacture
than our polyolefin foams and certain materials
require years to be qualified for supply.
We have reduced, and continue to seek
toreduce, technology displacement risk
byentering into newmarkets with significant
barriers and cost of market entry for competitors.
For example, the development of
high-performance products and ReZorce
®
mono-material barrier technology using MuCell
®
processes, where the product offerings are
unique and protected by patents and/or process
know-how and capability, opens up new
markets for the Group with potential significant
and lasting differential advantages.
Investing in R&D capability and people
We invest in people to broaden our technical
capability, research new ways to leverage our
technology and accelerate the opportunities that
make Zotefoams unique. We invest in people to
ensure that know-how related to the design and
efficient use of high-pressure autoclave systems
and know-how related to polymer processing is
retained by the business. We have introduced
aGraduate Scheme and developed strong
relationships with respected local universities
toattract high-potential individuals in the
fieldsofmaterial science and engineering.
Wededicate financial resource to testing
materials and solutions to remain at the
forefrontof cellular materials technology.
Protecting our intellectual property
We actively maintain our intellectual property and
patent our technology, wherever we believe it is
appropriate to do so, and guard our know-how
to sustain protection when technology is not
subject to patent or patents are no longer
applicable. This know-how spans multiple
disciplines across ourbusiness, making it
difficult to poach. We protectour know-how
using confidentiality andcontractual agreements
with employees, suppliers and customers
and by maintaining cyber security. The Group
keeps a watching brief on competitor activity
and maintains close contact with its customers
and end-users of its products to understand
market activity.
MEL actively maintains and updates its
intellectual property portfolio. This is done by
undertaking research and development to add
new patents to the portfolio, further developing
its know-how and obtaining licences of key
third-party patents, which are complementary
to the existing portfolio. In some cases, our close
connection with our customers and dedication
to a customised solution has yielded new
intellectual property opportunities.
MEL licences typically include a bundle of
patentsand know-how and therefore are not
completely dependent on any particular patent.
Alllicences are reviewed by senior personnel
andthe Group CEO to ensure that terms are
appropriate. The portfolio is managed by the
MELExecutive Committee.
Control Committees
X
Executive Committee
X
New Product Development Committee
X
Zotefoams Inc Executive Committee
X
MEL Executive Committee
40
Zotefoams plc
Annual Report 2020
Risk management and principal risks
Continued
Scaling up international operations
Strategy
Risk trend
Description and context
What is the risk?
Working more remotely with international
operations and engaging with legal environments
and cultures less familiar to us increases the risk
ofnot delivering on our growth opportunities or
suffering a compliance incident. We must ensure
that we hire theright people and manage the
span of controlchallenges.
Material influencing factors
X
Our business is growing in Asia and our
manufacturing facility in Poland commenced
operations in February 2021.
X
Until recently, most of Zotefoams’ revenue
was shipped from the UK. Following our
investments inthe USA, Europe and Asia, the
Group now employs more people, holds more
assets and generates ahigher proportion of
revenues outside the UK. We are hiring people
globally at a faster rate than previously, with
high expectations of material contributions
tothe Group’s growth strategy.
X
Failure to ensure responsible corporate
behaviour in these new areas will undermine
our reputation in these new regions, could
bring substantial financial penalties and affect
our growth path. Failure to provide these
distant operations with effective financial
andIT systems, educate them effectively on
allaspects of Zotefoams’ culture andethics
and align them on our strategic objectives
could impact business performance.
X
Critical to any Group’s success is its people.
The failure to attract, develop or retain the right
calibre of staff will impact our ability to deliver.
Getting this right from a distance, in cultures
lessfamiliar to us, will be challenging.
X
COVID-19 has tightly restricted international
travel, requiring management and recruitment
by distance, making it more challenging to
ensure the right people are in the right roles
and that behaviours are aligned with those
atthe corporate centre.
Mitigating actions
Reinforcing high barriers to entry
The Board and Executive Committees have
continued to review the Group’s corporate
culture, its communication and the embedding
of controls across the organisation.
Key leaders, under normal circumstances,
havetravelled frequently to overseas locations to
ensure that the right people are in the right roles
and that behaviours are aligned with those at the
corporate centre. Over the past year, as a result
of the travel restrictions imposed by COVID-19,
this engagement has taken place via the Group’s
videoconferencing capabilities.
Hiring and developing overseas leaders
The Group’s USA operations, comprising
Zotefoams Inc and MuCell Extrusion LLC, have
been part of the Group since 2001 and 2008
respectively, have experienced management
teamswith significant tenure at Zotefoams and
well-embedded reporting andcontrol structures
and engage in regular and effective communication
with senior operational leaders of Zotefoams and
the Board. The Zotefoams Inc President is a
member ofthe Executive Committee.
The Group’s China subsidiary was formed in
2016,while the India subsidiary was formed
in2019. With the exception of Finance, local
management reports directly into the HPP
Business President, who has created strong
communication and reporting structures.
Thelocal finance teams report directly into the
GroupFinancial Controller for independence,
clearer leadership and greater assurance
aroundgovernance.
Building up our global functions
We have invested significantly in human
resourceover the past few years as we
buildglobal functions and hire leaders with
international and cross-cultural experience.
InJanuary 2020, an HRExecutive was recruited
as an addition to the Executive team, elevating
the importance and representation of the
function and charged with managing the
challenge of a growing, international workforce.
Poland manufacturing site start-up
We recognise the importance and risks
surrounding the operation of a new
manufacturing site in a country we are less
familiar with. In July 2019, we hired the Poland
Plant Manager, in order that he gain experience
with Zotefoams’ unique technology, become
familiar with the keyfunctional support staff in
the UK required tosupport the plant going
forward, and understand and adopt the
Zotefoams culture as staff are hired in Poland.
While cut short by COVID-19, he was still able
to spend a significant amount of his first seven
months’ tenure at the Croydon site. Key players
in his leadership team, hired during H2 2019,
were also able to spend considerable time in
the UK. Since March 2020, project and risk
management teams have maintained high levels
of engagement, assisted by communication
technology, between critical functions and
leadership between both locations.
Upgraded IT
We have up-to-date IT systems which
standardise information and improve
communication and visibility. We implemented
Microsoft Teams for effective videoconferencing
engagement in Q1 2020 and have continued
toroll out and educate the upgrades that
Microsoft has introduced throughout the
period.Thesystems are implemented into all
new subsidiaries as they are set up. We have
introduced a global training tool which provides
training, in the local language, plus tracking
mechanisms across all ourlocations on a
risk-assessed basis.
Control Committees
X
Board
X
Audit Committee (in relation to Finance)
X
Executive Committee
X
HR and Training Steering Committee
X
IT Steering Committee
X
Zotefoams Inc Internal Control Steering
Committee
X
MEL Executive Committee
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Financial Statements
Loss of a key customer
Strategy
Risk trend
Description and context
What is the risk?
Group performance could be impacted by the
loss, insolvency or divergence of interest with
akey customer.
Material influencing factors
X
Other than in our footwear business, the
Group’s largest customers have traditionally
been converters of foam, none of whom have
represented a material share of the Group’s
revenue or future opportunities. The Group
has successfully grown its footwear business
through an exclusive partnership with Nike,
which in 2020 represented 26% of Group
sales, and projects in the HPP portfolio have
the potential to be much larger than with
our typical AZOTE
®
customers. Divergence
ofinterest with Nike represents a material
risk if the business is lost, while our growth
opportunities in HPP are also likely to
reshapethis risk profile.
X
The Group’s capacity expansion programme
has completed, built in some cases to
service growth from these customers. In an
organisation with high operational gearing,
filling capacity is critical to strong financial
performance.
X
COVID-19 threatens the existence of
a key customer.
Mitigating actions
We have good knowledge of the end-users of
our major customers for polyolefin foams and,
with some additional short-term work and a
stable macroeconomic environment, would
expect to bring or identify additional converter
capacity, supply routes and channel partners or
take a direct approach to service these markets.
We are excited by the size of the opportunities
offered by our ZOTEK
®
product portfolio and
havethe risk appetite to pursue them. Where
we engage with large HPP customers, we seek
to ensure that our interests are protected by
balanced commercial contracts and strong
relationship management such as with Nike.
The Board isheavily involved in such decisions.
These relationships are by their nature longer
term, providing a unique technical solution and
competitive advantage to the ZOTEK foams
customer or end-user. The loss of such a
customer is likely to come with a reasonable
notice period, allowing us time to take
appropriate action. Continued investment
intheportfolio could yield further successes
thatspread the risk of any single loss, while
theT-FIT
®
insulation business provides further
balancing with its more broadly spread global
customer base.
Existing large HPP customers are blue-chip
global organisations, which management
considers to have the financial strength or
strategic importance to withstand a pandemic.
We will continually review our customer spread
and balance, particularly as the HPP business
segment takes on more importance.
Control Committees
X
Board
X
Executive Committee
X
Marketing Steering Committee
42
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Annual Report 2020
External
Strategy
Risk trend
Description and context
What is the risk?
Business growth prospects are vulnerable
tomovements in foreign exchange rates
andgeopolitical developments. These factors
are often out of our control and mayinfluence
our business in a number of ways, including
influencing the other key risks listed.
Material influencing factors
X
COVID-19 has realised the previously
considered low risk likelihood of a pandemic
event severely impacting demand, affecting
continuity of operations and the health of our
staff, and restricting the ability to manage
abusiness and people in different
geographic locations.
X
Our markets are exposed to general
economic and political changes which have
an influence oneconomic stability and market
and consumer confidence, which in turn may
impact the Group’s performance and ability
to achieve our strategic objectives. Being at
the beginning of the value chain, the Group
often sees the impacts of downturns early,
accentuated as customers deplete their
inventories, but it then benefits from seeing
the recovery sooner too. The profit impact
on such risk is accentuated by the Group’s
operational gearing and its demand for skilled
employees, given the business’s uniqueness,
which makes short-term cost cutting often
inadvisable. The timing of a downturn in
the Group’s performance coupled with
completion of the capacity enhancement
programme, and the resulting debt profile,
could place pressure on debt facilities and
banking covenants.
X
Zotefoams is exposed to foreign exchange
fluctuations. This is both transactional
and on the translation of foreign currency
balances and the consolidation of its foreign
subsidiaries. Despite recent investments
overseas, our operations remain substantially
based in the UK and, therefore, most of
our manufacturing assets and costs are
sterling denominated. Wenormally invoice
our customers in their local currencies and
in 2020 a large proportion of theGroup’s
revenue was in currencies other than sterling,
mainly US dollars or euros. We therefore
generate surpluses in US dollars and
euros,whichareconverted into sterling.
X
A trade deal has been concluded between
the UK and the European Union, allowing for
tariff-free trade; however, there remains a risk
of short-term disagreements which could
lead to disruption and tariff penalties or, in
the longer term, tariff or non-tariff barriers
being enacted. There also remains the risk of
increased difficulty in attracting EU talent into
our global headquarters in Croydon, UK as a
result of the end of free movement of people.
Mitigating actions
COVID-19 response
See “Operational disruption” risk, above.
Diversifying our markets
Some of our markets can be cyclical. However,
this risk is spread geographically and across
anumber of segments that are expected to
diversifyfurther with the growth of HPP and
MEL.The Group is operationally geared, but
ourexperience is that, during challenging times,
certain operational labour costs can be reduced,
polymer prices generally fall with reduced
economic demand, giving a cost benefit, and
cash can be generated from both reducing
working capital and slowing capital expenditure
projects to help offset the effects of a downturn.
Decisions in this regard are, however, taken with
respect to our assessment of the underpinning
reasons for a downturn, our belief in the likely
recovery and an assessment of the impact of
short-term cost control on medium-term
growthpotential.
Managing exposure to the
US dollar and euro
We reduce our net foreign exposure for
transactional items by making purchases either
inUS dollars or euros. For example, there are
USdollar costs associated with the Group’s
operations in Kentucky, USA and with MEL.
Inaddition, the majority of the Group’s raw
materials are purchased in euros or US dollars.
With our significant capital investment in
Kentucky, USA complete, we have reduced
exposure for transactional items on the US dollar
by increasing the operating cost base in the
USA. Raw materials are now purchased locally
and a larger workforce supports full process
production. While on a smaller scale, at least
tobegin with, the same will apply for the euro
asour Poland manufacturing facility ramps
upproduction.
Currency hedging
The Group has a hedging policy which is
approved by the Board. The Group hedges a
proportion of its net exposure to transactional
riskby using forward exchange contracts.
Wedonot hedge for the translation of our
foreignsubsidiaries’ assets or liabilities in
theconsolidation of the Group’s financial
statements. We are, however, increasingly
focused on hedging ourstatement of financial
position through matching, where possible,
our foreign currency denominated assets with
foreign currency denominated liabilities, such
as by foreign currency debt financing.
Managing our debt facilities
We maintain close relationships with our
supporting banks, meeting with them regularly
and updating them on performance and outlook.
Our 2018 refinancing and capital raise have given
us sufficient liquidity to manage through a
downturn, as demonstrated thus far during the
current pandemic. With our capacity expansion
programme complete and based on our most
recent five-year strategic plan, we expect our
net debt levels to fall. Our budgets and forecasts
going forward include investments in growth
opportunities, some of which can be slowed
if necessary. We stress-test our possible
outcomes and engage with our banks to ensure
their continued support under all circumstances.
Control Committees
X
Executive Committee
X
Marketing Steering Committee
X
Foreign Exchange Steering Committee
X
Zotefoams Inc Internal Control Steering
Committee
X
MEL Executive Committee
Risk management and principal risks
Continued
43
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Financial Statements
Viability statement
The viability period
In accordance with provision 30 of the 2018
UK Corporate Governance Code, the Directors
have assessed the prospects of the Group over
a longer period than the 12 months required by
the going concern provision.
The Directors consider the timeline of five years
to be appropriate, being the period upon which
the Group actively focuses, has reasonable
visibility over its opportunity portfolio and, given
the nature of capital investment needed to
support the Group’s anticipated rate of growth,
covers investment that in some cases requires
long lead times as a result of the unique nature
and capital intensity of its technology. A longer
period of assessment introduces greater
uncertainty since the variability of potential
outcomes increases as the period considered
extends. A shorter period of assessment
impacts the Group’s ability to put the right
capacity in the right place on time.
Assessing viability
The Group is considered to be viable if it
maintains interest cover and net borrowings
toEBITDA ratios, as prescribed by its existing
financial covenants, and if there is available
debtheadroom to fund operations.
The Directors’ assessment of viability has
been made with reference to Zotefoams’
current position and prospects, our alignment
with global trends, our strategy, the Board’s
riskappetite and Zotefoams’ principal risks
andhowthese are managed, as detailed
onpages36 to 42.
The Board reviews our internal controls and risk
management policies as well as our governance
structure. It also appraises and approves major
financing and investment decisions as well as
the Group’s performance and prospects as a
whole. The Board reviews Zotefoams’ strategy
and makes significant capital investment
decisions over a longer-term time horizon,
basedon the Group’s strategic growth
objectives, individual project investment returns,
the continuing performance of thebusiness,
thequality of its portfolio of opportunities, its
financing arrangements and opportunities and
a multi-year assessment of return on capital.
The bottom-up five-year plan is reviewed
atleasttwice annually by the Directors. In
assessing the future prospects of the Group
andachievability of this plan, the Group has
considered the potential effect of risks that could
have a significant financial impact under severe
but plausible scenarios. The risks considered
were identified from the Group’s principal risks
and uncertainties assessment. While testing
against each individual scenario, the Board has
also considered the impact of a combination
ofthe scenarios over the assessment period.
This was in order to stress-test an aggregation
ofsevere but plausible risks occurring that
shouldrepresent the greatest potential
financialimpact both in the short-term
andlonger-term viability period.
The Directors considered mitigating factors
thatcould be employed when reviewing these
scenarios and the effectiveness of actions
attheir disposal. These include experiences
and successes related to cost and capital
expenditure management during 2020 inthe
face of the COVID-19 pandemic, adequate
insurance coverage, the unwinding of working
capital in a downturn and ceasing
some activities.
We are satisfied that we have robust mitigating
actions in place. We recognise, however, that
thelong-term viability of the Group could also
beimpacted by other, as yet unforeseen, risks
orthat the mitigating actions we have put
inplace could turn out to be less effective
thanintended.
Scenarios tested
The following downside scenarios have
been evaluated:
Scenario 1:
Pandemic disruption. We applied our
experiences of the 2020 pandemic and the
cost and cash saving activities we successfully
implemented to stress-test for Group revenue
levels that breach banking covenants.
Read more Principal risk:
Operational
disruption page 36; External page 42.
Scenario 2:
Significant operational disruption over a long
period. This risk focuses on the extreme
scenario of a fire at the Croydon, UK plant
requiring a significant rebuild over a period
inexcess of a year.
Read more Principal risk:
Operational disruption
page 36; Global capacity management page 38.
Scenario 3:
Business performance risks. These include
bothPolyolefin Foams and High-Performance
Products growth at rates significantly below
those included within the five-year plan.
Read more Principal risk:
Technology
displacement page 39; External page 42.
Scenario 4:
Loss of a key customer in HPP. This scenario
reflects losing the footwear business.
Read more Principal risk:
Operational disruption
page 36; Global capacity management page 38;
Loss of a key customer page 41.
Scenario 5:
Sterling returning to 20-year highs of two US
dollars to one pound sterling.This scenario
evaluates the cash impact onthe Group as a
result of forecast growth coming increasingly
from US-denominated sales. The euro impact is
not considered material given the natural hedge
of euro sales against raw materials and the
operating costs of the Poland plant.
Read more Principal risk:
External page 42.
Confirmation of longer-term viability
Based on the assessment explained above, the
Directors confirm that they have a reasonable
expectation that the Group will continue to
operate and meet its liabilities, as they fall
due,over the next five years.
44
Zotefoams plc
Annual Report 2020
Environmental, social and governance
(ESG) report
Zotefoams considers that managing
environmental, social and governance
(ESG) impacts contributes to long-term
value creation, supports resilience,
enhances the Group’s reputation and
helps safeguard the business’s future
inan evolving climate. This report is a
step forward in the Company’s ESG
reporting and is intended to provide our
shareholders and other stakeholders
with information about how Zotefoams
manages relevant ESG topics. We
willcontinue to focus on material
sustainability and ESG metrics and
objectives and will provide further
information as they are developed.
I am pleased to introduce our new
environmental, social and governance
(ESG) report. Zotefoams’ purpose of providing
optimal material solutions for the benefit of
society encompasses our beliefs that plastics,
when used appropriately, can be 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.
This report outlines our ESG governance
framework and is intended to support
decision-making by our stakeholders”
Steve Good
Non-Executive Chair
“
45
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Financial Statements
Environment
Our priorities
Integrating ESG considerations into a business
strategy which inherently relies on the sustainable
characteristics of Zotefoams’ products.
2020 highlight
Adoption of the SASB framework and public
declaration of support for TCFD.
Group CEO’s review
page 24
New principal risk on sustainability and
climate change
page 37
Our place in a lower-carbon economy
page 12
OHSE section
page 49
Our growth has created opportunities to make
lighter, more efficient, less wasteful, longer-life
products. We have the technical expertise to
identify ways to reduce customers’ carbon
footprints or increase material efficiency.
For further details of our products’ technical
credentials, see
pages 6 and 7.
We have set out to improve post-consumer
recycling rates of single-use packaging by
designing ReZorce
®
mono-material barrier
packaging for full compatibility with HDPE
recycling (Stream 2).
The solution is designed to keep material in use
and support the principles of a circular economy.
For further details, see
page 14.
Zotefoams’ main three-stage process uses only
pure nitrogen to expand foams and is inherently
environmentally friendly. The process affords
exceptional product characteristics that
contribute to a long service life.
Further details of our manufacturing process
areprovided on
pages 8 and 9.
Zotefoams achieved accreditation to
ISO45001:2018 ahead of the 2021 deadline.
Zotefoams’ sustainability strategy is based
on the following principles:
1. We operate in markets where our products
offer unique sustainability advantages which
benefit society
2. We seek to minimise the use of natural
resources through a series of measures
such as reducing energy and optimising
polymer usage.
2020 initiatives:
X
Sustainability strategy approved
X
SASB framework implementation planning in
place, including completion of gap analysis,
identification of owners and task allocation.
X
Development of strategy based on SASB
framework requiring adoption of TCFD
recommendations.
X
Establish an independent ESG committee
responsible for longer-term ESG planning
and for ESG disclosures to stakeholders.
X
Switching to an electricity supplier signed up
to the Renewable Energy Guarantees of Origin
scheme to achieve 100% renewable sources.
opportunities arising from climate change
and wider sustainability concerns.
4. Beyond 2021
3. Extending ESG considerations
into the value chain – 2021
2. Integrating ESG into our strategy – 2020
1. ESG achievements to date
Zotefoams’ ESG roadmap
46
Zotefoams plc
Annual Report 2020
Social
Our priorities
Protecting our workforce and being guided by
strong ethical principles that inform our activities.
2020 highlight
COVID-19 measures protected our workforce.
Refer to pages 48 and 49 for details of our
response to COVID-19.
Governance section
page 60
Our people section
page 54
We adopted DART metrics from the US
Department of Labor in 2018 as a global
benchmark for staff absences resulting from
workplace incidents and accidents. Globally,
we were better than this benchmark of 2.4 in
both 2019 (1.3) and in 2020 (1.6), although we
continue to strive for zero workplace accidents.
Policies and internal controls are in place,
andare monitored by the Board, on health
andsafety, modern slavery, ethics, bribery
andanti-corruption, anti-fraud and
equalopportunities.
www.zotefoams.com/downloads/
policy-statements/
Biennial compliance training programmes are
delivered globally to relevant staff on modern
slavery, anti-bribery and corruption, money
laundering and data protection.
X
Implementation and monitoring of COVID-19
safety measures in the workplace and safe
working from home practices for relevant
employees.
X
In support of our Learning Organisation
cultural pillar: launch of GO1 training
programmes, offering all staff over 76,000
online courses for professional and personal
development.
X
Review of UK key suppliers compliance
requirements to ensure alignment with
Zotefoams standards on ethics, modern
slavery, anti-fraud and anti-bribery and
corruption requirements.
X
Improved payment practices to UK suppliers
by reducing average settlement period from
50 days to 33 days during 2020.
X
In 2020, despite the challenges brought
by COVID-19, no employee restructurings
or salary sacrifices were implemented.
Zotefoams maintained all contractual
performance-related pay arrangements
throughout 2020 for the general workforce.
Executive staff agreed to delayed
bonus and LTIP arrangements as
detailed on page 47.
X
Continue to operate in COVID-19 secure
sites and enhance controls by introducing
rapid mass testing.
X
Implementation of a new performance
management system designed to support
the development of a diverse workforce
inamanufacturing environment.
X
Develop an organisational development
plan to improve our new product
implementation process.
X
Deployment of mental health first aiders
complemented by extensive mental health
awareness training.
X
Expansion of safety engagement process with
increased training and awareness of hazard
identification and hazard controls.
X
Safety culture assessment centered
on competency and best practice to
ensuresafety behaviours are aligned
toorganisational values.
X
Implementation of an incident and observation
based software, for environment, health
andsafety, to provide greater visibility
andmonitor trends.
X
Develop a holistic approach to employee
wellbeing by fostering a culture of health
which recognises and supports both physical
and mental health.
X
Ongoing monitoring of Zotefoams’
compliance policies and processes
affectinghuman rights.
4. Beyond 2021
Zotefoams ESG roadmap
76,000
online courses for professional
and personal development
are provided by GO1 training
and are now at the disposition
of Zotefoams employees
3. Extending ESG considerations
into the value chain – 2021
2. Integrating ESG into our strategy – 2020
1. ESG achievements to date
47
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Financial Statements
Governance
Our priorities
Managing Zotefoams by embedding robust
corporate governance systems and principles in
our business, led by a diverse and independent
Board and operating under an effective and
principled management team.
2020 highlight:
Zotefoams appointed two female directors,
increasing diversity on the Board.
Risk management framework
page 33
Corporate governance
page 62
Audit Committee report
page 66
Nomination Committee report
page 69
Directors’ Remuneration report
page 70
The Group complies with the requirements
of the UK Corporate Governance Code 2018
and has due regard to best practice in
governance matters.
In particular:
X
71% of the Board is independent, with 29%
executive representation, supporting effective
stewardship of the Company’s assets
X
All Board committees are fully independent
X
Board and committee members in post at
year end attended 100% of all meetings in
2020 (2019: 94%)
X
Progression towards greater gender diversity
is noted in senior roles
Group in 2020 were female
Committees representation amounting
to 45% female overall
X
An annual performance evaluation was
carried out for the Board and its committees
with the support of the Company Secretary in
Q4. The results were discussed by the Board
and actions agreed for the following year.
The Remuneration Committee sets executive
remuneration in light of prevailing conditions
and takes into account wider workforce pay
and conditions.
Zotefoams gained the Cyber Essentials Plus
certification in 2018. The Cyber Essentials
Scheme is part of the UK Government’s
National Cyber Security Strategy, which
aims to make the UK a safer place to
conduct business online.
X
Zotefoams did not benefit from government
funding related to COVID-19, having repaid in
August the small amount of furlough money
it received.
X
The active participation and engagement
of Board members was maintained, and
even increased during the pandemic,
through virtual meetings.
X
An updated IT strategy was adopted to
support the development of the five-year
strategic plan.
X
Cyber security training was delivered to
431 employees worldwide.
X
Despite the adoption of a new remuneration
policy in 2019, the Remuneration Committee
reflected on shareholders’ concerns and the
impact of COVID-19 in 2020 and deferred
vesting of LTIP 2017 and executive bonus
payments due. In 2020, there was no deferral
of any performance-related or other pay to
employees other than at executive level.
X
A competitive tender process compliant with
the FRC Revised Ethical Standard 2019 was
carried out, following which a new External
Auditor PKF Littlejohn LLP was appointed.
Review the process for assessing the external
auditor’s effectiveness and independence in
accordance with FRC guidance.
Ongoing succession planning
Make use of new technology to evolve
systems of governance in accordance with
prevailing best practice.
Consider, when appropriate, setting Group-wide
diversity targets.
4. Beyond 2021
Zotefoams ESG roadmap
3. Extending ESG considerations
into the value chain – 2021
2. Integrating ESG into our strategy – 2020
1. ESG achievements to date
48
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Sustainability Accounting
Standards Board (SASB)
Having decided to put in place a system to
collect standardised ESG data, we considered
anumber of internationally recognised
frameworks. SASB standards and metrics were
selected as we consider that they best reflect the
presentation and disclosure of sustainability data
for our business that is comparable, consistent
and financially material. The framework is in the
process of being implemented. By the end of
2021, we anticipate being able to report back
on metrics identified and targets set against
agreed objectives, including carbon emission
reduction targets.
Task Force on Climate-Related
Financial Disclosures
In June 2017, the Task Force on Climate-related
Financial Disclosures (TCFD) published
recommendations to encourage businesses
to increase disclosure of climate-related
information. These recommendations focus on
governance, risk management and business
strategies to manage climate-related risks and
low-carbon opportunities, with an emphasis
onfinancial disclosure and the use of scenario
analysis. Zotefoams is already well positioned
tosupport the long-term goal of reducing carbon
emissions, with foam products delivering high
performance, insulation and reduced weight
which offer the potential for carbon emissions
reduction in excess of the carbon emissions
required to manufacture the product. We are
improving our energy intensity and material
consumption and adapting our product range
toenter new markets where these benefits are
clearly understood and valued. Measurement of
energy consumption and polymer usage, which
generate carbon emissions, are monitored
monthly and we have clear actions to improve
these as described further in this report.
Zotefoams is committed to testing the
resilience of its strategy in 2021 by taking into
consideration different climate-related scenarios
where such information is material. We will report
back on progress on compliance with TCFD
recommendations in 2021.
Our response to COVID-19
The COVID-19 pandemic declared in March
2020 has brought significant human, social,
economic and business uncertainty. The Board’s
initial focus was on identifying risks posed to the
health and safety of staff within the Group, to the
continued efficiency of the Group’s global supply
chain and to the impact on the Group’s
customers and then, ultimately, to the demand
for Zotefoams’ products. Since then, the Board
has continued to monitor impacts from the
ongoing situation on all business areas and
continues to monitor risk through the risk
management framework, further details
ofwhich may be found on page 33.
Area
Action taken
Health and
Safety
X
From March 2020, put in place working-from-home health and
safety practices for those employees able to do so efficiently, in
order to mitigate risk to the site-based workforce, and provided
necessary home-working equipment where required
X
Closed and reopened the China facility in line with local guidance,
and closed the UK factory over Easter allowing time to identify
COVID-19 safety measures required to continue operating safely
X
Implemented a COVID-19 tracker to capture details of staff self-
isolating for any reason (including return from travel, experiencing
symptoms, family/household member experiencing symptoms,
shielding or a positive test), to risk-assess contact with other staff
X
Provided ‘COVID-19 secure’ sites by ensuring compliance
withevolving governmental guidelines globally, which included,
asaminimum, hygiene stations, social distancing and PPE
where appropriate
X
Restricted non-essential site visits to our sites
X
Introduced a pre-arrival questionnaire for staff and contractors to
assess COVID-19 status and determine safe access to site, together
with temperature checking for staff and visitors
X
Reviewed and risk-assessed staff travel arrangements, significantly
restricted business travel and implemented measures to mitigate
any risks
X
Implemented scenario-planning to test the effectiveness of our
response process
X
Trained 11 mental health first aiders in the UK to provide first line
support to staff affected by the impact of COVID-19
Financial
Q1 2020
Given uncertainty and the likelihood of reduced demand levels
in the short term, the Board:
X
Secured agreement with banks to amend the net debt to EBITDA
(‘leverage’) ratio covenant of 3.0x, tested semi-annually on a rolling
12-month basis, to 4.0x for the June test
X
Suspended the final dividend for 2019, ordinarily payable in May 2020
X
Implemented appropriate and targeted cost reduction measures
and deferred capital expenditure where feasible
X
Sought new revenue opportunities
Q2 2020
X
Accessed UK Government support (furlough and tax-deferral schemes)
X
Our products were selected for a number of PPE projects globally,
the largest of which was for the UK Government
Q3 2020
X
With clearer visibility on the impacts of the pandemic, successful
implementation of the cost and capital saving measures and
confidence in future prospects, the Board declared an interim
dividend for 2020. Immediately prior to this, the Group also repaid
the small levels of government support it had secured in Q2
As at 31 December 2020
X
The Board has continually monitored the situation to ensure early
detection of any deteriorating trends which would affect the financial
stability of the Group. Zotefoams’ financial resilience means that
the Group is well placed to withstand the economic shocks that
COVID-19 might continue to bring. Further details are provided
intheviability statement on page 43
Environmental, Social and Governance
Continued
49
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/
Financial Statements
Area
Action taken
Suppliers
X
Worked collaboratively with capital suppliers where restrictions
were preventing them from travelling to Zotefoams’ Poland site.
This included rephasing and remote-commissioning of equipment
Customers
Throughout the pandemic, Zotefoams’ approach to customers
remained consistent with our strategy:
X
Responded to customer demand against a background of low
customer inventory and limited demand visibility
X
Offered commercial incentives and technical training to support
customers diversifying into new markets
X
Agreed extended payment terms and some shipment deferrals
tocustomers in the worst affected industries, including aviation
X
Group Executive and senior management worked closely to support
a material customer contract with the UK Government for PPE:
plus test houses and NHS direct contacts
customer at our UK site to set volume commitment
agreement with customer to allow high volume manufacture
tocommence in line with government expectations
Strategy
Reassessed strategy in light of the pandemic, concluding that it
remained relevant. Reprioritised certain activities to balance long-term
goals with short-term actions such as cost control implemented to
manage risk
Occupational health, safety
and the environment (OHSE)
Zotefoams considers that the management of
health, safety and environmental matters forms
akey element of effective corporate governance.
Health and safety
Behavioural safety was a significant focus
of the Group in 2019 and 2020. COVID-19
reaffirmed the importance of embedding safe
behaviour in the workplace through maintaining
physical distancing, proactively complying with
hygiene measures in place and all staff being
cognisant of the symptoms, risks and testing
regime applicable to the virus.
Full details of our response to COVID-19
can be found on
pages 48 and 49.
A programme of health surveillance in the UK,
run by an external provider, resumed in Q4 2020
following suspension during the pandemic and
isthe subject of case study 1 on page 50.
Over the past few years, we have heightened
ourfocus on health and safety and delivered a
marked improvement in performance across the
Group. Our chosen metrics allow benchmarking
against similar industries and our performance
isnow better than average in these comparator
industries. 2020 focused on strengthening our
safety culture through the development of the
behavioural aspects of health and safety. This
focus will continue in 2021 and beyond. One of
our core priorities in 2021 will be to review the
risk assessment process around our equipment
to ensure that all machinery is engineered in a
way that minimises risk of injuries to operators,
regardless of levels of skills and experience.
Protecting the health of those employees
who, due to the nature of their work, had
to remain on site to perform their duties
during COVID-19 was paramount.
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ISO 9001: Quality Management
ISO 9001:2015 is a highly respected global
standard that defines the requirements for a
Quality Management System. Compliance
with the standard supports Zotefoams’
efficiency, provides strong foundations
onwhich to grow, improves customer
satisfaction and ensures the business meets
and strives to exceed customer expectations.
Certification to ISO 9001 demonstrates
Zotefoams’ commitment to quality products
and services and ensures all applicable
regulatory requirements are verifiably met
through external audit.
ISO 14001: Environmental Management
ISO 14001:2015 specifies the requirements
for an environmental management system
that Zotefoams operates to enhance its
environmental performance and sustainability
and maintain its commitment to the
protection of the environment.
As part of this commitment, Zotefoams
reviews the aspects of the business which
could negatively impact the environment and
ensures suitable control measures are in
place to mitigate this. Through external audit,
certification demonstrates that Zotefoams
has a firm grasp of environmental legislation,
aims to reduce environmental risk and
validates a commitment to continually
improving Zotefoams’ environmental
performance.
ISO 45001: Occupational Health
andSafety
The new ISO Standard in Occupational
Health and Safety, ISO 45001:2018, aligns
with both ISO 9001 and ISO 14001 through
an overarching structure. ISO 45001:2018
is an international standard and an evolution
from the internationally recognised OHSAS
18001. ISO 45001 supports a proactive,
holistic approach to the incorporation of
asafety culture at every level of an
organisation. It provides a structure to
increase safety, reduce workplace risks
andenhance health and wellbeing at work.
While the standard requires that OHS risks
be addressed and controlled, it also takes
a holistic risk-based approach to the OHS
management system itself, to ensure that it
is effective and is being continually improved.
Certification is the endorsement that
demonstrates to external parties that
compliance to the Standard has been
achieved.
Sustainability
In 2020, the Board updated its sustainability
strategy centred on the twin principles of
i) preferentially operating in markets where
Zotefoams’ products offer sustainability
advantages which benefit society and ii)
minimising the use of natural resources through
aseries of internal measures. The implementation
of the strategy in 2021 will take into account the
TCFD requirements and aim to align the internal
Achieving accreditations
CASE STUDY 1
Focus on safe behaviour
In 2020, the Managing Director (Europe) and the Health and Safety
Manager led over 897 factory floor behavioural safety engagements
with the workforce, comprising coaching sessions, safety forums,
individual and group training, surveys, safety suggestion boxes, safety
drills and intervention on potential risk hazards. As a result, 1,705
safety-based observations were carried out (2019: 930). Improved
safety awareness among the workforce has been noted as a
result of these initiatives.
CASE STUDY 2
Employees’ health
surveillance programme
Health surveillance
Employees’ health and wellbeing are a cornerstone of Zotefoams’
success. Occupational health considers an individual’s health, ability
and fitness to perform a particular job. Its purpose is to protect each
employee to ensure that the proposed work does not in any way
impact their health negatively.
In the UK, a programme of health surveillance run by Maitland Medical
has been in place since 2018. The programme supports Zotefoams
in its compliance with legal and regulatory requirements and provides
at-risk employees with medical monitoring and support to ensure that
relevant medical conditions are identified and addressed promptly
through the appropriate referral to medical specialists.
Environmental, Social and Governance
Continued
Employee working
in below areas
Potential hazard
exposed to
Maitland
surveillance
Noisy areas (level of decibel
over 85)
Hearing loss
Audio test repeated annually for
the first two years. If no issues are
detected, frequency switches to
every 3 years
Areas in which talc is used
Lung function
Spirometer test repeated annually
Chemical exposure Skin sensitivity
Skin assessment repeated annually
Forklift drivers
Physical harm to
self and others in
the vicinity arising
from accidents
Audiogram
Blood pressure check
Urinalysis
Height/weight check
Eye sight check
General health questionnaire,
medical history check
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Financial Statements
risk management framework described on page
33 with the SASB framework, in order to set and
implement clear targets for improvement.
Safety, Health and
Environment (SHE)
The Board has in place separate policies
relating to Safety, Health and Environment (SHE).
The Company is certified to accredited standard
ISO 45001:2018 for Health and Safety, following
a migration from OHSAS 18001:2007, and
ISO14001:2015, the International Standard for
Environmental Management Systems, and is
regularly audited by certification bodies to ensure
that the Company complies with those standards.
The Board has ultimate responsibility for SHE
policy and performance and receives quarterly
reports on SHE issues. The Board has set a very
low risk appetite for safety, health and environmental
matters. Annual performance objectives are
agreed by the Board and performance against
these is monitored as partof its quarterly
reporting programme. RIDDOR reportable lost
time accidents are reported immediately and
discussed in detail at the Board meeting following
any such incident. Additionally, the Board has a
detailed review ofSHE performance, targets,
metrics and approach through monthly updates.
The Group CEO is directly responsible to the
Board for SHE performance. Committees on
SHE normally meet once per quarter to consider
all SHE matters and are overseen by steering
committees, chaired by the Group CEO (or
appropriate responsible person in subsidiary
companies). The steering committees consider
overall performance and the impact of current
and impending legislation.
On joining the Group, all employees receive
induction training on SHE matters, including the
Group’s OHSE policies, and refresher training
isprovided, as appropriate, to ensure that
theemployees understand SHE matters.
Allemployees are made aware that everyone
has a part to play to ensure the safety of
themselves and their colleagues at work.
Employees are encouraged to report to their
managers any unsafe, or potentially unsafe, acts
or conditions. Senior managers are responsible
for ensuring that SHE policies are implemented
in their areas, that their teams are informed of the
departmental SHE requirements and that the
employees receive training on environmental
issues and safe working practices and
understand them. Regular audits are conducted
to ensure policy and procedure implementation
is appropriate.
The Group takes the reporting of all SHE
incidents very seriously and requires employees
to report all incidents, including any near misses,
as well as damage to plant or equipment which
has not resulted in personal injury. The Group
considers the reporting of near misses to be
asequally important as actual incidents, since
itraises situations to management that could
cause, or might have caused, harm. It then
ensures appropriate corrective action can be
taken to eliminate or minimise the risk. The
Group also ensures that appropriate safety
practices are included in standard operating
procedures to reduce the risk of SHE
incidentsoccurring.
Few controlled substances are used in the
manufacture of our foams, but where they are,
the Group has established procedures, inwhich
the relevant employees are trained, toensure
that the storage and handling of such substances
are safe and in accordance with regulatory
requirements. The manufacturing process
involves manual handling and processing of
materials. When new or altered equipment or
materials are introduced, and at regular periods
thereafter, the risks to the processes are
assessed and improvements made wherever
possible, such as to the design of the equipment,
to reduce or eliminate the risks identified.
The most strictly controlled parts of the Group’s
sites are where high-pressure gas is used. The
high-pressure autoclaves are subject to the
Pressure Systems Safety Regulations 2000 in
the UK and OSHA (Occupational Safety and
Health Administration) in the USA. Tightly defined
procedures and operational controls are in place
to manage the safety of these pressure systems.
Fail-safe mechanisms, known as pressure relief
valves and bursting discs (which act like fuses in
an electrical system), are included in the design
of the pressure systems which, when triggered,
allow depressurisation of sections of the system
and prevent any further risks. Operation of these
fail-safe mechanisms releases harmless nitrogen
gas into the atmosphere. The air we breathe is
composed of 78% nitrogen.
An increase in energy usage in the UK and USA
arose from increased output levels in H2 2020,
buoyed by the high volumes resulting from the
Group’s supply of polyolefin foams to a key
customer to service its PPE contract with the
UKGovernment, and increased footwear-related
output. The USA showed a further increase
against 2019 following the installation of a new
high-pressure autoclave at the start of the year.
The construction of the Poland facility also
contributed to the global increase.
All SHE incidents are investigated by
appropriate levels of management to ascertain
the root cause of the incident and, wherever
possible, working practices and procedures
are improved to minimise the risk of recurrence.
In 2020, there were no prosecutions, fines or
enforcement actions taken as a result of
non-compliance with SHE legislation
(2019:none).
Health and safety performance
The primary metric used to monitor the number
of reportable lost time injuries is RIDDOR. In
2020, the number of RIDDOR incidents across
the Group remained at 1 (2019: 1).
The Zotefoams Group also uses metrics
devised by the United States Department of
Labor to measure staff absences resulting from
workplace incidents and accidents. This allows
comparison with a large, relevant peer group
aswell as provides an established methodology
with which we can benchmark our performance
annually. In2020, there was a slight increase in
Days Away From Work (DAFW) and Days Away
Restricted Or Transferred (DART). To combat this
in 2021, we will continue the programme of
increasing risk and hazard awareness, which is
also linked to the continuation of expanding the
new safety engagement process. In bothcases,
the metrics are compared with thelatest
benchmark data for Rubber and Plastics
Processors. Good performance against this
benchmark was noted in both 2019 and 2020.
