Setting
the pace
Annual Report 2019
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Setting the
pace for
growth
Following sustained growth in demand
for our unique materials and completion
of our first programme in the USA to
install a high-pressure autoclave and
infrastructure, Zotefoams embarked in
2018 on a second, broader programme
of investment designed to make our
organisation more agile and responsive
to the many opportunities that exist
for our products. With all projects due
to be complete by H2 2020, see how
we progressed over the course of 2019,
along with other highlights from the year.
Lift to find out more
Timeline
of the year
May
We open a sales office in Ahmedabad,
India for our T-FIT® insulation range,
enabling us to fully capitalise on the
immense opportunity presented by
the Indian pharmaceutical production
market, which is forecast to be one of
the world’s top three markets by 2030.
July
On time and on budget: the
new factory at our UK plant
is officially opened, increasing
capacity for production of
our high-performance
products (HPP) range.
February
Construction of our plant in
Poland begins. Scheduled for
completion in H2 2020, this will
increase our global annual foam
manufacturing capacity by up
to 50,000m3, or around 15%.
June
Our UK site gains Authorised
Economic Operator status,
recognising that our place in
the international supply chain
is secure, with customs controls
and procedures that are efficient
and meet EU standards.
March
Zotefoams wins the
Innovation in Technology
award at the prestigious
PLC Awards, underlining
how our unique materials
are more relevant than ever
in an increasingly safety- and
energy-conscious world.
September
We launch AZOTE® Adapt, a new
range of crosslinked polyolefin
block foams, which harnesses our
knowledge of foam processing
using autoclaves to redefine
chemical foaming.
November
The construction phase of our Polish
plant is completed on time and on
budget and, following handover from
the contractors, delivery, installation
and commissioning of production
equipment commences.
October
Zotefoams records an
industry first as we launch
ReZorce®, a range of recyclable
high-density polyethylene
(HDPE) mono-materials for
barrier packaging of foodstuffs,
beverages, household and
personal care goods.
December
In its centenary year Royal
British Legion Industries (RBLI)
presents Zotefoams plc with an
award recognising our support for
ex-service personnel through our
business choices, having worked
closely with RBLI since 2003.
August
Work on supporting infrastructure
for the second high-pressure
autoclave at our USA plant nears
completion. The project will add
capacity and flexibility to produce
more foams closer to our North
American customer base.
1
Contents
Strategic Report
8
Group at a glance
10 A unique manufacturing process
12 An introduction from our Chair
14 Group CEO’s review
18 Our business model
20 Our external context
22 Our strategic objectives
24 Our brands in action
28 Group CFO’s review
33 Risk management and principal risks
39 Viability statement
40 Our people
43 Sustainability
47
s172(1) statement
The Board and its Committees
Governance
48 Board of Directors
50 Corporate governance
51
53 Audit Committee report
55 Nomination Committee report
56 Directors’ Remuneration report
73 Directors’ report
75 Statement of Directors’ responsibilities
Independent auditors’ report
Financial Statements
76
81 Consolidated income statement
Consolidated statement of
82
comprehensive income
Consolidated statement of
financial position
Company statement of
financial position
84
83
85 Consolidated statement of cash flows
86 Company statement of cash flows
87
Consolidated statement of changes
in equity
Company statement of changes
in equity
88
89 Notes
128 Five-year trading summary
Notice of the 2020 Annual
129
General Meeting
IBC Company information
IBC Financial calendar
Financial highlights
Group revenue
£80.86m
Change 0%
2018 £81.04m
Gross margin
35.4%
Change -43 basis points
2018 35.8%
Operating profit before
exceptional item
Operating
profit
£9.10m
Change -21%
2018 £11.57m
Profit before tax and
exceptional item
£8.76m
Change -19%
2018 £10.81m
Basic earnings per share
before exceptional item
14.91p
Change -20%
2018 18.66p
Total dividend
for the year
2.03p
Change -67%
2018 6.12p
£10.15m
Change -4%
2018 £10.62m
Profit
before tax
£9.81m
Change 0%
2018 £9.86m
Basic earnings
per share
17.10p
Change +1%
2018 16.96p
Return on capital
employed
10.5%
Change 600 basis points
2018 16.5%
Impact of exceptional item
Operating profit
Exceptional item (£m)
Profit before tax (£m)
Tax (£m)
Profit after tax (£m)
Weighted average number of shares (number)
Basic earnings per share (p)
Impact of IFRS 16*
Operating profit before exceptional item
Profit before tax and exceptional item (£m)
Basic earnings per share before exceptional item (p)
Gross margin (%)
Operating profit
Profit before tax (£m)
Basic earnings per share (p)
Return on capital employed (%)
Before
exceptional item
9.10
–
8.76
1.39
7.17
48,054,819
14.91p
After
exceptional item
10.15
1.05
9.81
1.59
8.22
48,054,819
17.10p
As reported
9.10
8.76
14.91
35.4
10.15
9.81
17.10
10.5
Before IFRS 16
adjustment
9.10
8.76
14.91
35.4
10.15
9.81
17.10
10.5
* The financial year ended 2018 includes operating lease costs under IAS 17. The financial year ended
2019 includes lease costs under IFRS16, which classifies operating leases as right-of-use assets and
lease liabilities on the statement of financial position. The net impact of IFRS 16 to profit before tax,
being the increase in depreciation charge and interest charge offset by the decrease in operating
lease charges, is nil for the year ended 31 December 2019.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 2
Setting the pace with Nike
ZOTEK®
Unique processes
deliver unique
materials
The unique Zotefoams three-stage
manufacturing process is recognised
for the suite of product characteristics it
delivers, including lighter weight and greater
consistency, durability and purity than
foams manufactured by any other method.
Equally important as a differentiator is
the fact that our autoclave technology
can be used to foam polymers that
cannot be reliably expanded by any
other method, which is the founding
principle of our High-Performance
Products (HPP) business.
Nowhere is this better illustrated
than with ZOTEK® PEBA, based
on a thermoplastic elastomer (TPE)
resin, which we began to develop
in 2012 as a material for demanding
applications in sports.
Zotefoams plc Annual Report 2019 3
High potential,
high energy return
With an unrivalled combination of durability,
outstanding energy return and ultra light
weight, ZOTEK® PEBA is perfect for applications
where cushioning and impact protection are
paramount, such as saddles, protective
clothing and, notably, high-tech footwear,
where energy return ranks alongside
cushioning as a critical performance factor.
In 2017, Nike and Zotefoams announced a
strategic partnership, whereby Zotefoams
supplies its foam materials exclusively to
Nike within the footwear industry.
A recent result of the partnership is the Nike
ZoomX Vaporfly NEXT%. Launched in 2019,
the shoe combines a Nike ZoomX midsole
produced from Zotefoams material with a
full-length carbon plate. Together, these
elements form a cushioning system that
helps maximise energy return for the athlete.
“ We are proud of this
partnership, through
which we continue
to work exclusively
with Nike to develop
and manufacture
foam innovations
to bring to market
high-performance
athletic product.”
David Stirling, Group CEO
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 4
Setting the pace in polyolefin foams
AZOTE®
Closer to our
customers
Zotefoams materials have always stood
apart from the competition thanks to our
unique manufacturing process based on
physical expansion using pure nitrogen.
This results in materials that are purer, lighter,
more uniform and durable than chemically blown
foams – all prized properties in the often-critical
applications that utilise Zotefoams material. The
capital-intensive nature of our business is one
of the main barriers to entry for potential
competitors. During periods of peak demand,
however, it can limit flexibility. In 2019, we
addressed this challenge with the launch
of AZOTE® Adapt.
Redefining
chemical foaming
Recognising the growing market our customers
serve with chemically blown foams but also
the concerns about residual volatile organic
compounds (VOCs) and stricter emissions
standards to limit workforce exposure levels,
Zotefoams saw a clear opportunity to improve
on that process.
AZOTE® Adapt is an entirely new category
of polyolefin foam that combines our unique
experience in physical expansion of foam using
autoclaves with the latest chemical blowing
agent technology in a proprietary process.
Closer to our
customers
Well received by customers following its test
launch in October, AZOTE® Adapt is currently
being produced in limited quantities at
Zotefoams’ UK facility. It will be manufactured
in volume in Poland on completion of the new
plant, which offers additional competitive
advantage thanks to its location close to
major European manufacturing centres.
Zotefoams plc Annual Report 2019 5
“ AZOTE® Adapt has been
developed specifically to
deliver the service, block size
and cell structure demanded
by our customers along with
consistency of density and
low VOC with minimal
chemical residues.”
David Stirling, Group CEO
The Polish plant will initially add
50,000m3
to our annual global foam production
capacity – an increase of some 15%
On completion of this final phase of our two-year
investment programme, we will have increased
Group annual capacity by
60%
since 31 December 2017
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 6
Setting the pace in fully recyclable
mono-material barrier packaging
ReZorce®
Reduce,
reuse,
recycle
Plastic is a mainstay of consumer packaging
thanks to its low cost, light weight and flexibility
in processing. MuCell Extrusion LLC works
with packaging materials suppliers delivering
technology that foams the core of solid plastics,
reducing material content, costs and weight.
Performance and
sustainability
Although plastic is the focus of much negative
publicity, when used and recycled appropriately
it is a highly sustainable resource. One area of
challenge remaining in this respect is barrier
packaging, primarily used for foods and
beverages where transmission of oxygen or
moisture through the packaging will impair the
product. Current barrier packaging typically
consists of different types of materials −
metallised foils, aluminium, paper and plastic –
laminated together. Barrier performance can
come at the expense of sustainability, however,
as these combinations of materials face
significant challenges in recycling.
®
In 2020, our team addressed this challenge
with the introduction of ReZorce® packaging.
Now available for licensing to brand owners
and converters, ReZorce® offers excellent
functional capability to replace current
composite versions of:
XX Tubes
XX Laminated paper
XX Pouches
XX Cartons
100% recyclable
ReZorce® is a multi-layer high-density
polyethylene (HDPE) film, with foamed layers
critical in providing moisture vapour transmission
(MVT) and oxygen barrier properties. It is also
compatible with float-sink sorting and HDPE
post-consumer recycling. The foamed layers
also contribute to paper-like feel and fold
characteristics, while the surface is compatible
with all common printing methods.
Zotefoams plc Annual Report 2019 7
“ Zotefoams’ products and technologies are
frequently part of the sustainability agenda
for our customers and their end users – and
demand is increasing. The global trend of
using less material creates opportunities to
use foams and we intend to develop further
products and solutions to satisfy global
needs in a sustainable manner.”
David Stirling, Group CEO
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 8
Zotefoams plc
Annual Report 2019
Group at a glance
Four strong, distinctive brands
Zotefoams produces a wide range of innovative
products that are critical components in a world
of everyday applications.
North America
27%
Rest of the world
25%
Revenue by
geography %
Continental Europe
32%
United Kingdom
16%
North America
Local manufacturing presence in Kentucky
for the Polyolefin Foams business, cutting
operation in Oklahoma to service the
construction market, and headquarters
of MuCell Extrusion LLC (MEL), based in
Massachusetts, licensing technology globally.
Local representation for our High-Performance
Products (HPP) business.
United Kingdom
Group headquarters and main factory,
manufacturing polyolefin foams and
high-performance products for sale globally.
Continental Europe
Largest market for polyolefin foams. Work
is well advanced on a £23m manufacturing
facility in south west Poland. Scheduled to
begin operations in H2 2020, the plant will
initially service 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 High-Performance
Products (HPP) business. Joint venture with
INOAC Corporation for AZOTE® polyolefin
foams sales in Asia. Commercial operation
established during the year in India.
Revenue by industry 2019
%
29
Revenue by business unit
£m
Revenue by business unit
£m
AUTOCLAVE TECHNOLOGY
AZOTE®
POLYOLEFIN
FOAMS
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
Fire
safety
Energy
saving
Read more page 24.
Durability
Reduced
toxicity
30
25
20
15
10
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22
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Polyolefin Foams
HPP
MEL
Polyolefin Foams
HPP
MEL
Lighter, purer, more durable
components for the automotive
industry
Read more page 24.
Zotefoams plc
Annual Report 2019
9
AUTOCLAVE TECHNOLOGY
EXTRUSION TECHNOLOGY
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ZOTEK®
HPP
T-FIT®
HPP
MuCell
MEL
Lightweight technical foams
Ultra-durable, highly heat-resistant
and impact-resistant foam. ZOTEK®
foams are manufactured from
engineering polymers using our
unique nitrogen-expansion process.
Key markets served
Athletic footwear
Automotive
Aviation
Construction
Product protection
Technical insulation for industry
A range of bacteria-resistant
insulation products manufactured
from Zotefoams’ own ZOTEK® block
foam materials. T-FIT® insulation
products are purpose-designed to
perform in demanding environments.
Key markets served
Food and personal care manufacturing
High-temperature processing environments
Pharmaceutical, biotech and
semiconductor cleanrooms
Innovative and accessible
technology for greener,
lower-cost plastic products
This pioneering technology injects
gas 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
use this technology.
Key markets served
Automotive
Consumer packaging
Key market drivers
Key market drivers
Key market drivers
Light
weighting
High-
technology
insulation
Fire
safety
Personal
safety
Durability
Sports
and leisure
Ageing
population
Reduced
toxicity
Demographic
changes
Environmental
benefit
Lower cost
Energy
saving
Read more page 25.
Read more page 26.
Read more page 27.
From lightweight to weightless:
ZOTEK® F proves a winner in
spacecraft interiors
T-FIT® Hygiene is first choice
insulation for cool chain customer
An industry first in recyclable
food packaging
Read more page 25.
Read more page 26.
Read more page 27.
10
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,
and represents a considerable barrier to entry for potential competitors.
Operating at temperatures up to 250ºC,
this environmentally 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.
A rapid 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
to them being unloaded.
Zotefoams plc Annual Report 2019 11
Polymer and any additives (colours,
fire retardants, conductive agents) are
extruded into a continuous solid plate.
The plate passes through an oven which
activates the crosslinking process.
It then cools and is cut into slabs.
Stage 1
Extrusion and
crosslinking
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 is reduced the
nitrogen expands turning the slab into
a larger foam sheet. This expansion
process is unconstrained, so uniform
in each dimension.
Stage 3
Expansion
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 12
An introduction from our Chair
Making good strategic progress
We remain committed to our strategy
of building a global business despite
a challenging environment.
Total dividend
for the year
2.03p
Change -67%
2018 6.12p
Final dividend suspended in response
to the COVID-19 virus outbreak
and related uncertainty.
Basic earnings per share
before exceptional item
14.91p
Change -20%
2018 18.66p
Earnings per share
17.10p
Change +1%
2018 16.96p
Overview
In a year which ended with a very challenging
demand environment, we have made good
strategic progress. We continued to deliver
strong growth in our High-Performance
Products (HPP) business, improved our
revenue base and opportunities for future
growth in MuCell Extrusion LLC (MEL) and all
capacity expansion investments to support our
medium-term growth ambitions completed as
planned or are on track to do so. In our Polyolefin
Foams business, following a good start to the
year, market demand, particularly in continental
Europe, deteriorated rapidly in the second half
of the year. This situation was exacerbated by
significant customer de-stocking and, while cost
actions were taken, the Group’s overall financial
performance was weaker than the previous
year as a result.
Performance
In 2019, Group revenue was £80.86m, broadly in
line with 2018 (£81.04m). Operating profit before
exceptional item was down 21% at £9.10m
(2018: £11.57m) and operating profit was down
4% at £10.15m (2018: £10.62m). Basic earnings
per share before exceptional item was down
20% at 14.91p (2018: 18.66p) and basic earnings
per share was up 1% at 17.10p (2018: 16.96p).
HPP is our fastest-growing business unit and
sales grew 20%, in line with our strategic targets.
MEL, while still small, grew sales by 59%, driven
by increased equipment revenue. The Polyolefin
Foams business, which is the largest part of the
business and whose volumes provide significant
cost absorption to drive profitability, declined
10% amid macroeconomic and geo-political
uncertainty.
Being a manufacturing exporter, the Group is
subject to foreign currency volatility, which it
seeks to mitigate through hedging of its net
operating cash flows and using foreign currency
denominated debt to offset the Company’s
exposure on its third party net assets as well
as its intercompany loans and trading positions.
While not affecting the cash profitability of
the business, the impact of foreign exchange
translation losses in 2019 of £0.47m (2018:
gains of £0.99m) represented a significant
adverse swing from the prior period.
The equity raise and refinancing of 2018 have
provided Zotefoams with funds to complete
our major capacity investment programme and
finance the additional working capital required
for growth. The timing of the cyclical downturn
in Polyolefin Foams, exacerbated by the
unprecedented economic uncertainty from
COVID-19, at the same time as these capacity
investments complete, has adversely impacted
returns on capital and will result in peak debt
levels and debt leverage (net debt to EBITDA)
being higher than previously anticipated. We
believe the Group has sufficient liquidity and
expect to remain within revised covenant levels.
Zotefoams plc Annual Report 2019 13
Summary
In 2019, Zotefoams delivered good strategic
progress in the face of very challenging
macroeconomic conditions. Looking ahead,
while the ongoing impact of the COVID-19 virus
is generating significant uncertainty, we continue
to benefit from an attractive product portfolio,
strong competitive positions in our markets, and
a broad range of growth opportunities which
maintain our optimism in the future prospects
of the business, our commitment to the Group’s
strategy, and the investments which underpin it.
S P Good
Chair
9 April 2020
Delivering our strategy
The Board reviews strategic plans throughout
the year and this forms the basis for our
decision-making. We have a clear and consistent
long-term strategy for organic growth, based
around the three long-term megatrends of
environment, regulation and demographics, all
of which drive demand for our products. We use
our unique technology to deliver stakeholder
value by creating a portfolio of differentiated
products which provide demonstrable benefits
to our customers. Our strategic objective is to
achieve annual growth in our Polyolefin Foams
business of at least twice global GDP and
develop HPP and MEL businesses that offer
enhanced growth rates and margins, while
growing operating margins and our return on
capital over the investment cycle. During 2019,
we have materially grown our HPP and MEL
businesses in line with our strategy and have
further developed our pipeline of opportunities
to sustain high rates of growth. We have also
maintained our focus on completing our capital
expansion programme, expected to provide
the capacity to support demand through
our strategic plan period. We successfully
completed our investments in the USA and
the UK and expect to commission our Polish
manufacturing facility in H2 2020.
The Board is very aware of the current plastics
debate and the importance of sustainability with
respect to driving desired outcomes for all
stakeholders in the future. Zotefoams’ products
are used almost exclusively for permanent
solutions and often form part of our customers’
sustainability agenda. They are seldom used for
single-use purposes which, understandably
in certain applications, is causing most public
concern. We believe that plastics, used
appropriately, remain the optimal solution
both functionally and environmentally for
our customers’ needs. We also recognise the
importance of continuous improvement around
product development and operating efficiency
to reduce the Group’s environmental impact.
More details are included under
Sustainability on page 43.
Governance and the Board
The Board sets out to deliver the highest
standards of corporate governance and has
remained abreast of developing governance
standards. We have continued to prioritise a safe
working environment for our staff across all
global locations and have improved the visibility
and quality of safety performance data across
the business. We continue to support and
empower our employees and are meeting our
commitment to enhancing the employee voice
in the boardroom through the appointment of
J Carling as Board representative for workforce
engagement. With the help of a diverse group
of employee representatives and seeking to
represent the interests of all stakeholder groups,
we have articulated the purpose of Zotefoams to
be “Optimal material solutions for the benefit of
society”. We feel this perfectly encapsulates all
three business units and reflects our alignment
with the megatrends of environment, regulation
and demographics. The Board considers that
it has fully applied all the principles and
provisions of the UK Corporate Governance
Code during 2019.
More information is provided in the
Corporate Governance report on page 50.
During the year, there were no changes to the
experienced and engaged Board, which has
continued to provide challenge, support and
guidance to the Executive Directors on the
delivery of our strategy. Board succession
planning is key to preserving this position and
to that end we are pleased to be appointing
C Wall and A Fielding to the Board with effect
from 14 May 2020. Both will bring highly
relevant skill sets and experience to the Board.
A Fielding will replace A Bromfield as Chair of
the Remuneration Committee, who will leave
the Board on 13 May 2020. A Bromfield
has served Zotefoams since 2014 and departs
with our sincerest thanks for her wise counsel
and leadership of the Remuneration Committee
and her valuable strategic and cultural insights.
People
Our people are key to our success. During
the year we have welcomed the first group of
employees who will help ensure the success
of our Poland manufacturing location, as well as
the first group of employees to our new Indian
organisation who will help achieve our ambitious
growth targets in our T-FIT® technical insulation
business. Having the right people at Zotefoams,
who understand and promote our culture, act at
all times with integrity, safety-consciousness and
dedication and possess the right knowledge and
skills, is critical to our future success. I would like
to welcome the new employees who have joined
us around the world during the past 12 months
and extend my thanks, once again, to all our
hard-working employees and their supportive
families who have helped the Group continue to
make good strategic progress while managing
the challenges faced by our Polyolefin Foams
Business Unit.
Dividend
The Board has a progressive dividend policy,
recognising the importance to our shareholders
of the dividend as part of their overall return.
However, as described above, the extraordinary
uncertainty posed by the COVID-19 outbreak
means that we are focused on minimising cash
outflows and strengthening our financial position
in the short term. As such, the Board believes it
prudent not to recommend a final dividend for
the year ended 31 December 2019 (2018: 4.15p).
The Board will keep this situation under review
and will determine the timing for resumption of
dividends as economic conditions stabilise.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 14
Group CEO’s review
Good strategic progress in a
weaker demand environment
Zotefoams remains well
positioned competitively
and environmentally.
Our core materials
offer improved product
performance using
less material, and MEL
licenses technology
specifically to reduce
polymer usage.
2019
Change %
United
Kingdom
Continental
Europe
North
America
Rest of
the world
(2)%
(13)%
3%
19%
Total
0%
Group revenue (£’000)
£12,875
£25,503
£22,010
£20,472
£80,860
% of Group revenue
16%
32%
27%
25%
100%
2018
Group revenue (£’000)
£13,137
£29,342
£21,340
£17,218
£81,037
% of Group revenue
17%
36%
26%
21%
100%
Zotefoams takes a long-term approach to
delivering organic growth through investment in
our product portfolio, unique technology, people
and processes. Our strategy is focused around
key market trends in an increasingly global
business. In 2019, we delivered good growth from
our HPP and MEL business units, while Polyolefin
Foams sales decreased by 10%, reflecting much
lower levels of demand in key Western Europe
and North American markets in the second half of
the year. As a predominantly UK-based exporter,
the impact of movements in foreign exchange
rates can also be material, particularly the
non-cash impact of translation differences, which
negatively impacted profit before tax in the period
by £0.47m (2018: benefit of £0.99m). Group
revenue was at a similar level to 2018, £80.86m
(2018: £81.04m), while profit for the year before
income tax and exceptional item declined by
19% to £8.76m (2018: £10.81m). Adjusting for the
aforementioned FX movement, profit for the year
before income tax and exceptional item declined
by 6% to £9.23m (2018: £9.82m).
Strategy update
Zotefoams’ strategy is to invest in flexible assets
with unique capability, to initially fill these assets
with relatively lower margin business where
required, then pursue longer-term mix
enrichment strategies to generate higher returns
and margins. This is more difficult to achieve
during a short-term cyclical downturn, but we
expect benefits from an initial improvement in
utilisation once the macroeconomic environment
improves, followed by further enhancement in
return from increasing proportions of higher
margin business.
As the world around us changes we regularly
re-test our strategy. The significant decline in the
demand for polyolefin foams during the second
half of 2019, we believe, is largely cyclical and
exacerbated by inventory reductions through the
supply chain. Since 2017, we have made
significant, long-term investments in further
capacity for our unique manufacturing process.
These have been recently commissioned, or are
in the latter stages of commissioning, and the fall
in demand for polyolefin foams means that some
of these assets are currently under-utilised. We
believe we have the product portfolio and
underlying market potential to grow to planned
levels of utilisation and that our existing strategy
will deliver stakeholder value over the coming
years. Investing in long-term assets at the
appropriate time in the right places is one of the
core challenges to implementing our strategy,
alongside allocation of resource across a
portfolio of products and markets, development
of an organisation with flexible, talented people
and a culture to support growth.
Zotefoams remains well positioned competitively
and environmentally. Our core materials offer
improved product performance using less
material than competitors, and MEL licenses
technology specifically to reduce polymer
content. The emergence of what we see as
a strongly negative public perception of plastic
is now becoming more nuanced beyond the
environmental impact of ill-considered,
single-use plastic, used predominantly in
consumer packaging. Zotefoams’ current
markets are not immediately impacted by this, as
products using our foams are primarily integral
components in larger systems or products (such
as cars, planes, footwear, 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. 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.
The markets in which we operate are driven by
global trends – environment, regulation and
demographics – which we believe offer potential
for high rates of market growth as well as
opportunity for our disruptive technology
solutions.
We measure strategic progress on four metrics,
all before exceptional items:
1. Our HPP and MEL Business Units, which
offer these unique, disruptive products and
solutions, together now account for 37%
(2018: 30%) of Group revenues. HPP and
MEL increased combined sales by 23% to
£29.57m (2018: £23.95m), which is a pleasing
performance. The unique benefits offered by
these products, combined with a focus on
selling into structural growth niches, means
that we expect strong further growth in these
product lines in the future.
2. Sales of our highly differentiated AZOTE®
polyolefin foam products declined by 10%
(2018: growth of 8%), against our target rate
of twice global GDP growth. Decreasing
demand in the main markets of Western
Europe and North America, specifically in the
second half of the year, significantly impacted
our sales in the Polyolefin Foams Business
Unit. Reductions in inventory levels of
customers, which contributed to the sharp
decline in the second half of 2019, would
normally be expected to reverse as underlying
demand improves, although the uncertainty in
the current economic environment is likely to
contribute to lower levels of inventory at
customers for the foreseeable future.
3. Group operating margins before exceptional
item were 11.3% (2018: 14.3%). Despite the
flat sales performance, gross margins
remained robust, with the structural mix
benefit of continued growth in HPP being
offset slightly by increased depreciation from
new assets. Continued investment in sales
teams globally, to ensure we have the
commercial platform to maximise the
opportunity from a growing product range, led
to a significant increase in distribution costs,
and adverse foreign exchange translation
movements increased administration costs.
We expect future sales growth to improve
Zotefoams plc Annual Report 2019 15
operating margins, although recent
investments add to fixed depreciation and
production overheads, which will now take
longer to absorb in this weaker demand
environment for polyolefin foams. We also
expect licensing revenues at MEL to increase,
which will have a positive impact on profit
margins, and are optimistic about
opportunities from our recently launched
ReZorce® technology in the medium term.
4. Group return on capital, which excludes large
asset investments not yet commissioned,
declined to 10.5% (2018: 16.5%). 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 at much lower incremental
cost. The committed large-scale increases in
capacity ends with the commissioning of our
Poland facility, at which point the Group will
be well invested to support future growth, and
capital spending will return to more normal,
lower levels, broadly in line with depreciation.
The net assets of the business will have
increased significantly and improvements in
the return on capital over the coming years will
largely arise from planned profitable sales
growth, which will gradually deliver improved
utilisation of this additional investment.
We believe Zotefoams’ investments are
consistent with our strong portfolio of business
opportunities and will support strong organic
growth in line with our stated strategic intent.
People and embedding
our culture to deliver
The top priority for Zotefoams is ensuring the
health and safety of employees and site visitors.
The Board tolerance for risk is set accordingly
and health and safety is an agenda item at every
Board and Executive Committee meeting.
We recognise that culture, and specifically the
behaviour of all employees, has a significant
impact on safety risk and performance.
Management therefore has a clear priority to
ensure that safety behaviour and culture are
continuously improved across our business
and we will not be satisfied until we achieve
our goal of no-one getting hurt while working
at Zotefoams. In 2019, the number of reportable
lost time incidents across the Group reduced
to 1 (2018: 4).
Following a few years of rapidly increasing
headcount to support new business and
initiatives, 2019 was a year of consolidation.
Developing our organisational capability and
culture globally is something which has, over the
past few years, been essential for delivering our
strategy. We have made significant investments
over the past five years in increasing and
developing our workforce which, by the end of
2019, numbered 445 people (2018: 443), an
increase of 33% since 2015 (334 people). In
2019, 84% of our revenues came from outside
the UK and our non-UK headcount comprises
33% of our global workforce. Continuing to
manage non-UK-based employee growth, such
as in our Poland facility, as we scale up our
international operations, ensuring governance
and building a strong culture remain the primary
focus for management. Zotefoams’ culture is
based around our four brand values: pioneering,
reliable, responsible and trustworthy. It also
strives for further development as a learning
organisation, where lessons from failure may
be the first step forward, where employees
understand how we all contribute to the
business and where we celebrate success
and value the contributions of others. Within
this structure, business units and brand
leaders have significant autonomy to
operate in a dynamic environment.
Key investments
To match Zotefoams’ growth ambition and
attractive pipeline of opportunities we require
sufficient capacity to meet projected demand for
our products. A key challenge we face is that our
capacity investments, which involve significant
infrastructure and bespoke machinery, take
time to bring on stream and are costly. The
first increment of capacity on any site
requires disproportionately high investment in
infrastructure, but subsequent investment on
the site can then be made more cost-effectively
and quickly. As foams are bulky and can be
expensive to transport over long distances, the
manufacturing location also plays a major part
in any investment decision as customers want
optimised transport and swift service.
Since 2014, we have invested £53.4m in growth
capital, including two high-pressure autoclaves
and matched extrusion capacity in Kentucky,
USA, two high-temperature, low-pressure
autoclaves in the UK, again with associated
extrusion capacity, and our new facility in
Poland. This Poland facility is planned to be
available for production during the second half of
2020, albeit at lower utilisation rates than initially
anticipated, in the early stages of operation given
the current challenging polyolefin foams market.
Since 2017, we will have increased Group
capacity by approximately 60% and, with
investment in latest generation technology,
significantly improved the capability of our
assets to produce the full range of Zotefoams’
innovative products. This is particularly important
to support the fast-growing HPP Business Unit,
which is currently supplied from our UK site and,
as this business grows, will utilise more of the
available capacity on site. The Poland site is
ideally placed to support and grow the
Polyolefin Foams business in Europe.
Both the USA and Poland sites have been
constructed with the option for further
investment. For example, the Poland site could
double its capacity for polyolefin foams with
cost-effective investment on approximately an
18-month lead time. This gives Zotefoams the
ability to react to increases in demand for all
products, with an increase in HPP foams
supplied via the UK and increasing supply to
European customers from Poland.
COVID-19
While our China-based customers and our
own relatively small processing facility for T-FIT®
technical insulation in China returned to work at
the beginning of March, following an extended
closure post Chinese New Year, the global
outbreak of COVID-19 is a constantly developing
situation. We are not in a position at this stage to
speculate on the duration nor its future impact
on the broader global customer base of the
Group; however, we have put appropriate
measures in place as we continue to monitor
developments. The health and safety of our
colleagues, their families and our business
partners remain our primary concern and public
health measures advised by governments are
being followed in support of their efforts to
contain the spread of the virus. The supply chain
is being proactively managed as are operating
costs and the timing of capital expenditure. We
believe the Group has sufficient liquidity and
expect to remain within revised covenant levels.
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 with caution,
given the unprecedented uncertainty
surrounding the impacts of the COVID-19 virus
on economic trends and business risks.
Current trading and outlook
On 24 March 2020 we made the statement below.
The challenging market conditions experienced
in the latter part of 2019, particularly within our
Polyolefin Foams business, have yet to improve
noticeably. Adding to this, the outbreak of the
COVID-19 virus is causing additional disruption.
Based largely on the expected demand profile
for HPP products across a number of markets,
the Board anticipates a stronger performance
during the second half of the year. We are,
however, mindful that the further spread of the
virus, and responses to this, have created
significant uncertainty in the near term with likely
adverse trading impacts on operations and
demand patterns.
In light of these exceptional circumstances,
Zotefoams is currently focused on cash,
including cost and capital management, and
maintaining core operational capability across
our business. We have a diverse customer
base and strong competitive position, with our
proprietary product portfolio focused on long
term structural growth applications. This enables
Zotefoams to continue to develop attractive
new markets for its products and underpins
the Board’s confidence in the Group’s
future prospects.
As expected, since 24 March 2020 market
conditions have remained challenging, with high
levels of customer uncertainty, subdued market
demand and rapid response times expected by
customers. Using recently commissioned Group
capacity, Zotefoams has aggressively targeted
market share in discrete segments, the benefit
of which is slowly being realised. We have also
implemented strict cost and capital control
throughout the business and are considering
all elements of government support across
our operating sites around the world. As a
result of the measures the Group is taking,
we believe we have sufficient liquidity to
navigate though this uncertain period.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 16
Group CEO’s review
Continued
POLYOLEFIN
FOAMS
AZOTE®
Segment revenue
£51.36m
Change -10%
2018 £57.16m
Segment profit margin
14%
2018 17%
Segment profit
£7.30m
Change -23%
2018 £9.45m
Sales in Polyolefin Foams declined by 10%
to £51.36m (2018: £57.16m). Sales volume fell
by 14%, while improvements in product mix
combined with the benefit of modestly better
exchange rates to moderate this fall. Segment
profit declined to £7.30m (2018: £9.45m), with
improvement activities unable to overcome the
lower absorption levels of fixed manufacturing
costs, distribution and administration costs
arising from the lower activity level. Included
within manufacturing costs is additional
depreciation, consistent with our investment
in capacity, which increased allocated costs
by £0.5m.
Zotefoams uses a commodity polymer, mostly
low-density polyethylene (LDPE) and, utilising
unique autoclave technology, creates AZOTE®
polyolefin foams. These foams are more
consistent, lighter and possess higher purity than
foams manufactured using traditional chemical
foaming technology. These attributes make
our foams ideal for multiple use or permanent
product protection, lightweight parts in aircraft,
cars and trains, construction applications and
medical equipment.
The commercial focus of our AZOTE® business
is to grow revenues through closer collaboration
with end users and channel partners, to
continually enhance our product range and
deliver capacity and efficiency improvements
from production.
In the second half of the year, market conditions
for polyolefin foams in the UK and continental
Europe deteriorated rapidly, leading to a 15%
decline in sales to these markets for the full year,
while sales in North America and Asia were
relatively flat. Supply chain destocking
contributed to the fall in demand, particularly
in continental Europe. Customers for AZOTE®
foams are remarkably diverse, both
geographically and in their use of our foams,
and in the second half we saw a broad decline
in demand across all major applications, such as
product protection, industrial and transportation
(which includes automotive, rail and aviation).
During the year, we delivered improvements in
material and energy usage in the UK and USA
facilities, as well as improved cycle times to
increase efficiency and free up capacity, which
will improve business flexibility in the future.
These improvements, combined with an
improved sales mix and active management of
costs, including labour, in the second half, were
critical in reducing the profit impact of the fall in
sales in a highly operationally geared business.
HPP
T-FIT®
ZOTEK®
Segment revenue
£26.48m
Change +20%
2018 £22.01m
Segment profit margin
24%
2018 26%
Segment profit
£6.43m
Change +11%
2018 £5.81m
HPP comprises ZOTEK® technical foams and
T-FIT® insulation products. Sales increased by
20% to £26.48m (2018: £22.01m) and segment
profit increased by 11% to £6.43m (2018:
£5.81m). HPP is a portfolio of products, where
our unique autoclave technology is applied to a
variety of high-performance polymers to create
foams with specific attributes. These attributes,
such as energy management, excellent fire
resistance, high-temperature performance etc,
are designed to meet the exacting needs of
industries such as sports equipment, aviation,
automotive, biotech and pharmaceutical. We see
excellent opportunities to continue the growth
experienced to date and we allocate resource
and development priority accordingly.
Zotefoams plc Annual Report 2019 MEL
MuCell®
ReZorce®
Segment revenue
£3.10m
Change +59%
2018 £1.95m
Segment loss before
amortisation
£1.27m
Change +22%
2018 £1.63m
Segment loss after
amortisation
£1.55m
Change +18%
2018 £1.89m
The HPP Business Unit accounted for 33% of
Group sales in 2019 (2018: 27%), with the two
largest applications being footwear and aviation.
All major applications and products grew in the
period with the strongest performance coming
from fluoropolymer foams, which are largely
used in aviation and in our T-FIT® technical
insulation range. Around half of HPP sales
revenue is derived from footwear products
where, beginning in 2017, we have an
exclusive relationship with Nike.
We continue to work under an exclusive
agreement with Nike, where we believe we
are able to optimise existing products and to
develop new materials to prove Zotefoams’
wider capability as a unique technology in this
exciting market. With additional equipment now
commissioned in the UK we have the capacity
to meet the planned demand increases for
our product range that we anticipate in the
second half of 2020.
Sales of ZOTEK® F fluoropolymer foams
increased by 28% compared with 2018.
Pleasingly, this was achieved despite the
backdrop of a more difficult aviation market
due to the well-publicised slowdown in
demand from Boeing. Growth came from
a combination of new applications as well
as increased penetration of existing
applications for aviation customers.
We have invested significantly in the sales
resource and manufacturing support for T-FIT®
advanced insulation. In 2019, sales increased by
33%, including a very strong performance from
India where we set up a sales office. These
products are sold mainly into biotech and
pharmaceutical markets, with further opportunity
for strong growth in food, dairy and general
process industries.
Segment margin has been impacted
somewhat by the allocation of additional fixed
manufacturing costs, primarily depreciation,
from newer assets and a lower absorption of
such costs by the Polyolefin Foams Business
Unit as a result of that business unit’s lower
volumes during the year. Further investment
has also been made in sales and administration
costs, primarily for T-FIT® products, increasing
the losses in this product line but with a view
to accelerating growth, as well as in technical
development costs primarily related to second
generation footwear products.
17
MuCell Extrusion LLC (MEL) licenses
microcellular foam technology and sells
related machinery. Sales increased by 59%
to £3.10m (2018: £1.95m) and segment loss,
before amortisation, declined to £1.27m
(2018: loss of £1.63m).
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, the team at MEL
recently developed mono-material barrier
packaging technology, which we have branded
ReZorce®. While MuCell® technology can be
used with most common plastics, ReZorce®
technology is specifically designed for
high-density polyethylene (HDPE). In both cases,
MEL will sell equipment to augment an existing
extrusion line and, when the licensee is in
production, MEL will collect a share of the value
created as a licence fee and/or royalty payment.
Occasionally, MEL will source an entire extrusion
line at the request of the customer, who
considers this a better way to leverage fully
the MuCell® technology, in which case it also
charges a small margin on the entire contract.
2019 was a year of good strategic progress for
MEL. Revenue increased, driven by increased
equipment sales, losses reduced and we
developed and filed patents around the
mono-material barrier technology. This
improvement is on the back of 2018 where the
business was restructured mid-year to improve
clarity over the development of new accounts,
delivery of machinery and financial management.
Late in 2019 we began the construction of a
$1m pilot production line for MEL to develop
customer applications on a commercial scale.
One of the major barriers to developing our
technology in the past has been the inability to
run large-scale commercial trials on customers’
equipment, something outside the control of
MEL and often linked to the high utilisation rates
of the customers’ production lines. The pilot line,
which is expected to be commissioned in the
second quarter of 2020, addresses these issues
and will be available for customer trials prioritised
for the development of ReZorce® mono-material
barrier packaging.
D B Stirling
Group CEO
9 April 2020
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 18
Our business model
How our business works
Zotefoams is a diversified value-added polymer
processor, utilising unique cellular materials
technology in a variety of markets globally.
What we do
Routes to market
Zotefoams manufactures block foams using
variations of our unique nitrogen-expansion
process, cuts and shapes its own foams for
specific markets, licenses intellectual property
(IP) and also sells related machinery.
The block foams business units compete
primarily through the superior foam properties
created by our technology, offering reduced
environmental impact and a better safety and
technical performance. This business has
significant barriers to entry, including capital
cost, know-how, user specifications and, in
our HPP business, patents.
Zotefoams’ block foams are sold, and often
specified, under the AZOTE® and ZOTEK® brand
names, which are well known in the industries
we serve: automotive, aerospace, product
protection, industrial parts, marine, building
and construction, military, and sports and
leisure. Zotefoams also sells T-FIT® technical
insulation, manufactured from ZOTEK® foams,
offering variants for sterile, aseptic and general
processing environments. Our block foams are
typically sold through channel partners, known
as foam converters. These converters cut and
shape foams into specific parts for end users
and, therefore, Zotefoams’ success is built on
a strong relationship with the foam converters
and on having products which meet the specific
needs of those end users. Our ZOTEK® foams
are often sold with high levels of end user
engagement, which reflects the more technical
nature of these products, while our AZOTE®
foams traditionally have grown with the
engagement and support of foam converters.
Local and global
market positions
Typically, the benefits of AZOTE® polyolefin
foams allow Zotefoams to command a stronger
market position closer to our factories, as
distribution costs are relatively high for these
types of foams. Distribution costs also act as a
barrier to imports from other regions. The main
markets for AZOTE® foams are, therefore, the
UK, continental Europe and North America.
Our ZOTEK® foams are more technical and
command higher selling prices, and distribution
costs are not normally a major factor in
selling these materials. These businesses
are more global in nature and we have strong
management alignment to the product
range and certain key markets.
Our licensing 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
a foamed 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
solid plastic, 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.
Recently, a variation of this technology has been
used to create ReZorce®, a recyclable,
mono-material barrier packaging solution and
an industry first. Most customers are in the
fast-moving consumer goods (FMCG) or food
packaging industries, where value is created
from making a small saving in plastic content,
which is multiplied across many millions of parts
annually, and where the current environment
is increasingly driving them towards more
sustainable solutions. MEL shares in the
customers’ benefits by receiving a licence
fee for IP and/or royalty on parts made.
A portfolio approach
Zotefoams works on a portfolio of opportunities
which, over time, we expect will deliver our
growth targets. Predominantly, our AZOTE® and
ZOTEK® foams are value-added materials used
in conjunction with other materials to meet an
end user requirement. We are often working in
conjunction with a channel partner and/or on
applications where other solutions may be
successful. MEL faces some similar challenges
in working mainly with packaging converters
who need to convince their end user customers
of the benefits provided. It is, therefore,
important that we invest in developing the
portfolio of potential opportunities and the
Group Executive team manages the allocation
of these resources to optimise our return and
risk over time.
Zotefoams plc Annual Report 2019 19
How we invest, create and deliver
Fundamental to our business model is our ability to invest for the long term
in people, products and processes. This enables us to create defensible
technology, a unique portfolio of products and a strong market position.
Our business can then deliver value for our stakeholders, a sustainable
margin and accelerated growth.
Invest
Create
Deliver
People
Our business is reliant on the quality of our
people. We recruit from a broad range of
cultures and backgrounds. Further information
on our equal opportunities policies may be
found in the Directors’ report. We invest in our
people so that they have the necessary skills
to contribute to the success of Zotefoams.
Products
We engage with our suppliers and customers
to ensure that the products we produce are
of a consistently high standard and meet our
customers’ needs. By listening to our customers,
we gain an understanding of their requirements
not just for the present, but for the future as
well. We use this information, coupled with
our extensive knowledge, to research and
develop products to meet those needs.
Processes
We invest in our equipment and business
processes to maintain and improve safety
standards, improve operating efficiencies,
increase capacity to meet future demands
and reduce operating costs.
