Zotefoams plc (ZTF) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Zotefoams plc preliminary results investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review questions submitted today, and will publish those responses on the Investor Meet Company platform. Before we begin, we'd like to submit the following poll. And if you give that your kind attention, I'm sure the company will be most grateful. I'd now like to hand over to CEO, David Stirling. Good afternoon.

Thanks for the introduction, Mark. I'm joined today by Gary McGrath, who's our CFO. Gary screens off for now, but he will come on later in the presentation. I'll just dive straight in. So we have a notice about the legal side of it. And then business, I'm sure a lot of our attendees know the business, but just for those who don't. We think about our business in 3 separate business units at polyolefin foams, which are made from predominantly low-density polyethylene; and high-performance homes, which are made from a variety of different materials exhibiting high-end attributes such as energy return, temperature resistance, fire retardants, chemical resistance, et cetera. Those we came together, the foams business, all made using our out class technology. We also have extrusion technology that in the past, we had licensed to other people extruding classic products. But predominantly today, we have focused that business on development of our own applications and that specifically ReZorce barrier packaging technology. So we'll cover both of those as we go through. You can see the main markets and the main drivers for each of those parts of the business. The strategy at Zotefoams is to focus resources where we have the potential to be a market leader in the world of foams or cellular materials. We really focus on using unique technology and differentiating ourselves and often creating new markets and new parts of markets or substituting materials other than foam with our lightweight -- predominantly very lightweight, high-performance foams. And largely the business is an organic growth business. Although partnerships, acquisitions, et cetera, have played a minor part, usually where we see associated technology that we want to leverage in our business. Strategic metrics. We -- what makes the business work? What makes it successful? Firstly, we have a variety of products that we make. Those are sold globally into a huge variety of markets. And over time, we look to improve the product mix, selling more of our high-value products or high-margin products as a percentage of the mix. And the best way to measure this is the average selling price. We don't give absolute figures here, but the average selling price, sorry, did increase by almost 3% last year compared to 2022. And those products are made predominantly on large, well-invested equipment, and so you've got high capital base. And important for profitability of the business is the high asset utilization. So again, we don't give absolute figures here, but our asset utilization increased by about 2.6% during the year. And how does that square with -- if you look further on in the presentation, sales volumes being slightly lower, while our production volumes were actually up. We'll hear later on from Gary about the inventory build that we specifically did last year, and the reasons for that were that we expected and have confirmed actually the first quarter this year seen a very strong performance. So getting inventory for that, we actually run the assets harder than the sales. And in addition to that, we look at efficiency gains within the manufacturing operation to deliver more capacity. Because our capacity covers in big chunks, if we buy a new machine, we want to overall improve the efficiency of the machinery we have. And we do that through a number of means, including faster cycle times, better machine loading or other adjustments to our operations that allow us to get more out of the machinery. And very pleased to see that efficiency gains in manufacturing, added almost 2% effective capacity. So what does that mean for the margin? Well, the margin increase, if we look at the reported figures to 12.1%, up 1% from last year. But in fact, a better metric, we think, is that we look at the foams business because the ReZorce/MuCell business is really developmental and pre-revenue. And so excluding the MuCell/ReZorce costs and very small net revenue, where operating margin was 15.5%, up from 12.7% prior year. Similarly, excluding MuCell return on capital employed was up at 14.2%, so up by 2.2%, which is a good performance, driven predominantly by the profitability in the business. Two of our longer-term metrics sustainability. We publish in our annual report and on our website a series of sustainability metrics. As we go through the presentation, you'll see where the business sits. And largely, lightweight foams are pretty good for the sustainability agenda. We sell materials that make products better insulated, lighter weight or protect people and products and therefore, help the society that way. We haven't until this point, set any net-zero targets. All of our targets were for Scope 1 and 2 reductions without any carbon offsetting. And the reason for that is that we felt as an organization that carbon offsetting was not very reliable. And therefore, in a false economy, if you like, and so prefer very much to focus on what we could do with our business. We are with changes in the way energy is being generated. And looking at that net-zero metric or made a commitment to look at that net-zero metric going forward. And then finally, MuCell/ReZorce, it's a big investment the business has made over the last couple of years in a market, which has been dominated by similar technology for about 40 years. And we think we've got a disruptive technology here, a lot of interest in the market. And we have, in fact, signed up with a world-leading beverage packaging company in the middle of last year and made very substantial progress in going to market trials here. So I think again, we'll cover that later, but that's the essence of the business and the key strategic metrics. At this point, I'll pass it over to Gary to talk us through some of the highlights of the year and the financials. So over to you, Gary. Thanks.

