Zotefoams : Preliminary Results (unaudited) 2018

Zotefoams plc

Preliminary Results (unaudited) for the Year Ended 31 December 2018

19 March 2019 - Zotefoams plc ("Zotefoams" or "the Company" or "the Group"), a world leader in cellular material technology, today announces its unaudited preliminary results for the twelve months ended 31 December 2018.

Significant financial progress during the year

•  16% increase in Group revenue (17% constant currency) to a record £81.04m (2017: £70.15m)

•  23% increase in reported profit before tax and exceptional item to a record £10.81m (2017: £8.81m)

•  31% increase in reported profit before tax to £9.86m (2017: £7.55m)

•  29% increase in EBITDA before exceptional item to £16.66m (2017: £12.87m)

•  35% increase in EBITDA to £15.71m (2017: £11.61m)

•  16% increase in basic EPS before exceptional item to 18.66p (2017: 16.04p)

•  24% increase in basic EPS to 16.96p (2017: 13.70p)

Successful strategic execution

•  High-Performance Products now accounts for 27% of Group revenue (2017: 19%) following a 67% increase in sales mainly from footwear and aviation applications

•  Core AZOTE® foams business grew by 8% while MuCell Extrusion refocused for expected return to growth in 2019

•  Kentucky, USA facility commissioned in March 2018, adding approximately 20% to Group capacity

•  Capacity increases on schedule for commissioning in UK and USA during 2019 and at a new site in Poland during 2020

•  Successful bank refinancing and equity raise in May 2018 to support growth plans

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

"We are seeing the benefits of Zotefoams' strong portfolio of products, backed by unique technology, across multiple sectors and geographies. 2018 was another record year for Zotefoams and I'm delighted with both the performance and opportunities we are creating.

We have experienced a strong start to the year, consistent with our growth expectations across the business as a whole. Investments in recent years in our product portfolio, people and productive capacity have positioned Zotefoams for further growth. Whilst we appear to be in a generally less favourable macroeconomic environment than in 2018, with volatile foreign exchange rates, the Board remains confident about the future prospects for our business and is excited by the opportunities we see for continued progress."

The preliminary results presentation for the year ended 31 December 2018 will be made available on the investors section of the Company's website during the day.

Enquiries:

Zotefoams plc [phone]

David Stirling, Group CEO

Gary McGrath, Group CFO

IFC Advisory (PR Firm) [phone]

Graham Herring

Miles Nolan Zach Cohen

About Zotefoams plc

Zotefoams plc (LSE - ZTF) is a world leader in cellular materials technology. Utilising a variety of unique manufacturing processes, including environmentally friendly nitrogen expansion for lightweight AZOTE® polyolefin and ZOTEK® high-performance foams, Zotefoams sells to diverse markets worldwide. Zotefoams uses its own cellular materials to manufacture T-FIT® advanced insulation for demanding industrial markets. In addition, Zotefoams owns and licenses patented MuCell® microcellular foam technology, developed specifically for extrusion applications, from a base in Massachusetts, USA to customers worldwide.

Zotefoams is headquartered in Croydon, UK, with additional manufacturing sites in Kentucky and Oklahoma, USA (foam products manufacture and conversion), Massachusetts, USA (MuCell Extrusion) and Jiangsu Province, China (T-FIT®). A third foam-manufacturing site, in Poland, is planned to begin operations in 2020.

www.zotefoams.com

AZOTE®, ZOTEK®, T-FIT® are registered trademarks of Zotefoams plc MuCell® is a registered trademark of Trexel Inc.

Chairman's statement

Significant financial and strategic progress in the year

I am pleased to report another successful year of strong sales and earnings growth and a step-change in the development of our high margin High-Performance Products (HPP) business. To support future growth, the Group is progressing a number of significant capital investment projects to expand capacity internationally and completed a successful refinancing and equity raise in May 2018. The equity raised maintains the Group's financial flexibility and enables debt levels to be kept within the Board's desired level of leverage.

2018 performance

Group sales grew 16% to £81.04m (2017: £70.15m) and profit before tax and exceptional item grew 23%, a similar growth rate to last year, to £10.81m (2017: £8.81m). Basic earnings per share before exceptional item rose 16% from 16.04p to 18.66p. Profit before tax increased by 31% to £9.86m (2017: £7.55m) and basic earnings per share was up 24% to 16.96p (2017: 13.70p).

Sales of polyolefin foams grew across all regions, with continued strong demand being supported primarily in H2 by the additional capacity from our first high-pressure vessel in the USA. The HPP business grew significantly, driven by our footwear business and supported by a return to solid growth in aviation. MuCell Extrusion (MEL) had a disappointing year. The business has been reorganised to provide focus and greater clarity on the resources needed to deliver the full potential of the MuCell® technology.