Defensible technology leadership
By investing in technology, often as an
extension of our existing knowledge, we
differentiate ourselves from our competitors.
We view our technology leadership as a
considerable barrier to entry.
Unique attributes
Our market position is based around the
uniqueness of our technology. We use this
technology to create a portfolio of products,
with unique attributes, which bring advantages
to our customers.
Market position
We are active in many markets, both
geographical and across industries, and are
therefore well positioned to identify and deliver
benefits for users of Zotefoams’ technology
and products.
Stakeholder value
Delivering stakeholder value is core to our
business. Our technology benefits people across
the world by delivering lightweight, protective,
regulatory-compliant, resource-efficient
products, which are used in leading-edge
solutions globally and which are
manufactured in a safe environment.
Sustainable margin
We charge the right price to our customers
to give a sustainable margin, and continuously
strive for efficiency improvements to maintain
or improve margins through the supply chain.
Accelerated growth
We continue to deliver value on core
products, augmented by success in new
and innovative areas.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 20
Our external context
Our response to short-,
medium- and longer-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
our products.
Understanding these market trends informs
our strategy 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
continues to enable us to grow strongly.
Sometimes, as happened in 2019, short-term
factors distort longer-term trends. With clarity
of purpose and an understanding of the
fundamental drivers of our business
environment, we will make adjustments to our
short-term approach, such as limiting expenses
and capital expenditure, while ensuring that
our longer-term goals remain achievable.
Environment
Optimising the use of scarce resources has
become a universal driver. Lightweighting is
fundamental 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
be recycled 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
of foam made in our autoclave process, giving
us both a cost and environmental advantage.
Zotefoams versus other
materials: typical like-for-
Zotefoams versus other materials:
like performance using less
like-for-like performance using less foam
polymer
Zotefoams
Crosslinked
Non-crosslinked
+10–15%
>15%
MuCell® technology produces
plastics with a foamed core
using 15–20% less material
Zotefoams plc Annual Report 2019 21
Regulation
Regulatory pressures, primarily to safeguard
consumers, are driving up standards 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
there are specific tests for fire performance
and toxicity 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 is
closely involved in developing new materials to
meet 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 easily recycled. We sell AZOTE® grades for
automotive, medical and packaging designed
to minimise emissions and/or meet specific
purity requirements. Around 45% of Zotefoams’
revenue from foams in 2019 came from products
with specific properties tested to customer
requirements, although not all of this was
demonstrably for regulation compliance.
Demographics
Better healthcare has created a population
boom, especially in the 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 48% 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% of sales.
OECD life expectancy and years of activity impairment EU 2014–16
Source: Eurostat database
Female
Male
64.2
83.6
64.2
63.5
78.2
63.5
100
s
r
a
e
y
0
Key
Regulatory pressures are driving up standards
in areas such as fire safety, while recycling
to optimise resources is a global focus.
Life expectancy
Life expectancy
with activity impairment
Healthy life years
In one US study
14%
of adults aged 65 and
over reported walking/
jogging as their favourite
way of remaining active.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 22
Our strategic objectives
Our four-part plan to deliver growing returns
We measure progress against four strategic objectives:
1
Grow sales in our
AZOTE® Polyolefin
Foams business in
excess of twice the rate
of GDP global growth.
2
Develop an HPP
portfolio and MEL
customer base to deliver
enhanced margins.
3
Increase our operating
margins, before
exceptional items.
4
Improve our return
on capital (over our
investment cycle).
Why?
Zotefoams is a capital-intensive business with high
operational gearing. The Polyolefin Foams business represents
the largest user of capacity and its volumes are important for
the absorption of fixed costs. AZOTE® foams provide unique
solutions to a broad spread of customers 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. Investment decisions are made based on
AZOTE® capacity requirements.
Why?
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. Increasing the
customer base will result in a win-win for the customer and
Zotefoams and allow us a royalty stream with enhanced
margins over a multi-year period.
Why?
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
a medium- 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),
to maximise future growth. Higher operating margins generate
higher returns to shareholders.
Why?
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
and maintain their support when funding is required to drive
longer-term capital projects. As Zotefoams’ business grows,
we have invested in, and further committed to, large capital
programmes which change the shape of our statement of
financial position. In order for return on capital to provide a
meaningful measurement, major capacity and infrastructure
investments, which are expected to require considerable
capital over a number of years before being commissioned
as production assets, are excluded from the calculation
until the point of commissioning.
Zotefoams plc Annual Report 2019 23
This year
In 2019, sales of AZOTE® polyolefin foams declined by
10% with sales volume falling by 14%. The market for these
products deteriorated very rapidly in the second half of
2019 and end user demand reduction was exacerbated
by destocking in the intermediate supply chain. We see
this decline as broadly cyclical in mainly industrial markets,
although we are broadening our product range to gain market
share in adjacent markets, developing relationships with
new supply chain partners and increasing our geographical
sales efforts.
Next year, and beyond
We are confident that growing AZOTE® sales at twice
the rate of GDP growth is achievable and that the recent
downturn is cyclical. The key drivers of this business – use
of materials, lightweight, insulation etc – remain as relevant
as ever and we are developing our product range and
geographical reach accordingly.
This year
In 2019, sales in these segments increased by 23%,
with all major product lines growing by double digits,
and accounted for 37% (2018: 30%) of Group revenue, at
£29.57m (2018: £23.95m). The profit margin of the HPP
Business Unit was 24% (2018: 26%) compared with a 14%
margin in AZOTE® foams (2018: 17%), both of which reflect
allocated overhead from under-utilised capacity. Within the
HPP Business Unit, T-FIT® insulation products and ZOTEK®
N nylon foams are currently loss making as we invest to
deliver higher growth in the future, as is MEL, which is
developing a portfolio of licensees where value will be
recognised over the life of the licence.
This year
In 2019, in aggregate, segment margins decreased to 15.1% from
16.5%. 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,
which include the results of forward exchange contracts (to hedge
foreign currency transaction risk) and non-cash balance sheet translation
movements from the net exposure to foreign currency denominated
assets, Group operating margin declined to 11.3% (2018: 14.3%). This
decline in operating margin, despite an improved sales mix from HPP
sales, results mainly from the year-on-year negative swing in non-cash
foreign currency translation movements, increased manufacturing
and depreciation overhead from the new US asset, investments
in the T-FIT® business, primarily in Asia, in preparation for growth,
and the lower than planned polyolefin sales expected to
absorb these costs.
This year
In 2019, the return on capital declined to 10.5% (2018:
16.5%). Profitability was impacted by the H2 downturn in
Polyolefin Foams, while the capital base included recently
commissioned assets in the UK as well as a full year from
the first line, including infrastructure, of the US capacity
expansion commissioned in 2018. The investment in the
Group’s ongoing expansion projects were excluded from
the calculation, in line with the Group’s definition of return
on capital.
Next year, and beyond
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 portfolio, such as ReZorce® mono-material barrier
technology from MEL and T-FIT® advanced insulation.
Next year, and beyond
In 2020, the additional depreciation and operating costs
of the final capacity improvement projects will hold back
operating margin potential given the time lag between
making capacity available and achieving targeted utilisation
rates. However, as we utilise these assets through the
investment cycle, we expect margins to continue to grow,
supported by the strong margin Polyolefin Foam business
and the enhanced-margin, faster-growing HPP business.
Next year, and beyond
The Group has committed to a large capital programme over
recent years and this accelerated capital spend ends with the
commissioning of our Poland facility later in 2020. The
statement of financial position of the business, which includes
new capacity as well as supporting infrastructure which will not
directly generate returns, will have increased significantly. We
approved these projects acknowledging and accepting the
dilution of return in capital over the shorter term but recognising
the importance of adequately investing in the capacity needed
for anticipated future growth and the corresponding
improvement in return on capital that should accompany it.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 24
Our brands in action
We offer what our
customers want
AZOTE®
AZOTE® polyolefin foams
are manufactured using
our unique, high-pressure
process. This process
differentiates Zotefoams
from competitors that
manufacture similar
foams using low-density
polyethylene (LDPE), which
is our main raw material.
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
demographics, regulation and the environment,
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.
Case Study
Lighter, purer, more
durable components for
the automotive industry
Context
Founded in 1949, Odenwald-Chemie GmbH
is a development partner and supplier of foam
products and fleece systems to a wide range
of markets. Headquartered in Neckarsteinach,
Germany, Odenwald has a global network of
partnerships and joint ventures. It strives to
meet ever-changing requirements through
innovative products and product optimisation,
with environmental considerations always
to the fore.
As a longstanding partner of the automotive
industry, Odenwald supplies foam products
for sealing against water, air and dust, as well
as thermal insulation and acoustic absorption.
In 2015, Mercedes-Benz requested a valve
insulation component able to withstand high
temperatures, ensure stable thermal and
acoustic insulation and minimise heat loss.
What we did
By selecting Plastazote® HD30 from
Zotefoams’ AZOTE® foam range, Odenwald
was able to successfully meet the rigorous
requirements of Mercedes-Benz. With a
density of 30kg/m³ and tolerance of
temperatures up to 125°C, HD30 is ideal for
addressing sealing and noise, vibration and
harshness (NVH) concerns while reducing
weight to improve fuel economy.
Manufactured via Zotefoams’ three-stage
process, Plastazote® has a minimal VOC
content compared with foams produced by
other methods. Its closed cell, crosslinked
structure delivers a unique combination of
advantages, including ease of fabrication and
purity and high chemical resistance; it neither
absorbs nor transmits water or water vapour.
Results
Zotefoams’ unique material combined
with Odenwald’s advanced processing
technologies produces an energy-efficient
product that satisfies the demanding criteria
for automotive applications. The valve
insulation component was successfully
applied to Mercedes-Benz vehicles from
2015 and continues in production today.
Zotefoams plc Annual Report 2019 25
Case Study
From lightweight to weightless:
ZOTEK® F proves a winner in
spacecraft interiors
Context
Space tourism is about to become a reality,
with inaugural commercial flights already
booked out and demand for tickets surging,
according to the companies vying for the
lead in this new space race.
The design of the reusable spacecraft is a
significant engineering achievement, with
capabilities that enable repeatable use at
unprecedented frequency. Internally, cabins
will offer a level of comfort more akin to that of
a luxury airliner than the cramped cockpits of
previous space travel.
What we did
Zotefoams’ ZOTEK® F closed cell PVDF foam
is recognised as the ultimate lightweight and
versatile material for aircraft interiors, boasting
the highest levels of safety and comfort, so it
was natural that spacecraft designers would
look to ZOTEK® F as an optimal material.
With the cost per kilogram of weight in a
spacecraft ranging from £10,000 to £50,000,
every gram saved pays off in altitude.
“ZOTEK® F is a super lightweight, low-density
material that can be formed in any number
of ways, allowing us to develop prototypes
easily in the studio along with flexibility in the
subsequent manufacturing process,” one
designer tells us. “At 15–20% of the weight of
solid equivalents and mechanical properties
that allow us to reduce the volume of material
significantly, it is a major contributor to
weight-saving targets.”
Results
ZOTEK® F features extensively throughout
the interior of one of the first commercial
spacecraft. Aside from weight and safety
considerations, it is adding to the comfort of
seats, while minimising the VOC content of
the interior as a whole, thanks to Zotefoams’
nitrogen-only expansion process.
ZOTEK®
ZOTEK® products use
Zotefoams’ unique autoclave
technology applied to
high-end polymers such
as polyvinylidene fluoride
(PVDF) fluoropolymer, nylon
or polyether block amide
(PEBA). Combining the original
polymer properties with our
foaming process creates truly
unique 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
is a 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® PEBA foams,
which delivered the largest contribution to
HPP growth for the second year in a row,
have excellent kinetic energy management
properties and are being sold primarily in
sports and leisure applications. Historically,
sales of ZOTEK® foams have grown due to
more stringent regulation in the aviation
markets, while recent growth is being led
by developments in the footwear market.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 26
Our brands in action
Continued
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 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 and
easy 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 capability to
withstand the steam purging process typical in
this sector. T-FIT® Hygiene can ensure air
conditioning, air filtration and other process
equipment continues to operate at optimum
levels of 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.
Case Study
T-FIT® Hygiene is first
choice insulation for
cool chain customer
What we did
The T-FIT® team in China worked with the
customer to retro-fit T-FIT® Hygiene to an
existing production line. The product
temperature during processing is just 3°C
versus an ambient temperature of 25°C in
winter and up to 40°C in summer, with a
humidity range of 60–75%, so the potential for
condensation – considered a high risk in food
and beverage production – was significant.
However, the fine, closed cell structure of
T-FIT® material, produced from Zotefoams’
ZOTEK® F PVDF foam, does not transmit
water or water vapour and is manufactured to
the precise diameter of pipework, thus limiting
the risk of condensation and traps.
T-FIT® materials are modular, supplied in
ready-made tubes in straight runs, elbow and
tee formats to minimise installation time and
maximise efficiency in use. Their performance
is such that a thin layer (6.25mm) achieves
comparable performance with much thicker
traditional open cell foam insulation.
Results
T-FIT® Hygiene was supplied to the customer
for installation commencing in May 2019. The
line was commissioned in mid-August, with
T-FIT® insulation providing a professional
appearance and compliance with GMP
(Good Manufacturing Practice).
Context
Coca-Cola Bottlers Manufacturing
(Suzhou) Co Ltd, a subsidiary of Coca-Cola
Corporation, bottles non-carbonated
beverages, such as fruit juice, for
distribution in China.
In 2019, the company had a project for a new
cool chain not-from-concentrate juice product.
Cool chain means that the product risks being
spoiled if temperatures during processing and
through the supply chain vary outside set
parameters, so the performance of insulation
material used on process pipework and
vessels is paramount.
Zotefoams plc Annual Report 2019 i
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Annual Report 2019
27
MuCell®
MEL licenses microcellular
foam technology and sells
related machinery. MEL’s
business model is to develop
and license IP and share in
the savings or benefits of
the licensee through a royalty
and/or licence fee.
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 large 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
of knowledge comes improved customer
satisfaction and also more opportunity
for further IP.
In the future, we expect to see most growth
coming from the existing and new customer
base for packaging, especially flexible films and
flat sheet (such as that used in the manufacture
of yoghurt pots and ready meal containers).
However, MEL is also active outside of
packaging, with developments for aviation,
as well as pipes and tubes.
Case Study
An industry first in
recyclable food
packaging
What we did
In 2018, SugarCreek’s Wingate division, which
prints the bacon board on narrow web flexo
presses, engaged with MuCell Extrusion,
resulting in a blown plastic material with a
foamed core that matches all the properties of
the previous coated paper at a lower cost.
This can be made of over 95% high-density
polyethylene (HDPE) foam, making it fully
recyclable via post-consumer waste streams.
It can even be recycled back into the core of
the same product.
A Life Cycle Assessment showed a reduction
in carbon footprint of 28%, a reduction in
freshwater consumption of 79%, and an
improvement of 22% in ReCiPe score (total
impact on human health, on the ecosystem
and on consumption of available resources.)
Results
The MuCell Extrusion solution meets or
exceeds all performance requirements,
including stiffness, coefficient of friction,
surface smoothness, high-definition print,
ease of processing and conversion, and food
safety regulations. This successful partnership
was the genesis of ReZorce®, our range of
fully recyclable barrier packaging materials
launched in October 2019.
Context
For more than 50 years, Ohio-based
SugarCreek has been manufacturing and
packing food for the USA’s largest and
best-known brands, offering a wide-ranging,
value-added assortment of raw and fully
cooked products for domestic and
international customers from its six facilities.
SugarCreek packs bacon for much of the
North American market, until recently using a
coated paper incorporating food contact on
one surface and high-quality print on the
other, known as bacon board. However, this is
non-recyclable, generating 14% waste at the
printing/cutting station and 100% landfill or
incineration after use. SugarCreek and others
had therefore long sought an alternative
material with no cost penalty.
28
Group CFO’s review
Macroeconomic challenges
delay financial progress
The Group experienced a strong performance in
High-Performance Products and advanced its capacity
expansion projects in line with budget and expected
timeframe. A second-half cyclical downturn in Polyolefin
Foams impacted Group performance, with limited flexibility
in discretionary fixed costs in the short term while
maintaining appropriate investment linked to the Group’s
focus on future growth. Foreign currency translation
movements generated a year-on-year negative profit
impact of £1.46m.
Profit before tax and
exceptional item
£8.76m
Change -19%
2018 £10.81m
Group revenue
£80.86m
Change 0%
2018 £81.04m
Profit before tax
£9.81m
Change 0%
2018 £9.86m
Overview
Following H1 growth in all business units
and continued strong performance from both
our HPP and MEL businesses through H2,
Zotefoams experienced difficult H2 trading
conditions within its Polyolefin Foams business.
Group revenue for the year was £80.86m (2018:
£81.04m), in line with the previous year but 3%
down in constant currency. HPP had another
very strong year, growing 20% (constant
currency: 15%) from £22.01m to £26.48m
and MEL saw a pleasing growth rate of 59%
(constant currency: 56%), up from £1.95m to
£3.10m. The Polyolefin Foams business was
impacted in H2 by a cyclical decline in demand,
including inventory depletion across all
geographies, resulting in a 10% decline in
revenue (constant currency: 12%) from £57.2m
to £51.4m. This was after the business unit
reported H1 performance up 3% vs H1 2018
(constant currency: up 1%).
Operating profit before exceptional item was
£9.10m (2018: £11.57m), down 21%, while
operating profit was £10.15m (2018: £10.62m),
down 4%. Excluding FX translation losses,
operating profit before exceptional item was
down 10% at £9.57m (2018: £10.58m), and
operating profit was up 10% at £10.62m (2018:
£9.63m). Underlying performance was impacted
by the rapid decline in polyolefin foam sales in
the latter part of the year and the resulting
adverse operational gearing impact. Once the
cyclical downturn became clear we managed
certain costs lower in line with the lower scale of
operations but refrained from taking measures
which would have materially impacted our
expected future growth prospects once the
macroeconomic environment improves. Given
the uniqueness of our business, a well-trained
and experienced workforce is important and
cannot be replaced easily.
Zotefoams is in the final stages of an extensive
strategic capacity expansion programme. Our
range of differentiated products requires a
unique technology which is capital intensive,
has long lead times and needs high levels of
utilisation to leverage strong returns. Timely
investment is essential to meet our anticipated
organic growth opportunities. In 2019, the Group
invested a total of £25.3m, after investing £16.1m
in the previous year. The final major capacity
expansion project, a new manufacturing facility
in Poland, is on track for completion later in 2020
at a total cost of approximately £23m. A sizeable
part of the Group’s investments during this
capacity expansion period has been directed
towards generating the necessary infrastructure
to run the equipment, infrastructure which will
be leverageable to support future growth. This
will moderate achievable returns on capital in
the medium term but provides high return
opportunities as incremental capacity is
required to support further growth
opportunities at the same locations.
Zotefoams plc Annual Report 2019 29
At 31 December 2019, net debt was £31.90m,
(2018: £12.96m) and leverage (net debt to
EBITDA) was 2.0x (2018: 0.7x). Under the
definition of the bank facility agreement net debt,
which adjusts for the impact of IFRS 2 and IFRS
16, was £30.69m (2018: £12.96m) and leverage
was 2.0x (2018: 0.7x). While net cash inflows
from operating activities were £9.35m (2018:
£4.49m), the aforementioned investment
programme required the Group to draw
down on its debt facilities, as expected.
Group revenue
Group revenue was at a similar level to the
previous year, at £80.86m (2018: £81.04m).
Polyolefin Foams sales decreased 10% versus
2018, with a decline of 22% in H2 following an
increase of 3% in H1, reflecting the significant
adverse change in demand conditions across
a range of our markets together with significant
de-stocking by customers. Regionally, all
geographies were impacted as well as most
sectors within these geographies, with the
UK down 12% and Europe, the largest market
for the business unit, down 16% (constant
currency: -16%). A North American slowdown
in manufacturing demand was also evident late
in the year, with full-year sales ending up in line
with the previous year (constant currency: -5%).
The single largest impact globally came from
German automotive, which was also the
earliest to show weakness.
HPP sales increased 20%. Footwear is the
largest application currently within HPP and
revenue in this market grew 13% (constant
currency: +7%), benefiting from the full-year
impact of sales programmes initiated late Q1
2018. ZOTEK® F fluoropolymer foams delivered
strong growth of 28% (constant currency: +23%)
and T-FIT® advanced insulation grew 33%
(constant currency: +31%), albeit from a lower
base. During the year, Zotefoams established
a subsidiary in India, primarily to support
T-FIT® sales, and sales from this country
surpassed $1m.
MEL sales increased 59% (constant currency:
52%), again from a relatively low base, with
equipment sales driving growth.
Revenue by market (%)
Product protection
Transportation
Sports and leisure
Building and construction
Industrial
Medical
Other
2019
2018
29
22
20
12
9
6
2
30
22
19
12
9
6
2
Within the transportation segment, aviation
represented 15% (2018: 13%) and automotive
7% (2018: 9%) of Group revenue.
Gross margin
Gross margin remained stable at 35.4% (2018:
35.8%). The increased proportion of sales from
HPP had a positive benefit on gross margin, in
line with strategy, but the lower plant utilisation
rates following the Polyolefin Foams downturn,
coupled with full-year depreciation charges from
the Group’s new US assets, amounting to an
additional £0.5m, and additional operating cost
from the Group’s investment in its international
operations, amounting to £0.8m, offset this
benefit. Zotefoams’ strategy is to fill these assets,
with relatively lower margin business where
required, then pursue longer-term mix
enrichment strategies to generate higher
returns and margins.
Distribution and administrative costs
The Group continues to pursue its 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.
Included within distribution costs in the
consolidated income statement are sales and
marketing, and warehousing expenses. These
costs increased by 11% to £8.00m (2018: £7.19m)
during the year, mostly reflecting investment in
sales capability in the China and India locations
of the T-FIT® Business Unit, as well as the full-year
impact of sales capability in other ZOTEK®
business units. Included within administrative
expenses before exceptional item are technical
development, finance, information systems and
administration costs as well as the impact of foreign
exchange hedges maturing in the period and
non-cash foreign exchange translation expenses.
These costs increased by 12% to £11.50m in 2019
(2018: £10.24m); however, they include a combined
net loss from foreign exchange hedging contracts
and foreign exchange translation movements of
£1.41m (2018: net gain £0.82m). See Currency
review for further information and context. Without
these foreign currency factors, administrative
expenses before exceptional item were down
£0.98m, reflecting reduced variable pay awards
and H2 cost management.
The business unit results are shown
on pages 16 to 17 in this Strategic Report.
They do not include central plc costs, which are
not considered to be segment specific. In 2019,
central plc costs were £1.68m (2018: £2.62m).
Finance costs
The total interest charge for the year was £0.46m
(2018: £0.75m) and includes £0.20m (2018:
£0.14m) of interest on the Company’s Defined
Benefit Scheme (the “DB Scheme”) pension
obligation. It also includes £0.03m (2018: nil)
related to the impact of IFRS 16. The Group
capitalised £0.93m (2018: £0.03m) of interest
in relation to the financing of its capacity
enhancement projects still under construction.
Capitalised interest in 2018 was significantly
lower as a result of a lower net debt level
following the equity raise of £20.00m (after
directly attributable costs) in May of that period.
Profit before tax
Profit before tax and exceptional item decreased
by 19% to £8.76m (2018: £10.81m). Profit before
tax was similar to the previous year at £9.81m
(2018: £9.86m).
Exceptional item
During the year, the Company was successful in
a claim against the previous advisers to the DB
Scheme following legal advice that the linkage to
future increases in salary had not been properly
broken. The Company was awarded £1.05m,
including £0.11m of expenses, following
mediation and has recorded this as an operating
exceptional item in the income statement.
In the previous year, the Company recognised an
additional liability in respect of a legal ruling around
guaranteed minimum pensions. This represented
a charge of £0.95m, including £0.01m of expenses,
and was considered an operating exceptional item
in the income statement.
Currency review
Zotefoams is a predominantly UK-based
exporter. In most cases, we invoice in local
currency. In 2019, approximately 87% of sales
were denominated in currencies other than
sterling, mostly US dollars or euros. Most
operating costs are incurred in sterling, other
than the main raw materials for polyolefin
foams used for production in the UK, which
are euro-denominated, and US subsidiary
production, operating cost, other subsidiaries
staff, operational cost and some HPP raw
materials, which are US dollar-denominated.
Movements in foreign exchange rates can have
a significant impact on results. The Group
therefore uses forward exchange contracts
to hedge its foreign currency transaction risk
and 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 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
difference between accounts receivable
recording and cash received. The Group does
not currently hedge for the translation of its
foreign subsidiaries’ assets or liabilities. This
policy is kept under regular review and is formally
approved by the Board on an annual basis.
During the year, the sterling average exchange
rate against the US dollar weakened by 4.6%,
while the sterling average exchange rate against
the euro strengthened by 0.9%. The sterling spot
rate against the US dollar from December 2018
to December 2019 strengthened by 3.2% and the
sterling spot rate against the euro from December
2018 to December 2019 strengthened by 5.3%.
Net revenues benefited from £2.06m of currency
effect, which were offset by £0.93m of operating
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 30
Group CFO’s review
Continued
costs to yield a net benefit before hedging of
£1.13m. The Group generated a net loss on
forward contracts of £0.94m (2018 loss: £0.18m),
resulting in a positive net transactional foreign
currency impact of £0.19m in the year (2018:
negative impact of £1.12m), a year-on-year
positive swing of £1.31m.
In addition, the Group recorded a translation
loss of £0.47m (2018 gain: £0.99m), representing
a year-on-year negative swing of £1.46m, and
resulting in a total net FX impact on the income
statement year-on-year of £0.1m. The Group’s
borrowings facility is held by Zotefoams plc,
the parent company, which has provided
intercompany funds to the USA and Poland
to complete the Group’s capacity expansion
projects. Together with a growing footwear
business, which is invoiced in US dollars, the
net exposure to foreign currency denominated
net assets has increased.
The combined income statement impact in the
year of transactional and translational foreign
currency movements was a charge of £1.41m
(2018: gain of £0.82m).
We expect future growth to come mainly from
outside the UK and recognise that one of our
key risks is our exposure to foreign currency
fluctuations, particularly in the US dollar. While
this exposure will increase as the Group grows
faster outside of the UK, we are mitigating this
transaction risk short term through hedging
activities and longer term through investment
in overseas operating locations. We recognise,
however, that inherent risk will remain. Based
on 2019, it is estimated that, with respect to
transaction risk and for every one percentage
point movement in the USD/£ rate, profit moves
by £0.26m unhedged and £0.02m hedged.
In the year, it is assumed that the transaction
exposure from euro/sterling movements
continue to be substantially naturally hedged,
with sales revenues offset by costs, primarily
related to raw material purchases and certain
further processing costs.
The translation movements of foreign currency
denominated net assets in the Company’s
statement of financial position are, to the extent
possible, hedged firstly through drawing down
debt in the relevant currency. This debt has
steadily grown through the year, helping to
reduce exposure. With the Group’s capacity
investments close to completion, intercompany
debt and intercompany trading accounts will
peak and begin to fall as cash flows from
those subsidiaries are used to pay back
these positions.
Tax and earnings per share
The effective tax rate for the year, before
exceptional item, is 18.20% (2018: 18.54%),
which is in line with the Group’s weighted
average corporate tax rate for the year of 18.72%
(2018: 17.99%). The effective tax rate for the year
is 16.25% (2018: 20.32%), the decline being
due to larger 2017 R&D expense reclaims than
calculated in the estimated tax charge for that
period. Net income tax paid during the year
was £2.33m (2018: £2.14m).
Basic earnings per share before exceptional item
was 14.91p (2018: 18.66p), a decrease of 20%.
Basic earnings per share was 17.10p (2018:
16.96p), an increase of 1%. In May 2018, the
Group increased its share capital by 8.8%
(3,886,792 shares) to 48,301,234 shares through
a placing, and the dilutive impact of this is 1.32p
on basic earnings per share before exceptional
item (2018: 1.03p) and 0.71p on basic earnings
per share (2018: 0.93p).
Currency impact on business segments in 2019
Segment revenue £m
Polyolefin Foams
HPP
MEL
Eliminations
Group
2019
Reported
2019
Adjusted*
2018
Reported
Net change %
Reported Adjusted
51.36
26.48
3.10
(0.08)
80.86
50.48
25.37
3.03
(0.08)
78.80
57.16
22.01
1.95
(0.07)
81.04
(10)
(12)
20
59
–
0
15
56
–
(3)
* Constant currency, adjusting 2019 values to 2018 rates.
Exchange rates
Zotefoams transacts significantly in euros and US dollars. The exchange rates used to translate
the key flows and balances were:
GBP to euro – average
GBP to euro – year-end spot
GBP to USD – average
GBP to USD – year-end spot
2019
0.88
0.85
0.79
0.76
2018
0.88
0.90
0.75
0.78
Dividend
The Board has a progressive dividend policy,
recognising the importance to our shareholders
of the dividend as part of their overall return.
However, as described within this Strategic
Report, the extraordinary uncertainty posed
by the COVID-19 outbreak means that we are
focused on minimising cash outflows and
strengthening our financial position in the short
term. As such, the Board believes it prudent
not to recommend a final dividend for the year
ended 31 December 2019 (2018: 4.15p). The
Board will keep this situation under review and
will determine the timing for resumption of
dividends as economic conditions stabilise.
Cash flow and net debt
Net cash inflow from operations before
investment in working capital decreased 12% to
£15.39m (2018: £17.48m). Without the award of
£1.05m following successful litigation specific to
the DB Scheme, see Post-employment benefits
below, net cash inflow from operations before
investment in working capital decreased 18%
to £14.34m, reflecting the downturn in the
Polyolefin Foams business but still
demonstrating the strong cash-generative nature
of the business. £1.94m (2018: £9.75m) of this
was re-invested in working capital. Trade and
other receivables reduced £2.66m (2018:
increased £6.36m), reflecting a more stabilised
position for the HPP footwear business following
the very strong final quarter of the previous year,
and the lower level of Polyolefin Foams activity
in Q4. Inventories increased £0.89m, with
increased HPP raw material, in preparation for
2020 growth, being offset by the underlying
lower level of Polyolefin Foams activity, with
its shorter lead times. HPP raw materials are
significantly more expensive than their polyolefin
counterparts and their uniqueness requires a
different approach to minimum holding
quantities. Trade and other payables decreased
£3.72m (2018: increased £0.37m), related to the
timing of raw material purchases. Zotefoams
recognises the importance of its supplier
relationships and continues to honour agreed
payment terms. As a result of the above, cash
generated from operations was £11.77m
(2018: £7.11m), up 66%.
Zotefoams continued to invest significantly
in property, plant and equipment during the
year, with a net cash outflow of £23.47m,
following investments of £15.80m, £11.39m,
£12.14m and £8.70m in 2018, 2017, 2016
and 2015 respectively. The 2019 expenditure
was mostly on completing the second
high-pressure autoclave project, with
accompanying extruder, in the USA, completing
the two high-temperature, low-pressure
autoclaves and infrastructure in the UK, and
making significant progress towards completion
of the Group’s final, major, capacity expansion
project, a new manufacturing facility in Poland.
In addition, interest of £0.93m was capitalised,
specific to these assets under construction.
The Group also invested £0.91m (2018:
£0.29m) in intangible assets, mostly related
to the upgrade of the Group’s Microsoft AX
ERP system to the latest version.
Zotefoams plc Annual Report 2019 31
Investments
Given the capital-intensive nature of the
Zotefoams business, long lead times for key
equipment and the importance of operational
gearing, investment decisions require
significant planning and are made with a
clear assessment of strategic fit, risk and
risk appetite. Confidence in the Group’s
developing portfolio of HPP opportunities is
a significant consideration in determining
the timing of certain investments, while the
strategic importance of maintaining growth
in the profitable Polyolefin Foams business,
the Group’s largest volume product range,
informs the decision to increase total
Group capacity versus relying solely
on mix enrichment.
Investment decisions target improvements
in the Group’s return on capital over the
investment cycle, while recognising the
short-term impact on this return during
construction and operating initially at lower
utilisation levels. When Zotefoams embarks
on investment in a major expansion or new
location, such as installation of extrusion
and high-pressure capability at our existing
Kentucky, US site, or the current investment
in foam manufacturing at the Poland site,
we take into account the importance of scale
and dilution of heavy infrastructure cost over
a (future) second or third line. As such, the first
step is invariably more dilutive to capital return
than any subsequent investments.
Investing in growth £m
Zotefoams defines the return on capital
employed (ROCE) as operating profit before
exceptional items divided by the average sum
of its equity, net debt and other non-current
liabilities. This measure excludes acquired
intangible assets and their amortisation costs.
We also exclude significant capacity investments
under construction until they enter production.
We do not attempt to adjust for the first phase
inefficiencies as mentioned above. In 2019, the
return on capital employed decreased to 10.5%
(2018: 16.5%). The cause of this movement
is reduced operating profit resulting from
a reduction in polyolefin foam sales and
consequent reduced rate of asset utilisation,
at the same time as an increasing capital base
from the full year impact of the first production
line and infrastructure in the USA. If the capacity
investments still under construction were also
included, the return on capital employed
reduced to 8.1% from 12.8% in 2018.
Zotefoams is reaching the end of this
significant investment programme.
Completing the Poland investment, with a
2020 estimated expenditure of £7.3m and
an expected start-up date in late 2020, both
subject to current COVID-19 uncertainty,
is the final stage of this programme, after
which we expect capital investment to
return to lower levels more in line with
the depreciation charge.
Investing in growth
Zotefoams’ strategy is focused primarily
on organic growth. Over the past five years,
Zotefoams has invested £72.4m in property,
plant and equipment, including capitalised
interest, 75% of which has been to increase
capacity in its unique technology. In 2020,
the new manufacturing facility in Poland will
be completed, at which point the scale of
growth capital will significantly reduce. With
infrastructure in place in the USA and Poland for
incremental capacity expansion at significantly
lower cost, cash flow and return on capital
employed will improve quickly as revenue grows.
Growth capital
Capitalised interest
Maintenance capital
Total investment in property,
plant and equipment
6.1
–
2.6
8.7
After dividends paid in the year amounting
to £2.97m (2018: £2.71m) and the inclusion
of £1.21m (2018: £nil) of lease liabilities in
accordance with IFRS 16, closing net debt was
£31.90m (2018: £12.96m). Under the definition
of the bank facility agreement, which adjusts for
the impact of IFRS 2 and IFRS 16, net debt was
£30.69m (2018: £12.96m). At the year end, the
Group remains comfortably within its bank
facility covenants, with a ratio of EBITDA to net
finance charges of 73 (2018: 29), versus a
covenant minimum of 4 and net debt to EBITDA
(leverage) of 2.0x (2018: 0.7x), against a covenant
of 3.0x. While liquidity remains sufficient under
the bank facility, the coincidence in timing of the
performance downturn in Polyolefin Foams, the
completion of the Group’s capacity expansion
projects and the unprecedented economic
uncertainty from COVID-19 has placed a degree
of risk around the Group’s ability to remain within
its leverage covenant. As a result, the Group’s
banks have amended the leverage covenant
2015
2016
2017
6.9
–
5.2
7.8
–
3.6
2018
12.8
–
3.0
2019
19.8
0.9
3.7
Total
53.4
0.9
18.1
12.1
11.4
15.8
24.4
72.4
from 3.0x to 4.0x for the 12 months to 30 June
2020. We expect to remain within revised
covenant levels, subject to a severe but plausible
scenario the Group has modelled, and which is
described in the Going concern section below.
Post-employment benefits
As previously reported, the Company provided
£1.27m in its 2017 income statement for potential
additional liabilities in its DB Scheme following
legal advice received by the pension trustees
and a calculation by the actuaries. This was
based on the legal opinion that the DB Scheme
was properly closed to future accrual of service
in 2005, but the linkage with future increases
in salary had not been broken. The Company
recorded this as an operating exceptional item
in the income statement, together with a £0.03m
accrual to take steps to break this link. The
action to break the link was completed in 2018.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 32
Group CFO’s review
Continued
June 2021. It applied foreign exchange rates of
$1.30: £1 and €1.15: £1. Set against this were
mitigating actions including tight management
of headcount, significantly reduced capital
expenditure, reduced SG&A expenditure
and suspension of dividends. This severe
but plausible scenario indicates a material
uncertainty which may cast significant doubt
over the Company’s and Group’s ability to
continue as a going concern without further
mitigating actions. The Company and Group
consolidated financial statements do not
include the adjustments that would result
if the Company and Group were unable
to continue as a going concern.
After due consideration of the range and
likelihood of potential outcomes, the Directors
continue to adopt the going concern basis of
accounting in preparing the Annual Report.
Financial risk management
The main financial risks of the Group relate
to funding and liquidity, credit, interest rate
fluctuations and currency exposures. The
management of these risks is documented
in note 22.
Events after the reporting period
In early 2020, the emergence and spread of a
new coronavirus, now known as COVID-19, is
affecting business and economic activity around
the world. The Group considers this outbreak to
be a non-adjusting post balance sheet event as
at 31 December 2019. Given the spread of the
virus, the range of potential negative outcomes
for the global economy are difficult to predict at
this point in time. Zotefoams is monitoring the
COVID-19 outbreak developments closely and
abiding by the advice and requirements of local
governments. We have also been implementing
a range of contingency plans to mitigate the
potential adverse impacts.
G C McGrath
Group CFO
9 April 2020
During the current year, the Company was
successful in a claim against the advisers of
both the Company and the Trustees, and was
awarded £1.05m following mediation, which
it has recorded as an exceptional item in the
income statement. After deduction of costs
incurred by the Company, the net award of
£0.94m was transferred into the DB Scheme
to help fund its deficit.
In the previous year, the Company sought advice
from the Actuaries of the Trustees in relation to a
High Court ruling in October 2018 relating to the
equalisation of pensions for males and females
and the impact on schemes with guaranteed
minimum pensions rights. It was determined
that the Company, as sponsoring employer of
the DB Scheme, may have an additional liability
of an estimated £0.95m and this liability was
recorded as an exceptional item in the 2018
income statement.
A full actuarial valuation of the DB Scheme was
completed as at 5 April 2017, in line with the
requirement to have a triennial valuation. The
outcome, on a Statutory Funding Objective
basis, calculated a deficit for the Pension
Scheme of £4.18m. As a result, the Company
agreed with the Trustees to make contributions
to the DB Scheme of £43,300 per month to
meet the shortfall by 31 October 2026, up
from £41,000 per month previously. In addition,
the Company pays the ongoing DB Scheme
expenses of £15,000 per month (previously
£10,600 per month) to cover death-in-service
insurance premiums, the expenses of
administering the Scheme and Pension
Protection Fund levies.
The net IAS19 deficit on the DB Scheme
decreased by £1.15m to £6.93m as at 31
December 2019 (2018: £8.08m). The main
factors contributing to the decrease in the
deficit are the additional contributions paid
into the DB Scheme following the mediation
settlement with its former advisers, and the
actual investment return achieved on the
assets being higher than required to match
the expected increase in the defined benefit
obligation over the year, partly offset by a
change in assumptions, primarily a lower
discount rate following falls in corporate
bond yields over the year.
Zotefoams does not consider its pension
scheme to be a key risk to its ability to achieve
its strategic objectives. Mitigation of further risk is
expected to come from our growth expectations
and a refocus by the pension 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 8 to 27 and the
section entitled ‘Risk management and principal
risks’ on pages 33 to 38. 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 2019, the Group’s financing
arrangements amounted to £55.2m, comprising
a multi-currency term loan of £25m, a
multi-currency revolving credit facility of £25m,
and a remaining balance of £5.2m of a further
£7.5m sterling annually renewable term loan,
repayable in equal quarterly instalments.
The bank facility is for a five-year period
and expires in May 2023. At the date
of the statement of financial position,
£17.7m was undrawn on the facility.
The facility is subject to two covenants, which
are tested semi-annually: net debt to EBITDA
(leverage) and EBITDA to net finance charges.
In recognition of the current macroeconomic
uncertainty, the Group’s banks have amended
the leverage covenant from 3.0x to 4.0x for
the 12 months to 30 June 2020.
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 performances
and considering the existing banking facilities,
including the available liquidity and increase
in leverage covenant from 3.0x to 4.0x, have
a reasonable expectation that the Group has
adequate resources to continue in operational
existence for the next 12 months following the
date of approval of the financial statements.
The uncertainty as to the future impact on the
Group of the current COVID-19 outbreak has
been considered as part of the Group’s adoption
of the going concern basis. Our China-based
customers and our own relatively small
processing facility for T-FIT® technical insulation
in China returned to work at the beginning of
March 2020. Across the Group, public health
measures advised by governments are being
followed in support of their efforts to contain the
spread of the virus, and the supply chain is being
proactively managed as are operating costs and
the timing of capital expenditure. The Board has
also resolved not to recommend a final dividend
for the year ended 2019 and will consider future
dividends as and when conditions normalise.
The Board has considered a downside scenario
that reflects the current unprecedented
uncertainty in the global economy and which we
consider to be severe but plausible. The results
of this scenario show that there is sufficient
liquidity in the business for a period of at least
12 months from the date of approval of these
financial statements but show the potential for
a covenant breach during the test period. The
scenario considered Group revenue 20% below
2019 for the 12 months to 31 December 2020,
and 25% below 2019 for the 12 months to 30
Zotefoams plc Annual Report 2019 33
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
Ensures that risk is managed
across the business
Defines the Group’s appetite
for risk
Assesses the Group’s principal
risks and opportunities
Executive Committee
Audit Committee
Inputs into 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
Monitors and reviews the effectiveness of the
Group’s risk management framework
Internal Controls Committee
Reviews and assesses the effective functioning of the Group’s risk management framework
Collates outputs of functional steering committees’ risk management exercises
Reviews, updates and submits the Group’s principal risks and uncertainties schedule to the Board
Affirms to the Audit Committee the Group’s compliance with the UK Corporate Governance Code in relation to risk
Functional steering committees
Chaired by, and including, Executive Committee members
Provide a regular forum for active monitoring of key business risks as they relate to 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
Health and Safety Steering Committee
IT Steering Committee
Credit Control Review Committee
Environmental Steering Committee
Quality Steering Committee
Foreign Exchange Committee
HR and Training Steering Committee
New Product Development Committee
Key Supplier Review Steering Committee
Marketing Steering Committee
Contract Review Steering Committee
Planning and Capacity Steering Committee
Capital Planning Steering Committee
Zotefoams Inc Executive Committee/
Zotefoams Inc Internal Control Steering
Committee
MEL Executive Committee/MEL Internal
Control Steering Committee
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
Active in the day-to-day management of risk
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 34
Risk management and principal risks
Continued
Risk appetite
Zotefoams is a growth business. 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 to
accept higher levels of risk. We seek an
appropriately balanced outcome, where we
consider the level of reward commensurate
with the likelihood of success. We recognise
the importance 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
and safety of our employees will always
be paramount, which translates into an
extremely low tolerance for risk in this area.
Developments during the year
XX The Board has continued to review and
provide feedback on the roll-out of the
Group’s improved, more thorough and
more inclusive risk management process.
The Group’s functional control committees
updated their terms of reference, further
improved and refined their generated risk
maps based on their perceived ability to help
the Group meet its strategic objectives and
used these to direct their focus of activities.