Thanks, David. I think in a summary of the summary, really, for 2023 was record profits, improved margins, cash generation used to reinvest and a strong balance sheet. You see these numbers on here. First thing is that if you look at the premiums this morning, there's always a delta. This is a deck that adjusts our profit numbers for our amortization of acquired intangibles, which is a small number, around GBP 250,000 this year and last year to change the numbers slightly. It's a bit of a nice to make the adjustments for such a small number, but it can confuse that these numbers here unless otherwise stated are adjusted for that amount specific to MuCell. So when we actually talk about excluding MuCell or the foams business, actually, that's the reported number as well. Starting here, revenue is unchanged or pretty much in line with last -- with the record of last year. Actually up 1% in the foams business that on first glance seems uneventful. But what if you split it, we actually had a 7% increase in HPP, and David will talk about that later, and a 4% decrease in a pretty challenging at times, particularly in the later part of the year, general industrial market and the polyolefin foams market, coupled with a focus by the business unit on margins, which you can see actually will fruit. Talk about margins, gross margins, you can see a 190 percentage points to 32.3% or another 1.5% up if you exclude MuCell. Adjusted operating margin, David mentioned, 15.5% without MEL and up to 12%, 1% up at a consolidated group level. The biggest move was the segment margin in polyolefin foams and that was from 7% last year, 1% the year before after -- through the COVID, or just coming out of the COVID period up to 7% last year, up to 11% this year. And profit before tax record, if you look at the foams business, only GBP 17.2 million, up significantly on last year, 22% and at group level, GBP 12.8 million, which is -- sorry, GBP 13.1 million adjusted, which is also a record for the group. I mentioned strong cash generation. You'll see and I'll refer later. David touched upon the inventory growth build, but an increase in quite significant investment in working capital in the year. And that really -- that together with the MuCell investment opportunity, and we actually spent GBP 5.5 million cash in the MuCell business driving the ReZorce opportunity onwards. That was all invested out of cash. But nevertheless, even though the debt went up by a few million to GBP 31.6 million, our leverage remained at 1.2 in line with the prior year. I'll just move on and touch upon the strategic highlights. We mentioned and we're focusing quite heavily on that distinction between 2 business streams that are at the different stages of development with a growth business with an opportunity in ReZorce and the more familiar core foams business, the HPP and AZOTE businesses. David -- they're performing well. David touched upon some strategic objectives and how we're delivering on those when you specifically look at mix enrichment and capacity utilization, very much, obviously, the foams business focus and successfully in both of those. Record profits, as I previously mentioned, improved margins for a number of reasons. I'll touch -- maybe touch more on that in the P&L slide coming up. We did announce middle of the year that we've extended our exclusivity agreement with Nike to take us through 2029. And as you probably saw on the first slide with our -- look at the GT Cut 3 picture, our first steps into, obviously jumps now into basket. And we have -- David will talk about that more as we look to expand upon that first product launch. And finally, planned investment in North America. We've mentioned that we're investing in the third stage, the low pressure vessel, a second vessel in the U.S. That is in recognition primarily of the growth opportunities within the U.S. and balancing some of the capacity we had 2 high-pressure vessels there, and so we have more capacity and expansion capability and as the market grows, and we're certainly seeing the demand there. We want to invest behind that as well as give some protection to the existing vessel, which is aging. As far as MuCell is concerned, we announced also midyear, a joint development agreement with a world-leading packager. That agreement really has in the cooperation that we've undergone since then have really helped drive the technical progress further. We are about -- we're very close to preparing filling our first cartons with fruit juice on a commercial-scale equipment at the partner. And we have announced, once or twice in the past 6 months, some of the awards that the technology has won. So Dave will talk more about ReZorce coming up. The businesses continues to be well balanced, both geographically and from an industrial perspective. As footwear grows, you see that yellow that rest of the world grow because that is primarily the Nike footwear