Cost inflation outweighs sales strength for Zotefoams

Cellular material company Zotefoams reported a 22% improvement in revenue in its preliminary results on Tuesday, to £100.8m, although its overall performance was impacted by “significant and unpredictable” cost inflation.

The London-listed firm said its gross margin narrowed by 720 basis points in the 12 months ended 31 December to 26.4%, while its operating profit was down 11% to £8.1m.

It recorded a profit before tax of £7m, down 16% year-on-year, while basic earnings per share were 29% weaker at 9.01p.

Cash generated from operations narrowed by 2% to £12.8m, and net debt was 4% higher year-on-year at £34.3m.

The company’s leverage ratio was stable at 2.1x, as the board proposed a 3% hike in the final dividend, to 4.4p per share.

“Geopolitical risks are currently much higher than normal,” said group chief executive officer David Stirling.

“Whilst these have limited direct impact on our operations currently, we are mindful of the risk that they may lead to more significant indirect impacts, especially in supply chain, inflation and demand, rendering forward looking statements particularly uncertain.

“Currently, we are experiencing good demand across our business consistent with our expectations.”

Stirling said prices for polyolefin foams were increased in January and, in some products and geographies, Zotefoams had notified additional increases to take effect in the second quarter.

“The inflationary environment for our input costs remains highly unsettled, with pricing of raw materials, freight and energy in particular expected to be volatile for the remainder of the year, at least, and accentuated by current events in Eastern Europe.

“Our sales prices and margins are therefore being closely managed.

“Our operational performance also continues to be challenged by an unpredictable supply chain and the ongoing challenges presented by Covid-19 and its variants.”

The company was “working hard” to manage those impacts as effectively as possible, David Stirling said, although inefficiencies were expected.

“We expect modest volume growth in our polyolefin foams business during the year, with a similar product mix to 2021 and a strong benefit from price increases improving margins, subject to managing cost inflation appropriately.

“In our HPP business unit, both T-FIT insulation and Zotek foams for aviation are expected to grow strongly as market conditions improve, particularly in the second half of the year, while demand for footwear products is expected to remain at similar levels to 2021.”

Stirling added that ‘ReZorce’ barrier packaging was a “potentially very significant” opportunity for Zotefoams, although it depended on a number of developmental milestones, the outcome and timing of which were difficult to predict.

“We are therefore conducting frequent reviews of progress but currently expect that, working with partners, we will be able to successfully develop and commercialise the technology.

“We will update stakeholders when appropriate.

“Overall, the board remains confident about the future prospects for our business.”

At 1127 GMT, shares in Zotefoams were down 1.33% at 296p.