Having arrived at a status considered by the
Group’s Internal Control Committee to be of
sufficient high quality, these risk maps were
consolidated, applying agreed risk tolerance
levels, to form a new Group risk register.
Having at first excluded the US activities while
the framework was being developed to a
suitable standard prior to overseas roll-out,
Zotefoams Inc and MuCell Extrusion LLC
were successfully included into the full risk
management process during the year.
XX In November 2019, the risk management
process was subject to an independent
internal audit by Equas, a consultancy
business supporting the implementation and
maintenance of ISO-compliant management
systems, to validate that the risk management
process complied with the international
standard for quality, ISO 9001:2015 and that
it was also effective, with positive results.
XX 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. The Board reassessed and agreed
amendments to this plan as a consequence
of the downturn in Group performance in
Q4 2019.
XX Risk discussions remained highly prominent at
Board meetings during the year as the Board
discussed the execution of existing plans and
reviewed capacity expansion initiatives. A risk
assessment checklist was also developed
for when a new business entity is proposed.
It was used for the first time when the Audit
Committee’s approval was sought for the
creation of the Group’s new Indian subsidiary.
XX The Executive team, also members of
the functional steering committees, met
twice during the year specifically to review
and update the Group’s principal risks
and uncertainties.
XX The Group reviewed its key policies, such
as anti-bribery and corruption, competition,
ethics, whistleblowing and share dealing,
to make sure they remain relevant and are
operating effectively. It also relaunched
online training activities, for risk-assessed
employees, to ensure continued adherence
to corporate governance compliance and
educate on IT cyber risks and pitfalls.
XX 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 await an annual re-audit
by the accredited bodies early 2020. 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
of cyber security. In addition to meeting
the requirements of the Cyber Essentials
Plus certification, we also implemented a
formal cyber security training programme
for all staff globally.
XX In December 2019, the Company
successfully completed recertification to
OHSAS 18001:2007. Throughout the year,
it has also been reviewing and updating its
health and safety management system in
order to transition to the new Occupational
XX Health and Safety Management System
ISO 45001:2018. As with previous years,
accreditation and product audits were
conducted during 2019 and the Company
received no significant non-conformities.
As a result, all the Company’s product
accreditations remain.
XX The Group continues to use an external
adviser to perform its financial internal
audit services. During the year, based
on the Group’s internal risk assessments,
our Internal Auditor Grant Thornton LLP
completed an audit on the internal financial
control environment at MuCell Extrusion
LLC, with outcomes and improvement plans
presented to the Audit Committee.
Principal risks and uncertainties
The details of our principal risks and
uncertainties and the key mitigating activities can
be found on pages 35 to 38. We are disclosing
those risks and uncertainties that we believe
have the greatest impact in achieving our
strategic objectives. The Group is exposed
to a wide 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.
Zotefoams’ risk profile will evolve as the
business grows at its targeted pace, although
we expect these principal risks and uncertainties
to remain broadly consistent. Following a
detailed reassessment of our thinking and
approach to risk management in the previous
year, and having assessed the inputs from our
risk framework mechanism during the current
year, we have concluded that there are no
changes to our assessment.
Key to links to the strategy
1
Grow sales
in our AZOTE®
Polyolefin
Foams business
in excess of
twice the rate
of global GDP
growth.
2
Develop an HPP
portfolio and MEL
customer base to
deliver enhanced
margins.
Read more on pages 22 to 23.
3
Increase
our operating
margins, before
exceptional
items.
4
Improve
our return
on capital
(over our
investment
cycle).
Zotefoams plc Annual Report 2019 35
Operational disruption
Description and context
The performance of our business will be impacted
if we are unable to run our equipment and
manufacture and distribute product at rates
at least equivalent to those currently achieved.
We face material operational risks from our
reliance on our UK site, the importance of effective
IT systems, our dependency on certain raw
materials and components from a single source.
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, 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
of time.
We do what others do not, making us unique
and providing significant opportunities. But this
uniqueness also means that certain of our
engineering components and raw materials
are sourced 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
customer claims.
The potential impacts of operational disruption
are: i) sizeable financial consequences related
to missed 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.
Having formally exited the European Union on
31 January 2020, uncertainty remains around the
nature of a trade agreement between the UK and
its key trading partners. While not imminent, there
remain potential risks of supply disruption given
our sourcing of raw materials from mainland
Europe and the size of our sales into the region,
transported through the UK’s ports.
At the time of writing this Annual Report,
COVID-19 is raising considerable global concern.
Its direct impact on Zotefoams in China seems to
have dissipated, with the start-up of the Kunshan
China T-FIT® processing plant operational after
a two-week delay post Chinese New Year.
However, while all foam manufacturing sites
continue to operate at present, there remains
uncertainty over the extent to which the virus
will disrupt supply chains, close down customer
locations or even shut down the UK plant.
Mitigating actions
Safety, Health and Environment policies
We have extensive Safety, Health and
Environment (SHE) policies and procedures
in place which are in line with best practice. The
reporting of incidents, including ‘near misses’
and damage to plant or equipment not resulting
in personal injury, is mandatory in order to track
issues and to prevent reoccurrences. Regular
internal and external audits are performed,
and quarterly reports are submitted to, and
discussed by, the Board.
Maintenance strategy
We ensure that our assets are well looked after
through a well-resourced maintenance team,
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
are in place in the event of the failure of
certain major pieces of equipment.
Operations outside of the UK
Zotefoams is also investing in manufacturing
capability outside of the UK. The Kentucky, USA
site commissioned its first full manufacturing line
in April 2018 and a second line became available
in February 2020. These lines provide polyolefin
foam capacity, in the first instance, but it will
become possible to manufacture some of the
more challenging higher-performance foams with
experience. We also continued the construction of
a third foam manufacturing location in Poland, the
first line of which is expected to commission in H2
2020. Underlying all this, the Group ensures that it
has updated and sufficient insurance in place to
cover capital restatement and loss of profits in
the event of operational disruption caused by
unforeseen events.
Seeking dual sources
Wherever possible, suppliers are sourced from
more than one supplier or location. However, this
is not always possible due to the special nature
of the 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
as a result of our investment activities at our
Kentucky, USA plant and continue to invest
dedicated resources in the search for, and testing
and approval of, alternative suppliers of critical
materials. We also ensure we have sufficient
levels of safety stock to mitigate short-term
supply issues.
Investing in IT
We continue to invest in our IT systems and
department. In November 2019, we upgraded our
Microsoft Dynamics AX ERP system to the latest
“365” environment. We have multiple redundancy
points limiting failure of any one hardware or
operating system, up-to-date policies and
procedures, comprehensive documentation
Strategy
Risk trend
on all our critical assets and core configurations.
We are accredited to the Cyber Essentials Plus
certification, part of the UK Government’s National
Cyber Security Strategy, which requires an annual,
full independent assessment of our IT systems’
ability to deal with common cyber-attacks.
We also train our employees on a regular
basis to spot potential cyber-attacks through
communication and online training.
Mitigating Brexit risks
We continue to monitor Brexit developments,
including planning our production and shipping
schedules around any key dates. We applied for
Authorised Economic Operator status, underwent
a thorough audit and were granted it. This status
provides a fast track for shipments in and out of
mainland Europe, subject to the meeting of certain
criteria audited by HMRC. Longer term, our
investments in the USA and Poland give us a more
diversified base to supply our polyolefin foam
customers, while we expect our UK facility to be
more focused on production of high-performance
products, which are less sensitive to the
macroeconomic trading environment.
COVID-19
The global outbreak of COVID-19 is a constantly
developing situation. We are not in a position at
this stage to speculate on the duration nor its
future impact on the broader global customer
base of the Group; however, we have put
appropriate measures in place as we continue to
monitor developments. The health and safety of
our colleagues, their families and our business
partners remain our primary concern and public
health measures advised by governments are
being followed in support of their efforts to contain
the spread of the virus. We have provided our staff
with the technology and training support to work
from home, where appropriate, and have limited
travel in line with World Health Organization
advice. All foam production facilities are operating.
The supply chain is being proactively managed
and we hold several months of inventory of
ZOTEK® raw material and work in progress due
to the uniqueness of the core materials. We have
alternative supply sources for LDPE in different
countries and have built additional inventory of key
grades for the purpose of contingency. While we
have sufficient liquidity headroom in our bank
facility, we are managing our leverage covenants
through tight control of operating costs and the
timing of discretionary capital expenditure. The
Board has also considered it prudent to suspend
the dividend until economic conditions stabilise.
We continue to monitor the development of
the virus and its implications given the evolving
nature of the situation.
Control Committees
XX Board
XX Executive Committee
XX Planning and Capacity Committee
XX Health and Safety Steering Committee
XX Environmental Steering Committee
XX Key Supplier Review Steering Committee
XX Contract Review Steering Committee
XX IT Steering Committee
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
36
Risk management and principal risks
Continued
Global capacity management
Description and context
As we grow our business at the rate we target, it
is critical that we create the required capacity to
match the anticipated demand. Failure to execute
well and in a timely manner will impact the speed
of growth.
We face material risks due to the uncertainty
of medium- to long-term demand, the long
construction periods of our unique technology, the
successful execution of our investment projects,
the risk of loss of an important customer and the
ability to finance these investments.
Zotefoams’ growth is founded upon its unique
offering, its relevance to the global megatrends
of environment, regulation and demographics,
listed on pages 20 and 21, and its ability 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 historically predictable, linked
to GDP, but boosted by the benefit of the
aforementioned megatrends. HPP sales are more
project-driven and have stronger links directly
with the end user, who also has a more direct
involvement in the growth trajectory. Together, this
can make the timing of opportunities 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 we believe this is the best
approach to ensure the future growth prospects
of this profitable Business Unit.
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
Technology displacement
Description and context
The loss of our technological advantage could
increase competition and affect growth rates
and margins.
Either our foam manufacturing process or
our MuCell® technology could be matched
or bettered.
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
not confidential, 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,
a competitor could target an alternate, more
economic, process. Critical to the success of
MuCell Extrusion LLC (MEL) is the strength of its
intellectual property and, on the 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 is required
to invest in autoclaves and related infrastructure.
High-performance products are significantly more
complex to manufacture than our polyolefin
infrastructural investment, accurate risk
assessment and more time to implement.
Foam is costly to transport, not matching
location with the customers it will serve
could impact operating margins.
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
over the upcoming 24 months.
We run an annual strategic planning process with
a five-year view to reflect the longer time horizons
related to capacity planning. Our five-year
strategic plan was rigorously tested by the
Board and reassessed and retested following the
downturn in Polyolefin Foams performance in Q4.
Close to the end of current investment programme
We have been engaged in a significant
programme of capital investment since 2014 and
are nearing its successful completion. The first
stage of this programme completed in the USA
in 2018, comprising a high-pressure autoclave,
ancillary equipment and infrastructure for two
further lines. A second high-pressure autoclave
was commissioned in February 2020, a UK
investment in two high-temperature, low-pressure
autoclaves was completed in December 2019
and the final major programme, the Poland
manufacturing facility, is on time and on budget,
foams, and certain materials require years to be
qualified for supply.
We have reduced, and continue to seek to reduce,
technology displacement risk by entering into
new markets with significant barriers and cost of
market entry for competitors. For example, the
development of high-performance products and
MuCell® technology, 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 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 a
Graduate Scheme and developed strong
relationships with local universities to attract high
potential individuals. We dedicate financial resource
to testing materials and solutions to remain at the
forefront of cellular materials technology.
Strategy
Risk trend
and expected to be commissioned in H2 2020,
subject to the current uncertainty related to
COVID-19.
Building on our experience in the USA
The experiences gained through the recent
investment in the Kentucky, USA site and 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 that were previously
single sourced in the UK. We have dedicated
project managers and project teams, and where
we do not have the required expertise, we have
either hired new employees or engaged
experienced consultants to lead and/or work
alongside us. The Executive Committee has
received progress reports monthly while the
Board has rigorously tested key risk assumptions
and project status throughout the year.
Sufficient funding to support investment
In May 2018, we completed a debt refinancing
to continue to grow capacity and meet our
expected demand growth, securing increased
facilities of £57.5m (up 64% from previous facilities
of approximately £35m) at improved pricing and
more favourable covenants. We also completed
a successful equity placing, raising a further
£20.6m (before expenses). This has provided
us with sufficient headroom and flexibility to
complete our investments as well as place us
well for further opportunities as they arise.
Control Committees
XX Board
XX Executive Committee
XX Planning and Capacity Steering Committee
XX Capital Planning Steering Committee
XX Zotefoams Inc Executive Committee
Strategy
Risk trend
know-how spans multiple disciplines across
our business, making it difficult to poach. We
protect our know-how using confidentiality
and contractual agreements with employees,
suppliers, 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 not actively sought.
MEL licences typically include a bundle of
patents and know-how and therefore are not
completely dependent on any particular patent.
All licences are reviewed by senior personnel
and the Group CEO to ensure that terms are
appropriate. The portfolio is managed by the
MEL Executive Committee.
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
Control Committees
XX Executive Committee
XX New Product Development Committee
XX Zotefoams Inc Internal Control Steering
Committee
XX MEL Executive Committee
Zotefoams plc Annual Report 2019
Scaling up international operations
Description and context
Working more remotely with international
operations and engaging with legal environments
and cultures less familiar to us increases the risk
of not delivering on our growth opportunities or
suffering a compliance incident.
Our business is growing in Asia and we are
investing in a Poland manufacturing facility, to
start up in 2020. We must ensure that we hire
the right people and manage the span of
control challenges.
Until recently, most of Zotefoams’ revenue was
shipped from the UK. Following our investments
in the USA and Asia, the Group now employs
more people, holds more assets and generates
a higher proportion of revenues outside the UK.
We are hiring people globally at a faster rate than
previously with high expectations of material
contributions to the Group’s growth strategy.
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 and IT systems, educate them
effectively on all aspects of Zotefoams’ culture
and ethics and align them on our strategic
objectives could impact business performance.
Critical to any company’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
less familiar to us, will be challenging.
Mitigating actions
Board and Executive involvement
The Board and Executive Committees have
continued to review the Group’s corporate culture,
its communication and the embedding of controls
across the organisation. A financial internal audit
of the MuCell Extrusion subsidiary was performed
during the year by our external service provider,
with the report’s findings and issue resolution
plan being reviewed and monitored by the
Audit Committee.
Key leaders have travelled 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.
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
teams with significant tenure at Zotefoams,
well-embedded reporting and control structures
and engage in regular and effective communication
with senior operational leaders of Zotefoams and
the Board. The Zotefoams Inc President is a
member of the Executive Committee.
The Group’s China subsidiary was formed in
2016, while the India subsidiary was formed
during the year. With the exception of Finance,
local management reports directly into the HPP
Business President, who has created strong
communication and reporting structures. The
local finance teams report directly into the
Group Financial Controller for independence,
clearer leadership and greater assurance
around governance.
Building up our global functions
We have invested significantly in human resource
over the past few years as we build global
functions and hire leaders with international and
cross-cultural experience. In January 2020, an
HR Executive 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. Now reporting into this HR Executive,
Zotefoams also has a Global Talent Manager, who
presents regularly at Executive Committee
37
Strategy
Risk trend
meetings and whose remit is to ensure that senior
and emerging talent is appropriate for the Group’s
current and future needs.
Preparing the Poland manufacturing
site for start-up
We recognise the importance and risks
surrounding the construction and start-up of a new
manufacturing site in a country we are less familiar
with. Following the decision to proceed with the
investment, we hired an experienced project leader
to manage all aspects of the project, including the
construction phase, which was completed on time
and within budget. In July 2019, we hired the
Poland Plant Manager in order to take over from the
project leader at the right time, gain experience with
Zotefoams’ unique technology, become familiar
with the key functional support staff in the UK
required to support the plant going forward, as well
as understand and adopt the Zotefoams culture as
staff are hired in Poland. Currently, the Polish team
comprises the Plant Manager and a further five key
staff, all of whom are training in the UK facility at
least four months prior to planned start-up.
Upgraded IT
We have upgraded IT systems to standardise
information and improve communication and
visibility. The systems are implemented into all
new subsidiaries as they are set up. We have
introduced a global training tool which provides
training, plus tracking mechanisms, across all
our locations on a risk-assessed basis and in
the local language.
Control Committees
XX Board
XX Audit Committee (in relation to Finance)
XX Executive Committee
XX HR and Training Steering Committee
XX IT Steering Committee
XX Zotefoams Inc Internal Control Steering
Committee
XX MEL Internal Control Steering Committee
Strategy
Risk trend
Loss of a key customer
Description and context
Group performance could be impacted by the
loss, insolvency or divergence of interest with
a key customer.
The Group’s largest customers have traditionally
been converters of foam, none of whom have
represented a material share of the Group’s
revenues or future opportunities. As the Group
successfully converts projects out of its HPP
portfolio into commercial opportunities, the
customers for ZOTEK® foams are expected to
be significantly larger than the average AZOTE®
customer and represent a more material risk if the
business is lost. Capacity will become available,
having been built in some cases to service these
customers, pressurising margins in an
organisation with high operational gearing.
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, channel partners or take a direct
approach to service these markets.
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 in the portfolio could
yield further successes that spread the risk of any
single loss, while the T-FIT® insulation business
provides further balancing with its more broadly
spread global customer base.
We are excited by the size of the opportunities
offered by our ZOTEK® product portfolio and
have the risk appetite to pursue them. Where we
engage in relationships with large HPP customers
we seek to ensure that our interests are protected
by balanced commercial contracts. The Board
is heavily involved in such decisions. These
relationships are by their nature longer term,
providing a unique technical solution and
competitive advantage to the ZOTEK® foams
We will continually review our customer spread
and balance, particularly as the HPP business
segment takes on more importance.
Control Committees
XX Board
XX Executive Committee
XX Marketing Steering Committee
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
38
Risk management and principal risks
Continued
External
Description and context
Business growth prospects are vulnerable
to movements in foreign exchange rates
and geo-political developments.
These factors are often out of our control and
may influence our business in a number of ways,
including influencing the other key risks listed.
Zotefoams has significant exposure 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.
We normally invoice our customers in their local
currencies, and in 2019 approximately 87% of
the Group’s revenue was in currencies other than
sterling, mainly US dollars or euros. We therefore
generate surpluses in US dollars and euros,
which are converted into sterling.
Our markets are exposed to general economic
and political changes which have an influence
on economic 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 reaching
the final stages of the Group’s global capacity
enhancement programme could place pressure
on debt facilities and banking covenants.
At the date of this Annual Report there is
unprecedented uncertainty from the outbreak
of the COVID-19 virus, with impacts on the
health and safety of our staff, customer demand,
continuity of plant operations and financial
liquidity. See also the COVID-19 paragraph
above under Operational disruption.
The consequences of the UK’s decision to leave
the European Union continue to risk impact to our
business in a variety of ways and affect other key
risks listed in this report, although this impact is
still not yet fully understood or fully quantifiable
given the negotiations expected during 2020.
However, an unfavourable outcome may impact
our ability to import raw materials and export
finished foam product in a timely manner
(operations disruption). Tariffs may increase input
costs and export prices, while labour regulations
may affect our ability to attract EU talent into our
global headquarters in Croydon, UK.
Mitigating actions
Managing exposure to the US dollar and euro
We reduce our net foreign exposure for
transactional items by making purchases either
in US dollars or euros. For example, there are
US dollar costs associated with the Group’s
operations in Kentucky, USA and with MEL.
In addition, the majority of the Group’s raw
materials are purchased in euros.
With our significant capital investment in Kentucky,
USA now 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 to begin with,
the same will apply for the euro when our Poland
manufacturing facility is complete in 2020.
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
risk by using forward exchange contracts.
We do not hedge for the translation of our
foreign subsidiaries’ assets or liabilities in the
consolidation of the Group’s financial statements.
We are, however, increasingly focused on hedging
our statement of financial position through
matching, where possible, our foreign currency
denominated assets with foreign currency
denominated liabilities, such as by foreign
currency debt financing.
Diversifying our markets
Some of our markets can be cyclical. However,
this risk is spread geographically and across
a number of segments that are expected to
diversify further with the growth of HPP and
MEL. The Group is operationally geared but
our experience 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
growth potential.
Strategy
Risk trend
Managing our debt facilities/COVID-19
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. We expect H1 2020 to be our highest
leverage (net debt to EBITDA) position, given the
challenging trading environment in Polyolefin
Foams, the rapidly evolving situation regarding
the COVID-19 pandemic and the final stages
of completion of the Group’s significant capital
investment programme. Our budgets and
forecasts 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.
The coincidence in timing of the performance
downturn in Polyolefin Foams, the current
uncertainty around COVID-19 and the completion
of the Group’s capacity expansion projects has
placed a degree of risk around the Group’s ability
to remain within its leverage covenant without
actions that would negatively impact our strategy.
In support of this strategy and in recognition of the
current macroeconomic uncertainty, the Group’s
banks have amended the leverage covenant from
3.0x to 4.0x based on the 12 months to 30 June
2020. In light of the exceptional circumstances,
Zotefoams is focused on cash, including cost
and capital management, in order to maintain
sufficient liquidity and remain within revised
covenant levels. The Board has also considered
it prudent not to recommend a final dividend for
the year ended 31 December 2019, and will
keep this situation under review and determine
the timing for resumption of dividends as
economic conditions stabilise.
Monitoring Brexit developments
As documented under the operational disruption
risk, we continue to monitor Brexit developments,
including planning our production and shipping
schedules around any key dates as they arise.
Our Authorised Economic Operator status
provides a fast track for shipments in and out
of mainland Europe. Our facility in Poland is
expected to become more important in the
supply to continental European customers.
Control Committees
XX Board review (at times of more
fundamental changes)
XX Executive Committee
XX Marketing Steering Committee
XX Foreign Exchange Steering Committee
XX Zotefoams Inc Internal Control Steering
Committee
XX MEL Executive Committee
Zotefoams plc Annual Report 2019
Viability statement
The viability period
In accordance with provision C.2.2. of the 2016
revision of the 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,
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
to EBITDA ratios, as prescribed by its existing
financial covenants, and if there is available
debt headroom 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 risk
appetite and Zotefoams’ principal risks and
how these are managed, as detailed on
pages 33 to 38.
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,
based on the Group’s strategic growth
objectives, a multi-year assessment of return
on capital, the continuing performance of
the business, the quality of its portfolio of
opportunities, and its financing arrangements
and opportunities. This is aligned with the
Group’s model to invest, create and deliver.
The bottom-up five-year plan is reviewed
at least twice annually by the Directors. In
assessing the future prospects of the Group
and achievability 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 of
the scenarios over the assessment period. This
was in order to stress-test an aggregation of
severe but plausible risks occurring that
should represent the greatest potential
financial impact both in the short-term
and longer-term viability period.
The Directors considered mitigating factors
that could be employed when reviewing these
scenarios and the effectiveness of actions at
their disposal. These include adequate insurance
coverage, adjusting investment in discretionary
and maintenance capital investment, the
unwinding of working capital in a downturn,
ceasing some activities and reducing overhead
previously invested to support the Group’s
growth initiatives.
We are satisfied that we have robust mitigating
actions in place. We recognise, however, that the
long-term viability of the Group could also be
impacted by other, as yet unforeseen, risks or
that the mitigating actions we have put in place
could turn out to be less effective than intended.
39
Scenarios tested
The following downside scenarios have
been evaluated:
Scenario 1:
Significant operational disruption over a long
period. This risk focuses on the most extreme
scenario of a fire at the Croydon, UK plant
requiring a significant rebuild over a period
in excess of a year.
Read more Principal risk: Operational disruption
page 35; Global capacity management page 36.
Scenario 2:
Business performance risks. These include
both Polyolefin Foams and High-Performance
Products growth at rates significantly below
those included within the five-year plan and
include the assumption that the Group’s current
major capacity expansion projects will
have been completed.
Read more Principal risk: Technology displacement
page 36; External page 38.
Scenario 3:
Loss of a key customer in HPP. This scenario
reflects having completed the capital investment
projects currently committed to but losing the
footwear business.
Read more Principal risk: Operational disruption
page 35; Global capacity management page 36;
Loss of a key customer page 37.
Scenario 4:
Sterling returning to pre-Brexit referendum
foreign exchange rates to the US dollar and
euro. This scenario evaluates the cash impact
on the Group as a result of forecast growth
coming increasingly from non-sterling
denominated sales.
Read more Principal risk: External page 38.
Scenario 5:
COVID-19 disruption. We considered the impact
of a severe but plausible scenario that reflects
the current unprecedented uncertainty in the
global economy, with Group revenue 20% below
2019 for the 12 months to 31 December 2020
and 25% below 2019 for the 12 months to 30
June 2021, together with mitigating cost and
cash actions.
Read more Principal risk: Operational disruption
page 35; External page 38.
The Group continues not to consider Brexit
a material risk to its long-term viability. While
operational disruption is possible in the period
immediately after an adverse outcome to
negotiations, albeit mitigated by appropriate
supply chain planning, the international markets
Zotefoams operates in are not expected to
be materially affected and any impact from
export tariffs are expected to be offset by
a weaker sterling.
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.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 40
Our people
Our people are key to our success and
we are committed to their development
Our continued expansion in markets, products and geography
brings ongoing challenges in talent and capability. Our strategy to
address this is centred on connecting people through a consistent
focus on our culture and values and by developing our workforce
for current and future roles.
The Board and Executive team discuss talent
and culture on a regular basis, with a deeper
review as an integral part of the annual Board
strategy day. We aim to set clear expectations
for culture and values which apply to, and
engage employees, at all levels. Again this
year we have placed significant emphasis on
increasing the level of engagement across our
diverse group of employees. Here are some
examples of how we are progressing:
Delivering culture and engagement
with a consistent theme
In 2017, we formulated a set of culture pillars to
complement our brand values; in 2019, we ran
workshops across our UK management team to
translate our culture pillars into tangible actions
and behaviours. From these, our management
team agreed to make a collective effort to drive a
learning culture through our organisation. Below
are examples of initiatives in 2019. We also ran
We are a learning organisation
leadership development sessions to pinpoint
and improve our focus areas in parallel with
a leadership culture development programme
which has been under way at executive level
since 2017.
Employee group
Senior management
Senior management
UK employees
US employees
Our culture pillars
Action
Outcome
To enhance our learning culture (and our talent
development programmes) we trained our senior
management team on coaching, mentoring
and sponsoring.
Managers are reporting successful use
of coaching techniques in our discussion
sessions. Selected managers are mentoring
our graduates as they move from their
development programme into dedicated
roles within the business.
We identified the components of a learning
culture, discussed challenges and successes
in small groups and scored our current
performance, establishing personal focus
areas and a team overview on how to improve.
Through our group workshops we identified
our weakest area as being in retrospection –
identifying mistakes and embedding the
changes for the organisation to learn. Moving
the dial on this is a management focus for 2020.
We initiated a 14-month Lean Education and
Development (LEAD) programme to train and
engage 45 employees, cross-functionally, in
a broad range of analysis and improvement
techniques – a toolbox – specific to an
operational business.
We have completed the classroom phase and
employees have identified improvement projects
to execute in cross-functional teams in 2020.
The business improvement techniques have
been incorporated into our operational practices
to produce a consistent Zotefoams approach
to improvement across all business functions.
A $101,000 government training grant was
awarded for an upskilling training and
development programme across operations,
building consistent cross-functionality, flexibility
and bench strength in leadership and
engineering know-how.
Through investment of this grant, we achieved
significant workforce development and role
progression, including leadership and technical
training with mentoring support for stretch
assignments, yielding a 25% rise in
engagement levels in this group.
Our AZOTE® global commercial team
pictured at its annual strategy meeting
Zotefoams plc Annual Report 2019 41
Spotlight on
Learning and
Development
LEAD operational
business toolbox
In May 2019, we used our apprenticeship levy
to embark on a large development programme.
Our primary objective was to give a broad
range of employees the skills to identify and
address inefficiencies: this training programme
covers lean techniques along with project
management and commercial tools. Our
secondary objective was to enhance
cross-functional teamwork through integrated
training and projects, using common language
and methodologies. We will be extending the
training, as part of continuous improvement,
across the UK plant’s shop floor during 2020.
“ Empowerment and engagement are
at the foundation of our strategy for
the future; the LEAD programme is
making significant progress in this
direction, developing capability
within operations and reinforcing
cross-functional alignment
throughout the business. I am
looking forward to the operational
improvements and alignment the
projects will deliver in 2020.”
Benito Sala
Managing Director, Europe
Our talent strategy addresses resourcing
challenges while promoting organic progression
Our brand values are an ongoing focus and we
continue to promote and hire in line with these
values. Talking about culture and values has
become an integral part of our business strategy
and operations at senior level and, for the first
time in 2019, values-based behaviour was
made integral to management reward schemes,
alongside the usual hard objectives. In 2020,
we will roll out a culture change programme
to enhance business-wide commitment to
these values.
We repeated our global employee engagement
survey in the spring of 2019, and again ran focus
groups to add insight to the results. The results
showed a significant increase in engagement in
all our overseas operations, and in our skilled
and shift employees in the UK. The demands
of our combined growth and future investment
have been felt most keenly by our specialist
employees and will continue through much of
next year. We have responded to this challenge
with a business-wide skills development
programme (operational business toolbox,
featured to the left) and a framework to become
more people focused. Additionally, as we
develop as a learning organisation, a closer
cross-functional alignment of project work is
emerging, which will streamline efforts and
increase productivity.
Building accountability
In line with our culture pillar “We hold ourselves
accountable”, we have built foundations to
increase accountability in 2020. These include
our work on being a learning organisation,
where we identified key components around
managing failure and capturing learning to get
lessons embedded through training, knowledge
sharing and process changes. We overhauled
our meetings culture to an objective and
action-focused approach. But our main
work in this area was a job evaluation project,
through which all job descriptions in the UK
were revised with clear accountabilities for
delivery and behaviours.
Growing flexible resource
through talent development
Our talent strategy allows us to address
resourcing challenges while continuing to
promote organic progression. Cross-functional
development is paramount and we have two
major programmes in place to deliver this:
1. Our Agile Talent Group, which consists of
employees with core business expertise,
commitment to our culture and values and
the desire to develop a broad skill set for
cross-functional progression. 62% of our Agile
Talent Group have successfully completed
development projects outside their areas of
expertise and 54% have progressed to new
roles during the last two years. We are
growing our internal agile talent pool and
adding a mentor scheme to complement
the project-based development we operate
currently. The development of this group
is intended to provide the business with
employees who are equipped for a variety
of progression opportunities and who
possess the breadth of knowledge and
insight required for a senior role.
2. The Zotefoams Graduate Scheme (featured
on page 42) is designed to equip some of the
brightest graduates in material science and
engineering with the knowledge, skills and
experience they require to excel in their
careers at Zotefoams. Our talent pipelines
(which include placement students) have a
shadowing programme to help them learn
about the roles they might progress to and,
exactly as in the previous year, 38% of
employee role changes in the UK during
the year were cross-functional. This talent
structure has largely addressed previous
hiring challenges where we were, to a sizeable
extent, reliant on mainland Europe to source
candidates with the right skills and experience.
Ongoing progression of expertise and
diversity through talent acquisition
We indicated in our 2018 Annual Report that
our growth in employee numbers globally
would slow in 2019 and we are reporting no net
increase for this year, in contrast to growth rates
as high as 17% in recent years. 2019 investment
has been primarily in capital projects.
Nevertheless, we have complemented our
programmes for growing talent by increasing
our expertise in key areas and in our international
presence through external appointment. Benito
Sala joined us as MD Europe, responsible for our
European operations, which will include our
Poland manufacturing site. We hired four key
roles in operations management and engineering
for Poland, investing in training and induction to
Zotefoams in preparation for a smooth start-up
of the new factory in 2020. We also invested in
our global commercial resource, appointing
10 new people, primarily in sales, to a new
subsidiary in India.
Diversity
We continue to progress diversity throughout
our organisation. Our balanced age profile
reflects our efforts over recent years to recruit
well-qualified people into development roles (the
under-35 cohort has grown from 25% to 30%
of our workforce since 2015) and our years of
service metric reflects our recent growth.
Attracting women into our business, especially
into senior and technical roles, remains a
challenge but globally we achieved 33% females
hired into senior roles across the Group in 2019.
We are particularly proud that one of our female
employees was appointed Chair of the Women
in Materials group of the Institute of Materials,
Minerals and Mining.
Our UK business is a knowledge and resource
hub, providing support to the Zotefoams Group
and directly servicing customers throughout
Europe and key accounts worldwide. In addition
to the broader benefits of diversity, our rich
culture helps us align with our colleagues,
suppliers and customers. We leverage this to
support our European business and currently
employ 17% non-British European staff and 20%
other non-British staff at our UK facility by
maintaining strong levels of retention and
remaining an attractive employer to these
groups. Our factory in Poland, due to open
in the second half of 2020, will further
strengthen our European employee base.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 42
Our people
Continued
Spotlight
on talent
development
Graduate Scheme
Our Graduate Scheme is designed to ensure
the future needs of Zotefoams are supported
by the right skill sets and versatility to respond
to a variety of growth opportunities in a highly
diverse business. It is a two-year scheme,
comprising two or three development roles
chosen to complement each graduate’s
expected career path. Alongside their day jobs,
graduates undertake a programme of learning
and hands-on exposure to all major functions
in the business to help build a broad business
insight, something that is already enhancing
their effectiveness and versatility. The
demographic of the group is 64% male
and 36% female. Our first cohort completed
the programme and transitioned into the
business in 2019, all taking roles we would
traditionally find difficult to fill.
“ Since becoming Director of
Technology & Development in 2010
I have created a structure within the
Technical Department to grow talent
for the wider business. The Graduate
Scheme adds a fast track for talented
engineers, allowing them to gain
experience in multiple roles, an
understanding of functions in the
business and giving them an
appreciation of the whole business.
Our aim is to develop people with
an engineering foundation and the
flexibility to adapt to new roles as
we grow.”
Dr Karl Hewson
Director of Technology & Development
We overhauled our talent acquisition strategy
in 2015 and continue to monitor our quality of
hiring. Our 2019 statistics in the UK show more
than a third of our hires from 2015 onwards are
retained and ranked as either high potential or
high performance two years following their start
of employment. In 2019, we have continued
to strengthen our relationships with four key
universities, offering industrial visits and industry
insight lectures as well as supporting careers
fairs and hiring opportunities. We continue to
sponsor Imperial College London’s Materials
Engineering Society as we have found it
worthwhile, not only for recruitment but for
increasing awareness of our unique foams within
a group of talented materials engineers, many
of whom will work for current and potential
customers when they graduate.
Talent pool sustainability
We strive to maintain and improve a talent pool
with the skills and flexibility to deliver our
ambitious growth targets. Zotefoams Group
operates unique technology and sells into a
wide diversity of applications globally. We expect
our business to grow primarily through new
applications for existing materials and from the
introduction of new technology. We therefore
expect our people to be demonstrably reliable
and pioneering, supporting existing and new
customers with materials for the benefit of
customers and society. These skills, combined
with process and materials knowledge, need
to be nurtured internally and, alongside role
succession, we conducted an audit in 2018
to identify key skills and knowledge across the
business with a view to ensuring sustainability.
The outcome was a plan and budget to address
30 areas where the knowledge or skills should
be grown or captured internally. In 2019, we
closed out 22 of these and made significant
progress on the remaining eight, all of which
we expect to close out during 2020.
Looking forward
Throughout 2020 and beyond, we will face
the continuing challenge of making significant
investments in the future of our business
while seeking to deliver ambitious growth.
We will support our employees with clear
communication on purpose and objectives,
with the aim of increasing engagement
and productivity.
We have made many steps this year to
increase our focus on culture, engagement
and developing people. This is a challenge for a
technical organisation where a natural task focus
is inherent. We need to remain people-centric
and our focus for next year is “we live the brand
values”, with a programme of work to bring these
values to life throughout the organisation. We will
continue our work on “learning organisation”,
building the right platform for us to move on to
“developing accountability” and “constructive
challenge” without losing the agility we value
and which has delivered so much success.
2019
2018
Age
150
100
50
0
<25
25–35
35–45
45–55
>55
Age grouping
Years of service
2019
2018
200
150
100
50
0
0–2
2–5
5–10
10–20
>20
Years of service
Role by gender
Non-Executive Director
Executive Director
Senior management
Male Female
3
2
5
1
–
1
Other staff
336
97
Cultural diversity
British:
European:
189
60
S. American: 1
N. American: 105
Afrian:
Asian:
16
73
Australasian:
1
We have been on a journey of change since
we commercialised our first unique foam in the
ZOTEK® range in 2004. However, culture change
is especially challenging and, in recognition of
the pivotal role line managers play in any change
process, we will be rolling out a step-by-step
programme of training and support to help
our line managers execute this in 2020.
Our talent structures have equipped us well to
replace the European talent pipeline we expect
to lose through Brexit, but talent acquisition is
an area where no business can be complacent.
We are only as good as our ability to attract and
retain the right people, so we continue to develop
our employer brand, our resourcing methods and
the sustainability of our talent pipelines.
Zotefoams plc Annual Report 2019 43
Sustainability
Doing the right thing
Zotefoams considers that the management of safety,
health, environmental, social and ethical matters forms
a key element of effective corporate governance.
Health and safety
Over the past few years we have heightened
our focus 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
is now better than average in these comparator
industries. The next stage of development
involves better awareness of the behavioural
aspects of health and safety and this will
form the core of our priorities for 2020
across the Group.
Environmental
Zotefoams operates in the plastics and polymer
industry where environmental performance is
increasingly under societal and regulatory
scrutiny. When developing our business we
consider both the internal and external
environment. Internally, the focus is mainly
around improving efficiency in energy and
polymer use. Externally, we consider the
benefit of the products and technology we
offer and seek to develop products which
we can justify as being more beneficial to
society than either our existing products or
those offered by competitors.
The debate on plastic prompted by inappropriate
applications and irresponsible disposal has
become polarised, with many beneficial uses
of plastic now tainted by association. We at
Zotefoams believe that responsible usage of
plastics, minimising usage (reduce), maximising
service life (reuse) and considering end of life
issues (recycle) is vital to ensuring the sustainability
of the plastics industry and our business.
Internal metrics are complicated by the changing
product mix of our business, as our HPP
business in particular grows more quickly
than Polyolefin Foams. The additional capacity
investments in the UK and USA are latest
generation technology that are more flexible
and energy-efficient than existing equipment,
although the benefits of this will not be fully
realised until utilisation levels increase.
Internal efficiencies
We continually strive for efficiency improvements
in our energy-intensive production processes.
Our newest low-pressure autoclaves are around
5% more efficient than older models. Our USA
high-pressure autoclaves heat and cool more
quickly and are around 10% more efficient than
those in the UK. Improvement activities in the
UK and USA are estimated to have improved
yields and reduced material usage by at
least £400,000 per annum, which also
benefited energy consumption and other
processing costs.
Through optimised machine loading and cycle
time reduction in our main high-pressure and
low-pressure gas processes, we have reduced
annual energy usage by around 700,000kWh.
UK investment
The development of Factory 4 on our UK site,
which was completed during 2019, has been
assessed using the BREEAM environmental
assessment methodology and has achieved
an Excellent rating. The design team has
incorporated a wide range of environmental
features into the design of the building, including:
XX monitoring the processes during the
construction period;
XX LED lighting and controls;
XX efficient space conditioning systems;
XX low water usage fittings with solenoid
shut-off valves;
XX energy-efficient equipment throughout; and
XX environmentally responsible materials.
External impact
XX Zotefoams products make airplanes, trains
and cars demonstrably lighter than traditional
materials, translating to better fuel efficiency
and a lower carbon footprint. This is a far more
tangible and immediate measure than e.g.
carbon offsetting.
XX Our foams are typically 15–20% less dense
than any competing foam for comparable
applications. This means less material content
and the maximum possible lightweighting
benefits for our customers.
XX 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.
We have set out to improve post-consumer
recycling rates of single use packaging by
designing ReZorce® mono-material barrier
packaging – now available for licensing globally
– for full compatibility with HDPE recycling
(Stream 2).
Foam products and technologies offer many
environmental benefits, and Zotefoams intends
to develop further products and solutions that
respond to global needs in a sustainable
manner.
Climate change
At Zotefoams, we understand that combating
climate change is a significant global challenge.
Regulatory and behavioural changes are
already shaping the markets we serve and the
environment in which we operate. We believe
the business is well positioned and prepared to
deal with these changes, with foam products
delivering high performance, insulation and
reduced weight which offer the potential for
CO2 reduction in excess of the CO2 required to
manufacture the product. We are improving
our energy intensity and material consumption
and adapting our product range to enter new
markets where these benefits are clearly
understood and valued. Measurement of
energy consumption and polymer usage,
which generate CO2 emissions, are monitored
monthly and we have clear targets to improve
these as described further in this report.
15%–20%
less dense than competing foam
for comparable applications
£400,000
reduced material usage
700,000kWh
reduced annual energy usage
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 44
Sustainability
Continued
Weight savings vs traditional materials
70%
weight
reduction
Lightweighting
70% lighter
and flying
high
Zotefoams’ latest PVDF foam, ZOTEK® F XR,
is an extra-rigid closed cell crosslinked foam
that significantly extends Zotefoams’ scope of
application in aircraft interiors. With sufficient
rigidity to replace solid thermoplastics in
applications such as the interior of seat pods,
stowage lockers, rigid armrests and tray tables,
ZOTEK® F XR reduces weight by up to 70%
on a like-for-like basis. The material meets
all relevant aviation standards, offering
outstanding fire, smoke and toxicity
(FST) ratings.
OHSE
APP ROVED
Safety
Introducing
our passport
to safety
The Board has ultimate responsibility for
Safety, Health and Environment (SHE)
policy and performance, setting annual
performance objectives and receiving
quarterly reports on SHE issues. In 2019,
we launched a Safety Passport initiative
for all our Croydon-based employees,
emphasising the priority the Board places
on SHE. Employees receive the passport as
part of their induction process and it serves
as a record of ongoing SHE training that
all staff receive throughout their career
with Zotefoams.
OHSE
PA S S P O R T
Safety is everyone’s responsibility
Zotefoams plc Annual Report 2019 45
Foam products and
technologies offer
many environmental
benefits, and Zotefoams
intends to develop
further products and
solutions that respond
to global needs in a
sustainable manner.
Achieving accreditations
Zotefoams achieved accreditation to ISO 14001
Environmental Management standard in 2018
and maintained this throughout 2019.
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 standards
OHSAS 18001 on Health and Safety and
ISO 14001, the International Standard for
Environmental Management Systems, and
is regularly audited by certification bodies to
ensure that the Company complies with those
standards. The Company achieved compliance
against ISO 14001/2015 in 2018 and has now
made considerable progress towards migration
to ISO 45001:2018 by successfully completing
recertification to OHSAS 18001:2007 in
December 2019. Migration to ISO 45001:2018
will be conducted beginning in March 2020 as
part of a continual improvement plan.
The Board has ultimate responsibility for SHE
policy and performance and receives quarterly
reports on SHE issues. Annual performance
objectives are agreed by the Board and
performance against these is monitored as
part of 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
of SHE performance, targets, metrics and
approach at least once a year.
The Group CEO is directly responsible to the
Board for SHE performance. Site Committees
on SHE normally meet once a 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
is provided, as appropriate, to ensure that
the employees understand SHE matters.
All employees 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
as equally important as actual incidents, since
it raises 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
incidents occurring.