Environmental performance
There were no significant environmental
incidents during the year (2019: none). Previous
years have been analysed against an internal
categorisation introduced in 2018, guided by
the Environmental reporting guidelines at
https://www.gov.uk/report-an-
environmental-incident
Level 1
– Reported to Environment
Agency (e.g. polluting incident)
Level 2
– Reported to local authority
(e.g. waste concerns)
Level 3
– Internal report only
(e.g. small granule spills)
SHE: Key metrics
2020
2019
2018
2017
2016
Group: Reportable lost time injuries
1
1 4 6
13
Internally recorded environmental incidents
Level 1
0
0 0 0 0
Level 2
0
0 0 0 0
Company metrics
Energy usage (MWh)
48,405
44,570
52,225
49,08546,912
Energy consumption (kWh/kg)
9.89*
11.6 0* 11.03* 11.0 5 11.76
Group metrics
Energy usage (MWh)
62,740
56,453 63,469
55,354
55,032
* Calculation shown as mix-neutral assessment of energy usage.
Year
2020
2019
2018
Industry
RIDDOR
1
1 4
n/a
DAFW
1.3
1.1
2.3
1.1DART
1.6
1.3
3.1
2.4
52
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Annual Report 2020
The mix-adjusted value reported for SEC has
significantly improved as we focused on better
processing efficiency for new products, including
footwear, in our UK facility.
Carbon emissions
Zotefoams’ foams are used in applications
globally to improve people’s lives and reduce
energy consumption, primarily through insulation
and weight reduction. The processes we employ
to create these foams allow us to use less raw
material and produce lighter foams than
competitive processes, both of which are
beneficial for carbon reduction. In making
thesefoams, energy (both gas and electricity)
isthe main source of carbon emissions from
ourfacilities.
The efficiency with which we use energy to
process polymer is measured in our specific
energy consumption and our UK site, which
processed approximately 80% of Group polymer
by tonnage, reduced this energy consumption
by over 14.7%. Overall emissions for 2020 were
14,637 metric tonnes (2019: 12,425 tonnes) with
the main changes due to increases in the volume
of foam produced (estimated increase 1,379
tonnes), a change in product mix with an
increase in more energy-intensive foams such as
those sold to the footwear segment (estimated
Specific Energy Consumption (SEC) has decreased to9.89 kWh/kg,
the lowest recorded since 2015
In 2020, no incidents were reported at Level
1or2, meaning no significant impact to the
environment. The Group ensures that all reports
are taken seriously and investigated and that the
responses given are appropriate to their level
ofimpact or potential impact.
Some 24 internally reported Level 3 reports
(2019:10) relating to waste segregation and
spillkit maintenance were recorded in 2020.
Thereports are captured by daily inspections
and actioned as required. The increase in 2020
is due to greater environmental engagement and
heightened observation, the result of a focus on
improving behavioural awareness. A reduction in
oil and granule spills has been noted following
control action.
In October 2009, the Company entered into a
Climate Change Levy (CCL) agreement which
involves meeting specific targets to reduce
energy consumption. Provided the Company
meets the requirements of the CCL agreement,
itreceives a rebate on its electricity bills and is
also exempt from the Carbon Reduction
Commitment Scheme.
The Company measures energy efficiency by
taking energy consumption and dividing it by the
amount of material (in kg) that passes through
high-pressure autoclaves. The increase in
production of our HPP foams, which requires
more energy than for polyolefin foams, prompted
us to update these metrics to be product-mix
neutral in 2018. In 2020, our adjusted energy
efficiency measure Specific Energy Consumption
(SEC) has decreased to 9.89kWh/kg (2019:
11.60kWh/kg), the lowest ever recorded. This
value was higher during the first half of the year
but significantly reduced due to the high
throughput experienced in the second half, along
with improvements on specific products (such as
foams for footwear) and manufacturing processes.
In 2019, the Company completed its second
assessment under the Energy Saving Opportunity
Scheme (ESOS) and remains compliant in 2020.
increase 1,097 tonnes) and emissions directly
related to the construction of our Poland facility
(increase 892 tonnes). These specific emissions
increases are offset by reductions, in the main
related to reduced activity linked to COVID-19,
resulting in the overall 2,212 tonne increase.
In 2020, 93.2% (2019: 98.5%) of the Group’s
carbon emissions arose from our use of
electricity and gas, primarily in processing
polymer with some use in facility heating and
cooling, while 6.1%, 892 tonnes (2019: zero), was
in relation to construction of our Poland facility.
Direct carbon emissions from other sources
were minimal (2.1% of Group emissions) as
wedo not operate our own fleet of vehicles.
The methodology we have used is in accordance
with the guidance published by the Department
for Environment, Food and Rural Affairs in June
2013. We have only included emissions for which
we are directly responsible. We have not
included emissions for activities over which we
have no direct control. For example, we have
included business mileage on a Company van
and mileage claimed by employees in the UK,
but not other forms of business travel, such
astravel made by employees elsewhere in
theGroup or travel using public transport
orairtravel.
The SEC value has been reported in the Annual Report as a mix-adjusted value since 2018 to reflect the growth of footwear
andtoshow the energy efficiency improvements made.
In order to benefit from a CCL exemption, the Company has entered into Climate Change Agreements (CCAs) as set out by
the Department for Business, Energy and Industrial Strategy. A CCA is a voluntary scheme setting targets to increase energy
efficiency and reduce carbon dioxide (CO
2
) emissions. For the plastics sector, the scheme is run by BPF Energy Limited, to
whichunadjusted SEC figures are reported quarterly. The scheme will run up to 2025.
Environmental, Social and Governance
Continued
Mix-adjusted SEC KWh/kg 12m roll
CCL Target
Corporate Target
Specific Energy Consumption (SEC)
14
2013 2014
2015 2016 2017 2018 2019 2020
9.5
KWH/KG PRODUCT
10
10.5
11
11.5
12
12.5
13
13.5
9
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Water and waste
Usage of water and the amount of waste
produced are key environmental metrics.
During the year, there were a number of UK
andUSA site initiatives to improve the efficiency
ofpolymer processes with respect to waste
reduction, all of which represented personal
objectives for the respective business unit
leaders. Our water consumption is metered and
again we have specific programmes to improve
efficiency and reduce water, including, planned
for 2021 during our plant shutdown, a significant
overhaul of water systems in our UK facility.
Our water and waste data is kept up to date
onour website:
https://www.zotefoams.com/
investors/sustainability/
Group: carbon emissions (CO
2
tonnes)
2020
2019
2018
2017
2016
Emissions arising directly from our operations
(including fuel used in our vehicles)
997
190
288
134 136
Indirect emissions – use of energy
(electricity and gas)
13,640
12,235
14,536*
16,291 16,006
Total
14,637
12,425
14,824*
16,425
16,142
Carbon emissions (kg)
per material gassed (kg)
1.6
1.6 1.7
2.1
2.3
* These figures have been retrospectively amended to show the impact of 93 tonnes of emissions relating to our facility in China,
which was not recorded in the 2019 Annual Report.
54
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Annual Report 2020
Continuing operations to secure the business
and the jobs of our people, while ensuring their
safety, became the overriding theme of 2020.
We made a conscious decision to embed our
cultural pillars further into the business through
our approach to leadership of our people during
the pandemic: caring deeply for everyone’s
safety, supporting those who were self-isolating
or working from home, appreciating their efforts
in keeping the business operating and working
together collaboratively.
Many of our people plans were postponed
tolater in the year to allow us to refocus
effectively. The launch of the new performance
management system for UK-based employees
and global learning and development initiatives
were deferred into 2021, although much of the
foundation planning was completed in 2020.
2020 brought significant challenges. We had
to learn, very quickly, to work remotely and
engage with our customers from a distance.
Communication with our people was key to allay
fears and keep motivation high. We focused
intense effort on health and safety behaviours
and controls to minimise risks of infection on
oursites globally. Above all, we leveraged our
ability to pivot and change our approach as
unpredictable events presented new problems.
As a team, we overcame the challenges of H1
2020 and ended H2 2020 with our strongest
sales performance ever for a six-month period,
a testament to the determination of our people
to take on the challenges and hold ourselves
accountable for creating success together.
Our people vision
To fulfil our purpose of delivering “optimal
material solutions for the benefit of society”,
we depend on the technical skills and capability
of our people. Our vision is to develop and grow
our people to be a resilient, international team
with the business, technical and market
knowledge to deliver these solutions to our
customers and achieve our planned future
growth in a rapidly changing environment.
COVID-19 highlighted the importance of
wellbeing and caring for each other. We
want our people to share common values, be
engaged in our business and genuinely feel they
are part of the Zotefoams international family.
Our culture
Our values form the foundation of the way we
work collaboratively together; we strive to be
reliable, pioneering, responsible and trustworthy.
We recognise there is still work to do to embed
our culture within the business. We are
implementing a manager academy in 2021 to
focus on improving the leadership skills of our
leaders. Key to our success is engaging our
managers to embody our values and set the
example for our people to follow; we plan to
assess our leaders on cultural behaviours,
through our new performance management
system, and identify the areas we need to work
on to improve.
To continue to embed our values into the fabric
ofthe organisation, we reviewed and updated
UK-focused HR policies, procedures, recruitment
processes and training and development to
ensure they are reflective of our values.
Zotefoams’ US subsidiaries already included
values assessments in their appraisal system.
Wewill review the feedback from this collated
data and extend it to all other countries in 2021.
Action has the most potent impact on
embedding values into an organisation. This
year we committed to reflecting those values in
our approach to handling the pandemic for our
people and our customers. We held ourselves
accountable by taking responsibility for keeping
our people safe during the pandemic and
introducing strong measures supported by
education across all our international sites.
Staff engagement scores were lower on
recognition and reward and specific action was
taken to address this. In the second half of the
year, a UK manufacturing bonus programme
was implemented to incentivise and reward
employees for meeting quality and production
targets required to achieve a very challenging
period of business activity. To recognise the
selfless commitment of our UK and USA
production staff, further initiatives were
introduced:
In the UK:
X
The Zotefoams Heroes Award granted up
tothree days’ holiday to UK production
employees for full attendance during the
pandemic.
X
A Recognition Award was given to other
employees who had made a particularly
high contribution in the March to July period,
including taking on the work of colleagues
who had been required to self-isolate.
In the USA:
X
Staff participated in a recognition programme
for perfect attendance.
Our people
We began the year with a plan: to continue developing the
skills of our workforce and to acquire key talent in support of
expected business growth. As COVID-19 developed, we had to
refocus our attention on prioritising the wellbeing of our people
and health of our business
Our Culture Pillars
We live the Brand Values
We hold ourselves accountable
We understand how we contribute
to Zotefoams’ success
We are a learning organisation
We constructively challenge
ourselves and others
We value people and recognise
our successes
Our Brand Values
Trustworthy
Responsive
Reliable
Pioneering
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COVID-19
Our most important objective this year was to
safeguard our people during the pandemic. To
enable the UK and USA businesses to continue
production, we adopted a guiding principle of
protecting manufacturing staff from an infection
outbreak by removing all staff from our sites who
could work effectively from home, carrying out
detailed risk assessments and implementing
stringent controls to ensure their wellbeing.
Maintaining cultural cohesion was also key.
The new normal
COVID-19 has been a stark reminder of the
importance of organisational agility. From
March 2020, we knew we would have to work
differently to continue operating at optimal levels.
We embraced remote and new ways of working,
including leveraging inclusive technology to allow
us to maintain team cohesion and to support
staff working from home. The pandemic has
changed the employment landscape
dramatically. We are in the course of updating
our working from home policy, to be launched
H1 2021, with the dual objective of catering for
the new normal and offering increased flexibility
to create a wider geographic reach and increase
our access to key talent. This new flexibility will
allow us to recruit the skills and knowledge
Zotefoams requires to take the organisation
tothe next level.
Organisation development
In January 2020, J Breingan joined our
Executive leadership team as HR Director,
responsible for all HR matters outside North
America. A key objective of this role is to develop
a cohesive international people strategy and HR
support function which will underpin our growth
strategy and maintain compliance.
We refocused the roles and capabilities of
the HR team to support the growth agenda,
dedicated HR support to UK manufacturing to
improve their people management and set up
an embryonic HR shared services team with a
view to establishing more effective support for
our international sites. We are developing our
expertise in key areas such as performance
management, talent recruitment, talent
management and learning and development.
A full HR strategy was established to underpin
our talent growth agenda and have a clear
roadmap to achieve it.
For our new factory in Poland, we established
the start-up team and developed the HR
policies, procedures, compensation strategy
and HR systems to enable us to go into full
operation in 2021. We also hired many of the
operating staff to allow our successful start-up
of February 2021. We managed COVID-19 with
a similar approach to that taken at the UK site,
albeit accounting for Polish legal requirements
and recognising the higher share of contractors
on site.
COVID-19 management
in the UK
At the start of the outbreak, we set up a
COVID-19 Committee with representatives
from Occupational Health, Safety and
Environment (OHSE), HR and Heads of
Department. The team met weekly to review
safety measures and monitor their
implementation. They ensured we followed
government guidelines and communicated
advice and guidelines for staff and managers.
In addition to the safety aspect of COVID-19,
the committee also focused on employee
wellbeing. We kept in touch with those who
were vulnerable and self-isolating for 12 weeks
on a regular basis and gave them updates on
the Company – these calls were well received
since many felt isolated.
To alleviate any staff member’s financial
concern, we committed to paying short-term
self-isolators sick pay at the Company rate
of13 weeks on full pay. This allowed and
encouraged staff who had been in contact
with COVID-19 to stay at home. Staff classed
as vulnerable, requiring to self-isolate for
longer than 13 weeks, were paid at 80%
oftheir full pay, which struck a fair balance
between those attending work and those
remaining at home, and allowed those
whowere vulnerable to stay safe.
Over the last 12 months, our employee
assistance programme, available to all UK
employees, offered advice, support and
reassurance through a difficult year.The
helpline, available to employees 24 hours
a day and seven days a week, has offered
assistance to employees requiring emotional
support and provided access to practical
support such as debt management and legal
support. Throughout the year, usage of the
helpline has been encouraged to support
engagement among staff.An online Health
Portal and Health e-Hub app also offers a
virtual library of wellbeing information, with
informative articles and self-help guides
providing support on a range of health and
advisory issues as well as instant guidance to
aid an employee’s physical and mental health.
Part of our wellbeing initiative, which
commenced roll-out in December 2020, is the
training of 11 mental health first aiders to offer
support to employees on our UK site.
All staff who could work from home did so,
reducing the numbers on our international
sites to a minimum. We enabled home
working through the Group’s up-to-date
Microsoft Teams communication software.
Managers were requested to regularly
check in with their team members.
For further details of our Occupational Health, Safety and Environment
(OHSE) COVID-19 response, please refer to
page 48.
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Our people
Continued
We pursued our T-FIT
®
business unit growth
plans despite the pandemic; we focused on
increasing the capability of our sales team
through strategic recruitment to bring new
customer acquisition skillsets into our
international sales teams. We are building a truly
global diverse team to support the business unit
growth, especially focused on China, India and
the USA.Our China team showed great
resilience during the COVID-19 challenge,
making considerable progress both operationally
and commercially, led by strong local leadership,
clear organisation and HR policies that ensure
span of control without losing the agility to
respond. In India, we are still building the sales
entity but successfully navigated the first full
year, creating the structure and systems to
achieve growth.
International reach
As we have grown beyond the geographical
regions of the UK and USA, we have recognised
the need to extend our HR service. We began
during the year to develop and document
international HR policies and HR processes,
adapted for country legislation to ensure we have
cohesive guidance for management and a fair
approach to all of our workforce. Our HR Shared
Services team will use these documented
procedures to support international sites to
reduce the requirement for local administration.
We are focusing on ensuring our HR structure,
policies and procedures effectively support
ourinternational teams and that we develop
international collaboration and support across
the Zotefoams companies through embedding
our shared values and culture in Poland, China
and India.
People development
Graduate Scheme
Our Graduate Scheme is designed to develop
the future leaders and technical specialists of
Zotefoams. It is a two-year scheme, comprising
two or three development roles chosen to
complement each graduate’s expected career
path. Graduates undertake a programme of
learning and hands-on exposure to all major
functions in the business, to build broad
business insight and give them the experience
that will enable them to progress within
thebusiness.
Training and development
We introduced an online training library towards
the end of the year to broaden our capacity to
provide cost-effective learning to our people,
widen the breadth of training available and
support our development plans for 2021.
CalledGO1, it benefits our people by providing
them with access to online courses, both for
work-specific or personal development
purposes, either at work or from home, and
inanumber of languages. We can now deliver
cost-effective, tailor-made training via this
portalto support our employee development
programmes. In the UK, we launched the
training portal at the end of 2020, focusing
onwellbeing support and remote working skills,
andplan to extend it internationally in 2021.
To build the future leadership of the Group,
those identified as key talent are studying
MBAs or taking other advanced qualifications
at a world-class university, supported by
Zotefoams. During 2020, we established the
plans for our Management Academy, which
will focus on developing leadership skills for
our people managers. Laying this foundation
in 2021 will enable us to grow these leaders.
Performance management
2020 was a difficult year for assessing and
managing ever-changing performance
objectives. Objectives set at the beginning of
the year were cascaded to align individual and
corporate objectives at that time. However, they
were reset at the half-year in recognition of the
significant change in environment. To improve
our management of performance appraisal and
objective setting, we reviewed systems available
and selected a new performance management
software system, which we will implement in
2021. The system will produce powerful data on
organisational performance against corporate
objectives, manage appraisals, assess
competence and help us to address skills
gaps by identifying learning and development
opportunities.
LEAD Operational Business Toolbox
Our LEAD programme, which covers
commercial, project management and lean
techniques, and is intended to give a broad
range of employees the skills to identify and
address inefficiencies, as well as enhance
cross-functional teamwork through integrated
training and projects, was suspended due to
COVID-19 but has been reinstated and will
continue during 2021. We have 30 LEAD
projects in progress, focused on improving our
manufacturing and supply chain processes.
These projects will conclude in spring 2021.
Following tuition provided by Zotefoams, 28
of our production operators passed the basic
English and maths requirements to participate
inthe programme, supporting our diversity
agenda to give those who do not have English
asa first language improved communication
andanalytical skills to progress further in
theorganisation.
Graduate Scheme
To help with their personal development and
provide us with insights into how we might
improve the scheme, we invited all members
of the Graduate Scheme completing their
two-year programme to share with the
Executive team their experiences.
Our key learnings were:
X
Mapping out placements in more detail
and setting out key learning objectives
for each one.
X
Providing a mentor for graduates
to benefit from the experience and
knowledge of an experienced member
of staff.
X
Developing manager guidelines and
training managers on how to effectively
manage a graduate placement in their
department.
X
Extending the scheme beyond technical
and operations into other functions.
We are implementing these changes in 2021.
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Production skills matrix
Both in the UK and USA we introduced a
production skills matrix and assessed our staff
against it, with the aim of achieving higher levels
of competency and cross-functional flexibility
within our operations staff through training
anddevelopment to fill identified skills gaps.
Diversity
Zotefoams’ culture allows and encourages
every person to make a unique and positive
contribution to the organisation irrespective of
their differences. Our vision is a culture where
diversity is recognised and respected: cultural
differences are embraced, contributions from all
groups are encouraged, people are empowered
to reach their full potential and differences are
celebrated. To achieve this, we are focusing
on strategic leadership recruitment and the
education and development of our workforce
to foster this culture. As a business with global
reach, we need a truly inclusive approach to
people to be successful. As we grow in different
countries, we recognise inclusiveness – feeling
part of the Zotefoams team across cultural
boundaries is an important part of our
people strategy.
Gender
In 2020, we honoured our commitment to
gender balance through the appointment of
three women at the highest levels of the
business. Two highly experienced female Board
members, A Fielding and C Wall, were appointed
in May and in January the Executive team was
strengthened with the appointment of a female
HR Director. Around a quarter of the total
workforce are female. We recognise that we
need a better gender balance at the managerial
and professional levels of the business and will
use our graduate recruitment and talent pool to
develop more women into these levels. Our new
working from home policy will allow us to attract
a greater number of professional women with
young families. In production, the shift patterns
and physical nature of the work present a
challenge to attracting women into the team.
We are researching the possible changes we
could make in production to improve our
gender balance.
Our Gender Pay Gap report can be accessed at
https://gender-pay-gap.service.gov.uk/Employer/
nKjZzwd1. The change in pay quarters for men
and women is a result of the recruitment of
female professionals as part of Zotefoams’
commitment to diversity in 2020.
Ethnic diversity
Overall, our international sites reflect the ethnic
demographics of the country and region where
they are based. Our China and India teams are
Asian, in Poland the team are European and the
majority of the US team are North American.
There is a greater mix of ethnic groups within
our UK professional population, 31% of which
are non-white. In the UK production team, there
is a strong ethnic mix; 49% are non-white, which
matches the demographics of the local Greater
London area.
Age
We have a good spread of age groups across
the majority of the business. An exception is the
UK, where we have an ageing workforce and
have planned that our apprenticeship and
graduate recruitment schemes will allow us
to transfer and grow knowledge from these
experienced employees. The US, India, Poland
and China businesses have a more balanced
distribution of ages across their workforce,
as they have been established for a shorter
period of time.
Looking forward
For 2021, we have a strong people agenda.
An important focus will be employee wellbeing
as we continue to work through the COVID-19
pandemic. We will roll out our performance
management system in the UK, China, India
andPoland, which will help us identify where
weneed to focus our people development
strategies. We will strengthen our international
HR capability and develop our learning and
development programmes to create strong
leadership with the capability to support
business growth. We will implement an
organisational development plan to improve our
new product implementation process. Overall,
we are focused on increasing our people’s
engagement in the business through improved
opportunities in recognition, learning and
development and leadership training.
Gender
Workforce Cultural Diversity 2020
Age Distribution of Total Workforce
Male
Female
2020
2019
2018
Role by gender
Female
Male
FemaleMale
2020 2020
2019 2019
Non-Executive Director
2 3 1 3
Director
– 2 – 2
Senior management
2 5 1 5
Other staff
106
359
97
336
110
369
99
346
400
300
2018 2019 2020
200
100
0
125
≥55 45-54 35-44
25-34
100
75
25
50
0
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Annual Report 2020
Since 1 October 2007, the Board has been
required to carry out its statutory duty to act in
away which it considers, in good faith, would
bemost likely to promote the success of the
Company for the benefit of its members as
awhole, and in doing so have regard to:
X
The likely consequences of any decision
in thelong term
X
Its environmental impact
X
Key stakeholders (including employees,
customers, suppliers and communities) and
X
Maintaining a reputation for high standards
ofbusiness conduct.
The Board has striven to embed these
considerations in its decision-making process
since the imposition of the duty and made its first
report on compliance in the 2019 Annual Report.
Decision-making
The Board delegates day-to-day management
and decision-making to its senior management
team, but maintains oversight of the Group’s
performance and reserves to itself specific
matters for approval, including significant new
business initiatives. It monitors that management
is acting in accordance with, and making
progress on, the agreed Group strategy through
regular Board meetings supported by information
packs received in advance to enable effective
preparation and consequent discussion, monthly
reporting of business performance, direct
engagement with the Executive team and
attendance by a Board member at the Joint
Consultative Committee representing workforce
views. Processes are in place to ensure that the
Board receives all relevant information to enable
itto make well-judged decisions in support of
theGroup’s long-term success.
2020 key events
The Board took key decisions in 2020 against
a background of significant human, social,
economic and business uncertainty. Retaining
the loyalty and motivation of employees,
suppliers, customers and local communities
was a crucial consideration for the Board,
whileremaining aware of the need to address
both the short- and long-term implications of
thepandemic. Our COVID-19 response provided
on pages 48 and 49 analyses the impact of
thepandemic on our key stakeholders and
explains the actions taken to mitigate it.
Having defined our organisational purpose
as providing “optimal material solutions for the
benefit of society” in 2019, Zotefoams focused
on its sustainability proposition in 2020. Given
the nature of the business, the Board takes a
long-term approach to its decision-making to
ensure that the Company is able to deliver its
strategy of creating long-term sustainable value
for the benefit of all of our stakeholders. As this
approach needs to be supported by appropriate
metrics and targets, the Board has approved
the adoption of the Sustainability Accounting
Standards Board (SASB) framework for
implementation through the risk management
framework in 2021.
Decision
Leveraging our optionality – personal protective equipment
Context
With demand impacted in many industrial markets in the wake of the
pandemic, the optionality of the business was fully leveraged through
the launch of a new Personal Protective Equipment (PPE) application
inH2 2020 for the supply of a UK Government contract through our
largest UK customer.
Stakeholders
considerations
Shareholders
The Group maintained its strong financial position in 2020 and
reinstated dividends in October 2020.
Employees
Employment for all staff was maintained throughout 2020 and additional
temporary workers were hired to support high levels of demand in
H2 2020.
Environment
The provision of a reusable material for NHS staff supported Zotefoams’
long-standing sustainability agenda.
Community
In a wider sense, the community benefited from a product aimed at
protecting their safety and supporting the key work done by frontline
medical workers.
Government
The effective cost and cash measures taken by the Group in H1 2020,
coupled with a more confident assessment of the Group’s financial
position and future and supported by an expected record performance
in H2 2020, allowed the Group to return the low amounts of government
support it had received earlier in the year.
Strategic actions
supported by the
Board
Development of a visor application for AZOTE
®
polyolefin foam.
Capacity pivot to accommodate PPE order.
No employee restructurings or salary sacrifices and an adapted bonus
plan to support high levels of operations activity in H2 2020.
Impact of these
actions on the
long-term success
of the Company
The flexibility and resilience of the Company’s portfolio helped secure
a sizeable polyolefin foam opportunity, which provided confidence in
the financial stability of the business and allowed it to recommence
operating cost investment in support of future growth.
Decision
Supporting T-FIT
®
advanced insulation growth through
a 5-year investment plan
Context
Shareholders
The HPP Business Unit accounted for 36% of Group sales in 2020
(2019: 33%). The continued growth of T-FIT
®
advanced insulation will
support future investor returns.
Employees
T-FIT growth will require additional headcount across operations, HR,
marketing and sales. Recruitment was initiated in 2020 with the hire of a
Global Marketing Manager, increased commercial headcount in China
and first recruitments in the USA.
The development of T-FIT capability at the Poland plant will also
generate new employment opportunities.
Customers
T-FIT advanced insulation products are a range of bacteria-resistant
insulation products, purpose-designed to perform in demanding
environments. They provide solutions to customers in the food and
personal care manufacturing, high-temperature processing and
pharmaceutical, biotech and semi-conductor cleanroom environments.
Strategic actions
supported by
the Board
Approval of 5-year plan at the 2020 strategy day.
Impact of these
actions on the
long-term success
of the Company
T-FIT insulation offers excellent potential over the short to medium term.
s172(1) statement
Our shareholders and stakeholders
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Decision
MEL: capturing a major opportunity
inmono-material barrier packaging
Context
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
thistechnology, in 2019 the team at MEL
developed mono-material barrier packaging
capability, which we have branded ReZorce
®
.
ReZorce mono-material barrier packaging
offers a readily scalable solution to
recyclability, a significant environmental issue
in the global consumer packaging market. In
2020, the Board approved ReZorce market
assessment, focusing primarily on the aseptic
liquid packaging market.
Stakeholders
considerations
Shareholders
The existing revenues generated by the
MELlicensing model and the range of
markets open to ReZorce mono-material
barrier packaging offer significant potential
opportunities over the long term.
Employees
The MEL team has been restructured to
accommodate ReZorce development.
Leaders with market-relevant experience have
been hired during 2020 to support realisation
of the ReZorce opportunity.
Environment
Our ReZorce product line can be made
withsignificant recycled plastic content and,
as itis classified as a mono-material, can
bereadily recycled to support a circular
economy. This puts sustainability at the
heartof our MEL development agenda.
Strategic actions
supported by the
Board
Close collaboration with external consultants
and packaging industry experts to support
the validation and evaluation of the ReZorce
opportunity and strategy.
Pivot a substantial portion of the MEL team
in2021 to be almost exclusively dedicated
toReZorce development.
Continue to support existing licensees and
current projects but accept redirection of
most resources to ReZorce at this time.
Impact of these
actions on the
long-term success
of the Company
The MEL business offers excellent potential to
maintain and develop value creation over the
medium term.
Decision
Developing the sustainability
proposition
Context
The world must progress towards net-zero
greenhouse gas emissions by 2050.
Increasing corporate reporting expectations in
sustainability and environmental matters must
be met to demonstrate the continuing value
ofthe Group’s business model. (See our
business model on page 10.)
Stakeholders
considerations
Environment
Zotefoams’ products deliver high
performance, insulation and reduced weight,
which offer the potential for carbon emissions
reductions in excess of the carbon emissions
required to manufacture the product.
Customers
Our products, when used appropriately,
remain the optimal solution both functionally
and environmentally for many of our
customers’ needs. We have the technical
expertise to identify ways to reduce our
customers’ carbon footprints or increase
material efficiency.
Employees
A diverse group of employees supported the
Board in 2019 in its articulation of Zotefoams’
purpose as “optimal material solutions for the
benefit of society”. As brand ambassadors,
employees remain a key stakeholder in the
development of our sustainability proposition.
Strategic actions
supported by
the Board
Update a sustainability strategy centred on
the twin principles of i) preferentially operating
in markets where Zotefoams’ products offer
sustainability advantages which benefit
society and ii) minimising the use of natural
resources through a series of internal
measures.
Add a new principal risk category:
sustainability and climate change.
Establish a parallel carbon accounting
emissions methodology in 2021 to help
us optimise our management of carbon
emissions.
Contribute to the development of a circular
economy by implementing the next phase
of development of ReZorce mono-material
barrier packaging.
Evaluate a number of reporting ESG
frameworks with a view to providing investors
and other stakeholders with financially
material information to support effective
decision-making, following which the
Sustainability Accounting Standards Board
framework was adopted, with planned
implementation in 2021.
Commit to reporting on the Task Force
on Climate-related Financial Disclosures
from 2021.
Impact of these
actions on the
long-term success
of the Company
Zotefoams views the transition to a lower
carbon economy as an opportunity to
demonstrate its competitive advantage
through the nature of the existing business
and the proactive pursuit of opportunities
withoutstanding sustainability credentials.
60
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Board of Directors
The right skills to take us forward
Steve Good
Non-Executive Chair
N
R
Appointed
October 2014 (Board)
and April 2016 (Chairman)
Skills
Strong and relevant international
experience in the speciality
chemicalsand plastics industries,
manufacturing and diverse industrial
markets which enables him to
giveboth guidance and challenge
tomanagement. He also has
significantplc board experience.
Experience
Steve was Chief Executive of Low
& Bonar plc between September
2009 and September 2014. Prior to
that role, he was Managing Director
of its technical textiles division
between 2006 and 2009, Director
of new business between 2005 and
2006 and Managing Director of its
plastics division between 2004 and
2005. Prior to joining Low & Bonar
he spent 10 years with BTP plc
(now part of Clariant) in a variety
of leadership positions managing
international speciality chemicals
businesses. Heisa Chartered
Accountant.
External appointments
Non-Executive Director, Chair
oftheRemuneration Committee
andmember of the Nomination
Committee, Elementis plc. Chair,
Chair of the Nomination Committee
and member of theRemuneration
Committee, Devro plc.
Gary McGrath
Group CFO
Appointed
December 2015 (Executive
Director) and February 2016
(Group CFO)
Skills
Diverse international experience
across a range of manufacturing
businesses. He has a track record
ofbuilding world-class finance
organisations and delivering
commercial finance support and
effective control environments
toachieve board strategies.
Experience
Gary is a Chartered Accountant,
qualifying with Arthur Andersen.
He spent 11 years with RMC Group
plc before joining Koch Industries
Inc, where he spent several years in
various positions, including Global
Finance Director of INVISTA
Apparel and EMEA Vice President
of Finance, Planning and Analysis
at Georgia Pacific. Before joining
Zotefoams, Gary was CFO of GC
Aesthetics Limited. He has worked
across public, private and private
equity environments in the UK,
Belgium, Germany, the USA and
the Republic of Ireland.
External appointments
None
David Stirling
Group CEO
Appointed
September 1997 (Finance Director)
and May 2000 (Group CEO)
Skills
Global leadership, strategy and
commercial experience, with a
specific skillset in intellectual
property, business development,
finance and manufacturing. He
has over 20 years’ plc board
experience.
Experience
David started his career with
KPMG inScotland, where he
qualified as aChartered
Accountant. He has worked for
Price Waterhouse in the USA and
Poland and with BICC plc. David is
a graduate of Glasgow University
and has an MBA from Warwick
University and an MSc inFinance
from London BusinessSchool.
External appointments
None
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Chair of Committee
A
Member of the Audit Committee
R
Member of the Remuneration Committee
N
Member of the Nomination Committee
Douglas Robertson
Senior Independent Director
A
N R
Appointed
August 2017
Skills
Extensive multinational experience
inboth public and private
companies, strategic planning,
acquisitions and divestments.
Experience
Doug was Group Finance Director
of SIG plc until his retirement in
January 2017. Prior to joining SIG,
Doug had been Group Finance
Director of Umeco plc and Seton
House Group Limited, having spent
his early career with Williams plc in
a variety of senior financial and
business roles.
External appointments
Non-Executive Director and Chair
ofthe Audit Committee, member of
the Remuneration and Nomination
Committees, HSS Hire Group plc.
Non-Executive Director, Chair of the
Audit Committee, member of the
Remuneration and Nomination
Committee, Mpac plc.
Alison Fielding
Non-Executive Director
A
N
R
Appointed
May 2020
Skills
Experienced entrepreneur and
Non-Executive Director, with
significant expertise in strategy
development and implementation
for start-ups, AIM/main market
listed and not-for-profit
organisations.
Experience
Alison is a Non-Executive Director
and Chair of the Remuneration
Committee at Nanoco plc and
Maven Income and Growth VCT plc
and a Non-Executive Director and
Chair of the Audit Committee at
Getech plc. Alison spent 13 years
with IP Group plc as Chief
Technology Officer, Chief Operating
Officer and latterly as Director of
Strategy and IP Impact and brings
extensive investment, strategy
development and execution
experience in fast-growing,
science-based businesses. Alison
has a PhDin Organic Chemistry
fromGlasgow University.
External appointments
Non-Executive Director and
Chair ofthe Remuneration
Committee ofNanoco plc,
Non-Executive Director and Chair
ofthe Remuneration Committee of
Maven Income and Growth VCT
plc, Non-Executive Director and
Chair of the Audit Committee
of Getech plc.
Catherine Wall
Non-Executive Director
A
N R
Appointed
May 2020
Skills
Skilled independent Chair and
Non-Executive Director for private
equity owned, quoted and family
companies. Sectors: industrials,
business services, consumer.
Experience
Catherine is a Non-Executive
Director and Chair of Audit at
Mobeus Income and Growth
VCTplc. Catherine has 30 years’
experience in the private equity
industry, primarily with Equistone
Partners Europe, where she led
numerous management buy-outs
and later became UK Portfolio
Partner supervising the
management of all the business’s
UKinvestments. Catherine also has
extensive industrial markets and
Non-Executive Director experience,
working with and helping develop
many management teams to deliver
ambitious growth plans.
External appointments
Chair of the Audit Committee of
Mobeus Income & Growth VCT plc.
Jonathan Carling
Non-Executive Director
A
N R
Appointed
January 2018
Skills
Extensive engineering,
manufacturing,operational and
business experience at board level,
having led the development and
production of a number of luxury
carsand aero engines before
embarking on his current role
inthefusion energyindustry.
Experience
Jonathan is the CEO of Tokamak
Energy, a technology business
developing a faster route to fusion
power. He was previously COO,
Civil Large Engines at Rolls-Royce
plc, COO at Aston Martin Lagonda
Limited, and Chief Engineer with
Jaguar Land Rover Limited.
Jonathanhas extensive
engineering, operational and
business experience. He was also
a Non-Executive Director of Aga
Rangemaster Group plc between
2011 and 2015.
External appointments
Chief Executive Officer, Tokamak
Energy Ltd.
62
Zotefoams plc
Annual Report 2020
Dear Shareholder
The Board recognises the importance of being
a well-managed business in the interests of our
shareholders and stakeholders and is committed
to the highest standards of corporate
governance.
Corporate governance encompasses overseeing
the Group’s operations, ensuring compliance
with statutory and regulatory obligations and
developing an appropriate culture to deliver
strong performance within a clearly defined risk
appetite, with the objective of protecting the
long-term economic viability of the business.
The COVID-19 pandemic has shone a
spotlight on the vital role of the Board in
supporting management to ensure that crisis
response efforts are fully coordinated, while
upholding a governance framework which
continues to meet the ‘business-as-usual’
requirements. Management of the pandemic
isongoing and we continue to be vigilant
aboutits ongoing impact.
Further details of our response to
COVID-19 are provided on
pages 48 to 49.
The Board has dedicated significant time to
the Group’s sustainability approach in 2020 and
acknowledges that climate change is a key issue
driving financial risk and opportunity against a
background of scientific, macroeconomic and
policy uncertainty. The Board has approved
theadoption of the Sustainability Accounting
Standards Board (SASB) framework for
implementation through the risk management
framework in 2021. Combined with climate
change considerations being afforded due
consideration during strategic discussions,
this will ensure that the Board has appropriate
oversight of the Group’s response to
climate change.
We are also pleased to publicly support the Task
Force on Climate-related Financial Disclosures
(TCFD) guidance and will begin to implement its
recommendations in our 2021 Annual Report.
The Board has continued to develop Zotefoams’
purpose in 2020: “optimal material solutions
for the benefit of society”. Further details are
provided in our ESG report on pages 44 to 53.
I am pleased to present the report on corporate
governance on behalf of the Board.
Updated Articles of Association
The articles were last reviewed and updated
in 2010.
The Company proposes to amend and update
the existing Articles of Association for the
following purposes:
X
To provide more flexibility by allowing general
meetings to be held partly through electronic
facilities (Hybrid General Meetings). The new
Articles of Association shall provide that, for
general meetings held at a physical venue,
simultaneous attendance and participation
will be allowed through electronic means.
The ability to do this would make participation
at general meetings easier for shareholders.
For the avoidance of doubt, the amendments
being proposed to the Articles of Association
do not permit wholly virtual general meetings
and the Board of Directors do not intend
to hold hybrid general meetings unless
thecircumstances require it.
X
To align the articles to other current best
practice requirements.
Full details of the proposed amendments
are provided in the notes to the AGM notice
on
page 139.
Statement of compliance with the
2018 UK Corporate Governance Code
Corporate governance plays an essential part
inthe long-term success of the Group, and
theBoard and I are committed to upholding
thehighest standards of governance in our
worldwide operations. Throughout the financial
year ended 31 December 2020, the Board has
considered the contents and requirements of the
Code and confirms that the Group has been
compliant with the provisions of the Code.
The Code can be downloaded here
https://bit.ly/2AKGqTm.
Further details are provided in this report and
in the BoardCommittee reports that follow
on
pages 66 to 70.
The disclosures required by Disclosure and
Transparency Rules DTR 7.2.6R have been
provided in the Directors’ report.
Board leadership and effectiveness
In line with the Code, we conducted an internal
review ofBoard effectiveness with the objective
of assessing whether the Board’s composition,
operations and structure remained effective for
the Group and its business environment, both
inthe short and long term.
The review confirmed that the Board and its
Committees remained effective and continued
tofulfil their remit, that the matters reserved for
the Board were up to date and that appropriate
Committees’ terms of reference were in place.
Further information relating to the evaluation
process can be found on
pages 63 and 64.
Board and Committee composition
Following the appointment of A Fielding and
C Wall on 14 May 2020, the Board now has
29% female membership. The Board members
gained their business experience in a broad
range of industries resulting in significant
collective knowledge of business practices
with a high degree of international exposure.
The Board also benefits from the broad cultural,
educational and professional backgrounds of its
members, which collectively include industrial,
engineering, energy, technology, intellectual
property and financial services. The Board
recognises that a significant benefit of diversity is
that it counters ‘groupthink’ by informing debate
from a range of perspectives. The structure,
diversity and composition of the Board remain
under review to ensure that we have the
appropriate mix of skills and experience to
best serve a dynamic, international company.
Director
Tenure at 31 December 2020
S Good 6 years and 3 months
J Carling
3 years
A Fielding
7 months
G McGrath
5 years and 1 month
D Robertson
3 years and 4 months
D Stirling
23 years and 4 months
C Wall
7 months
Accountability
The Board acknowledges its responsibility to
give a fair, balanced and understandable view
ofthe financial position and future prospects
of the business. On behalf of the Board, at
the recommendation of the Audit Committee,
I confirm that we believe that the 2020 Annual
Report presents a fair, balanced and
understandable assessment of the Group’s
position, its performance and its prospects,
as well as its business model and strategy.
AGM
The AGM provides our shareholders with
theopportunity to engage with our Directors.
Welook forward to receiving shareholders’
feedback at the AGM on 26 May 2021.
S P Good
Chair
7 April 2021
Corporate governance
Committed to the highest standards
of corporate governance
63
Zotefoams plc
Annual Report 2020
Strategic Report
/
Governance
/
Financial Statements
The Board and its Committees
The Board’s role is to provide the entrepreneurial
leadership of the Group within a framework of
prudent and effective controls which enables risk
to be assessed and managed. The Board sets
the strategic aims of the Group, ensures that the
necessary resources are in place to achieve the
Group’s objectives and reviews management
performance. The Board’s role is to act as
representative of the shareholders and other
stakeholders and focus on the governance
oftheGroup. Management is delegated to
theExecutive Directors and senior
executivemanagement.
As part of their role as members of a unitary
Board, the Non-Executive Directors
constructively challenge and develop proposals
on strategy. The Non-Executive Directors
scrutinise the performance of management
inmeeting agreed goals and objectives and
monitor the reporting of performance. They
satisfy themselves on the integrity of financial
information and that financial controls and
systems of risk management are robust and
defensible. They are responsible for determining
appropriate levels of remuneration of Executive
Directors and have a prime role in appointing
and, where necessary, removing Executive
Directors and in succession planning.
Three principal Committees report into the
Board, functioning within defined Terms of
Reference. These are the Audit, Remuneration
and Nomination Committees. The Terms of
Reference for these Committees are available
onthe Group’s website, www.zotefoams.com.
The Board has put in place a schedule of
matters that are reserved for its determination
orwhich need to be reported to the Board.
Thisschedule is reviewed regularly and was
lastupdated in November 2020.