We have continued to invest in our pipeline of commercial opportunities and in product and market development as well as in the governance structures to support an increasingly international, high-growth business.

Investments

In my 2017 statement I reported the Board's approval to invest in low-pressure autoclave capacity and infrastructure at the Croydon, UK site at a cost of £12m, primarily for expansion of our ZOTEK® range of HPP foams but with the flexibility to expand our full range of products. Commissioning is expected to commence at the beginning of Q2 2019. I also reported the Board's approval to proceed with a $9m investment to commission the second high-pressure autoclave, together with a supporting extrusion line, at our Kentucky, USA, site, following the start-up of our first high-pressure autoclave. I am pleased to advise that both of these projects are progressing well and are expected to be commissioned on time and on budget.

In May 2018 the Board approved a £23m investment in south-west Poland to increase foam manufacturing capacity. With the site acquired, contractors engaged and ground broken, we expect the production facility to be operational in H2 2020. To support these activities we have enhanced our engineering and project management capabilities and resources and are confident that the capacity expansion projects required to support our growth opportunities will be successfully delivered.

This remains an exciting time for Zotefoams. Upon completion of these investment projects and after including the start-up of our first high-pressure autoclave in the USA, we will have increased Group manufacturing capacity by over 60% and provided infrastructure to scale capacity growth further when required.

Brexit

At the time of writing there is considerable uncertainty over Brexit, both over the form it may take, its timing and its potential impact on our business. Zotefoams is predominantly a UK-based exporter utilising materials and expertise from global supply partners and invoicing approximately 87% of sales in currencies other than sterling, mostly US dollars or euros. The inherent risks of supply chain disruption and foreign exchange rate volatility are therefore high. We have assessed these risks in detail and have plans in place, co-operating closely with our suppliers, to mitigate the immediate impact of any disruption in supply chains and hedging our cash flows and balance sheet, where possible. Longer term our investments in the USA and Poland give us a more geographically diversified base from which to supply our AZOTE® polyolefin foam customers while we expect our UK facility to be more focused on production of HPP product, which is less sensitive to the macroeconomic trading environment.

Dividend

The Board is proposing a final dividend of 4.15p per ordinary share (2017: 4.02p) which, if approved by shareholders, would make a total of 6.12p per ordinary share for the year (2017: 5.93p), an increase of 3.2%. This reflects the Board's continued confidence in the Group's future and is in line with the policy of paying a progressive dividend. If approved, the final dividend will be paid on 30 May 2019 to shareholders on the register on 26 April 2019.

Board changes and governance

As I reported in the 2017 Annual Report Richard Clowes retired from the Board in May 2018 and, to prepare for this, Jonathan Carling joined the Board in January 2018. I also reported that Doug Robertson would replace Richard as the Senior Independent Director upon his departure. Following these changes, we have an experienced and engaged Board and no further changes have been made in 2018.

The interactions and communications between Executive and Non-Executive Directors continue to develop positively and as a result the Board is well placed to challenge, guide, and support the Executives in the delivery of our strategy.

The Board considers that it has fully applied all the principles and provisions of the UK Corporate Governance Code during 2018.

People

Having the right people at Zotefoams, which encompasses traits such as integrity, safety-consciousness and dedication as well as the right knowledge and skills, is critical to our future success. The average number of employees in the Group increased by 16% during the year. I would like to welcome the new employees who have joined us around the world during the past twelve months and extend my thanks to all our hard-working employees and their supportive families for making 2018 a year of significant progress for the Group.

Steve Good

Chairman

19 March 2019

Group CEO's review

Strong organic growth in line with our strategy

I am pleased to report another record year of profits and sales. We have delivered strong organic growth, in line with our strategy, from a long-term approach to investment in our product portfolio, supported by unique technology and focused around key market trends in an increasingly global business. Profit before tax and exceptional item increased 23% to £10.81m (2017: £8.81m) while Group revenue grew 16% to £81.04m (2017: £70.15m). Profit before tax increased 31% to £9.86m (2017: £7.55m).

Strategy update

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. Our business faces challenges primarily with regard to how we manage our growth: investing at the appropriate time in the right places, allocation of resource across a portfolio of products and markets, and development of an organisation with flexible, talented people and a culture to support this 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 use. The emergence of a strongly negative public perception of plastic is, we believe, mainly driven by ill-considered single use applications predominantly in consumer packaging. Zotefoams' current markets are not immediately impacted by this, as products using our foams are almost solely 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 planes, 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 resource 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 - demographic, environmental and regulatory - 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 30% (2017: 25%) of Group revenues.