Few controlled substances are used in the
manufacture of our foams, but where they
are, the Group has established procedures,
in which the relevant employees are trained,
to ensure 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
SHE: Key metrics
Year
Group: Reportable lost time injuries
Company: Environmental metrics
Internally recorded environmental incidents
Level 1
Level 2
Level 3
2019
2018
2017
2016
2015
1
0
0
4
0
0
10
24
6
0
0
7
13
0
0
11
7
0
0
6
Energy usage – (Mwh)
44,570
52,225
49,085
46,912
50,006
Energy consumption (kWh/kg)
11.60*
11.03*
11.05
11.76
11.75
* Calculation now shown as mix-neutral assessment of energy usage.
16%
reduction
in carbon
emissions
in our UK facility, mainly due to
lower usage of natural gas and
electricity within the plant, together
with lower output volumes in the
second half of 2019
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements In 2019, the Company completed its second
assessment under the Energy Saving
Opportunity Scheme (ESOS) and remains
compliant.
Carbon emissions
The Group’s total carbon emissions for 2019
for all its operations were 12,425 metric tonnes
(2018: 14,825 tonnes, adjusted to include
94 tonnes for our China facility). A reduction
of 19% has been recorded in the UK facility
(2,268 metric tonnes), mainly due to lower
usage of natural gas and electricity within the
plant, together with lower output volumes in the
second half of 2019. An update to the conversion
factors for greenhouse gasses also supports the
above, while increased output in the USA was
achieved with an 8% reduction in carbon
emissions. Contribution from other Group
locations is included in the total above
but was minimal.
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 Company vehicles
and mileage claimed by employees in the UK,
but not other forms of business travel, such
as travel made by employees elsewhere in
the Group or travel using public transport
or aeroplanes.
46
Sustainability
Continued
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.
Health and safety performance
The primary metric used to monitor the number
of reportable lost time injuries is RIDDOR. In
2019, the number of RIDDOR incidents across
the Group decreased to 1 (2018: 4).
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
as well as provides an established methodology
with which we can benchmark our performance
annually. In 2019, there was a marked
improvement in Days Away From Work (DAFW)
and Days Away Restricted Or Transferred
(DART). In both cases, the metrics are compared
with the latest benchmark data for Rubber and
Plastics Processors and represent approximately
the rate of accidents and incidents per 190
full-time Zotefoams employees.
Year
RIDDOR
DAFW
DART
2019
2018 Industry
1
1.1
1.3
4
2.3
3.1
n/a
1.1
2.4
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 reoccurrence. In 2019,
there were no prosecutions, fines or
enforcement actions taken as a result of
non-compliance with Safety, Health or
Environment legislation (2018: none).
Behaviour is now the focus for Group health
and safety training and intervention. Analysis
of incidents and near misses clearly shows
that behaviour is the main root cause of these
incidents and this focus is needed to maintain and
better the recently improved safety outcomes.
Environmental performance
There were no significant environmental
incidents during the year (2018: none). Minor
incident reports at our UK facility decreased
significantly. In 2019, 10 internally reported
environmental incidents were reported (2018:
24). Previous years have been analysed against
a new internal categorisation, guided by the
Environmental reporting guidelines at
https://www.gov.uk/
report-an-environmental-incident
Level 1 – Reported to Environmental 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)
In 2019, no incidents were reported at Level
1 or 2, meaning no significant impact to the
environment. The Group ensures that all reports
are taken seriously, investigated, and the
responses given are appropriate to their level
of impact or potential impact. Figures on page
45 are reported for the Company. There were
no Level 1 or Level 2 equivalent incidents
elsewhere in the Group in 2019.
In October 2009, the Company entered into a
Climate Change Levy (CCL) agreement which
involves meeting specific targets to reduce
energy consumption. Providing the Company
meets the requirements of the CCL agreement,
it receives 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 2019, our adjusted energy
efficiency measure Specified Energy
Consumption (SEC) has increased to 11.60kWh/
kg (2018: 11.03kWh/kg). The increase seen
this year is adversely influenced by the lower
plant utilisation in the second half of the year,
due to the high energy base load of the
manufacturing process.
Group: carbon emissions (CO2 tonnes)
2019
2018
2017
2016
2015
Emissions arising directly from our operations
(including fuel used in our vehicles)
190
288
134
136
382
Indirect emissions – use of energy
(electricity and gas)
Total
Carbon emissions (kg)
per material gassed (kg)
12,235 14,443 16,291 16,006
18,194
12,425 14,731 16,425
16,142 18,576
1.6
1.7
2.1
2.3
2.4
Zotefoams plc Annual Report 2019 s172(1) statement
Our shareholders and stakeholders
Since 1 October 2007, the Board has been
required to carry out its statutory duty to act in
a way which it considers, in good faith, would
be most likely to promote the success of the
Company for the benefit of its members as a
whole, and in doing so have regard to:
XX the likely consequences of any decision in
the long term;
XX its environmental impact;
XX key stakeholders (including employees,
customers, suppliers and communities); and
XX maintaining a reputation for high standards
of business conduct.
The Board has striven to embed these
considerations in its decision-making process
since the imposition of the duty and now reports
on compliance.
With the help of a diverse group of employee
representatives and seeking to represent the
interests of all stakeholder groups, we have
articulated the purpose of Zotefoams to be
“Optimal material solutions for the benefit of
society”. We feel this perfectly encapsulates all
three business units and reflects our alignment
with the megatrends of environment, regulation
and demographics.
Our purpose
Optimal material solutions
for the benefit of society
Decision-making
The Board delegates day-to-day management
and decision-making to its senior management
team, but it maintains oversight of the Group’s
performance, and reserves to itself specific
matters for approval, including significant new
business initiatives. Then, by receiving regular
updates on business programmes and
objectives, the Board monitors that management
is acting in accordance with agreed strategy.
Processes are in place to ensure that the Board
receives all relevant information to enable it to
make well-judged decisions in support of the
Group’s long-term success.
Achieving long-term value for our
shareholders
The Board places considerable emphasis on
engaging with shareholders to understand their
interests and any concerns they may have. The
Executive Directors and their advisers manage and
develop the Group’s external relationships with
institutional investors and prospective investors.
They follow a comprehensive programme of
investor meetings and calls, particularly following
the release of annual and half-year results.
In 2019:
XX The Board closely monitored the previously
approved ongoing investments in the UK,
USA and Poland, which significantly enhance
capacity and support the business’ continued
growth in line with its strategic objectives.
Further details are provided in the CEO review
on page 15 and in the CFO review on page 31.
XX The Remuneration Committee, on behalf
of the Board, solicited feedback from the
Company’s major shareholders in advance of
making decisions relating to the three-yearly
review of the Directors’ Remuneration Policy
which will be proposed for approval at the
2020 AGM. A similar process was followed for
the approval of the Directors’ Remuneration
Policy in 2017, with 99.96% of the votes cast
in favour of the Policy at the 2017 AGM.
Further details may be found in the Directors’
Remuneration report on pages 58 to 72.
XX The Board met with the members of the
Executive team and reviewed, discussed
and approved the five-year strategic plan.
Investing in people
Our people strategy is centred on connecting
employees through a consistent focus on our
culture and values and by developing our
workforce for current and future roles. The
Board placed significant emphasis in 2019 on
increasing the level of engagement with our
diverse group of employees and enhanced
the employee voice in the boardroom through
the appointment of J Carling as Board
representative for workforce engagement.
The Board reviewed the results of the employee
engagement survey at its meeting in June. Good
progress was noted with the leadership culture
development programme, which has been
under way at executive level since 2017.
Health and safety is the Group’s top priority. The
Board has reviewed and amended the format
and focus of global health and safety data
provided to it on a quarterly basis, to maintain
relevance and provide leading and lagging data
points, and engaged directly with the Group’s
Head of Health, Safety and Environment.
The Sustainability report on pages 43 to 46
provides further details.
Our customers
The Board has a keen interest in customers’
feedback and encourages the business to
maintain multiple channels and methods of
communication to engender a useful dialogue,
including customer services contact, social
media, and in the future customer satisfaction
surveys. Representatives from all business
units attended Board meetings in 2019 to
provide insight on customer relationships
and market expectations.
Our supply chain
A strong supply chain is key to Zotefoams’
success, and the Group aims to build strong,
collaborative relationships with its suppliers,
informed by the external context. The Board
receives monthly management information
relating to inventory and sales, and regularly
discusses with management logistical issues
which may affect sales. In 2019, the Board
satisfied itself that suppliers’ due diligence
procedures, including financial checks
and modern slavery compliance,
were sufficiently robust.
Zotefoams plc
Annual Report 2019
47
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
a
i
l
S
t
a
t
e
m
e
n
t
s
Since 2003, Zotefoams has worked with a
social enterprise set up by the Royal British
Legion Industries. The company, called
“Britain’s Bravest Manufacturing Company”,
supplies 50,000 wooden pallets a year to
Zotefoams to ensure the safe distribution
worldwide of its products, helping to provide
crucial employment for over 100 military
veterans and supporting a valued supplier.
Zotefoams’ support was recognised by a
special award it received from the company
in November 2019.
The Board will keep engagement methods
under review to ensure it remains effective
and will continue to foster business
relationships with suppliers, customers
and others in its decision-making process
in order to achieve good quality outcomes.
The environment and our
communities
The debate on plastic prompted by inappropriate
applications and irresponsible disposal has
become polarised, with many beneficial uses of
plastic now tainted by association. Considering
the responsible usage of plastic, minimising
relevant usage (reduce), maximising service
life (reuse) and considering end of life issues
(recycle) has formed an inherent part of the
Board’s discussions on the future of the
business and the plastics industry in 2019.
Following the launch of ReZorce® recyclable
mono-material barrier packaging, the Board
approved the construction of a $1m pilot line
for MEL to develop customer applications
on a commercial scale.
With a UK business operating in close proximity
to a residential community in South London,
Zotefoams is conscious of its impact as a
neighbour. The development of Factory 4 on our
Croydon site, completed during 2019, has been
assessed using the BREEAM environmental
assessment methodology and has achieved
an Excellent rating. The design and build has
included monitoring the processes used during
construction as well as incorporating a wide
range of environmental features into the design
of the building. These include LED lighting and
controls, efficient space conditioning systems,
low water usage fittings with solenoid shut-off
valves, and in all cases we installed
energy-efficient equipment throughout the
development and sourced environmentally
responsible materials.
48
Board of Directors
The right skills to take us forward
Steve Good
Non-Executive Chair
David Stirling
Group CEO
Gary McGrath
Group CFO
Douglas Robertson
Senior Independent Director
Angela Bromfield
Non-Executive Director
Jonathan Carling
Non-Executive Director
Alison Fielding
Catherine Wall
Non-Executive Director
Non-Executive Director
N R
A
N
R
A
N
R
A
N
R
A
N
R
Appointed
October 2014 (Board) and April 2016
(Chairman)
Appointed
September 1997 (Finance Director)
and May 2000 (Group CEO)
Appointed
December 2015 (Executive Director)
and February 2016 (Group CFO)
Appointed
August 2017
Skills
Strong and relevant international
experience in the speciality
chemicals and plastics industries,
manufacturing, and diverse industrial
markets which enables him to
give both guidance and challenge
to management. He also has
significant plc 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.
He is a Chartered Accountant.
External appointments
Non-Executive Director, Chair
of the Remuneration Committee
and member of the Nomination
Committee, Elementis plc
Chair, Chair of the Nomination
Committee and member of
the Remuneration Committee
Devro plc
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
in Scotland, where he qualified as
a Chartered 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
in Finance from London
Business School.
Skills
Diverse international experience
across a range of manufacturing
businesses. He has a track record
of building world-class finance
organisations and delivering
commercial finance support and
effective control environments
to achieve 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
External appointments
None
Skills
Extensive multinational experience
in both 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
of the 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
R
A
N
Appointed
October 2014
Skills
Appointed
January 2018
Skills
Appointed
14 May 2020
Skills
Appointed
14 May 2020
Skills
Business leader and strategist with
a broad-based international career
Extensive engineering,
manufacturing, operational and
Experienced entrepreneur and
Non-Executive Director, with
business experience at board level,
significant expertise in strategy
Skilled independent Chair and
Non-Executive Director for private
equity owned, quoted and family
development and implementation for
companies. Sectors: industrials,
start-ups, AIM / main market listed
business services, consumer.
and not-for-profit organisations.
in manufacturing, distribution,
construction and infrastructure.
Angela has a strong track record
of leading companies to change
and grow with a particular focus
on customers and brand.
having led the development and
production of a number of luxury
cars and aero engines before
embarking on his current role
in the fusion energy industry.
Experience
Experience
Experience
Experience
Angela was Strategic Marketing &
Jonathan is the CEO of Tokamak
Communications Director at Morgan
Energy, a technology business
Alison is a Non-Executive Director
and Chair of the Remuneration
Catherine is a Non-Executive Director
and Chair of Audit at Mobeus Income
Sindall plc until 2013 and prior to that
developing a faster route to fusion
Committee at Nanoco plc and Maven
and Growth VCT plc. Catherine has
she held senior roles at the Tarmac
power. He was previously COO, Civil
Income and Growth VCT plc and a
30 years’ experience in the private
Group, Premier Farnell plc and ICI plc,
Large Engines at Rolls-Royce plc,
Non-Executive Director and Chair of
equity industry, primarily with
also serving as a Non-Executive
COO at Aston Martin Lagonda
Director for Mondi Paper & Packaging
Limited, and Chief Engineer with
Jaguar Land Rover Limited.
the Audit Committee at Getech plc.
Alison spent 13 years with IP Group
Equistone Partners Europe, where
she led numerous management
plc as Chief Technology Officer, Chief
buy-outs and later became UK
Jonathan has extensive engineering,
Operating Officer and latterly as
operational and business experience.
Director of Strategy and IP Impact,
Portfolio Partner supervising the
management of all the business’
He was also a Non-Executive Director
and brings extensive investment,
UK investments. Catherine also has
of Aga Rangemaster Group plc
strategy development and execution
extensive industrial markets and
between 2011 and 2015.
experience in fast-growing,
science-based businesses. Alison
has a PhD in Organic Chemistry
from Glasgow University.
Non-Executive Director experience,
working with and helping develop
many management teams to deliver
ambitious growth plans.
External appointments
Chief Executive Officer, Tokamak
Energy Ltd
External appointments
Non-Executive Director and Chair
of the Remuneration Committee
External appointments
Non-Executive Director and Chair of
Mobeus Income and Growth VCT plc
Limited. Angela has a degree in
Chemistry from the University
of Reading, and an MBA from
Warwick University.
External appointments
Non-Executive Director, Chair of
the Remuneration Committee and
Member of the Audit Committee,
Churchill China plc
Non-Executive Director and member
of the Audit and Remuneration
Committees, Harworth Group plc
Non-Executive Director and member
of the Nomination, Remuneration and
Audit Committees of Marshall plc
of Nanoco plc
Non-Executive Director and Chair
of the Remuneration Committee of
Maven Income and Growth VCT plc
Non-Executive Director and Chair of
the Audit Committee of Getech plc
Zotefoams plc Annual Report 2019
49
Chair of Committee
Member of the Audit Committee
Member of the Remuneration Committee
Member of the Nomination Committee
A
R
N
Steve Good
Non-Executive Chair
David Stirling
Group CEO
Gary McGrath
Group CFO
Douglas Robertson
Senior Independent Director
Angela Bromfield
Non-Executive Director
Jonathan Carling
Non-Executive Director
Alison Fielding
Non-Executive Director
Catherine Wall
Non-Executive Director
N R
Appointed
(Chairman)
Skills
October 2014 (Board) and April 2016
September 1997 (Finance Director)
December 2015 (Executive Director)
and May 2000 (Group CEO)
and February 2016 (Group CFO)
Appointed
Appointed
Skills
Skills
Strong and relevant international
experience in the speciality
Global leadership, strategy and
commercial experience, with a
Diverse international experience
across a range of manufacturing
Extensive multinational experience
in both public and private companies,
chemicals and plastics industries,
specific skillset in intellectual property,
businesses. He has a track record
strategic planning, acquisitions and
manufacturing, and diverse industrial
business development, finance and
of building world-class finance
divestments.
markets which enables him to
manufacturing. He has over 20 years’
organisations and delivering
A
N
R
Appointed
August 2017
Skills
give both guidance and challenge
plc board experience.
to management. He also has
significant plc board experience.
Experience
Experience
Steve was Chief Executive of Low &
David started his career with KPMG
Bonar plc between September 2009
in Scotland, where he qualified as
and September 2014. Prior to that
a Chartered Accountant. He has
role, he was Managing Director of its
worked for Price Waterhouse in the
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.
USA and Poland and with BICC plc.
David is a graduate of Glasgow
University and has an MBA from
Warwick University and an MSc
in Finance from London
Prior to joining Low & Bonar he spent
Business School.
commercial finance support and
effective control environments
to achieve 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
External appointments
External appointments
None
of Ireland.
None
10 years with BTP plc (now part of
Clariant) in a variety of leadership
positions managing international
speciality chemicals businesses.
He is a Chartered Accountant.
External appointments
Non-Executive Director, Chair
of the Remuneration Committee
and member of the Nomination
Committee, Elementis plc
Chair, Chair of the Nomination
Committee and member of
the Remuneration Committee
Devro plc
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
of the 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
R
A
N
Appointed
October 2014
A
N
R
A
N
R
A
N
R
Appointed
January 2018
Appointed
14 May 2020
Appointed
14 May 2020
Skills
Business leader and strategist with
a broad-based international career
in manufacturing, distribution,
construction and infrastructure.
Angela has a strong track record
of leading companies to change
and grow with a particular focus
on customers and brand.
Experience
Angela was Strategic Marketing &
Communications Director at Morgan
Sindall plc until 2013 and prior to that
she held senior roles at the Tarmac
Group, Premier Farnell plc and ICI plc,
also serving as a Non-Executive
Director for Mondi Paper & Packaging
Limited. Angela has a degree in
Chemistry from the University
of Reading, and an MBA from
Warwick University.
Skills
Extensive engineering,
manufacturing, operational and
business experience at board level,
having led the development and
production of a number of luxury
cars and aero engines before
embarking on his current role
in the fusion energy industry.
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.
Jonathan has 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
External appointments
Non-Executive Director, Chair of
the Remuneration Committee and
Member of the Audit Committee,
Churchill China plc
Non-Executive Director and member
of the Audit and Remuneration
Committees, Harworth Group plc
Non-Executive Director and member
of the Nomination, Remuneration and
Audit Committees of Marshall plc
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.
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 VCT plc. 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’
UK investments. 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
Non-Executive Director and Chair of
Mobeus Income and Growth VCT plc
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 PhD in Organic Chemistry
from Glasgow University.
External appointments
Non-Executive Director and Chair
of the Remuneration Committee
of Nanoco plc
Non-Executive Director and Chair
of the Remuneration Committee of
Maven Income and Growth VCT plc
Non-Executive Director and Chair of
the Audit Committee of Getech plc
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
50
50
Zotefoams plc
Annual Report 2019
Corporate governance
Committed to the highest standards
of corporate governance
Board leadership and effectiveness
Together with the support of the Company
Secretary, we conducted an internal review
of Board effectiveness. The review confirmed
that the Board represents a strong mix of skills,
experience and knowledge and that each
Board member continues to demonstrate this,
effectively contributing to Board matters.
Further information relating to the evaluation
process can be found on pages 51 to 52.
Board and Committee composition
The Board membership has remained
unchanged throughout 2019. As part of its
succession planning process, the Board has
carried out a thorough review of the balance
of skills, experience and knowledge present in
the Board’s membership. This process led to
the decision to seek two new Non-Executive
Directors with additional strategy, marketing
and leadership experience to support
the continued growth of the Group. The
recruitment process began in 2019 and was
finalised in 2020 with the appointment, with
effect from 14 May 2020, of two experienced
Non-Executive Directors, A Fielding and C Wall.
A Fielding will replace A Bromfield as Chair of
the Remuneration Committee following her
retirement from the Board on 13 May 2020.
The Board will continue to monitor the
structure, diversity and composition of the
Board to ensure that we have the appropriate
mix of skills and experience to best serve a
dynamic, international company.
Accountability
The Board acknowledges its responsibility to
give a fair, balanced and understandable view
of the business’ financial position and future
prospects. On behalf of the Board, at the
recommendation of the Audit Committee, I
confirm that we believe that the 2019 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
the opportunity to engage with our Directors.
We look forward to receiving shareholders’
feedback at the AGM on 8 June 2020.
S P Good
Chair
9 April 2020
Dear Shareholder
I am pleased to present the report on corporate
governance on behalf of the Board. At
Zotefoams, we recognise the importance of
being a well-managed business, not only in
the interests of our shareholders, but for other
stakeholders as well. The Board and I are
committed to the highest standards of
corporate governance.
Statement of compliance with
the 2018 UK Corporate Governance Code
Corporate governance plays an essential part
in the long-term success of the Group, and
the Board and I are committed to upholding
the highest standards of governance in our
worldwide operations. The Board welcomed the
introduction of the new Corporate Governance
Code (the “Code”) in 2018 and introduced new
practices, or adapted existing practices where
appropriate, to ensure compliance with the
Code’s obligations.
The Code can be downloaded here
https://bit.ly/2AKGqTm.
Throughout the financial year ended 31
December 2019, 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.
Explained further in this report and in the
Board Committee reports that follow on
pages 53 to 72.
The disclosures required by Disclosure and
Transparency Rules DTR 7.2.6R have been
provided in the Directors’ Report.
Purpose
The Board considered the Code’s
requirements during the year and a number
of discussions took place on the development
of the Company’s purpose before concluding
on ‘Optimal material solutions for the benefit
of society’.
Zotefoams plc Annual Report 2019 The Board and its Committees
51
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
of the Group. Management is delegated to
the Executive Directors and senior
executive management.
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
in meeting 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
on the Group’s website, www.zotefoams.com.
The Board has put in place a schedule of
matters that are reserved for its determination
or which need to be reported to the Board.
This schedule is reviewed regularly and was
last updated in November 2019.
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
of the 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
of Elementis plc and Chair of Devro plc. He
has recently stepped down from his role as
Non-Executive Director of Dialight plc.
The Group CEO is responsible for the running
of the Group’s business. He is supported by the
Group CFO and the senior management team.
Board balance and independence
The Board currently comprises two Executive
Directors, three independent Non-Executive
Directors and the Non-Executive Chair.
D Robertson was appointed Senior
Independent Director at the AGM held
on 16 May 2018. The Board considers
D Robertson 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
carry out a review of the Chair’s performance,
in line 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 55.
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
and the Group, no specific policy or quotas
have been 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
an appropriate mix of skills, 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
pages 40 to 42.
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. 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 is
evaluated by the Chair in consultation with
the Executive 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
the Group 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 2020. The 2019 Board
evaluation process was undertaken by means of
a qualitative questionnaire which was prepared
by the Chair and the Company Secretary,
circulated confidentially through an online portal.
The review covered all aspects of the Board’s
structure, composition and operation, Board
interactions (external and internal) and business
strategy, risks and priorities. In addition, the
survey included specific sections on the Audit,
Nomination and Remuneration Committees,
including how they were chaired and organised,
the quality of the Committee papers as well as
The Directors’ attendance at meetings of the Board and Committees is as follows:
Attendance at meeting
Eligible
Attended
Eligible
Attended
Eligible
Attended
Eligible
Attended
Board
Meetings
Audit Committee
Meetings
Remuneration Committee
Meetings
Nomination Committee
Meetings
A C Bromfield
J D Carling
S P Good
G C McGrath
D G Robertson
D B Stirling
7
7
7
7
7
7
6*
7
6*
7
7
7
4
4
–
–
4
–
4
4
–
–
4
–
9
9
9
–
9
–
9
9
9
–
9
–
3
3
3
–
3
–
2
3
3
–
3
–
* Failure to attend Board meetings by S P Good and A C Bromfield was due to ill health and an accident, respectively.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 52
The Board and its Committees
Continued
their effectiveness. After the Directors had each
completed a qualitative questionnaire, the Chair
held individual meetings with each Director and
then prepared a discussion document, which
reviewed progress against the actions identified
from the 2018 Board evaluation and set out
recommended actions for the following year.
These included enhancing engagement
opportunities with the business and its people,
and an increased focus on sustainability.
The outcome of the review highlighted that
the Board and its committees are effective
and well run, and that all Directors contribute
effectively and provide appropriate
commitment to their role.
The Board considers that it is functioning
well and that its current composition contains
an appropriate balance and diversity of views,
qualifications, skills, experience and personal
attributes necessary to carry out its duties
and responsibilities.
Re-election of Directors
The 2018 Code requires Directors to submit for
re-election annually at the AGM. The Company
implemented this practice in 2012 and will
continue to do so.
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 56 to 72.
Financial reporting
The Directors’ responsibilities for preparing
the financial statements are set out in the
Statement of Directors’ Responsibilities.
The report can be found on page 75.
Audit Committee and Auditor
The Audit Committee report provides details
of the role and activities of the Committee and
its relationship with the External Auditor.
The report can be found on pages 53 to 55.
Relations with shareholders
Meetings with institutional shareholders are
held twice a year following the announcement
of the Group’s interim and preliminary results,
usually in August and March respectively. Other
meetings are held at institutional shareholders’
request. 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
held following the interim and preliminary results
announcements. The Chair and the Senior
Independent Director, as well as the other
Non-Executive Directors, are available to
meet institutional shareholders if requested.
The Board considers the Annual Report,
the AGM and the corporate website
www.zotefoams.com to be the primary
vehicles for communication with private
investors. The Chairs of the Board
Committees will normally be available
at the AGM 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
of approval 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
for reviewing 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
of internal control and the principal risks facing
the Group, the Board had not identified, nor
been advised of, any failings or weaknesses
it determined to be significant. Therefore, a
confirmation in respect of necessary actions
has not 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
and monitoring business operations in order
to achieve Group objectives. Overall business
objectives are set by the Board and
communicated through the organisation.
Lines of responsibility and delegations of
authority are documented.
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
be associated with a variety of internal or
external sources.
The Group’s risk management framework
is detailed on page 33.
Information and communication
Annual and quarterly budgets are a key part
of the planning process and the Board reviews
performance against these. In addition, the
Board receives monthly management reports,
which highlight financial results, performance
against key performance indicators and
significant activities and matters of note
during the month under review.
Through these mechanisms, the performance
of the 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, reviews by management,
Internal Audit and the External Auditor. The
effectiveness of these control procedures
is tested by the Group’s Internal Controls
Committee (which is chaired by the Group
CEO), the Audit Committee and the Board.
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
timely completion.
Monitoring and corrective action
There are clear and consistent procedures
in place 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
Audit and management.
Non-financial controls are reviewed regularly by
executive management, who report any issues
and corrective actions taken.
Zotefoams plc Annual Report 2019 Audit Committee report
The risk profile of the business
continues to become more international
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. During the year, the Committee
monitored the effective implementation of the
actions arising from the 2018 internal audit of the
Group’s operations in China. In November 2019,
it engaged Grant Thornton LLP to perform a
review of the control environment of MuCell
Extrusion LLC. Their report was presented to the
Audit Committee in December 2019 and timely
management actions were discussed, approved
and are being monitored.
Capital projects
In light of the significant capital investments
being made by the Group in the UK, USA and
Poland, the Committee considered the key
judgements made by management and
reviewed each project’s progression against
budget and timetable. This will continue to be
an area of focus in 2020 until the final capital
project, the investment in Poland, is complete,
which is expected to be in H2 2020.
Risk appetite
Following the introduction of a new, robust,
risk management framework in 2018, the
governance structure has allowed the Board
to provide effective oversight through clear
discussions of the organisation’s objectives and
risk appetite. The Committee reviewed how the
Board’s risk appetite was communicated to the
organisation to ensure consistent understanding
and application of risk principles.
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 will be available at the AGM
to answer any questions about the work of
the Committee.
D G Robertson
Chair of the Audit Committee
9 April 2020
Dear Shareholder
I am pleased to present my report on the
activities of the Audit Committee in 2019.
As the Group pursues its growth strategy,
Zotefoams has continued to move into new
markets, backed by planned capital investment
in its manufacturing facilities and significant
product innovation. With a new plant under
construction in Poland, increased activity out of
China, and the establishment of a commercial
operation in India, the risk profile of the business
continues to become more international. This
brings increased challenges in terms of oversight
and management processes. In 2019, the
Committee focused its attention on global
controls, the importance of culture and the
processes for setting the Board’s risk appetite.
These are discussed in further detail below.
Global control
Global controls were a focus of the Committee
in 2019. As headcount and assets grow globally,
the Group recognises the importance of
ensuring an effective control environment across
the world, paying particular attention to its
smaller or more remote subsidiaries, some of
which are relatively new and still in the process of
embedding process and control environments.
In November 2019, an upgrade to the Microsoft
Dynamics AX ERP system, in place since 2014,
took the Group onto the latest “365”
environment, a single, global platform with
significantly improved capability to support
business growth, facilitate global expansion and
provide global oversight and effective control.
The Group’s online governance training platform
was relaunched in 2019, providing a centralised
management system to match governance
training requirements with those individuals
deemed to be exposed to a higher inherent
risk. Additionally, the Group adopted a rigorous
compliance checklist, encompassing risk,
finance, regulatory and commercial
considerations to support the Committee’s
decision-making around the creation of new
group entities. This was most recently applied
to the incorporation of the Group’s Indian
subsidiary, which will support the HPP Business
Unit, primarily in the sale, installation and support
of T-FIT® technical insulation products. The
Committee’s assessment is that the global
controls of the Group remain appropriate
and effective.
53
Summary of the role of the
Audit Committee
The main responsibilities of the
Audit Committee are:
XX 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;
XX to keep under review the adequacy and
effectiveness of the Group’s internal financial
controls and internal control and risk
management systems;
XX to review the Group’s systems and controls for
the prevention of bribery and receive reports
on non-compliance;
XX to monitor and review the effectiveness of the
Group’s internal audit function in the context of
the Group’s overall risk management system;
XX to review and approve the terms of
engagement, including any engagement letter
issued at the start of each external audit and
the scope of any audit before it begins;
XX to assess annually the qualification, skills
and resources, effectiveness, objectivity and
independence of the External Auditor;
XX 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, which takes into account any
relevant ethical guidance on the matter; and
XX to report to the Board on how it has
discharged its responsibilities, including
making recommendations, when necessary,
on any actions or improvements required.
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 November 2019.
Composition of the Audit Committee
In line with the Code, the Committee comprises
three independent Non-Executive Directors,
including the Chair.
The members of the Audit Committee during
2019 were D Robertson (Chair), A Bromfield
and J Carling.
Their biographies can be found on
pages 48 to 49.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 54
Audit Committee report
Continued
D Robertson is a Fellow of the Institute of
Chartered Accountants of England and Wales
and was Group Finance Director of SIG plc
until January 2017, having previously held that
position at both Umeco plc and Seton House
Group Limited. In the opinion of the Board,
D Robertson has significant, recent and relevant
financial experience to fulfil the requirements
of the role.
The Audit Committee’s membership, as a whole,
has competence relevant to the sector in which
the Group operates. All current members have
held, or currently hold, board-level positions in
manufacturing industries with international reach.
Meetings
The Audit Committee has a planned calendar,
linked to events in the Group’s financial calendar.
The Audit Committee met four times in 2019.
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
to raise 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.
During the year, on an informal basis, the
Audit Committee Chair liaises with senior
representatives of both the External and
Internal Auditors to discuss matters ahead
of the formal Committee meetings.
Overview of the actions taken by the
Audit Committee to discharge its duties
Since the beginning of 2019 the Audit
Committee has:
XX reviewed the financial statements in the 2018
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
2018 Annual Report;
XX reviewed the Interim Report issued in
August 2019 and received the report from
the External Auditor on their review of the
Interim Report;
XX considered the risks impacting the Group,
its customers and the economic environment,
relating to Brexit and the Group’s preparations
to mitigate those risks;
XX considered the inventory management and
working capital position of the Group;
XX 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;
XX considered the provisions of the 2018
UK Corporate Governance Code;
XX considered how the Board’s risk appetite
was communicated throughout the Group;
XX reviewed the Group’s policies on ethics,
anti-bribery, corruption and fraud;
XX considered the output from the Group-wide
process used to identify, evaluate and mitigate
high-level business risks;
XX 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;
XX agreed a programme of work for 2019 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;
XX reviewed 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;
XX reviewed the structure and skill base of
the Finance team;
XX reviewed and agreed the scope of the audit
work to be undertaken by the External
Auditor;
XX considered the views of both the External
and Internal Auditor on the effectiveness
of the Group’s internal financial controls;
XX agreed the fees to be paid to the External
Auditor for their audit and work on the Annual
Report and Interim Report;
XX 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; and
XX reviewed its own effectiveness by conducting
a confidential evaluation through an online
portal, the outcome of which was discussed
by the Committee. It was agreed the
Committee remained effective.
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 the work undertaken on
the audit or review.
An area of significant focus in Q1 2019 was the
£0.95m exceptional item declared in the 2018
full-year results in relation to Guaranteed
Minimum Pension, the result of guidance post
year end relating to a court ruling late in the year,
and the treatment was considered appropriate.
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 47, including the
section entitled ‘Risk management and principal
risks’ on pages 33 to 38. The Strategic Report
also describes 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 2019, the Group’s financing
arrangements amounted to £55.2m, comprising
a multi-currency term loan of £25m, a
multi-currency revolving credit facility of £25m,
and a remaining balance of £5.2m of a further
£7.5m sterling annually renewable term loan,
repayable in equal quarterly instalments.
The bank facility is for a five-year period
and expires in May 2023. At the date of the
statement of financial position, £17.7m was
undrawn on the facility.
The Committee has reviewed the Group’s cash
flow forecasts, taking into account strategic
initiatives and sensitivity analysis based on
reasonably possible changes in trading
performance. The COVID-19 outbreak has
created a further material uncertainty in these
forecasts. While it is difficult to accurately quantify
the effects on financial performance of COVID-19,
the Committee has reviewed the severe but
plausible downside scenario produced by
management and the mitigating actions identified.
Under this severe but plausible downside
scenario, while there is sufficient liquidity in the
business for at least 12 months from the date
of approval of these financial statements, there
is the potential for a breach of the leverage
covenant during the test period. This indicates
a material uncertainty which may cast significant
doubt over the Company’s and Group’s ability
to continue as a going concern without further
mitigating actions.
The Committee is aware that lenders to the
Group have expressed a strong commitment
to support the business through this difficult
period. Moreover, Government measures are
also being implemented to support businesses
economically through the downturn and this
reinforces the Committee’s view that the going
concern principle remains appropriate in
preparing the financial statements.
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
(as set out in the Competition and Markets
Authority’s Statutory Audit Services for Large
Companies Market Investigation (Mandatory
Use of 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 Ethical
Standard subject to the requirement to put
Zotefoams plc Annual Report 2019 55
Nomination Committee report
Focus on succession planning
and talent development
the audit to tender every ten years. A tender
process for the external audit for the Group
was last undertaken in 2012, following which
PricewaterhouseCoopers LLP (PwC) was
selected as the External Auditor, and the
Audit Committee expects to carry out a
tender process in 2022. The 2019 Audit was
PwC’s eighth annual audit for the Group.
A new Audit Partner, Simon Bailey, was
appointed by PwC in November 2019.
Effectiveness of the External Auditor
The Audit Committee assesses the
effectiveness of the external audit process in a
number of ways. At least annually, the External
Auditor presents a report, which includes an
assessment and confirmation of their
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 their fulfilment
of the agreed audit plan, the robustness
and perceptiveness 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 December 2016, the Audit Committee
approved a policy, which took effect from
1 January 2017, in relation to the provision of
non-audit services provided by the External
Auditor. The new policy requires that no
non-audit services will be provided by the
External Auditor without the prior approval
of the Audit Committee. Other than the
review of the Group’s Interim Report, the
External Auditor did not provide any
non-audit services in 2019.
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 2020 AGM
to re-appoint PwC 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 2019. 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 has not undertaken
any other work for the Group and, therefore,
the Audit Committee considers them to
be independent and objective in their
judgement. The External Auditor is
aware of the Internal Audit outsourcing
arrangements and fully supports them.
Key areas of focus
The Nomination Committee currently comprises
the Chair and the three 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
2019. The Committee is supported by the Company
Secretary in planning its activities, monitoring best
practice and meeting its Terms of Reference.
The main responsibilities of the Committee are to:
XX 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;
XX 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;
XX lead on the annual performance evaluation of the
Board and its Committees;
XX identify and manage any potential conflicts of
Directors’ interests;
XX review the external interests and time commitments
of the Directors to ensure that each has sufficient
time to effectively discharge his/her duties; and
XX manage succession planning for the Executive
Leadership team and Non-Executive Directors.
During 2019, the Committee:
XX reviewed the performance and ability of the Chair
to continue to contribute to the Board in the light
of the knowledge, skills and experience required,
and recommended to the Board that the Chair
be re-appointed for a three-year term subject
to annual re-election by shareholders at the
Company’s 2019 AGM;
XX continued to review succession and development
plans for the Executive Leadership team and wider
senior management team to ensure that a suitable
talent pool is in place and continues to be nurtured
to meet the Group’s strategic objectives;
XX 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;
XX planned, considered and recommended to the
Board that a search for two new Non-Executive
Directors should be initiated and subsequently
engaged with Warren Partners to conduct the
search;
XX considered and recommended to the Board the
election/re-election of each Director ahead of
their election/re-election by shareholders at the
Company’s 2019 AGM;
XX ensured that at least annually the Non-Executive
Directors met without the Executive Directors
present; and
XX reviewed and updated the Ethics policy, including
diversity requirements.
Dear Shareholder
I am pleased to present my report on the
activities of the Nomination Committee
in 2019.
In 2019, the Committee has focused its
attention on Zotefoams’ resourcing for future
growth and mitigating risk. Critical skill gaps
identified by executive management have
been addressed through a talent
management programme, aimed at
developing a diverse and sustainable talent
pipeline linked to the Company’s strategy.
The gender balance in senior management
levels has improved in 2019, with the
appointment of a female Company Secretary
raising the percentage of female senior
managers to 26% (2018: 21%).
Following the nominations of D Robertson
and J Carling in 2018, good progress has
been made with succession planning at
Board and Executive team levels. The Board,
having recognised the benefits of greater
diversity of gender, social and ethnic
backgrounds, cognitive and personal
strengths, commenced a recruitment
exercise in 2019 to engage two new
Non-Executive Directors with the support of
Warren Partners, a leading executive search
firm. The process concluded in 2020 with the
appointment, with effect from 14 May 2020,
of two experienced Non-Executive Directors,
A Fielding and C Wall. A Fielding will replace
A Bromfield as Chair of the Remuneration
Committee following her retirement from
the Board on 13 May 2020.
The Board’s annual evaluation process was
completed in Q4 2019 and demonstrated
further progress in the effectiveness of the
Board with some areas highlighted for
ongoing development in 2020.
Further details are provided in the Board
and its Committees section on pages 51 to 52.
The Committee will continue to focus
on talent development and succession
planning in 2020.
S P Good
Chair of the Nomination Committee
9 April 2020
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 56
Directors’ Remuneration Report
Remuneration practices and policies aimed
at entrenching a high-performance culture
with the wider interests of the Company’s
shareholders and other stakeholders.
Overall, the Committee is satisfied that the
current Remuneration Policy has been
successful in incentivising the Executive
Directors to focus on delivering growth in the
size of the business, demonstrated by a 41%
increase in the Group’s turnover, a 21% increase
in the Group’s underlying PBT and the market
capitalisation having grown by over 94% in the
three-year period ending 31 December 2019.
Taking the above into account, the Committee
felt that it would be appropriate to continue with
the same overall remuneration structure, which
consists of fixed pay, an annual bonus and a
separate long-term incentive plan and adheres
to latest best practice in areas such as time
horizons. Minor changes are proposed from a
structural perspective to align with the updated
corporate governance code, which include: (i)
making it clear that the pension arrangements
for new executive directors will be aligned with
the wider workforce (in line with the approach
taken for the CFO); (ii) updating our
post-cessation shareholding policy such
that 50% of shares up to the value of the
shareholding requirement must be held for
two years post-cessation of employment
(shares to the value of 100% of the shareholding
requirement must already be held for one year
post-cessation); and (iii) minor updates to the
malus and clawback triggers.
The key area of change going forward is the
approach to performance measurement for
the long-term incentive plan, which reflects the
current stage of maturity of the business and
feedback from shareholders. To that end, the
Committee intends to change the metrics
used for the purpose of the LTIP as follows:
XX Earnings per share (EPS) metric will be
maintained as the key metric for the plan;
however, the weighting will be reduced from
70% to 50% of the award. The Committee
continues to believe that EPS remains a key
measure to incentivise delivery of the Group’s
business strategy going forward and focus
management on the delivery of operational
performance.
XX Relative Total Shareholder Return (relative
to the FTSE SmallCap Index excluding
investment trusts) is maintained at 30%
of the award, to ensure that management
is appropriately aligned to the creation of
long-term value for our shareholders.
XX A new metric of return on capital employed
(ROCE) will be introduced. The weighting will
be 20%, to ensure that there is an appropriate
level of focus on efficient capital allocation. For
the purpose of the LTIP, the ROCE measure
used will be adjusted to exclude large asset
investments not yet commissioned.
During the course of late 2019 and early 2020,
the Committee consulted in detail with investors
on the proposed changes, who were supportive
of the proposed approach and, in particular, the
inclusion of a return-based metric in the LTIP.
I want to thank shareholders and the
proxy advisers for their time during the
consultation process.
Implementation of the Policy in 2020
As many investors will recall, the 2018
Remuneration Report set out a phased
approach to increasing the Executive Directors’
base salaries over a two-year period which was
supported by shareholders at the 2019 AGM.
Phase one of the salary increase was
implemented on 1 April 2019. In light of the
trading announcement of 3 October 2019, the
Committee has decided that it would not be
appropriate to go ahead with the second phase
of the proposed increase in 2020. It has been
decided instead that no increase should be
awarded in 2020 and that the second phase of
the proposed increase should be postponed to
2021, subject to continued good performance
of the Executive Directors and the Group.
The Committee believes that it is important to
postpone rather than cancel the second phase
of the increase. This will enable the Committee
to continue with the strategy, previously agreed
with shareholders, to remove the significant
discount to the market on base salaries for the
Executive Directors and avoid unnecessary risk
to the execution of our strategy and the delivery of
the major investment programmes which underpin
it. This is because, notwithstanding the near-term
headwinds in the Polyolefin Foams business and
the unprecedented uncertainty caused by the
COVID-19 pandemic, the Board remains confident
in the growth strategy and in the long-term
prospects of the business. We continue to deliver
strong growth in our HPP business, we have
improved our revenue base and opportunities for
future growth in MEL and all capacity expansion
investments to support our medium-term growth
ambitions have been completed as planned or
are on track to do so. Any increase in 2021 will
be subject to good performance.
Dear Shareholder
I am pleased to present the Remuneration
report for the year ended 31 December 2019.
Introduction
This is my final report as chair of the
Remuneration Committee. A Fielding will
be taking over as chair from 14 May 2020.