opportunity into [indiscernible] sales into China and Vietnam. Otherwise, a fairly stable picture. On the right, the revenue by business unit reflects, as I said earlier, the 7% increase in HPP with a 4% decrease in AZOTE. And the revenue by industry really is relatively unchanged. Sports & Leisure and Nike footwear driving being the leader out of our industrial segments, but a broad range across a number of industries. If I then move on to the financial review and on to the P&L abbreviated. I mentioned the adjustments, so I don't need to refer to that again. And I mentioned group revenue, so I won't touch upon that again. The gross profit margin, I mentioned up to 32.3%. We didn't put any price rises through in 2023, but we put a number of them we communicated that the price increases that we put through in '22. So '23 saw the full year impact of those adjustments. It also came alongside a softening of the LDPE raw material prices. I have a separate slide later to show the trends, but it's fallen back down to what we assess to be more of the historical trends of from peaks back in May '22 that were quite significantly higher. Energy costs have actually still gone up, but they're far less volatile than they were. So we -- I think we're seeing about an 8% increase in energy up to about GBP 8 million. That's about 10% of our non-SG&A cost base. So it's not a significant factor, but it's still gone in the long direction, let's say. Operational efficiencies absolutely at the U.K., it's an older site. It's well embedded, but there's still opportunity to improve and find new ways to eliminate waste, improve yields, improve operational effectiveness, plant efficiency through investment and the guys have been doing a sterling job -- excuse me, the panel has done a sterling job on that. At the same time, the U.S. possibly had more opportunity. We invested in that and along came COVID. It's not set up to really be perfectly self-sufficient. The intention is always that it would leverage the skill sets in the U.K. Probably lost its way slightly at times, and we've been doing a great -- there's been a lot of great work there, leading to improving yields, improving uptimes. And we fully still feel there's opportunity to go there as well. And then finally, of course, mix enrichment, as David mentioned, the objectives being a strategic objective. The increase -- the faster growth in HPP versus AZOTE helps with the margin uplift too. When you look at distribution admin, 5% increase. If you split it, distribution pretty stable and around GBP 8 million. That really -- that is effectively cost increases offset by some really good efficiency gains, optimization gains in warehousing and storage in the U.K. If you then look at the admin costs, the admin costs on their own look like a relatively low movement. But if you strip out our FX hedging gains and losses, which we put through this line in the accounts, the admin costs were up GBP 2.7 million or 19%. Now that GBP 2.7 million, about 1/3 of it is the ReZorce investment. And then other elements of that include investment in people obviously, the cost of living increases, pay rises, which quite -- which were more significantly more than average as one would understand and expect through last year. If you then -- so that then leaves us -- gives us an adjusted profit before tax, I've mentioned for GBP 13.1 million, up 5% on the previous year. And sorry, don't forget also missed out finance cost interest, which I think is understandable. The debt is fairly level with last year, the interest rates are higher. There's nothing more sinister than that. Now GBP 4.4 million loss, which therefore, if you exclude that is what I mentioned before, the GBP 17.2 million profit, 22% up, and that leads us to the GBP 13.1 million after [indiscernible] like I mentioned. Tax has gone up. Clearly, we all know that corporation tax gone up by 25% from 19%. That's the major driver within that tax change plus and some deferred tax movements are all related to the way our profit was earned during last year in the various jurisdictions and the impacts of tax losses where we actually don't recognize to be prudent, we don't recognize tax losses or the -- we don't recognize the potential to use those in the future until they come. So possibly a little bit prudent there. But as a result, the tax charge increases. It's that that's driving the 8% decline in profit after tax and it's that that's driving the 8% decline in adjusted EPS. And finally, proposed dividend, 6% up 4.90p. Total dividend for the year, up 5.6% at 7.18p. If I move to the cash flow, good performance in profit as we've covered. And there is the increase in -- and therefore, before investments in working capital. Capital -- CapEx, a similar position to last year at GBP 24 million worth of cash generated. We invested heavily, as I've mentioned in working capital, and you can see there, the receivables