• 2. Sales of our highly differentiated AZOTE® polyolefin foam products grew by 8%, which was above our target rate of twice global GDP growth.

• 3. Group operating margins were 14.3% (2017: 13.4%).

• 4. Group return on capital, which excludes large asset investments not yet commissioned, increased to 16.5% from 15.5%.

Our consistent strategy has resulted in another year of record sales and profits. Zotefoams has become an international, diversified supplier of technical materials and retains a strong portfolio of opportunities to deliver further organic growth in line with our stated strategic intent.

People and embedding our culture to deliver

Developing our organisational capability and culture globally is something which has, over the past few years, become increasingly important for delivering our strategy. We have made significant investments in increasing and developing our workforce which, by the end of 2018, had grown to 459 people, an increase of 16% in the year. A third of our people have less than two years' service. In 2018 83% of our revenues and most of our sales growth came from outside the UK and we increased our non-UK headcount by 33%. Managing this growth as we scale up our international operations, ensuring governance and building a strong culture is therefore a primary focus for management. Zotefoams' culture is based around brand values and 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.

The top priority for our business 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 the behaviour of all employees, has a significant impact on safety, risk and performance. Management therefore has a clear priority to ensure safety culture is continuously improved across our business and we will not be satisfied until we achieve our goal of no-one getting hurt whilst working at Zotefoams.

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.

Zotefoams has embarked on a significant capital expansion programme, supported by an equity fundraising and debt refinancing in May 2018. In Kentucky, USA during 2018 we commissioned a high-pressure autoclave and two extruders which increased Group capacity by approximately 20%, and we are investing further on this site for a similar scale of capacity increase during 2019. To balance the investments in the USA, which will supply an existing low-pressure autoclave on that site, we have added two further low-pressure autoclaves on our UK site which will begin commissioning in Q2 2019. In addition, we have begun work on our third major Zotefoams manufacturing location, in south-west Poland, to deliver a further increase to group capacity of around 20%.

Our USA operation is now positioned as a significant, stand-alone contributor to Group capacity, initially focused on AZOTE® polyolefin foams, with the site large enough for further investment if required. The UK site will have significantly increased capacity to manufacture our ZOTEK® range of HPP foams, while remaining the primary production site for AZOTE® polyolefin foams in the foreseeable future, while Poland is specifically designed initially for polyolefin foam manufacture and could double its capacity with cost-effective investment in equipment relatively inexpensively on approximately an 18-month lead time. This gives Zotefoams the ability to react to increases in demand for all of our foams range, with an increase in HPP foams supplied via UK and some UK-supplied customers switching to Poland if needed.

These investments demonstrate confidence in the significant growth opportunities in our HPP portfolio and commitment to our customers in our growing Polyolefin Foams business.

Current trading and outlook

We have experienced a strong start to the year, consistent with our growth expectations across the business as a whole. Investments in recent years in our product portfolio, people and productive capacity have positioned Zotefoams for further growth. Whilst we appear to be in a generally less favourable macroeconomic environment than in 2018, with volatile foreign exchange rates, the Board remains confident about the future prospects for our business and is excited by the opportunities we see for continued progress.

Polyolefin foams

AZOTE®

Group revenue: £57.16m. 2017 £52.82m. Growth +8% Segment profit margin: 17%. 2017: 19%

Segment profit: £9.45m. 2017: £10.29m. Change -8%

Sales in Polyolefin foams increased by 8% to £57.16m (2017: £52.82m). Sales volume grew by 6% while product mix, customer mix and some price increases, offset by modest headwinds in currency exchange rates, contributed a further 2% to growth. Segment profit declined to £9.45m (2017: £10.29m) impacted by higher fixed costs and depreciation of the Kentucky, USA facility which was largely expected at this point in the investment cycle.

Zotefoams uses a commodity polymer, most commonly low-density polyethylene ("LDPE"), and through infusion of nitrogen gas at high temperature and pressure via its 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 Unit 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.

Sales of polyolefin foams increased by 8% (9% in constant currency) with a strong performance in the UK and continental Europe, growing 10% and 12% respectively. Sales in North America grew by 1%, with stronger underlying demand for some of our more technically demanding AZOTE® products, supplied from the UK, dampened by product allocation. An increase of 7% in sales to the rest of the world was substantially driven by increased demand in Japan. Customers for AZOTE® foams are remarkably diverse, both geographically and in their use of our foams. However, the largest segments of product protection, industrial and transportation (which includes automotive, rail and aviation) account for around 70% of our polyolefin foam revenue and we recorded double-digit