Zotefoams has a growth strategy focused on
generating sustainable long-term value. Despite
the difficult trading conditions in the Polyolefin
Foams business in the latter part of 2019, the
Group has remained focused on delivery of this
strategy and continued to demonstrate progress
in the High Performance Products (HPP) and
MuCell (MEL) business units. The strategic
capacity investments to support our long-term
growth expectations are on track. These assets
will provide a platform for significantly enhanced
returns over the medium term.
The HPP business has continued to achieve
strong levels of growth in sales (£26.48m – 20%
growth) and profits (£6.43m – 11% growth) in
2019. Given continued strong performance by
the HPP business unit, the Board remains of the
view that motivating and retaining our Executive
Directors is key to driving progress against our
long-term goals.
Remuneration Policy review
In line with the three-year cycle, the Committee
undertook a detailed review of the Group’s
approach to executive remuneration to ensure
that it continues to support the delivery of the
Group’s long-term strategic ambitions and
operational performance, and is aligned
Zotefoams plc Annual Report 2019 57
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.
Reflecting on the impact of COVID-19 in recent
weeks, and given the decision of the Board not
to recommend a final dividend for the year
ended 31 December 2019, the Committee has
decided the following:
At the request of the Executive Directors, the
proportion of the bonus that would normally
have been paid in cash (75% of the award),
will be 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.
The decision on the timing of the vesting of the
2017 LTIP award has been deferred for a period
of up to one year by the Committee.
Further information on performance against the
targets is provided on page 67.
Conclusion
The Committee and I believe that the proposed
approach to the Remuneration Policy going
forward and the proposed changes to the
LTIP metrics are consistent with our ethos of
rewarding strong long-term performance and
are in the best interests of our shareholders
and other key stakeholders.
The Committee and I hope you will be able
to support the resolutions in respect of the
Remuneration Policy and the annual
Remuneration report at the 2020 AGM.
A C Bromfield
Chair of the Remuneration Committee
9 April 2020
With regards to the annual incentive, the
structure will continue to operate in line with
previous years. To ensure that the bonus
framework continues to reward the key annual
strategic priorities for the Group, the Committee
has introduced a new cash metric into the
incentive plan (weighted at 15% and 20% for
the CEO and CFO respectively) and metrics
linked to Health, Safety and Environment and
Sustainability for the 2020 performance year.
Details on the wider metrics to be used
for the purpose of the annual bonus are
set out on page 64.
With regards to 2020 LTIP awards, in line with
our normal practice, the Committee’s intention
had been to publish details of the targets for
the 2020 LTIP award within the Directors’
Remuneration report. The Committee is,
however, mindful of the more challenging
business environment and recent share price
performance, both as a result of Group
performance and the impact of COVID-19.
The Committee has decided therefore to defer
a decision on granting of the 2020 LTIP until
around the time of the interim results expected
to be in August of this year. It is hoped that,
by then, the Committee will be able to better
understand the impact of COVID-19 on the
business and allow the Committee appropriate
time to make an informed decision on quantum
and the targets for awards. Prior to grant of the
2020 LTIP award, the Committee will consult
with shareholders as appropriate.
Group performance for 2019 and incentive
outcomes
In light of the performance delivered in 2019, the
Committee determined that 37.1% and 35.2%
of the maximum bonus should be paid to the
CEO and CFO respectively.
A detailed description of performance
against the targets is set out on pages 66 to 67.
With regard to longer-term performance, the
Company achieved EPS before exceptional
item of 14.9p in 2019, which represented a
compound growth rate of over 6% and relative
TSR performance above the upper quartile of
the FTSE SmallCap Index (excluding investment
trusts) over the three-year performance period.
In line with performance delivered, 46.99% of the
2017 LTIP award will vest, in equal tranches on
the third, fourth and fifth anniversaries of grant.
The Committee took into account the underlying
financial performance of the Group when
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 58
Directors’ Remuneration report
Directors’ Remuneration
Policy Report
Introduction
In developing the Remuneration Policy as set out
below, the Committee was guided by three key
principles:
Remuneration principles
Strategic and operational delivery
XX The Remuneration Policy should support the
delivery of the Group’s long-term strategic
ambitions and operational performance.
Competitive salaries
XX Base salaries should be set to be market
competitive, reflecting the size and complexity
of the business and the calibre of individuals
in each role.
Focus on long-term performance
XX A significant element of the total package
should be delivered through long-term
incentives, increasing the focus on long-term
performance and aligning management with
growth for the shareholders. Within this:
– Short-term incentives should continue
to focus management on the delivery
of annual results; and
– Long-term incentives should focus
management on both the delivery
of operational performance and the
growth potential of the Group.
Directors’ Remuneration Policy
The following sections sets out the
Remuneration Policy for our Executive
and Non-Executive Directors.
This Policy will be put to shareholders for
approval at the Annual General Meeting to be
held on 8 June 2020. The Policy is intended to
apply, subject to shareholder approval, from
the date of the Annual General Meeting.
As set out in the Committee Chair’s statement,
the previous Remuneration Policy was
considered to be fit for purpose and therefore no
material changes are proposed. In determining
the new Remuneration Policy, the Committee
followed a robust process which included
discussions on the content of the Policy at six
Remuneration Committee meetings. The
Committee considered input from management
(although Committee meetings where decisions
were made were not attended by management
to avoid conflicts of interest) and from our
independent advisers, as well as best practice
and shareholder guidance from major
shareholders and proxy advisory bodies.
Remuneration Policy for Executive
Directors
Base salary
Benefits
Purpose and link to strategy
Purpose and link to strategy
To provide market-competitive benefits for the
Executive Directors, to assist in carrying out their
duties effectively.
Maximum opportunity
There is no maximum or minimum level
of benefits as they are dependent on the
individual’s circumstances and the cost to
the Company.
Participation in all-employee share plans that the
Company establishes from time to time will be
on the same basis as all other UK employees.
Relocation/international assignment benefits.
The level of such benefits would be set at an
appropriate level taking into account the
circumstances of the individual and typical
market practice.
Operation
The Committee’s policy is to provide Executive
Directors with a market-competitive level of
benefits, taking into consideration benefits
offered to other senior managers within the
Group, the individual’s circumstances and
prevailing market practice.
XX Core benefits currently provided to Executive
Directors include, but are not limited to, a car
allowance, private medical insurance and
death in service cover.
XX Participation in all-employee share plans that
the Company establishes from time to time is
on the same terms as all other UK employees.
XX Relocation/international assignment benefits
where an Executive Director is required
to relocate to take up their position, may
be provided, including, but not limited to:
assistance for housing, school fees, travel
assistance, relocation costs, insurance cover
and assistance with tax advice.
Performance measures
N/A
To provide a core reward for undertaking the
role, positioned at a level needed to recruit and
retain Executive Directors of the calibre required
to develop and deliver the business strategy.
Maximum opportunity
Base salaries for Executive Directors are set at
an appropriate level to be market competitive,
reflecting the size and complexity of the
business, and to attract and incentivise the
calibre of individuals required of each role.
While there is no maximum opportunity for base
salary, any increases for Executive Directors will
be considered in the context of the typical level
of increases awarded to other employees in
the Company.
In specific circumstances, the Committee may
award increases above this level, including but
not limited to:
XX where the Committee has set the base salary
for a newly appointed Executive Director at
lower than the market level for such a role to
allow for the individual to progress into the
role; or
XX where, in the Committee’s opinion, there
has been a significant increase in the size
or scope of an Executive Director’s role
or responsibilities.
Operation
The Committee sets base salary taking into
consideration a range of factors, including:
XX the individual’s experience, performance
and skills;
XX the scope of the role;
XX pay and conditions elsewhere in the Group;
and
XX remuneration levels at companies of a
comparable size and complexity.
Base salary is normally reviewed annually, with
increases effective from 1 April, however the
Committee may review base salary more
frequently where it considers this appropriate.
Paid in cash.
Performance measures
N/A
Zotefoams plc Annual Report 2019 59
Pension
Annual Bonus
2017 Long-Term Incentive Plan (LTIP)
Purpose and link to strategy
Purpose and link to strategy
Purpose and link to strategy
To provide Executive Directors with competitive
post-retirement benefits and reward sustained
contribution.
Maximum opportunity
The maximum level of contribution in respect
of any financial year is as follows:
D B Stirling – 15.75% pensionable salary
G C McGrath – 5% pensionable salary
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 B Stirling) by 3% of
pensionable salary every five years. The
most recent increase was applicable from
1 January 2016.
The DB Scheme is closed to future accruals,
but legacy arrangements will continue to
be honoured.
Contributions for new Executive Directors will be
set in line with the rate received by the majority
of the workforce in the relevant jurisdiction.
Operation
Executive Directors are eligible to participate
in the DC Scheme or receive a cash allowance
in lieu of pension.
D B Stirling is also a deferred member of the
closed DB Scheme.
The policy for a new Executive Director is either
to participate in a DC Scheme or receive a cash
allowance in lieu of pension. There will be no
contractual commitment to increase the level
of contribution every five years.
The Committee would continue to honour any
legacy arrangements agreed with an individual
prior to them being promoted to an Executive
Director role.
Performance measures
N/A
Incentivise Executive Directors to achieve
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
Maximum opportunity in respect of any financial
year is 75% of base salary.
Operation
Awards are based on a balanced scorecard
combining Group financial and non-financial
performance targets.
Performance is normally assessed over one
financial year.
Performance targets are normally set annually by
the Remuneration Committee to ensure they are
appropriately stretching.
Bonus out-turns are determined by the
Committee, taking into consideration actual
performance against targets and the underlying
performance of the business.
The Committee has the discretion to adjust
bonus out-turns should the formulaic output
not produce a result, which in the view of the
Committee, fairly reflects overall performance.
25% of the earned bonus is normally deferred
under the Deferred Bonus Share Plan (DBSP).
Awards under the DBSP will vest after a period
set by the Committee, which will normally be
three years from the date of award.
Deferred awards are normally granted in the
form of conditional awards of shares, although
awards may take other forms if it is considered
appropriate.
Deferred awards will accrue dividend equivalents
during the deferral period. These will normally
be paid in shares on a reinvested basis.
Deferred awards are subject to Malus and
Clawback provisions (see page 60).
The Committee may adjust and amend awards
in accordance with the DBSP Rules.
Performance measures
Performance is measured based on an
appropriate mix of financial, strategic and
personal performance measures.
At least 75% of the bonus opportunity will be
based on financial performance targets. The
split between financial, strategic and personal
performance measures will be kept under
review and set annually by the Committee.
Normally no more than 20% of the bonus is
payable at the trigger point, dependent on the
stretch in the targets, with a graduated scale
operating thereafter through to the maximum
bonus being payable for outperforming the
Group’s targets for the year.
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
The normal maximum award permitted in respect
of any financial year is 150% of base salary.
Operation
Awards are subject to a performance period
of normally no less than three years with a
subsequent holding period of up to two years.
Performance targets are normally set annually by
the Remuneration Committee to ensure they are
appropriately stretching.
The Committee has the discretion to adjust the final
level of vesting of awards if it does not consider that
it reflects the underlying performance of the Group.
LTIP awards are normally in the form of
conditional awards of shares, although the
Remuneration Committee may decide to make
awards in other forms, such as nil-cost options,
if considered appropriate.
Dividend equivalent payments accrue during the
performance period and holding period. These will
normally be paid in shares on a reinvested basis.
LTIP awards are subject to Malus and Clawback
provisions (see page 60).
The Committee may adjust and amend awards
in accordance with the 2017 LTIP Rules.
Performance measures
Awards vest based on an appropriate balance
of earnings, capital efficiency and shareholder
return measures.
The current intention is that LTIP awards for
2020 will be based on:
XX Earnings per share (50%);
XX Relative Total Shareholder Return measured
against the FTSE SmallCap Index (excluding
investment trusts) (30%); and
XX Adjusted Return on Capital Employed (20%).
20% of the award vests for performance at
the trigger point, increasing to 100% of the
maximum for maximum performance.
The performance measures selected by the
Committee may change from time to time in
certain circumstances, for example, to reflect
any change in the Group’s strategy. If the
Committee were to introduce a new
performance measure, it would consult with
the Company’s largest shareholders in advance,
as appropriate.
The performance measures will be disclosed
in the Directors’ Remuneration report for
the relevant year.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 60
Directors’ Remuneration report
Continued
Shareholding guidelines
To align the interests of the Executive Directors
with shareholders, the Company operates a
shareholding guideline for Executive Directors
of 200% of salary. A newly appointed Executive
Director will have five years from the date of his
or her appointment to the Board to build up
such a holding.
Upon cessation of employment, Executive
Directors are expected to remain aligned with
the interests of shareholders for an extended
period after leaving the Company. Details of
the application of this policy will be disclosed
in the Directors’ Remuneration report for the
relevant year.
Notes to the policy table
The deferred share element of the Annual Bonus
Plan and the 2017 Long-Term Incentive Plan shall
be operated in accordance with the rules of the
respective plan.
The Committee reserves the right to make any
remuneration payments and/or payments for
loss of office (including exercising any discretion
available to it in connection with such payments),
notwithstanding that they are not in line with the
policy set out above, where the terms of the
payment were agreed: (i) before the policy set
out above and any previous policy came into
effect; or (ii) at a time when a previous policy,
approved by shareholders, was in place,
provided the payment is in line with the terms
of that policy; or (iii) at a time when the relevant
individual was not a director of the Company
and, in the opinion of the Committee, the
payment was not in consideration for the
individual becoming a director of the Company.
For these purposes, “payments” includes (but is
not limited to) the Committee satisfying awards
of variable remuneration and, in relation to an
award over shares (including legacy awards
under the 2008 Approved Share Option Plan
(“CSOP”)) the terms of the payment being
“agreed” at the time the award is granted.
Changes to the Policy
The key changes that have been made to this
Policy compared with the last Policy approved
by shareholders are:
XX the ability to include a measure related to
capital efficiency in the long-term incentive
plan (return on capital employed will determine
vesting of 20% of the 2020 award under the
2017 Long Term Incentive Plan);
XX updates to reflect the new UK Corporate
Governance Code as well as best
practice; and
XX minor amendments to clarify the Committee’s
intended approach and ensure that the
Committee has an appropriate level of
flexibility to implement the Policy in the
most appropriate manner each year.
Committee discretion in relation to future
operation of the Remuneration Policy
For share awards, in the event of a variation
of the Company’s share capital or a demerger,
delisting, special dividend, rights issue or any
other event that may affect the Company’s share
price, the number of shares subject to an award
and/or any exercise price applicable to the award
and/or any performance condition attached to
the award may be adjusted.
The Committee may amend any performance
conditions applicable to CSOP or LTIP awards if
any event occurs which causes the Committee
to consider an amended performance condition
would be more appropriate and not materially
less difficult to satisfy.
The Committee may make minor amendments
to the Policy set out above for, for example,
regulatory, exchange control, tax or
administrative purposes or to take account
of a change in legislation, without obtaining
shareholder approval for that particular
amendment.
Performance measures and approach
to target setting
Annual bonus
Performance measures for the short-term
incentive arrangements are selected annually by
the Committee to align with Zotefoams’ annual
business strategy.
Performance targets for the financial element are
set to be appropriately stretching, by reference
to the Group’s internal business plan, and to
align with delivery of returns to shareholders.
Performance targets for the strategic element
are determined annually by the Committee and
set to incentivise the delivery of key strategic
priorities over the course of the year.
Long-Term Incentive Plan
Performance measures for the long-term
incentive arrangements are selected annually
by the Committee to align with Zotefoams’
long-term business strategy and to reflect the
Group’s growth ambitions, desire to efficiently
manage capital employed and returns to the
shareholders.
The performance targets for the Long-Term
Incentive Plan are reviewed annually and set
taking into account market conditions, external
market forecasts, internal business forecasts
and market practice.
Malus/Clawback arrangements for the
DBSP and LTIP
The Remuneration Committee may, in its
absolute discretion, determine at any time prior
to the fifth anniversary of the date of grant of
an award under the DBSP or LTIP to:
a) reduce the number of shares to which an
award relates;
b) cancel an award;
c) impose further conditions on an award;
d) require a cash repayment; or
e) require a transfer of shares delivered under
incentive plans in circumstances where the
Remuneration Committee considers such
action is appropriate.
Such circumstances include, but are not
limited to:
a) a material misstatement of the Group’s (or any
subsidiaries) audited financial results
b) corporate failure (2020 awards onwards);
c) deliberately misleading management, the
market and/or shareholders regarding financial
performance;
d) overpayments due to material abnormal
write-offs;
e) payments based on erroneous or misleading
data (2020 awards onwards);
f) reputational damage resulting from
misconduct; and
g) serious misconduct or conduct which causes
significant financial loss.
Remuneration structure for employees
below the Board
The remuneration for the senior management
immediately below the Board is a similar
structure to the structure used for the Executive
Directors. Middle management participates, at
the discretion of the Remuneration Committee,
in the 2018 Approved Share Option Plan and the
CSOP, both subject to the Plans’ rules. There is
a general staff discretionary bonus scheme
which is based on the performance of the Group
and other factors. Other arrangements are also
in place for specific areas of the Group.
Illustration of application of
remuneration policy
The following charts below show how the
composition of each of the Executive Directors’
remuneration packages varies at different levels
of performance achievement. The assumptions
used in the charts above are as follows:
Minimum
performance
Mid-point
performance
Maximum
performance
Maximum
performance + 50%
share price growth
(50% of maximum)
(75% of salary)
(75% of salary)
Fixed pay1
Annual
bonus
Long-Term
Incentive
1 Comprises base salary for 2020, benefits (as per the 2019 single figure) and pension contribution/cash in lieu of pension for 2020.
(50% of maximum)
(150% of salary)
(150% of salary x 1.5)
Zotefoams plc Annual Report 2019
61
The charts below do not take into account share price appreciation, unless otherwise stated, or dividends.
Group CEO
£1,400,000
£1,200,000
£1,000,000
£800,000
£600,000
£400,000
£364,000
£200,000
100%
£0
£1,045,000
43%
22%
35%
£1,273,000
18%
36%
18%
29%
£705,000
32%
16%
52%
Group CFO
£1,000,000
£800,000
£600,000
£400,000
£200,000
£0
£673,000
45%
22%
33%
£823,000
18%
37%
45%
34%
£448,000
34%
17%
50%
£222,000
100%
Minimum
performance
Mid-point
performance
Maximum
performance
Maximum
performance
+50% share price
growth
Minimum
performance
Mid-point
performance
Maximum
performance
Maximum
performance
+50% share price
growth
Fixed pay
Bonus
LTIP
Share price growth
Fixed pay
Bonus
LTIP
Share price growth
Remuneration Policy on recruitment
Area
Principles
Policy and operation
The Remuneration Committee takes into consideration all relevant factors, including local market practice in the
individual’s home country, appropriate market data, internal relativities, the current remuneration arrangements
applicable for other Executive Directors on the Board and the Committee’s desire to recruit an Executive Director of
the required calibre to develop and deliver the business strategy while at the same time ensuring that remuneration
arrangements offered are in the best interests of both Zotefoams and its shareholders.
The Committee endeavours to align the remuneration arrangements of new recruits with the Policy outlined on
the previous pages.
In the event that an internal candidate was promoted to the Board, legacy terms and conditions would normally
be honoured.
The Committee will make every effort to explain the rationale for the remuneration arrangements for a new recruit
in the Remuneration report following the recruitment of a new Director.
Base salary
Set at a level to recruit the candidate with the required calibre, skills and experience to deliver the Group’s strategy.
Benefits and pension
Incentive awards
Buy-outs
To be provided in line with normal policy.
In the event that an Executive Director is required to re-locate to undertake the role, the Committee may provide
additional benefits to reflect the relevant circumstances (on a one-off or ongoing basis).
When appointing a new Executive Director, existing incentive arrangements will be used where possible.
The Committee has the discretion to include any other remuneration component or award which it feels is
appropriate, taking into account the specific commercial circumstances, and subject to the limit on variable
remuneration set out below. The key terms and rationale for any such component would be appropriately disclosed.
The maximum level of annual variable pay and long-term incentive awards which may be awarded to a new Executive
Director in respect of their recruitment, excluding any buy-out awards, is 225% of salary. Such variable remuneration
may be made in the form of cash or shares, subject to performance conditions as selected by the Committee, and
may vest immediately or at a future point in time.
To facilitate recruitment, the Remuneration Committee may ‘buy out’ any remuneration arrangements forfeited by the
new Executive Director on leaving his or her former employment. In doing so, the Committee will consider all relevant
factors including the form of the awards (i.e. cash or equity), performance conditions attached to the awards, the
likelihood of such conditions being met and the timeframe of the awards.
Typically, any buy-outs will be made on a like-for-like basis.
On recruitment, the Committee retains discretion to grant awards under Listing Rule 9.4.2 which allows for the
grant of awards specifically to facilitate, in unusual circumstances, the recruitment of an Executive Director.
Non-Executive Directors
The Remuneration Committee will normally align the remuneration arrangements for new Non-Executive Directors
with those outlined in the Policy table on page 63.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 62
Directors’ Remuneration report
Continued
Service contracts and termination policy
When determining leaving arrangements for an Executive Director the Committee takes into account any pre-established contractual agreements
including the provisions of any incentive plans, pension entitlements, typical market practice, the performance and conduct of the individual and the
commercial justification for any payments.
The following summarises our policy in relation to Executive Director service contracts and payments in the event of loss of office:
Area
Notice period
Policy and operation
XX D B Stirling, Group CEO – 12 months’ notice by either party.
XX G C McGrath, Group CFO –12 months’ notice by either party.
XX For new recruits, the Committee’s policy is that Executive Director contracts will normally provide up to 12 months’
notice by the Company and up to 12 months’ notice by the Executive Director.
Contract commencement
date
XX D B Stirling, Group CEO – 1 September 1997 (contract last updated 13 May 2019).
XX G C McGrath, Group CFO – 1 December 2015 (contract updated 15 April 2019).
Expiry date
XX The contracts for the Executive Directors are rolling service contracts with no expiry date.
Termination payments
XX If the Company terminates an Executive Director’s contract without full notice then the Executive Director has the
Other information
right to a termination payment to reflect the unexpired term of the notice.
XX A payment in lieu of notice can be made of no more than one year’s base salary.
XX Our policy for new appointments is that termination payments in lieu of notice will be based on base salary.
XX Termination payments may be subject to mitigation and may be paid in instalments.
XX Rights to annual bonus, DBSP awards, LTIP awards and CSOP awards are governed by the respective plan rules.
XX The Committee reserves the right to make any other payments in connection with a Director’s cessation of office/
employment where the payments are made in good faith in the discharge of an existing legal obligation (or by way
of damages for breach of such an obligation) or by way of settlement of any claim arising in connection with the
cessation of the Director’s office/employment. Any such payments may include, but are not limited to, any fees
for outplacement assistance and/or the Director’s legal and/or professional advice fees in connection with his
cessation of office/employment.
Annual bonus
XX Under the Annual Bonus Plan a “good leaver” is someone that leaves employment because of death, disability,
ill health, injury, sale or transfer out of the Group of the participant’s employing company or business, redundancy
or any other circumstance at the discretion of the Remuneration Committee.
XX A “bad leaver” is someone that leaves employment for any other reason.
XX For “good leavers”, rights to any outstanding annual bonus in the year of cessation will be determined at the discretion
of the Remuneration Committee, normally after the end of the financial year, and taking into account the level of
performance achieved during the performance period. Any payments will be made in such proportions of cash
and shares as the Committee considers appropriate. Outstanding DBSP awards will normally vest at the end of the
normal vesting period, although the Remuneration Committee may, in its discretion, allow the award to vest earlier.
XX For “bad leavers” rights to annual bonus and unvested DBSP awards will normally be forfeited.
2017 Long-Term Incentive Plan
Leavers during the performance period
XX Under the 2017 Long-Term Incentive Plan, a “good leaver” is someone that leaves employment because of death,
disability, injury, ill health, redundancy, retirement, their employing company or business being sold/transferred out
of the Group, or any other circumstances at the discretion of the Remuneration Committee.
XX A “bad leaver” is someone that leaves employment for any other reason.
XX For “good leavers”, rights to any awards under this plan will normally, unless the Remuneration Committee
determines otherwise, be pro-rated by reference to the proportion of the performance period that has elapsed on
cessation and will vest, subject to performance, at the normal time.
XX The Remuneration Committee retains the discretion to accelerate vesting in certain circumstances, e.g. death.
XX For “bad leavers”, rights to unvested awards under this plan will normally be forfeited.
Leavers during the holding period
XX Where a participant who is subject to a further holding period in relation to his / her award ceases to be employed
by the Group, the award will normally be delivered at the end of the holding period or the expiry of such shorter
period as the Committee may determine. In cases where the individual leaves employment and where the
Company is entitled to dismiss the individual without notice, the award will lapse on cessation of employment.
2008 Approved Share Option Plan (CSOP)
XX Under the 2008 Approved Share Option Plan a “good leaver” is someone that leaves employment because of
death, disability, injury, redundancy, retirement, their employing company or business being sold or transferred out
of the Group or any other circumstance at the discretion of the Committee.
XX A “bad leaver” is someone that leaves employment for any other reason.
XX For “good leavers”, rights to any awards under this plan will normally be pro-rated from the start of the performance
period to cessation and will vest based on performance to the date of cessation. The Remuneration Committee
has the discretion to adjust the final level of vesting of these awards.
XX For “bad leavers”, rights to unvested awards under this plan will normally be forfeited.
XX Mr McGrath currently has 10,344 awards exercisable from 5 April 2019 subject to the above provisions.
Zotefoams plc Annual Report 2019 63
Area
Policy and operation
Change of control
The Committee would determine the treatment of any annual bonus award at the time taking into account such
circumstances as it considers appropriate.
In the event the Company is taken over, CSOP, DBSP and LTIP awards vest early. The extent to which LTIP
awards granted after the date of the 2017 AGM vest will be determined by the Committee, taking into account
the performance conditions and, unless the Committee determines otherwise, the proportion of the performance
period that has elapsed. The extent to which any LTIP awards granted prior to the 2017 AGM vest will be
determined by the Committee.
If there is a demerger, special dividend, delisting or any other event that may materially affect the Company’s share
price, the Committee may allow awards to vest on the same basis as for a takeover.
Awards may be exchanged for new awards if the Committee considers this appropriate.
Copies of the Executive Directors’ service contracts and deeds of indemnity in favour of the Directors are available for inspection at the Company’s
registered office.
External appointments
Executive Directors may be invited to become Non-Executive Directors of other companies. These appointments provide an opportunity to gain broader
experience outside Zotefoams and therefore benefit the Group. Providing that appointments are not likely to lead to a conflict of interest and the Board
agrees, Executive Directors may accept non-executive appointments and retain the fees received.
Remuneration Policy for Non-Executive Directors
Approach to fees
Operation
Other items
Fees for the Company Chair and Non-Executive
Directors (NEDs) are set at an appropriate level
to reflect:
XX the time commitment required to fulfil the role;
XX the responsibilities and duties of the positions;
and
XX typical practice in other companies.
Fees are reviewed at appropriate intervals by
the Board.
Base fees are subject to the aggregate limit in
the Company’s Articles of Association for fees
paid to NEDs.
Our NED fee policy is to pay:
XX a base fee for membership of the Board; and
XX an additional fee for being Chair of a Committee
and/or Senior Independent Director to
reflect the additional responsibilities and
time commitments of the role.
The Company Chair receives an inclusive fee
for the role.
Additional fees for membership of a committee,
chairing or membership of subsidiary boards
for a time commitment significantly more than
anticipated at the start of the year, or other fixed
fees, may be introduced if considered appropriate.
Fees can be paid in cash and/or shares as
appropriate.
The Company Chair and NEDs are not eligible
to participate in the bonus or any long-term
incentive arrangements.
NEDs do not currently receive any taxable
benefits.
Benefits (such as travel and accommodation
allowances to allow the NEDs to fulfil their duties
along with any tax liability arising on such
allowances) may be provided in the future if
the Board considers this appropriate.
Non-Executive Directors and the Company Chair have appointment letters setting out their duties and the time commitment expected. Appointment
letters are currently for terms of three years. Appointments may be terminated by either party with six months’ written notice.
Considering employment considerations elsewhere in the Group
Budgeted salary increases for the wider employee group are taken into consideration when determining increases for the Executive Directors.
The Remuneration Committee does not consult with employees when formulating the Remuneration Policy for Executive Directors.
Considering shareholder views
The Remuneration Committee is committed to engaging in an open dialogue with the Company’s shareholders and will seek views and opinions on
significant matters relating to the remuneration of the Executive Directors as appropriate. As part of formulating the Remuneration Policy, a consultation
was undertaken with the Company’s main shareholders regarding the proposed changes to the Policy. The feedback from shareholders was taken into
account by the Committee and is reflected in the final proposal. The Committee would like to thank shareholders for the time they provided and their
input in to the consultation.
The Company Chair and the Chair of the Remuneration Committee are available (requests should be made to the Company Secretary), should a
shareholder wish to raise a matter on remuneration.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 64
Directors’ Remuneration report
Continued
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
Act 2006 and Schedule 8 to the Large and Medium sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
Implementation of the Directors’ Remuneration Policy in 2020
Element and purpose / link to
strategy
Salary
Positioned at a level needed
to recruit and retain Executive
Directors of the calibre required
to develop and deliver the
business strategy.
Benefits
Provide market-competitive
benefits for the Executive
Directors, to assist in carrying
out their duties effectively.
Retirement benefits
Provide competitive
post-retirement benefits and
reward sustained contribution.
Annual bonus
Incentivise Executive Directors
to achieve 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.
Implementation for 2020
Base salaries will remain unchanged for 2020:
D B Stirling – £303,000
G C McGrath – £200,500
Benefits to be provided in line with approved policy.
In line with policy:
D B Stirling – 15.75% of salary
G C McGrath – 5% of salary
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 2020, the bonus will be assessed against the following measures for both Executive Directors:
Measure
Profit before tax
Free cashflow delivery1
Strategic financial2
Safety
Sustainability
Individual objectives3
1 CEO: 15%. CFO: 20%
2 CEO: 10%. CFO: 0%
3 CEO: 5%. CFO: 10%
Weighting
60%
15%-20%
0%-10%
5%
5%
5%-10%
The underlying performance targets for these measures have not been disclosed in advance as they are considered
to be commercially sensitive. Underlying targets will be provided, where appropriate, in next year’s Directors’
Remuneration report.
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:
XX EPS growth (50%);
XX Relative TSR measured against the FTSE SmallCap Index (excluding investment trusts) (30%); and
XX Return on Capital Employed (20%).
As set out in the Committee Chair’s cover letter, the Committee is mindful of the more challenging business
environment and recent share price performance both as a result of Group performance and the impact of COVID-19.
The Committee has decided therefore to defer a decision on granting of the 2020 LTIP until around the time of the
interim results, expected to be in August of this year. It is hoped that, by then, the Committee will be able to better
understand the impact of COVID-19 on the business and allow the Committee appropriate time to make an informed
decision on quantum and the targets for awards. Prior to grant of the 2020 LTIP award, the Committee will consult
with shareholders as appropriate.
The Non-Executive Directors (including the Company Chair) would normally receive a fee increase of 2.3%, effective
1 April 2020, which is line with the general salary increase that was given to the Company’s staff in the UK in 2019.
In light of the impact of COVID-19, fee increases for the Non-Executive Directors (including the Company Chair)
have been suspended.
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.
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.
Non-Executive Director fees
Shareholding requirement
and post-cessation
shareholding policy
Aligns the interests of Executive
Directors and shareholders.
Zotefoams plc Annual Report 2019 65
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
Simplicity
Risk
Predictability
Proportionality
Alignment with culture
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.
Remuneration arrangements are simple, comprising the following key elements:
XX Fixed pay: comprises base salary, benefits and pension.
XX Annual bonus: bonus which incentivises the delivery of financial, non-financial and personal performance objectives.
XX LTIP: which incentivises financial performance over a three-year period, promoting long-term sustainable value
creation for shareholders. Awards are subject to a two-year holding period post vesting.
Performance targets for incentive plans are designed to reward out-performance, 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
that they are appropriate in the context of the overall performance of the Group.
The Remuneration scenario charts, set out on page 61, provide estimates on the potential future remuneration
opportunity for Executive Directors in a range of scenarios, including below threshold, target and maximum
performance (including share price appreciation).
Incentives are directly aligned to the Group’s strategic objectives, with performance targets calibrated to reward
out-performance both over the short and long term.
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 2019 and 2018 financial years.
Executive Directors
D B Stirling
2019
2018
G C McGrath
2019
2018
Salary
(£)
Benefits
(£)
Bonus1
(£)
LTIP2
(£)
CSOP
(£)
Pension
(£)
Total
fixed pay
(£)
Total
variable pay
(£)
Total
(£)
290,500
249,375
13,057
12,926
84,272
66,602
204,128
427,670
193,000
167,064
11,574
11,441
53,007
62,147
133,946
277,965
nil
nil
nil
29,015
45,516
38,332
349,073
288,400
300,633
494,272
637,473
794,905
20,632
17,859
225,206
186,953
196,364
369,127
412,159
565,491
1 As set out in the letter from the Committee Chair, reflecting on the impact of COVID-19 in recent weeks, none of the 2019 bonus will be 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) will be 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.
2 The performance period for the 2017 LTIP award (granted in June 2017) ended on 31 December 2019. Details on out-turns against the performance targets are set out on page 67. As set out in the
letter from the Committee Chair, reflecting on the impact of COVID-19 in recent weeks, while no change is proposed to the formulaic outcome at this time, the final decision on the timing of vesting of
the 2017 award has been deferred for a period of up to one year. As the awards would not normally have been due to vest until June 2020, and are 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 award made in April 2016 vested on 5 April 2019 and the 2016 LTIP value for the Executive Directors has been recalculated using the actual market price achieved for the shares when they
were delivered (£5.74) on 16 April 2019 (previous value used £5.705 which was the three-month average to 31 December 2018).
Non-Executive Directors1
A C Bromfield
J D Carling
S P Good
D G Robertson
R J Clowes2
Fees paid in respect of 2019 (£)
Fees paid in respect of 2018 (£)
41,707
36,494
83,415
41,707
Nil
40,750
35,693
81,500
40,750
15,175
1 Non-Executive Directors who also chair a Board Committee receive an additional fee.
2 R J Clowes retired from the Board on 16 May 2018.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
66
Directors’ Remuneration report
Continued
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. Where 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 C 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 was sacrificed. At 31 December 2019, the base salary (before
salary sacrifice) for G C McGrath was £200,500 p.a. (£170,500 p.a. as at 31 December 2018).
D B Stirling receives a cash contribution in lieu of pension contributions. At 31 December 2019, the base salary for D B Stirling was £303,000 p.a.
(£253,000 p.a. as at 31 December 2018).
Benefits
Benefits include a company car allowance, private medical insurance and the value of the Matching Shares (at dates when awarded) acquired during the
year under the Share Incentive Plan (SIP).
Annual bonus 2019
The targets for the annual bonus for 2019 for D B Stirling and G C McGrath are as set out in the below table:
Weighting (% max)
Targets
Pay-out
Measure
D B Stirling
G C McGrath
Trigger point
Maximum
Performance
achieved
D B Stirling
G C McGrath
Profit before tax and
exceptional items1
Working capital
Development of
MEL business
Individual objectives
Total
60%
15%
5%
20%
100%
60%
15%
5%
20%
100%
£12.2m
£13.0m
£9.1m
See below
See below
See below
See below
See below
See below
See below
See below
See below
n/a
n/a
n/a
Nil
15%
5%
17.1%
37.1%
Nil
15%
5%
15.25%
35.25%
1 The Group uses forward exchange contracts to hedge its foreign currency transaction risk. In 2019, 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 at budgeted exchange rates for foreign currency translations. The reported PBT, before
exceptional item, was £9.1m.
The below table sets out the targets and performance for the Executive Directors for the following measures: Working capital; development of the MuCell
Extrusion, LLC (MEL) business; Group refinancing; and personal objectives.
Achieved in full or predominantly achieved
Partially achieved
Not achieved
Strategic financial metrics – D B Stirling & G C McGrath
Measure
Working capital1
Objective
Performance
Scoring
Reduce required inventory levels at the Croydon
facility by £1m using a dynamic metric based on
anticipated future global sales
Inventory at Croydon facility on 31 December
was £12.65m, which was £2.5m below target
inventory based on our risk optimised inventory
levels by business stream vs expected sales
activity in 2020
Development of MEL
Achieve annual revenues of at least £3m
Revenue of £3.03m
Personal objectives – D B Stirling
Measure
Objective
Individual objectives
Health and safety (5%)
Achieve 20% reduction in Group reportable
incidents (Riddor UK and equivalents for
non-UK locations)
Strategic development of T-FIT® insulation
products (5%)
Deliver 25% growth in sales of T-FIT and
successfully launch T-FIT Process and
T-FIT Hygiene grades
Capital projects (5%)
Ensure all major capital programmes
delivered on time and on budget
Cultural engagement (5%)
Deliver detailed programme to engage
staff and grow capability
Performance
75% reduction achieved
Scoring
31% growth in T-FIT® sales but sub-brands
did not meet specific targets
All programmes in UK, USA and Poland
delivered on time and on budget
Detailed programme implemented in
recruitment, induction and staff development
but not completely embedded into
performance management
Zotefoams plc Annual Report 2019 67
Personal objectives – G C McGrath
Measure
Objective
Individual objectives
Health and safety (5%)
Achieve 20% reduction in Group reportable
incidents (Riddor UK and equivalents for
non-UK locations)
Internal controls (5%)
Ensure all subsidiaries are confirmed compliant
with effective internal systems and self-audit
process (5%)
IT implementation (5%)
Successfully launch Microsoft AX 365 upgrade
by the end of Q3 2019
Fixed costs (5%)
Ensure effective control mechanisms
for fixed costs are in place and drive
performance improvement
Performance
75% reduction achieved
Scoring
Compliance achieved; self-audit process
outstanding
Successfully completed but outside timeframe
Control mechanisms partly implemented
1 Inventory at our Croydon site is considered a critical and controllable element of Group working capital. Croydon accounts for 77% of total inventory in the Group. As many HPP materials, and some
polyolefin foam additives, are single sourced from suppliers across the globe, we have a low tolerance for this risk and correspondingly higher levels of inventory for some product lines. The objective
was therefore set as a dynamic target based on anticipated future sales linked to a global Sales and Operations Planning system.
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 is
deferred in shares held in trust for three years under the Deferred Bonus Share Plan (DBSP). As set out in the letter from the Committee Chair, reflecting
on the impact of COVID-19 in recent weeks, none of the 2019 bonus will be 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) will be 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.
2019
D B Stirling
G C McGrath
Voluntary deferred
bonus (£)
Compulsory
deferred bonus (£)
Total bonus (£)
63,204
39,755
21,068
13,252
84,272
53,007
The Committee considered the bonus levels in view of the performance achieved. The objectives were a balance of financial and non-financial metrics with
90% of the CEO’s bonus based on formulaic targets. The Committee noted the fact that the PBT element had not been met (largely because of the cyclical
downturn in the polyolefin foams market) but believes that the Executive Directors continue to deliver against the strategy, delivering strong growth in the
HPP business and improved revenue growth opportunities in the MEL business. It therefore determined no discretion should be exercised in relation to
the level of pay-out, noting that the Executive Directors voluntarily agreed to the cash proportion of the award being deferred.
LTIP
The 2017 LTIP award was subject to two performance conditions. 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 2017 award, which in normal circumstances would have been due to vest on 1 June 2020.
Relative TSR performance
Annualised EPS growth
Performance
target
Median
performance
against peer
group
5%
Trigger point
% of award
vesting
6
14
Performance
target
Upper quartile
performance
against peer
group
22%
Maximum
% of award
vesting
30
70
Level of vesting
(% maximum)
30%
Achievement
Upper quartile
performance
against peer
group
14.9p
16.99%
Based on the above level of performance, 46.99% of the total awarded vested. The Committee considered the overall performance of the Group when
assessing the LTIP outturn, including performance against the targets. The Committee noted that the TSR performance for the Company over the period
was 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 a result of the impact of COVID-19, however, as set out in the cover letter from the Committee Chair, while no change is
proposed to the formulaic outcome, the final decision on the timing of vesting of the 2017 LTIP award has been deferred for a period of up to one year.
Vested awards will be subject to holding periods, in line with the intention when the awards were granted.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 68
Directors’ Remuneration report
Continued
Scheme interests granted during 2019 (audited)
The table below sets out details of scheme interest granted to the Executive Directors during 2019:
D B Stirling
G C McGrath
D B Stirling
G C McGrath
Type
of award
Deferred
bonus4
(Unconditional
shares)
LTIP5
(Conditional
shares)
Date
of grant
20.05.2019
20.05.2019
Number of
shares
granted
2,677
2,497
73,070
48,352
Face value¹
(£)
Face value
(% of salary)
Performance
condition
Trigger point
for vesting (%
of face value)
End of
performance
period
16,651
15,531
454,495
300,750
n/a
n/a
150
150
n/a
n/a
n/a
n/a
n/a
n/a
31.12.2021
30% based
on relative
TSR growth²
and 70%
annualised
EPS growth³
6% for relative
TSR growth
and 14% for
annualised
EPS growth
1 Face value calculated using the average of the Company’s mid-market price for the five trading days preceding the date of grant (£6.22). The share price was £6.34 on 20 May 2019.
2 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.
3 Annualised EPS growth is from the EPS for 2018. The trigger point is 8% annualised growth, where 14% of the award will vest, to the maximum of 22% annualised growth, where 70% of the award will vest.
4 Awards vest on the third anniversary of grant.
5 Award is subject to a three-year performance period and, subject to performance, is released after a two-year holding period.
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 B Stirling
21,933
514
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), 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 Regulations, 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 2019; and
– in the application of section 234 of the Act, the figure 20 is substituted for the figure 16.
The following is additional information relating to the Director’s pension from the DB Scheme:
(a) Before the DB Scheme closed, members had the option of paying Additional Voluntary Contributions (AVCs). The value of these AVCs has been excluded from the above figures.
(b) Normal retirement age is 65.
(c) 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.
(d) 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.
(e) 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 2019.
Payments for loss of office (audited)
No payments were made during 2019.
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 to be proposed at
the 2020 AGM will also require 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. Throughout 2019, D B Stirling complied
with the Policy (holding 717% of salary in shares in the Company as at 31 December 2019). G C McGrath, who joined the Group on 1 December 2015
is making progress towards meeting the requirement and has until 17 May 2022 to build up a shareholding to comply with the Policy (G C McGrath
currently holds 78% of salary in shares in the Company as at 31 December 2019).
The tables below set out the Directors’ interests (including those of their connected persons) in Zotefoams shares as at 31 December 2019. There were
no changes in the Directors’ interests between the year end and the date of this report.
Zotefoams plc Annual Report 2019 69
Executive Directors
D B Stirling
G C McGrath
Shares owned outright¹
493,037
35,646
Interest in share incentive
schemes without
performance conditions2
Interest in share incentive
schemes with performance
conditions3
74,039
59,823
139,978
93,442
Includes Partnership Shares, Dividend Shares and vested Matching Shares under the SIP.
1
2 Comprises: vested CSOP awards; DBSP shares; unvested Matching Shares under the SIP; and the unvested 2017 LTIP award that is due to vest on 1 June 2020.