Chair and Group CEO
The Chair is responsible for the leadership of the
Board, ensuring its effectiveness on all aspects
of its role and setting its agenda. The Chair is
also responsible for ensuring that the Directors
receive accurate, timely and clear information.
The Chair facilitates the effective contribution
ofthe Non-Executive Directors and ensures
constructive engagement between Executive
and Non-Executive Directors.
The Board considers that S Good has sufficient
time to devote to his role as Chair of the Group.
S Good is currently a Non-Executive Director
ofElementis plc and Chair of Devro plc.
The Group CEO is responsible for the running
ofthe Group’s business. He is supported by
theGroup CFO and the Executive team.
Board balance and independence
The Board currently comprises two Executive
Directors, four independent Non-Executive
Directors and the Non-Executive Chair.
DRobertson was appointed Senior
IndependentDirector at the AGM held
on16May 2018. The Board considers
DRobertson to be independent.
S Good is also Chair of the Nomination
Committee and a member of the Remuneration
Committee. Only the respective Committee
Chairs and members are entitled to be present
at meetings of the Remuneration, Audit and
Nomination Committees, but others may attend
at the invitation of the Committee Chair. During
the year, the Chair met with the Non-Executive
Directors regularly without the Executive
Directors present and the Non-Executive
Directors met without the Chair present to
carryout a review of the Chair’s performance,
inline with the principles of the Code.
Appointments to the Board and the
Nomination Committee
Appointments to the Board are proposed
by the Nomination Committee and approved
by the Board.
The Nomination Committee report
can be found on
page 69.
The Board acknowledges the benefits of
diversity, including that of gender. When
considering appointments to the Board,
appointments are made on merit and against
objective criteria. Given the size of the Board
andthe Group, no specific policy or quotas
havebeen set on diversity and, when search
consultants are briefed on the search criteria,
they are encouraged to cast their search
sufficiently broadly to identify the best
candidates to ensure that the Board has
anappropriate mix of skills, knowledge,
experience and background. This approach
is mirrored in our wider recruitment strategy,
which is having a positive impact on the talent
pipeline in what has historically been a
male-dominated industry.
More details can be found in Our people
on
pages54 to 57.
Care is taken to ensure that appointees, as well
as the existing Directors, have sufficient time to
devote to their roles.
Information and professional development
Each month all Directors receive management
reports and briefing papers in relation to Board
matters provided in a timely manner to ensure
they have due time to consider the information
and act accordingly. New appointments to the
Board receive an induction and, where
appropriate, training. The Directors have access
to the Company Secretary and independent
professional advisers, at the Group’s expense,
if required for the furtherance of their duties.
Board evaluation
A formal review of the performance of the
Board and its Committees is carried out each
year. The review of the Chair’s performance is
led by the Senior Independent Director, together
with the other Non-Executive Directors in
consultation with the Executive Directors. The
other Non-Executive Directors’ performance
isevaluated by the Chair in consultation with
theExecutive Directors. The Executive team’s
performance is evaluated by the Remuneration
Committee in conjunction with the Group CEO
(except in the case of the Group CEO, when
theGroup CEO is not present).
The Board considered the merits of retaining
the services of an external facilitator and
concluded that, given the Group’s size and
the Board’s needs, this was not appropriate.
The matter will be kept under review in 2021.
The 2020 Board evaluation covered all
aspects of the Board’s structure, composition
and operation, Board interactions (external
and internal) and business strategy, risks
and priorities.
The Directors’ attendance at meetings of the Board and Committees is as follows:
Attendance at meeting
Board
Meetings
Audit Committee
Meetings
Remuneration Committee
Meetings
Nomination Committee
Meetings
Eligible Attended Eligible Attended Eligible Attended Eligible Attended
A Bromfield
6 8 2 2
4*
21*
8J Carling
14 14
6 6 8 8 3 3
S Good
14 14
– – 8 8 3 3
G McGrath
14 14
– – – – – –
D Robertson
14 14
6 6 8 8 3 3
D Stirling
14 14
– – – – – –
A Fielding
8 8 4 4 3 3 3 3
C Wall
8 8 4 4 3 3 3 3
* Absence from Board meetings on the part of A C Bromfield was due to ill health.
64
Zotefoams plc
Annual Report 2020
The process involved the following steps:
X
completion of a combined qualitative
questionnaire for the Board and its
Committees,
X
a skills matrix and
X
individual interviews and a group discussion.
The main observations from the evaluation were:
X
Good arrangements were in place for the
administration of the Board’s business
(including the flow and availability of
information, the conduct of meetings and
interactions with Executive Directors and the
Executive team). The significant increase in
the number of meetings during the COVID-19
pandemic had benefited engagement
and Board effectiveness and had been
satisfactorily handled through the use
of technology.
X
The skills matrix evidenced a strong mix
of skills, experience and knowledge.
X
The Board’s culture enabled each
Director to contribute fully and effectively
to Board debate.
X
Directors had clear sight of the Board’s
objectives, with a good balance between
a short- and long-term focus.
X
The quality of chairmanship was highly
regarded.
X
The response to the COVID-19 pandemic
was highly rated, recognising the strength
of the Board, Executive team and wider
management in dealing with the situation
safely and efficiently.
The outcome of the review highlighted that
theBoard and its committees are effective
andwell run and that all Directors contribute
effectively and provide appropriate
commitmentto their role.
The Board considers that it is functioning
welland that its current composition contains
anappropriate balance and diversity of views,
qualifications, skills, experience and personal
attributes necessary to carry out its duties
andresponsibilities.
Re-election of Directors
The Code requires Directors to submit for
re-election annually at the AGM. The Company
implemented this practice in 2012 and will
continue to observe it.
Remuneration Committee and
executive remuneration
A report on the work of the Remuneration
Committee is contained within the Directors’
Remuneration report.
The report can be found on
pages 70 to 80.
Financial reporting
The Directors’ responsibilities for preparing
thefinancial statements are set out in the
Statement of Directors’ responsibilities.
The report can be found on
page 83.
Audit Committee and Auditor
The Audit Committee report provides details
ofthe role and activities of the Committee and
itsrelationship with the External Auditor.
The report can be found on
pages 66 to 68.
Relations with shareholders
Our communication strategy with shareholders
is guided by the principle of effective and
transparent engagement.
Meetings with institutional shareholders are
usually heldtwice a year following the
announcement ofthe Group’s interim and
preliminary results, inAugust and March
respectively. Other meetings are held at
institutional shareholders’ request. In 2020,
thesemeetings were held virtually through video
conferencing technology. To ensure that the
Board, particularly the Non-Executive Directors,
understands the views of the shareholders, the
Group’s corporate brokers provide summary
feedback from the investor meetings, in
particular the meetings heldfollowing the interim
and preliminary results announcements. The
Chair and the Senior Independent Director, as
well as the other Non-Executive Directors, are
available to meetinstitutional shareholders
ifrequested.
The Board also recognises the importance of
engaging with individual shareholders, and the
Executive Directors now hold presentations
through the Investor Meet Company digital
platform at least twice per year. The platform
provides individual investors with the same
opportunity for two-way engagement as
institutional investors through live, interactive
presentations, as part of the investor roadshow.
The Annual Report, theAGM and the corporate
website www.zotefoams.com also support
communication with investors. The Chairs of
the Board Committeeswill normally be available
attheAGM to answer questions.
Internal control
The Board has applied the 2018 Code by
establishing procedures to manage risk,
overseeing the internal control framework, and
determining the nature and extent of the principal
risks the Group is willing to accept in order to
achieve its long-term strategic objectives. The
Board regularly reviews the process, which has
been in place throughout the year to the date
ofapproval of this report and which is in
accordance with the Financial Reporting
Council’s Guidance on Risk Management,
Internal Control and Related Financial and
Business Reporting. The Board is responsible
for the Group’s system of internal control and
forreviewing its effectiveness. Such a system is
designed to manage, rather than eliminate, the
risk of failure to achieve business objectives and
can only provide reasonable and not absolute
assurance against material misstatement or loss.
In compliance with the 2018 Code, the
Board regularly reviews the effectiveness of the
Group’s system of internal control, as well as
how it is reported to the Board. The Board’s
monitoring covers all controls, including financial,
operational and compliance controls and risk
management. It is based principally on reviewing
reports from management and the Internal
Control Committee to consider whether
significant risks are identified, evaluated,
managed and controlled and whether any
significant weaknesses are promptly remedied.
The Board has also performed a specific
assessment for the purpose of this Annual
Report. This assessment considered all the
significant aspects of internal control arising
during the period covered by the report. The
assessment also included a robust review of the
principal risks facing the Group, including those
that would threaten the Group’s business model,
future performance, solvency and liquidity.
The Audit Committee assists the Board in
discharging its review responsibilities.
During the course of its review of the system
ofinternal control and the principal risks facing
the Group, the Board had not identified, nor
been advised of, any failings or weaknesses
itdetermined to be significant. Therefore, a
confirmation in respect of necessary actions
hasnot been considered appropriate.
Key elements of the Group’s system
of internal controls are as follows:
Control environment
The Group has an appropriate organisational
structure for planning, executing, controlling
andmonitoring business operations in order
toachieve Group objectives. Overall business
objectives are set by the Board and
communicated through the organisation.
Linesof responsibility and delegations of
authority aredocumented.
Risk identification
Group management is responsible for the
identification and evaluation of key risks
applicable to its areas of business. These risks
are assessed on a continual basis and may
beassociated with a variety of internal or
external sources.
The Group’s risk management framework
isdetailed on
page 33.
Information and communication
The annual budget and quarterly forecast
updates are a key part of the planning and
performance management process and the
Board reviews performance against these.
Inaddition, the Board receives monthly
management reports, which highlight financial
results, performance against key performance
indicators and significant activities and matters
of note duringthe month under review. During
2020, the frequency of Board engagement was
intensified to ensure the Board met via video
conference at least twice each month, in
recognition of the challenge presented by
The Board and its Committees
Continued
65
Zotefoams plc
Annual Report 2020
Strategic Report
/
Governance
/
Financial Statements
COVID-19 and the value of timely information
sharing and contributions from Board members.
Through these mechanisms, the performance
ofthe Group is regularly monitored, risks are
identified in a timely manner, their financial
implications assessed, control procedures
evaluated and corrective actions agreed
and implemented.
Control procedures
The Group has implemented control procedures
designed to ensure complete and accurate
accounting for financial transactions and to limit
the potential exposure to loss of assets or fraud.
Measures taken include physical controls,
segregation of duties, and reviews by
management, Internal Audit and the External
Auditor. The effectiveness of these control
procedures istested by the Group’s Internal
Controls Committee (which is chaired by
theGroup CEO),the Audit Committee and
theBoard.
A process of control self-assessment and
hierarchical reporting has been established,
which provides for a documented and auditable
trail of accountability. These procedures are
relevant across the Group and provide for
successive assurances to be given at
increasingly higher levels of management
and,finally, to the Board. Planned corrective
actions are independently monitored for
timelycompletion.
Monitoring and corrective action
There are clear and consistent procedures
inplace for monitoring the system of internal
financial and non-financial controls. The Audit
Committee normally meets not less than three
times a year and, within its remit, reviews the
effectiveness of the Group’s system of internal
financial controls. The Committee receives
reports from the External Auditor, Internal
Auditand management.
Non-financial controls are reviewed regularly
byexecutive management, which reports
anyissues and corrective actions taken.
66
Zotefoams plc
Annual Report 2020
Dear Shareholder
The Committee has reviewed the contents of the
2020 Annual Report and Accounts and advised
the Board that it considers the Report to be fair,
balanced and understandable and provides
theinformation necessary for shareholders to
assess the Group’s position and performance,
business model and strategy.
The Group maintained its financial resilience
in2020 despite challenging conditions.
Commercial adaptability and sound cash flow
risk management, the primary focus in H1,
underpinned operational continuity and enabled
the Group to re-engage the pursuit of its growth
strategy in H2. Following a long period of
significant capital investments by the Group
inthe UK and internationally, the final capital
project, the investment in Poland, was largely
completed by the end of 2020 and was
commissioned in February 2021. While in
linewith budget, the timing was delayed to
manage H1 cash flow and in reflection of
travelrestrictions related to COVID-19.
COVID-19
Following the emergence of COVID-19 in Q1
2020, the FCA issued a statement of policy in
March 2020 recognising the unprecedented
challenges faced by companies and their
auditors in preparing audited financial
information, and requesting companies to
observe a moratorium of at least two weeks on
the publication of their preliminary results to allow
the opportunity to absorb the implications of the
pandemic and give them due consideration in
their disclosures. The Company complied with
the request and issued a trading statement on
24 March 2020, followed by a full preliminary
results announcement on 7 April 2020.
While the Board focused on the risks posed by
the pandemic to the health and safety of staff
within the Group, the continued efficiency of the
Group’s global supply chain, the impact on the
Group’s customers and, ultimately, the demand
for Zotefoams’ products, the Committee
provided constructive challenge to the
consideration of internal control mitigation and
disclosure implications, with particular emphasis
on going concern and ensuring that the control
environment remained fit for purpose. Further
details of the Group’s response to COVID-19
may be found on pages 48 and 49.
Updated IT strategy
An updated IT strategy, structured to align with
the Group’s operating model, strategic priorities
and key risks, was adopted in 2020. In the wake
of the pandemic, the Committee had the
opportunity to assess the effectiveness of the
measures put in place to minimise operational
disruption and address cyber risk issues arising
from remote working conditions for staff able
todo so effectively.
Internal audit
After due consideration, the Committee remains
of the view that an outsourced internal audit
function is more appropriate and effective than
in-house provision at this stage of the Group’s
development. Having considered the impact of
COVID-19 on working practices, and having
regard to the importance of purchase-to-pay
(P2P) as a key financial control, the Committee
engaged Grant Thornton UK LLP (“Grant
Thornton”) in August 2020 to perform a review
of the P2P policies, processes, procedures and
controls in place in the UK. Its report was
presented to the Audit Committee in December
2020 and due challenge was delivered by the
Committee on areas requiring management
actions. Following agreement, the actions were
approved and are being implemented to an
appropriate timetable. The Committee will
keepunder review and assess the continued
independence and effectiveness of internal
auditin 2021.
External Auditor
This year, the Company welcomed PKF
Littlejohn LLP (PKF), which replaced
PricewaterhouseCoopers LLP (PwC) as the
External Auditor. PKF’s appointment followed
a competitive tender process, in which clear
selection criteria were used to invite bids from
a range of firms. PKF’s excellent credentials and
proficient use of technology were identified as
key attributes in meeting the Company’s auditing
needs. Under the direction of Audit Partners,
M Ling and J Archer and working closely with
the Company and its material subsidiaries, PKF
has implemented a comprehensive audit
transition plan and carried out the audit for the
year ended 31 December 2020. A resolution to
re-appoint PKF as the Company’s External
Auditor will be put to the Company’s 2021
Annual General Meeting.
The Committee continues to fulfil a key role in
the Group’s governance framework, providing
valuable independent challenge and oversight
across the Group’s financial reporting and
internal control procedures and protecting
shareholders’ long-term interests.
As a result of its work during the year, the Audit
Committee has concluded that it has acted in
accordance with its Terms of Reference and has
ensured the independence and objectivity of the
External Auditor. I am available to answer
questions you may have about the work of
the Committee. Please contact the Company
Secretary in this regard.
D G Robertson
Chair of the Audit Committee
7 April 2021
Summary of the role of the
Audit Committee
The main responsibilities of the
Audit Committee are:
X
To monitor significant financial reporting
issues and judgements and the clarity
and completeness of disclosures made
in connection with the preparation of the
Group’s and Company’s financial statements,
assumptions for the going concern and
viability statements, interim reports,
preliminary announcements and related
formal statements, including any matters
whichthe External Auditor may wish to raise
X
To review and challenge, where necessary,
the application of significant accounting
policies and any changes to them; the
methods used to account for significant
or unusual transactions where different
approaches are possible; whether the
Group has adopted appropriate accounting
policies and made appropriate estimates and
judgements, taking into account the External
Auditor’s views on the financial statements;
the clarity and completeness of disclosures
in the financial statements and the context in
which statements are made
X
To review on behalf of the Board the integrity
of the Group’s internal financial controls
and assess the scope and effectiveness of
the systems established by management
to identify, assess, manage and monitor
financial and non-financial risks and make
recommendations to the Board
X
To keep under review the adequacy and
effectiveness of the Group’s internal financial
controls and internal control and risk
management systems
X
To review the Group’s systems and controls
for the prevention of bribery and receive
reports on non-compliance
X
To review the adequacy and security of the
Group’s arrangements for its employees to
raise concerns, in confidence, about possible
wrongdoing in financial reporting or other
matters
X
To monitor and review the effectiveness of the
Group’s internal audit function in the context of
the Group’s overall risk management system
X
To review and approve the terms of
engagement of the External Auditor, including
any engagement letter issued at the start
of each external audit and the scope of any
auditbefore it begins
X
To assess annually the qualification, skills
and resources, effectiveness, objectivity
andindependence of the External Auditor
X
To develop and implement a policy in relation
to the provision of non-audit services by the
External Auditor and the approval by the
Committee of such services, in order to avoid
any threat to the External Auditor’s objectivity
and independence and the impact that such
services could have on the audited financial
statements, while taking into account any
relevant ethical guidance on the matter and
X
To report to the Board on how it has
discharged its responsibilities, including
making recommendations, when necessary,
on any actions or improvements required.
Audit Committee report
Overseeing risk management
in a volatile environment
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The Audit Committee’s Terms of Reference,
which are available on the Group’s website,
include all matters indicated by the Disclosure
and Transparency Rule 7.1 and the UK Corporate
Governance Code. The Terms of Reference are
reviewed annually by the Audit Committee to
ensure that they remain appropriate and reflect
best practice. The Terms of Reference were last
reviewed in August 2020.
Composition of the Audit Committee
In line with the Code, the Committee comprises
four independent Non-Executive Directors,
including the Chair. The Company Chair is
notamember of the Audit Committee.
The members of the Audit Committee during
2020 were D Robertson (Chair), A Bromfield
(resigned 13 May 2020), J Carling, A Fielding
(appointed 14 May 2020) and C Wall (appointed
14 May 2020).
Their biographies can be found
on
pages 60 and 61.
D Robertson is a Fellow of the Institute of
Chartered Accountants of England and Wales
and was Group Finance Director of SIG plc
untilJanuary 2017, having previously held that
position at both Umeco plc and Seton House
Group Limited. In the opinion of the Board,
DRobertson has significant, recent and relevant
financial experience to fulfil the requirements
ofthe role. All current members of the Audit
Committee have held, or currently hold,
board-level positions in manufacturing
industrieswith international reach.
The Audit Committee’s membership, as a whole,
has competence relevant to the sector in which
the Group operates and is able to function
effectively with the appropriate degree of
challenge.
Meetings
The Audit Committee has a planned calendar,
linked to events in the Group’s financial calendar.
The Audit Committee met six times in 2020.
The Company Secretary acts as secretary to the
Audit Committee. The Company Chair, Group
CEO, Group CFO, Group Financial Controller
and senior representatives of the External and
Internal Auditor are invited to attend relevant
meetings of the Committee, although the
Committee reserves the right to request any of
these individuals to withdraw. At each meeting,
the External Auditor is given the opportunity
toraise matters without management being
present. Other senior management may be
invited to present such reports as are required
for the Committee to discharge its duties.
Duringthe year, on an informal basis, the
AuditCommittee Chair liaises with senior
representatives of both the External and
InternalAuditors to discuss matters outside
theformal Committee meetings.
Overview of the actions taken by the
AuditCommittee to discharge its duties
Since the beginning of 2020, the Audit
Committee has:
X
Reviewed the financial statements in the 2019
Annual Report, including the going concern
and viability statements and the stress-testing
of the viability statement, and received the
External Auditor’s report on the audit of
the 2019 Annual Report
X
Reviewed the Interim Report issued in
August 2020 and received the report from
the External Auditor on its review of the
InterimReport
X
Agreed a programme of work for 2020 to be
performed by the Internal Auditor and received
the Internal Auditor’s reports on the work
undertaken and management’s responses
to the recommendations therein
X
Undertaken a retender of the External Audit
and selected PKF Littlejohn LLP to replace
PriceWaterhouseCoopers LLP
X
Reviewed and agreed the scope of
the audit work to be undertaken by the
External Auditor
X
Agreed the fees to be paid to the External
Auditor for its audit and work on the Annual
Report and Interim Report
X
Undertaken an evaluation of the
independence, objectivity and effectiveness
of the External Auditor, including reviewing the
amount of non-audit services provided by the
External Auditor
X
Reviewed and approved an updated policy in
relation to the provision of non-audit services
by the External Auditor compliant with the
FRC Revised Ethical Standard 2019
X
Considered the inventory management and
working capital position of the Group
X
Considered the risks impacting the Group,
its customers and the economic environment,
relating to Brexit and the Group’s preparations
to mitigate those risks
X
Considered the output from the Group-wide
process used to identify, evaluate and mitigate
high-level business risks
X
Considered the views of both the External and
Internal Auditor on the effectiveness of the
Group’s internal financial controls
X
Reviewed and challenged the effectiveness
of the Group’s internal controls (including, but
not limited to, financial controls and measures
for detecting fraud) to ensure that they remain
appropriate and adequate as the Group
grows, having regard in particular to the
impact of COVID-19 in 2020
X
Received reports from J Carling in relation to
his engagement with the Joint Consultative
Committee (JCC), which comprises
an employee representative from each
department and meets regularly to consider
a wide range of matters affecting the
employees’ current and future interests
X
Reviewed the Group’s policies on ethics,
anti-bribery, corruption and fraud
X
Satisfied itself that the requirements of the
Regulations made under section 3 of the
Small Business, Enterprise and Employment
Act 2015 relating to payment practices
reporting had been met, with a focus on
improved payment terms for suppliers
in 2020
X
Considered the provisions of the 2018 UK
Corporate Governance Code and the FRC
Guidance on Audit Committees and
X
Reviewed its own effectiveness by conducting
a confidential evaluation through an online
portal, the anonymised outcome of which was
discussed by the Board. It was agreed that
the Committee remained effective, had fulfilled
its remit and had in place appropriate Terms
ofReference.
Financial reporting and significant
financial issues
The Audit Committee assesses whether
suitable accounting policies have been
adopted and whether management has made
appropriate estimates and judgements. The
Committee reviews accounting papers prepared
by management which provide details on the
main financial reporting judgements. The
Committee reviews reports by the External
Auditor on the full-year and half-year results
which highlight any issues with respect to
thework undertaken on the audit or review.
A primary area of focus in the 2019 Annual
Report, considered by the Audit Committee in
2020, was the going concern assumption and
viability statement, elevated in significance due to
the rapidly escalating COVID-19 outbreak across
the world at the time, creating unprecedented
uncertainty. In addition to the normal reviews of
the Group’s cash flow forecasts, consideration of
strategic initiatives and sensitivity analysis based
on reasonably possible changes in trading
performance, the Committee also reviewed
asevere but plausible downside scenario
produced by management as a consequence
ofthe pandemic and the mitigating actions
identified. Under this severe but plausible
downside scenario, while there was sufficient
liquidity in the business for at least 12 months
from the date ofapproval of these financial
statements, there wasthe potential for
a breach of the leverage covenant during the
test period. The Audit Committee concluded
from the scenario that there was amaterial
uncertainty which might cast significant
doubtover the Group’s and Company’s ability
tocontinue as a going concern without further
mitigating actions. However, the Committee was
aware that lenders to the Group had expressed
a strong commitment tosupport the business
through this difficult period and government
measures were also being implemented to
support businesses economically through the
downturn. This reinforced the Committee’s
viewthat the going concern principle remained
appropriate in preparing the financial statements.
The subsequent performance of the Group,
successful implementation of activities to
manage this risk and covenant compliance
confirm the Committee’s view made at the time.
Another area of significant focus in the 2019
Annual Report, considered by the Audit
Committee in 2020, was revenue recognition
under IFRS15 in respect of a licence sold to
customers of MEL. The Committee and the
External Auditor considered whether revenue
should be recognised as a right to access or
aright to use the technology, and concluded
itwas the latter as the customer was able to
directly use and obtain substantially all of the
benefits from the licence on day one of the
contract and there were few, if any, continuing
performance obligations on MEL.
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External audit tender
The Audit Committee is aware of the requirement
for FTSE 350 companies to put to tender their
external audits at least once every ten years
(asset out in the Competition and Markets
Authority’s Statutory Audit Services for Large
Companies Market Investigation (Mandatory
Useof Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014) and for
audit committees to state their plans for when
they are likely to consider a tender process if the
external audit has not been put to tender in the
past five years.
The Group is by virtue of the FRC Revised
Ethical Standard 2019 subject to the requirement
to put theaudit to tender every ten years. A
tender process for the external audit for the
Group was undertaken in 2020, following which
PKF Littlejohn LLP (PKF) was selected as the
External Auditor. The Audit Committee intends
to monitor PKF’s performance and determine
the most appropriate time to carry out a new
tender process in due course, which will be,
at the latest, in 2030. Any future tender will be
carried out in line with the prevailing best
practice. The 2020 Audit was PKF’s first annual
audit for the Group and was led by two Audit
Partners, M Ling and J Archer.
The Committee confirms that there were no
contractual obligations that acted to restrict the
Committee’s choice of External Auditor and that
the agreement with PKF will not restrict the
shareholders’ choice of auditor in future
general meetings.
Effectiveness of the External Auditor
The Audit Committee assesses the
effectiveness of the external audit process ina
number of ways. At least annually, the External
Auditor presents a report, which includes an
assessment and confirmation of its
independence, as well as the activities that the
External Auditor is undertaking to ensure
compliance with best practice and regulation.
At the conclusion of the annual audit, the Audit
Committee undertakes an assessment of the
External Auditor in relation to its fulfilment ofthe
agreed audit plan, the robustness
andperceptiveness of the External Auditor in
handling key accounting and audit judgements
and the thoroughness of the External Auditor’s
review of internal financial controls. As part of
this assessment, management’s opinions on
the External Auditor are also considered.
In November 2020, the Audit Committee
updated the policy in relation to the provision
of non-audit services provided by the External
Auditor. The policy requires that no non-audit
services will be provided by the External Auditor
without the prior approval ofthe Audit
Committee, which will only be granted in
compliance with the FRC Revised Ethical
Standard 2019. Other than the review of the
Group’s Interim Report, PwC, as External
Auditor in post at that time, did not provide any
non-audit services in 2020. PKF, the External
Auditor appointed by the Board on 6 October
2020, did not provide any non-audit services
in 2020.
The Audit Committee, having conducted its
review of the External Auditor, concluded that
the External Auditor has performed in a
satisfactory manner and continues to be
objective and independent and, therefore, has
recommended to the Board that a resolution be
put to the shareholders at the 2021 AGM to
re-appoint PKF as the External Auditor.
Internal audit function
Each year the Audit Committee reviews the
need for an internal audit function and, given the
size of the Group, continues to be of the opinion
that the internal audit function is best performed
by an external audit firm, which complements
the services provided by the External Auditor.
Following a tender process in 2015, Grant
Thornton UK LLP has continued to be used
to provide internal audit services in 2020. The
Audit Committee agreed the scope for the
internal audit, reviewed the report received
and discussed the proposals made with
management. Grant Thornton UK LLP
hasnotundertaken any other work for the
Groupand, therefore, the Audit Committee
considers itto be independent and objective
inits judgement. The External Auditor is aware
oftheinternal audit outsourcing arrangements
andfully supports them.
Audit Committee report
Continued
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Dear Shareholder
I am pleased to present my report on the
activities of the Nomination Committee in2020.
Following the departure of A Bromfield on
13 May 2020, the Board was refreshed and
strengthened by the appointment of two
experienced Non-Executive Directors, A Fielding
and C Wall, who brought a wealth of business
experience aligned to the Group’s strategy.
Acomprehensive induction programme was
deployed to equip them with the tools required
tounderstand the strategy, culture, risks and
uncertainties of the Group. The potential
disruption to onboarding that might have arisen
from the social distancing measures implemented
by the Group, in line with government directives,
has been successfully mitigated for the most part
by the effective use of modern technology at
Zotefoams, ensuring strong communication,
engagement and information sharing.
The Committee met the challenges of 2020
through a focus on optimising the breadth of the
Board’s skills, knowledge and experience, while
continuing to consider talent development in
arapidly evolving external context.
Careful succession planning for the Board and
the Executive Leadership team and a rigorous
assessment of the Board and its Committees
remain key to the long-term success of the
Group. The Board’s annual evaluation process
in 2020 incorporated a skills matrix mapping the
existing skillsets against those required to deliver
the strategy. This demonstrated that the Board
collectively continued to provide an appropriate
balance of skills, knowledge and experience to
ensure there was robust and effective challenge
and stewardship of the Group’s purpose and
strategy. Further development opportunities
are planned in 2021 to expand Directors’
knowledge. Full details of the Board’s annual
evaluation process are provided in the
corporate governance section on page 63.
Key position succession plans are in place
for Executive roles and their direct reports.
The Group continues to develop a pipeline
ofemployees demonstrating high potential
through a talent pool initiative. Further details
areprovided in our people section on page 54.
The principle of diversity is strongly supported
and recognised by the Board and has clear
linkages to the Group’s ambitious growth
strategy, which relies on a diverse workforce,
spread across many geographies. It is the
Board’s policy that appointments to the Board
will always be based on merit. The Board
currently has not imposed a diversity quota.
The gender balance of those in the Executive
Leadership team and senior management are
detailed on page 57.
The appointment of a Human Resources (HR)
Director in January 2020 elevated the voice
ofthis function to Executive Committee level
andhas supported the development and
implementation of a more ambitious HR strategy,
which has at its core growing people capability
and supporting diversity and inclusion. The HR
Director provides the Executive Committee
withmonthly updates and leads the quarterly
HRrisk steering committee that focuses on
themitigation of risks and optimisation of
opportunities which might impact the Group’s
achievement of its business objectives. This
person also reports to the Board at least twice
ayear with an update on progress in diversity,
employee engagement and recruitment.
The Committee is satisfied that the separation of
Executive and Non-Executive roles at the head
of the Group has been maintained, with the
Company Chair being responsible for leading
the Board and the Group CEO being responsible
for the executive leadership of the business.
Further details are provided in the Board
and its Committees section on
pages 63 to 65.
The Committee will continue to focus on
succession planning and talent development
in 2021.
S P Good
Chair of the Nomination Committee
7 April 2021
Key areas of focus
The Nomination Committee currently
comprises theChair and the four independent
Non-Executive Directors.
The Nomination Committee operates within
defined Terms of Reference and is responsible for
putting in place succession plans for the Board,
reviewing the continuation in office of the Directors
and managing the recruitment of new Board
members within criteria set by the Board. The
Committee met three times in 2020. The
Committee is supported by the Company
Secretary inplanning its activities, monitoring best
practice andmeeting its Terms of Reference.
The main responsibilities of the
Committee are to:
X
Evaluate and review the structure, size
and composition of the Board, including the
balance of skills, knowledge, experience and
diversity of the Board, taking into account the
Group’s risk profile and strategy
X
Identify and nominate suitable candidates
for appointment to the Board, including Chair
of the Board and its Committees, against
a specification of the role and capabilities
required for the position
X
Lead on the annual performance evaluation
of the Board and its Committees
X
Identify and manage any potential conflicts
of Directors’ interests
X
Review the external interests and time
commitments of the Directors to ensure
that each has sufficient time to effectively
discharge his/her duties
X
Manage succession planning for the
Executive Leadership team and Non-
Executive Directors and
X
Seek engagement with shareholders on
significant matters related to the Committee’s
areas of responsibility when appropriate
todoso.
During 2020, the Committee:
X
Reviewed and updated its Terms of Reference
in line with current best practice
X
Reviewed the composition of the Board
and its Committees and assessed whether
the Board required additional skills and/or
experience which would complement those
of the existing members having regard to the
Group’s risk profile and strategy
X
Reviewed the performance and ability of
J Carling and D Robertson to continue
to contribute to the Board in light of the
knowledge, skills and experience required
and recommended to the Board that they be
re-appointed for a three-year term subject
to annual re-election by shareholders at the
Company’s 2020 AGM
X
Discussed extensively the merits, strengths
and weaknesses of the candidates shortlisted
by Warren Partners, an independent executive
search agency, for two Non-Executive
Directors’ roles and made a unanimous
recommendation to the Board to appoint
A Fielding and C Wall
X
Considered and recommended to the
Boardthe election/re-election of each
Director ahead of their election/re-election by
shareholders at the Company’s 2020 AGM
X
Continued to review succession and
development plans for the Executive
Leadership team and wider senior
management team to ensure that a
suitabletalent pool remained in place
andcontinued to be nurtured to meet
theGroup’s strategic objectives
X
Ensured that at least annually the
Non-Executive Directors met without
the Executive Directors present.
Nomination Committee report
Cultivating agility
70
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Annual Report 2020
Directors’ Remuneration report
While 2020 has been a challenging year, we
are committed to shaping the reward structure
for executive management to ensure it drives
value for all stakeholders
Impact of COVID-19 on implementation of
Remuneration Policy in 2020
Management responded to the uncertainties
arising from COVID-19 by prioritising staff
welfare, managing costs and conserving cash to
protect the business. Operational continuity was
maintained throughout the year, supported by a
resilient supply chain with focus on high levels of
customer service and new opportunities, such
as the supply of polyolefin foam to our largest
UKcustomer in its delivery of a UK Government
PPE contract.
Reflecting on the remuneration context, the
Committee has been very mindful of balancing
the need to attract, motivate and retain our
Executive Directors and Executive team to
ensure progress against our long-term goals
with the interests of all stakeholders, including
shareholders and employees.
In making its decisions on remuneration,
theCommittee has taken into account the
experience of our wider stakeholders,
shareholders and employees. Towards the start
of the year, precautionary measures were taken
to safeguard the business in light of heightened
market uncertainty. As demand declined in many
of our main markets, the Group prioritised
maintaining cash flow and preserving cash
balances. The Board also considered it prudent
not to pay the 2019 final dividend, ordinarily
payable in May 2020. However, 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 and resulted in the payment
ofan interim 2020 dividend. There was also
noadditional equity issued, no employee
restructurings or salary sacrifices and the small
amount of government support the Company
received was fully repaid.
Long-term Incentive Plan (LTIP) 2020
The 2020 LTIP awards were deferred until after
the publication of the interim results, to ensure
that targets and levels of award could be set
appropriately in the context of a rapidly evolving
external environment. In determining the targets
for the 2020 LTIP, the Remuneration Committee
took into account a number of factors, including:
X
Historical target ranges set for previous
long-term incentive awards
X
The initial targets that were being considered
prior to the impact of COVID-19 on the
business, which severely impacted the first six
months and altered the likely shape of growth
over the coming years
Dear Shareholder
I am pleased to present the Remuneration
reportfor the year ended 31 December 2020.
Introduction
This is my first report as Chair of the
Remuneration Committee, after taking over
fromA Bromfield in May 2020.
Despite 2020 being an extremely challenging
year due to the COVID-19 pandemic, Zotefoams
demonstrated its resilience and flexibility and
continued to make good strategic progress.
Against a difficult global economic backdrop,
Zotefoams’ Executive team have ensured that
the business remained well-managed and
continued to deliver on the Group’s strategy.
Ourrecently opened facility inPoland completes
our current investment programme and
ourshort-term priority is growing sales to
increase asset utilisation. In the medium
term,improving our product mix to a higher
proportion of ZOTEK
®
HPP foams and
T-FIT
®
insulation products is expected
todriveimproved profitability.
In 2020, the Group achieved a Group revenue
of£82.7m, up 2% on 2019, and profit before tax
and exceptional item of £8.3m, down 5% on
2019. The Group’s share price in the first quarter
of 2021 was at a similar level to the price in the
first quarter of 2020, prior to the date when the
impact of COVID-19 precipitated a sharp decline
in the market, and, as at the date of this report,
has increased by over 283% since the lowest
pointinApril 2020.
X
The three-year business plan for the Group,
extracted from the five-year strategic review
approved by the Board
X
The desire of the Remuneration Committee
to set targets that balance the delivery of
superior returns for our shareholders with
being able to attract, retain and motivate the
talent required to deliver this level of return.
Reflecting on the above, and following extensive
debate by the Remuneration Committee, it was
agreed that targets for the 2020 LTIP award
would be as follows:
Metric
Weighting
Threshold
target
Maximum
target
Earnings Per
Share
50%
5% p.a.
15% p.a.
Return on
Capital
Employed
20%
11%
12.5%
Relative Total
Shareholder
return
1
30%
Median
Upper
quartile
1 Relative to the FTSE Small Cap Index excluding
investmenttrusts.
Reflecting on the targets set, and share price
performance over 2019 and early 2020, including
the impact of the trading announcement in
October 2019 and the impact of COVID-19, the
Committee reduced award levels by 17% from
150% to 125% of salary for both the Group CEO
and Group CFO.
During September 2020, the Committee
consulted with investors, who were supportive
ofthe proposed changes to reflect the more
challenging and uncertain environment.
2020 incentive outcomes
Annual bonus
In light of the performance delivered in 2020, the
Committee determined that 28.0% and 38.0%
of the maximum bonus should be paid to the
Group CEO and Group CFO respectively.
Adetailed description of performance against
the targets is set out on pages 74 and 75.
Long Term Incentive Plan: 2018 outcome
With regard to longer-term performance, the
Group achieved EPS before exceptional item of
14.87p in 2020 and a relative TSR performance
between median and upper quartile of the FTSE
SmallCap Index (excluding investment trusts)
over the three-year performance period. In line
with performance delivered, 23.49% (solely
onthe TSR metric) of the 2018 LTIP award will
therefore vest, in equal tranches on the third,
fourth and fifth anniversaries ofgrant.
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The Committee took into account the underlying
financial performance of the Group when
considering the out-turns against the annual
bonus and the LTIP and determined that the
formulaic outcome was an appropriate reflection
of the performance delivered. It has, therefore,
not exercised discretion in relation to incentive
outcomes during the year.
Implementation of the Policy in 2021 and
looking forward
Base salary
As many shareholders will recall, within the 2018
Directors’ Remuneration report the Committee
set out a phased approach to increasing the
Executive Directors’ base salaries, over a
two-year period, to £323,000 for D Stirling and to
£215,000 for G McGrath, with effect from 1 April
2020. This approach was supported by 99.9%
of shareholders at the 2019 AGM.
The Committee postponed the implementation
of the second phase of the increase, in light of
the trading announcement on 3 October 2019.
At the time, the Remuneration Committee Chair
noted that it was important that shareholders
understood that the decision was to postpone
the second increase rather than cancel it, as the
Committee felt that it was important that the
significant discount to the market on base
salaries for the Executive Directors be removed
to avoid unnecessary risk to the execution of our
strategy and the delivery of the major investment
programmes which underpin it.
Reflecting on the performance delivered by the
Executive Directors in this particularly challenging
year (as highlighted above), the Committee
considers it appropriate to proceed with the
second phase of the increase. Base salaries
willtherefore increase in line with the original
proposal, together with an inflationary
adjustment in line with the anticipated base
salary increases for the wider workforce for
2021. The base salaries will therefore increase
to£331,075 for D Stirling and £220,375 for
GMcGrath, effective from April 2021.
Pension
In addition to the above, the Committee has
reviewed D Stirling’s employer’s pension
contributions in light of the 2018 Corporate
Governance Code and developing shareholder
expectations around the alignment of Executive
Director pension contributions with those
provided to the majority of the wider workforce.
As previously disclosed, following the closure
ofthe Defined Benefit Pension Scheme in 2005,
DStirling was entitled to a pension contribution
of 15.75% of salary, increasing by 3% every five
years (with the next increase due to take effect
from January 2021). This gradual increase in
thepension contribution was in line with the
approach agreed with all other employees in the
plan. There are currently 36 active members in
the scheme, with employers’ contributions
ranging from 14% to 20.5%.
Having considered his position, D Stirling has
waived his entitlement to the periodic 3%
increase and has accepted a reduction in his
pension contribution to 15% of pensionable
salary for 2021. This decision will be reviewed
annually. Further consideration will be given to
DStirling’s pension going forward.
During the course of 2021, the Committee
intends to review the pension contribution rate
for the wider workforce, which currently stands
at 5% for the majority of UK employees.
During February 2021, the Committee consulted
with shareholders on the proposed changes to
base salaries and pension, who were supportive
of the changes.
Incentive awards
Incentive award levels for the Executive Directors
will be set in line with the Remuneration Policy.
With regard to the LTIP, the Committee
considered the performance targets for the EPS
and ROCE elements of the award, reflecting on
the internal business plan, the impact of the
recent planned capacity increases, external
forecasts of performance and market
uncertainties as a result of COVID-19. Details
ofthe proposed targets are set out on page 72.
For ease of reference, a short summary of how
the Remuneration Policy will be implemented in
2021 is included on page 72.
In line with the three-yearly cycle, the current
Remuneration Policy is due to come to the end
of cycle at the 2023 AGM, when a new Policy
willbe put to a vote. The Committee will
reviewthe Policy next year and ensure
itremainsfit for purpose.
The Committee and I would like to thank you for
your continued engagement over the last year
and look forward to receiving your support in
respect of the Directors’ Remuneration report
atthe AGM.
In the meantime, I am available to answer any
questions you may have. Please contact the
Company Secretary.
A M Fielding
Chair of the Remuneration Committee
7 April 2021
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Annual Report 2020
Directors’ Remuneration report
The Directors’ Remuneration report has been prepared in accordance with the relevant provisions of the Listing Rules, section 421 of the Companies
Act2006 and Schedule 8 to the Large and Medium sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
Directors’ Remuneration Policy and Implementation in 2021
The current Directors’ Remuneration Policy (the “Remuneration Policy”) was approved at the 2020 AGM held on 8 June 2020 and is intended to remain
inplace until the AGM that will be held in 2023. A summary of the Remuneration Policy and how it will be implemented in 2021 has been set out below.