movement but really relates in part -- mostly to timing of sales. We had quite a strong Q4. And it also relates to increasingly now to the [ wins ], let's say, of what particular day our footwear customer is going to pay us at year-end for the due invoices. Back in '23 for the '22 invoices, they paid us on the 26th of December, whereas this year, they paid us on the 5th of January. So a space of a week makes a GBP 3 million -- has a GBP 3 million impact on our debt and working capital position. That was paid on the 5th, like I said. So it's very much transitioning and timing based around a fixed year-end period. Inventory is the one that's more -- that's maybe more worth talking to. And that GBP 6 million in inventory, we break down to 2 parts. First part was, as David mentioned, an investment in inventory build recognizing significant opportunity in H1, partly despite our -- certainly when it came to footwear despite -- so reminding everyone that there is risk out in the Red Sea, there are supply chain challenges and people ought to really be thinking about getting in early. Not everyone took that up. And so we thought we better chance it and build. We had the opportunity and we had some -- there was a bit of -- there was certainly softening in the AZOTE business in Q4, giving us capacity. So we used that in the past we wouldn't have been able to do anything with it because we wouldn't have had storage space. We now have Poland. And Poland service as much of our European business, so we have the ability to produce and store. And indeed, what we've seen in Q1 is that the customers have actually come back stronger than we expected. And as a result, much of the -- let's say, half of that inventory build, which was first strategic inventory build, has been consumed already. The other part of that is the PVDF, is the ZOTEK F polymer, the fluoropolymer, which -- where the prices increased or doubled during 2023. And that didn't have it because we haven't run a [ FIFO ] system and we had sufficient inventory. We didn't consume any of that, and therefore, the impact wasn't visible in 2023. It's more visible in 2024. David will talk about price increases in that market and the effects of that when he comes on later. I mentioned higher tax payments related to the high tax charges. We had no refunds this year. Interest was higher for obvious reasons. And the capital spend is more in line with depreciation, fairly similar to last year, certainly in terms of our plant, property and equipment is pretty much in line, as you can see. The increase -- the GBP 1 million increase is related to intangibles, GBP 2.7 million entirely related to the ReZorce investment. And just a good measure. You can see a pretty chunky number there in borrowings, and that's all related to the way it is our refinancing last year, closing down and redrawing down our new facility, which took place in March '22. And then if I move on to the last slide, the balance sheet. Not too much to touch upon here. Intangibles, like I said, very much ReZorce related. In fact, the entire intangible asset is almost, I think, 90% related to MuCell and in that GBP 9.4 million, GBP 6.8 million of that net book value is ReZorce. Tangible assets, we did invest in line with depreciation, but FX, there are quite a lot of assets. If you think most of our newer assets are outside the U.K., therefore, subject to euro and dollar, any movement has an impact. And so that's why the number is coming down. Working capital, I've talked about. Tax, I talked about. Post employment benefits is 2.3% of our net assets. That was 3% last year. So we do not see our pension -- deferred pension as a risk to the business. And that leaves a net debt as I touched upon up slightly, up GBP 3 million to GBP 31.6 million. Yet we still have a leverage of -- leverage ratio of 1.2, which is the same as the previous year. Important to mention, David mentioned that one of our strategic objectives ROCE with ReZorce up 0.2% to 10.3%, but that includes a discretionary spend of ReZorce. If you exclude that, it's starting to move up to respectable levels 14.2%, up 2.2% than the previous year. And I won't go through that, but I'd select a debt facility reminder on the slide. Final slide really just covered this in the last few years, the -- just 1 key inflation or key influencers of costs over the past couple of years have been I could add -- obviously, I should and could add people, certainly in the last 18 months or so. But this is a slide where you can see the low-density polyethylene, that's the primary raw material for polyolefin foams. And you can see that the red line is effectively the year average. And you can -- if you look at the '23 year, you can see it's pretty similar to the pre-COVID period and hence, our messaging that we feel has returned back to historical levels. You can see it did grow quite significantly. You can see the peak of the LDPE