3 Comprises: unvested LTIP shares.
Non-Executive Directors
A C Bromfield
J D Carling
S P Good
D G Robertson
Shares owned outright
5,145
3,323
30,047
7,302
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:
As at
31 Dec
2018
Date of
exercise or
release
Granted
during the
year
Exercised
or released
Lapsed or
cancelled
Scheme
As at
31 Dec
2019
Market
price on
exercise
date
Exercise
price
Date from
which
exercisable
Expiry
date
D B
Stirling
LTIP (2016)
74,507 26.04.2019
LTIP (2017)1
115,842
LTIP (2018)
66,908
LTIP (2019)
–
–
–
–
DBSP (2015)
8,278 26.04.2019
DBSP (2016)
10,061
DBSP (2017)
6,656
DBSP (2018)
SIP3
–
399
CSOP
10,344
–
–
–
–
–
LTIP (2016)
48,426 26.04.2019
G C
McGrath
LTIP (2017)1
LTIP (2018)
LTIP (2019)
DBSP (2016)
DBSP (2017)
DBSP (2018)
76,014
45,090
–
6,533
4,419
SIP3
351
–
–
–
–
–
–
–
–
–
–
73,070
–
–
–
2,677
85
–
–
–
–
48,352
–
–
2,497
85
74,507
–
–
–
8,278
–
–
–
–
–
48,426
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£5.740
– 05.04.2019
115,842
66,908
73,070
–
–
–
–
TBC2
– 24.05.2021
– 20.05.2022
–
£5.740
– 05.04.2019
10,061
6,656
2,677
484
10,344
–
–
–
–
–
– 27.03.2020
– 24.05.2021
– 20.05.2022
–
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
£2.900 05.04.2019 05.04.2026
–
£5.740
– 05.04.2019
76,014
45,090
48,352
6,533
4,419
2,497
436
–
–
–
–
–
–
–
–
TBC2
– 24.05.2021
– 20.05.2022
– 27.03.2020
– 24.05.2021
– 20.05.2022
–
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
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 has increased
in full for the final year of the performance period (i.e. year ending 31 December 2019). No change was made to the relative stretch in the underlying targets agreed at the outset of the performance
period – which remain as follows: trigger point of 5% p.a. growth; maximum of 22% p.a. growth.
2 As set out in the Committee Chair’s cover letter, the decision on the timing of the vesting of the 2017 award has been deferred for a period of up to one year by the Committee.
3 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”.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 70
Directors’ Remuneration report
Continued
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 2019:
Director
A C Bromfield
J D Carling
S P Good1
G C McGrath
D G Robertson
D B Stirling
Date of current service contract
or appointment letter
Unexpired terms at 31 December 2019
21 June 2017
20 December 2017
4 September 2019
15 April 2019
7 August 2017
13 May 2019
9 months
1 year
2 years and 3 months
–
8 months
–
1 S P Good was appointed by the Board for a second three-year term in March 2019 and was re-elected by shareholders at the 2019 AGM. Copies of the Directors’ service contracts and appointment
letters are available for inspection at the Company’s registered office.
External appointments
During 2019, Executive Directors did not receive any fees from external appointments.
Change in remuneration of the Group CEO (unaudited)
The table below illustrates the percentage change in salary and benefits for the Group CEO 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 the Group CEO is based in the UK and this employee representative group is the largest group of employees within
the organisation.
Group CEO
Employee subset
% change in base salary
(2019 to 2018)
% change in taxable benefits
(2019 to 2018)
% change in annual bonus
UK employees only
(2019 to 2018)
14.161
2.3
(1)
–
(33.33)
(0.23)
1 Context on the salary increase for the CEO is provided in detail in the 2018 Directors’ Remuneration report.
The employees’ salary review is negotiated with the unions, applied to all UK employees and a 2.3% increase was agreed in relation to 2019. The 2020
salary review for the employees has not yet been agreed.
The staff bonus in the UK was 0% of base salary in relation to 2019 (2018: 4.25% of base salary).
CEO pay ratio
New legislation requires companies with more than 250 employees 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 CEO 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 2019. The CEO’s total remuneration has been taken from the single total figure of remuneration for 2019, as disclosed on page 65.
The Committee considers that the median CEO pay ratio at the 50th percentile is consistent with the relative roles and responsibilities of the CEO and
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 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 the ratio is likely to
fluctuate depending on the outcomes of incentive plans in each year.
Year
2019
Pay data (£’000)
CEO’s remuneration
UK employees 25th percentile
UK employees 50th percentile
UK employees 75th percentile
Method
Option A
25th percentile
pay ratio
50th percentile
pay ratio
75th percentile
pay ratio
21:1
17:1
13:1
Base salary
290,500
29,000
35,694
45,370
Total pay
637,473
30,954
38,604
49,668
Zotefoams plc Annual Report 2019 71
Historic 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.
1,000
800
600
400
200
0
Jan 10
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
Zotefoams
FTSE SmallCap Index
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
has considered 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 nine-year period.
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Group CEO’s
single figure of
remuneration (£)
Annual bonus
pay-out (% of
maximum)
LTIP vesting (%
of maximum)
Average share
price for the final
quarter (p)
EPS (p)
637,473
794,9052
676,816
497,545
418,568
439,452
270,687
490,715
572,969
367,970
177,562
37.1
35.1
84.4
55.0
44.4
44.0
–
62.0
33.3
46.2
29.8
47.0
100.0
58.0
37.7
50.0
66.0
24.8
84.0
88.7
54.9
–
14.9
18.7
16.61
13.7
11.1
10.7
8.0
11.8
11.8
10.2
6.8
375.4
570.5
389.2
252.5
344.3
237.8
182.4
202.2
121.1
136.7
90.4
1 While basic earnings per share before exceptional items for 2017 was 16.04p, the Remuneration Committee decided to eliminate the impact on deferred tax (the net operating losses which are
carried forward) due to 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.
2 2016 LTIP value (vesting in respect of the performance period ending 31 December 2018) has been recalculated using a share price of £5.74 (previously £5.705) as described on page 69.
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 2019 and 2018.
Total remuneration¹ £’000
Executive Directors’ remuneration £’000
Profit after tax £’000 (including exceptional item)
Shareholder distributions2 £’000
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.
2019
19,270
1,049
8,217
2,973
2018
18,212
1,356
7,852
2,707
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 72
Directors’ Remuneration report
Continued
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 C Bromfield, S P Good, D G Robertson and J D Carling were members of the Committee during 2019 to the date of this report. All the members
are independent Non-Executive Directors, with the exception of S P Good, who was independent on appointment as Chair of the Company. The
Committee was chaired by A C Bromfield throughout the year. The Committee’s Terms of Reference were last updated in December 2019 and may
be found on the Group’s website.
None of the Committee members have any personal financial interest (other than fees paid as disclosed on page 65 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 2019 with full attendance at each meeting. The Company Secretary acts as secretary to the Committee.
In 2019, the Remuneration Committee considered the following matters:
XX 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 the proposed Remuneration Policy put forward for approval at the 2020 AGM;
XX approved the 2018 Directors’ Remuneration report;
XX considered and approved the annual bonuses for the Executive team;
XX considered and approved the grant of awards under the Long-Term Incentive Plan and the Deferred Bonus Share Plan in 2019 and the vesting of
awards made in 2016 under the Long-Term Incentive Plan;
XX considered and approved the salary reviews of the Executive team and the Company Secretary; and
XX considered the performance targets for the 2020 Executive Directors’ bonus and Long-Term Incentive Plan awards.
Deloitte LLP 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 2019 in respect of general remuneration advice and proposed changes to the Policy, which are tabled for approval
at the 2020 AGM. Deloitte LLP is a member of the Remuneration Consultants Group and adheres to its Code on executive remuneration consulting
in the UK.
Total fees for advice provided to the Committee amounted to the following:
Deloitte LLP
Total
2019
(£)
32,700
32,700
Shareholder voting (unaudited)
The table below sets out the results of the votes received on the 2018 Remuneration report at the 2019 AGM as well as the previous Directors’
Remuneration Policy (approved at the 2017 AGM):
Votes in favour
Votes against
Discretion
Total votes
Votes withheld
Directors’ Remuneration
Policy
24,044,881
279
9,768
24,054,648
5,500
%
99.96
0.00
0.04
100.00
–
Annual Report on
remuneration
27,220,976
21,598
6,068
27,248,642
2,500
2018
(£)
18,950
18,950
%
99.90
0.08
0.02
100.00
–
Zotefoams plc Annual Report 2019 73
Directors’ report
The Directors present their Annual Report
and audited consolidated financial statements
for the year ended 31 December 2019
Conflicts of interest
All Directors submit details to the Company
Secretary of any new situations, or changes
to existing ones, which may give rise to an
actual or potential conflict of interest with
those of 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
in any discussion or decision affected by the
conflicted matter. Authorisation of a conflict is
only given to Directors who are not interested
in the matter. No new conflicts of interest were
noted during 2019 or between the year end and
the date 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.
Corporate governance report
The Corporate governance report on
pages 50 to 52 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
Occupational Health and Safety (OHSAS 18001).
Migration to ISO 45001:2018 will be conducted
in March 2020 as part of a continual
improvement plan.
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
their employment with Zotefoams continues
and that 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.
Results and dividends
Profit attributable to shareholders for the year
amounted to £8.22m (2018: £7.85m). An interim
dividend of 2.03p (2018: 1.97p) per share was
paid on 10 October 2019. The Board has a
progressive dividend policy, recognising the
importance to our shareholders of the dividend
as part of their overall return. However, the
extraordinary uncertainty posed by the
COVID-19 outbreak means that the Board is
focused on minimising cash outflows and
strengthening the Company’s and Group’s
financial position in the short term. As such, the
Board believes it prudent not to recommend a
final dividend for the year ended 31 December
2019 (2018: 4.15p). The Board will keep this
situation under review and will determine the
timing for resumption of dividends as economic
conditions stabilise.
For further information on the performance
of the entity refer to the Strategic Report on
pages 1 to pages 47, which should be read
as forming part of the Directors’ 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.
Details of Directors who were in office during the
year and up to the date of signing of the financial
statements are set out on pages 48 and 49.
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,
the Board has required Directors to stand
for annual re-election each year.
D B Stirling and G C McGrath, the
Executive Directors, have service contracts
which are terminable on 12 months’ 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
2019. The Company has issued Deeds of
Indemnity in favour of all Directors. These Deeds
were in force throughout the year ended 31
December 2019 and remain in force as at the
date of this report. These Deeds, as well as the
service contracts and the Company’s Articles
of Association, are available for inspection
during normal business hours at the Company’s
registered office and will be available at the AGM.
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
in making 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 1 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
to employees’ views in their decision-making.
In order to encourage employees to share in
the success of Zotefoams, an all-employee
share incentive 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
of the Group’s business relationships with
suppliers, customers and others in its
decision-making process in order to
achieve good-quality outcomes.
Further information on this topic can be found
on page 47 of the Strategic Report (the s172(1)
statement), which is incorporated into this
Directors’ report by cross-reference.
Human rights
While Zotefoams does not, at present, have a
specific policy on human rights, it recognises
and respects all human rights as defined in
international conventions. 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:
XX ensuring our employees have the freedom to
join a union, associate or bargain collectively
without fear of discrimination against the
exercising of such freedoms;
XX not using forced labour or child labour; and
XX respecting the rights of privacy of our
employees and protecting access and
use of their 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
that goods and services are from sources that
do not jeopardise human rights, safety or the
environment, and expect our suppliers to
observe business principles consistent
with our own.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 74
Directors’ report
Continued
Business ethics
Zotefoams is committed to high standards
of business conduct and seeks to maintain
these standards across all of our operations
throughout the world. Under our Ethics Policy,
we state that we will:
XX operate within the law;
XX not tolerate any discrimination or harassment;
XX not make any political donations;
XX not make or receive bribes;
XX avoid situations that might give rise to
conflicts of interest;
XX not enter into any activity that might be
considered anti-competitive;
XX aim to be a responsible company within
our local communities; and
XX support and encourage our employees
to report, in confidence, any suspicions
of wrongdoing.
Supporting our Ethics Policy, we have policies
on anti-bribery and corruption, anti-fraud,
anti-competitive behaviour, employee share
trading and whistleblowing.
Substantial shareholdings
In accordance with the Disclosure and
Transparency Rules DTR 5, the Company,
as at 8 April 2020, had received notices of
the following material interests of 3% or
more in the issued ordinary share capital:
Ordinary
shares of
5.0p
Percentage
of issued
share
capital
Schroders plc
5,674,351
11.75%
Invesco Ltd
4,007,910
Sekisui Alveo AG
3,820,258
8.29%
7.91%
Premier Miton
Group plc
Legal & General
Investment
Management
Highclere
International
Investors LLP
Canaccord Genuity
Group, Inc
BlackRock, Inc
Nicholas Adrian
Beaumont-Dark
Claire and Marc
Downes
3,561,760
7.37%
2,385,712
5.19%
2,432,527
5.04%
2,317,334
2,150,385
4.90%
4.45%
1,938,352
4.01%
1,935,019
4.01%
Directors’ shareholdings are shown in the
Directors’ Remuneration report on page 69.
Research and development
The amount spent by the Group on R&D in
the year was £1,357,000 (2018: £1,350,000).
In the opinion of the Directors £121,000
(2018: £243,000) of this expenditure met the
requirements for capitalisation under IAS 38,
while £1,236,000 (2018: £1,107,000) did not
and was 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
by the 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
that may result in restrictions on the transfer
of securities or on voting rights. No person has
any special rights of control over the Company’s
share capital and all issued shares are fully paid.
At 31 December 2019, the Zotefoams
Employees’ Benefit Trust (EBT) held 178,395
shares (approximately 0.4% of issued share
capital) (2018: 403,758 shares) to satisfy
share plans as described in the Directors’
Remuneration report. During the year, the EBT
released 225,363 shares in respect of these
share plans. No shares were acquired by the
EBT during the year. In accordance with best
practice, the voting rights on the shares held
in the EBT are not exercised and the right
to receive dividends has been waived.
At the AGM held on 15 May 2019, authority was
given to the Directors to allot unissued shares
in the 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
at the AGM to be held on 8 June 2020. The
Directors seek new authorities for a further
year, in line with market practice.
The Company was given authority at the 2019
AGM to purchase up to 4,830,123 of its ordinary
shares. This authority will also expire on 8 June
2020 and, at the date of this Report, had not
been used. In accordance with normal practice
for listed companies, a special resolution will
be proposed 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
of the 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
to the 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 12 to 27.
Greenhouse gas emissions
Information on the Group’s greenhouse gas
emissions may be found in the Sustainability
report on page 46.
Pension schemes
Refer to the Post-employment benefits section
of the Group CFO’s review and note 24 of the
financial statements for information related
to the Company’s pension schemes.
Employees are offered membership of
one of a number of defined contribution
pension schemes.
Finance costs capitalised
Refer to note 11 of the financial statements
for details of borrowing costs capitalised
by the Group.
Events after the reporting period
Refer to page 32 of the CFO’s review and
note 29 of the financial statements for details
of post-balance sheet events affecting the
Group since the year-end.
Disclosure of information to Auditor
The Directors who held office at the date of
approval of this Directors’ report confirm that,
in so far as they are each aware, there is
no relevant audit information of which the
Company’s Auditor is unaware, and each
Director has taken all the steps that they
ought to have taken as a Director in order to
make themselves aware of any relevant audit
information and to establish that the Company’s
Auditors are aware of that information.
Independent auditors
A resolution to re-appoint
PricewaterhouseCoopers LLP as the
Company’s Auditor will be proposed
at the forthcoming AGM.
On behalf of the Board.
G C McGrath
Director
9 April 2020
Zotefoams plc Annual Report 2019 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
75
The Directors are responsible for the
maintenance and integrity of the Company’s
website. Legislation in the United Kingdom
governing the preparation and dissemination
of financial statements may differ from
legislation in 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
and strategy of the Group and Company.
With the exception of C Wall and A Fielding,
whose appointments take place after the
approval of these financial statements, each of
the Directors, whose names and functions are
listed on pages 48 and 49 of the Annual Report,
confirm that, to the best of their knowledge:
XX the Consolidated and Company financial
statements, which have been prepared in
accordance with IFRSs as adopted by the
European Union, give a true and fair view of
the assets, liabilities, financial position and
profit of the Group and Company; and
XX 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 CFO’s review
provides a description of the principal risks
and uncertainties faced by the Group and
the Company.
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 the
Consolidated and Company financial statements
in accordance with International Financial
Reporting Standards (IFRSs) as adopted by
the European Union. Under company law
the Directors must not approve the financial
statements unless they are satisfied that they
give a true and fair view of the state of affairs
of the Group and Company and of the profit
or loss of the Group and Company for that
period. In preparing the financial statements,
the Directors are required to:
XX select suitable accounting policies and then
apply them consistently;
XX state whether applicable IFRSs as adopted
by the European Union have been followed
for the Consolidated and Company financial
statements, subject to any material departures
disclosed and explained in the financial
statements;
XX make judgements and accounting estimates
that are reasonable and prudent; and
XX 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 also responsible for
safeguarding the assets of the Group and
Company and hence for taking reasonable
steps for the prevention and detection of
fraud and 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 and, as regards the
consolidated financial statements, Article 4 of
the IAS Regulation.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 76
Independent auditors’ report to the
members of Zotefoams plc
Report on the audit of the financial statements
Opinion
In our opinion, Zotefoams plc’s Group financial statements and Company financial statements (the “financial statements”):
XX give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2019 and of the Group’s profit and the Group’s
and the Company’s cash flows for the year then ended;
XX have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and,
as regards the Company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and
XX have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4
of the IAS Regulation.
We have audited the financial statements, included within the Annual Report, which comprise: the consolidated and Company statements of financial
position as at 31 December 2019; the consolidated income statement and consolidated statement of comprehensive income, the consolidated and
Company statements of cash flows, and the consolidated and Company statements of changes in equity for the year then ended; and the notes to
the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under ISAs (UK)
are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group
or the Company.
Other than those disclosed in note 5 to the financial statements, we have provided no non-audit services to the Group or the Company in the period
from 1 January 2019 to 31 December 2019.
Material uncertainty related to going concern – Group and Company
In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 2 to the
financial statements concerning the Group’s and Company’s ability to continue as a going concern.
In light of the emerging impact of COVID-19 on the global economy, the Directors have sensitised their Board-approved forecasts ("base case scenario")
to reflect what they consider to be a possible reduction in demand for the Group’s and Company’s products as a result of the impact of COVID-19 (their
"downside scenario"). In the downside scenario, set out in further detail in note 2 to the financial statements, in the absence of any further mitigation
actions that could be taken by management, the Group and Company would be in breach of their leverage banking covenant and would need to
negotiate a waiver with their lenders in order to avoid borrowings becoming repayable immediately. These conditions, along with the other matters
explained in note 2 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the Group’s and
Company’s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group and Company
were unable to continue as a going concern.
Audit procedures performed
In concluding there is a material uncertainty, our audit procedures included evaluating the Directors’ assessment of the impact of COVID-19 on the
financial performance, and in particular, on the Group’s and Company’s liquidity and its forecast covenant compliance.
In assessing the impact on the Directors’ forecasts, which are referred to in note 2 of the financial statements, we performed the following procedures
on the Directors’ assessment that the Group and Company will continue as a going concern:
XX checked the mathematical accuracy of the spreadsheet used to model future financial performance, agreed the underlying cash flow projections to
management-approved forecasts, recalculated covenant compliance and liquidity headroom for the base case scenario;
XX evaluated 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;
XX assessed 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;
XX recalculated the impact on the Group’s and Company’s banking covenants; and
XX assessed 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.
Zotefoams plc Annual Report 2019 77
Our audit approach
Overview
XX Overall Group materiality: £438,000 (2018: £525,000), based on 5% of profit before income tax and exceptional item.
XX Overall Company materiality: £360,000 (2018: £500,000), based on 5% of profit before tax and exceptional item.
Materiality
Audit scope
XX There are nine trading companies (including joint ventures) within the consolidated financial statements, two based
in the UK, one in Europe, three in the USA and three in Asia.
XX We conducted an audit of full-year financial information on three trading companies, Zotefoams plc in the UK
and Zotefoams Inc. and MuCell Extrusion LLC in the USA. We visited these trading companies as part of our
audit procedures.
XX We audited property, plant and equipment in Zotefoams Poland Sp. z.o.o.
XX The trading companies where we performed full audit procedures accounted for 93% of the Group’s profit before
tax and exceptional item.
Key audit
matters
XX Impairment of intangible assets in MuCell Extrusion LLC (Group)
XX Defined benefit pension scheme assumptions (Group and Company)
XX Going concern – refer to Material uncertainty section above (Group and Company)
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws and regulations related to
the Listing Rules, Pensions legislation, UK tax legislation and equivalent local laws and regulations applicable to the significant components, and we
considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations
that have a direct impact on the preparation of the financial statements such as the Companies Act 2006. We evaluated management’s incentives and
opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks
were related to posting inappropriate entries to misstate revenue or reduce expenditure, and management bias in accounting estimates. The Group
engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures in response to
such risks in their work. Audit procedures performed by the Group engagement team and/or component auditors included:
XX discussions with management, including consideration of any known or suspected instances of non-compliance with laws and regulation and fraud;
XX challenging assumptions made by management in their significant accounting estimates, in particular in relation to defined benefit pensions scheme
assumptions and impairment of intangible fixed assets (see Key audit matters below);
XX identifying and testing journal entries, in particular any journal entries posted with unusual account combinations, journals posted by senior
management and consolidation journals; and
XX review of disclosures included in the financial statements to underlying supporting documentation.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from
the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example,
forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the 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) identified by the auditors, 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, and any comments we make on the results of our procedures thereon, 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. In addition to going concern,
described in the Material uncertainty related to going concern section above, we determined the matters described below to be the key audit matters
to be communicated in our report. This is not a complete list of all risks identified by our audit.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 78
Independent auditors’ report to the members of Zotefoams plc
Continued
Key audit matter
How our audit addressed the key audit matter
Impairment of intangible assets in MuCell Extrusion LLC (Group)
Refer to note 28 of the financial statements (Key sources of estimation
uncertainty for the Group).
The Group’s consolidated statement of financial position as at 31
December 2019 includes goodwill of £2.3m, which arose on the acquisition
of MuCell Extrusion LLC (MuCell) in a previous accounting period, and
other intangible assets of £2.2m.
The carrying value of goodwill and other intangible assets is supported by
future cash flows. There is a risk that, if these cash flows do not meet the
Group’s expectations, these intangible assets will be impaired. It is noted
at this time that MuCell continues to be loss making.
The impairment reviews performed by the Group contain a number of
significant judgements and estimates, including revenue growth, profit
margins, and long-term growth and discount rates. Changes in these
assumptions can have a significant impact on the headroom available in
the impairment calculations.
The above factors represent a risk that the balance of goodwill and other
intangible assets relating to MuCell could be misstated.
Defined benefit pension scheme assumptions (Group and Company)
Refer to note 28 of the financial statements (Key sources of estimation
uncertainty for the Group).
The Group’s closed defined benefit pension scheme represents one of the
largest liabilities on the consolidated statement of financial position as at
31 December 2019.
The valuation of the scheme’s liabilities requires management to apply
its judgement in making a number of key assumptions, being the rates of
inflation (Consumer Price Index and Retail Price Index), the discount rate,
and the life expectancy of scheme members. There is a risk of material
misstatement as the calculation of the liability is highly sensitive to even
small changes in certain key assumptions.
We obtained the Group’s impairment analysis and tested the
reasonableness of key assumptions, including profit and cash flow growth,
terminal values and the discount rate. We also involved our valuations
experts to benchmark the discount rate used by management in the
impairment analyses.
Where management included minimum guaranteed contractual revenues
in their impairment analysis we have agreed these amounts to the customer
contract. We considered the reasonableness of the remaining, non-
contractual cash flows through comparison with current year actual sales.
We verified the integrity and mathematical accuracy of supporting
calculations. We obtained and evaluated management’s sensitivity analysis
to ascertain the impact of changes in key assumptions, and we performed
our own independent sensitivity calculations to quantify the downside
changes to management’s models required to result in impairment.
As a result of our work, we determined that the carrying values of goodwill
and intangible assets are appropriate in the context of the consolidated
financial statements taken as a whole.
We reviewed the disclosures made in the financial statements, including
sensitivity analysis and the reasonably possible downsides. We are
satisfied that these disclosures are appropriate.
We assessed the competence of the Group’s actuary.
We involved our pensions experts to evaluate and benchmark the key
assumptions applied by management in determining the scheme’s
liabilities. The assumptions applied by management are within ranges
which we considered reasonable.
Based on the procedures performed, we did not identify any material
misstatements in the defined benefit pension obligation at the year end.
We reviewed the disclosures made in the financial statements and are
satisfied that these disclosures are appropriate.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking
into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
All the work was performed by the Group engagement team.
Of the eight trading companies (including joint ventures), three of these are considered to be significant components of the Group, Zotefoams plc in the UK
and Zotefoams Inc. and MuCell Extrusion LLC in the USA, on which we have performed full-scope audits, all of which are 100%-owned subsidiaries of the
Group. We also performed audit procedures on property, plant and equipment in Zotefoams Poland Sp. z.o.o.
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 statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
How we determined it
Rationale for
benchmark applied
Group financial statements
£438,000 (2018: £525,000).
Company financial statements
£360,000 (2018: £500,000).
5% of profit before income tax and exceptional item.
5% of profit before tax and exceptional item.
Based on the benchmarks used in the Annual Report,
profit before tax and exceptional item is the primary
measure used by the shareholders in assessing the
performance of the Group, and is a generally accepted
auditing benchmark.
Based on the benchmarks used in the Annual
Report, profit before tax and exceptional item is
the primary measure used by the shareholders in
assessing the performance of the Company, and
is a generally accepted auditing benchmark.
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 £220,000 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 £21,900 (Group audit) (2018: £26,250)
and £21,900 (Company audit) (2018: £26,250) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Zotefoams plc Annual Report 2019 79
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw
attention to in respect of the Directors’ statement in the financial statements
about whether the Directors considered it appropriate to adopt the going
concern basis of accounting in preparing the financial statements and the
Directors’ identification of any material uncertainties to the Group’s and the
Company’s ability to continue as a going concern over a period of at least
12 months from the date of approval of the financial statements.
We are required to report if the Directors’ statement relating to going
concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent
with our knowledge obtained in the audit.
We have nothing material to add or to draw attention to other than the
material uncertainty we have described in the Material uncertainty related
to going concern section above.
However, because not all future events or conditions can be predicted, this
statement is not a guarantee as to the Group’s and Company’s ability to
continue as a going concern.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The
Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we
do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, 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 audit, or otherwise appears to be materially misstated.
If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material
misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act 2006 have
been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and the
Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK)
unless otherwise stated).
Strategic Report and Directors’ report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ report for the year
ended 31 December 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify
any material misstatements in the Strategic Report and Directors’ report. (CA06)
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
XX the Directors’ confirmation on page 52 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group,
including those that would threaten its business model, future performance, solvency or liquidity;
XX the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated; and
XX the Directors’ explanation on page 39 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have
done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will
be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the principal risks
facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only
consisted of making enquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with
the relevant provisions of the UK Corporate Governance Code (the “Code”); and considering whether the statements are consistent with the knowledge
and understanding of the Group and Company and their environment obtained in the course of the audit. (Listing Rules)
Other Code provisions
We have nothing to report in respect of our responsibility to report when:
XX the statement given by the Directors, on page 75, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and
provides the information necessary for the members to assess the Group’s and Company’s position and performance, business model and strategy
is materially inconsistent with our knowledge of the Group and Company obtained in the course of performing our audit;
XX the section of the Annual Report on page 54 describing the work of the Audit Committee does not appropriately address matters communicated by
us to the Audit Committee; and
XX the Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provision of
the Code specified, under the Listing Rules, for review by the auditors.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 80
Independent auditors’ report to the members of Zotefoams plc
Continued
Directors’ remuneration
In our opinion, the part of the Directors’ Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
(CA06)
Responsibilities for the financial statements and the audit
Responsibilities of the Directors for the financial statements
As explained more fully in the Statement of Directors’ responsibilities in respect of the financial statements set out on page 75, the Directors are
responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair
view. The Directors are also responsible for such internal control as they 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 financial statements, the Directors are responsible for assessing the Group’s and the 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 Company or to cease operations, or have no realistic alternative but to do so.
Auditors’ 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 to
fraud or error, and to issue an auditors’ 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 on the
basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the
Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come, save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
XX we have not received all the information and explanations we require for our audit; or
XX adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited
by us; or
XX certain disclosures of Directors’ remuneration specified by law are not made; or
XX the Company financial statements and the part of the Directors’ Remuneration report to be audited are not in agreement with the accounting records
and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the Directors on 26 July 2012 to audit the financial statements for the
year ended 31 December 2012 and subsequent financial periods. The period of total uninterrupted engagement is 8 years, covering the years ended
31 December 2012 to 31 December 2019.
Simon Bailey (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Gatwick
9 April 2020
Zotefoams plc Annual Report 2019 Consolidated income statement
For the year ended 31 December 2019
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses before exceptional item
Exceptional item
Total administrative expenses
Operating profit
Operating profit before exceptional item
Finance costs
Finance income
Share of profit/(loss) from joint venture
Profit before income tax
Profit before income tax and exceptional item
Income tax expense
Profit for the year
Profit for the year before exceptional item
Profit attributable to:
Equity holders of the Company
Earnings per share:
Basic (p)
Diluted (p)
81
2018
£’000
81,037
(52,034)
29,003
(7,193)
(10,236)
(950)
(11,186)
10,624
11,574
(753)
–
(16)
9,855
10,805
(2,003)
7,852
8,641
7,852
7,852
16.96
16.69
Note
3
4
7
7
10
2019
£’000
80,860
(52,270)
28,590
(8,008)
(11,481)
1,050
(10,431)
10,151
9,101
(462)
50
72
9,811
8,761
8
(1,594)
8,217
7,167
8,217
8,217
17.10
16.84
9
9
All activities of the Group are continuing.
The notes on pages 89 to 127 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 and
other comprehensive income.
Company number: 2714645
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
82
Consolidated statement
of comprehensive income
For the year ended 31 December 2019
Profit for the year
Other comprehensive (expense)/income
Items that will not be reclassified to profit or loss
Actuarial losses on defined benefit pension schemes
Tax relating to items that will not be reclassified
Total items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss
Foreign exchange translation (losses)/gains on investment in foreign subsidiaries
Change in fair value of hedging instruments
Hedging gains reclassified to profit or loss
Tax relating to items that may be reclassified
Total items that may be reclassified subsequently to profit or loss
Other comprehensive expense for the year, net of tax
Total comprehensive income for the year
Total comprehensive income attributable to:
Equity holders of the Company
Total comprehensive income for the year
The notes on pages 89 to 127 form an integral part of these financial statements.
Note
24
2019
£’000
8,217
(319)
54
(265)
(1,146)
(349)
939
(101)
(657)
(922)
7,295
2018
£’000
7,852
(1,449)
246
(1,203)
1,442
(1,467)
920
93
988
(215)
7,637
7,295
7,637
7,295
7,637
Zotefoams plc Annual Report 2019
Consolidated statement
of financial position
As at 31 December 2019
Non-current assets
Property, plant and equipment
Right-of-use assets
Intangible assets
Investments in joint venture
Trade and other receivables
Deferred tax assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Derivative financial instruments
Current tax liability
Lease liabilities
Interest-bearing loans and borrowings
Total current liabilities
Non-current liabilities
Lease liabilities
Interest-bearing loans and borrowings
Deferred tax liabilities
Post-employment benefits
Total non-current liabilities
Total liabilities
Total net assets
Equity
Issued share capital
Share premium
Own shares held
Capital redemption reserve
Translation reserve
Hedging reserve
Retained earnings
Total equity
83
Note
2019
£’000
2018
£’000
11
12
13
10
16
20
15
16
22
17
18
22
12
19
12
19
20
24
21
21
85,652
1,207
6,614
145
166
327
67,607
–
6,515
73
439
923
94,111
75,557
18,604
23,315
332
6,656
48,907
143,018
(6,831)
(134)
(261)
(369)
(15,717)
(23,312)
(836)
(21,630)
(674)
(6,926)
(30,066)
(53,378)
89,640
2,415
44,178
(9)
15
2,907
131
40,003
89,640
17,894
26,371
6
7,073
51,344
126,901
(11,328)
(399)
(1,978)
–
(14,500)
(28,205)
–
(5,537)
–
(8,078)
(13,615)
(41,820)
85,081
2,415
44,178
(21)
15
4,053
(358)
34,799
85,081
The notes on pages 89 to 127 form an integral part of these financial statements.
These financial statements on pages 81 to 88 were authorised for issue by the Board of Directors on 9 April 2020 and were signed on its behalf by:
G C McGrath
Group CFO
Company number: 2714645
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
84
Company statement
of financial position
As at 31 December 2019
Non-current assets
Property, plant and equipment
Right-of-use assets
Intangible assets
Investments in subsidiaries
Trade and other receivables
Deferred tax assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Derivative financial instruments
Current tax liability
Lease liabilities
Interest-bearing loans and borrowings
Total current liabilities
Non-current liabilities
Lease liabilities
Interest-bearing loans and borrowings
Deferred tax liabilities
Post-employment benefits
Total non-current liabilities
Total liabilities
Total net assets
Equity
Issued share capital
Share premium
Own shares held
Capital redemption reserve
Hedging reserve
Retained earnings
At 1 January
Profit for the year attributable to the owners
Other changes in retained earnings
Total equity
The notes on pages 89 to 127 form an integral part of these financial statements.
Note
2019
£’000
2018
£’000
11
12
13
14
16
20
15
16
22
17
18
22
12
19
12
19
20
24
21
21
40,919
1,064
2,082
30,576
166
–
36,603
–
1,773
23,549
439
292
74,807
62,656
14,362
42,546
332
4,107
61,347
136,154
(4,905)
(134)
(261)
(291)
(15,717)
(21,308)
13,444
37,121
6
5,626
56,197
118,853
(8,206)
(399)
(1,797)
–
(14,500)
(24,902)
(769)
–
(21,630)
(5,537)
(675)
(6,926)
(30,000)
(51,308)
84,846
2,415
44,178
–
15
131
34,107
7,013
(3,013)
38,107
84,846
–
(8,078)
(13,615)
(38,517)
80,336
2,415
44,178
(21)
15
(358)
27,959
9,034
(2,886)
34,107
80,336
These financial statements on pages 81 to 88 were authorised for issue by the Board of Directors on 9 April 2020 and were signed on its behalf by:
G C McGrath
Group CFO
Company number: 2714645
Zotefoams plc Annual Report 2019
Consolidated statement
of cash flows
For the year ended 31 December 2019
Cash flows from operating activities
Profit for the year
Adjustments for:
Depreciation and amortisation
Disposal of assets
Finance costs
Share of (profit)/loss from joint venture
Net exchange differences
Employee defined benefit service charges
Equity-settled share-based payments
Taxation
Operating profit before changes in working capital and provisions
Decrease/(increase) in trade and other receivables
Increase in inventories
(Decrease)/increase in trade and other payables
Employee defined benefit contributions
Cash generated from operations
Interest paid
Income taxes paid, net of refunds
Net cash flows generated from operating activities
Cash flows from investing activities
Interest received
Interest paid
Purchases of intangibles
Proceeds on disposal of property, plant and equipment
Purchases of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from options exercised and issue of share capital
Proceeds of share issue, net of expenses
Repayment of borrowings
Proceeds from borrowings
Principal elements of lease payments
Dividends paid to equity holders of the Company
Net cash generated from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents as 1 January
Exchange losses on cash and cash equivalents
Cash and cash equivalents at 31 December
85
Note
2019
£’000
2018
£’000
8,217
7,852
11,12,13
5,769
5,082
77
412
(72)
(999)
–
391
1,594
15,389
2,659
(883)
(3,720)
(1,674)
11,771
(88)
(2,334)
9,349
50
(933)
(914)
–
–
753
16
–
950
822
2,003
17,478
(6,361)
(3,751)
366
(619)
7,113
(485)
(2,136)
4,492
–
(31)
(294)
3
(23,473)
(25,270)
(15,796)
(16,118)
92
–
(3,829)
22,578
(343)
(2,973)
15,525
(396)
7,073
(21)
6,656
31
20,078
(45,055)
44,576
–
(2,707)
16,923
5,297
1,810
(34)
7,073
7
10
19
4
25
8
24
7
7
13
12
9
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 £1,021k of which it capitalised £933k (2018: £31k) on qualifying assets under IAS 23 ‘Capitalisation of Borrowing
Costs’. The interest paid has been split between operating activities of £88k (2018: £485k) and investing activities of £933k (2018: £31k) to reflect the
Group’s utilisation of the interest paid.
The net exchange differences of £999k within operating activities relate to the foreign exchange movement of the borrowings in the year. This has been
disclosed separately this year due to materiality (2018: immaterial).
Refer to note 19 for a reconciliation of liabilities arising from financing activities.
The notes on pages 89 to 127 form an integral part of these financial statements.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
86
Company statement
of cash flows
For the year ended 31 December 2019
Cash flows from operating activities
Profit for the year
Adjustments for:
Depreciation and amortisation
Finance costs
Net exchange differences
Employee defined benefit service charges
Equity-settled share-based payments
Taxation
Operating profit before changes in working capital and provisions
Decrease/(increase) in trade and other receivables
Increase in inventories
(Decrease)/increase in trade and other payables
Employee defined benefit contributions
Cash generated from operations
Interest paid
Income taxes paid, net of refunds
Net cash flows generated from operating activities
Cash flows from investing activities
Investment in subsidiaries
Interest received
Interest paid
Loans given to subsidiaries, net of prepayments
Purchases of intangibles
Proceeds on disposal of property, plant and equipment
Purchases of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from options exercised and issue of share capital
Proceeds of share issue, net of expenses
Repayment of borrowings
Proceeds from borrowings
Principal elements of lease payments
Dividends paid to equity holders of the Company
Net cash generated from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents as 1 January
Exchange losses on cash and cash equivalents
Cash and cash equivalents at 31 December
Note
2019
£’000
2018
£’000
7,013
9,034
11,12,13
3,253
3,040
19
4
24
325
(999)
–
391
1,279
11,262
3,372
(918)
(3,468)
(1,674)
8,574
(405)
(2,142)
6,027
14
(7,027)
26
(610)
(8,431)
(707)
–
(6,400)
(23,149)
92
–
(3,829)
22,578
(265)
(2,973)
15,603
(1,519)
5,626
–
4,107
13
11
9
17
469
–
950
822
1,959
16,274
(10,194)
(2,044)
181
(619)
3,598
(471)
(2,039)
1,088
(3)
102
–
(6,828)
(251)
1
(10,928)
(17,907)
31
20,078
(39,922)
44,576
–
(2,707)
22,056
5,237
406
(17)
5,626
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 £1,015k of which it capitalised £610k (2018: nil) on qualifying assets under IAS 23 ‘Capitalisation of
Borrowing Costs’. The interest paid has been split between operating activities of £405k (2018: £471k) and investing activities of £610k (2018: nil) to reflect
the Company’s utilisation of the interest paid.
The net exchange differences of £999k within operating activities relate to the foreign exchange movement of the borrowings in the year. This has been
disclosed separately this year due to materiality (2018: immaterial).
Refer to note 19 for a reconciliation of liabilities arising from financing activities.
The notes on pages 89 to 127 form an integral part of these financial statements.
Zotefoams plc Annual Report 2019
Consolidated statement
of changes in equity
For the year ended 31 December 2019
87
Balance as at 1 January 2018
2,221
24,340
(26)
15
2,611
96
29,833
59,090
Share
capital
£’000
Share
premium
£’000
Note
Own
shares
held
£’000
Capital
redemption
reserve
£’000
Translation
reserve
£’000
Hedging
reserve
£’000
Retained
earnings
£’000
Total
equity
£’000
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
Profit for the year
Total comprehensive income/(expenditure) for
the year
Transactions with owners of the Parent:
Options exercised
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Proceeds from shares issued, net of expenses
194
19,838
Equity-settled share-based payments net of tax
Dividends paid
9
Total transactions with owners of the Parent
Balance as at 31 December 2018
Balance as at 1 January 2019
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
Profit for the year
Total comprehensive income/(expenditure) for
the year
Transactions with owners of the Parent:
Options exercised
Equity-settled share-based payments net of tax
Dividends paid
9
Total transactions with owners of the Parent
–
–
–
–
194
19,838
2,415
44,178
2,415
44,178
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Balance as at 31 December 2019
2,415
44,178
–
–
–
–
–
–
–
–
5
–
–
–
5
(21)
(21)
–
–
–
–
–
–
–
–
12
–
–
12
(9)
–
–
–
–
–
–
–
–
–
–
–
–
–
1,442
–
–
–
–
–
–
–
(1,467)
920
93
–
–
–
–
–
–
–
1,442
(1,467)
920
93
(1,449)
(1,449)
246
246
7,852
7,852
1,442
(454)
6,649
7,637
–
–
–
–
–
–
–
–
–
–
26
–
998
31
20,032
998
(2,707)
(2,707)
(1,683)
18,354
15
15
4,053
4,053
(358)
34,799
85,081
(358)
34,799
85,081
–
–
–
–
–
–
–
–
–
–
–
–
(1,146)
–
–
–
–
–
–
–
(349)
939
(101)
–
–
–
–
–
–
–
(319)
(1,146)
(349)
939
(101)
(319)
54
54
8,217
8,217
(1,146)
489
7,952
7,295
–
–
–
–
–
–
–
–
80
145
92
145
(2,973)
(2,973)
(2,748)
(2,736)
15
2,907
131
40,003
89,640
The aggregate current and deferred tax relating to items that are credited to equity is £293k (2018: debited £515k).
The notes on pages 89 to 127 form an integral part of these financial statements.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
88
Company statement
of changes in equity
For the year ended 31 December 2019
Balance as at 1 January 2018
2,221
24,340
(26)
15
96
27,959
54,605
Share
capital
£’000
Share
premium
£’000
Note
Own
shares
held
£’000
Capital
redemption
reserve
£’000
Hedging
reserve
£’000
Retained
earnings
£’000
Total
equity
£’000
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
Profit for the year
Total comprehensive income/(expenditure) for the year
Transactions with owners of the Parent:
Options exercised
Proceeds from shares issued, net of expenses
Equity-settled share-based payments net of tax
Dividends paid
Total transactions with owners of the Parent
Balance as at 31 December 2018
Balance as at 1 January 2019
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9
194
19,838
–
–
–
–
194
19,838
2,415
44,178
2,415
44,178
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
Profit for the year
Total comprehensive income for the year
Transactions with owners of the Parent:
Options exercised
Equity-settled share-based payments net of tax
Dividends paid
Total transactions with owners of the Parent
Balance as at 31 December 2019
9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,415
44,178
–
–
–
–
–
–
–
5
–
–
–
5
–
–
–
–
–
–
–
–
–
–
–
–
(1,467)
920
93
–
–
–
(454)
–
–
–
(1,467)
920
93
(1,449)
(1,449)
246
9,034
7,831
246
9,034
7,377
–
–
–
–
–
26
–
998
31
20,032
998
(2,707)
(2,707)
(1,683)
18,354
(21)
(21)
15
15
(358)
34,107
80,336
(358)
34,107
80,336
–
–
–
–
–
–
–
21
–
–
21
–
–
–
–
–
–
–
–
–
–
–
–
(349)
939
(101)
–
–
–
489
–
–
–
(319)
54
7,013
6,748
(349)
939
(101)
(319)
54
7,013
7,237
–
–
–
–
80
145
101
145
(2,973)
(2,973)
(2,748)
(2,727)
15
131
38,107
84,846
The aggregate current and deferred tax relating to items that are credited to equity is £293k (2018: debited £515k).