The full version may be found on pages 58 to 63 of the 2019 Annual Report. A copy of the 2019 Annual Report may be found by following this link:
https://www.zotefoams.com/investors/annual-interim-reports/?category=2019
Element and purpose/
link to strategy
Implementation for 2021
Salary
Positioned at a level needed to recruit
and retain Executive Directors of the
calibre required to develop and deliver
the business strategy.
As set out in detail in the Remuneration Committee Chair’s cover letter, base salaries will be increased as
follows from 1 April 2021:
D Stirling – £331,075
G McGrath – £220,375
Benefits
Provide market-competitive benefits
for the Executive Directors, to assist in
carrying out their duties effectively.
Benefits to be provided in line with approved policy.
Retirement benefits
Provide competitive post-retirement
benefits and reward sustained
contribution.
D Stirling – 15%
1
of salary
G McGrath – 5% of salary
1 Following the closure of the Defined Benefit Pension Scheme (the “DB Scheme”), there was a commitment to increase the level of contribution to the
replacement Defined Contribution Pension Scheme (the “DC Scheme”) for the members of that scheme (which includes D Stirling) by 3% of pensionable
salary every five years. The most recent increase was applicable from 1 January 2016. D Stirling has contractually waived his entitlement to a 3%
increase from 1 January 2021 on an existing contribution level of 15.75% and has agreed to a reduction in the contribution level to 15% for 2021.
Annual bonus
Incentivise Executive Directors
toachieve specific financial and
predetermined strategic goals aligned
with the Group’s annual business plan.
Deferred proportion of annual variable
pay provides a retention element and
alignment with shareholders.
Maximum opportunity – 75% of salary.
25% of the bonus is deferred into shares in the Company for three years under the deferred bonus share plan.
For 2021, the bonus will be assessed against the following measures for both Executive Directors:
Measure
Weighting – D Stirling
Weighting – G McGrath
Profit before tax
60 60
Free cash flow delivery
15
20
Strategic financial
15 15
Safety
5 5
Sustainability
5 –
The underlying performance targets for these measures have not been disclosed in advance as they are
considered tobe commercially sensitive. Underlying targets will be provided, where appropriate, in next year’s
Directors’ Remuneration report.
Long-Term Incentive Plan
To incentivise the delivery of long-term
sustainable operational performance
and the growth potential of the Group.
To align interests of Executive Directors
and shareholders.
To attract and retain executives of the
calibre required to drive the Group’s
long-term strategic ambitions.
Maximum opportunity – up to 150% of salary.
Awards granted subject to a three-year performance period and a subsequent two-year holding period such
that no shares will normally be released until the end of year five.
Awards will be subject to three performance conditions:
Measure
Weighting Threshold
(20% vesting)
1
Maximum
(100% vesting)
1
Adjusted EPS growth
3
50%
5%
15%
Average Return on Capital Employed
20%
8%
10%
Relative Total Shareholder Return
2
30%
Median
Upper quartile
1 Straight-line vesting occurs between threshold and maximum.
2 Relative to the FTSE Small Cap Index excluding investment trusts
3 Given the tax rebate to the Group in 2020 (as set out on page 30), which has resulted in a lower effective tax rate than normal, the base year
EPS will be set based on a normalised tax rate of 19%. Performance will be assessed assuming a constant tax rate.
Non-Executive Director fees
In light of the impact of COVID-19, fee increases for the Non-Executive Directors (including the Company Chair)
were suspended in 2020. The Non-Executive Directors (including the Chair) will receive a fee increase of 2.3%
effective 1 April 2021, in line with the general salary increase that was given to the Company’s staff in the UK in
2019, as no general salary increase was awarded to the Company’s staff in 2020 due to the uncertainty caused
by COVID -19.
Shareholding requirement and
post cessation shareholding policy
Aligns the interests of Executive
Directors and shareholders.
Executive Directors are required to hold shares in the Company equivalent to 200% of base salary.
Executive Directors are expected to retain their full shareholding requirement for one year post cessation of
employment and 50% in the second year after leaving.
Directors’ Remuneration report
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73
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/
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/
Financial Statements
The Committee considers that the remuneration framework in place at the Group appropriately addresses the following principles set out in the 2018 UK
Corporate Governance Code:
Clarity
Incentive arrangements are based on clearly defined financial, non-financial and personal performance objectives which are
aligned with the Group’s long-term strategy.
Incentive payments operate throughout the Group (with participation in the LTIP based on seniority) to ensure that there is
alignment on key priorities throughout the Group.
Simplicity
Remuneration arrangements are simple, comprising the following key elements:
X
Fixed pay: comprises base salary, benefits and pension.
X
Annual bonus: bonus which incentivises the delivery of financial, non-financial and personal performance objectives.
X
LTIP: which incentivises financial performance over a three-year period, promoting long-term sustainable value creation
forshareholders. Awards are subject to a two-year holding period post vesting.
Risk
Performance targets for incentive plans are designed to reward outperformance, while at the same time being calibrated to
ensure that they do not encourage excessive risk taking by the Executive Directors.
The Remuneration Committee retains the flexibility to review formulaic outcomes under incentive plans to ensure thatthey
areappropriate in the context of the overall performance of the Group.
Predictability
The Remuneration Policy sets out the threshold targets and maximum level of pay that the Executive Directors may earn in
any given year. The actual incentive outcomes would vary depending upon the level of performance against pre-determined
performance measures.
Proportionality
The Committee is satisfied that the remuneration framework does not reward poor performance. Incentives are directly
aligned to the Group’s strategic objectives, with performance targets calibrated to reward outperformance both over the short
and long term.
Furthermore, the Committee retains the discretion to adjust formulaic outcomes under the incentive plans in the event that it
determines that the outcomes do not align with individual or Company performance.
The Committee also takes account of the pay and conditions for the wider workforce when considering executive
remuneration.
Alignment with
culture
The Remuneration Policy has been set in the context of the nature, size and complexity of the Group. It has been designed to
support the delivery of the Group’s key strategic priorities and is in the best interests of the Group and its stakeholders.
Single total figure of remuneration (audited)
The following tables set out the single figure for total remuneration for Directors for the 2020 and 2019 financial years.
Executive Directors
Salary
(£)
Benefits
(£)
Bonus
1
(£)
LTIP
2
(£)
CSOP
(£)
Pension
(£)
Total
fixed pay
(£)
Total
variable pay
(£)
Total
(£)
D Stirling
2020
303,000
14,642
63,630
65,226
nil
47,722
365,364 128,856
494,220
2019
290,500
13,057
84,272
20 4,128
349,073nil
45,516
288,400
637,473
G McGrath
2020
200,500
12,754
57,143
43,955
nil
21,434
234,688
101,098
335,786
2019
193,000
11,574
53,007
412,159133,946
nil
20,632
225,206
186,953
1 None of the 2019 bonus was paid in cash. At the request of the Executive Directors, the proportion of the bonus that would normally have been paid in cash (75% of the award) was deferred into shares for
a period of up to one year, exercisable by 20 April 2023. The proportion of the bonus that would normally be deferred into shares (25%) will continue as normal and be released three years after vesting.
2 The performance period for the 2017 LTIP award (granted in June 2017) ended on 31 December 2019 and has been included in the 2019 comparative figures above. Details on out-turns against the
performance targets are set out on page 67 of the 2019 Annual Report. The final decision on the timing of vesting of the 2017 award was deferred for a period of up to one year. Following due consideration
by the Committee, including taking into account the stability of the Group following the impact of COVID-19, the Remuneration Committee agreed that it would be appropriate to release the award in line
with the formulaic outcome on 1 June 2021. As the awards would not normally have been due to vest until June 2020, and were subject to a holding period, for the purposes of this table, in line with the
applicable regulations, the award has been valued using the average share price over the three months to 31 December 2019 of £3.75. This compares with a share price of £3.04 at the date of grant, with
share price appreciation representing 23% of the overall value set out in the table above. Vested awards will be subject to holding periods, in line with the intention when the awards were granted. The LTIP
awards made in May 2018 are not due to vest until 24 May 2021 but have been included in the 2020 table as the three-year performance period ended on 31 December 2020. For the purposes of this
table, the award has been valued using the average share price over the three months to 31 December 2020 of £4.15. This compares with a share price of £5.67 at the date of grant.
Non-Executive Directors
1
Fees paid in respect of 2020 (£) Fees paid in respect of 2019 (£)
A Bromfield
2
15,427
41,707
J Carling
36,700
36,494
S Good
83,886
83,415
D Robertson
41,943 41,707
A Fielding
3
26,395
Nil
C Wall
3
23,284
Nil
1 Non-Executive Directors who also chair a Board Committee receive an additional fee.
2 A Bromfield retired from the Board on 13 May 2020.
3 A Fielding and C Wall joined the Board on 14 May 2020.
74
Zotefoams plc
Annual Report 2020
Notes to the table (audited)
Base salary and pension contributions
The Company operates a Defined Contribution Pension Scheme (the “DC Scheme”) or a cash contribution equivalent. When participating in the DC
Scheme, individuals may elect to enter a salary sacrifice arrangement, whereby their salary is reduced and the Company makes a corresponding
contribution into their DC Scheme. G McGrath opted for the salary sacrifice arrangement and the amounts shown for his base salary are after salary
sacrifice. Similarly, the amounts shown for pension include the amounts of salary that were sacrificed. As at 31 December 2020, the base salary
(beforesalary sacrifice) for G McGrath was £200,500 p.a. (£200,500 p.a. as at 31 December 2019).
D Stirling receives a cash contribution in lieu of pension contributions in accordance with the rules of the Scheme, which apply to all members.
Asat31December 2020, the base salary for D Stirling was £303,000 p.a. (£303,000 p.a. as at 31 December 2019).
Benefits
Benefits include a company car allowance, private medical insurance and the value of the Matching Shares (at dates when awarded) acquired during
theyear under the Share Incentive Plan (SIP).
Annual bonus 2020
The targets for the annual bonus for 2020 for D Stirling and G McGrath are as set out in the below table:
Measure
Weighting (% max)
Targets
Performance
achieved
Pay-out
D Stirling
G McGrath
Trigger point
Maximum
D Stirling
G McGrath
Profit before tax and exceptional items
1
60% 60%
£9.8m
£11.4m
£8.3m
Nil Nil
Free cash flow delivery (before
investment in MEL pilot line and
capacity enhancements)
15%
20%
£6.8m
£8.4m
£9.4m
15%
20%
Strategic financial – HPP sales
growth (excluding footwear)
5%
0% 0%
25%
30%Not achieved
0%Strategic financial – MEL
5%
0%
Improve
EBITDA of MEL
by $800k
Improve
EBITDA of MEL
by $1m
Not achieved
0% 0%
Strategic financial – fixed costs
control
0%
5%
0%See below See below See below
5%
Safety
5% 5%
See below See below See below
4% 4%
Sustainability
5% 5% 5%
See below See below See below
5%Customer survey
5% 5%
See below See below See below
4% 4%
Total
100% 100%
n/a n/a n/a
28% 38%
1 The Group uses forward exchange contracts to hedge its foreign currency transaction risk. In 2020, the Group did not hedge for the translation of its foreign subsidiaries’ assets or liabilities. The
Committee set the targets and assessed the out-turn for the PBT element of the bonus measure. The reported PBT, before exceptional items, was £8.3m.
The below table sets out the targets and performance for the Executive Directors.
Achieved in full or predominantly achieved
Partially achieved
Not achieved
Strategic financial metrics – D B Stirling & G C McGrath
Measure
Weighting (% max)
Objective
Performance
Scoring
D Stirling
G McGrath
D StirlingG McGrath
Strategic financial
– fixed costs control
0%
5%
Ensure there are control mechanisms
todeliver fixed cost management.
Achieved. Fixed cost control
significantly enhanced
during the year, with cost
improvement programmes
identified during the budget
process managed in a
SMART manner and cost
spend regularly reviewed
against revised targets,
withphased release of
approved spending.
n/a
Safety
5% 5%
Achieve 95% attainment on documented
safety tours carried out by members of
theExecutive team.
Awarded 80%, with
alternative arrangements in
place during the COVID-19
lockdown period and
consideration of specific
safety performance metrics
by the Remuneration
Committee.
Directors’ Remuneration report
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75
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Financial Statements
Measure
Weighting (% max)
Objective
Performance
Scoring
D Stirling
G McGrath
D StirlingG McGrath
Sustainability
5% 5%
Develop a foam using at least 20% recycled
content by 31 December 2020 sufficient for
market and commercial evaluation.
Achieved.
Customer survey
5% 5%
Complete a customer survey (non-USA entities) identifying key areas for
improvement (needs vs performance) and
implement an improvement plan.
The survey was completed
and key areas for
improvement were
identified. There were
implementation delays
dueto disruption caused
by Brexit.
The annual bonus was based on base salary before salary sacrifice. The maximum opportunity for the bonus was 75% of salary. 25% of the bonus
isdeferred in shares held in trust for three years under the Deferred Bonus Share Plan (DBSP). Full details of the operation of the DBSP are set out
intheDirectors’ Remuneration Policy.
2020
Cash bonus (£)
Deferred bonus (£)
Total bonus (£)
D Stirling
47,72 3
15,907
63,630
G McGrath
42,857
14,286
57,14 3
The Committee considered the bonus levels in view of the performance achieved and determined that no discretion should be exercised.
LTIP
The 2018 LTIP award was subject to two performance conditions measured over the three financial years ended 31 December 2020. 30% of the award
was subject to relative total shareholder return against the FTSE SmallCap Index (excluding investment trusts). 70% of the award was subject to an EPS
growth target. Performance is measured over a three-year period and a proportion of the restricted shares will be released to the participant, to the extent
that TSR and EPS targets over the period have been met, together with additional shares that represent the dividends that would have been paid during
the performance period on the restricted shares that have been released.
The total award vesting is the sum of the awards for TSR and EPS. If the performance is below the EPS trigger point, then no part of the EPS award vests.
If performance is below the TSR trigger point, then no part of the TSR award vests. Between the trigger point and the maximum, the award vests on a
sliding scale basis.
The table below summarises the performance criteria for the 2018 award, which is due to vest on 24 May 2021.
Trigger point
Maximum
Achievement
Level of vesting
(% maximum)
Performance
target
% of award
vesting
Performance
target
% of award
vesting
Relative TSR performance
Median
performance
against peer
group
6
Upper quartile
performance
against peer
group
30
Between median and
upper quartile
performance against
peer group
23.49%
Annualised EPS growth
5%
14
22%
14.9p70
0%
Based on the above level of performance, 23.49% of the total awarded vested. The Committee considered the overall performance of the Group when
assessing the LTIP out-turn, including performance against the targets. The Committee noted that the TSR performance for the Company over the period
was between median and upper quartile when compared with the FTSE SmallCap Index (excluding investment trusts) and determined that the pay-outs
were reflective of the performance delivered. As such, the Committee determined that no discretion should be exercised.
Scheme interests granted during 2020 (audited)
The table below sets out details of scheme interest granted to the Executive Directors during 2020:
Type
of award
Date
of grant
Number of
shares
granted
Face value¹
(£)
Face value
(% of salary)
Performance
condition
Trigger point for
vesting (% of face
value)
End of
performance
period
D Stirling
Deferred
bonus
2
(Unconditional
shares)
20.04.2020
11,8 35
21,066
n/a n/a n/a n/a
G
McGrath
7,444
13,250
n/a n/a n/a n/a
D Stirling
Deferred
bonus
3
(Unconditional
shares)
20.04.2020
35,508
63,204
n/a n/a n/a n/a
G
McGrath
22,335
39,756
n/a n/a n/a n/a
76
Zotefoams plc
Annual Report 2020
Type
of award
Date
of grant
Number of
shares
granted
Face value
4
(£)
Face value
(% of salary)
Performance
condition
Trigger point for
vesting (% of face
value)
End of
performance
period
D Stirling
LTIP
5
(Conditional
shares)
21.09.2020
87, 6 74
378,752
125
30% based on relative
TSR growth
6
. 50% on
annualised EPS growth
7
and 20% on Return on
Capital Employed
(ROCE)
8
growth
20% of maximum
award for meeting the
trigger points specified
in notes 6, 7 and
8below
31.12.202 2
G McGrath
58,015
250,625
125
1 Face value calculated using the average share price for the period 6 April 2020 to 17 April 2020 (£1.78). The share price was £2.37 on 20 April 2020.
2 Awards vest on the third anniversary of grant.
3 Awards are available for exercise from 1 January 2021 until 20 April 2023 and are not subject to Good Leaver/Bad Leaver provisions as defined under the DBSP’s rules.
4 Face value calculated using the average share price for five days before the grant of the award (£4.32). The share price was £4.40 on 21 September 2020.
5 Award is subject to a three-year performance period and, subject to performance, is released after a two-year holding period.
6 Relative TSR growth is measured against the FTSE SmallCap Index (excluding investment trusts). The trigger point for relative TSR performance is median performance against the peer group, where
6% of the award will vest, to upper quartile performance against the peer group, where the maximum of 30% of the award will vest.
7 Annualised EPS growth is from the EPS for 2019. The trigger point is 5% annualised growth, where 10% of the award will vest, to the maximum of 15% annualised growth, where 50% of the award will vest.
8 ROCE is defined as operating profit before exceptional items divided by the average sum of equity, net debt and other non-current liabilities. This measure excludes acquired intangible assets and their
amortisation costs. It is measured against the third year’s performance. The trigger point is 11% growth, where 4% of the award will vest, to the maximum of 12.5% annualised growth, where 20% of
the award will vest.
Total pension entitlements (audited)
The Zotefoams Defined Benefit Pension Scheme (the “DB Scheme”) was closed to future accrual of benefits as from 31 December 2005. At this time, all
active members left the DB Scheme and were granted preserved pensions payable from their normal retirement age (or immediately, if the member had
reached normal retirement age).
The following Director was a member of the DB Scheme during the year.
Accrued pension at
31 December 2019
(£ p.a.)
Gross increase
in pension
(£)
Increase in accrued
pension net of
CPI inflation
(£)
Change in value
over the year
(£)
D Stirling
22,306
373
0 0
Notes
(1) The pension entitlement shown is that which would be paid annually on retirement at normal retirement age (or immediately upon late retirement where applicable), based on service to 31 December
2005 (the date the DB Scheme was closed to future accrual), pensionable salary increases to 31 March 2018 (the date salary linkage ceased) and including statutory increases to the year end, but
excluding any future increases under the Rules of the Scheme.
(2) As required by the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, the pension input amount has been calculated using the method set out
in section 229 of the Finance Act 2004(a) where:
– “pension input period” is the year ended 31 December 2020; and
– in the application of section 234 of the Act, the figure 20 is substituted for the figure 16.
(3) The following is additional information relating to the Director’s pension from the DB Scheme:
(a) Normal retirement age is 65.
(b) On death before retirement, a spouse’s pension is payable of one half of the member’s preserved pension at leaving, revalued from leaving to the date of death. On death in retirement, a spouse’s
pension is payable of one half of the member’s pension at death, without reduction for any part of the member’s pension commuted for cash at retirement.
(c) Members’ Guaranteed Minimum Pensions increase at statutory rates. Other pensions increase in payment at 5% p.a., or the increase in the Retail Prices Index if lower.
(d) From 1 January 2006, active employee members were able to pay contributions to the Defined Contribution Pension Scheme set up by the Company in order to receive retirement benefits. The
Company also contributes to this arrangement. Details of the contributions made into this Scheme have been disclosed in the single figure calculation and are not included in the above disclosure.
Payments made to past Directors (audited)
No payments were made during 2020.
Payments for loss of office (audited)
No payments were made during 2020.
Statement of Directors’ shareholding and share interests (audited)
Executive Directors are required to hold shares in the Company equivalent to 200% of base salary, with a five-year period to build up this holding from:
(1)appointment to the Board; or (2) the date of the 2017 AGM (17 May 2017) for the current Executive Directors. The Remuneration Policy adopted at the
2020 AGM also requires 100% of the shareholding requirement to be held for one year following cessation of employment with the Group and 50% of the
shareholding requirement to be held for two years following cessation of employment with the Group. The Committee intends to review the mechanism
toenforce the post cessation shareholding requirement during the course of 2021. Throughout 2020, D Stirling and G McGrath complied with the Policy,
holding 708% and 202% of base salary at 31 December 2020 respectively
1
.
1 Includes shares owned outright and interest in share incentive schemes without performance conditions. Calculated on the basis of the average share price over the three months to 31 December
2020 of £4.15.
The tables below set out the Directors’ interests (including those of their connected persons) in Zotefoams shares as at 31 December 2020. There were
nochanges in the Directors’ interests between the year end and the date of this report.
Executive Directors
Shares owned outright¹
Interest in share incentive
schemes without
performance conditions
2
Interest in share incentive
schemes with performance
conditions
3
D Stirling
449,273
127,115
160,744
G McGrath
43,171
93,638
106,367
1 Includes Partnership Shares, Dividend Shares and vested Matching Shares under the SIP.
2 Comprises: vested CSOP awards; DBSP shares; unvested Matching Shares under the SIP; the unvested 2017 LTIP award that is due to vest on 1 June 2021; and the unvested 2018 LTIP award that is
due to vest on 24 May 2021.
3 Comprises: unvested LTIP shares.
Directors’ Remuneration report
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Financial Statements
Non-Executive Directors
Shares owned outright
J Carling
3,323
A Fielding
9,121
S Good
30,047
D Robertson
7,3 02
C Wall
7,9 36
Scheme interests (audited)
The table below provides details of the current position of outstanding awards made to the Executive Directors who served in the year under review:
Scheme
As at
31 Dec
2019
Date of
exercise or
release
Granted
during the
year
Exercised
or released
Lapsed or
cancelled
As at
31 Dec
2020
Market
price on
exercise
date
Exercise
price
Date from
which
exercisable
Expiry
date
D Stirling
LTIP (2017)
1
115,842
– – –
(61,408)
2
54,434
– –
01.06.2021
4
n/a
LTIP (2018)
66,908
– – –
(51,191)
3
15,717
– –
24.05.2021
n/a
LTIP (2019)
73,070
– – – – –
73,070
–20.05.2022
n/a
LTIP (2020)
– – – –
87,674
–87,674
–21.09.2023
n/a
DBSP (2016)
10,061
07.04.2020
–
(10,061)
–
–
£1.59
–27.03.2020
n/a
DBSP (2017)
6,656
– – – – –
6,656
–24.05.2021
n/a
DBSP (2018)
2,677
– – – – –
2,677
–20.05.2022
n/a
DBSP (2019)
6
25%
–
–
11,835
– – –
11,835
–20.04.2023
n/a
DBSP (2019)
6
75%
– – – –
35,508
–35,508
–See below
7
n/a
SIP
5
484
– – – –
125
–609
–n/a
G McGrath
CSOP
10,344
– – – –
10,344
–£2.90
05.04.2019
05.04.2026
LTIP (2017)
1
76,014
– – –
(40,295)
2
35,719
– –
01.06.2021
4
n/a
LTIP (2018)
45,090
– – –
(34,498)
3
10,592
– –
24.05.2021
n/a
LTIP (2019)
48,352
– – – – –
48,352
–20.05.2022
n/a
LTIP (2020)
– – – –
58,015
–58,015
–21.09.2023
n/a
DBSP (2016)
6,533
07.04.2020
–
27.03.2020(6,533)
––
£1.59
–n/a
DBSP (2017)
4,419
– – – – –
4,419
–24.05.2021
n/a
DBSP (2018)
2,497
– – – – –
2,497
–20.05.2022
n/a
DBSP (2019)
6
25%
– –
7,444
– –
7,444
– –
20.04.2023
n/a
DBSP (2019)
6
75%
– – – –
22,335
–22,335
–See below
7
n/a
SIP
5
436
– – – –
125
–561
–n/a
1 30% based on relative TSR. 70% based on EPS growth. As set out in the 2018 Directors’ Remuneration report, the base year EPS number for the 2017 award was adjusted to take into account the
increased number of shares following the placing in 2018. The base year EPS was therefore adjusted by 8.7% (from 13.7p to 12.5p) to reflect that the weighted average number of shares had increased
in full for the final year of the performance period (i.e. year ended 31 December 2019). No change was made to the relative stretch in the underlying targets agreed at the outset of the performance
period – which remained as follows: trigger point of 5% p.a. growth; maximum of 22% p.a. growth.
2 As set out in the 2019 Directors’ Remuneration report, 46.99% of the total awarded vested.
3 As set out above, 23.49% of the total awarded vested.
4 As set out in the Committee Chair’s cover letter of the 2019 Directors’ Remuneration report, the decision on the timing of the vesting of the 2017 award was deferred for a period of up to one year by
the Committee. The Committee has now set an exercise date of 1 June 2021.
5 Matching Shares under the SIP. Participants buy Partnership Shares monthly under the SIP. The Company provides one Matching Share for every four Partnership Shares purchased. These Matching
Shares are first available for vesting three years after being awarded or on leaving if the person is considered to be a “good leaver”.
6 None of the 2019 bonus was paid in cash. At the request of the Executive Directors, the proportion of the bonus that would normally have been paid in cash (75% of the award) was deferred into
shares for a period of up to one year. The proportion of the bonus that would normally be deferred into shares (25%) will continue as normal, and will be released after three years.
7 Not subject to Good Leaver/Bad Leaver provisions as defined under the DBSP rules. May not be exercised prior to 1 January 2021 and must be exercised by 20 April 2023.
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Annual Report 2020
Details of Directors’ service contracts and appointment letters (unaudited)
The following table sets out the details of the service contracts and appointment letters for the Directors as at 31 December 2020:
Director
Date of current service contract
or appointment letter Unexpired terms at 31 December 2020
J Carling
1
10 August 2020
2 years and 5 months
A Fielding
19 March 2020
2 years and 5 months
S Good
4 September 2019
1 year and 3 months
G McGrath
15 April 2019
–
D Robertson
1
6 August 2020
2 years and 5 months
D Stirling
13 May 2019
–
C Wall
19 March 2020
2 years and 5 months
1 Both J Carling and D Robertson were appointed by the Board in August 2020 for a second term to expire at the 2023 AGM and were re-elected by shareholders at the 2020 AGM. Copies of the
Directors’ service contracts and appointment letters are available for inspection at the Company’s registered office.
A Bromfield service contract was terminated upon resignation effective 13 May 2020.
External appointments
During 2020, Executive Directors did not receive any fees from external appointments.
Change in remuneration of Group Directors and employees (unaudited)
The table below illustrates the percentage change in salary and benefits for the Group Directors and the UK workforce.
The employee subset consists of an average of the UK workforce employees for the period under review.
This group has been selected as this employee representative group is the largest group of employees within the organisation. The Non-Executive
Directors receive no taxable benefits or annual bonus.
% change in base salary
(2020 to 2019)
% change in taxable benefits
(2020 to 2019)
2
% change in annual bonus
UK employees only
(2020 to 2019)
D Stirling
0
12.1
-24.5
G McGrath
0
10.2
7. 8
A Bromfield
1
n/a n/a n/a
J Carling
0
n/a n/a
S Good
0
n/a n/a
D Robertson
0
n/a n/a
A Fielding
1
n/a n/a n/a
C Wall
1
n/a n/a n/a
Average employee
0 0
300
1 A Bromfield retired from the Board on 13 May 2020. A Fielding and C Wall joined the Board on 14 May 2020 and thus did not receive any remuneration in 2019.
2 The change in taxable benefits arose from an increase in premium by the health insurance provider.
The employees’ salary review is negotiated with the unions, applied to all UK employees and a 0% increase was agreed in relation to 2020. The 2021
salary review for the employees has not yet been agreed.
The mean staff bonus in the UK was 3.15% of base salary in relation to 2020 (2019: 1.05% of base salary).
The staff bonus for all employees in FY 2019 has been restated to include bonuses paid to all employees in the UK.
CEO pay ratio
Companies with more than 250 employees are required to publish the CEO to employee pay ratio. The ratio compares the total remuneration of the Group
CEO against the remuneration of the median employee, and employees in the lower and upper quartiles. These pay ratios form part of the information that
is provided to the Committee on broader employee pay policies and practices. The Committee has considered the pay data and concluded that the
current ratio is proportionate and allows the business to retain high calibre individuals capable of delivering the growth strategy.
The ratios were calculated using the Option A methodology which uses the pay and benefits of all UK employees as it provides the most accurate
information and representation of the ratios. The employee pay data used was based on the total remuneration of all Zotefoams plc’s full-time employees
as at 31 December 2020. The Group CEO’s total remuneration has been taken from the single total figure of remuneration for 2020, as disclosed on
page73.
The Committee considers that the median CEO pay ratio at the 50th percentile is consistent with the relative roles and responsibilities of the Group
CEOand the identified employees who are production operatives at this level, not professionals. Base salaries of all employees, including our Executive
Directors, are set with reference to a range of factors, including market practice, location, experience and performance in role. The Group CEO’s
remuneration package is weighted towards variable pay (including the annual bonus, LTIP and DBSP) due to the nature of the role, which means that
theratio is likely to fluctuate depending on the outcomes of incentive plans in each year. The reduction in total pay ratio in comparison to 2019 is due
toareduction in the value of the LTIP award for 2020.
Directors’ Remuneration report
Continued
79
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Annual Report 2020
Strategic Report
/
Governance
/
Financial Statements
Year
Method
25th percentile
pay ratio
50th percentile
pay ratio
75th percentile
pay ratio
2020 – Base salary Option A
11:1
9:1
7:1
2020 – Total pay
17:1
14:1
10:1
2019 – Total pay
21:1
17:1
13:1
Pay data (£’000)
Base salary
Total pay
CEO’s remuneration
303,000
494,220
UK employees 25th percentile
26,573
28,976
UK employees 50th percentile
33,759
35,680
UK employees 75th percentile
44,628
47, 875
Historical TSR performance and Group CEO remuneration outcomes (unaudited)
The graph below compared the TSR of Zotefoams against the FTSE SmallCap Index (excluding investment trusts), which is considered the most
appropriate choice of index by the Remuneration Committee due to the Group’s size and membership of this index.
Zotefoams FTSE SmallCap Index
600
400
500
300
200
100
0
Dec 20Dec 19Dec 18Dec 17Dec 16Dec 15Dec 14Dec 13Dec 12Dec 11Jan 11
Workforce alignment
While it remains important to set base salaries on a market-competitive basis reflective of the size and complexity of the business, the Committee
hasconsidered alignment of executive remuneration with workforce reward structures.
The table below illustrates the Group CEO’s single figure for total remuneration, annual bonus pay-out, LTIP vesting as a percentage of maximum
opportunity, the EPS and the average share price for the final quarter for the same ten-year period.
Group CEO’s
single figure of
remuneration (£)
Annual
bonus pay-out
(% of maximum)
LTIP vesting
(% of maximum) EPS (p)
Average share
price for the final
quarter (p)
2020
494,220
28.0
14.923.5
415.5
2019
637,473
37.1 47.0
14.9
375.4
2018
794,905
18.735.1
100.0
570.5
2017
676,816
84.4
16.658.0
1
389.2
2016
497,545
55.0
37.7
13.7
252.5
2015
418,568
44.4
50.0
344.311.1
2014
439,452
44.0
66.0
10.7
2 3 7. 8
2013
270,687
–
24.8
8.0
182.4
2012
490,715
62.0
84.0
202.211.8
2011 121.1
572,969
11.833.3
88.7
1 While basic earnings per share before exceptional item for 2017 was 16.04p, the Remuneration Committee decided to eliminate the impact on deferred tax (the net operating losses which are carried
forward) of the change in expected future US corporate tax rates, which resulted in an EPS of 16.59p being used for calculating the satisfaction of the EPS target for the vesting of the 2015 LTIP awards.
80
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Annual Report 2020
Relative importance of spend on pay (unaudited)
The below table and chart illustrate the year-on-year change in total Executive Directors’ remuneration and Executive Directors’ remuneration compared
with profit after tax and distributions to shareholders for 2020 and 2019.
2020
2019
Total remuneration¹ £’000
19,900 19,270
Executive Directors’ remuneration £’000
830
1,049
Profit after tax £’000 (including exceptional item)
7,16 3
8,217
Shareholder distributions
2
£’000
977
2,973
1 Social security costs paid by the Group have been excluded from this figure.
2 Shareholder distributions refer to the dividends paid during the year. No final dividend was paid in respect of 2019 due to uncertainty caused by COVID-19.
Committee role and advisers (unaudited)
The Group has established a Remuneration Committee, which is constituted in accordance with the recommendations of the UK Corporate Governance
Code. A Fielding (appointed 14 May 2020), S Good, D Robertson, J Carling, A Bromfield (retired 13 May 2020) and C Wall (appointed 14 May 2020) were
members of the Committee during 2020 to the date of this report. All the members are independent Non-Executive Directors, with the exception of S
Good, who was independent on appointment as Chair of the Company. The Committee was chaired by A Bromfield from 1 January 2020 to 13 May
2020, and A Fielding from 14 May 2020 to 31 December 2020. The Committee’s Terms of Reference were last updated in August 2020 and may be
foundon the Group’s website.
None of the Committee members have any personal financial interest (other than fees paid as disclosed on page 73 and as shareholders) in the Company,
nor do they have any interests that may conflict with those of the Group, such as cross directorships. None of the Committee members are involved in the
day-to-day management of the business. The Committee makes recommendations to the Board on remuneration matters. No Director is involved in any
decision concerning his or her own remuneration.
The Remuneration Committee met eight times in 2020 with full attendance at each meeting. The Company Secretary acts as secretary to the Committee.
In 2020, the Remuneration Committee carried out the following work:
X
Completed a review of the remuneration arrangements for the Executive Directors and the wider workforce and consulted with the Group’s largest
shareholders in relation to proposals arising out of the review
X
Approved the 2019 Directors’ Remuneration report
X
Considered and approved the annual bonus for the Executive team, including deferral arrangements due to circumstances arising from COVID-19
X
Considered and approved the grant of awards under the Long-Term Incentive Plan and the Deferred Bonus Share Plan in 2020 and the vesting of
awards made in 2017 under the Long-Term Incentive Plan, including deferral arrangements due to circumstances arising from COVID-19
X
Considered the salary reviews of the Executive team and concluded that no increases would be awarded
X
Considered the salary review of the Company Secretary, and awarded an increase reflecting experience gained in the role
X
Considered the performance targets for the 2020 Executive Directors’ bonus and Long-Term Incentive Plan awards and
X
Reviewed the terms of the MuCell Long-Term Incentive Plan to support the Group’s sustainability agenda.
Deloitte LLP (Deloitte) was engaged in 2016 to assist and provide advice to the Remuneration Committee in relation to Directors’ remuneration. They
continued to work with the Committee through 2020 in respect of general remuneration advice. Deloitte is a member of the Remuneration Consultants
Group and adheres to its Code on executive remuneration consulting in the UK. The Committee is comfortable that Deloitte does not have connections
with Zotefoams plc that may impair its objectivity and independence. Deloitte provided no other services to the Company.
Total fees for advice provided to the Committee amounted to the following:
2020
(£)
2019
(£)
Deloitte LLP
24,500
32,700
Total
24,500
32,700
Shareholder voting (unaudited)
The table below sets out the results of the votes received on the 2019 Directors’ Remuneration report at the 2020 AGM as well as the previous Directors’
Remuneration Policy (approved at the 2020 AGM):
Directors’ Remuneration
Policy
%
Annual Report on
remuneration
%
Votes in favour
20,542,091
89.76
22,8 6 6,741
99.90
Votes against
2,331,595
10.19
9,931
0.04
Discretion
12,699
0.05
12,6990.06
Total votes
22,886,385
100.00
22,889,371
100.00
Votes withheld
4,520
–
1,384
–Directors’ Remuneration report
Continued
81
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Strategic Report
/
Governance
/
Financial Statements
Directors’ report
The Directors present their Annual Report
and audited consolidated financial statements
for the year ended 31 December 2020
Results and dividends
Profit attributable to shareholders for the year
amounted to £7.2m (2019: £8.2m). The Board has
a progressive dividend policy, recognising the
importance to our shareholders of the dividend
aspart of their overall return. However, the
extraordinary uncertainty posed by the COVID-19
pandemic, particularly at the time the Directors
were required to recommend a final dividend for
the year ended 2019, meant that the Directors
were focused on minimising cash outflows and
strengthening the financial position of Zotefoams
plc in the short term. As a consequence, no final
dividend was recommended at that time. The
impact of the pandemic became clearer during
Q2 which, taken together with the Group’s
resilient and flexible response to it, resulted in a
robust H1 performance. The Directors, having
confidence in the future prospects, declared an
interim dividend of 2.03p (2019: 2.03p) per share
which was paid on 9 October 2020. The Directors
recommend that a final dividend of 4.27p
(2019:nil) per share be paid on 1 June 2021 to
shareholders who are on the Company’s register
at the close of business on 7 May 2021, resulting
in a total dividend of 6.30p per share for the year
(2019: 2.03p). For further information on the
performance ofthe entity, refer to the Strategic
Report on pages 1 to 59, which should be read
as forming part oftheDirectors’ report.
Directors
The appointment, replacement and powers of
the Directors are governed by the Company’s
Articles of Association (the “Articles”), the UK
Corporate Governance Code, the Companies
Act 2006, prevailing legislation and resolutions
passed at the Annual General Meeting (AGM)
or other general meetings of the Company.
With the exception of A Bromfield, who retired
from the Board on 13 May 2020, details of
Directors who were in office during the year
andup to the date of signing of the financial
statements are set out on pages 60 and 61. A
Bromfield’s details were provided on page 49
the2019 Annual Report.
The Articles give the Directors power to appoint
and replace Directors. Under the Terms of
Reference of the Nomination Committee, any
appointment must be recommended by the
Nomination Committee for approval by the Board
of Directors. The Articles also require Directors to
retire and, if they so wish, submit themselves for
election at the first AGM following their
appointment and normally every three years
thereafter. Since 2012, theBoard has required
Directors to stand forannual re-election each year.
D Stirling and G McGrath, the Executive Directors,
have service contracts which are terminable on
12months’ written notice. All the other Directors
have letters of appointment which are terminable
on six months’ written notice.
The Company maintained Directors’ and
Officers’ Liability Insurance cover throughout
2020. The Company has issued Deeds of
Indemnity in favour of all Directors. These Deeds
were in force throughout the year ended 31
December 2020 and remain in force as at the
date of this report. These Deeds, as well as the
service contracts and the Company’s Articles
ofAssociation, are available for inspection
duringnormal business hours at the Company’s
registered office and will be available at the AGM.
Conflicts of interest
All Directors submit details to the Company
Secretary of any new situations, or changes
toexisting ones, which may give rise to an
actualor potential conflict of interest with
thoseof the Company.
Where an actual, or potential, conflict is
approved by the Board, the Board will normally
authorise the situation on the condition that the
Director concerned abstains from participating
inany discussion or decision affected by the
conflicted matter. Authorisation of a conflict is
only given to Directors who are not interested
inthe matter. No new conflicts of interest were
noted during 2020 or between the year end and
thedate of signing of the financial statements.
Amendment to the Articles of Association
The Company’s Articles of Association may
only be amended by a special resolution of
the shareholders passed in general meeting.
The Company will propose a special resolution
at the 2021 AGM to amend and update the
existing Articles of Association.
Full details of the proposed amendments
are provided in the notes to the AGM notice
on
pages 136 to 139.
Corporate governance report
The corporate governance report on
page 62
should be read as forming part of the
Directors’report.
Employees
To ensure employee welfare, the Group has
documented and well-publicised policies on
occupational health and safety, the environment
and training. The Group operates an equal
opportunities, single-status employment policy
together with an open management style.
The Company operates to a number of
recognised industry standards, including Quality
(ISO 9001), Environmental (ISO 14001) and, until
June 2020, Occupational Health and Safety
(OHSAS 18001). In June, Zotefoams successfully
migrated to ISO 45001:2018, as part of a
continuous improvement plan.
Further details of our certifications are
provided in our OHSE section on
page 50.
Zotefoams operates an equal opportunities policy
and we believe diversity (ethnicity, age, gender,
language, sexual orientation, gender
re-orientation, religion, socio-economic status,
personality and ability) of the employees promotes
a better working environment, which in turn leads
to innovation and business success.Applications
for employment by disabled persons are always
fully considered and, in the event of an employee
becoming disabled, every effort is made to ensure
that theiremployment with Zotefoams continues
andthat appropriate training is provided where
necessary. Zotefoams’ policy is that the training,
career development and promotion of disabled
persons should, as far as possible, be identical to
that of other employees.
Zotefoams places considerable value on the
involvement of its people and holds formal and
informal meetings to brief them on matters
affecting them as employees and on the various
factors (including financial and economic factors)
affecting the performance of the Group; it also
ensures that their views are taken into account
inmaking decisions which are likely to affect their
interests. In the UK, there is a Joint Consultative
Committee (JCC), which comprises an employee
representative from each department. The JCC
meets regularly and considers a wide range of
matters affecting the employees’ current and
future interests. From January 2019, J Carling
has attended meetings of the JCC in his
capacity as Board representative, to provide
employees with an opportunity to engage with
the Board and allow the Board to have regard
toemployees’ views in their decision-making.
In order to encourage employees to share in
thesuccess of Zotefoams, an all-employee
shareincentive scheme was established in 2015
in the UK. Under the scheme, employees can
purchase shares each month directly from their
salary. For every four shares bought, one further
share is awarded. The shares vest on the third
anniversary of award and are normally exempt
from tax after five years.
Relationships with others
The Board has had regard to the fostering
oftheGroup’s business relationships with
suppliers, customers and others in its
decision-making process in order to
achievegood-quality outcomes.
Further information on this topic can be found
on
page 58
of the Strategic Report (the s172(1)
statement), which is incorporated into this
Directors’ report by cross-reference.
Human rights
Zotefoams does not, at present, have a specific
policy on human rights; however, it believes in
recognising and respecting all human rights as
defined in international conventions. This belief is
embedded within the organisation’s values and
ethical policies. We conduct every aspect of our
business with honesty, integrity and openness,
respecting human rights and the interests of our
employees, customers and other stakeholders,
according to the principles set out in our Ethics
Policy, which covers:
X
Ensuring our employees have the freedom to
join a union, associate or bargain collectively
without fear of discrimination against the
exercising of such freedoms
X
Not using forced labour or child labour and
X
Respecting the rights of privacy of our
employees and protecting access and
useoftheir personal information.