price, the light blue in '22, you can see by how much it's come down since then. What you do also see in the brown at the bottom is that the producers made quite a bit of money, as I mentioned before, in the COVID period, particularly as a result of imports not being possible, which is what normally controls and manage the market. You can see that in the last -- for much of the year, particularly the second half of the year, they weren't making any margin. So that may move. But it obviously can't if there's not a lot of positive news and optimism. Foreign exchange -- sorry, energy and nitrogen. Energy is, like I mentioned, it's about 10% of our total non-SG&A cost base. It went up 8%. It's been extremely volatile. It hasn't been recently. So we're able to fix. We're able to buy ahead and feel confident, and we've been doing so. We've got much more visibility, therefore. 3/4 of the total spend is the U.K. And foreign exchange also a similar story. Certainly, in terms of volatility, a crazy year of volatility, yet it started as it finished and the average was the same as last year. So the impact this year on PBT is actually very, very minimal compared to quite a much larger movement in the previous year. And I think with that, I'm going to pass you back to David.

Thanks, Gary. So we move on to the business review now. Start with the polyolefin foams. We've got a situation where segment revenue was down 4%. Backdrop really is fairly difficult industrial markets, particularly Continental Europe and the U.K.. I don't think there'll be any surprises amongst the listeners on that. The markets in Japan, China, not too bad actually. In North America, not too bad, but with 1 or 2 points of weakness in the second half that surprised us a little bit and actually have come back very strongly in the first half this year and so it implies that it was perhaps inventory management decisions through the supply chain that caused that weakness. But overall, generally slowed industrial markets. We have seen the better performing parts of those being coming off the bottom of previous year. So on the way up, but still not at high levels compared to long-term averages. And for us, we've gone through a period with fairly high, as Gary said, raw material and energy inflation, putting up prices. Those have now been either consolidated into list prices or in the case of some surcharges, which were linked to those very high prices that have been reversed. And so where we see pricing, it's more in the product mix or it's a full year impact of decisions taken in 2022. But those higher energy costs, the higher raw material costs have caused a lot of conversations with our customers about pricing. And in some cases, we have walked away from business, but not very many. And mostly, we've been encouraging customers to move to the right product. And I think customers over the years have been buying products where maybe they could have bought lower density, less expensive materials. They have got switching costs, but the way things are now, that might make sense that didn't make sense a few years ago. So -- and the lower density tend to be lower priced because of lower raw material costs. Obviously, for us, lower cost and they go through the plant more quickly, we can make more of them. And so therefore, it can actually improve margins. And so that right product, right price trend is something we've seen more in Continental Europe than necessarily elsewhere. And we have been active in producing materials with 30% recycled content. We've got a number of grades there. A bit different than perhaps you read in the media. I think it feels like the customers should be biting your hand off. Actually, it's long and involved conversations with them about the benefits to them, how they sell the benefits downstream. And we're seeing it more where we've got business-to-consumer type markets, sports and leisure, et cetera, like swim floats or yoga mats or something like that. And far less in the industrial markets, where pricing performance is still very much the leading conversation. So overall, revenue down a little bit, profit up considerably up 53%, and we see the segment profit up at 11.1%. That's come off lows of around 1% a couple of years ago. Certainly, the input costs on raw material have helped there. But as Gary said, energy is still above where it was a few years ago, and we have seen labor inflation come through there as well. So with those cost base increases, we have really been focusing on efficiency gains, cost improvements, et cetera, and waste reduction and logistics have been particularly evident -- logistics improvements are pretty evident there. So I think overall, a genuinely good performance in difficult markets, not horrible markets, but not very beneficial markets were polyolefin for. If we move on to the high-performance products, we are looking predominantly at footwear being the