The notes on pages 89 to 127 form an integral part of these financial statements.
Zotefoams plc Annual Report 2019
Notes
1. General information
Zotefoams plc (the “Company”) is a public limited company, which is
listed on the London Stock Exchange and incorporated and domiciled in
England, UK. The registered office of the Company is 675 Mitcham Road,
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. During the year, the Group has applied the following standards
and amendments for the first time for the financial year commencing
1 January 2019:
XX IFRS 16 ‘Leases’;
XX ‘Prepayments Features with Negative Compensation’ – Amendments
to IFRS 9;
XX ‘Long-term Interest in Associates and Joint Ventures’ – Amendments
to IAS 28;
XX ‘Annual Improvements to IFRS Standards 2015–2017 Cycle’;
XX ‘Plan Amendments, Curtailment or Settlement’ – Amendments to
IAS 19; and
XX Interpretation 23 ‘Uncertainty over Income Tax Treatments’.
The Group also elected to adopt the following amendments early:
XX ‘Definition of Material’ – Amendments to IAS 1 and IAS 8.
The Group had to change its accounting policies as a result of adopting
IFRS 16 ‘Leases’. The Group elected to adopt the new rules retrospectively
but recognised the cumulative effect of initially applying the new standard
on 1 January 2019. This is disclosed in note 27. The other amendments
listed above did not have any impact on the amounts recognised in prior
periods and are not expected to significantly affect current or future
periods.
2.1 Basis of preparation
The financial statements of Zotefoams plc have been prepared in
accordance with International Financial Reporting Standards (IFRS) and
IFRS Interpretations Committee (IFRS IC) interpretations, as adopted by
the European Union and with the Companies Act 2006 applicable to
companies reporting under IFRS. 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.
89
i) 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 47 and include the section entitled ‘Risk
management and principal risks’ on pages 33 to 38. This also describes
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 2019, the Group’s financing arrangements amounted to
£55.2m, comprising a multi-currency term loan of £25m, a multi-currency
revolving credit facility of £25m, and a remaining balance of £5.2m of a
further £7.5m sterling annually renewable term loan, repayable in equal
quarterly instalments. The bank facility is for a five-year period and expires
in May 2023. At the date of the statement of financial position, £17.7m was
undrawn on the facility.
The facility is subject to two covenants, which are tested semi-annually:
net debt to EBITDA (leverage) and EBITDA to net finance charges. In
recognition of the current macroeconomic uncertainty, the Group’s banks
have amended the leverage covenant from 3.0x to 4.0x for the 12 months
to 30 June 2020.
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
performances and considering the existing banking facilities, including
the available liquidity and increase in leverage covenant from 3.0x to 4.0x,
have a reasonable expectation that the Group has adequate resources to
continue in operational existence for the next 12 months following the date
of approval of the financial statements.
The uncertainty as to the future impact on the Group of the current
COVID-19 outbreak has been considered as part of the Group’s adoption
of the going concern basis. Our China-based customers and our own
relatively small processing facility for T-FIT® technical insulation in China
returned to work at the beginning of March. Across the Group, public
health measures advised by governments are being followed in support
of their efforts to contain the spread of the virus, and the supply chain
is being proactively managed, as are operating costs and the timing of
capital expenditure. The Board has also resolved not to recommend a
final dividend for the year ended 2019 and will determine the timing for
resumption of dividends as economic conditions stabilise.
The Board has considered a downside scenario that reflects the current
unprecedented uncertainty in the global economy and which we consider
to be severe but plausible. The results of this scenario show that there is
sufficient liquidity in the business for a period of at least 12 months from
the date of approval of these financial statements but shows the potential
for a covenant breach during the test period. The scenario considered
Group revenue 20% below 2019 for the 12 months to 31 December
2020, and 25% below 2019 for the 12 months to 30 June 2021. It applied
foreign exchange rates of $1.30:£1 and €1.15:£1. Set against this were
mitigating actions including tight management of headcount, significantly
reduced capital expenditure, reduced SG&A expenditure and suspension
of dividends. This severe but plausible scenario indicates a material
uncertainty which may cast significant doubt over the Company’s and
Group’s ability to continue as a going concern without further mitigating
actions. The Company and Consolidated financial statements do not
include the adjustments that would result if the Company and Group
were unable to continue as a going concern.
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 financial statements.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 90
Notes
Continued
2. Significant accounting policies (continued)
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) Acquisitions and disposals of non-controlling interests
Acquisitions and disposals of non-controlling interests that do not result
in a change of control are accounted for as transactions with owners in
their capacity as owners and therefore no goodwill is recognised as a
result of such transactions. The adjustments to non-controlling interests
are based on a proportionate amount of the net assets of the subsidiary.
Any difference between the price paid or received and the amount by
which non-controlling interests are adjusted is recognised directly in
equity and attributed to the owners of the Company.
iv) Joint arrangements
The Group applies IFRS 11 to its joint arrangement. 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 arrangement and
determined it to be a joint venture. Interest in the joint venture is accounted
for using the equity method, after initially being recognised at cost.
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. If
this 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.
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 goodwill
at the acquisition date as:
XX the fair value of the consideration transferred; plus
XX the recognised amount of any non-controlling interests in the acquiree;
plus
XX if the business combination is achieved in stages, the fair value re-
measured at acquisition date of the existing interest in the acquiree; less
XX the net recognised amount (generally in fair value) 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 re-measured, 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.
Zotefoams plc Annual Report 2019 91
2. Significant accounting policies (continued)
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 re-measured). 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:
XX 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;
XX 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
at the rate on the dates of each transaction); and
XX 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 as
trading instruments.
Derivatives are initially recognised at fair value on the date when a derivative
contract is entered into, and they are subsequently re-measured 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
or a 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
used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items.
The fair values of various derivative instruments used for hedging purposes
are disclosed in note 22. Movements on the hedging reserve in other
comprehensive income are shown 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.
i) Cash flow 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
hedge 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 hedge 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 remain in equity until 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
cost less 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 financial
year in 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.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 92
Notes
Continued
2. Significant accounting policies (continued)
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
Plant and equipment
Fixtures and fittings
20 years
5–15 years
3–5 years
Assets under construction are depreciated from the beginning of the
following quarter once 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
of identifiable and unique products controlled by the Group are recognised
as intangible assets where the following criteria are met:
XX it is technically feasible to complete the asset so that it will be available
for use;
XX management intends to complete the asset and use or sell it;
XX there is an ability to use or sell the asset;
XX it can be demonstrated how the asset will generate probable future
economic benefits;
XX adequate technical, financial and other resources to complete the
development and to use or sell the asset are available; and
XX the expenditure attributable to the asset during its development can
be reliably 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
subsequent period.
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
fair value 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
in a subsequent period.
v) Amortisation
The estimated useful lives of the Group’s intangible assets are as follows:
Marketing related
Customer related
Technology related
Software related
5–15 years
2–10 years
5–20 years
3–10 years
Capitalised development
3–10 years, from the date
the patent is granted
Amortisation methods, useful lives and residual values are reviewed at
each reporting date and adjusted if appropriate.
2.8 Financial assets
i) Classifications
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
profit or 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 in the short term. Derivatives
are also categorised as held for trading, unless they are designated
as hedges. Assets in this category are classified as current assets if
expected to be settled within 12 months, otherwise they are classified
as non-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.
Zotefoams plc Annual Report 2019
93
2. Significant accounting policies (continued)
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 in which
they arise.
iii) Offsetting financial 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 financial 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 the 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 highly
liquid 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.
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 as
part 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
(or group 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.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 94
Notes
Continued
2. Significant accounting policies (continued)
2.15 Employee benefits
i) Defined contribution schemes
A defined contribution scheme is a pension scheme 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 schemes are recognised
as an expense in the income statement as incurred.
For defined contribution schemes, 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
or a reduction in the future payments is available.
Share awards granted since 1 January 2006 are valued using a
Black–Scholes 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.
ii) Defined Benefit Schemes
A defined benefit scheme is a pension scheme that is not a defined
contribution scheme. Typically, defined benefit schemes 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 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.
The liability recognised in the statement of financial position in respect
of defined benefit schemes 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 rate bonds that have terms to maturity
approximating to the terms of the related pension obligation.
The current service cost of the Defined Benefit Pension Scheme,
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 in
other comprehensive 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 the
share awards granted:
XX including any market performance conditions (for example, an entity’s
share price);
XX 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
XX 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).
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.
i) Own shares held by the Employee Benefit Trust (EBT)
Transactions of the EBT are treated as being those of the Group and are
therefore 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.
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
they are incurred.
Zotefoams plc Annual Report 2019 95
2. Significant accounting policies (continued)
2.19 Revenue
Revenue comprises sale of foam, sale of equipment, and licence and
royalty income. All these revenue streams are revenues arising from
contracts with customers. The recognition and measurement principles
of IFRS 15 are applied as set out below.
Revenue excludes inter-company revenues and value added taxes and
are stated net of discounts and returns.
i) Sale of foam
Revenue from sale of foam is recognised when the 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.
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 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
enacted by the statement of financial position date and are expected
to apply when the related deferred tax asset is realised, or the deferred
tax liability 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.
ii) Sale of equipment
Revenue from sale of equipment is recognised when the 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.
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 or
different 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 in
equity 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
the Company’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,
and are presented within the line items to which they best relate.
iii) Licence and royalty income
Revenue from usage-based royalties in exchange for a licence of the
Group’s technology is recognised at the later of when the performance
obligation is satisfied and when the sale or usage occurs. Licence revenue
from contracts, which include a minimum royalty guarantee, to provide
use of the Group’s technology, are recognised at a point in time when it
becomes unconditional.
2.20 Leases
From 1 January 2019, the Group implemented IFRS 16 ‘Leases’ and
changed its accounting policy for leases where the Group is the lessee.
The new policy is described in note 12 and the impact of the change in
note 27.
Until 31 December 2018, leases of property and equipment where the
Group, as lessee, had substantially all the risks and rewards of ownership
were classified as finance leases. Finance leases were capitalised, at the
lease’s inception at the fair value of the leased property or, if lower, the
present value of the minimum lease payments. The corresponding rental
obligations, net of finance charges, were included in other short-term
and long-term payables. Each lease payment was allocated between the
liability and finance cost. The finance cost was 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 for each period. The
property and equipment acquired under finance leases was depreciated
over the asset’s useful life, or over the shorter of the asset’s useful life and
the lease term if there was no reasonable certainty that the Group would
obtain ownership at the end of the lease term.
Leases in which a significant portion of the risks and rewards of ownership
were not transferred to the Group as lessee were classified as operating
leases. Payments made under operating leases (net of any incentives
received from the lessor) were charged to the income statement on a
straight-line basis over the period of the lease.
2.21 Current and deferred tax
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
in equity, in which case it is recognised in other comprehensive income
or directly 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.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 96
Notes
Continued
2. Significant accounting policies (continued)
2.24 New standards and interpretations not yet adopted
The IASB and IFRS Interpretations Committee have issued the following standards and interpretations with an effective date of implementation for
accounting 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 2019
The following standards and interpretations apply for the first time to financial reporting periods commencing on or after 1 January 2019:
IFRS 16 ‘Leases’
Interpretation 23 ‘Uncertainty over Income Tax Treatments’
‘Prepayment Features with Negative Compensation’ – Amendments to IFRS 9 ‘Financial
Instruments’
‘Long-term Interests in Associates and Joint Ventures’ – Amendments to IAS 28 ‘Investments in
Associates and Joint Ventures’
‘Annual Improvements to IFRS Standards 2015–2017 Cycle’
IFRS 3 ‘Business Combinations’
IFRS 11 ‘Joint Arrangements’
IAS 12 ‘Disclosure of Interests in Other Entities’
IAS 23 ‘Borrowing Costs’
‘Plan Amendment, Curtailment or Settlement’ – Amendments to IAS 19 ‘Employee Benefits’
Effective for accounting
periods beginning on
or after
1 January 2019
1 January 2019
1 January 2019
1 January 2019
1 January 2019
1 January 2019
1 January 2019
1 January 2019
1 January 2019
Endorsed by
the EU
Expected
Impact
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
See note 27
None
None
None
None
None
None
None
None
ii) Forthcoming requirements
As at 31 December 2019, the following standards and interpretations had been issued but were not mandatory for annual reporting periods ending on
31 December 2019.
IFRS 17 ‘Insurance Contracts’
‘Definition of Material’ – Amendment to IAS 1 ‘Presentation of financial Statements’
‘Definition of Material’ – Amendment to IAS 8 ‘Accounting Policies’
‘Definition of a Business’ – Amendments to IFRS 3 ‘Business Combinations’
Revised Conceptual Framework for Financial Reporting
Interest rate benchmark reform – Amendments to IFRS 9 ‘Financial Instruments’
Interest rate benchmark reform – Amendments to IAS 39 ‘Financial Instruments: Recognition
and Measurement’
Interest rate benchmark reform – Amendments to IFRS 7 ‘Financial Instruments: Disclosures’
Sale or contribution of assets between an investor and its associate or joint venture –
Amendments to IFRS 10 ‘Consolidated Financial Statements’ and IAS 28 ‘Investments
in Associates and Joint Ventures’
Effective for accounting
periods beginning on
or after
Endorsed by
the EU
Expected
Impact
1 January 2021
1 January 2020
1 January 2020
1 January 2020
1 January 2020
1 January 2020
1 January 2020
1 January 2020
No
Yes
Yes
No
Yes
No
No
No
None
None
None
None
None
None
None
None
n/a*
n/a*
n/a*
*
In December 2015, the IASB decided to defer the application date of this amendment until such time as the IASB has finalised its research project on the equity method.
Zotefoams plc Annual Report 2019
97
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 CEO,
D Stirling, who is considered to be the Chief Operating Decision-Maker for the purpose of evaluating segment performance and allocating resources.
The Group CEO primarily uses a measure of profit for the year (before exceptional items) to assess the performance of the operating segments.
The Group manufactures and sells high-performance foams, and licenses related technology for specialist markets worldwide. The Group’s activities
are categorised as follows:
XX Polyolefin Foams: these foams are made from olefinic homopolymer and copolymer resin. The most common resin used is polyethylene.
XX 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 polyether block amide (PEBA). Foams are sold under the brand
name ZOTEK®, while technical insulation products manufactured from certain materials are branded as T-FIT®.
XX MuCell Extrusion LLC (MEL): licenses microcellular foam technology and sells related machinery.
Polyolefin Foams
HPP
MEL
Eliminations
Consolidated
2019
£’000
2018
£’000
2019
£’000
2018
£’000
2019
£’000
2018
£’000
Group revenue
51,363
57,158
26,477
22,009
3,097
1,945
Segment profit/(loss) pre-amortisation
7,301
9,448
6,430
5,814
(1,270)
(1,628)
Amortisation of acquired intangible assets
–
–
–
–
(276)
(262)
Segment profit/(loss)
7,301
9,448
6,430
5,814
(1,546)
(1,890)
Foreign exchange (losses)/gains
Unallocated central costs
Operating profit before exceptional items
Financing costs
Financing income
Share of profit/(loss) from joint venture
Taxation (before exceptional items)
Profit for the year (before exceptional items)
–
–
–
–
72
–
–
–
–
–
(16)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100,497
95,153
34,088
22,903
8,106
7,922
–
–
–
–
–
–
(44,530)
(37,604)
(7,254)
(1,791)
(659)
(447)
–
–
–
–
–
–
Segment assets
Unallocated assets
Total assets
Segment liabilities*
Unallocated liabilities
Total liabilities
Depreciation of PPE
4,009
3,894
703
339
Depreciation of right-of-use assets
Amortisation
Capital expenditure:
268
344
–
384
43
55
Property, plant and equipment (PPE)
21,222
15,242
3,475
Right-of-use assets
Intangible assets
804
611
–
17
126
97
–
–
989
–
243
83
–
264
139
–
206
83
–
382
62
–
34
2019
£’000
(77)
2018
£’000
2019
£’000
2018
£’000
(75)
80,860
81,037
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12,461
13,634
(276)
(262)
12,185
13,372
(1,405)
818
(1,679)
(2,616)
9,101
11,574
(462)
(753)
50
72
–
(16)
(1,594)
(2,164)
7,167
8,641
142,691 125,978
327
923
143,018 126,901
(52,443)
(39,842)
(935)
(1,978)
(53,378)
(41,820)
4,795
4,316
311
663
–
766
24,836
16,293
930
914
–
294
Unallocated assets are made up of deferred tax assets of £327k (2018: £923k). Unallocated liabilities are made up of corporation tax £261k (2018:
£1,978k) and deferred tax liabilities £674k (2018: nil).
* Segment liabilities include current lease liabilities of £369k (2018: nil) and non-current lease liabilities of £836k (2018: nil) under the new IFRS 16 ‘Leases’
standard, see note 27 for full financial impact in the year. These liabilities have been allocated to the segments as follows:
Polyolefin Foams: £1,042k (2018: nil), HPP: £163k (2018: nil) and MEL: £nil (2018: nil).
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.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
98
Notes
Continued
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.
For the year ended 31 December 2019
Group revenue from external customers
Non-current assets
Capital expenditure – PPE
For the year ended 31 December 2018
Group revenue from external customers
Non-current assets
Capital expenditure – PPE
United
Kingdom
£’000
Continental
Europe
£’000
North
America
£’000
Rest of
the world
£’000
12,875
44,231
7,239
13,137
38,816
11,048
25,503
13,038
12,069
29,342
1,488
1,488
22,010
35,908
5,380
21,340
33,842
3,677
20,472
462
148
17,218
416
81
Total
£’000
80,860
93,639
24,836
81,037
74,562
16,294
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 ‘Rest of the World’ contributes £12,858k (2018: £10,092k) to the Group’s revenue.
Analysis of revenue by category
Breakdown of revenues by products and services for the Group:
Sale of foam
Licence and royalty income
Sale of equipment
Less: eliminations
Group revenue
4. Exceptional item
Past service costs
Settlement income relating to legal claim
2019
£’000
77,840
836
2,261
(77)
2018
£’000
79,167
895
1,050
(75)
80,860
81,037
2019
£’000
–
(1,050)
2018
£’000
950
–
During the 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.
During the prior year, following a High Court ruling regarding Guaranteed Minimum Pension (GMP) equalisation, the Company provided £940k for
additional liabilities in its DB Scheme based on calculations by the Company's actuaries and £10k for related expenses.
Zotefoams plc Annual Report 2019 99
2019
£’000
(784)
1,494
409
2018
£’000
1,197
1,986
311
22,168
22,092
233
663
5,106
77
1,236
(121)
1,405
161
19
415
766
4,316
–
1,107
(243)
(818)
205
17
5. Expenses by nature
Included in profit for the year are:
Changes in inventories of finished goods and work in progress
Changes in raw materials and consumables used
Inventory write-down
Employee benefits expenses
Operating lease charges (note 12)
Amortisation (note 13)
Depreciation of PPE and right-of-use assets (note 11 and note 12)
Disposal of assets
Research and development costs expensed
Development costs capitalised (note 13)
Net exchange losses/(gains)
External auditors’ remuneration:
Group – Fees payable to the Group’s external auditors and its associates for the audit of the Company and consolidated
financial statements*
Fees payable to the external auditors and its associates in respect of other services:
– audit-related assurance services
Total cost of sales, distribution costs and administrative expenses
70,709
70,413
* The 2018 amount includes fees of £60k for the audit of the financial statements for the year ended 31 December 2017.
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:
Production
Maintenance
Distribution and marketing
Administration and technical
The aggregate payroll costs of these persons were as follows:
Wages and salaries*
Social security costs*
Share options granted to Directors and employees (note 25)
Pension costs, including past service costs
* Net of directly attributable costs capitalised
Number of employees
Group
Company
2019
242
28
78
106
454
2018
204
28
74
110
416
Group
2019
£’000
2018
£’000
18,132
17,090
2,508
390
1,138
22,168
898
2,108
822
2,072
22,092
668
2019
161
21
46
84
312
2018
148
22
44
86
300
Company
2019
£’000
12,959
1,290
339
845
15,433
411
2018
£’000
12,425
1,225
696
1,948
16,294
287
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
100
Notes
Continued
6. Staff numbers and expenses (continued)
Details of aggregate Directors’ emoluments are provided below:
Aggregate emoluments
Aggregate gains made on the exercise of the share options
Aggregate amounts receivable under long-term incentive schemes
Company contribution to money purchase pension scheme
2019
£’000
645
740
338
66
2018
£’000
568
306
730
56
1,789
1,660
Further details on Directors’ emoluments, including details of the highest-paid Director, are included in the Remuneration report on page 65.
7. Finance income and costs
Finance income
Interest income
Finance costs
Finance costs on bank loans and lease liabilities
Lease liabilities interest
Amount capitalised
Finance costs expensed
Interest on defined benefit pension obligation (note 24)
2019
£’000
(50)
2019
£’000
1,164
28
(933)
259
203
462
2018
£’000
–
2018
£’000
644
–
(31)
613
140
753
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 3.38% (2018: 3.95%).
8. Income tax expense
UK corporation tax
Overseas tax
Adjustment to prior year UK corporation tax charge
Total current tax
Deferred tax
Income tax expense
2019
£’000
1,011
11
(405)
617
977
1,594
Factors affecting the tax charge
The weighted average applicable tax rate for the Group is 18.72% (2018: 17.99%). Differences arise on account of the following factors:
Tax reconciliation
Profit before tax
Tax at the UK tax rate of 19.00% (2018: 17.99%)
Effects of:
Expenses not deductible for tax purposes
Research and development and other tax credits
Overseas tax losses for which no deferred income tax asset recognised
Effect of different overseas tax rates
Other differences
Adjustments to prior year UK corporation tax charge
2019
£’000
9,811
1,864
90
(133)
225
(77)
30
(405)
1,594
2018
£’000
2,452
20
117
2,589
(586)
2,003
2018
£’000
9,855
1,773
13
(171)
344
–
(73)
117
2,003
Zotefoams plc Annual Report 2019
101
8. Income tax expense (continued)
Changes to UK corporation tax rates were substantively enacted as part of Finance Bill 2016 (on 6 September 2016). These include reductions to the
main rate to reduce the rate to 17% from 1 April 2020. Deferred taxes at the balance sheet date have been measured using these enacted tax rates
and reflected in these financial statements.
In November 2019, the Prime Minister announced that he intended to cancel the future reduction in corporate tax rate from 19% to 17%. This
announcement does not constitute substantive enactment and therefore deferred taxes at the balance sheet date continue to be measured at the
enacted tax rate of 17%. However, it is possible that the corporation tax rate remains at 19% after 1 April 2020.
The Tax Cuts and Jobs Act (“US Tax Reform”), enacted on 22 December 2017, reduced the US federal corporate income tax rate from 35% to 21%.
Deferred taxes at the statement of financial position date have been measured using these enacted tax rates and reflected in these financial statements.
The Group has not identified any uncertain tax positions as at 31 December 2019 (2018: none).
9. Dividends and earnings per share
Prior year final dividend of 4.15p (2018: 4.02p) per 5.0p ordinary share
Interim dividend of 2.03p (2018: 1.97p) per 5.0p ordinary share
Dividends paid during the year
2019
£’000
1,996
977
2,973
2018
£’000
1,763
944
2,707
The Board has a progressive dividend policy, recognising the importance to our shareholders of the dividend as part of their overall return. However,
as described above, the extraordinary uncertainty posed by the COVID-19 outbreak means that we are focused on minimising cash outflows and
strengthening our financial position in the short term. As such, the Board believes it prudent not to recommend a final dividend for the year ended 31
December 2019 (2018: 4.15p). The Board will keep this situation under review and will determine the timing for resumption of dividends as economic
conditions stabilise.
Earnings per ordinary share
Earnings per ordinary share is calculated by dividing consolidated profit after tax attributable to equity holders of the Company of £8,217k (2018: £7,852k) 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 2019 was 178,395 (2018: 403,758). 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’.
Weighted average number of ordinary shares in issue
Adjustments for share options
Diluted number of ordinary shares issued
2019
2018
48,054,819
46,310,356
752,321
722,503
48,807,140
47,032,859
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 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. Azote Asia Limited is the exclusive distributor of Zotefoams’ Azote® products
in the Far East. Azote Asia Limited works closely with its customers to develop products and find innovative solutions to meet their business needs
through an ongoing commitment to quality, sustained value and customer service. 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.
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:
Cash and cash equivalents
Other current assets (excluding cash)
Total current assets
Financial liabilities (excluding trade payables)
Other current liabilities (including trade payables)
Total current liabilities
Net assets
As at 31 December
2019
£’000
255
981
1,236
(40)
(906)
(946)
290
2018
£’000
730
1,009
1,739
(12)
(1,581)
(1,593)
146
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 102
Notes
Continued
10. Investments in joint venture (continued)
Summarised statement of comprehensive income:
Revenue
Finance costs
Profit/(loss) before tax
Income tax expense
Profit/(loss) after tax
Other comprehensive income
Total comprehensive income/(expense)
Dividend received from joint venture
As at 31 December
2019
£’000
3,716
(3)
144
–
144
–
144
–
2018
£’000
3,169
(2)
(32)
–
(32)
–
(32)
–
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:
Opening net assets
Profit/(loss) for the year
Other comprehensive income
Closing net assets
Interest in joint venture @ 50%
Information of the joint venture
Carrying value at 1 January
Share of profit/(loss) for the year
Carrying value at 31 December
2019
£’000
146
144
–
290
145
2019
£’000
73
72
145
2018
£’000
178
(32)
–
146
73
2018
£’000
89
(16)
73
Zotefoams plc Annual Report 2019
103
11. Property, plant and equipment
Group
Cost
Balance at 1 January 2018
Additions
Disposals
Reclassifications from under construction
Transfers
Effect of movement in foreign exchange
Balance at 31 December 2018
Balance at 1 January 2019
Adjustment for change in accounting policy (note 27)
Additions
Disposals
Transfers
Effect of movement in foreign exchange
Balance at 31 December 2019
Accumulated depreciation
Balance at 1 January 2018
Depreciation charge for the year
Disposals
Effect of movement in foreign exchange
Balance at 31 December 2018
Balance at 1 January 2019
Adjustment for change in accounting policy (note 27)
Depreciation charge for the year
Disposals
Effect of movement in foreign exchange
Balance at 31 December 2019
Net book value
At 1 January 2018
At 31 December 2018 and 1 January 2019
At 31 December 2019
Land and
buildings
£’000
Plant and
equipment
£’000
Fixtures and
fittings
£’000
Leased
machinery
£’000
Under
construction
£’000
Total
£’000
16,656
–
(920)
2,768
–
480
18,984
18,984
–
8
–
12,383
(300)
62,293
1,670
(4,062)
18,415
–
2,497
80,813
80,813
–
744
(77)
3,364
(870)
7,401
155
(2,474)
640
(2,469)
44
3,297
3,297
–
172
(16)
496
(34)
31,075
83,974
3,915
11,048
44,697
611
(920)
222
10,961
10,961
–
657
–
(147)
3,229
(4,059)
1,574
45,441
45,441
–
3,784
(8)
(281)
4,122
399
(2,474)
66
2,113
2,113
–
354
(8)
(22)
11,471
48,936
2,437
5,608
8,023
19,604
17,596
35,372
35,038
3,279
1,184
1,478
432
–
–
–
–
–
432
432
(432)
–
–
–
–
–
49
77
–
–
126
126
(126)
–
–
–
–
383
306
–
27,250
14,468
114,032
16,293
–
(7,456)
(21,823)
2,469
358
22,722
22,722
–
–
3,379
126,248
126,248
–
(432)
23,912
24,836
–
(16,243)
(93)
–
(859)
(2,063)
29,532
148,496
–
–
–
–
–
–
–
–
–
–
–
27,250
22,722
29,532
59,916
4,316
(7,453)
1,862
58,641
58,641
(126)
4,795
(16)
(450)
62,844
54,116
67,607
85,652
Depreciation is included in cost of sales in the income statement.
From 2019, leased assets are presented as a separate line item in the balance sheet, see note 12.
During the year, the Group has capitalised borrowing costs amounting to £933k (2018: £31k) on qualifying assets. Borrowing costs were capitalised at the
rate of its specific borrowings of 3.95% (2018: 3.95%).
Bank borrowings are secured on property, plant and equipment. Refer to note 19 for details.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
104
Notes
Continued
11. Property, plant and equipment (continued)
Company
Land and
buildings
£’000
Plant and
equipment
£’000
Fixtures and
fittings
£’000
Leased
machinery
£’000
Under
construction
£’000
Cost
Balance at 1 January 2018
Additions
Disposals
Reclassifications from under construction
Transfers
Balance at 31 December 2018
Balance at 1 January 2019
Adjustment for change in accounting policy (note 27)
Additions
Transfers
Balance at 31 December 2019
Accumulated depreciation
Balance at 1 January 2018
Depreciation charge for the year
Disposals
Balance at 31 December 2018
Balance at 1 January 2019
Adjustment for change in accounting policy (note 27)
Depreciation charge for the year
Balance at 31 December 2019
Net book value
At 1 January 2018
At 31 December 2018 and 1 January 2019
At 31 December 2019
10,590
–
(920)
28
–
9,698
9,698
–
2
12,431
22,131
7,590
226
(920)
6,896
6,896
–
222
7,118
3,000
2,802
15,013
57,027
169
(4,056)
1,804
–
54,944
54,944
–
352
2,830
58,126
40,631
2,043
(4,055)
38,619
38,619
–
2,123
40,742
16,396
16,325
17,384
6,698
31
(2,455)
542
(2,469)
2,347
2,347
–
84
496
2,927
3,613
311
(2,455)
1,469
1,469
–
272
1,741
3,085
878
1,186
432
–
–
–
–
432
432
(432)
–
–
–
49
77
–
126
126
(126)
–
–
383
306
–
12. Leases
(i) Amounts recognised in the statement of financial position relating to leases:
Right-of-use assets
5,334
10,863
–
(2,374)
2,469
16,292
16,292
–
6,801
(15,757)
–
–
–
–
–
–
–
–
5,334
16,292
7,336
Property
Equipment
Lease liabilities
Current
Non-current
Group
Company
2019
£’000
72
1,135
1,207
1 January
2019*
£’000
133
455
588
2019
£’000
–
1,064
1,064
Group
Company
2019
£’000
369
836
1,205
1 January
2019*
£’000
131
255
386
2019
£’000
291
769
1,060
*
In the previous year, the Group only recognised leased assets and liabilities in relation to leases that were classified as “finance leases” under IAS 17 ‘Leases’. The assets were presented in property,
plant and equipment and the liabilities as part of the Group’s borrowings. For adjustments recognised on adoption of IFRS 16 on 1 January 2019, please refer to note 27.
7,336
90,520
Total
£’000
80,081
11,063
(7,431)
–
–
83,713
83,713
(432)
7,239
–
51,883
2,657
(7,430)
47,110
47,110
(126)
2,617
49,601
28,198
36,603
40,919
1 January
2019*
£’000
–
389
389
1 January
2019*
£’000
108
294
402
Zotefoams plc Annual Report 2019
105
12. Leases (continued)
Additions to the right-of-use assets during the 2019 financial year were £930k for Group and £914k for Company.
(ii) Amounts recognised in the income statement relating to leases:
Depreciation charge of right-of-use assets
Property
Equipment
Interest expenses (included in finance costs)
Expense relating to short-term leases (included in cost of sales and administrative
expenses)
Expense relating to leases of low-value assets that are not shown above as short-term
leases (included in administrative expenses)
The total cash outflow for leases in 2019 was £343k for Group and £265k for Company.
Group
Company
2019
£’000
1 January
2019*
£’000
2019
£’000
1 January
2019*
£’000
–
–
–
61
250
311
28
233
19
–
–
–
–
238
238
23
24
2
(iii) The Group’s leasing activities and how these are accounted for:
The Group leases property and various equipment. Rental contracts are typically 2–5 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.
Until the 2018 financial year, leases of property, plant and equipment were classified as either finance or operating leases, see note 27 for details.
Payments made under operating leases (net of any incentives received from the lessor) were charged to the income statement on a straight-line basis over
the period of the lease.
From 1 January 2019, 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:
XX fixed payments (including in-substance fixed payments), less any lease incentives receivable;
XX variable lease payments that are based on an index or a rate;
XX amounts expected to be payable by the lessee under residual value guarantees;
XX the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
XX 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:
XX the amount of initial measurement of lease liability;
XX any lease payments made at or before the commencement date less any lease incentives received;
XX any initial direct costs; and
XX 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 of small items of office furniture and equipment.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 106
Notes
Continued
13. Intangible assets
Group
Cost
Balance at 1 January 2018
Additions
Effect of movement in foreign exchange
Balance at 31 December 2018
Balance at 1 January 2019
Additions
Effect of movement in foreign exchange
Balance at 31 December 2019
Accumulated amortisation
Balance at 1 January 2018
Charge for the year
Effect of movement in foreign exchange
Balance at 31 December 2018
Balance at 1 January 2019
Charge for the year
Effect of movement in foreign exchange
Balance at 31 December 2019
Net book value
At 1 January 2018
At 31 December 2018 and 1 January 2019
At 31 December 2019
Marketing
related
£’000
Customer
related
£’000
Technology
related
£’000
Software
related
£’000
Goodwill
£’000
Capitalised
development
£’000
240
–
8
248
248
–
(8)
240
131
24
56
211
211
25
(8)
228
109
37
12
311
–
85
396
396
–
(9)
387
285
–
111
396
396
–
(9)
387
26
–
–
4,701
34
195
4,930
4,930
207
(168)
4,969
2,315
358
(68)
2,605
2,605
240
(93)
2,752
2,386
2,325
2,217
2,566
17
(9)
2,574
2,574
586
–
2,255
–
126
2,381
2,381
–
(77)
3,160
2,304
1,015
384
–
1,399
1,399
398
–
1,797
1,551
1,175
1,363
–
–
–
–
–
–
–
–
2,255
2,381
2,304
354
243
–
597
597
121
–
718
–
–
–
–
–
–
–
–
354
597
718
Total
£’000
10,427
294
405
11,126
11,126
914
(262)
11,778
3,746
766
99
4,611
4,611
663
(110)
5,164
6,681
6,515
6,614
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
by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below.
The growth 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 that 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 23% but there would still be sufficient headroom. If the discount rate
was increased to 13%, the headroom would decrease by 14% but there would still be sufficient headroom.
Zotefoams plc Annual Report 2019
107
Total
£’000
3,041
251
3,292
3,292
707
3,999
1,136
383
1,519
1,519
398
1,917
1,905
1,773
2,082
Customer
related
£’000
Software
related
£’000
Capitalised
development
£’000
121
–
121
121
–
121
121
–
121
121
–
121
–
–
–
2,566
8
2,574
2,574
586
3,160
1,015
383
1,398
1,398
398
1,796
1,551
1,176
1,364
354
243
597
597
121
718
–
–
–
–
–
–
354
597
718
2019
£’000
23,549
7,027
30,576
2018
£’000
23,546
3
23,549
13. Intangible assets (continued)
Company
Cost
Balance at 1 January 2018
Additions
Balance at 31 December 2018
Balance at 1 January 2019
Additions
Balance at 31 December 2019
Accumulated amortisation
Balance at 1 January 2018
Charge for the year
Balance at 31 December 2018
Balance at 1 January 2019
Charge for the year
Balance at 31 December 2019
Net book value
At 1 January 2018
At 31 December 2018 and 1 January 2019
At 31 December 2019
14. Investment in subsidiaries
Company
Shares in Group undertakings – at cost
Additions during the year
During the year the Company, through its subsidiary Zotefoams International Limited, incorporated a new subsidiary T-FIT Insulation Solutions India Private
Limited on 22 March 2019 for the consideration of £124k, and increased its share capital in Zotefoams Poland Sp. z.o.o. for the consideration of £6,904k.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
108
Notes
Continued
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
Zotefoams Pension Trustees Limited
675 Mitcham Road, Croydon CR9 3AL
Zotefoams Inc. (indirectly owned)
Zotefoams Midwest LLC (indirectly owned)
MuCell Extrusion LLC (indirectly owned)
Corporation Trust Center, 1209 Orange Street, Wilmington,
New Castle, Delaware
Corporation Trust Center, 1209 Orange Street, Wilmington,
New Castle, Delaware
Corporation Trust Center, 1209 Orange Street, Wilmington,
New Castle, Delaware
Zotefoams Operations Limited (indirectly owned)
675 Mitcham Road, Croydon CR9 3AL
Zotefoams Technology Limited (indirectly owned)
675 Mitcham Road, Croydon CR9 3AL
KZ Trading and Investment Limited (indirectly owned)
15/F OTB Building, 160 Gloucester Road, Hong Kong
Zotefoams T-Fit Material Technology (Kunshan) Limited
(indirectly owned)
181 Huanlou Road, Kunshan, Jiangsu
Zotefoams France SAS (indirectly owned)
29 Boulevard Albert Einstein, Nantes
Zotefoams Poland Sp. z.o.o. (indirectly owned)
Al. Jerozolimskie 56C, 00-803, Warsaw
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
T-Fit Insulation Solutions India Private Limited
(indirectly owned)
335 Udyog Vihar Phase IV Gurgaon, Gurgaon, Haryana 122015 100%
Great Britain
Great Britain
USA
USA
USA
Great Britain
Great Britain
Hong Kong
China
France
Poland
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, distributes T-FIT technical insulation products and operated a branch in Thailand until March 2019,
at which point closure procedures commenced. 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 2019. Zotefoams Poland Sp. z.o.o. is a wholly owned subsidiary of Zotefoams
International Limited and did not engage in any trading activities in 2019. T-Fit Insulation Solutions India Private Limited incorporated and began trading
in 2019, 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,
JE2 3QT. 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 2019 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. During the year it closed its branch in Germany.
15. Inventories
Raw materials and consumables
Work in progress
Finished goods
Inventories are shown net of:
Provision for impairment losses
Group
Company
2019
£’000
9,542
4,827
4,235
18,604
2018
£’000
8,048
5,561
4,285
17,894
2019
£’000
8,131
3,302
2,929
2018
£’000
6,905
3,450
3,089
14,362
13,444
1,756
2,232
1,315
1,784
In 2019, the value of inventory recognised by the Group as an expense in cost of goods sold was £38,521k (2018: £40,318k).
Zotefoams plc Annual Report 2019
109
15. Inventories (continued)
Movement in provision
Movements in the inventory provision during the financial year is set out below:
Provision for impairment losses as at 1 January 2019
Inventories written off against provision
Additional provisions recognised
Unused amounts reversed
Provision for impairment losses as at 31 December 2019
16. Trade and other receivables
Amounts falling due over one year:
Prepayments and accrued income
Amounts falling due within one year:
Trade receivables
Amounts owed by Group undertakings
Other receivables
Prepayments and accrued income
Group
2019
£’000
2,232
(409)
422
(489)
1,756
Company
2019
£’000
1,784
(311)
312
(470)
1,315
Group
2019
£’000
2018
£’000
Company
2019
£’000
2018
£’000
166
439
166
439
19,448
23,753
–
2,832
1,035
23,481
–
2,240
378
26,810
13,736
27,979
490
341
42,712
16,575
18,686
1,732
128
37,560
Amounts owed by Group undertakings are payable on demand. The trading portion does not attract any interest. Unsecured loans provided to Zotefoams
Inc. MuCell Extrusion LLC, KZ Trading and Investments Ltd and Zotefoams Poland Sp. z.o.o. through Zotefoams International Ltd during the year total
£8,431k (2018: £6,828) and attract an interest charge of 3.29% for loans linked to US dollar LIBOR, 1.35% for euro and 2.54% for sterling (2018: 3.90%
for Zotefoams Inc and 3.54% for MuCell Extrusion LLC).
Bank borrowings are secured on the trade receivables of the Group. Refer to note 19 for details.
17. Cash and cash equivalents
Cash at bank and in hand
18. Trade and other payables
Trade payables
Other taxation and social security
Other payables
Accruals and deferred income
Group
2019
£’000
6,656
2018
£’000
7,073
Company
2019
£’000
4,107
Group
Company
2019
£’000
3,066
460
737
2,568
6,831
2018
£’000
6,301
463
1,441
3,123
11,328
2019
£’000
2,555
377
385
1,588
4,905
2018
£’000
5,626
2018
£’000
4,587
356
1,055
2,208
8,206
Amounts owed to Group undertakings are unsecured, repayable on demand and attract no interest.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
110
Notes
Continued
19. Interest-bearing loans and borrowings
Current bank borrowings
Non-current bank borrowings
Non-current lease liabilities*
Group
Company
Note
2019
£’000
15,717
21,630
–
22
37,347
2018
£’000
14,500
5,231
306
20,037
2019
£’000
15,717
21,630
–
2018
£’000
14,500
5,231
306
37,347
20,037
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 £55.2m comprises a £25m multi-currency term
loan, repayable in two equal instalments of £5m during year four and year five, with the remainder at the end of year five, a £25m multi-currency revolving
credit facility, repayable on demand and a further £5.2m sterling term loan, renewable annually and repayable over five years in equal quarterly repayments
over the term. The negotiated facility also includes a £25m accordion feature to provide additional flexibility to pursue further investment opportunities in
the future.
At the end of the financial year, the Group has utilised £21.9m ($29m) of the multi-currency term loan, £10.7m (€12.5m) of the revolving facility and has
an outstanding £5.2m on the sterling term loan. The total amount of £37.8m is gross of £0.5m loan origination fees paid upfront, being amortised over
the period of the loan. The difference of £0.3m between the undrawn amount of £17.7m and £17.4m (£55.2m – £37.8m) is due to the different exchange
rates used by the Group and the bank.
The Group and the Company have the following undrawn borrowing facilities:
Floating rate:
Expiring within one year
Expiring beyond one year
Total
2019
£’000
2018
£’000
–
17,725
17,725
–
37,030
37,030
The difference of £0.3m between the undrawn amount of £17.7m and £17.4m (£55.2m – £37.8m) is due to the different exchange rates used by the Group
and the bank.
Reconciliation of liabilities arising from financing activities:
Group
Long-term borrowings
Short-term borrowings
Non-current lease liabilities*
Total liabilities
Net cash
inflows/
(outflows)
£’000
7,846
10,903
–
18,749
2018
£’000
5,231
14,500
306
20,037
Non-cash changes
Loan
origination fee
£’000
Loan
restructure
£’000
Recognition
of lease
liabilities
£’000
Foreign
exchange
movement
£’000
(74)
(60)
–
(134)
9,108
(9,108)
–
–
–
–
(306)
(306)
(481)
(518)
–
(999)
* Lease liabilities have been reclassified as their own separate item in the statement of financial position. See note 27 for details about the impact from changes in accounting policies.