The Company operates an Equal
Opportunities Policy and a Dignity at Work
Policy, which promote the right of every
employee to be treated with dignity and respect
and not be harassed or bullied. We work hard
to ensure thatgoods and services are from
sources that do not jeopardise human rights,
safety or the environment, and expect our
suppliers to observe business principles
consistent withourown.
82
Zotefoams plc
Annual Report 2020
Business ethics
Zotefoams is committed to high standards
ofbusiness conduct and aims to maintain
thesestandards across all of our operations
throughout the world. Under our Ethics Policy,
we state that we will:
X
Operate within the law
X
Not tolerate any discrimination or harassment
X
Not make any political donations or grant
public donation for the purpose of political
advocacy of any kind
X
Not make or receive bribes
X
Avoid situations that might give rise to
conflicts of interest
X
Not enter into any activity that might be
considered anti-competitive
X
Aim to be a responsible company within
our local communities and
X
Support and encourage our employees
to report, in confidence, any suspicions
of wrongdoing.
Supporting our Ethics Policy, we have policies
onanti-bribery and corruption, anti-fraud,
anti-competitive behaviour, employee share
trading and whistleblowing.
In 2020, we introduced a declaration of
adherence to the principles laid out in the
Anti-Bribery and Corruption, Anti-Fraud and
Ethics policies in the business dealings of all
new suppliers. Suppliers’ ethical matters will
be reviewed further in 2021.
Substantial shareholdings
In accordance with the Disclosure and
Transparency Rules DTR 5, the Company,
asat6 April 2021, had received notices of
thefollowing material interests of 3% or
moreintheissued ordinary share capital:
Research and development
The amount spent by the Group on R&D in
theyear was £1,014k (2019: £1,357k). Inthe
opinion of the Directors, £nil (2019:£121k) of this
expenditure met the requirements for capitalisation
under IAS 38, while £1,014k (2019: £1,236k) did
not andwas consequently expensed in the
consolidated income statement.
Share capital and reserves
The Company has one class of ordinary shares,
which has no right to fixed income. Each share
carries the right, on a poll, to one vote at general
meetings of the Company. There are no specific
restrictions on the size of a holding nor on the
transfer of shares, which are both governed
bythe general provisions of the Articles of
Association and prevailing legislation. The
Directors are not aware of any agreements
between holders of the Company’s shares
thatmay result in restrictions on the transfer
ofsecurities or on voting rights. No person has
anyspecial rights of control over the Company’s
share capital and all issued shares are fully paid.
At 31 December 2020, the Zotefoams
Employees’ Benefit Trust (EBT) held 459,201
shares (approximately 0.9% of issued share
capital) (2019: 178,395 shares) to satisfy
shareplans as described in the Directors’
Remuneration report. During the year, the EBT
released 39,194 shares in respect of these share
plans. The EBT acquired 320,000 shares on 14
May 2020. In accordance with best practice, the
voting rights on the shares held inthe EBT are
not exercised and the right toreceive dividends
has been waived.
At the AGM held on 8 June 2020, authority was
given to the Directors to allot unissued shares
inthe Company up to a maximum amount
equivalent to approximately two-thirds of the
issued share capital of the Company. Authority
was also given to the Directors to allot equity
securities in the Company for cash without
regard to the pre-emption provisions of the
Companies Act 2006. Both authorities expire
atthe AGM to be held on 26 May 2021. The
Directors seek new authorities for a further
year,in line with market practice.
The Company was given authority at the 2020
AGM to purchase up to 4,830,123 of its ordinary
shares. This authority will also expire on 26 May
2021 and, at the date of this Report, had not
been used. In accordance with normal practice
for listed companies, a special resolution will
beproposed at this year’s AGM to seek a new
authority to make market purchases up to a
maximum of 10% of the issued share capital
ofthe Company.
Subsidiaries and branches
Details of the joint ventures, subsidiaries and
branches within the Group are given in the
financial statements.
Treasury and financial instruments
Information in respect of the Group’s policies on
financial risk management objectives, including
policies for hedging, as well as an indication of
exposure to financial risk, is given in note 22
tothe financial statements.
Future developments
Information on future developments for the
Group has been set out in an Introduction
from our Chair and the Group CEO’s review
on
pages 22 to 27.
Greenhouse gas emissions
Information on the Group’s greenhouse gas
emissions may be found in the ESG report
on
page 52.
Pension schemes
Refer to the post-employment benefits section
ofthe Group CFO’s review and note 24 to the
financial statements for information related
totheCompany’s pension schemes.
In the UK, employees have access to anumber
of defined contribution pensionschemes.
Newjoiners are eligible to join the Zotefoams
Stakeholder Pension Scheme.
Finance costs capitalised
Refer to note 7 to the financial statements
for details of borrowing costs capitalised
bytheGroup.
Events after the reporting period
Refer to note29 to the financial statements for
details ofany events after the reporting period
affecting the Group.
Disclosure of information to Auditor
The Directors who held office at the date of
approval of this Directors’ report confirm that,
inso far as they are each aware, there is
norelevant audit information of which the
Company’s External Auditor is unaware, and
each Director has taken all the steps that they
oughttohave taken as a Director in order to
make themselves aware of any relevant audit
information and to establish that the Company’s
External Auditor is aware of that information.
Independent Auditor
A resolution to re-appoint PKF Littlejohn LLP
as the Company’s Auditor will be proposed at
the forthcoming AGM.
On behalf of the Board.
G C McGrath
Director
7 April 2021
Ordinary
shares of
5.0p
Percentage
of issued
share
capital
Schroders plc
6,036,096
12.41
Invesco Ltd
4, 0 07, 910
8.29
Premier Miton Group
plc
3,561,760
7.37
BlackRock, Inc
5,506,830
5.18
Highclere International
Investors LLP
2,432,527
5.04
Canaccord Genuity
Group, Inc
2,317,334
4.90
Claire and Marc
Downes
2,102,090
4.32
Nicholas Adrian
Beaumont Dark
1,938,352
3.99
Pershing Securities
Ltd
1,735,620
3.57
Directors’ shareholdings are shown in the
Directors’ Remuneration report on
pages
76and77.
Directors’ report
Continued
83
Zotefoams plc
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Strategic Report
/
Governance
/
Financial Statements
Statement of Directors’ responsibilities
in respect of the financial statements
The Directors consider the Annual Report, taken
as a whole, to be fair, balanced and understandable
The Directors are responsible for preparing the
Annual Report and the financial statements in
accordance with applicable law and regulation.
Company law requires the Directors to prepare
financial statements for each financial year.
Under that law, the Directors have prepared
theGroup and Company financial statements
inaccordance with international accounting
standards in conformity with the requirements
of the Companies Act 2006. Additionally, the
Financial Conduct Authority’s Disclosure
Guidance and Transparency Rules require
theDirectors to prepare the Group financial
statements in accordance with international
financial reporting standards adopted pursuant
to Regulation (EC) No. 1606/2002 as it applies
inthe European Union. Under company law
theDirectors must not approve the financial
statements unless they are satisfied that they
give a true and fair view of the state of affairs
ofthe Group and Company and of the profit or
loss of the Group and Company for that period.
In preparing the financial statements,
theDirectors are required to:
X
Select suitable accounting policies and
then apply them consistently
X
State whether applicable international
accounting standards, in conformity with the
requirements of the Companies Act 2006
and, for the Group, international financial
reporting standards adopted pursuant to
Regulation (EC) No. 1606/2002 as it applies
in the European Union, have been followed,
subject to any material departures disclosed
and explained in the financial statements
X
Make judgements and accounting estimates
that are reasonable and prudent and
X
Prepare the financial statements on the going
concern basis unless it is inappropriate to
presume that the Group and Company will
continue in business.
The Directors are responsible for safeguarding
the assets of the Group and Company and
hence for taking reasonable stepsfor the
prevention and detection of fraudand other
irregularities.
The Directors are responsible for keeping
adequate accounting records that are sufficient
to show and explain the Group’s and Company’s
transactions and disclose with reasonable
accuracy at any time the financial position of the
Group and Company and enable them to ensure
that the financial statements and the Directors’
Remuneration report comply with the
Companies Act 2006.
The Directors are also responsible for the
maintenance and integrity of the Company’s
website. Legislation in the United Kingdom
governing the preparation and dissemination
offinancial statements may differ from
legislationin other jurisdictions.
Directors’ confirmations
The Directors consider that the Annual
Report, taken as a whole, is fair, balanced and
understandable and provides the information
necessary for shareholders to assess the
position and performance, business model
andstrategy of the Group and Company.
Each of the Directors, whose names and
functions are listed on pages 60 and 61 of the
Annual Report, confirm that, to the best of
their knowledge:
X
The Consolidated and Company financial
statements, which have been prepared in
accordance with international accounting
standards, in conformity with the requirements
of the Companies Act 2006 and, for the
Group, international financial reporting
standards adopted pursuant to Regulation
(EC) No. 1606/2002 as it applies in the
European Union, give a true and fair view of
the assets, liabilities, financial position and
profit of the Group and Company and
X
The Group CEO’s review includes a fair
review of the development and performance
of the business and the position of the Group
and Company. The Group CFO's review
provides a description of the principal risks
and uncertainties faced by the Group and
theCompany.
Independent auditor’s report to
the members of Zotefoams plc
Opinion
We have audited the financial statements of Zotefoams plc (the “parent company”) and its subsidiaries (the “group”) for the year ended 31 December
2020 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of
Financial Position, the Company Statement of Financial Position, the Consolidated Statement of Cash Flows, the Company Statement of Cash Flows,
the Consolidated Statement of Changes in Equity and the Company Statement of Changes in Equity and notes to the financial statements, including
significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and international accounting
standards in conformity with the requirements of the Companies Act 2006 and as regards the parent company financial statements, as applied in
accordance with the provisions of the Companies Act 2006.
In our opinion:
X
The financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2020 and of the
group’s and parent company’s profit for the year then ended;
X
The group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements
of the Companies Act 2006;
X
The parent company financial statements have been properly prepared in accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006 and as applied in accordance with the provisions of the Companies Act 2006; and
X
The financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and as regard to the group financial
statements, international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those
standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the
group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including
the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors use of the going concern basis of accounting in the preparation of the financial
statements is appropriate. Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern
basis of accounting included:
X
Checking the mathematical accuracy of the spreadsheet used to model future financial performance, agreeing the underlying cash flow projections
tomanagement-approved forecasts, recalculating covenant compliance and liquidity headroom for the base case scenario;
X
Evaluating the assumptions regarding the loss in revenue and associated EBITDA impact, the associated potential cost savings and the potential
decrease in working capital levels that could be achieved in the downside scenario;
X
Assessing the impact of the mitigating factors available to management in respect of the ability to restrict capital expenditure, cash payments
associated with dividends, bonus and share options;
X
Recalculating the impact on the group’s and company’s banking covenants; and
X
Assessing whether management has adequately disclosed the conditions which cast significant doubt on the ability of the group and company to
continue as a going concern in the financial statements.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively,
may cast significant doubt on the group’s or parent company’s ability to continue as a going concern for a period of at least 12 months from when the
financial statements are authorised for issue.
In relation to the entities reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to
inrelation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis
ofaccounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Our application of materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate, on the financial
statementsas a whole.
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Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements Company financial statements
Overall materiality
£400,000
£360,000
Performance materiality
£240,000
£216,000
Basis of materiality
5% of profit before tax (PBT) 5% of PBT capped at 90% of group
Rationale
This is the primary key performance
indicator used by management in assessing
the performance of the group. As a profit
generating group, we consider the users of
thefinancial statements, such as investors,
willalso consider PBT to be a key metric.
This is the primary key performance indicator
used by management in assessing the
performance of the company. As a profit
generating company, we consider the users
ofthe financial statements, such as investors,
willalso consider PBT to be a key metric.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality
allocated across components was between £145,000 and £360,000. Certain components were audited to a local statutory audit materiality that was also
less than our overall group materiality. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above
£20,000 (group audit) and £18,000 (company audit) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative
reasons.
Our approach to the audit
As part of designing our audit, we determined materiality and assessed the risk of material misstatement in the financial statements. In particular, we
looked at areas involving significant accounting estimates and judgement by the directors and considered future events that are inherently uncertain
such as the impairment of intangible assets and assumptions used in calculating the defined benefit pension scheme. We also addressed the risk of
management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk
ofmaterial misstatement due to fraud.
The Group has nine trading companies (including one joint venture) within the consolidated financial statements, two based in the UK, four in Asia
and three in the US (excluding Poland which was not trading at 31 December 2020). We identified three significant components, the parent company,
Zotefoams Inc and MuCell Extrusion LLC, which were subject to a full scope audit by a team with relevant sector experience undertaken from our office
based in London. We were not able to visit the overseas components due to the COVID travel restrictions in place so we engaged the assistance of PKF
network firms to assist with verification of property, plant and equipment and inventory count procedures.
In addition, we identified components which were material but not significant to the group and performed an audit of specific account balances
andclasses of transactions to ensure that balances which were material to the group were subject to audit procedures, including:
X
Property, plant and equipment in Zotefoams Poland Sp.z.o.o.;
X
Inventory and revenue in Zotefoams T-FIT Material Technology (Kunshan) Co. Limited; and
X
Revenue in Zotefoams Midwest LLC
The components identified as not significant and not material were subject to review procedures undertaken by the same audit team. The approach
gavethe audit team the following coverage:
Coverage of PBT
Full
Specific
Analytical
Coverage of gross assets
Full
Specific
Analytical
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/
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/
Financial Statements
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the
greatest effect on: the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion
on these matters.
Key audit matter How our scope addressed this matter
Impairment of intangible assets in MuCell Extrusion LLC (see notes
13and 28)
The consolidated statement of financial position as at 31 December 2020
includes intangible assets with a carrying value of £4.3m (2019: £4.5m) in
respect of the cash generating unit, MuCell, which is comprised of goodwill
that arose on the acquisition of MuCell in a previous accounting period,
and other intangible assets.
MuCell has historically been loss making and has continued to incur
losses in 2020. Intangible assets with finite useful lives are considered for
impairment when there is an indication that the asset has been impaired.
Intangible assets with indefinite useful lives such as goodwill are tested
annually for impairment and whenever there is an indication of impairment.
An impairment review requires management estimation and judgement in
determining the future cash flows. For this reason, along with the financial
significance of the account balance (more than ten times group materiality),
we have assessed this to be a key audit matter.
This was also assessed as a key audit matter in the previous year.
Our work in this area included:
X
Obtaining and reviewing the impairment assessment prepared by
management;
X
Challenging the assumptions used in the model by testing to supporting
evidence, including internally approved budgets and external data where
available;
X
Corroborating growth assumptions to supporting documents such as
sales pipelines and obtaining key contracts to verify minimum royalty/
licence revenue;
X
Critically reviewing and benchmarking the discount rate used in the net
present value calculation for reasonableness;
X
Requesting management to perform sensitivity analysis on the key
assumptions in the model and challenging the effect on the impairment
review;
X
Performing our own sensitivity analysis on the model to understand the
effect that key assumptions used have on the headroom to the model;
and
X
Discussion with management around the new business opportunity
including an assessment of the potential upside.
Key observations
We concluded that the assumptions in the impairment models, specifically
in the value-in-use calculations, were within an acceptable range, and no
impairment charge is required.
Pension assumptions (see notes 24 and 28)
The Group’s closed defined benefit pension scheme represents one of
the largest liabilities on the consolidated statement of financial position at
£8,851k as at 31 December 2020. The valuation of the schemes liabilities
requires management to use its judgement in making a number of key
assumptions, being the rate of inflation (CPI and RPI), the discount rate
andthe life expectancy of the scheme members.
While historical assumptions are noted as being within acceptable ranges,
the liability is highly sensitive to small changes.
Given the financial significance and the inherent estimation within the
calculation, this has been assessed as a key audit matter.
This was also assessed as a key audit matter in the previous year.
Our work in this area included:
X
An assessment of the independence and competence of management’s
actuary to calculate the pension scheme liability;
X
An assessment of the appropriateness of the key assumptions used by
management to value the pension liability;
X
A comparison of key assumptions to benchmarks performed by the PKF
Actuarial team;
X
Obtaining confirmations and control reports from the investment
manager and custodian to confirm pension assets;
X
Testing employee data used by the actuary;
X
Testing contributions and payments/claims paid to bank statements;
X
An assessment of whether adequate disclosures have been included
inthe annual report and accounting in line with IAS 19.
Key observations
We are satisfied that the overall methodology is appropriate and the
assumptions applied in relation to determining the pension valuation are
within an acceptable range.
The discount rate has reduced from 1.9% p.a. in 2019 to 1.2% pa in 2020.
We are comfortable that the proposed reduction is within the acceptable
range, towards the prudent end of the scale.
The RPI assumption is within the range we would expect, at the slightly
optimistic end of the range (i.e. resulting in a lower value of deficit).
CPI has been derived as 1% less than RPI until 2030 and 0.25% less than
RPI thereafter. This is a change in approach compared with 31 December
2019 when CPI was set as 1% less than RPI at all future terms. The CPI
assumption is within the range we would expect and the change suggests
an increase in the level of prudence in this assumption.
Independent auditor’s report to the members of Zotefoams plc
Continued
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Other information
The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. The
directors are responsible for the other information contained within the annual report. Our opinion on the group and parent company financial statements
does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance
conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial
statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we
arerequired to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the Directors’ Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
X
The information given in the Strategic Report and the Directors’ report for the financial year for which the financial statements are prepared is consistent
with the financial statements; and
X
The Strategic Report and the Directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have
not identified material misstatements in the Strategic Report or the Directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
X
Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not
visited by us; or
X
The parent company financial statements and the part of the Directors’ Remuneration report to be audited are not in agreement with the accounting
records and returns; or
X
Certain disclosures of directors’ remuneration specified by law are not made; or
X
We have not received all the information and explanations we require for our audit.
Corporate governance statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance
Statement relating to the group’s and parent company’s compliance with the provisions of the UK Corporate Governance Statement specified for our
review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is
materially consistent with the financial statements or our knowledge obtained during the audit:
X
The Directors’ statement with regards the appropriateness of adopting the going concern basis of accounting, set out on page 32 of this annual report;
X
The Directors’ explanation as to their assessment of the entity’s prospects, the period this assessment covers and why the period is appropriate, set
out on page 43 of this annual report;
X
The Directors’ statement that they consider the annual report and the financial statements, taken as a whole, to be fair, balanced and understandable,
set out on page 83 of this annual report;
X
The Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks, set out on page 64 of this annual report;
X
The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on page 64 of this
annual report; and
X
The section describing the work of the Audit Committee set out on pages 66 to 68 of this annual report.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the group and parent company
financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the group and parent company financial statements, the directors are responsible for assessing the group’s and the parent company’s ability
to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
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Financial Statements
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due
tofraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken
onthe basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting
irregularities, including fraud, is detailed below.
We obtained an understanding of the group and parent company and the sector in which they operate to identify laws and regulations that could
reasonably be expected to have a direct effect on the financial statements. We obtained our understanding in this regard through discussions with
management, application of audit knowledge and experience of the sector.
Our audit procedures were designed to ensure the audit team considered whether there were any indications of non-compliance by the group and parent
company with those laws and regulations. The group and parent company is subject to laws and regulations that directly affect the financial statements,
including financial reporting legislation, pensions legislation, distributable profits legislation and taxation legislation and we assessed the extent of
compliance with these laws and regulations as part of our procedures on the related financial statement items.
In addition, the group and parent company are subject to many other laws and regulations where the consequences of non-compliance could have a
material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following
areas as those most likely to have such an effect: health and safety; various regulations around the handling of chemicals and general environmental
protection legislation; fraud; bribery and corruption; export control; Consumer Rights Act; and employment law recognising the nature of the group’s and
parent company’s activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry
of the directors and other management and inspection of regulatory and legal correspondence, if any. The identified actual or suspected non-compliance
was not sufficiently significant to our audit to result in our response being identified as a key audit matter.
We also identified the risks of material misstatement of the financial statements due to fraud. We considered, in addition to the non-rebuttable presumption
of a risk of fraud arising from management override of controls, the recognition of revenue, posting of unusual journals and manipulating the group’s
alternative performance profit measures and other key performance indicators to meet remuneration targets and externally communicated targets.
As in all of our audits, we addressed the risk of fraud arising from management override of controls by performing audit procedures which included, but
were not limited to: the testing of journals; reviewing accounting estimates for evidence of bias; and evaluating the business rationale of any significant
transactions that are unusual or outside the normal course of business.
Because of the inherent limitations of an audit, there is a risk that we will not detect all irregularities, including those leading to a material misstatement
in the financial statements or non-compliance with regulation. This risk increases the more that compliance with a law or regulation is removed from
the events and transactions reflected in the financial statements, as we will be less likely to become aware of instances of non-compliance. The risk is
also greater regarding irregularities occurring due to fraud rather than error, as fraud involves intentional concealment, forgery, collusion, omission or
misrepresentation.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.
uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Other matters which we are required to address
We were appointed by the Audit Committee on 6 October 2020 to audit the financial statements for the period ended 31 December 2020 and subsequent
financial periods. Our total uninterrupted period of engagement is one year.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company and we remain independent of
the group and the parent company in conducting our audit.
Our audit opinion is consistent with the additional report to the audit committee.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work
has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no
other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone, other than the company and the company’s
members as a body, for our audit work, for this report, or for the opinions we have formed.
Joseph Archer (Senior Statutory Auditor)
For and on behalf of PKF Littlejohn LLP
15 Westferry Circus
Canary Wharf
London E14 4HD
7 April 2021
Independent auditor’s report to the members of Zotefoams plc
Continued
88
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Annual Report 2020
Consolidated income statement
For the year ended 31 December 2020
Note
2020
£’000
2019
£’000
Revenue
3
Cost of sales 52,270 )
(54,874 )
(Gross profit
Distribution costs
(6,793 )
(8,008 )
Administrative expenses before exceptional item
(11,876 )
(11,481 )
Exceptional item 4
Total administrative expenses 10,431 )
(11,876 )
(Operating profit 9,109 10,151
Operating profit before exceptional item 9,109 9,101
Finance costs 7
(872 )
(462 )
Finance income 7
Share of profit from joint venture 10 38 72
Profit before income tax
Profit before income tax and exceptional item
Income tax expense 8 1,594 )
(1,138 )
(Profit for the year 7,163 8,217
Profit for the year before exceptional item 7,163 7,167
Profit attributable to:
Equity holders of the Company 7,163 8,217
Earnings per share:
Basic (p) 14.87 17.10
9
Diluted (p) 14.63 16.84
9
All activities of the Group are continuing.
The notes on pages 97 to 134 form an integral part of these financial statements.
The Company has elected to take the exemption under section 408 of the Companies Act 2006 from presenting the Company income statement
andother comprehensive income.
Company number: 2714645
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Financial Statements
Consolidated statement
of comprehensive income
For the year ended 31 December 2020
Note
2020
£’000
2019
£’000
Profit for the year 7,163 8,217
Other comprehensive income
Items that will not be reclassified to profit or loss
Actuarial losses on defined benefit pension schemes 24
(2,460 )
(319 )
Tax relating to items that will not be reclassified
Total items that will not be reclassified to profit or loss (1,993 )
(265 )
Items that may be reclassified subsequently to profit or loss
Foreign exchange translation losses on investment in foreign subsidiaries
(583 )
(1,146 )
Change in fair value of hedging instruments
(349 )
Hedging gains reclassified to profit or loss
Tax relating to items that may be reclassified 101 )
(256 )
(Total items that may be reclassified subsequently to profit or loss 195
(657 )
Other comprehensive income for the year, net of tax (1,798 )
(922 )
Total comprehensive income for the year 5,365 7,295
Total comprehensive income attributable to:
Equity holders of the Company 5,365 7,295
Total comprehensive income for the year 5,365 7,295
The notes on pages 97 to 134 form an integral part of these financial statements.
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Consolidated statement
of financial position
As at 31 December 2020
Note
2020
£’000
2019
£’000
Non-current assets
Property, plant and equipment 11 92,925 85,652
Right-of-use assets 12 1,397 1,207
Intangible assets 13 5,888 6,614
Investments in joint venture 10 183 145
Trade and other receivables 16 54 166
Deferred tax assets 20 509 327
Total non-current assets 100,956 94,111
Current assets
Inventories 15 23,033 18,604
Trade and other receivables 16 22,150 23,315
Derivative financial instruments 22 1,580 332
Cash and cash equivalents 17 8,503 6,656
Total current assets 55,266 48,907
Total assets 156,222 143,018
Current liabilities
Trade and other payables 18 6,831 )
(7,851 )
(Derivative financial instruments 22 134 )
(53 )
(Current tax liability 261 )
(101 )
(Lease liabilities 12 369 )
(420 )
(Interest-bearing loans and borrowings 19 15,717 )
(23,430 )
(Total current liabilities (31,855 )
(23,312 )
Non-current liabilities
Lease liabilities 12 836 )
(986 )
(Interest-bearing loans and borrowings 19 21,630 )
(19,263 )
(Deferred tax liabilities 20 674 )
(891 )
(Post-employment benefits 24 6,926 )
(8,851 )
(Total non-current liabilities (29,991 )
(30,066 )
Total liabilities (61,846 )
(53,378 )
Total net assets 94,376 89,640
Equity
Issued share capital 21 2,431 2,415
Share premium 21 44,178 44,178
Own shares held 9 )
(23 )
(Capital redemption reserve 15 15
Translation reserve 2,324 2,907
Hedging reserve 909 131
Retained earnings 44,542 40,003
Total equity 94,376 89,640
The notes on pages 97 to 134 form an integral part of these financial statements.
These financial statements on pages 89 to 96 were authorised for issue by the Board of Directors on 7 April 2021 and were signed on its behalf by:
G C McGrath
Group CFO
Company number: 2714645
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Company statement
of financial position
As at 31 December 2020
2020
£’000
2019
£’000
Non-current assets
Property, plant and equipment 11
41,960
40,919Right-of-use assets 12
780
1,064Intangible assets 13
1,546
2,082Investments in subsidiaries 14
30,822
30,576Trade and other receivables 16
54
166Total non-current assets 75,162
74,807
Current assets
Inventories 15
16,854
14,362Trade and other receivables 16
49,502
42,546Derivative financial instruments 22
1,580
332Cash and cash equivalents 17
6,328
4,107Total current assets 74,264
61,347
Total assets 149,426
136,154
Current liabilities
Trade and other payables 18
(6,188)
(4,905)Derivative financial instruments 22
(53)
(134)Current tax liability
–
(261)Lease liabilities 12
(279)
(291)Interest-bearing loans and borrowings 19
(23,430)
(15,717)Total current liabilities (29,950)
(21,308)
Non-current liabilities
Lease liabilities 12
(504)
(769)Interest-bearing loans and borrowings 19
(19,263)
(21,630)Deferred tax liabilities 20
(891)
(675)Post-employment benefits 24
(8,851)
(6,926)Total non-current liabilities (29,509)
(30,000)
Total liabilities (59,459)
(51,308)
Total net assets 89,967
84,846
Equity
Issued share capital 21
2,431
2,415Share premium 21
44,178
44,178Own shares held
–
–Capital redemption reserve
15
15Hedging reserve
909
131Retained earnings
At 1 January
38,107
34,107Profit for the year attributable to the owners
6,951
7,013Other changes in retained earnings
(2,624)
(3,013)42,434
38,107Total equity 89,967
84,846
The notes on pages 97 to 134 form an integral part of these financial statements.
These financial statements on pages 89 to 96 were authorised for issue by the Board of Directors on 7 April 2021 and were signed on its behalf by:
G C McGrath
Group CFO
Company number: 2714645
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Consolidated statement
of cash flows
For the year ended 31 December 2020
Note
2020
£’000
2019
£’000
Cash flows from operating activities
Profit for the year 7,163 8,217
Adjustments for:
Depreciation and amortisation 11, 12, 13 6,746 5,769
Disposal of assets 5 40 77
Finance costs 7 846 412
Share of profit from joint venture 10 72 )
(38 )
(Net exchange differences 999 )
(133 )
(Equity-settled share-based payments 25 300 391
Taxation 8 1,138 1,594
Operating profit before changes in working capital and provisions 16,062 15,389
Decrease in trade and other receivables 1,199 2,659
Increase in inventories 883 )
(4,536 )
(Increase/(decrease) in trade and other payables 980 (3,720 )
Employee defined benefit contributions 24 1,674 )
(700 )
(Cash generated from operations 13,005 11,771
Interest paid 88 )
(456 )
(Income taxes paid, net of refunds 2,334 )
(1,113 )
(Net cash flows generated from operating activities 11,436 9,349
Cash flows from investing activities
Interest received 7 26 50
Interest paid 7 933 )
(604 )
(Purchases of intangibles 13 914 )
(346 )
(Purchases of property, plant and equipment 23,473 )
(12,363 )
(Net cash used in investing activities (13,287 )
(25,270 )
Cash flows from financing activities
Proceeds from options exercised and issue of share capital – 92
Repayment of borrowings 3,829 )
(8,053 )
(Proceeds from borrowings 13,180 22,578
Principal elements of lease payments 12 343 )
(433 )
(Dividends paid to equity holders of the Company 9 2,973 )
(977 )
(Net cash generated from financing activities 3,717 15,525
Net increase/(decrease) in cash and cash equivalents 1,866 (396 )
Cash and cash equivalents at 1 January 6,656 7,073
Exchange losses on cash and cash equivalents 21 )
(19 )
(Cash and cash equivalents at 31 December 8,503 6,656
17
Cash and cash equivalents comprises cash at bank and short-term highly liquid investments with a maturity date of less than three months.
During the year, the Group paid interest of £1,060 k of which it capitalised £604 k (2019: paid interest of £1,021 k of which it capitalised £933 k) on qualifying
assets under IAS 23 “Capitalisation of Borrowing Costs”. The interest paid has been split between operating activities of £456 k (2019: £88 k) and investing
activities of £604 k (2019: £933 k) to reflect the Group’s utilisation of the interest paid.
The net exchange differences of £133 k within operating activities relate to the foreign exchange movement on borrowings and open forward contracts in
the income statement (2019: £999 k).
Refer to note 19 for a reconciliation of liabilities arising from financing activities.
The notes on pages 97 to 134 form an integral part of these financial statements.
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Financial Statements
Company statement
of cash flows
For the year ended 31 December 2020
Note
2020
£’000
2019
£’000
Cash flows from operating activities
Profit for the year
6,951
7,013Adjustments for:
Depreciation and amortisation 11, 12, 13
3,958
3,253Disposal of assets
38
–Finance costs
574
325Net exchange differences
(133)
(999)Equity-settled share-based payments 25
300
391Taxation
1,199
1,279Operating profit before changes in working capital and provisions 12,887
11,262
Decrease in trade and other receivables
975
3,372Increase in inventories
(2,492)
(918)Increase/(decrease) in trade and other payables
1,481
(3,468)Employee defined benefit contributions 24
(700)
(1,674)Cash generated from operations 12,151
8,574
Interest paid
(451)
(405)Income taxes paid, net of refunds
(1,095)
(2,142)Net cash flows generated from operating activities 10,605
6,027
Cash flows from investing activities
Investment in subsidiaries 14
(246)
(7,027)Interest received
6
26Interest paid
(166)
(610)Loans given to subsidiaries, net of prepayments
(7,555)
(8,431)Purchases of intangibles 13
(111)
(707)Purchases of property, plant and equipment
(4,144)
(6,400)Net cash used in investing activities (12,216)
(23,149)
Cash flows from financing activities
Proceeds from options exercised and issue of share capital
–
92Repayment of borrowings
(8,053)
(3,829)Proceeds from borrowings
13,180
22,578Principal elements of lease payments 12
(318)
(265)Dividends paid to equity holders of the Company 9
(977)
(2,973)Net cash generated from financing activities 3,832
15,603
Net increase/(decrease) in cash and cash equivalents
2,221
(1,519)Cash and cash equivalents at 1 January 4,107
5,626
Cash and cash equivalents at 31 December
17
6,3284,107
Cash and cash equivalents comprises cash at bank and short-term highly liquid investments with a maturity date of less than three months.
During the year, the Company paid interest of £617k of which it capitalised £166k (2019: paid interest of £1,015k of which it capitalised £610k) on qualifying
assets under IAS 23 “Capitalisation of Borrowing Costs”. The interest paid has been split between operating activities of £451k (2019: £405k) and investing
activities of £166k (2019: £610k) to reflect the Company’s utilisation of the interest paid.
The net exchange differences of £133k within operating activities relate to the foreign exchange movement on borrowings and open forward contracts in
the income statement (2019: £999k).
Refer to note 19 for a reconciliation of liabilities arising from financing activities.
The notes on pages 97 to 134 form an integral part of these financial statements.
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Consolidated statement
of changes in equity
For the year ended 31 December 2020
Note
Share
capital
£’000
Share
premium
£’000
Own
shares
held
£’000
Capital
redemption
reserve
£’000
Translation
reserve
£’000
Hedging
reserve
£’000
Retained
earnings
£’000
Total
equity
£’000
Balance as at 1 January 2019 2,415 44,178 (21 ) 15 4,053 (358 ) 34,799 85,081
Profit for the year
Foreign exchange translation gains on investment in
subsidiaries
Change in fair value of hedging instruments
recognised in other comprehensive income
Reclassification to income statement – administrative
expenses
Tax relating to effective portion of changes in fair
value of cash flow hedges, net of recycling
Actuarial loss on defined benefit pension scheme 24
Tax relating to actuarial loss on defined benefit
pension scheme – – – – – – 54 54
Total comprehensive income for the year – – – – (1,146 ) 489 7,952 7,295
Transactions with owners of the Parent:
Options exercised
Equity-settled share-based payments net of tax
Dividends paid 9 – – – – – – (2,973 ) (2,973 )
Total transactions with owners of the Parent – – 12 – – – (2,748 ) (2,736 )
Balance as at 31 December 2019 2,415 44,178 (9 ) 15 2,907 131 40,003 89,640
Balance as at 1 January 2020 2,415 44,178 (9 ) 15 2,907 131 40,003 89,640
Profit for the year
Foreign exchange translation losses on investment in
subsidiaries
Change in fair value of hedging instruments
recognised in other comprehensive income
Reclassification to income statement – administrative
expenses
Tax relating to effective portion of changes in fair
value of cash flow hedges, net of recycling
Actuarial loss on defined benefit pension scheme 24
Tax relating to actuarial loss on defined benefit
pension scheme – – – – – – 467 467
Total comprehensive income for the year – – – – (583 ) 778 5,170 5,365
Transactions with owners of the Parent:
Options exercised
Proceeds of shares issued, net of expenses 21
Equity-settled share-based payments net of tax
Dividends paid 9 – – – – – – (977 ) (977 )
Total transactions with owners of the Parent 16 – (14 ) – – – (631 ) (629 )
Balance as at 31 December 2020 2,431 44,178 (23 ) 15 2,324 909 44,542 94,376
The aggregate current and deferred tax relating to items that are credited to equity is £259 k (2019: credited £293 k).
The notes on pages 97 to 134 form an integral part of these financial statements.
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Company statement
of changes in equity
For the year ended 31 December 2020
Note
Share
capital
£’000
Share
premium
£’000
Own
shares
held
£’000
Capital
redemption
reserve
£’000
Hedging
reserve
£’000
Retained
earnings
£’000
Total
equity
£’000
Balance as at 1 January 2019
2,415 44,178 (21) 15 (358) 34,107 80,336
Profit for the year – – – – – 7,013 7,013
Change in fair value of hedging instruments recognised in other
comprehensive income – – – – (349) – (349)
Reclassification to income statement – administrative expenses – – – – 939 – 939
Tax relating to effective portion of changes in fair value of cash
flow hedges, net of recycling – – – – (101) – (101)
Actuarial loss on defined benefit pension scheme 24 – – – – – (319) (319)
Tax relating to actuarial loss on defined benefit pension scheme – – – – – 54 54
Total comprehensive income for the year – – – – 489 6,748 7,237
Transactions with owners:
Options exercised – – 21 – – 80 101
Equity-settled share-based payments net of tax – – – – – 145 145
Dividends paid 9 – – – – – (2,973) (2,973)
Total transactions with owners – – 21 – – (2,748) (2,727)
Balance as at 31 December 2019 2,415 44,178 – 15 131 38,107 84,846
Balance as at 1 January 2020 2,415 44,178 – 15 131 38,107 84,846
Profit for the year
– – – – – 6,951 6,951
Change in fair value of hedging instruments recognised in other
comprehensive income
– – – – 952 – 952
Reclassification to income statement – administrative expenses
– – – – 82 – 82
Tax relating to effective portion of changes in fair value of cash
flow hedges, net of recycling
– – – – (256) – (256)
Actuarial loss on defined benefit pension scheme 24
– – – – – (2,460) (2,460)
Tax relating to actuarial loss on defined benefit pension scheme
– – – – – 467 467
Total comprehensive income for the year – – – – 778 4,958 5,736
Transactions with owners:
Options exercised
– – – – – (2) (2)
Proceeds of shares issued, net of expenses 21
16 – – – – – 16
Equity-settled share-based payments net of tax
– – – – – 348 348
Dividends paid 9
– – – – – (977) (977)
Total transactions with owners
16 – – – – (631) (615)
Balance as at 31 December 2020 2,431 44,178 – 15 909 42,434 89,967
The aggregate current and deferred tax relating to items that are credited to equity is £259k (2019: credited £293k).
The notes on pages 97 to 134 form an integral part of these financial statements.
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Notes
1. General information
listed on the London Stock Exchange and incorporated and domiciled in
Croydon CR9 3AL.
The Company, its subsidiaries and joint venture (together referred to as the
“Group”) is engaged in the manufacturing and sale of high-performance
foams and licensing of related technology for specialist markets worldwide.
2. Significant accounting policies
The principal accounting policies applied in the preparation of these
financial statements are set out below. These policies have been
consistently applied to all of the years presented, unless otherwise stated.
2.1 Basis of preparation
The financial statements of Zotefoams plc have been prepared in
accordance with 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. The financial statements have been
prepared under the historical cost convention except for derivative financial
instruments, which are measured at fair value through profit or loss.
The preparation of financial statements in conformity with IFRS requires the
use of certain critical accounting estimates. It also requires management to
exercise its judgement in the process of applying the Group’s accounting
policies. The areas involving a higher degree of judgement or complexity,
or areas where assumptions and estimates are significant to the financial
statements, are disclosed in note 28.
Going concern
The Group’s business activities, together with the factors likely to affect its
future development, performance and position, are set out in the Strategic
Report on pages 1 to 59 and the section entitled “Risk management
and principal risks” on pages 33 to 42. These also describe the financial
position of the Group, its cash flows and liquidity position. In addition, note
22 to the financial statements includes the Group’s objectives, policies
and processes for managing its capital, its financial risk management
objectives, details of its financial instruments and hedging activities,
borrowing facilities and its exposure to credit risk and liquidity risk.
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
offinancial 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
dateof 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
inpreparing the Annual Report.
2.2 Basis of consolidation
i) Subsidiaries
Subsidiaries are all entities over which the Group has control. The Group
controls an entity when the Group is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect
those returns through its power over the entity. Subsidiaries are fully
consolidated from the date on which control is transferred to the Group.
They are deconsolidated from the date on which that control ceases.
ii) Transactions eliminated on consolidation
Intra-group balances and transactions, including any unrealised gains
and losses or income and expenses arising from such transactions, are
eliminated in preparing the consolidated financial statements. Unrealised
losses are eliminated in the same way as unrealised gains, but only to the
extent that there is no evidence of impairment. Where necessary, amounts
reported by subsidiaries have been adjusted to conform with the Group’s
accounting policies.
iii) Joint arrangements
The Group applies IFRS 11 to its joint arrangements. Under IFRS 11,
investments in joint arrangements are classified as either joint operations
or joint ventures, depending on the contractual rights and obligations of
each investor. The Group has assessed the nature of its joint arrangements
and determined them to be joint ventures. Interests in the joint ventures
areaccounted for using the equity method, after initially being recognised
at cost.
iv) Equity method
Under the equity method of accounting, the investment is initially
recognised at cost and the carrying amount is increased or decreased to
recognise the investor’s share of the change in net assets of the investee
after the date of acquisition.
If the ownership interest in the joint venture is reduced but joint control is
retained, only a proportionate share of the amounts previously recognised
in other comprehensive income is reclassified to profit or loss where
appropriate.
The Group’s share of post-acquisition profit or loss is recognised in the
income statement, and its share of post-acquisition movements in other
comprehensive income is recognised with a corresponding adjustment
to the carrying amount of the investment. Where the Group’s share of
losses in the joint venture equals or exceeds its interest in the joint venture,
including any other unsecured receivables, the Group does not recognise
further losses, unless it has incurred legal or constructive obligations or
made payments on behalf of the joint venture. Distributions received from
the joint venture reduce the carrying amount of the investment.
The Group determines at each reporting date whether there is any
objective evidence that the investment in the joint venture is impaired.
Ifthis is the case, the Group calculates the amount of impairment as the
difference between the recoverable amount of the joint venture and its
carrying value, and it recognises the amount adjacent to “share of profit/
(loss) of joint venture” in the income statement.
Gains and losses resulting from upstream and downstream transactions
between the Group and the joint venture are recognised in the Group’s
financial statements only to the extent of an unrelated investor’s interests
in the joint venture. Unrealised losses are eliminated unless the transaction
provides evidence of an impairment of the asset transferred. Accounting
policies of the joint venture have been aligned where necessary to ensure
consistency with the policies adopted by the Group.
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2. Significant accounting policies (continued)
v) Accounting for business combinations
Business combinations are accounted for using the acquisition method
as at the acquisition date, which is the date on which control is transferred
to the Group. Control is the power to govern the financial and operating
policies of an entity so as to obtain benefits from the activities. In assessing
control, the Group takes into consideration potential voting rights that
currently are exercisable.