biggest part of that. So -- of the GBP 58 million revenue was GBP 45 million. And we saw, again, good growth from that. We have got basketball in there for the first time, and that certainly contributed to the growth. But over the kind of footwear development cycle, what we are seeing is we're seeing more content, a number of different models that Nike are putting our foams into. And we've genuinely seen good progress there as well. We'll remind you that during the year, we extended the exclusivity agreement with Nike. Previously, well, we didn't see an expiry date was actually, but we extended it to the end of December 2029, which gives us plenty of scope to continue working with Nike, looking not just at the current models and how we do there in the next generation. But beyond that, development of new materials, improved foams, et cetera, for the longer-term partnership. The fluoropolymer sales mainly go to aviation space, up 6%. So decent performance, but still well below the peaks that we've seen back in 2018 or so. Aviation market is still not operating really at the levels it has been. And I would expect that to see some improvement in 2024, but really 2025 would be -- we would expect the real improvement in that business to be. T-FIT Insulation, GBP 5.9 million, up a little bit on the previous year. India is pretty good. Food and beverage is good. Biotech pharma in China, not so good. We definitely went backwards there. The market is not being as active. And so that's part of what we see. But we've also seen customers making different buying decisions based on pricing or alternative materials. And that's something that we've been -- we've looked at pretty hard and trying to figure out is that just the kind of rubber the green over a fairly short time or is there something structural there. So I would say, largely, we've got our hands around that and we expect that market to be better this year. So I would put that down to something that we can do something about. We have seen a high raw material cost, as Gary said, that's mainly come in the fluoropolymer PVDF and T-FIT side, but no impact in the profit and loss this year because of the time as using up existing inventory. So we will see -- we have put prices up 2024, and we will see that impact coming through in 2024. So overall, segment profit margin down a little bit. Mostly, that's because of investment in SG&A and trying to build the team to do more. We do see a lot of opportunity, but getting the right people in there to drive the business forward has cost us a little bit of money in the short term in a year where sales have been decently grown, but perhaps slightly off the long-term trend for growth percentages. So that's that. And then moving on to MuCell. As I said earlier, we've substantially pivoted from licensing the technology to others to developing our own tech, and that's the ReZorce barrier packaging, where it's almost exclusively focused right now on the carton product. We're at the point where during the year, we had signed with a world-leading beverage packer, who have been very involved in preparations to go to market trials in Continental Europe. And we are at the point now where we are fairly imminently looking to run 150,000 cartons through a machine, create. And then the next step after that would be a sterility testing and assuming we pass that, which is it's important we do, and it's something we are -- we know and then our partners know from past experience. There is an expected failure rate there. So -- but we're not concerned that we will get that it's more a matter of timing. Do we need to run the trial machine conditions differently or something to get the stability right. And so we feel very confident we'll get past that. And at that point, we're talking about putting products into the market. So watch the space a little bit for announcements on that. But we are looking at a product market introduction from a -- to talk to the trade, the trade press, et cetera, in mid-May. So that's something we are -- we believe that, that's about the right time to really generate the interest and go out and show people what we've been doing. And at that point, our partners, both the retailer and the packer would be on stage with us, and therefore, people can see who we've been working with this time. So also around that time, we would expect that we've been engaging with potential strategic investors. I think this part of the journey that Zotefoams is that develop the products, finance, et cetera. We see that we have assembled a really professional team of industry experts and commercial experts, machinery, print, quality and stability. And so we own in the sense of understanding and documenting and having the answers that process front to back, how do we get from a plastic pellet to a carton. And at the end of that, how is that carton recycled and come back in. So we've done all that work. And