Group
Long-term borrowings
Short-term borrowings
Non-current lease liabilities
Total liabilities
Net cash
inflows/
(outflows)
£’000
(2,785)
3,226
(77)
364
2017
£’000
8,155
11,228
383
19,766
Non-cash changes
Loan
origination fee
£’000
Loan
restructure
£’000
Recognition
of lease
liabilities
£’000
Foreign
exchange
movement
£’000
(243)
(71)
–
(314)
–
–
–
–
–
–
–
–
104
117
–
221
2019
£’000
21,630
15,717
–
37,347
2018
£’000
5,231
14,500
306
20,037
Zotefoams plc Annual Report 2019
111
2019
£’000
21,630
15,717
–
37,347
2018
£’000
5,231
14,500
306
20,037
2018
£’000
1,121
548
(277)
(67)
19. Interest-bearing loans and borrowings (continued)
Company
Long-term borrowings
Short-term borrowings
Non-current lease liabilities*
Total liabilities
Net cash
inflows/
(outflows)
£’000
7,846
10,903
–
18,749
2018
£’000
5,231
14,500
306
20,037
Non-cash changes
Loan
origination fee
£’000
Loan
restructure
£’000
Recognition
of lease
liabilities
£’000
Foreign
exchange
movement
£’000
(74)
(60)
–
(134)
9,108
(9,108)
–
–
–
–
(306)
(306)
(481)
(518)
–
(999)
* Lease liabilities have been reclassified as their own separate item in the statement of financial position. See note 27 for details about the impact from changes in accounting policies.
Company
Long-term borrowings
Short-term borrowings
Non-current lease liabilities
Total liabilities
Net cash
inflows/
(outflows)
£’000
1,635
3,756
(77)
5,314
2017
£’000
3,735
10,698
383
14,816
Non-cash changes
Loan
origination fee
£’000
Loan
restructure
£’000
Recognition
of lease
liabilities
£’000
Foreign
exchange
movement
£’000
(243)
(71)
–
(314)
–
–
–
–
–
–
–
–
104
117
–
221
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
Property, plant and equipment
Rolled-over gain
Inventories
Derivatives financial instruments
Defined Benefit Pension Scheme
Share option charges
Tax value of recognised losses carried forward
Set off
Deferred tax (assets)/liabilities
2019
£’000
–
–
(190)
–
2018
£’000
–
–
(277)
(67)
(1,177)
(1,373)
(211)
(137)
(1,715)
1,388
(327)
(521)
(354)
(2,592)
1,669
(923)
2019
£’000
1,480
548
–
34
–
–
–
2,062
(1,388)
674
2018
£’000
1,121
548
–
–
–
–
–
1,669
(1,669)
–
2019
£’000
1,480
548
(190)
34
(1,177)
(1,373)
(211)
(137)
347
–
347
(521)
(354)
(923)
–
(923)
Unrecognised deferred tax assets
The Group has tax losses carried forward in the USA of $1,608k (2018: $3,295k), which expire between 2022 and 2037 under prevailing tax legislation.
In addition to this, the Group has further tax losses in the USA of $11,668k (2018: $880k), which are carried forward indefinitely. At year-end exchange
rates, these tax losses translate to £10,047k (2018: £3,251k). Of the above, the Board expects to utilise only tax losses of £657k (2018: £1,685k) in the
upcoming years based on projections. Applying the enacted tax rate of 21% (2018: 21%), the Group has recognised a deferred tax asset of £137k
(2018: £354k) on such tax losses expected to be utilised in future periods.
The Group can potentially recover £190k (2018: £344k) 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 £34k (2018: £nil) 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.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
112
Notes
Continued
20. Deferred tax assets and liabilities (continued)
Movement in deferred tax
Property,
plant and
equipment
£’000
Rolled-over
gain
£’000
Inventories
£’000
Derivative
financial
instruments
£’000
Balance at 1 January 2018
1,335
548
(Credited)/charged to the income
statement
Recognised in other
comprehensive income
Balance at 31 December 2018
Balance at 1 January 2019
Charged to the income statement
Recognised in other
comprehensive income
Balance at 31 December 2019
(214)
–
1,121
1,121
360
–
1,481
(146)
(131)
–
(277)
(277)
87
–
–
–
548
548
–
–
548
(190)
(26)
52
(93)
(67)
(67)
–
101
34
Deferred tax assets and liabilities – Company
Deferred tax assets and liabilities are attributable to the following:
Property, plant and equipment
Rolled-over gain
Derivative financial instruments
Defined Benefit Pension Scheme
Share option charges
Set off
Deferred tax (assets)/liabilities
Movement in deferred tax
Balance at 1 January 2018
Charged/(credited) to the income statement
Recognised in other comprehensive income
Balance at 31 December 2018
Balance at 1 January 2019
Charged to the income statement
Recognised in other comprehensive income
Balance at 31 December 2019
Assets
2019
£’000
–
–
–
(1,177)
(211)
(1,388)
1,388
–
2018
£’000
–
–
(67)
(1,373)
(521)
(1,961)
1,669
(292)
Property,
plant and
equipment
£’000
Rolled-over
gain
£’000
Derivative
financial
instruments
£’000
1,335
(214)
–
1,121
1,121
360
–
1,481
548
–
–
548
548
–
–
548
(26)
52
(93)
(67)
(67)
–
101
34
Defined
Benefit
Pension
Scheme
£’000
(1,049)
Share
option
charges
£’000
(268)
Tax value of
recognised
losses carried
forward
£’000
(216)
Total
£’000
178
(78)
(77)
(138)
(586)
(246)
(1,373)
(1,373)
250
(54)
(1,177)
Liabilities
2019
£’000
1,481
548
34
–
–
2,063
(1,388)
675
(176)
(521)
(521)
64
246
(211)
2018
£’000
1,121
548
–
–
–
1,669
(1,669)
–
Defined
Benefit
Pension
Scheme
£’000
(1,049)
(78)
(246)
(1,373)
(1,373)
250
(54)
(1,177)
–
(354)
(354)
216
–
(138)
Net
2019
£’000
1,481
548
34
(515)
(923)
(923)
977
293
347
2018
£’000
1,121
548
(67)
(1,177)
(1,373)
(211)
675
–
675
Share
option
charges
£’000
(268)
(77)
(176)
(521)
(521)
64
246
(211)
(521)
(292)
–
(292)
Total
£’000
540
(317)
(515)
(292)
(292)
674
293
675
Zotefoams plc Annual Report 2019
113
21. Issued share capital
Issued, allotted and fully paid ordinary shares of 5p each:
Opening balance 1 January 2018
Rights issue
Less: Transaction costs arising on rights issue
Closing balance 31 December 2018
Closing balance 31 December 2019
Number of
shares
Par value
£’000
44,414,442
3,886,792
48,301,234
–
48,301,234
48,301,234
2,221
194
2,415
–
2,415
2,415
Share
premium
£’000
24,340
20,406
44,746
(568)
44,178
44,178
Total
£’000
26,561
20,600
47,161
(568)
46,593
46,593
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. The cumulative amount is reclassified to the income statement when the net investment is disposed of.
Hedging reserve
The hedging reserve includes the cash flow hedge reserve and the costs of the hedging reserve (see note 22 for details). The cash flow hedge 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
and Company’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.
The Board 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.
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 by
the carrying amount of each financial asset, including derivative financial instruments, in the statement of financial position.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
114
Notes
Continued
22. Financial instruments and financial risk management (continued)
Credit quality of financial assets
Counterparties without external credit rating:
Existing customers with no defaults in the past
Existing customers with some defaults in the past, net of impairment allowance
Cash at bank
Moody’s P-1
Derivative financial assets
Moody’s P-1
Trade receivables are analysed as follows:
Group
Company
2019
£’000
18,219
1,229
19,448
Group
2019
£’000
6,656
Group
2019
£’000
332
2018
£’000
23,484
269
23,753
2018
£’000
7,073
2018
£’000
6
2019
£’000
13,143
593
13,736
Company
2019
£’000
4,107
Company
2019
£’000
332
2018
£’000
16,306
269
16,575
2018
£’000
5,626
2018
£’000
6
While cash and cash equivalent are subject to impairment review under IFRS 9 ‘Financial Instruments’, the identified impairment loss was immaterial
(2018: immaterial).
Gross carrying amount
– due for less than 60 days
– due for more than 60 days
Expected loss rate
– due for less than 60 days
– due for more than 60 days
Loss allowance
Trade receivables net of allowances
Loss allowances analysed as follows:
At 1 January 2018
Increase in loss allowance recognised in profit or loss during the year
Receivable written off during the year as uncollectible
Reversal of loss allowance on collection of dues
At 31 December 2018
At 1 January 2019
Increase in loss allowance recognised in profit or loss during the year
Reversal of loss allowance on collection of dues
At 31 December 2019
The normal terms of trade are 30–90 days from the end of the month of invoice.
Group
Company
2019
£’000
19,560
18,733
827
0.29%
6.96%
112
2018
£’000
23,778
22,688
1,090
0.00%
2.29%
25
2019
£’000
13,786
13,786
–
0.36%
0.00%
49
2018
£’000
16,600
16,306
294
0.00%
8.50%
25
19,448
23,753
13,737
16,575
Group
£’000
130
46
(59)
(92)
25
25
177
(90)
112
Company
£’000
72
46
(59)
(34)
25
25
114
(90)
49
The credit quality of trade receivables that are neither past due nor impaired is assessed individually based on credit history and experience. In 2019
and 2018, the Group and Company insured a significant portion of its trade receivable balances to mitigate credit risk. The uninsured exposure as at
31 December 2019 for the Group was £8,992k (2018: £11,984k) and for the Company was £5,813k (2018: £7,463k). 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.
Zotefoams plc Annual Report 2019
115
22. Financial instruments and financial risk management (continued)
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 has strong cash generation from its operations and closely monitors its 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
Dollar short-term borrowings
Sterling short-term borrowings
Euro short-term borrowings
Dollar long-term borrowings
Total*
Company
Dollar short-term borrowings
Sterling short-term borrowings
Euro short-term borrowings
Dollar long-term borrowings
Total*
2019
Effective
interest rate
%
Fixed
rates
£’000
Variable
rates
£’000
Effective
interest rate
%
–
2.51%
1.37%
3.34%
–
–
–
–
–
–
5,250
10,598
21,946
37,794
3.98%
2.55%
–
3.98%
2019
Effective
interest rate
%
Fixed
rates
£’000
Variable
rates
£’000
Effective
interest rate
%
–
2.51%
1.37%
3.34%
–
–
–
–
–
5,250
10,598
21,946
37,794
3.98%
2.55%
–
3.98%
2018
Fixed
rates
£’000
–
–
–
–
–
2018
Fixed
rates
£’000
–
–
–
–
–
Variable
rates
£’000
8,065
6,435
–
5,231
19,731
Variable
rates
£’000
8,065
6,435
–
5,231
19,731
* The total amount of £37,794k is gross of £447k loan origination fees paid upfront, being amortised over the period of the loan.
The impact on post-tax profit of a 1% shift in the variable rate borrowings would be £306k (2018: £94k).
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
Non-derivative financial
liabilities
Interest-bearing loans and
borrowings
2019
2018
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
(37,347)
(40,009)
(16,847)
(5,582)
(17,580)
(20,037)
(15,153)
(9,714)
(222)
(5,217)
Bank overdraft
–
–
–
Trade and other payables
(3,803)
(3,803)
(3,803)
–
–
–
–
–
–
–
(7,742)
(7,742)
(7,742)
Lease liabilities
(1,205)
(1,322)
(411)
(333)
(578)
–
–
–
–
–
–
–
–
–
Total non-derivative financial
liabilities
(42,355)
(45,134)
(21,061)
(5,915)
(18,158)
(27,779)
(22,895)
(17,456)
(222)
(5,217)
Derivative financial liabilities
(134)
(134)
(134)
–
–
(399)
(399)
(399)
–
–
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
116
Notes
Continued
22. Financial instruments and financial risk management (continued)
Company
Non-derivative financial
liabilities
Interest-bearing loans
and borrowings
Bank overdraft
Amounts owed to Group
undertakings
Total non-derivative
financial liabilities
2019
2018
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
(37,347)
(40,009)
(16,847)
(5,582)
(17,580)
(20,037)
(15,153)
(9,714)
(222)
(5,217)
Trade and other payables
(2,940)
(2,940)
(2,940)
–
–
–
–
–
–
–
–
–
–
(5,642)
(5,642)
(5,642)
(1,060)
(1,117)
(316)
(292)
(509)
–
–
–
–
–
–
–
–
–
(41,347)
(44,066)
(20,103)
(5,874)
(18,089)
(25,679)
(20,795)
(15,356)
(222)
(5,217)
Derivative financial liabilities
(134)
(134)
(134)
–
–
(399)
(399)
(399)
–
–
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
or liabilities 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 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 between accounts receivable
recording and cash received.
The euro and US dollar rates used in preparing the financial statements are as follows:
Euro/sterling
US dollar/sterling
2019
2018
Average
Closing
Average
Closing
0.88
0.79
0.85
0.76
0.88
0.75
0.90
0.78
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.
Zotefoams plc Annual Report 2019 22. Financial instruments and financial risk management (continued)
Recognised assets and liabilities
The table below shows non-derivative financial instruments of the Group and Company in currencies other than sterling:
Group – 2019
Cash and cash equivalents
Trade receivables
Trade payables
Group – 2018
Cash and cash equivalents
Trade receivables
Trade payables
Company – 2019
Cash and cash equivalents
Trade receivables
Trade payables
Company – 2018
Cash and cash equivalents
Trade receivables
Trade payables
Euro
£’000
2,085
3,476
(803)
Euro
£’000
1,730
5,585
(2,868)
Euro
£’000
1,219
3,401
(786)
Euro
£’000
1,679
4,706
(2,867)
US dollar
£’000
1,940
11,312
(937)
US dollar
£’000
2,046
11,876
(915)
US dollar
£’000
718
6,508
(567)
US dollar
£’000
932
6,100
(47)
Other
£’000
518
2,931
(81)
Other
£’000
301
2,632
(847)
Other
£’000
174
2,092
(32)
Other
£’000
43
2,103
(27)
117
Total
£’000
4,543
17,719
(1,821)
Total
£’000
4,077
20,093
(4,630)
Total
£’000
2,111
12,001
(1,385)
Total
£’000
2,654
12,909
(2,941)
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 2019
Assets
Forward exchange contracts
Total assets
Liabilities
Forward exchange contracts
Total liabilities
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
–
–
–
–
332
332
(134)
(134)
–
–
–
–
332
332
(134)
(134)
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
118
Notes
Continued
22. Financial instruments and financial risk management (continued)
31 December 2018
Assets
Forward exchange contracts
Total assets
Liabilities
Forward exchange contracts
Total liabilities
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
–
–
–
–
6
6
(399)
(399)
–
–
–
–
6
6
(399)
(399)
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 of 31 December 2019 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 2019 or 2018 in relation
to the 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.
They are classified according to the following fair value hierarchy:
XX Level 1: quoted process (unadjusted) in active markets for identical assets or liabilities;
XX 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); and
XX 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 rates (2018: Handelsbanken and NatWest mid-market rates)
at the statement of financial position date.
The maturity profile of the forward contracts as at 31 December is as follows:
2019
2018
Group and Company:
Sell EUR
Buy EUR
Sell USD
Buy USD
Foreign
currency
Contract
value
£’000
Transaction
fair value
£’000
Contract
fair value
£’000
–
–
–
–
–
–
$23,751
18,172
17,974
–
–
–
–
–
198
–
Foreign
currency
€1,100
–
Contract
value
£’000
Transaction
fair value
£’000
Contract
fair value
£’000
998
–
992
–
$17,450
13,184
13,583
–
–
–
6
–
(399)
–
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 retranslation of monetary items, at 31 December 2019, it is estimated that an increase of one percentage point in the value of sterling against
the euro would decrease the Group’s profit before tax by approximately £29k (2018: £42k) before forward exchange contracts and £20k (2018: £14k) after
forward exchange contracts are included.
In respect of retranslation of monetary items, at 31 December 2019, it is estimated that an increase of one percentage point in the value of sterling against
the US dollar would decrease the Group’s profit before tax by approximately £261k (2018: £302k) before forward exchange contracts and £20k (2018:
£101k) after forward exchange contracts are included.
Zotefoams plc Annual Report 2019 119
22. Financial instruments and financial risk management (continued)
Financial instruments by category
Group
Trade and other receivables
Cash and cash equivalents
Bank overdraft
Derivative financial instruments – assets
– liabilities
Interest-bearing loans and
borrowings
Trade and other payables
Lease liability
Company
Trade and other receivables
Cash and cash equivalents
Bank overdraft
Derivative financial instruments – assets
– liabilities
Interest-bearing loans and
borrowings
Trade and other payables
Lease liability
Financial
assets at
amortised
cost
£’000
22,280
6,656
–
–
–
–
–
–
Financial
assets at
amortised
cost
£’000
42,205
4,107
–
–
–
–
–
–
2019
Derivatives
used for
hedging
£’000
Financial
liabilities at
amortised
cost
£’000
–
–
–
332
(134)
–
–
–
–
–
–
–
–
(37,347)
(3,803)
(1,205)
2019
Derivatives
used for
hedging
£’000
Financial
liabilities at
amortised
cost
£’000
–
–
–
332
(134)
–
–
–
–
–
–
–
–
(37,347)
(2,940)
(1,060)
2018
Derivatives
used for
hedging
£’000
Financial
liabilities at
amortised
cost
£’000
–
–
–
6
(399)
–
–
–
2018
Derivatives
used for
hedging
£’000
–
–
–
6
(399)
–
–
–
–
–
–
–
–
(20,037)
(7,742)
–
Financial
liabilities at
amortised
cost
£’000
–
–
–
–
–
(20,037)
(5,642)
–
Loans and
receivables
£’000
25,993
7,073
–
–
–
–
–
–
Loans and
receivables
£’000
36,993
5,626
–
–
–
–
–
–
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 EBITDA (as per bank facility agreement).
i) Loan Covenant
Under the terms of the major borrowing facilities, the Group is required to comply with the following financial covenants:
XX 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.
XX The ratio of EBITDA to net finance charges is 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.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
120
Notes
Continued
22. Financial instruments and financial risk management (continued)
Net borrowings
EBITDA
Net borrowings/EBITDA
Net finance charges
EBITDA/Net finance charges
As at
31 December
2019
£’000
As at
31 December
2018
£’000
30,691
15,261
12,964
17,478
2.01
209
73.16
0.74
613
28.51
Net borrowings comprise current and non-current interest-bearing loans and borrowings of £37,347k, as per note 19, and cash and cash equivalent of
£6,656k as per note 17.
EBITDA comprises:
Profit for the year
Depreciation and amortisation
Finance costs
Share of (profit)/loss from joint venture
Equity-settled share-based payments
Taxation
Exceptional items
Note
11,12,13
7
10
25
8
4
2019
£’000
8,217
5,769
412
(72)
391
1,594
(1,050)
15,261
2018
£’000
7,852
5,082
753
16
822
2,003
950
17,478
Net finance charges comprise interest income of £50k and finance costs expensed of £259k as per note 7.
The Group’s objective is to maintain the leverage ratio below the Board’s appetite of 2.0x. However, it has accepted that this ratio will increase as the
Group completes its capacity expansion programme, while remaining below the covenant level. This will reduce quickly back to 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 2.01 to 2.09.
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 2019, the return on capital was 10.5% (2018: 16.5%). If the significant capacity investments were
included, the return on capital was 8.1% (2018: 12.8%).
23. Commitments – Group
Group
2019
£’000
2018
£’000
Company
2019
£’000
2018
£’000
Capital expenditure contracted for at the end of the reporting period
but not yet incurred is as follows:
Property, plant and equipment
2,966
4,054
2,118
1,540
24. Post-employment benefits
Defined Benefit Pension Scheme
The Company operates a UK registered trust-based pension scheme (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 of the Scheme. There is a requirement that one-third of the Trustees are nominated by the members of the Scheme.
There are two categories of pension scheme members:
XX deferred members: former and current employees of the Company; and
XX pensioner members: in receipt of pension.
Zotefoams plc Annual Report 2019
121
24. Post-employment benefits (continued)
The defined benefit obligation is valued by projecting the best estimate of future benefit outgoings (allowing for 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 2019 was 17 years (2018: 18 years).
The Scheme closed to new entrants on 30 September 2001. With effect from 31 December 2005, the Scheme was closed to service accrual on pension
benefits. All active members at that date became entitled to deferred benefits.
The manner in which the Scheme closed to the future accrual of benefits in 2005 has been reviewed by the Scheme’s legal advisers, who have advised
that, while the Scheme closure was effective in terminating all periods of active membership from the end of December 2005, the breaking of the salary
linkage at that point was deemed to be invalid. The legal advisers advised that it was possible to break the link to salary, but only in respect of future salary
increases and only with the informed consent of the affected members. The Trustees and the Company carried out an exercise to obtain the informed
consent of the affected members and a Deed of Amendment was executed which specified that, for those members who provided consent, no allowance
will be made for any further salary increases after 31 March 2018. For any affected members who did not provide consent, their benefits will remain
calculated by reference to their Pensionable Salary as at the date of leaving service with the Employer.
Future funding obligation
A full actuarial valuation of the DB Scheme was completed as at 5 April 2017, in line with the requirement to have a triennial valuation. The outcome, on a
Statutory Funding Objective basis, calculated a deficit for the Scheme of £4.18m. As a result, the Company agreed with the Trustees to make contributions
to the DB Scheme of £43,300 per month to meet the shortfall by 31 October 2026, up from £41,000 per month previously. In addition, the Company pays
the ongoing DB Scheme expenses of £15,000 per month (previously £10,600 per month) to cover death-in-service insurance premiums, the expenses of
administering the Scheme and Pension Protection Fund levies.
Risks
Through the Scheme, the Company is exposed to a number of risks:
XX 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 are
subject to increased volatility and risk in the short term.
XX 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.
XX 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.
XX 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 the Company manage risks in the Scheme through the following strategies:
XX 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.
XX Investment strategy: the Trustees are required to review their investment strategy on a regular basis.
The Company has recognised all actuarial gains and losses immediately in other comprehensive income. The initial results calculated as part of the formal
actuarial valuation as at 5 April 2017 by a qualified independent actuary. The major assumptions used by the actuary were (in nominal terms) as follows:
Discount rate
RPI inflation (before retirement)
CPI inflation (before retirement)
RPI inflation (after retirement)
CPI inflation (after retirement)
Salary increases
Pension increases
– Post 88 GMP
– Non GMP
Revaluation of deferred pensions in excess of GMP
As at
31 December
2019
As at
31 December
2018
1.90%
2.90%
1.90%
1.90%
1.90%
1.90%
1.80%
2.90%
1.90%
2.70%
3.20%
2.20%
3.20%
2.20%
2.20%
2.00%
3.10%
2.20%
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 122
Notes
Continued
24. Post-employment benefits (continued)
Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in each territory.
These assumptions translate into an average life expectancy, in years, for a pensioner retiring at age 65, of:
For an individual aged 65
– Male
– Female
At age 65 for an individual aged 45
– Male
– Female
The table below outlines where the Company’s post-employment amounts and activity are included in the financial statements.
Statement of financial position for:
– Defined Benefit Pension Scheme obligations
Income statement charge for:
– Defined benefit pension interest cost
– Defined benefit pension past service costs
Actuarial (losses)/gains recognised in other comprehensive income for:
– Defined Benefit Pension Scheme
The amounts recognised in the statement of financial position are determined as follows:
Market value of plan assets
Present value of Defined Benefit Pension Scheme obligation
Deficit – recognised as a liability in the statement of financial position
The movement in the defined benefit obligation over the year is as follows:
Value of defined benefit obligation at the start of the year
Interest cost
Benefits paid
Past service costs (refer to note 4)
Actuarial (gains)/losses: experience differing from that assumed
Actuarial (gains)/losses: changes in demographic assumptions
Actuarial losses/(gains): changes in financial assumptions
Value of defined benefit obligation at the end of the year
The movement in the value of the plan assets over the year is as follows:
Market value of plan assets at the start of the year
Interest income
Actual return on plan assets
Employer contributions*
Benefits paid
2019
2018
22
23
23
25
22
24
23
25
2019
£’000
2018
£’000
(6,926)
(8,078)
(203)
–
(140)
(940)
(319)
(1,449)
2019
£’000
29,560
(36,486)
(6,926)
2018
£’000
25,650
(33,728)
(8,078)
2019
£’000
2018
£’000
33,728
33,480
899
(877)
–
355
(827)
3,208
36,486
2019
£’000
25,650
696
2,417
1,674
(877)
792
(943)
940
654
(202)
(993)
33,728
2018
£’000
27,312
652
(1,990)
619
(943)
Market value of assets at the end of the year
29,560
25,650
* The employer contributions amount includes £941k of the repayment made to the Deferred Benefit Pension Scheme as per note 4.
Zotefoams plc Annual Report 2019
123
24. Post-employment benefits (continued)
The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is:
Discount rate
RPI inflation
Assumed life expectancy
Change in assumption
+0.5%/–0.5% p.a.
+0.5%/–0.5% p.a.
+1 year
Change in defined
benefit obligation
–8%/+9%
+6%/–7%
+4%
The above sensitivity analyses are based on a change in an assumption, while holding all other assumptions constant. In practice, this is unlikely to occur,
and changes in some of the other assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial
assumptions the same method – present value of the defined benefit obligation calculated with the projected unit credit method at the end of the financial
year – has been applied as when calculating the pension liability recognised within the statement of financial position.
The assets of the Scheme are invested as follows:
Asset class
Equities and other growth assets
Corporate bonds
Diversified Credit Funds
Gilts
Liability Driven Investments
Cash
Other
Total
Actual return on assets over the year
Year ended 31 December 2019
Year ended 31 December 2018
Market
value
£’000
14,634
–
5,867
–
7,001
1,081
977
29,560
3,113
% of total
Scheme
assets
50%
0%
20%
0%
23%
4%
3%
100%
Market
value
£’000
16,245
4,959
–
3,029
–
888
529
25,650
(1,338)
% of total
Scheme
assets
63%
19%
0%
12%
0%
4%
2%
100%
All assets listed above have a quoted market price in an active market (except for the reserve for insured pensioners).
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 2019 were
£828k (2018: £971k).
For certain non-UK based employees of the Company, the Company makes contributions into individual schemes. The contributions paid by the
Company in 2019 were £17k (2018: £16k).
For USA-based employees, Zotefoams Inc. operates a 401(k) plan. The contributions paid by Zotefoams Inc. in 2019 were £246k (2018: £153k).
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 10 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 a Long-Term Incentive Plan (LTIP) 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 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 Remuneration report on pages 67 to 68.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
124
Notes
Continued
25. Share-based payments (continued)
Movements in share options during the year are as follows:
The options outstanding at 31 December 2019 have an exercise price between 245.7p and 572p and a weighted contractual life of 7 years (2018: 8 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 (10 years) is used as an input into this model. No allowance is made for early leavers.
Outstanding at the beginning of the year
Exercised during the year
Granted during the year
Forfeited during the year
Outstanding at the end of the year
Exercisable at the end of the year
Movements in LTIP awards during the year are as follows:
Outstanding at the beginning of the year
Exercised during the year
Granted during the year
Forfeited during the year
Outstanding at the end of the year
Exercisable at the end of the year
Movement in Deferred Bonus Plan awards during the year are as follows:
Outstanding at the beginning of the year
Exercised during the year
Granted during the year
Outstanding at the end of the year
Exercisable at the end of the year
2019
2018
Number
of share
options
116,198
(27,584)
15,164
(6,658)
97,120
55,236
Weighted
average
exercise
price (p)
278
290
572
375
331
262
Number
of share
options
166,229
(36,574)
–
(13,457)
116,198
24,204
2019
2018
Number
of share
options
706,868
(176,062)
216,250
(5,289)
741,767
–
2019
Number
of share
options
50,796
(12,220)
10,559
49,135
–
Weighted
average
exercise
price (p)
–
–
–
–
–
–
Weighted
average
exercise
price (p)
–
–
–
–
–
Number
of share
options
660,089
(85,118)
193,667
(61,770)
706,868
–
2018
Number
of share
options
46,520
(12,169)
16,445
50,796
–
Weighted
average
exercise
price (p)
278
220
–
297
278
268
Weighted
average
exercise
price (p)
–
–
–
–
–
–
Weighted
average
exercise
price (p)
–
–
–
–
–
Zotefoams plc Annual Report 2019 125
25. Share-based payments (continued)
Fair value of share options and assumptions
The expected volatility is based on historic volatility for a three-year period prior to the award.
Share price (p)
Exercise price (p)
Expected volatility
Option life
30-Mar-15
17-Aug-15
05-Apr-16
27-Mar-17
24-Aug-17
16-Apr-19
285
285
35%
310
301.7
35%
290
290
35%
305.5
305.5
35%
305.5
327.5
35%
572
572
25%
Five years
Five years
Five years
Five years
Five years
Three years
Expected dividends (p) (assumed to be increasing at 2.5% p.a.)
Risk free interest rate (based on national government bonds)
Fair value at grant date (p)
5.5
2.00%
80
5.5
2.00%
90
5.6
2.00%
80
5.7
2.00%
103.1
5.7
2.00%
111.1
5.5
2.00%
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
Plan awards are granted under a service condition.
The amounts recognised in the income statement for equity-settled share-based payments are as follows:
Within administrative expenses – share-based payment charge
– related National Insurance
Of the above, amounts relating to Directors of Zotefoams plc aggregate to £199k (2018: £644k).
2019
£’000
390
(21)
2018
£’000
822
222
26. Related parties
Directors
The Directors of the Company as at 31 December 2019 and their immediate relatives control approximately 1.9% (2018: 1.0%) of the voting shares of the
Company. Details of Directors’ pay and remuneration are given in the Remuneration report on pages 58 to 72. 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:
Sale of goods: subsidiaries of the Company
Sale of services: subsidiaries of the Company
Loans given (net of repayments): subsidiaries of the Company
Interest income: subsidiaries of the Company
Sale of goods: joint venture of the Company
Sale of service: joint venture of the Company
Total
2019
£’000
7,481
1,636
15,683
101
3,112
813
2018
£’000
9,892
165
6,828
95
2,938
–
28,826
19,918
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 126
Notes
Continued
26. Related parties (continued)
Balances between the Company and its active subsidiaries and joint venture are as follows:
Zotefoams Inc.
KZ Trading and Investment Ltd
Azote Asia Limited
MuCell Extrusion LLC
Zotefoams International Limited
Zotefoams Operations Limited
Zotefoams T-Fit Material Technology (Kunshan) Limited
Zotefoams Poland Sp. z.o.o.
T-Fit Insulation Solutions India Private Limited
Receivable from/(payable to)
Investment in
2019
£’000
9,204
1,895
907
96
–
1
22
809
131
2018
£’000
14,166
2,133
1,601
877
–
–
53
1,566
–
2019
£’000
–
–
145
–
2018
£’000
–
–
73
–
30,576
23,549
–
–
–
–
–
–
–
–
27. Changes in accounting policies
This note explains the impact of the adoption of IFRS 16 ‘Leases’ on the Group’s financial statements.
The Group has adopted IFRS 16 ‘Leases’ retrospectively from 1 January 2019 but has not restated comparatives for the 2018 financial year, as permitted
under the specific transition provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore
recognised in the opening statement of financial position on 1 January 2019. The new accounting policies are disclosed in note 12.
On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as “operating leases” under the
principles of IAS 17 ‘Leases’. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s banking
borrowing rate as a proxy to the incremental borrowing rate as at 1 January 2019. The weighted average lessee’s incremental borrowing rate applied to
the lease liabilities on 1 January 2019 was 2.8%.
For leases previously classified as finance leases the entity recognised the carrying amount of the lease asset and lease liability immediately before
transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. The measurement principles of IFRS 16
are only applied after that date.
(i) Practical expedients applied
In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:
XX the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
XX reliance on previous assessments on whether leases are onerous;
XX the accounting for operating leases with a remaining lease term of less than 12 months as at January 2019 as short-term leases;
XX the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
XX the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
The Group has also elected not to reassess whether a contract is, or contains, a lease at the date of initial application. Instead, for contracts entered into
before the transition date the Group relied on its assessment made by applying IAS 17 and IFRIC 4 ‘Determining whether an Arrangement contains a Lease’.
(ii) Measurement of lease liabilities
Operating lease commitments disclosed as at 31 December 2018
Discounted using the lessee’s incremental borrowing rate at the date of initial application
Add: finance lease liabilities recognised as at 31 December 2018
(Less): short-term leases recognised on a straight-line basis as an expense
(Less): low-value leases recognised on a straight-line basis as an expense
Lease liability recognised as at 1 January 2019
of which are:
Current lease liabilities
Non-current lease liabilities
2019
£’000
662
644
306
(559)
(5)
386
131
255
386
Zotefoams plc Annual Report 2019
127
27. Changes in accounting policies (continued)
(iii) Measurement of right-of-use assets
The right-of-use assets for property and equipment leases were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid
or accrued lease payments relating to that lease recognised in the statement of financial positions as at 31 December 2018. There were no onerous lease
contracts that would have required an adjustment to the right-of-use assets at the date of initial application.
(iv) Adjustments recognised in the statement of financial position on 1 January 2019
The change in accounting policy affected the following items in the statement of financial position on 1 January 2019:
XX property, plant and equipment – decrease by £306k;
XX right-of-use assets – increase by £588k;
XX borrowings – decrease by £306k; and
XX lease liabilities – increase by £588k.
The net impact on retained earnings on 1 January 2019 was £nil.
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
that are 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 (see
note 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. The Directors also draw upon experience in making these judgements.
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) Going concern
The financial statements have been prepared on a going concern basis. This requires significant judgment given the current unprecedented
circumstances of the COVID-19 virus. Refer to note 2.1 i) for details of the judgements and assumptions made by the Directors in forming their view
on going concern in preparing the financial statements.
ii) Unrecognised deferred tax assets
The Group currently has tax losses carried forward of £10,047k in respect of the USA business. Currently tax losses of £657k have been recognised
in the statement of financial position and a deferred tax asset of £137k has been recognised by the Directors.
While in the longer term (over the next 5 to 10 years) the Directors expect to utilise the majority of the USA carried forward tax losses, given that the
businesses in this tax jurisdiction have only been profitable for one financial year, the Directors do not yet consider it appropriate to fully recognise these
assets based on the uncertainty around the future profitability of these businesses. However, the Directors note that if the USA tax group were to make
sufficient levels of taxable profit in 2020, this position will be re-assessed and this may lead to a materially higher deferred tax balance being recognised.
The Directors recognise that this is a significant judgement in preparing the Group’s financial statements.
iii) Exceptional item
Due to the material and non-recurring nature of the items, the Group has disclosed the decrease in past service costs as an exceptional item in 2019
(2018: increase in past service costs).
29. Events after the reporting period
In early 2020, the emergence and spread of a new coronavirus, now known as COVID-19, is affecting business and economic activity around the world.
The Group considers this outbreak to be a non-adjusting post balance sheet event as at 31 December 2019.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements 128
Five-year trading summary
Group revenue
Operating profit (excluding exceptional item)
Profit before tax (excluding exceptional item)
Profit before tax
Profit after tax
Capital expenditure (including intangibles)
Cash generated from operations
Basic earnings per share excluding exceptional item (p)
Basic earnings per share (p)
Dividends per ordinary share (p)
2019
£m
80.9
9.1
8.8
9.8
8.2
24.4
11.8
14.91
17.10
2.03
2018
£m
81.0
11.6
10.8
9.9
7.9
16.1
7.1
18.66
16.96
6.12
2017
£m
70.1
9.4
8.8
7.5
6.0
12.2
10.0
16.04
13.70
5.93
2016
£m
57.4
7.6
7.2
7.0
5.7
12.6
6.4
13.69
13.25
5.75
2015
£m
53.9
6.3
6.0
6.0
4.8
9.1
8.4
11.07
11.07
5.60
Zotefoams plc Annual Report 2019 Notice of the 2020
Annual General Meeting
129
THIS DOCUMENT IS IMPORTANT AND REQUIRES
YOUR IMMEDIATE 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,
you should forward this document and other documents enclosed as
soon as possible either to the purchaser or transferee or to the person
who arranged the sale or transfer so they can pass these documents
to the person 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.
The Stay At Home Measures (“Measures”) in force at the time of issue
of this notice prohibit public gatherings of more than two people.
Consequently, in order to ensure the safety of the attendees and
allow the business of the meeting to be transacted, attendance by
shareholders and proxies at the 2020 AGM will be prohibited while
the Measures remain in place.
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 to the 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 a RNS and on the
AGM 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 8 June 2020
at 10.00 am for the following purposes. In light of the Stay At Home
Measures, no access to shareholders or proxies will be granted
to the premises whilst the Measures remain in force.
All resolutions will be proposed as ordinary resolutions, save for resolutions
14, 15, 16 and 17, which will be proposed as special resolutions.
Ordinary resolutions
1.
To receive the Annual Report of the Company for the year ended
31 December 2019.
2.
3.
To approve the New Directors’ Remuneration Policy set out on pages
58 to 63 in the Annual Report.
To approve the Annual Statement by the Chair of the Remuneration
Committee and the Annual Report on Remuneration for the
year ended 31 December 2019 set out on pages 56 to 72 of the
Annual Report.
4. To elect A M Fielding as a Director.
5. To elect C A Wall as a Director.
6. To re-elect S P Good as a Director.
7. To re-elect D B Stirling as a Director.
8. To re-elect G C McGrath as a Director.
9. To re-elect D G Robertson as a Director.
10. To re-elect J D Carling as a Director.
11. That PricewaterhouseCoopers 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.
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
£805,020 (such amount to be reduced by the nominal amount of
any allotments or grants made under paragraph (b) below in excess
of £805,020); and further
(b) to allot equity securities (as defined in Section 560 of the Act) up to
an aggregate nominal amount of £1,610,040 (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
as practicable) to the respective number of ordinary shares in
the capital 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
consider necessary,
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;
(c) provided that, unless previously revoked, varied or extended,
this authority shall expire on the earlier of 30 June 2021 and the
conclusion of the next Annual General Meeting 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.
Special resolutions
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
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 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
amount of £120,750,
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
130
Notice of the 2020 Annual General Meeting
Continued
such authority to expire at the conclusion of the next Annual General
Meeting of the Company (or, if earlier, on 30 June 2021) 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
shares up to a nominal amount of £120,750; 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
date of this notice,
such authority to expire at the conclusion of the next Annual General
Meeting of the Company (or, if earlier, on 30 June 2021) 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.
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 4,830,123, representing approximately 10% of the
issued ordinary share capital as at 8 April 2020;
(b) the minimum price which may be paid for any such ordinary share is
5 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 2021 and the conclusion of the
next Annual General Meeting, 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 Annual General Meeting may be
called on not less than 14 clear days’ notice.
The following notes are subject to Stay At Home Measures
prohibiting attendance of the Annual General Meeting 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 4 June 2020 (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 to
the 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 4 June 2020.
(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
by proxy, shall be accepted to the exclusion of the votes of other
joint holders.
(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
was given.
Dated: 9 April 2020
By order of the Board
Registered Office:
675 Mitcham Road
Croydon
CR9 3AL
L Harratt
Company Secretary
Zotefoams plc Annual Report 2019 131
(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 the
exercise 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
at the AGM.
(xi) As at the close of business on 8 April 2020, the Company’s issued
share capital comprised 48,301,234 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 as
at the close of business on 8 April 2020 is 48,301,234.
(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 auditors’ report and the
conduct of the audit) that are to be laid before the AGM; or (ii) any
circumstance connected with the auditors 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
Sections 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
Auditors 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
for the financial year ended 31 December 2019, as required by law.
Resolutions 2 and 3 – Directors’ Remuneration Policy and
Remuneration Report
Resolution 2 seeks shareholder approval for the new Directors’
Remuneration Policy, which can be found on pages 58 to 63 of the
Annual Report. The new Directors’ Remuneration Policy will replace the
current Directors’ Remuneration Policy which was approved at the AGM
held on 17 May 2017. The new Directors’ Remuneration Policy sets out the
Company’s future policy on Directors’ remuneration, including the setting
of the Directors’ pay and the granting of share awards. Details on how the
policy will be applied in practice in 2020 are set out in the Annual Report
on Remuneration on pages 64 to 65 of the Annual Report. If Resolution
2 is approved, the new Directors’ Remuneration Policy will become
effective immediately.
Resolution 3 seeks shareholder approval of the remuneration report for
the year ended 31 December 2019 which can be found on pages 56 to 72
of the Annual Report. The Company’s Auditors, PricewaterhouseCoopers
LLP, have audited those parts of the Directors’ remuneration report that are
required to be audited and their report may be found on pages 76 to 80 of
the Annual Report.
Resolutions 4 to 10 – Election and re-election of Directors
Resolutions 4 and 5 concern the election of A M Fielding and C A Wall,
who were both appointed to the Board since the last AGM was held on
15 May 2019.
Resolutions 6 to 10 concern the re-election of the Directors, in accordance
with the UK Corporate Governance Code.
Biographies for the Directors are set out on pages 48 to 49 of the report
and financial statements for the year ended 31 December 2019. 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 elected/re-elected.
Resolutions 11 and 12 – Re-appointment of Auditor and
their remuneration
Resolution 11 concerns the re-appointment of PricewaterhouseCoopers
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 the Audit Committee to determine the
Auditor’s remuneration.
Zotefoams plc Annual Report 2019Strategic ReportGovernanceFinancial Statements
132
Notice of the 2020 Annual General Meeting
Continued
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 £805,020, representing approximately one-third of the nominal
value of the issued ordinary share capital of the Company as at 8 April
2020, 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 £1,610,040 representing approximately two-thirds of the nominal value of
the issued ordinary share capital of the Company as at 8 April 2020, being
the latest practicable date before publication of this notice. This additional
authority may be only 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
(“Treasury Shares”).
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
of fulfilling future potential awards.
Unless revoked, varied or extended, this authority will expire at
the conclusion of the next AGM of the Company or 30 June 2021,
whichever is the earlier.
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 £120,750, representing approximately 5%
of the nominal value of the issued ordinary share capital of the Company
as at 8 April 2020, 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
the announcement 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 2021, 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
any intention at the present time of exercising them.
Resolution 16 – Authority to purchase shares (market purchases)
This resolution authorises the Board to make market purchases of up
to 4,830,123 ordinary shares (representing approximately 10% of the
Company’s issued ordinary shares as at 8 April 2020, 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 2021, 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. 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 8 April 2020, 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
679,320 ordinary shares in the capital of the Company representing 1.4%
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 1.5% 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. If the authority is used, the Company will offer the
ability, as required by the Companies Act 2006, to vote electronically.
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.
Zotefoams plc Annual Report 2019 Company information
Registered office
675 Mitcham Road
Croydon CR9 3AL
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
PricewaterhouseCoopers LLP
The Portland Building
25 High Street
Crawley
Sussex RH10 1BG
Bankers
Handelsbanken plc
3 Thomas More Square
London E1W 1WY
National Westminster Bank plc
Turnpike House, 123 High Street
Crawley RH10 1DD
Solicitors
Osborne Clarke LLP
One London Wall
London EC2Y 5EB
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
8 June 2020
Payment of interim dividend
October 2020
Announcement of 2020 results
March 2021
Website
The Company has a website (www.zotefoams.com) which provides
information on the business and products.
AZOTE®, ZOTEK®, T-FIT® and ReZorce® are registered trademarks
of Zotefoams plc.
MuCell® is a registered trademark of Trexel Inc.
Registrars
Enquiries concerning the holding of ordinary shares in the Company
should be addressed to the registrars who should also be notified of
any changes 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
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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
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