For acquisitions on or after 1 January 2010, the Group measures
goodwillat the acquisition date as:
X
The fair value of the consideration transferred; plus
X
The recognised amount of any non-controlling interests in the
acquiree;plus,
X
If the business combination is achieved in stages, the fair value
remeasured at acquisition date of the existing interest in the acquiree
less the net recognised amount of the identifiable assets acquired and
liabilities assumed.
When the excess is negative, a bargain purchase gain is recognised
immediately in the income statement. The consideration transferred does
not include amounts related to the settlement of pre-existing relationships.
Such amounts are generally recognised in the income statement. Costs
related to the acquisition, other than those associated with the issue
of debt or equity securities, that the Group incurs in connection with a
business combination are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the
acquisition date. If the contingent consideration is classified as equity, it is
not remeasured, and settlement is accounted for within equity. Otherwise,
subsequent changes to the fair value of the contingent consideration are
recognised in the income statement.
When share-based payment awards (replacement awards) are required
to be exchanged for awards held by the acquiree employees (acquiree
awards) and relate to past services, then all or a portion of the amount
of the acquirer replacement awards are included in measuring the
consideration transferred in the business combination. This determination
is based on the market-based value of the replacement awards compared
with the market-based value of the acquiree awards and the extent to
which the replacement awards relate to past and/or future services.
2.3 Foreign currency
i) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities
are measured using the currency of the primary economic environment in
which each entity operates (“the functional currency”). The consolidated
financial statements are presented in sterling, which is the Group’s
presentation currency.
The Company’s financial statements are prepared and presented in
sterling, which is its functional currency.
ii) Transactions and balances
Foreign currency transactions are translated into the functional currency
using the exchange rates prevailing at the dates of the transactions or
valuation (where items are remeasured). Foreign exchange gains and
losses resulting from the settlement of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement,
except when deferred in other comprehensive income as qualifying cash
flow hedges. All foreign exchange gains and losses are presented in the
income statement within administrative expenses.
Translation differences related to items classified through other
comprehensive income are recognised in other comprehensive income,
while remaining translation differences are recognised in the income
statement.
iii) Group companies
The results and financial position of all of the Group entities (none of which
has the currency of a hyper-inflationary economy) that have a functional
currency different from the presentation currency are translated into the
presentation currency as follows:
X
Assets and liabilities for each statement of financial position presented
are translated at the closing rate at the date of that statement of financial
position;
X
Income and expenses for each income statement are translated
at average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the
transaction dates, in which case income and expenses are translated
atthe rate on the dates of each transaction); and
X
All resulting exchange differences are recognised in other
comprehensive income.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity, and they are
translated at the closing rate. Exchange differences arising are recognised
in other comprehensive income.
2.4 Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to
foreign exchange risks arising from operational, financing and investment
activities. In accordance with its treasury policy, the Group does not hold
or issue derivative financial instruments for trading purposes. However,
derivatives that do not qualify for hedge accounting are accounted for
astrading instruments.
Derivatives are initially recognised at fair value on the date when a derivative
contract is entered into, and they are subsequently remeasured at their fair
value. The method of recognising the resulting gain or loss depends on
whether the derivative is designated as a hedging instrument and, if so, the
nature of the item being hedged. The Group designates all derivatives as
hedges of a particular risk associated with a recognised asset or liability
ora highly probable forecast transaction (cash flow hedge).
At the inception of the transaction, the Group documents the relationship
between hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking various hedging
transactions. The Group also documents its assessment, both at hedge
inception and on an ongoing basis, of whether the derivatives that are
usedin hedging transactions are highly effective in offsetting changes
infairvalues or cash flows of hedged items.
The fair values of various derivative instruments used for hedging purposes
are disclosed in note 22. The full fair value of a hedging derivative is
classified as a non-current asset or liability where the remaining maturity of
the hedged item is more than 12 months, and as a current asset or liability
where the remaining maturity of the hedged item is less than 12 months.
Trading derivatives are classified as a current asset or liability.
The fair value of forward exchange contracts is their quoted market price
at the statement of financial position date, being the present value of the
quoted forward price.
Notes
Continued
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2. Significant accounting policies (continued)
Cash ow hedging
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges is recognised in the hedging
reserve within equity. The gain or loss relating to the ineffective portion
is recognised immediately in the income statement within administrative
expenses.
When forward contracts are used to hedge forecast transactions, the
Group generally designates only the change in fair value of the forward
contract related to the spot component as the hedging instrument.
Gains or losses relating to the effective portion of the change in the spot
component of the forward contracts are recognised in the cash flow
hedging reserve within equity. The change in the forward element of the
contract that relates to the hedged item (“aligned forward element”) is
recognised within other comprehensive income in the costs of hedging
reserve within equity. In some cases, the entity might designate the full
change in fair value of the forward contract (including forward points) as
the hedging instrument. In such cases, the gains or losses relating to the
effective portion of the change in fair value of the entire forward contract
are recognised in the cash flow hedging reserve within equity.
When a hedging instrument expires or is sold or terminated, or when a
hedge no longer meets the criteria for hedge accounting, any cumulative
deferred gain or loss and deferred costs of hedging in equity at that time
remains in equity until the forecast transaction occurs, resulting in the
recognition of a non-financial asset. When the forecast transaction is no
longer expected to occur, the cumulative gain or loss and deferred costs
of hedging that were reported in equity are immediately reclassified to the
income statement.
2.5 Investments in subsidiaries and joint arrangements
The Company’s investments in subsidiaries and joint arrangements are
stated at cost less provision for impairment.
2.6 Property, plant and equipment
i) Owned assets
Items of property, plant and equipment are stated at cost or deemed
costless accumulated depreciation and any impairment losses.
When parts of an item of property, plant and equipment have different
useful lives, those components are accounted for as separate items of
property, plant and equipment.
Subsequent costs are included in the asset’s carrying amount or
recognised as a separate asset, as appropriate, only when it is probable
that future economic benefits associated with the item will flow to
the Group and the cost of the item can be measured reliably. The
carrying amount of the replaced part is derecognised. All other repairs
and maintenance are charged to the income statement during the
financialyearin which they are incurred.
The cost of assets under construction includes the cost of materials and
direct labour and any other costs directly attributable to bringing the asset
to a working condition for its intended use.
ii) Depreciation
Land is not depreciated. Depreciation is charged to the income statement
on a straight-line basis over the estimated useful lives of each part of the
item of property, plant and equipment. The estimated useful lives are as
follows:
Buildings 20–40 years
Plant and equipment 5–20 years
Fixtures and fittings 3–5 years
Assets under construction are depreciated from the month in which the
asset is ready for its intended use.
The assets’ residual values and useful lives are reviewed, and adjusted if
appropriate, at the end of each financial year.
2.7 Intangible assets
i) Research and development
Expenditure on research activities undertaken with the prospect of gaining
new scientific or technical knowledge and understanding is recognised in
the income statement as an expense as incurred.
Development costs that are directly attributable to the design and testing
ofidentifiable and unique products controlled by the Group are recognised
as intangible assets where the following criteria are met:
X
It is technically feasible to complete the asset so that it will be available
for use;
X
Management intends to complete the asset and use or sell it;
X
There is an ability to use or sell the asset;
X
It can be demonstrated how the asset will generate probable future
economic benefits;
X
Adequate technical, financial and other resources to complete the
development and to use or sell the asset are available; and
X
The expenditure attributable to the asset during its development can
bereliably measured.
Directly attributable costs that are capitalised as part of the asset include
the product development employee costs and an appropriate portion of
relevant overheads.
Other development expenditures that do not meet these criteria are
recognised as an expense as incurred. Development costs previously
recognised as an expense are not recognised as an asset in a
subsequentperiod.
ii) Goodwill
Goodwill represents the excess of the cost of acquisition over the fair value
of the Group’s interest in the identifiable assets, liabilities and contingent
liabilities acquired in a business combination. Goodwill is stated at the
amount recognised on acquisition date less any accumulated impairment
losses. Goodwill is tested annually for impairment or more frequently if
there are indications that goodwill may be impaired.
iii) Software
Acquired computer software licences are capitalised on the basis of the
costs incurred to acquire and bring to use the specific software.
iv) Other intangible assets
Intangible assets acquired from a business combination are capitalised at
fair value as at the date of acquisition and amortised over their estimated
useful economic life. Their carrying value is the fair value at acquisition less
cumulative amortisation and any impairment. An intangible asset acquired
as part of a business combination is recognised outside goodwill if the
asset is separable or arises from contractual or other legal rights and its
fairvalue can be measured reliably.
Development costs that are directly attributable to the design and
development of internally generated intangible assets controlled by
the Group are recognised when the relevant criteria are met. Internally
generated intangible assets are amortised from the point at which the
asset is ready for use.
Expenditure on internally generated goodwill and brands is recognised
in the income statement as an expense as incurred. Research
expenditure and development expenditure that do not meet the criteria
above are recognised as an expense as incurred. Development costs
previously recognised as an expense are not recognised as an asset
inasubsequentperiod.
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2. Significant accounting policies (continued)
The estimated useful lives of the Group’s intangible assets are as follows:
Marketing related 5–15 years
Customer related 2–10 years
Technology related 5–20 years
Software related 3–10 years
Capitalised development 3–10 years, from the date the
patentisgranted
Amortisation methods, useful lives and residual values are reviewed
ateach reporting date and adjusted if appropriate.
2.8 Financial assets
i) Classications
The Group classifies its financial assets in the following categories: a) those
to be measured subsequently at fair value; and b) those to be measured at
amortised cost.
The classification depends on the purpose for which the financial assets
were acquired. Management determines the classification of its financial
assets at initial recognition.
a) Financial assets subsequently measured at fair value through protor
loss
Financial assets at fair value through profit or loss are financial assets
held for trading. A financial asset is classified in this category if acquired
principally for the purpose of selling it in the short term. Derivatives
are alsocategorised as held for trading, unless they are designated
as hedges.Assets in this category are classified as current assets if
expectedto be settled within 12 months, otherwise they are classified
asnon-current assets.
b) Financial assets at amortised cost
Financial assets at amortised cost are held for collection of contractual
cash flows where those cash flows represent solely payments of principal
and interest and are measured at amortised cost.
ii) Recognition and measurement
Financial assets not carried at fair value through profit or loss are initially
recognised at fair value plus transaction costs. Financial assets carried
at fair value through profit or loss are initially recognised at fair value
and transaction costs are expensed in the income statement. Financial
assets are derecognised when the rights to receive cash flows from the
investments have expired or have been transferred and the Group has
transferred substantially all risks and rewards of ownership. Interest income
from financial assets at amortised cost is included in finance income using
the effective interest rate method. Any gain or loss arising on derecognition
is recognised directly in profit or loss and presented in other gains/(losses)
together with foreign exchange gains and losses. Impairment losses are
presented as a separate line item in the statement of profit or loss.
Gains or losses arising from changes in the fair value of the “financial assets
at fair value through profit or loss” category are presented in the income
statement within administrative expenses in the financial year inwhich
theyarise.
iii) Offsetting nancial instruments
Financial assets and liabilities are offset, and the net amount is reported in
the statement of financial position, when there is a legally enforceable right
to offset the recognised amounts and there is an intention to settle on a net
basis or realise the asset and settle the liability simultaneously. The legally
enforceable right must not be contingent on future events and it must be
enforceable in the normal course of business and in the event of default,
insolvency or bankruptcy of the Group or the counterparty.
iv) Impairment of nancial assets carried at amortised cost
The Group assesses on a forward-looking basis the expected credit
losses associated with its debt instruments carried at amortised cost. The
impairment methodology applied depends on whether there has been a
significant increase in credit risk. For trade receivables, the Group applies
the simplified approach permitted by IFRS 9, which requires expected
lifetime losses to be recognised from initial recognition of the receivables.
Further details are provided in note 22.
2.9 Trade and other receivables
Trade receivables are amounts due from customers for goods sold or
services performed in the ordinary course of business. They are generally
due for settlement within 30–90 days and are therefore all classified
as current. Trade receivables are recognised initially at the amount of
consideration that is unconditional, unless they contain significant financing
components, in which case they are recognised at fair value. The Group
holds the trade receivables with the objective of collecting the contractual
cash flows and so it measures them subsequently at amortised cost using
the effective interest method.
Due to the short-term nature of current receivables, their carrying amount
is considered to be the same as their fair value. Information about the
impairment of trade receivables and the Group’s exposure to credit risk
and foreign currency risk can be found in note 22.
2.10 Inventories
Inventories are stated at the lower of cost and net realisable value. Net
realisable value is the estimated selling price in the ordinary course of
business, less the estimated costs of completion and selling expenses.
In determining the cost of raw materials, consumables and goods
purchased for resale, the weighted average purchase price is used. The
cost of finished goods and work in progress comprises design costs,
raw materials, direct labour, other direct costs and related production
overheads (based on normal operating capacity) but excludes borrowing
costs. For work in progress and finished goods manufactured by the
Group, cost is taken as production cost, which includes an appropriate
proportion of attributable overheads.
2.11 Cash and cash equivalents
Cash and cash equivalents comprise cash balances and short-term
highlyliquid investments with an original maturity of three months or less.
2.12 Impairment of non-financial assets
The carrying amounts of the Group’s non-financial assets are reviewed
at each statement of financial position date where there is an indication
that the asset may be impaired. If any such indication exists, the asset’s
recoverable amount is estimated (see below).
For goodwill, property, plant and equipment and intangible assets that have
indefinite useful lives or that are not yet available for use, the recoverable
amount is estimated each year at the same time. An impairment loss is
recognised if the carrying amount of an asset or its related cash-generating
unit (CGU) exceeds its estimated recoverable amount.
i) Calculation of recoverable amount
The recoverable amount of an asset or CGU is the greater of its value
in use and its fair value less costs to sell. In assessing value in use, the
estimated future cash flows are discounted to their present value using a
discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset or CGU. For the purpose of
impairment testing, assets that cannot be tested individually are grouped
together into the smallest group of assets that generates cash inflows
from continuing use that are largely independent of the cash inflows of
other assets or CGUs. Subject to an operating segment ceiling test, for
the purposes of goodwill impairment testing, CGUs to which goodwill has
been allocated are aggregated so that the level at which impairment testing
is performed reflects the lowest level at which goodwill is monitored for
internal reporting purposes. Goodwill acquired in a business combination
is allocated to groups of CGUs that are expected to benefit from the
synergies of the combination.
Notes
Continued
100
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Annual Report 2020
2. Significant accounting policies (continued)
The Group’s corporate assets do not generate separate cash inflows and
are utilised by more than one CGU. Corporate assets are allocated to
CGUs on a reasonable and consistent basis and tested for impairment
aspart of the testing of the CGU to which the corporate asset is allocated.
ii) Impairment losses
Impairment losses are recognised in the income statement. Impairment
losses recognised in respect of CGUs are allocated first to reduce the
carrying amount of any goodwill allocated to the CGU (or group of CGUs),
and then to reduce the carrying amounts of the other assets in the CGU
(orgroup of CGUs) on a pro rata basis.
iii) Reversal of impairment
An impairment loss in respect of goodwill is not reversed. In respect of
other assets, impairment losses recognised in prior years are assessed at
each reporting date for any indications that the loss has decreased or no
longer exists. An impairment loss is reversed if there has been a change in
the estimates used to determine the recoverable amount. An impairment
loss is reversed only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined, net of
depreciation or amortisation, if no impairment loss had been recognised.
2.13 Dividends
Final dividends are recognised as a liability in the financial year in which
they are approved. Interim dividends are recognised when paid.
2.14 Interest-bearing loans and borrowings
Interest-bearing borrowings are recognised initially at fair value less
attributable transaction costs. Subsequent to initial recognition, interest-
bearing borrowings are stated at amortised cost with any differences
between cost and redemption values being recognised in the income
statement over the period of the borrowings on an effective interest
basis,where material.
2.15 Employee benefits
i) Dened contribution plans
A defined contribution plan is a pension plan under which the Group
pays fixed contributions into a separate entity. The Group has no legal or
constructive obligations to pay further contributions if the fund does not
hold sufficient assets to pay all employees the benefits relating to employee
service in the current and prior periods. Obligations for contributions to
defined contribution pension plans are recognised as an expense in the
income statement as incurred.
For defined contribution plans, the Group pays contributions to publicly
or privately administered pension insurance plans on a mandatory,
contractual or voluntary basis. The Group has no further payment
obligations once the contributions have been paid. The contributions are
recognised as an employee benefit expense when they are due. Prepaid
contributions are recognised as an asset to the extent that a cash refund
ora reduction in the future payments is available.
ii) Dened benet plans
A defined benefit plan is a pension plan that is not a defined contribution
plan. Typically, defined benefit plans define an amount of pension benefit
that an employee will receive on retirement, usually dependent on one or
more factors, such as age, years of service and compensation.
The liability recognised in the statement of financial position in respect of
defined benefit pension plans is the present value of the defined benefit
obligation at the end of the financial year, less the fair value of plan assets.
The defined benefit obligation is calculated annually by independent
actuaries using the projected unit credit method. The present value of the
defined benefit obligation is determined by discounting the estimated future
cash outflows using AA credit-rated bonds that have terms to maturity
approximating to the terms of the related pension obligation.
The current service cost of the defined benefit plan, recognised in “staff
expenses” in the income statement, except where included in the cost of
an asset, reflects the increase in the defined benefit obligation resulting
from service in the current year, benefit changes, curtailments and
settlements.
Past service costs are recognised immediately in the income statement.
The net interest cost is calculated by applying the discount rate to the net
balance of the defined benefit obligation and the fair value of plan assets.
This cost is included in finance costs in the income statement.
Actuarial gains and losses arising from experience adjustments and
changes in actuarial assumptions are charged or credited to equity
inothercomprehensive income in the year in which they arise.
2.16 Share-based payment transactions
The Company operates a number of equity-settled, share-based
compensation plans, under which the entity receives services from
employees as consideration for equity instruments (share awards) of the
Company. The fair value of the employee services received in exchange
for the grant of the share awards is recognised as an expense. The total
amount to be expensed is determined by reference to the fair value of
theshare awards granted:
X
Including any market performance conditions (for example, an entity’s
share price);
X
Excluding the impact of any service and non-market performance
vesting conditions (for example, profitability, sales growth targets and
remaining an employee of the entity over a specified time period); and
X
Including the impact of any non-vesting conditions (for example, the
requirement for employees to save or hold shares for a specific period
of time).
Where material, share awards granted since 1 January 2006 with market-
based vesting conditions are valued using a Monte Carlo model.
At the end of each reporting period, the Company revises its estimates of
the number of share awards that are expected to vest based on the non-
market vesting conditions and service conditions. It recognises the impact
of the revision to original estimates, if any, in the income statement, with a
corresponding adjustment to equity.
In addition, in some circumstances, employees might provide services in
advance of the grant date, and so the grant date fair value is estimated
for the purposes of recognising the expense during the period between
service commencement and grant date.
When the share awards vest or are exercised, the Employee Benefit Trust
(EBT) will normally release the shares to the participant. This may involve
selling all, or a portion of, the shares. The proceeds received from the sale,
net of any directly attributable transaction costs, are credited to share
capital (nominal value) and share premium.
The grant by the Company of share awards over its equity instruments
to the employees of subsidiary undertakings in the Group is treated
as a capital contribution. The fair value of employee services received,
measured by reference to the grant date fair value, is recognised over the
vesting period as an increase to investment in subsidiary undertakings,
with a corresponding credit to equity in the parent entity accounts.
Any social security contributions payable in connection with the grant of
the share awards are considered an integral part of the grant itself and the
charge will be treated as a cash-settled transaction.
Own shares held by the EBT
Transactions of the EBT are treated as being those of the Group and
aretherefore reflected in the financial statements. In particular, the EBT’s
purchase and sale of shares in the Company are debited and credited
directly to equity.
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2. Significant accounting policies (continued)
2.17 Trade and other payables
Trade and other payables are obligations to pay for goods or services that
have been acquired in the ordinary course of business from suppliers.
Trade and other payables are classified as current liabilities if payment
is due within one year or less (or in the normal operating cycle of the
business, if longer). If not, they are presented as non-current liabilities.
Trade and other payables are stated at cost.
Trade and other payables are recognised initially at fair value and
subsequently measured at amortised cost using the effective interest
method.
2.18 Borrowing costs
General and specific borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets, which are assets that
necessarily take a substantial period of time to get ready for their intended
use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific
borrowings, pending their expenditure on qualifying assets, is deducted
from the borrowing costs eligible for capitalisation. All other borrowing
costs are recognised in the income statement in the period in which
theyare incurred.
2.19 Revenue
Revenue comprises the sale of foam and equipment and licence and
royalty income. All these revenue streams are revenues arising from
contracts with customers. The recognition and measurement principles
ofIFRS 15 are applied as set out below.
Revenue excludes inter-company revenues and value added taxes and
arestated net of discounts and returns.
i) Sale of foam
Revenue from the sale of foam is recognised when control of the goods
has been transferred to a third party. This usually occurs when title
passes to the customer, either on shipment or on receipt of goods
bythecustomer, depending on agreed trading terms. Payment is due
withincredit terms which are consistent with industry practices, with
nofinancing components.
ii) Sale of equipment
Revenue from the sale of equipment is recognised when control of the
goods has been transferred to a third party. This usually occurs when title
passes to the customer, either on shipment or on receipt of goods by the
customer, depending on agreed trading terms.
iii) Licence and royalty income
Revenue from usage-based royalties in exchange for a licence of the
Group’s technology is recognised when the performance obligation is
satisfied, which is at the time when the sale or usage occurs. Licence
revenue from contracts, which include a minimum royalty guarantee to
provide use of the Group’s technology, is recognised at a point in time
when the uptake of the minimum royalty becomes unconditional. Royalty
income which does not include a minimum royalty guarantee is recognised
when the usage occurs.
2.20 Leases
The Group leases offices and various equipment. Rental contracts are
typically two to five years. Lease terms are negotiated on an individual
basis and contain a wide range of different terms and conditions. The lease
agreements do not impose any covenants, but leased assets may not be
used as security for borrowing purposes.
Leases are recognised as a right-of-use asset and a corresponding liability
at the date at which the leased asset is available for use by the Group.
Each lease payment is allocated between the liability and finance cost. The
finance cost is charged to the income statement over the lease period to
produce a constant periodic rate of interest on the remaining balance of
the liability for each period. The right-of-use asset is depreciated over the
shorter of the asset’s useful life and the lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially measured on a present
value basis. Lease liabilities include the net present value of the following
lease payments:
X
Fixed payments (including in-substance fixed payments), less any lease
incentives receivable;
X
Variable lease payments that are based on an index or a rate;
X
The exercise price of a purchase option if the lessee is reasonably
certain to exercise that option; and
X
Payments of penalties for terminating the lease, if the lease term reflects
the lessee exercising that option.
The lease payments are discounted using the Group’s incremental
borrowing rate, being the rate that the Group would have to pay to borrow
the funds necessary to obtain an asset of similar economic environment
within similar terms and conditions. Lease payments are allocated between
principal and finance costs. The finance cost is charged to the income
statement over the lease period so as to produce a constant periodic rate
of interest on the remaining balance of the liability each period.
Right-of-use assets are measured at cost comprising the following:
X
The amount of initial measurement of lease liability;
X
Any lease payments made at or before the commencement date less
any lease incentives received;
X
Any initial direct costs; and
X
Restoration costs.
Payments associated with short-term leases and leases of low value are
recognised on a straight-line basis as an expense in the income statement.
Short-term leases are leases with a lease term of 12 months or less. Low-
value assets comprise small items of office furniture and equipment.
Notes
Continued
102
Zotefoams plc
Annual Report 2020
2. Significant accounting policies (continued)
2.21 Current and deferred tax
The tax expense for the period comprises current and deferred tax. Tax
is recognised in the income statement except to the extent that it relates
to items recognised directly in other comprehensive income or directly
inequity, in which case it is recognised in other comprehensive income
ordirectly in equity respectively.
The current tax charge is calculated on the basis of the tax laws enacted
at the statement of financial position date in the countries where the
Group operates and generates taxable income. Management periodically
evaluates positions taken in tax returns with respect to situations in
which applicable tax regulation is subject to interpretation. It establishes
provisions, where appropriate, on the basis of amounts expected to be
paid to the tax authorities.
Deferred tax is recognised on temporary differences arising between the
tax bases of assets and liabilities and their carrying amounts in the financial
statements. However, deferred tax liabilities are not recognised if they arise
from the initial recognition of goodwill; deferred tax is not accounted for if it
arises from the initial recognition of an asset or liability in a transaction other
than a business combination that, at the time of the transaction, affects
neither accounting nor taxable profit or loss. Deferred tax is determined
using tax rates (and laws) that have been enacted or substantively
enactedby the statement of financial position date and are expected
toapply when the related deferred tax asset is realised, or the deferred
taxliability is settled.
Deferred tax assets are recognised only to the extent that it is probable
that future taxable profit will be available against which the temporary
differences can be utilised.
Deferred tax liabilities are provided on taxable temporary differences
arising from investments in subsidiaries and joint arrangements, except for
any deferred tax liability where the timing of the reversal of the temporary
difference is controlled by the Group and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax assets are recognised on deductible temporary differences
arising from investments in subsidiaries and joint arrangements only to
the extent that it is probable that the temporary difference will reverse in
the future and there is sufficient taxable profit available against which the
temporary difference can be utilised.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities
and when the deferred tax assets and liabilities relate to income taxes
levied by the same taxation authority on either the same taxable entity
ordifferent taxable entities and there is an intention to settle the balances
on a net basis.
2.22 Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new ordinary shares or options are shown
inequity as a deduction, net of tax, from the proceeds.
Where any group company purchases the Company’s equity share capital
(treasury shares), the consideration paid, including any directly attributable
incremental costs (net of income tax), is deducted from equity attributable
to the Company’s equity holders until the shares are cancelled or reissued.
Where such ordinary shares are subsequently reissued, any consideration
received, net of any directly attributable incremental transaction costs
and the related income tax effects, is included in equity attributable to
theCompany’s equity holders.
2.23 Exceptional items
Exceptional items are disclosed separately in the financial statements,
where it is necessary to do so to provide further understanding of the
financial performance of the Group. These are items that are material,
either because of their size or their nature, or that are non-recurring
andarepresented within the line items to which they best relate.
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2. Significant accounting policies (continued)
2.24 New standards and interpretations
The IASB and IFRS Interpretations Committee have issued the following standards and interpretations with an effective date of implementation
foraccounting periods beginning after the date on which the Group’s financial statements for the current year commenced.
i) New standards and amendments – applicable 1 January 2020
The following standards and interpretations apply for the first time to financial reporting periods commencing on or after 1 January 2020:
Effective for accounting
periods beginning on
or after
Impact
Definition of Material – Amendment to IAS 1 “Presentation of financial statements”
1 January 2020
None
Definition of Material – Amendment to IAS 8 “Accounting policies”
1 January 2020
None
Definition of a Business – Amendments to IFRS 3 “Business Combinations”
1 January 2020
None
Revised Conceptual Framework for Financial Reporting
1 January 2020
None
Interest rate benchmark reform – Amendments to IFRS 9 “Financial Instruments”
1 January 2020
None
Interest rate benchmark reform – Amendments to IAS 39 “Financial Instruments: Recognition and Measurement”
1 January 2020
None
Interest rate benchmark reform – Amendments to IFRS 7 “Financial Instruments: Disclosures”
1 January 2020
None
ii) Forthcoming requirements
As at 31 December 2020, the following standards and interpretations had been issued but were not mandatory for annual reporting periods ending
on31December 2020.
Effective for accounting
periods beginning on
or after
Expected
Impact
COVID-19-related Rent Concessions – Amendments to IFRS 16
1 June 2020
None
Property, Plant and Equipment: Proceeds before intended use – Amendments to IAS 16 1 January 2022
None
Reference to the Conceptual Framework – Amendments to IFRS 3 1 January 2022
None
Onerous Contracts: Cost of Fulfilling a Contract – Amendments to IAS 37 1 January 2022
None
Annual Improvements to IFRS Standards 2018 – 2020 1 January 2022
None
Classification of Liabilities as Current or Non-current – Amendments to IAS 1
1 January 2023
None
Notes
Continued
104
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Annual Report 2020
3. 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
arecategorised as follows:
X
Polyolefin Foams: these foams are made from olefinic homopolymer and copolymer resin. The most common resin used is polyethylene.
X
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: polyvinylidene fluoride (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
®
.
X
MuCell Extrusion LLC (MEL): licenses microcellular foam technology and sells related machinery.
Polyolefin Foams
HPP
MEL
Inter-segment
eliminations
Consolidated
2020
£’000
2019
£’000
2020
£’000
2019
£’000
2020
£’000
2019
£’000
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Group revenue
50,904
51,363
30,01626,477
1,813
82,6523,097
(81)
(77)
80,860
Segment profit/(loss) pre-amortisation
4,836
7, 3 01
7,907
6,430
(1,184)
(1,270)
–
–
11,559
12,461
Amortisation of acquired intangible assets
–
–
––
(262)
(276)
–
(276)–
(262)
Segment profit/(loss)
4,836
7, 3 01
7,907
6,430
(1,446)
(1,546)
–
–
11, 297
12,18 5
Foreign exchange (losses)/gains
–
–
––
––
––
(300)
(1,405)
Unallocated central costs
–
–
––
––
––
(1,888)
(1,679)
Operating profit before exceptional items
9,109
9,101
Financing costs
–
–
––
––
––
(872)
(462)
Financing income
–
–
––
––
––
26
50
Share of profit/(loss) from joint venture
38
72
–
38–
––
––
72
Taxation (before exceptional items)
–
–
––
––
––
(1,13 8)
(1,594)
Profit for the year (before exceptional items)
7,163
7,16 7
Segment assets
106,792
100,497
41,046
34,088
7,875
8 ,106
–
–
155,713
142,691
Unallocated assets
–
–
––
––
––
509
327
Total assets
156,222
143,018
Segment liabilities
(46,676)
(44,530)
(13,234)
( 7, 25 4)
(944)
(659)
–
–
(60,854)
(52,443)
Unallocated liabilities
–
–
––
––
––
(992)
(935)
Total liabilities
(61,846)
(53,378)
Depreciation of PPE
4,478
4,009
813
703
115
83
–
–
5,4064,795
Depreciation of right-of-use assets
307
268
71
43
36
–
–
–414
311
Amortisation
494
344
153
55
279
264
–
–
926
663
Capital expenditure:
PPE
9,928
21,222
2,401
3,475
447
139
–
–
12,776
24,836
Right-of-use assets
13
804
3
126
623
–
––
639
930
Intangible assets
89
611
22
97
235
206
–
–
346
914
Unallocated assets relate to deferred tax assets of £509k (2019: £327k). Unallocated liabilities are made up of corporation tax £101k (2019: £261k) and
deferred tax liabilities £891k (2019: £674k).
Segment profit/(loss) is made up of operating profit/(loss) before exceptional items, foreign exchange gains/(losses) and unallocated central costs.
Unallocated central costs are not directly attributable or cannot be allocated to a segment.
Segment profit/(loss) pre-amortisation only excludes amortisation on acquired intangible assets.
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3. Segment reporting (continued)
Geographical segments
Polyolefin Foams, HPP and MEL are managed on a worldwide basis but operate from UK, US and Asian locations. In presenting information on the basis
of geographical segments, segmental revenue is based on the geographical location of customers. Segment assets are based on the geographical
location of assets.
United
Kingdom
£’000
Continental
Europe
£’000
North
America
£’000
Rest of
the world
£’000
Total
£’000
For the year ended 31 December 2020
Group revenue from external customers
19,106
17,856
17,629
28,061
82,652
Non-current assets
44,343
21,050
34,351
520
100,264
Capital expenditure – PPE
4,090
7,0 95
1,423
168
12,776
For the year ended 31 December 2019
Group revenue from external customers
12,875
25,503
22,010
20,472
80,860
Non-current assets
44,231
13,038
35,908
462
93,639
Capital expenditure – PPE
7, 23 9
12,069
5,380
148
24,836
Non-current assets do not include deferred tax assets or investments in joint ventures.
Major customer
Revenues from one customer of the Group located in the United Kingdom and one customer located in ‘Rest of the world’ contributed £13,904k and
£21,608k respectively to the Group’s revenue (2019: one customer located in ‘Rest of the world’ contributed £12,858k to the Group’s revenue).
Analysis of revenue by category
Breakdown of revenues by products and services for the Group:
2020
£’000
2019
£’000
Sale of foam
80,920
7 7,8 40
Licence and royalty income
989
836
Sale of equipment
824
2,261
Less: eliminations
(81)
(77)
Group revenue
82,652
80,860
4. Exceptional item
2020
£’000
2019
£’000
Settlement income relating to legal claim
–
1,050
In the prior year, the Company was successful in a claim against the previous advisers 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.
Notes
Continued
106
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Annual Report 2020
5. Expenses by nature
2020
£’000
2019
£’000
Included in profit for the year are:
Changes in inventories of finished goods and work in progress
297
(784)
Changes in raw materials and consumables used
4,132
1,494
Inventory write-down
17
409
Employee benefits expenses
22,784
22,16 8
Operating lease charges (note 12)
228
233
Amortisation (note 13)
926
663
Depreciation of PPE and right-of-use assets (note 11 and note 12)
5,820
5,10 6
Disposal of assets
40
77
Research and development costs expensed
1,014
1,236
Development costs capitalised (note 13)
–
(121)
Net exchange losses/(gains)
300
1,405
External auditor’s remuneration:
Group – Fees payable to the Group’s external auditor and its associates for the audit of the Company and consolidated
financial statements
PricewaterhouseCoopers LLP (PwC)
38
161
PKF Littlejohn LLP
175
–
Fees payable to the external auditor and its associates in respect of other services:
– audit-related assurance services (PwC)
30
19
Total cost of sales, distribution costs and administrative expenses
73,543
70,709
6. Staff numbers and expenses
The monthly average number of people employed by the Group and Company (including Executive Directors) during the year, analysed by category, was
as follows:
Number of employees
Group
Company
2020
2019
20202019
Production
225
242
153
161
Maintenance
36
28
23
21
Distribution and marketing
77
78
44
46
Administration and technical
114
106
88
84
452
454
308
312
The aggregate payroll costs of these persons were as follows:
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Wages and salaries*
18,857
18,132
13,502
12,959
Social security costs*
2,584
2,508
1,488
1,290
Share options granted to Directors and employees (note 25)
300
390
300339
Pension costs, including past service costs
1,043
1,138
759
845
22,784
22,16 8
16,049
15,433
* Net of directly attributable costs capitalised
672
898
207
411
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6. Staff numbers and expenses (continued)
Details of aggregate Directors’ emoluments are provided below:
2020
£’000
2019
£’000
Aggregate emoluments
652
645
Aggregate gains made on the exercise of share options
26
740
Aggregate amounts receivable under long-term incentive schemes
109
338
Company contribution to money purchase pension scheme
69
66
856
1,789
Further details on Directors’ emoluments, including details of the highest-paid Director, are included in the Directors’ Remuneration report on pages 72 to 80.
7. Finance income and costs
Finance income
2020
£’000
2019
£’000
Interest income
26
50
Finance costs
2020
£’000
2019
£’000
Finance costs on bank loans
1,280
1,164
Lease liabilities interest
31
28
Amount capitalised
(604)
(933)
Finance costs expensed
707
259
Interest on defined benefit pension obligation (note 24)
165
203
872
462
Capitalised borrowing costs
The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the entity’s
general borrowings during the year, in this case 2.46% (2019: 3.38%).
8. Income tax expense
2020
£’000
2019
£’000
UK corporation tax
1,105
1,011
Overseas tax
120
11
Adjustment to prior year UK corporation tax charge
(381)
(405)
Total current tax
844
617
Deferred tax
294
977
Income tax expense
1,13 8
1,594
Notes
Continued
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8. Income tax expense (continued)
Factors affecting the tax charge
The weighted average applicable tax rate for the Group is 19.65% (2019: 18.72%). Differences arise on account of the following factors:
2020
£’000
2019
£’000
Tax reconciliation
Profit before tax
8,301
9,811
Tax at the UK tax rate of 19% (2019: 19%)
1,577
1,864
Effects of:
Expenses not deductible for tax purposes
223
90
Research and development and other tax credits
(250)
(133)
(Utilisation of) tax losses for which no deferred income tax asset recognised
(147)
225
Effect of different overseas tax rates
(28)
(77)
Changes in tax rates
79
–
Other differences
65
30
Adjustments to prior year UK corporation tax charge
(381)
(405)
1,138
1,594
The main rate of UK corporation tax which was substantively enacted for the period was 19%. On 1 September 2016, a reduction of the main rate of UK
corporation tax to 17% from 1 April 2020 was enacted. However, on 11 March 2020 the Chancellor of the Exchequer presented his Budget to Parliament
which maintained the main rate at 19%.
The Group has not identified any uncertain tax positions as at 31 December 2020 (2019: none).
9. Dividends and earnings per share
2020
£’000
2019
£’000
Prior year final dividend of nil (2019: 4.15p) per 5.0p ordinary share
–
1,996
Interim dividend of 2.03p (2019: 2.03p) per 5.0p ordinary share
977
977
Dividends paid during the year
977
2,973
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.
2020
2019
Weighted average number of ordinary shares in issue
48,186,077
48,054,819
Adjustments for share options
779,660
752,321
Diluted number of ordinary shares issued
48,965,737
4 8, 8 07,14 0
10. Investments in joint venture
During 2013, the Group entered into joint-venture arrangements with INOAC Corporation. As a result, the Group has a 50% interest in Azote Asia Limited
(a private company incorporated in Hong Kong) and Inoac Zotefoams Korea Limited (incorporated in South Korea). Azote Asia Limited commenced
trading in 2014 and is the exclusive distributor of Zotefoams’ AZOTE
®
products in the Far East. The registered address and principal place of business
is 1318-22, Park-In Commercial Centre, 56 Dundas Street, Kowloon, Hong Kong. Inoac Zotefoams Korea Limited remains non-trading. The registered
address is 100, Jayumuyeok 5-gil, Masanhoewon-gu, Chang-won-si, Gyeongsangnam-do, Republic of Korea. As at the end of the year, there were no
contingent liabilities relating to the Group’s interest in the joint venture.
The joint venture has share capital consisting solely of ordinary shares, which is held directly by the Group. Azote Asia Limited is a private company and
there is no quoted market price available for its shares.
A summarised statement of financial position of Inoac Zotefoams Korea Limited is not presented as the company is dormant.
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10. Investments in joint venture (continued)
Set out below is the summarised financial information for Azote Asia Limited, which is accounted for using the equity method.
Summarised statement of financial position:
As at 31 December
2020
£’000
2019
£’000
Cash and cash equivalents
371
255
Other current assets (excluding cash)
1,027
981
Total current assets
1,398
1,236
Financial liabilities (excluding trade payables)
(76)
(40)
Other current liabilities (including trade payables)
(956)
(906)
Total current liabilities
(1,032)
(946)
Net assets
366
290
Summarised statement of comprehensive income:
As at 31 December
2020
£’000
2019
£’000
Revenue
2,694
3,716
Finance costs
(2)
(3)
Profit before tax
76
144
Income tax expense
–
–
Profit after tax
76
144
Other comprehensive income
–
–
Total comprehensive income
76
144
Dividend received from joint venture
–
–
The information above reflects the amounts presented in the financial statements of the joint venture. There are no material differences in accounting
policies between the Group and the joint venture.
Reconciliation of the summarised financial information presented to the carrying amount of the interest in the joint venture is provided below:
2020
£’000
2019
£’000
Opening net assets
290
146
Profit for the year
76
144
Other comprehensive income
–
–
Closing net assets
366
290
Interest in joint venture @ 50%
183
145
2020
£’000
2019
£’000
Information of the joint venture
Carrying value at 1 January
145
73
Share of profit for the year
38
72
Carrying value at 31 December
183
145
Notes
Continued
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11. Property, plant and equipment
Group
Land and
buildings
£’000
Plant and
equipment
£’000
Fixtures and
fittings
£’000
Under
construction
£’000
Total
£’000
Cost
Balance at 1 January 2019
18,984
80,813
3,297
22,722
125,816
Additions
8
744
172
23,912
24,836
Disposals
–
(77)
–(16)
(93)
Transfers
12,383
3,364
496
(16,243)
–
Effect of movement in foreign exchange
(300)
(870)
(859)(34)
(2,063)
Balance at 31 December 2019
31,075
8 3,974
3,915
29,532
148,496
Balance at 1 January 2020
31,075
83,974
3,915
29,532
148,496
Additions
159
720
115 11,782
12,776
Disposals
–
(51)
–(2)
(53)
Transfers
1,857
15,866
36
(17,759)
–
Effect of movement in foreign exchange
(298)
(1,472)
(33)
1,178
(625)Balance at 31 December 2020
32,793
99,037
24,7334,031
160,594
Accumulated depreciation
Balance at 1 January 2019
10,961
45,441
2,113
–
58,515
Depreciation charge for the year
657
3,784
354
4,795–
Disposals
–
(8) (8)
–(16)
Effect of movement in foreign exchange
(147)
(281)
(22)
–
(450)
Balance at 31 December 2019
11,471
48,936
2,437
–
62,844
Balance at 1 January 2020
11,471
48,936
2,437
–
62,844
Depreciation charge for the year
1,277
3,642
487
– 5,406
Disposals
– –
(13)
–(13)
Effect of movement in foreign exchange
(170)
(370)
(28)
–
(568)
Balance at 31 December 2020
12,578
52 ,195
2,896
–
67,669
Net book value
At 1 January 2019
8,023
35,372
1,184
22,722
67, 3 01
At 31 December 2019 and 1 January 2020
19,604
35,038
1,478
29,532
85,652
At 31 December 2020
20,215
46,842
1,135
24,733
92,925
Depreciation is included in cost of sales in the income statement.
During the year, the Group has capitalised borrowing costs amounting to £604k (2019: £933k) on qualifying assets. Borrowing costs were capitalised
atthe rate of its general borrowings of 2.46% (2019: 3.38%)
Bank borrowings are secured on property, plant and equipment. Refer to note 19 for details.
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11. Property, plant and equipment (continued)
Company
Land and
buildings
£’000
Plant and
equipment
£’000
Fixtures and
fittings
£’000
Under
construction
£’000
Total
£’000
Cost
Balance at 1 January 2019
9,698
54,944
2,347
16,292
83,281
Additions
2
352
84
6,801
7,23 9
Transfers
12,431
2,830
496
(15,757)
–
Balance at 31 December 2019
22,131 58,126
2,927
7, 3 3 6
90,520
Balance at 1 January 2020
22 ,131 58,126
2,927
7,336
90,520
Additions
130
31
53
3,876
4,090
Disposals
– –
(51)
–(51)
Transfers
1,795
6,136
36
(7,9 67)
–
Balance at 31 December 2020
24,056
64,242
3,016
3,245
94,559
Accumulated depreciation
Balance at 1 January 2019
6,896
38,619
1,469
–
46,984
Depreciation charge for the year
222
2,123
272
–
2,617
Balance at 31 December 2019
7,118
4 0,742 1,741
–
49,601
Balance at 1 January 2020
7,118
40,742 1,741
–
49,601
Depreciation charge for the year
841
1,772
398
–
3,011
Disposals
– –
(13)
–(13)
Balance at 31 December 2020
7,959
42,501
2,139
–
52,599
Net book value
At 1 January 2019
2,802
16,325
878
16,29236,297
At 31 December 2019 and 1 January 2020
15,013
17, 38 4 33 6
1,18 6
7,40,919
At 31 December 2020
16,097
21,741
877
3,245
41,960
Notes
Continued
112
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12. Leases
(i) Amounts recognised in the statement of nancial position relating to leases:
Right-of-use assets
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Property
560
72
–
–
Equipment
837
1,135
780
1,064
1,397
1,207
780
1,064
Lease liabilities
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Current
420
369
279
291
Non-current
986
836
504
769
1,406
1,205
783
1,060
Additions to the right-of-use assets during the financial year were £639k for the Group and £16k for the Company (2019: £930k for the Group and £914k
for the Company).
(ii) Amounts recognised in the income statement relating to leases:
Depreciation charge of right-of-use assets
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Property
99
61
–
–
Equipment
315
250
300
238
414
311
300
238
Interest expenses (included in finance costs)
31
28
24
23
Expense relating to short-term leases (included in cost of sales and administrative
expenses)
228
233
28
24
Expense relating to leases of low-value assets that are not shown above as short-term
leases (included in administrative expenses)
22
19
222
The total cash outflow for leases
433
343
318
265
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13. Intangible assets
Group
Marketing
related
£’000
Customer
related
£’000
Technology
related
£’000
Software
related
£’000
Goodwill
£’000
Capitalised
development
£’000
Total
£’000
Cost
Balance at 1 January 2019
248
396
4,930
2,574
2,381
597
11,126
Additions
– –
207
–586
121
914
Effect of movement in foreign exchange
(8)
(9)
(168)
–
(77)
–(262)
Balance at 31 December 2019
240
387
4,969
3,16 0
2,304
11,778718
Balance at 1 January 2020
240
387
4,969
3,160
2,304
718
11,778
Additions
– – –
234
–112
346
Effect of movement in foreign exchange
(8) (8)
(177)
1
(76)
–(268)
Balance at 31 December 2020
232
379
5,026
3,273
2,228
718
11,856
Accumulated amortisation
Balance at 1 January 2019
211
396
4,6112,605
1,399
– –
Charge for the year
25
– –
240
–398
663
Effect of movement in foreign exchange
(8)
(9)
(93)
– – –
(110 )
Balance at 31 December 2019
228
387
2,752
1,797
– –
5,16 4
Balance at 1 January 2020
228
387
2,752
1,797
– –
5,164
Charge for the year
12
–
266 558
–90
926
Effect of movement in foreign exchange
(8) (8)
(106)
– – –
(122)
Balance at 31 December 2020
232
379
2,912
2,355
–
90
5,968
Net book value
At 1 January 2019
37
–
2,325
1,175
2,381
597
6,515
At 31 December 2019 and 1 January 2020
12
–
2,217
1,363
2,304
718
6,614
At 31 December 2020
– –
2,114
918
2,228
628
5,888
Amortisation is included in cost of sales in the income statement.
Goodwill arising on acquisition is allocated to the cash-generating unit (CGU) that is expected to benefit, being MEL. The recoverable amount of the CGU
has been determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial forecasts approved
bymanagement covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below.
Thegrowth rate does not exceed the long-term average growth rate for the business in which the CGU operates.
The key assumptions used in the value-in-use calculations are as follows:
Key assumptions:
Sales growth and forecast contribution margin
This is based on past performance and management’s expectations of market development over the five-year forecast period plus perpetuity.
Other operating costs
These are the fixed costs of the CGU, which do not vary significantly with sales volumes or prices. Management forecasts these costs based on the
current structure of the business, adjusting for inflationary increases, and these do not reflect any future restructurings or cost-saving measures.
Long-term growth rate 2.5%
This growth rate is based on a prudent assessment of past experience and future estimations of market expectations.
Discount rate 12%
The pre-tax discount rate applied to the cash flow forecasts for the CGU is derived from the estimated pre-tax weighted average cost of capital for the
MEL CGU.
Sensitivity to changes in assumptions
There is sufficient headroom for the MEL CGU such that management believes no reasonable change in any of the above assumptions would cause the
carrying value of MEL goodwill to exceed its recoverable amount.
If the long-term growth rate was reduced to zero, the headroom would decrease by 34% but there would still be sufficient headroom. If the discount rate
was increased to 13%, the headroom would decrease by 20% but there would still be sufficient headroom.
Notes
Continued
114
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13. Intangible assets (continued)
Company
Customer
related
£’000
Software
related
£’000
Capitalised
development
£’000
Total
£’000
Cost
Balance at 1 January 2019
121
2,574
597
3,292
Additions
–
586
121
707
Balance at 31 December 2019
121
3,16 0
718
3,999
Balance at 1 January 2020
121
3,160
718
3,999
Additions
–
111
–111
Balance at 31 December 2020
121
3,271
718
4,110
Accumulated amortisation
Balance at 1 January 2019
121
1,398
–
1,519Charge for the year
–
398
–398
Balance at 31 December 2019
121
1,796
–
1,917
Balance at 1 January 2020
121
1,796
–
1,917
Charge for the year
–
558
89
647
Balance at 31 December 2020
121
2,354
89
2,564
Net book value
At 1 January 2019
–
1,176
597
1,773
At 31 December 2019 and 1 January 2020
–
1,364
718
2,082
At 31 December 2020
–
917
629
1,546
14. Investment in subsidiaries
Company
2020
£’000
2019
£’000
Shares in Group undertakings – at cost
30,576
23,549
Additions during the year
246
7, 0 27
30,822
30,576
During the year, the Company, through its subsidiary Zotefoams International Limited, increased its share capital in Zotefoams Poland Sp. z.o.o. for the
consideration of £246k.
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14. Investment in subsidiaries (continued)
The following is a complete list of the subsidiary undertakings of the Company:
Registered office
Ownership
Incorporated in:
Zotefoams International Limited
675 Mitcham Road, Croydon CR9 3AL
100%
Great Britain
Zotefoams Pension Trustees Limited
675 Mitcham Road, Croydon CR9 3AL
100%
Great Britain
Zotefoams Inc. (indirectly owned) Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle, Delaware
100%
USA
Zotefoams Midwest LLC (indirectly owned)
Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle, Delaware
100%
USA
MuCell Extrusion LLC (indirectly owned)
Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle, Delaware
100%
USA
Zotefoams Operations Limited (indirectly owned)
675 Mitcham Road, Croydon CR9 3AL
100%
Great Britain
Zotefoams Technology Limited (indirectly owned)
675 Mitcham Road, Croydon CR9 3AL
100%
Great Britain
KZ Trading and Investment Limited (indirectly owned) 15/F OTB Building, 160 Gloucester Road, Hong Kong
100%
Hong Kong
Zotefoams T-FIT Material Technology (Kunshan) Limited
(indirectly owned)
181 Huanlou Road, Kunshan, Jiangsu
100%
China
Zotefoams France SAS (indirectly owned) 29 Boulevard Albert Einstein, Nantes
100%
France
Zotefoams Poland Sp. z o.o. (indirectly owned) Al. Jerozolimskie 56C, 00-803, Warsaw
100%
Poland
T-FIT Insulation Solutions India Private Limited
(indirectly owned)
335 Udyog Vihar Phase IV Gurgaon, Gurgaon, Haryana 122015
100%
India
The principal activities of the subsidiary undertakings are as follows: Zotefoams International Limited is a holding company. Zotefoams Pension Trustees
Limited and Zotefoams Technology Limited are currently inactive. Zotefoams Inc. purchases, manufactures and distributes cross-linked block foams.
Zotefoams Midwest LLC, based in Oklahoma, USA is a trading company with operations in Oklahoma, USA and supplies specialist materials, based on
AZOTE
®
foams, for the construction industry. MuCell Extrusion LLC holds and develops microcellular foam technology which it licenses to customers.
Zotefoams Operations Limited is a trading company that distributes T-FIT
®
technical insulation products. KZ Trading and Investment Limited is a holding
and trading company for Zotefoams T-FIT Material Technology (Kunshan) Limited (previously known as Kunshan Zotek King Lai Limited), which is a trading
company based in Kunshan, China, processing Zotefoams foams into T-FIT
technical insulation products and distributing them. Zotefoams France SAS is
a wholly-owned subsidiary of Zotefoams International Limited and did not engage in any trading activities in 2020. Zotefoams Poland Sp. z.o.o, is a wholly-
owned subsidiary of Zotefoams International Limited and did not engage in any trading activities in 2020. T-FIT Insulation Solutions India Private Limited
incorporated and began trading in2019, distributing T-FIT technical insulation products. In the opinion of the Directors, the investments in the Company’s
subsidiary undertakings are worth at least the amount at which they are stated in the statement of financial position.
Zotefoams plc Employee Benefit Trust (EBT) is a wholly owned entity with its registered office at Gaspe House, 66-72 Esplanade, St Helier, Jersey,
JE23QT. The EBT releases shares in the Company when share awards vest or are exercised.
Zotefoams International Limited, Zotefoams Technology Limited and Zotefoams Operations Limited are relying upon the exemption from audit of individual
financial statements as permitted by section 479A of the Companies Act 2006. All outstanding liabilities as at 31 December 2020 of these companies
have been guaranteed by the Company and no liability is expected to arise under this guarantee.
The Company has a representative office in China and a branch in Italy.
15. Inventories
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Raw materials and consumables
13,674
9,542
10,167
8,131
Work in progress
5,348
4,827
4,268
3,302
Finished goods
4,011
4,235
2,419
2,929
23,033
18,604
16,854
14,362
Inventories are shown net of:
Provision for impairment losses
1,773
1,756
1,10 0
1,315In 2020, the value of inventory recognised by the Group as an expense in cost of goods sold was £31,760k (2019: £31,152k).
Notes
Continued
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15. Inventories (continued)
Movement in provision
Movements in the inventory provision during the financial year are set out below:
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Provision for impairment losses as at 1 January
1,756
2,232
1,3151,784
Inventories written off against provision
(633)
(409)
(633)(311)
Additional provisions recognised
816
422
584
312
Unused amounts reversed
(166)
(489)
(166)
(470)
Provision for impairment losses as at 31 December
1,773
1,756
1,10 0
1,31516. Trade and other receivables
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Amounts falling due over one year:
Prepayments and accrued income
54
166
54166
Amounts falling due within one year:
Trade receivables
19,766
19,448
15,836
13,736
Amounts owed by Group undertakings
–
–
32,815
27, 979
Other receivables
1,331
2,832
488
490
Prepayments and accrued income
1,053
1,035
363
341
22,204
23,481
49,556
42,712
Amounts owed by Group undertakings are payable on demand. The trading portion does not attract any interest. Unsecured loans provided to Group
undertakings totalling £23,519k (2019: £15,683k) attract an interest charge of 2.32% for loans linked to US dollar LIBOR, 2.10% for euro and 1.81% for
sterling (2019: 3.29% for loans linked to US dollar LIBOR, 1.35% for euro and 2.54% for sterling).
Bank borrowings are secured on the trade receivables of the Group. Refer to note 19 for details.
17. Cash and cash equivalents
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Cash at bank and in hand
8,503
6,656
6,328
4,107
18. Trade and other payables
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Trade payables
3,864
3,066
3,276
2,555
Amounts owed to Group undertakings
–
–
30
–
Other taxation and social security
811
460
452
377
Other payables
809
737
687
385
Accruals and deferred income
2,367
2,568
1,743
1,588
7,8 51
6,831
6,18 8
4,905
Amounts owed to Group undertakings are unsecured, repayable on demand and attract no interest.
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Financial Statements
19. Interest-bearing loans and borrowings
Note
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Current bank borrowings
23,430
15,717
23,43015,717
Non-current bank borrowings
19,263
21,630
19,263
21,63022
42,693
37, 3 47 3 47
42,693
37,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 £25.0m multi-currency
term loan, repayable in two equal instalments of £5.0m during year four and year five, with the remainder at the end of year five, a £25.0m 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 £25.0m 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 £25.0m ($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,
beingamortised over the period of the loan.
The Group and the Company have the following undrawn borrowing facilities:
2020
£’000
2019
£’000
Floating rate:
Expiring within one year
–
–
Expiring beyond one year
10,191
17,725
Total
10,191
17,725
The difference of £0.5m between the utilised amount of £43.6m and £43.1m (£42.7m + £0.4m loan origination fees) is due to the different exchange rates
used by the Group and the bank.
Reconciliation of liabilities arising from financing activities:
Group
2019
£’000
Non-cash changes
2020
£’000
Net cash
inflows/
(outflows)
£’000
Loan
origination fee
£’000
Loan
restructure
£’000
Recognition
of lease
liabilities
£’000
Foreign
exchange
movement
£’000
Long-term borrowings
21,630
3,197
87
(5,000)
–
(651)
19,263
Short-term borrowings
15,717
1,930
(32)
5,000
–
815
23,430
Total liabilities
37, 347
5,127
55
– –
164
42,693
Group
2018
£’000
Non-cash changes
2019
£’000
Net cash
inflows/
(outflows)
£’000
Loan
origination fee
£’000
Loan
restructure
£’000
Recognition
of lease
liabilities
£’000
Foreign
exchange
movement
£’000
Long-term borrowings
5,231
7, 8 4 6
(74)
9,10 8
–
(481)
21,630
Short-term borrowings
14,500
10,903
(60) (9,108)
–
(518)
15,717
Non-current lease liabilities
306
– – – –
(306)
–Total liabilities
20,037
18,74 9
(134)
–
(306)
(999)
37,3 47
Notes
Continued
118
Zotefoams plc
Annual Report 2020
19. Interest-bearing loans and borrowings (continued)
Company
2019
£’000
Non-cash changes
2020
£’000
Net cash
inflows/
(outflows)
£’000
Loan
origination fee
£’000
Loan
restructure
£’000
Recognition
of lease
liabilities
£’000
Foreign
exchange
movement
£’000
Long-term borrowings
21,630
3,197
87
(5,000)
–
(651)
19,263
Short-term borrowings
15,717
1,930
(32)
5,000
–
815
23,430
Total liabilities
37, 347
5,127
55
– –
164
42,693
Company
2018
£’000
Non-cash changes
2019
£’000
Net cash
inflows/
(outflows)
£’000
Loan
origination fee
£’000
Loan
restructure
£’000
Recognition
of lease
liabilities
£’000
Foreign
exchange
movement
£’000
Long-term borrowings
5,231
7, 8 4 6
(74)
9,10 8
–
(481)
21,630
Short-term borrowings
14,500
10,903
(60) (9,108)
–
(518)
15,717
Non-current lease liabilities
306
– – – –
(306)
–Total liabilities
20,037
18,74 9
(134)
–
(306)
(999)
37,3 47
20. Deferred tax assets and liabilities
Recognised deferred tax assets and liabilities – Group
Deferred tax assets and liabilities are attributable to the following:
Assets
Liabilities
Net
2020
£’000
2019
£’000
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Property, plant and equipment
–
–
1,986
1,480
1,9861,480
Rolled-over gain
–
–
613
548
613548
Inventories
(374)
(190)
–
(374)–
(190)
Derivatives financial instruments
–
–
295
34
29534
Defined benefit pension scheme
(1,681)
(1,177)
–
(1,681)–
(1,177)
Share option charges
(317)
(211)
–
(317)–
(211)
Tax value of recognised losses carried forward
(140)
(137)
–
–
(140)
(137)
(2,512)
(1,715)
2,894
2,062
382
347
Set off
2,003
1,388
(2,003)
(1,388)
–
–
Deferred tax (assets)/liabilities
(509)
(327)
891
674
382
347
Unrecognised deferred tax assets
The Group has tax losses carried forward in the USA of $1,100k (2019: $1,608k) which expire between 2022 and 2037 under prevailing tax legislation.
In addition to this, the Group has further tax losses in the USA of $15,622k (2019: $11,668k) which are carried forward indefinitely. At year-end exchange
rates, these tax losses translate to £12,240k (2019: £10,047k). Of the above, the Board expects to utilise only tax losses of £667k (2019: £657k) in the
upcoming years based on projections. Applying the enacted tax rate of 21% (2019: 21%), the Group has recognised a deferred tax asset of £140k
(2019:£137k) on such tax losses expected to be utilised in future periods.
The Group can potentially recover £374k (2019: £190k) of the deferred tax asset within 12 months of the reporting period. The remainder of the deferred
tax asset will be recovered more than 12 months after the reporting period.
The Group can potentially settle £295k (2019: £34k) of the deferred tax liability within 12 months of the reporting period. The remainder of the deferred tax
liability will be settled more than 12 months after the reporting period.
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Financial Statements
20. Deferred tax assets and liabilities (continued)
Movement in deferred tax
Proper ty,
plant and
equipment
£’000
Rolled-over
gain
£’000
Inventories
£’000
Derivative
financial
instruments
£’000
Defined
Benefit
Pension
Scheme
£’000
Share
option
charges
£’000
Tax value of
recognised
losses carried
forward
£’000
Total
£’000
Balance at 1 January 2019
1,121
548
(277)
(67)
(1,373)
(521)
(354)
(923)
Charged to the income statement
360
–
87
–250
64
216
977
Recognised in other
comprehensive income
– – –
101
–(54)
246
293
Balance at 31 December 2019
1,481
548
(190)
34
(1,177) (211)
(138)
347
Balance at 1 January 2020
1,481
548
(190)
34(1,177)
(211)
(138)
347
Charged to the income statement
505 65
(184)
2945
(37)
(58)
(2)
Recognised in other
comprehensive income
– – –
256
–(467) (48)
(259)
Balance at 31 December 2020
1,986
613
(374)
295
(1,681)
(317)
(140)
382
Deferred tax assets and liabilities – Company
Deferred tax assets and liabilities are attributable to the following:
Assets
Liabilities
Net
2020
£’000
2019
£’000
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Property, plant and equipment
–
–
1,986
1,481
1,9861,481
Rolled-over gain
–
–
613
548
613548
Derivative financial instruments
–
–
290
34
29034
Defined benefit pension scheme
(1,681)
(1,177)
–
(1,681)–
(1,177)
Share option charges
(317)
(211)
–
(211)–
(317)
(1,998)
(1,388)
2,889
2,063
891
675
Set off
1,998
1,388
(1,998)
(1,388)
–
–
Deferred tax (assets)/liabilities
–
–
891
675
891
675Movement in deferred tax
Proper ty,
plant and
equipment
£’000
Rolled-over
gain
£’000
Derivative
financial
instruments
£’000
Defined
Benefit
Pension
Scheme
£’000
Share
option
charges
£’000
Total
£’000
Balance at 1 January 2019
1,121
548
(67)
(1,373)
(521)
(292)
Charged to the income statement
360
– –
250
64
674
Recognised in other comprehensive income
– –
101
(54)
246
293
Balance at 31 December 2019
1,481
548
34
(1,177 ) (211)
675
Balance at 1 January 2020
1,481
548 34
(1,177)
(211)
675
Charged to the income statement
505 65
–
(37)
(58)
475
Recognised in other comprehensive income
– –
256
(467) (48)
(259)Balance at 31 December 2020
1,986
613
290
(1,681)
(317)
891
Notes
Continued
120
Zotefoams plc
Annual Report 2020
21. Issued share capital
Issued, allotted and fully paid ordinary shares of 5p each:
Number of
shares
Par value
£’000
Share
premium
£’000
Total
£’000
At 1 January 2019 and 31 December 2019
48,301,234
2,415
44,178
46,593
Opening balance 1 January 2020
48,301,234
2,415
44,178
46,593
Share issue to Employee Benefit Trust
320,000
16
–
16Closing balance 31 December 2020
48,621,234
2,431
44,178
46,609
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.
Nature and purpose of other reserves
Capital redemption reserve
On the buy-back and cancellation of preference shares, an amount equal to the par value was transferred from retained earnings to the capital redemption
reserve for capital maintenance purposes.
Translation reserve
Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income and accumulated in a separate
reserve within equity. Thecumulative amount is reclassified to the income statement when the net investment is disposed of.
Hedging reserve
The hedging reserve includes the cash flow hedging reserve and the costs of hedging reserve (see note 22 for details). The cash flow hedging reserve is
used to recognise the effective portion of gains or losses on derivatives that are designated and qualify as cash flow hedges. Amounts are subsequently
reclassified to the income statement as appropriate.
22. Financial instruments and financial risk management
Policy
The Group’s and Company’s principal financial instruments include cash in hand and at bank and interest-bearing loans and borrowings, the main
purpose of which is to provide finance for the Group’s and Company’s operations. Foreign exchange derivatives are used to help manage the Group’s
andCompany’s currency exposure. Per the Group’s and Company’s policy, no trading in financial instruments is undertaken.
The main risks arising from the Group’s and Company’s financial instruments are credit risk, interest rate risk, liquidity risk and foreign currency risk.
TheBoard reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained consistent
throughout the year.
Credit risk
Credit risk is managed on a Group basis, except for credit risk relating to accounts receivable balances. Each local entity is responsible for managing
and analysing the credit risk for each of their new clients before standard payment and delivery terms and conditions are offered. Credit risk arises
from cash and cash equivalents and derivative financial instruments with banks and financial institutions, as well as credit exposures to customers,
including outstanding receivables and committed transactions. A financial asset is considered in default when the counterparty fails to pay its contractual
obligations. Financial assets are written off when there is no expectation of recovery.
Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed for customers
offered credit over a certain amount. The Group and Company do not require collateral in respect of financial assets.
At the statement of financial position date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented
bythe carrying amount of each financial asset, including derivative financial instruments, in the statement of financial position.
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Financial Statements
22. Financial instruments and financial risk management (continued)
Credit quality of financial assets
Counterparties without external credit rating:
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Existing customers with no defaults in the past
19,427
18,219
15,511
13,143
Existing customers with some defaults in the past, net of impairment allowance
339
1,229
325
593
19,766
19,448
15,836
13,736
Cash at bank
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Moody’s P-1
8,220
6,656
6,328
4,107
Moody's P-3
283
–
–
–8,503
6,656
6,328
4,107
Derivative financial assets
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Moody’s P-1
966
332
966
332
Moody's P-2
614
–
614
–1,580
332
1,580
332While cash and cash equivalents are subject to impairment review under IFRS 9 “Financial Instruments”, the identified impairment loss was immaterial
(2019: immaterial).
Trade receivables are analysed as follows:
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Gross carrying amount
19,798
19,560
15,847
13,786
– due for less than 60 days
19,324
18,733
15,841
13,786
– due for more than 60 days
474
827
6
–
Expected loss rate
– due for less than 60 days
0.06%
0.29%
0.07%
0.36%
– due for more than 60 days
4.43%
6.96%
0.00%
0.00%Loss allowance
32
112
11
49
Trade receivables net of allowances
19,766
19,448
15,836
13,737
Notes
Continued
122
Zotefoams plc
Annual Report 2020
22. Financial instruments and financial risk management (continued)
Loss allowances analysed as follows:
Group
£’000
Company
£’000
At 1 January 2019
25 25
Increase in loss allowance recognised in profit or loss during the year
177
114
Reversal of loss allowance on collection of dues
(90) (90)
At 31 December 2019
112
49
At 1 January 2020
112
49
Increase in loss allowance recognised in profit or loss during the year
11 11
Receivable written off during the year as uncollectable
(42)
–
Reversal of loss allowance on collection of dues
(49) (49)
At 31 December 2020
32
11
The normal terms of trade are between 30 and 90 days from the end of the month of invoice.
The credit quality of trade receivables that are neither past due nor impaired is assessed individually based on credit history and experience. In 2020
and 2019, the Group and Company insured a significant portion of their trade receivable balances to mitigate credit risk. The uninsured exposure as at
31 December 2020 for the Group was £12,037k (2019: £8,992k) and for the Company was £8,467k (2019: £5,813k). The Group and the Company make
provisions against trade receivables, such provisions being based on the debtor’s prior credit history and knowledge of any adverse conditions affecting
the debtor (e.g. receivership or liquidation). The Directors believe an adequate provision has been made for trade receivables at the year end. None of the
amounts owed by Group undertakings are impaired.
Interest rate risk
The Group’s and Company’s interest rate risk arises from long-term borrowings and short-term borrowings. Borrowings issued at variable rates expose
the Group and Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk.
The Group and Company have strong cash generation from their operations and closely monitor their borrowing levels to manage the interest rate risk.
The interest rate profile of the Group’s and Company’s borrowings at 31 December is shown below:
Group
2020
2019
Effective
interest rate
%
Fixed
rates
£’000
Variable
rates
£’000
Effective
interest rate
%
Fixed
rates
£’000
Variable
rates
£’000
Dollar short-term borrowings
2.35%
–
500
–
– –
Sterling short-term borrowings
1.97%
–
8,250
2.51%
–
5,250
Euro short-term borrowings
2.10%
–
14,842
1.37%
–
10,598
Dollar long-term borrowings
2.35%
–
19,492
3.34%
–
21,946
Total* –
43,084 –
37,79 4
Company
2020
2019
Effective
interest rate
%
Fixed
rates
£’000
Variable
rates
£’000
Effective
interest rate
%
Fixed
rates
£’000
Variable
rates
£’000
Dollar short-term borrowings
2.35%
–
500
–
– –
Sterling short-term borrowings
1.97%
–
8,250
2.51%
–
5,250
Euro short-term borrowings
2.10%
–
14,842
1.37%
–
10,598
Dollar long-term borrowings
2.35%
–
19,492
3.34%
–
21,946
Total* –
43,084 –
37,79 4
* The total amount of £43,084k is gross of £391k loan origination fees paid upfront, being amortised over the period of the loan (2019: £37,794k is gross of £447k loan origination fees).
The impact on post tax profit of a 1% shift in the variable rate borrowings would be £349k (2019: £306k).
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Financial Statements
22. Financial instruments and financial risk management (continued)
Liquidity risk
Group Finance performs cash flow forecasting in the operating entities of the Group, which is then aggregated. Group Finance monitors rolling forecasts
of the Group’s liquidity requirements to ensure that it has sufficient cash to meet operational needs, while maintaining sufficient headroom on its undrawn
committed borrowing facilities (note 19) at all times, so that the Group does not breach borrowing limits or covenants (where applicable) on any of its
borrowing facilities. Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance, compliance with internal balance
sheet ratio targets and any applicable external regulatory or legal requirements.
The following are the contractual maturities of financial liabilities, including estimated payments and excluding the effect of netting agreements:
Group
2020
2019
Carrying
amount
£’000
Contractual
cash flows
£’000
1 year
or less
£’000
1 to 2
years
£’000
More
than
2 years
£’000
Carrying
amount
£’000
Contractual
cash flows
£’000
1 year
or less
£’000
1 to 2
years
£’000
More
than
2 years
£’000
Non-derivative
financial liabilities
Interest-bearing loans
andborrowings
(42,693)
(44,388)
(24,199)
(5,400)
(14,789)
(37,347)
(40,009)
(16,847)
(5,582)
(17,5 80 )
Trade and other payables
(4,673) (4,673) (4,673)
– –
(3,803) (3,803) (3,803)
– –
Lease liabilities
(1,406) (1,467)
(448)
(399) (620)
(1,205) (1,322)
(411)
(333)
(578)
Total non-derivative
financial liabilities
(48,772)
(50,528)
(5,799)(29,320)
(15,409)
(42,355)
(4 5,134)
(21,061)
(5,915)
(18,158)
Derivative financial liabilities
(53) (53) (53)
– –
(134) (134) (134)
– –
Company
2020
2019
Carrying
amount
£’000
Contractual
cash flows
£’000
1 year
or less
£’000
1 to 2
years
£’000
More
than
2 years
£’000
Carrying
amount
£’000
Contractual
cash flows
£’000
1 year
or less
£’000
1 to 2
years
£’000
More
than
2 years
£’000
Non-derivative financial
liabilities
Interest-bearing loans
andborrowings
(42,693)
(44,388)
(24,199)
(5,400)
(14,789)
(37,347)
(40,009)
(16,847)
(5,582)
(17,5 80 )
Trade and other payables
(3,963) (3,963) (3,963)
– –
(2,940) (2,940) (2,940)
– –
Lease liabilities
(783)
(815)
(296) (252) (267)
(1,060)
(1,117 )
(316)
(292)
(509)
Total non-derivative
financial liabilities
(47,439)
(49,166)
(28,458)
(5,652)
(15,056)
(41,347)
(44,066)
(20,103)
(5,874)
(18,089)
Derivative financial liabilities
(53) (53) (53)
– –
(134) (134) (134)
– –
Foreign currency risk
The Group and Company operate internationally and are exposed to foreign exchange risk arising from various currency exposures, primarily with respect
to the US dollar and euro. Foreign exchange risk arises from recognised assets and liabilities and future commercial transactions.
Foreign exchange risk is managed centrally by Group Finance. Foreign exchange risk arises when future commercial transactions or recognised assets
orliabilities are denominated in a currency that is not the Company’s functional currency.
The Group’s policy is to use forward currency contracts to cover approximately two-thirds of the estimated net cash foreign exchange trading exposure
for the euro and US dollar for the next 12 months, as well as cover approximately 25% of the estimated net cash foreign exchange trading exposure for
the following six months. The Group also hedges its exposure to foreign currency denominated assets, where possible, by offsetting them with same-
currency liabilities, primarily through borrowing in the relevant currency. These foreign currency denominated assets, which are translated on a mark to
market basis every month and the movement on which is taken to the income statement, include loans made by the Company to, and intercompany
trading balances with, its overseas subsidiaries, the effect of which is cash neutral. They also include non-sterling accounts receivable, held on the
Company’s statement of financial position, the impact of which should reverse through forward currency contracts, but are subject to the timing
betweenaccounts receivable recording and cash received.
Notes
Continued
124
Zotefoams plc
Annual Report 2020
22. Financial instruments and financial risk management (continued)
The euro and US dollar rates used in preparing the financial statements are as follows:
2020
2019
Average
Closing
Average
Closing
Euro/sterling
0.88 0.90
0.88 0.85
US dollar/sterling
0.78 0.73
0.79 0.76
In respect of other monetary assets and liabilities held in currencies other than the euro and the US dollar, the Group and the Company ensure that the net
exposure is kept to a manageable level by buying or selling foreign currencies at spot rates, where necessary, to address short-term imbalances.
Where possible, the Group tries to hold a majority of its cash and cash equivalent balances in the local currency of the respective entity or, for borrowings,
in a currency which provides an offset, albeit often partial, against monetary working capital net assets in that currency.
Recognised assets and liabilities
The table below shows non-derivative financial instruments of the Group and Company in currencies other than sterling:
Group – 2020
Euro
£’000
US dollar
£’000
Other
£’000
Total
£’000
Cash and cash equivalents
834
3,391
542
4,767
Trade receivables
3,700
11,553
736
15,989
Trade payables
(2,254)
(522)
(2,899)(123)
Group – 2019
Euro
£’000
US dollar
£’000
Other
£’000
Total
£’000
Cash and cash equivalents
2,085
1,940
518
4,543
Trade receivables
3,476
11,312
2,931
17,719
Trade payables
(803)
(937)
(81)
(1,821)
Company – 2020
Euro
£’000
US dollar
£’000
Other
£’000
Total
£’000
Cash and cash equivalents
512
2,063
36
2 ,611
Trade receivables
3,352
8,287
139
11,778
Trade payables
(2,133)
(244)
–
(2,377)
Company – 2019
Euro
£’000
US dollar
£’000
Other
£’000
Total
£’000
Cash and cash equivalents
1,219
718
174
2,111
Trade receivables
3,401
6,508
2,092
12,001
Trade payables
(786)
(567)
(32)
(1,385)
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/
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/
Financial Statements
22. Financial instruments and financial risk management (continued)
Forecast transactions
The Group and the Company classify their forward exchange contracts used to hedge forecast transactions as cash flow hedges. The fair value of such
forward exchange contracts is shown in the table below:
31 December 2020
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Assets
Forward exchange contracts
–
1,580
–1,580
Total assets
–
1,580
–1,580
Liabilities
Forward exchange contracts
–
(53)
–(53)
Total liabilities
–
(53)
–(53)
31 December 2019
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Assets
Forward exchange contracts
–
332
–332
Total assets
–
332
–332
Liabilities
Forward exchange contracts
–
(134)
–(134)
Total liabilities
–
(134)
–(134)
The hedged highly probable forecast transactions denominated in foreign currency are expected to occur at various dates during the next 12 months.
Gains and losses recognised in the hedging reserve in equity on forward foreign exchange contracts as at 31 December 2020 are recognised in the
income statement in the period or periods during which the hedged forecast transaction affects the income statement. This is generally within 12 months
of the end of the reporting period.
Hedge ineffectiveness
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure
that an economic relationship exists between the hedged item and hedging instrument. In hedges of forward exchange contracts, ineffectiveness mainly
arises if the timing of the forecast transaction changes from what was originally estimated. There was no ineffectiveness during 2020 or 2019 in relation
tothe forward exchange contracts.
Estimation of fair values
The following summarises the major methods and assumptions used in estimating fair values of financial instruments reflected in the table above.
Theyareclassified according to the following fair value hierarchy:
X
Level 1: quoted process (unadjusted) in active markets for identical assets or liabilities
X
Level 2: inputs other than quoted process included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly
(derived from prices)
X
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Derivative financial instruments are valued using Handelsbanken and NatWest mid-market rate (2019: Handelsbanken and NatWest mid-market rate)
atthe statement of financial position date.
The maturity profile of the forward contracts as at 31 December is as follows:
Group and Company:
2020
2019
Foreign
currency
Contract
value
£’000
Transaction
fair value
£’000
Contract
fair value
£’000
Foreign
currency
Contract
value
£’000
Transaction
fair value
£’000
Contract
fair value
£’000
Sell EUR
€2,800
2,509
2,519
(10)
– – – –
Buy EUR
€600 553
566
(13)
– – – –
Sell USD
$33,600
26,101
24,551
1,550
$23,751
18,172
17, 974
198
Buy USD
– – – –
– – – –
Notes
Continued
126
Zotefoams plc
Annual Report 2020
22. Financial instruments and financial risk management (continued)
Sensitivity analysis
In managing currency risks, the Group and Company aim to reduce the impact of short-term fluctuations on their earnings. Over the longer term, however,
changes in foreign exchange would have an impact on earnings.
In respect of the retranslation of monetary items, at 31 December 2020, it is estimated that an increase of one percentage point in the value of sterling
against the euro would increase the Group’s profit before tax by approximately £11k (2019: decrease of £29k) before forward exchange contracts and
£39k (2019:decrease of £20k) after forward exchange contracts are included.
In respect of the retranslation of monetary items, at 31 December 2020, it is estimated that an increase of one percentage point in the value of sterling
againstthe US dollar would decrease the Group’s profit before tax by approximately £251k (2019: £261k) before forward exchange contracts and £82k
(2019: £20k) after forward exchange contracts are included.
Financial instruments by category
Group
2020
2019
Financial
assets at
amortised
cost
£’000
Derivatives
used for
hedging
£’000
Financial
liabilities at
amortised
cost
£’000
Financial
assets at
amortised
cost
£’000
Derivatives
used for
hedging
£’000
Financial
liabilities at
amortised
cost
£’000
Trade and other receivables
21,097
– –
22,280
– –
Cash and cash equivalents
8,503
– –
6,656
– –
Bank overdraft
– – –
– – –
Derivative financial instruments
– assets
–
1,580
––
332
–– liabilities
–
(53)
––
(134)
–Interest-bearing loans and
borrowings
– –
(42,693)
– –
(37,347)
Trade and other payables
– –
(4,673)
– –
(3,803)
Lease liability –
– –
–(1,406)
(1,205)
Company
2020
2019
Financial
assets at
amortised
cost
£’000
Derivatives
used for
hedging
£’000
Financial
liabilities at
amortised
cost
£’000
Financial
assets at
amortised
cost
£’000
Derivatives
used for
hedging
£’000
Financial
liabilities at
amortised
cost
£’000
Trade and other receivables
49,139
– –
42,205
– –
Cash and cash equivalents
6,328
– –
4,107
– –
Bank overdraft
– – –
– – –
Derivative financial instruments
– assets
–
1,580
––
332
–– liabilities
–
(53)
––
(134)
–Interest-bearing loans and
borrowings
– –
(42,693)
– –
(37,347)
Trade and other payables
– –
(3,963)
– –
(2,940)
Lease liability –
– –
–(783)
(1,060)
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 the previous 12 months’ EBITDA (as per bank
facilityagreement).
Loan covenants
Under the terms of the major borrowing facilities, the Group is required to comply with the following financial covenants:
X
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
X
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.
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/
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/
Financial Statements
22. Financial instruments and financial risk management (continued)
As at
31 December
2020
£’000
As at
31 December
2019
£’000
Net borrowings
34,190
30,691
EBITDA
16,156
15,261
Net borrowings/EBITDA
2.12
2.01
Net finance charges
681
209
EBITDA/Net finance charges
23.72
73.16
Net borrowings comprise current and non-current interest-bearing loans and borrowings of £42,693k, as per note 19, and cash and cash equivalents
of£8,503k as per note 17.
EBITDA comprises:
2020
£’000
2019
£’000
Profit for the year
7,163
8,217
Depreciation and amortisation
6,746
5,769
Finance costs
846
412
Share of profit from joint venture
(38)
(72)
Equity-settled share-based payments
300
391
Taxation
1,138
1,594
Exceptional items
–
(1,050)
16,155
15,261
Net finance charges comprise interest income of £26k and finance costs expensed of £707k as per note 7.
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 will 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.
The Group defines its return on capital 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. The Group also excludes significant capacity investments
under construction until they enter production. In 2020, the return on capital was 9.0% (2019: 10.5%). If the significant capacity investments were included,
the return on capital was 7.1% (2019: 8.1%).
23. Commitments
Group
Company
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Capital expenditure contracted for at the end of the reporting period
but not yet incurred is as follows:
Property, plant and equipment
1,475
2,966
471
2,118
Notes
Continued
128
Zotefoams plc
Annual Report 2020
24. Post-employment benefits
Defined benefit pension plans
The Company operates a UK registered trust-based pension scheme that provides defined benefits. Pension benefits are linked to the members’ final
pensionable salaries and service at their retirement (or date of leaving if earlier). The Trustees are responsible for running the Scheme in accordance with
the Scheme’s Trust Deed and Rules, which set out their powers. The Trustees of the Scheme are required to act in the best interests of the beneficiaries
ofthe Scheme. There is a requirement that one-third of the Trustees are nominated by the members of the Scheme.
There are three categories of pension scheme members:
X
Deferred members with salary linkage: current employees of the Company who have not consented to the break in their salary link;
X
Deferred members: former and current employees of the Company not yet in receipt of pension; and
X
Pensioner members: in receipt of pension.
The defined benefit obligation is valued by projecting the best estimate of future benefit outgoings (allowing for future salary increases for deferred
members with salary linkage, revaluation to retirement for deferred members and annual pension increases for all members) and then discounting to the
statement of financial position date. The majority of benefits received increases in line with inflation (subject to a cap of no more than 5% per annum). The
valuation method is known as the Projected Unit Method. The approximate overall duration of the Scheme’s defined benefit obligation as at 31 December
2020 was 16 years (2019: 17 years).
Future funding obligation
The Trustees are required to carry out an actuarial valuation every three years.
The last actuarial valuation of the DB Scheme was performed by the DB Scheme Actuary for the Trustees as at 5 April 2017. This valuation revealed
afunding shortfall of £4.175m.
In respect of the deficit in the DB Scheme as at 5 April 2017, the Company has agreed to pay £519,600 p.a. from 1 August 2018 for eight years and
threemonths. In addition, the Company will pay £180,000 p.a. to cover administration expenses, Pension Protection Fund levies and premiums for
deathin service lump sums associated with the Scheme.
The Company therefore currently expects to pay £699,600 to the Scheme during the account year beginning 1 January 2021, however there is currently
avaluation underway as at 5 April 2020 which, when finalised, will reveal a different funding level and therefore will likely result in a different recovery plan
for the future.
Method and assumptions
The initial results of the valuation as at 5 April 2020 have been updated to 31 December 2020 by a qualified independent actuary.
The assumptions used were as follows:
As at
31 December 2020
As at
31 December 2019
Discount rate
1.20%
1.90%
RPI inflation
2.90%
2.90%
CPI inflation
2.30%
1.90%
Salary increases
2.30%
1.90%
Pension increases
– Post 88 GMP
2.10%
1.80%
– Non GMP
2.90%
2.90%
Revaluation of deferred pensions in excess of GMP
2.30%
1.90%
Mortality (pre and post-retirement)
100% S3PMA_M/100%
S3PFA_M CMI_2019_M/F
1.25% (yob)
102% S3PMA/100% S3PFA
CMI_2018_M/F 1.25% (yob)
Life expectancies (in years):
Year ended 31 December 2020
Year ended 31 December 2019
Males Females
Males
Females
For an individual aged 65 in 2020
21.3
23.6
21.7
23.4
At age 65 for an individual aged 45 in 2020
22.6
25.2
23.0
24.9
129
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Financial Statements
24. Post-employment benefits (continued)
Risks
Through the Scheme, the Company is exposed to a number of risks:
X
Asset volatility: the Scheme’s defined benefit obligation is calculated using a discount rate set with reference to corporate bond yields, however the
Scheme invests significantly in equities and other growth assets. These assets are expected to outperform corporate bonds in the long term, but
subject to increased volatility and risk in the short term.
X
Changes in bond yields: a decrease in corporate bond yields would increase the Scheme’s defined benefit obligation, however this would be partially
offset by an increase in the value of the Scheme’s bond holdings.
X
Inflation risk: a significant proportion of the Scheme’s defined benefit obligation is linked to inflation, therefore higher inflation will result in a higher
defined benefit obligation (subject to the appropriate caps in place). The majority of the Scheme’s assets are either unaffected by inflation, or only
loosely correlated with inflation, therefore an increase in inflation would also increase the deficit.
X
Life expectancy: if Scheme members live longer than expected, the Scheme’s benefits will need to be paid for longer, increasing the Scheme’s defined
benefit obligation.
The Trustees and Company manage risks in the Scheme through the following strategies:
X
Diversification: investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of
assets.
X
Investment strategy: the Trustees are required to review their investment strategy on a regular basis.
X
ALM: the Scheme invests in an asset-liability matching (ALM) framework that aims to achieve long-term investment returns in line with the obligations
under the Scheme. This is achieved through around 25% of assets being invested in Liability Driven Investment funds.
Change in assumption
Change in defined
benefit obligation
Discount rate
+0.5%/–0.5% pa
–8%/+9%
RPI inflation
+0.5%/–0.5% pa
+7%/–7%
Assumed life expectancy
+1 ye a r
+4%
These calculations provide an approximate guide to the sensitivity of results and may not be as accurate as a full valuation carried out on these
assumptions. Each assumption change is considered in isolation, which in practice is unlikely to occur, as changes in some of the assumptions
arecorrelated.
The assets of the Scheme are invested as follows:
Asset class
Year ended 31 December 2020
Year ended 31 December 2019
Market
value
£’000
% of total
Scheme
assets
Market
value
£’000
% of total
Scheme
assets
Equities and other growth assets
16,319
51%
14,634
50%
Diversified Credit Funds
6,308
20%
5,867
20%
Liability Driven Investments
7,409
23%
7,0 01
23%
Cash
804
3%
1,081
4%
Other
1,078
3%
977
3%
Total
31,918
100%
29,560
100%
Actual return on assets over the year
2,949
3,113
Note: All assets listed above have a quoted market price in an active market (except for the reserve for insured pensioners).
The amounts recognised in the statement of financial position are determined as follows:
2020
£’000
2019
£’000
Market value of plan assets
31,918
29,560
Present value of Defined Benefit Pension Scheme obligation
(40,769)
(36,486)
Deficit – recognised as a liability in the statement of financial position
(8,851)
(6,926)
Notes
Continued
130
Zotefoams plc
Annual Report 2020
24. Post-employment benefits (continued)
The movement in the defined benefit obligation over the year is as follows:
2020
£’000
2019
£’000
Value of defined benefit obligation at the start of the year
36,486
33,728
Interest cost
721
899
Benefits paid
(1,291)
(877)
Actuarial (gains)/losses: experience differing from that assumed
(117)
355
Actuarial losses/(gains): changes in demographic assumptions
19
(827)
Actuarial losses: changes in financial assumptions
4,951
3,208
Value of defined benefit obligation at the end of the year
40,769
36,486
The movement in the value of the plan assets over the year is as follows:
2020
£’000
2019
£’000
Market value of plan assets at the start of the year
29,560
25,650
Interest income
556
696
Actual return on plan assets
2,393
2,417
Employer contributions *
700
1,674
Benefits paid
(1,291)
(877)
Market value of assets at the end of the year
31,918
29,560
* The 2019 employer contributions amount includes £941k of the repayment made to the Defined Benefit Pension Scheme as per note 4.
2020
£’000
2019
£’000
Statement of financial position for:
– Defined benefit pension scheme obligations
(8,851)
(6,926)
Income statement charge for:
– Defined benefit pension interest cost
(165)
(203)
Actuarial losses recognised in other comprehensive income for:
– Defined benefit pension scheme
(2,460)
(319)
Other pension schemes
On 1 January 2006, a separate stakeholder scheme was set up for those employees who were originally in the closed defined benefit pension scheme.
In addition to the above, the Company created two further stakeholder schemes for future joiners. The contributions paid by the Company in 2020 were
£755k (2019: £828k).
For certain non-UK based employees of the Company, the Company makes contributions into individual schemes. The contributions paid by the
Company in 2020 were £4k (2019: £17k).
For USA based employees, Zotefoams Inc. operates a 401(k) plan. The contributions paid by Zotefoams Inc. in 2020 were £263k (2019: £246k).
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/
Financial Statements
25. Share-based payments
The Company has a share option scheme that entitles senior management personnel to purchase shares in the Company. Options are exercisable at a price
equal to the lower of the mid-market price of the Company’s shares the day before the option is granted or the average mid-market price for the three dealing
days before the option is granted. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the
options will expire. Depending on the circumstances, options are normally forfeited if the employee leaves the Group before the options vest.
In 2007, the Company introduced an LTIP scheme for senior management personnel. Shares are awarded in the Company and vest after three years to
the extent performance conditions are met. Dependent on the circumstances, awards are normally forfeited if the employee leaves the Group before the
award vests. A new LTIP scheme was introduced in 2017, which operates in a similar way to the LTIP scheme introduced in 2007. No new awards are
made under the 2007 scheme. Depending on the circumstances, options are normally forfeited if the employee leaves the Group before the options vest.
In 2007, the Company introduced a Deferred Bonus Share Plan. Originally under the Plan executive bonuses over 40% of eligible salary were held as
deferred shares for three years. In 2014, the Remuneration Committee amended the Deferred Bonus Share Plan for bonuses awarded since 2014, where
25% of executive bonuses are held as deferred shares for three years. Depending on the circumstances, awards are normally forfeited if the employee
leaves the Group before the award vests. A new Deferred Bonus Share Plan scheme was introduced in 2017, which operates in a similar way to the old
Plan introduced in 2007. No new awards are made under the 2007 Plan. Depending on the circumstances, awards are normally forfeited if the employee
leaves the Group before the award vests.
Details of the vesting conditions for the share, share option and LTIP awards are given in the Directors’ Remuneration report on pages 72 to 80.
Movements in share options during the year are as follows:
The options outstanding at 31 December 2020 have an exercise price between 245.7p and 572.0p and a weighted contractual life of six years
(2019: seven years).
The fair value received in return for share options granted is measured by reference to the fair value of share options granted using a Black-Scholes model.
The contractual life of the option (ten years) is used as an input into this model. No allowance is made for early leavers.
2020
2019
Number
of share
options
Weighted
average
exercise
price (p)
Number
of share
options
Weighted
average
exercise
price (p)
Outstanding at the beginning of the year
97,120
331
116,198
278
Exercised during the year
– –
(27,584)
290
Granted during the year
– –
15,16 4
572
Forfeited during the year
(7,8 54)
382
(6,658)
375
Outstanding at the end of the year
89,266
327
97,12 0
331
Exercisable at the end of the year
77,598
290
55,236
262
Movements in LTIP awards during the year are as follows:
2020
2019
Number
of share
options
Weighted
average
exercise
price (p)
Number
of share
options
Weighted
average
exercise
price (p)
Outstanding at the beginning of the year
741,767
–
706,868
–
Exercised during the year
– –
(176,0 62)
–
Granted during the year
264,615
–
216,250
–
Forfeited during the year
(178,717)
–
(5,289)
–
Outstanding at the end of the year
827,665
–
741,767
–
Exercisable at the end of the year
– –
– –
Movement in Deferred Bonus Share Plan awards during the year are as follows:
2020
2019
Number
of share
options
Weighted
average
exercise
price (p)
Number
of share
options
Weighted
average
exercise
price (p)
Outstanding at the beginning of the year
49,135
–
50,796
–
Exercised during the year
(33,014)
–
(12,220)
–
Granted during the year
139,763
–
10,559
–
Outstanding at the end of the year
155,884
–
49,135
–
Exercisable at the end of the year
– –
– –
Notes
Continued
132
Zotefoams plc
Annual Report 2020
25. Share-based payments (continued)
Fair value of share options and assumptions
The expected volatility is based on historical volatility for a three-year period prior to the award.
30-M ar-15 16 -Apr-19
17-Aug-15
05-Apr-1627-M ar-17
24-Aug-17Share price (p)
285
310
290
305.5
305.5
572
Exercise price (p)
285
301.7
290
305.5
327.5
572
Expected volatility
35% 35% 35% 35%
35% 25%
Option life
Five years Five years Five years Five years
Five years
Three years
Expected dividends (p) (assumed to be increasing at 2.5% p.a.)
5.5 5.5
5.6
5.7
5.7
5.5
Risk free interest rate (based on national government bonds)
2.00% 2.00% 2.00% 2.00%
2.00% 2.00%
Fair value at grant date (p)
80
90
8010 3.1 111.1
103
The share option awards are granted under a service condition and a performance condition. There are no market conditions associated with the share
options. The LTIP awards are granted under a service condition and a performance condition, part of which is a market condition. The Deferred Bonus
Share Plan awards are granted under a service condition.
The amounts recognised in the income statement for equity-settled share-based payments are as follows:
2020
£’000
2019
£’000
Within administrative expenses – share-based payment charge
300
390
– related National Insurance
57
(21)
Of the above, amounts relating to Directors of Zotefoams plc aggregate to £177k (2019: £199k).
26. Related parties
Directors
The Directors of the Company as at 31 December 2020 and their immediate relatives control approximately 1.1% (2019: 1.2%) of the voting shares of
the Company. Details of Directors’ pay and remuneration are given in the Directors’ Remuneration report on pages 72 to 80. Executive Directors are
considered to be the only key management personnel. Details of compensation paid to key management personnel are included in note 6.
Subsidiaries and joint venture
Details of the joint venture and subsidiaries of the Company are set out in notes 10 and 14. These companies are considered to be related parties.
The following material transactions were carried out with related parties:
2020
£’000
2019
£’000
Sale of goods: subsidiaries of the Company
6,465
7, 4 81
Sale of services: subsidiaries of the Company
760
1,636
Loans given (net of repayments): subsidiaries of the Company
8,606
15,683
Interest income: subsidiaries of the Company
569
101
Sale of goods: joint venture of the Company
2,155
3,112
Sale of services: joint venture of the Company
407
813
Total
18,962
28,826
133
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/
Governance
/
Financial Statements
26. Related parties (continued)
Balances between the Company and its active subsidiaries and joint venture are as follows:
Receivable from/(payable to)
Investment in
2020
£’000
2019
£’000
2020
£’000
2019
£’000
Zotefoams Inc
9,426
9,204
–
–
KZ Trading and Investment Ltd
1,498
1,895
–
–
Azote Asia Limited
896
907
–
–
MuCell Extrusion LLC
3,424
96
–
–
Zotefoams International Limited
15,087
14,317
30,822
30,576
Zotefoams Operations Limited
76
1
–
–Zotefoams T-FIT Material Technology (Kunshan) Limited
2,402
22
––
Zotefoams Poland Sp. z o.o.
523
809
–
–
Zotefoams France SAS
(30)
–
–
– T-FIT Insulation Solutions India Private Limited
379
131
–
–
27. Changes in accounting estimates
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.
28. Accounting estimates and judgements for the Group and Company
In the application of the Group’s accounting policies, which are described in note 2, the Directors are required to make judgements, estimates and
assumptions about the carrying amounts of assets and liabilities which are not readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other facts that are considered relevant. Actual amounts may differ from these estimates.
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events
thatare believed to be reasonable under the circumstances.
Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are disclosed below.
i) Estimated impairment of goodwill and intangibles
The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2.12. The recoverable
amounts of cash-generating units (CGUs) have been determined based on value-in-use calculations. These calculations require the use of estimates
(seenote 13).
The determination of impairment in the carrying value of goodwill and intangible assets requires judgements to be made by Directors. These assets are
assessed on an ongoing basis to determine whether circumstances exist that could lead to the conclusion that the carrying value of such assets is not
supportable. Such calculations require judgement relating to the appropriate discount factors and long-term growth prevalent in particular markets as well
as estimation of short-term business performance. In respect of assessing intangibles associated with the MEL segment and ReZorce barrier technology,
the Directors have drawn upon their own experiences, in addition to those of external consultants and packaging industry experts, in making these
judgements and have concluded that the opportunity and strategy supports the carrying value of the underlying intangible assets.
ii) Pensions assumptions
The present value of the defined benefit pension obligations depends on a number of factors that are determined on an actuarial basis using a number of
assumptions. Any changes in these assumptions will impact the carrying amount of pension obligations. The Company engages an independent actuary
to perform the valuation and assist in determining appropriate assumptions at the end of each year. The valuation is prepared by an independent qualified
actuary, but significant judgements are required in relation to the assumptions for pension increases, inflation, the discount rate applied, investment returns
and member longevity, which underpin the valuations. Note 24 contains information about the assumptions relating to retirement benefit obligations.
Key judgements
i) Unrecognised deferred tax assets
At year-end exchange rates, the Group has tax losses carried forward of £12,240k in the USA. Currently, tax losses of £667k have been recognised on the
balance sheet. Based on projections, the Group is expected to utilise all carried forward tax losses, however management has taken a prudent approach
based on historical performance by the entities in this tax jurisdiction and recognised a lower figure. If the Group makes a second consecutive year of
profit in the USA, then the Group will re-assess the amount that should be recognised.
ii) Exceptional item
Due to the material and non-recurring nature of the items, the Group disclosed the decrease in past service costs as an exceptional item in 2019.
29. Events after the reporting period
There are no events after the reporting period affecting these financial statements, other than those disclosed in note 9.
Notes
Continued
134
Zotefoams plc
Annual Report 2020
Five-year trading summary
2020
£m
2019
£m
2018
£m
2017
£m
2016
£m
Group revenue
82.7
80.9
81.0
70.1
57.4
Operating profit (excluding exceptional item)
9.1
9.1
11.6
9.4
7.6
Profit before tax (excluding exceptional item)
8.3
8.8
10.8
8.8
7.2
Profit before tax
8.3
9.8
9.9
7.5 7.0
Profit after tax
7.2
8.2
7.9
6.0
5.7
Capital expenditure (including intangibles)
12.7
24.4
16.1
12.2 12.6
Cash generated from operations
13.0
11.8
7.1
10.0
6.4
Basic earnings per share excluding exceptional item (p)
14.87
14.91
18.66
16.04
13.69
Basic earnings per share (p)
14.87
17.10
16.96
13.70 13.25
Dividends per ordinary share (p)
6.30
2.03
6.12
5.93
5.75
135
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Annual Report 2020
Strategic Report
/
Governance
/
Financial Statements
Notice of the 2021
Annual General Meeting
THIS DOCUMENT IS IMPORTANT AND REQUIRES
YOURIMMEDIATE ATTENTION
If you are in any doubt as to the action you should take, you are
recommended to seek your own financial advice from your stockbroker,
bank manager, solicitor, accountant or other independent adviser
authorised under the Financial Services and Markets Act 2000 if you
are resident in the UK or, if you reside elsewhere, another appropriately
authorised financial adviser.
If you have sold or otherwise transferred your shares in Zotefoams plc,
youshould forward this document and other documents enclosed as
soon as possible either to the purchaser or transferee or to the person
whoarranged the sale or transfer so they can pass these documents
totheperson who now holds the shares.
ZOTEFOAMS PLC
Notice of Annual General Meeting
COVID-19
Zotefoams plc considers it vital to engage with investors and other
stakeholders through the most appropriate channels. Shareholders’
views are important and we want to ensure that they are given
as much information as possible in good time to enable them to
participate in the decision-making process.
In light of the COVID-19 pandemic and the UK Government’s current
guidance regarding social distancing and the prohibition of public
gatherings, the arrangements and format of the Annual General
Meeting (AGM) have been altered this year in order to protect
the health and wellbeing of shareholders and other attendees.
Accordingly, the Company will make arrangements such that the
legal requirements to hold the AGM can be satisfied through the
attendance of a minimum number of people.
While it is with regret that shareholders are requested not to
attend the AGM, a separate presentation open to all existing and
potential shareholders will be held after the AGM on 26 May 2021
at 11.00am on the Investor Meet Company platform: https://www.
investormeetcompany.com/zotefoams-plc/register-investor
Investors who already follow Zotefoams plc on the Investor Meet
Company platform will automatically be invited.
In addition, new articles provisions are being proposed to allow hybrid
AGMs to be held in the future.
Shareholders are strongly encouraged to submit a proxy form
indicating their votes in accordance with the notes below and email
any question for the Board to investorinfo@zotefoams.com a minimum
of 48 hours prior tothe AGM. The Board will do its best to answer
these questions either during, or immediately after, the AGM, by email.
The Board is monitoring the situation and will make any further
announcement required through the release of an RNS and on
theAGM page of its website: https://www.zotefoams.com/agm/.
Notice is hereby given that the Annual General Meeting (the AGM) of
Zotefoams plc (the “Company”) will be held at the registered office of the
Company,
675 Mitcham Road, Croydon, CR9 3AL on 26 May 2021
at 10.00am
for the following purposes.
In light of social distancing
restrictions, no access will be granted tothepremises to
shareholders or proxy holders.
All resolutions will be proposed as ordinary resolutions, save for resolutions
14, 15, 16, 17 and 18, which will be proposed as special resolutions.
Ordinary business
1. To receive the Annual Report of the Company for the year ended
31December 2020.
2. To approve the Annual Statement by the Chair of the Remuneration
Committee and the Annual Report on Remuneration for the
year ended 31 December 2020 set out on pages 70 to 80 of the
AnnualReport.
3. To declare a final dividend for the year ended 31 December 2020
of4.27 pence per ordinary share, such dividend to be payable on
1 June 2021 to shareholders on the register of members of the
Company at the close of business on 7 May 2021.
4. To re-elect S P Good as a Director.
5. To re-elect D B Stirling as a Director.
6. To re-elect G C McGrath as a Director.
7. To re-elect J D Carling as a Director.
8. To re-elect A M Fielding as a Director.
9. To re-elect D G Robertson as a Director.
10. To re-elect C A Wall as a Director.
11. That PKF Littlejohn LLP be and is hereby re-appointed as Auditor of
the Company to hold office from the conclusion of the AGM until the
conclusion of the next general meeting at which accounts are laid
before the Company.
12. To authorise the Audit Committee to determine the
Auditor’s remuneration.
Special business
To consider and, if thought fit, to pass the following resolutions of which
resolution 13 will be proposed as an ordinary resolution and resolutions
14,15, 16, 17 and 18 will be proposed as special resolutions:
13. That, in substitution for any equivalent authorities and powers granted
to the Directors prior to the passing of this resolution, the Directors be
and are generally and unconditionally authorised pursuant to Section
551 of the Companies Act 2006 (the “Act”):
(a) to exercise all powers of the Company to allot shares in the
Company and grant rights to subscribe for or to convert any
security into shares of the Company (such shares, and rights to
subscribe for or to convert any security into shares of the Company,
being “relevant securities”) up to an aggregate nominal amount of
£810,353 (such amount to be reduced by the nominal amount of
any allotments or grants made under paragraph (b) below in excess
of £810,353), and further
an aggregate nominal amount of £1,620,706 (such amount to be
reduced by the nominal amount of any allotments or grants made
under paragraph (a) above) in connection with an offer by way of
rights issue:
(i) in favour of holders of ordinary shares in the capital of the
Company, where the equity securities respectively attributable
to the interests of all such holders are proportionate (as nearly
aspracticable) to the respective number of ordinary shares in
thecapital of the Company held by them, and
(ii) to holders of any other equity securities as required by
the rights of those securities or as the Directors otherwise
considernecessary,
but subject to such exclusions or other arrangements as the
Directors may deem necessary or expedient to deal with treasury
shares, fractional entitlements or legal, regulatory or practical
problems arising under the laws or requirements of any overseas
territory or by virtue of shares being represented by depository
receipts or the requirements of any regulatory body or stock
exchange or any other matter whatsoever,
provided that, unless previously revoked, varied or extended,
this authority shall expire on the earlier of 30 June 2022 and the
conclusion of the next AGM of the Company, except that the
Company may at any time before such expiry make an offer or
agreement which would or might require relevant securities to
be allotted after such expiry and the Directors may allot relevant
securities in pursuance of such an offer or agreement as if this
authority had not expired.
136
Zotefoams plc
Annual Report 2020
14. That if resolution 13 is passed, the Directors be authorised to allot
equity securities (as defined in Section 560 of the Act) for cash under
the authority given by that resolution and/or to sell ordinary shares
heldby the Company as treasury shares for cash as if Section 561
ofthe Act did not apply to any such allotment or sale, such authority
tobe limited:
(a) in favour of holders of ordinary shares in the capital of the Company,
where the equity securities respectively attributable to the interests
of all such holders are proportionate (as nearly as practicable) to the
respective number of ordinary shares in the capital of the Company
held by them and
(b) to the allotment of equity securities or sale of treasury shares
(otherwise than under paragraph (a) above) up to a nominal
amountof £121,553,
such authority to expire at the conclusion of the next AGM of the
Company (or, if earlier, on 30 June 2022) but, in each case, prior to
its expiry the Company may make offers, and enter into agreements,
which would, or might, require equity securities to be allotted (and
treasury shares to be sold) after the authority expires and the Directors
may allot equity securities (and sell treasury shares) under any such
offer or agreement as if the authority had not expired.
15. That if resolution 13 is passed, the Directors be authorised in addition
to any authority granted under resolution 14 to allot equity securities (as
defined in Section 560 of the Act) for cash under the authority given by
that resolution and/or to sell ordinary shares held by the Company as
treasury shares for cash as if Section 561 of the Act did not apply to
any such allotment or sale, such authority to be:
(a) limited to the allotment of equity securities or sale of treasury
sharesup to a nominal amount of £121,553 and
(b) used only for the purposes of financing (or refinancing, if the
authority is to be used within six months after the original
transaction) a transaction which the Directors determine to be an
acquisition or other capital investment of a kind contemplated by
the Statement of Principles on Disapplying Pre-Emption Rights
most recently published by the Pre-Emption Group prior to the
dateof this notice,
such authority to expire at the conclusion of the next AGM of the
Company (or, if earlier, on 30 June 2022) but, in each case, prior to
its expiry the Company may make offers, and enter into agreements,
which would, or might, require equity securities to be allotted (and
treasury shares to be sold) after the authority expires andthe Directors
may allot equity securities (and sell treasury shares) under any such
offer or agreement as if the authority had not expired.
16. That the Company be and is hereby unconditionally and generally
authorised for the purposes of Section 701 of the Act to make market
purchases (within the meaning of Section 693(4) of the Act) of its
ordinary shares of 5 pence each (“ordinary shares”) provided that:
(a) the maximum number of ordinary shares authorised to be
purchased is 4,862,123, representing approximately 10% of the
issued ordinary share capital as at 6 April 2021,
(b) the minimum price which may be paid for any such ordinary share
is5 pence,
(c) the maximum price which may be paid for an ordinary share shall be
an amount equal to 105% of the average middle market quotations
for an ordinary share as derived from the London Stock Exchange
Daily Official List for the five business days immediately preceding the
day on which the ordinary share is contracted to be purchased and
(d) this authority shall, unless previously renewed, revoked or varied,
expire on the earlier of 30 June 2022 and the conclusion of the next
AGM, but the Company may enter into a contract for the purchase
of ordinary shares before the expiry of this authority which would or
might be completed (wholly or partly) after its expiry.
17. That a general meeting other than an AGM may be called on not less
than 14 clear days’ notice.
18. That, with effect from the conclusion of the AGM and pursuant to
Section 21(1) of the Companies Act 2006, the Articles of Association
produced to the meeting, and for the purpose of identification signed
by the Chair, be approved and adopted as the Articles of Association
of the Company in substitution for, and to the exclusion of, the existing
Articles of Association of the Company.
Dated: 7 April 2021
By order of the Board
Registered Office:
675 Mitcham Road
Croydon
CR9 3AL
L Harratt
Company Secretary
The following notes are subject to social distancing measures prohibiting
attendance of the AGM by a Member or Proxy:
(i) Pursuant to Part 13 of the Companies Act 2006 and to Regulation
41 of the Uncertificated Securities Regulations 2001 (as amended),
only those members registered in the register of members of the
Company at the close of business on 24 May 2021 (or if the AGM is
adjourned, 48 hours before the time fixed for the adjourned AGM) shall
be entitled to attend and vote at the AGM in respect of the number of
shares registered in their name at that time. In each case, changes
to the register of members after such time shall be disregarded in
determining the rights of any person to attend or vote at the AGM.
(ii) If you wish to attend the AGM in person, please bring some form of
identification (such as driver’s licence or bankcard) and present this
tothe Company’s reception desk on arrival.
(iii) A member who is entitled to attend, speak and vote at the AGM
may appoint a proxy to attend, speak and vote instead of him or her.
A member may appoint more than one proxy, provided each proxy
is appointed to exercise rights attached to different shares (so a
member must have more than one share to be able to appoint more
than one proxy). A proxy need not be a member of the Company but
must attend the AGM in order to represent you. A proxy must vote in
accordance with any instructions given by the member by whom the
proxy is appointed. Appointing a proxy will not prevent a member from
attending in person and voting at the AGM (although voting in person
at the AGM will terminate the proxy appointment). A proxy form is
enclosed or has been sent to you separately. The notes to the proxy
form include instructions on how to appoint the Chair of the AGM or
another person as a proxy. You can only appoint a proxy using the
procedures set out in these notes and in the notes to the proxy form.
(iv) To be valid, a proxy form, and the original or duly certified copy of the
power of attorney or other authority (if any) under which it is signed or
authenticated, should reach the Company’s registrars, Computershare
Investor Services plc, The Pavilions, Bridgwater Road, Bristol BS99
6ZY, by no later than 10.00 am on 24 May 2021.
(v) The proxy form includes details on how to vote electronically. The
notes to the proxy form also include instructions on how to appoint a
proxy by using the CREST proxy appointment service. You may not
use any electronic address provided either in this notice of AGM or in
any related documents (including the proxy form) to communicate with
the Company for any purposes other than those expressly stated.
(vi) In the case of joint holders of shares, the vote of the first named in
the register of members who tenders a vote, whether in person or
byproxy, shall be accepted to the exclusion of the votes of other
jointholders.
137
Zotefoams plc
Annual Report 2020
(vii) The following information is available at www.zotefoams.com: (1) the
matters set out in this notice of AGM; (2) the total numbers of shares in
the Company, and shares in each class, in respect of which members
are entitled to exercise voting rights at the AGM; (3) the totals of the
voting rights that members are entitled to exercise at the AGM, in
respect of the shares of each class; and (4) members’ statements,
members’ resolutions and members’ matters of business received
by the Company after the first date on which notice of the AGM
wasgiven.
(viii) If you are a person who has been nominated by a member to enjoy
information rights in accordance with Section 146 of the Companies
Act 2006, notes (iii) to (v) above do not apply to you (as the rights
described in these notes can only be exercised by members of the
Company) but you may have a right under an agreement between
you and the member by whom you were nominated to be appointed
or to have someone else appointed, as a proxy for the meeting. If you
have no such right or do not wish to exercise it, you may have a right
under such an agreement to give instructions to the member as to
theexercise of voting rights.
(ix) A member that is a company or other organisation not having a
physical presence cannot attend in person but can appoint someone
to represent it. This can be done in one of two ways: either by the
appointment of a proxy (described in notes (iii) to (v) above) or of a
corporate representative. Members considering the appointment of
a corporate representative should check their own legal position, the
Company’s Articles of Association and the relevant provision of the
Companies Act 2006.
(x) Members attending the AGM have the right to ask, and, subject to the
provisions of the Companies Act 2006, the Company must cause to
be answered, any questions relating to the business being dealt with
atthe AGM.
(xi) As at the close of business on 6 April 2021, the Company’s issued
share capital comprised 48,621,234 ordinary shares of 5 pence
each. Each ordinary share carries the right to one vote at a general
meeting of the Company. No ordinary shares were held in treasury
and accordingly the total number of voting rights in the Company
asattheclose of business on 6 April 2021 is 48,621,234.
(xii) Shareholders should note that it is possible that, pursuant to requests
made by shareholders of the Company under Section 527 of the
Companies Act 2006, the Company may be required to publish on
a website a statement setting out any matter relating to: (i) the audit
of the Company’s accounts (including the auditor’s report and the
conduct of the audit) that are to be laid before the AGM; or (ii) any
circumstance connected with the auditor of the Company ceasing to
hold office since the previous meeting at which annual accounts and
reports were laid in accordance with Section 437 of the Companies
Act 2006. The Company may not require the shareholders requesting
any such website publication to pay its expenses in complying with
Section 527 or 528 of the Companies Act 2006. Where the Company
is required to place a statement on a website under Section 527 of the
Companies Act 2006, it must forward the statement to the Company’s
Auditor not later than the time when it makes the statement available
on the website. The business which may be dealt with at the AGM
includes any statement that the Company has been required under
Section 527 of the Companies Act 2006 to publish on a website.
(xiii) Copies of the Executive Directors’ service contracts with the Company
and any of its subsidiary undertakings, deeds of indemnity in favour of
the Directors and letters of appointment of the Non-Executive Directors
are available for inspection at the registered office of the Company
during the usual business hours on any weekday (Saturday, Sunday
or public holidays excluded) from the date of this notice until the
conclusion of the AGM.
Explanatory notes to the resolutions
Ordinary business
Resolution 1 – Receiving the Annual Report
Shareholders will be asked to receive the Company’s Annual Report
forthefinancial year ended 31 December 2020, as required by law.
Resolution 2 – Directors’ Remuneration report
Resolution 2 seeks shareholder approval of the Directors’ Remuneration
report for the year ended 31 December 2020 which can be found on
pages 72 to 80 ofthe Annual Report. The Company’s External Auditor,
PKF Littlejohn LLP, has audited those parts of the Directors’ Remuneration
report that are required to be audited and its report may be found on
pages 84 to 88 of the Annual Report.
The shareholders approved the current Directors’ Remuneration Policy
at the AGM held on 8 June 2020 and it became effective immediately. As
there have been no changes to the Directors’ Remuneration Policy, there
is no need to seek further approval of it at this year’s AGM. The current
intention is to submit the Directors’ Remuneration Policy for shareholder
approval at the AGM scheduled for 2023, unless, in the interim, there
are specific changes that require shareholder approval. The Directors’
Remuneration Policy may be found in the 2019 Annual Report on
pages58to 63.
Resolution 3 – Declaration of dividend
This resolution concerns the Company’s final dividend payment. The
Directors are recommending a final dividend of 4.27 pence per ordinary
share in respect of the year ended 31 December 2020 which, if approved,
will be payable on 1 June 2021 to the shareholders on the register of
members on 7 May 2021.
Resolutions 4 to 10 – Re-election of Director
Biographies for the Directors are set out on pages 60 to 61 of the report
and financial statements for the year ended 31 December 2020. With the
Chair having undertaken performance reviews of the Directors, and the
Non-Executive Directors having undertaken a performance review of the
Chair, the Board is satisfied that each Director continues to be effective and
demonstrates commitment to the role and recommends that each Director
should be re-elected.
Resolutions 11 and 12 – Re-appointment of Auditor and itsremuneration
Resolution 11 concerns the re-appointment of PKF Littlejohn LLP as the
Company’s Auditor, to hold office until the conclusion of the Company’s
next general meeting where accounts are laid. Resolution 12 authorises
theAudit Committee to determine the Auditor’s remuneration.
Special business
Resolution 13 – Power to allot shares
This resolution grants the Directors authority to allot shares in the capital
of the Company and other relevant securities up to an aggregate nominal
value of £810,353, representing approximately one-third of the nominal
value of the issued ordinary share capital of the Company as at 6 April
2021, being the latest practicable date before publication of this notice. In
addition, in accordance with the latest institutional guidelines issued by the
Investment Association, paragraph (b) of resolution 13 grants the Directors
authority to allot further equity securities up to an aggregate nominal value
of £1,620,706 representing approximately two-thirds of the nominal value of
the issued ordinary share capital of the Company as at 6 April 2021, being
the latest practicable date before publication of this notice. This additional
authority may only be applied to fully pre-emptive rights issues.
The intention of the authority granted pursuant to paragraph (b) of
resolution 13 is to preserve maximum flexibility and if the Directors do
exercise this authority, they intend to follow best practice as regards its use.
The Company does not currently hold any shares as treasury shares
within the meaning of Section 724 of the Companies Act 2006
(“TreasuryShares”).
The Directors consider it desirable that the specified amount of authorised
but unissued share capital is available for issue so that they can more
readily take advantage of possible opportunities, which may include
the allotment of shares to the Employee Benefit Trust for the purpose
offulfillingfuture potential awards.
Unless revoked, varied or extended, this authority will expire at
the conclusion of the next AGM of the Company or 30 June 2022,
whicheveristhe earlier.
Notice of the 2021 Annual General Meeting
Continued
138
Zotefoams plc
Annual Report 2020
Resolutions 14 and 15 – Authority to allot shares disregarding
pre-emption rights
These resolutions authorise the Directors in certain circumstances to
allot equity securities for cash other than in accordance with the statutory
pre-emption rights (which require a company to offer all allotments for cash
first to existing shareholders in proportion to their holdings). Resolution
14 authorises the Directors to issue shares either where the allotment
takes place in connection with a rights issue or the allotment is limited to
a maximum nominal amount of £121,553, representing approximately 5%
of the nominal value of the issued ordinary share capital of the Company
as at 6 April 2021, being the latest practicable date before publication of
this notice. Resolution 15 authorises the Directors to issue a further 5%
of the issued ordinary share capital of the Company, but only to be used
to raise finance for an acquisition or a specified capital investment (within
the meaning given in the Pre-Emption Group’s Statement of Principles)
which is announced contemporaneously with the allotment, or which
has taken place in the preceding six-month period and is disclosed in
theannouncement of the allotment.
Unless revoked, varied or extended, these authorities will expire at the
conclusion of the next AGM of the Company or 30 June 2022, whichever
is the earlier.
The Directors consider that the powers proposed to be granted by these
resolutions are necessary to retain flexibility, although they do not have
anyintention at the present time of exercising them. In accordance with
the Pre-Emption Group’s Statement of Principles, the Directors confirm
that they do not intend to issue more than 7.5% of the issued ordinary
share capital of the Company on a non-pre-emptive basis in any rolling
three-year period without prior consultation with Shareholders.
Resolution 16 – Authority to purchase shares (market purchases)
This resolution authorises the Board to make market purchases of up
to 4,862,123 ordinary shares (representing approximately 10% of the
Company’s issued ordinary shares as at 6 April 2021, being the latest
practicable date before publication of this notice). Shares so purchased
may be cancelled or held as Treasury Shares. The authority will expire at
the end of the next AGM of the Company or 30 June 2022, whichever
is the earlier. The Directors intend to seek renewal of this authority at
subsequent AGMs.
The minimum price that can be paid for an ordinary share is 5 pence, being
the nominal value of an ordinary share. The maximum price that can be
paid is 5% over the average of the middle market prices for an ordinary
share, derived from the Daily Official List of the London Stock Exchange,
for the five business days immediately before the day on which the share is
contracted to be purchased.
The Directors intend to exercise this right only when, in light of the market
conditions prevailing at the time and taking into account all relevant factors
(for example, the effect on earnings per share), they believe that such
purchases are in the best interests of the Company and shareholders
generally and will result in an increase in earnings per ordinary share. The
overall position of the Company will be taken into account before deciding
upon this course of action. The decision as to whether any such shares
bought back will be cancelled or held in treasury will be made by the
Directors on the same basis at the time of the purchase.
As at 6 April 2021, being the latest practicable date before publication of
this notice, there were outstanding awards under the Company’s long-
term incentive schemes (excluding the Share Incentive Plan) in respect of
900,363 ordinary shares in the capital of the Company representing 1.9%
of the Company’s issued ordinary share capital. If the authority to purchase
the Company’s ordinary shares were exercised in full, such awards would
represent 2.1% of the Company’s issued ordinary share capital.
Resolution 17 – Notice period for general meetings
Under the Companies Act 2006, a listed company must give at least 21
days’ notice of its general meetings. However, the Act enables general
meetings (other than AGMs) to be held on shorter notice of not less
than 14 days, provided the shareholders have given their consent at the
previous AGM or a general meeting held since the last AGM. Resolution
17 seeks such approval similar to the resolution that was passed last
year. The approval will be effective until the Company’s next AGM, when
it is intended that a similar resolution will be proposed. The Directors will
always endeavour to give as much notice as possible of general meetings,
but would like to have the flexibility to call a general meeting on the shorter
permitted notice period for time sensitive matters that are clearly in the
shareholders’ interests and otherwise for non-routine business, where
merited, in the interests of shareholders as a whole. If the authority is used,
the Company will offer the ability, as required by the Companies Act 2006,
to vote electronically.
Resolution 18 – New articles of association
Resolution 18 proposes that the Company adopts updated Articles of
Association (the “New Articles”), principally in order to reflect developments
in law and practice since the Company’s current articles (the “Current
Articles”) were adopted in 2010. A copy of the New Articles, together with a
copy marked to show the changes from the Current Articles, is available for
inspection and can be viewed on the Company’s website.
A summary of the principal changes is set out below:
Hybrid General Meetings: The New Articles give the Directors the power
to convene a hybrid general meeting, being a meeting which has the
facilities for shareholders to attend either wholly by electronic platforms or
by both in a physical place and via electronic platforms. The New Articles
do not give the Directors the power to hold a solely electronic General
Meeting. The provisions included in the New Articles include, for example,
the details that need to be provided to shareholders if such a meeting is
to be held and a requirement that all resolutions must be taken on a poll in
the event of a hybrid meeting. The Directors consider that the Company
should properly have the ability to convene hybrid general meetings
shouldthecircumstances require this.
Untraced members: In line with market practice, the New Articles provide
additional flexibility in relation to the sale of shares owned by shareholders
who are untraced after a period of at least 12 years. Under the Current
Articles, the Company is required to give notice to untraced shareholders
of an intention to sell their shares by way of an advertisement in one
national daily newspaper and one local newspaper circulating in the area
in which the shareholder’s last known address is known by the Company.
Under the New Articles, the Company must instead send a notice to the
last registered or known address of the shareholder and use reasonable
steps to trace the shareholder including, if considered appropriate, using
aprofessional asset reunification company or other tracing agent.
Additionally, under the New Articles, in respect of the proceeds of shares
sold on behalf of an untraced member, the Company may use or invest
such proceeds as the Directors see fit.
Sub-division of shares: The New Articles, in line with market practice,
provide that a resolution to sub-divide shares may include the creation of
deferred shares, so as to make administering any sub-division of shares
more straightforward.
Postponement/Change of general meeting: The New Articles now
expressly permit the Directors, in line with current market practice,
togivenotice of any change or postponement to be advertised in the
manner that the Directors (in their discretion) decide.
Votes of members: To reflect guidance published by The Chartered
Governance Institute, the New Articles confirm that the Company is not
required to ascertain whether a proxy or corporate representative has
voted in accordance with the member’s instructions.
Scrip dividends: In accordance with the IA Share Capital Management
Guidelines 2016, the expiry period for an ordinary resolution authorisation
in respect of a scrip dividend has been limited to three years.
Minor amendments: Some additional minor changes have been made to
the New Articles, including to clarify the position in relation to the annual
retirement of Directors and how to deal with fractional entitlements on a
sub-division of shares.
Recommendation
The Directors consider that the proposals being put to the shareholders at
the AGM are in the best interests of the Company and of the shareholders
as a whole. Accordingly, the Directors recommend that you vote in favour
of the resolutions set out in the Notice of the AGM, as they intend to do in
respect of their own beneficial holdings of ordinary shares.
139
Zotefoams plc
Annual Report 2020
Company information
Registered office
675 Mitcham Road
Croydon CR9 3AL
cosec@zotefoams.com
Registered number
2714645
Financial adviser and broker
Investec Bank plc
30 Gresham Street
London EC2V 7QP
Joint broker
Peel Hunt LLP
Moor House, 120 London Wall
London EC2Y 5ET
Financial Public Relations
IFC Advisory Limited
24 Cornhill
London EC3V 3ND
Auditor
PKF Littlejohn LLP
15 Westferry Circus
Canary Wharf
London E14 4HD
Bankers
Handelsbanken plc
3 Thomas More Square
London E1W 1WY
National Westminster Bank plc
Turnpike House, 123 High Street
Crawley RH10 1DD
Solicitors
Collyer Bristow LLP
4 Bedford Row
London WC1R 4TF
Registrars
Computershare Investor
Services plc
The Pavilions
Bridgwater Road
Bristol BS13 8AE
www.computershare.com
Financial calendar
AGM
26 May 2021
Payment of final dividend 1 June 2021 to shareholders on
the register at the close of business
on 7 May 2021
Payment of interim dividend
October 2021
Announcement of 2021 results
March 2022
Website
The Company has a website (www.zotefoams.com) which provides
information on the business and products.
AZOTE
®
, ZOTEK
®
, T-FIT
®
, Plastazote
®
and ReZorce
®
are registered
trademarks ofZotefoams plc.
MuCell
®
is a registered trademark of Trexel Inc.
Registrars
Enquiries concerning the holding of ordinary shares in the Company
shouldbe addressed to the registrars who should also be notified of
anychanges in a holder’s address.
The registrars are: Computershare Investor Services Plc, The Pavilions,
Bridgwater Road, Bristol BS13 8AE.
Telephone: 0370 707 1424
www.investorcentre.co.uk/contactus
140
Zotefoams plc
Annual Report 2020
Designed and produced by
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www.friendstudio.com
Print: CPI Colour
Zotefoams plc
675 Mitcham Road
Croydon
CR9 3AL
United Kingdom
T +44 (0)20 8664 1600
F +44 (0)20 8664 1616
investorinfo@zotefoams.com
www.zotefoams.com
Zotefoams plc
Annual Report 2020