so we are at a point where there is very large commercial interest. The carton market globally is about 300 billion cartons a year. We're already at the point where -- if we were able to wave a magic wand and go to market today, we would have around about 1 billion, maybe more than 1 billion cartons per year customers, very interested in that. And so we are looking at how do we scale that up, and we have developed relationships with toll conversion partners in extrusive for example, who are really interested in moving to scale up with us at the right time. But really to lead that, we believe that we need an investing partner and ideally someone, who has experience in pockets -- depth of pockets financially to really invest against what is a pretty compelling market pool story here, but we need to get past that point of demonstrating the product works. So that's kind of where we are. And at this point, there's a little bit of revenue going through there from the MuCell business. But largely, what we see is a pre-revenue development of ReZorce carton. Let's talk a little bit about sustainability. It's always on someone's agenda somewhere. So let's deal with the hand on. Zotefoams is manufacturing light density materials that use a nitrogen-based process, very efficient use of raw materials, and our products are very helpful, our customers avoiding their emission Scope 3, whether that's lightweighting or installation or protection of products, et cetera. So we're in a good place. And the vast majority of our revenue is if we define it by the green revenue metric is 85% of that is green. So that's pretty significant, and we can have that audited. We've had our ReZorce development looked at from a life cycle analysis. We're getting strong ESG credentials across the board. The one thing we have not done and we've been criticized for is setting a net-zero target. And that's something that internally we debated long and hard is difficult to do given the diversity of the downstream products that we sell to. And also, very much manufacturing businesses approached this by investing in carbon credits. That's the solution for residual emissions. And we took the view that carbon credits were becoming increasingly discredited. So it is something we are committed to continue to look at every -- regularly but we don't believe that paying someone to not cut down trees is a valid offsetting method, particularly when it has been proven that other people are claiming the same credits for not cutting down the same trees. So it's -- we are very much a fact-based organization, and we'll approach it that way. Just quickly on ReZorce positioning here. I mean the ReZorce we have got something in sustainability, we are talking compared to the incumbent cartons, half the energy, half the water, half the carbon footprint. We are currently using 30% recycled carton. All of -- everything we've looked at, all the legislation upcoming and current we are compliant with. And I have had a question, I'll just pick up right here. How do we know that, that gets recycled correctly? Well, we've done a whole of trials. I can't go into the detail. But if you take cartons and put them in Europe, you're recycling them here. They do get sorted. We do recognize plastic. There are a number of different ways that it's done, but infrared scanning and optical sorting, float-sink tests, et cetera. There's a whole lot of different ways that this can be done. But we've put this through what's kind of a mixed recycling facility, MRF. The cartons were properly picked out as plastic. They then go into a plastics recycling facility, part in the U.K. system and they were correctly sorted there into correct -- we call it correct fraction, but high-density polyethylene. So they ended up with the milk cartons. No confusion as to how this is [indiscernible] a cardboard or paperboard carton with plastic. And now you may [indiscernible] sorted into different streams. It does depend on the recycling infrastructure in the particular country, of course, but we have tried this in Germany. We've tried it in other areas and have incredible results to back up our claims that this will go to the right place. And in fact, Biffa, who are one of the big recyclers in the U.K. waste and recycling companies actively are promoting this as a solution because they want more high-quality recycled plastic and they would process the materials and sell it back to us for inclusion in the next carton. So they're very interested in this. So to summarize, key messages. The 2 business streams, we've got a really good performing forms business, and we've got this huge optionality potential with ReZorce that we are pretty close to getting across the line. We think the foams business has got record profits and very good margin growth, and we have got that planned investment in North America to support further organic growth there. And we can already see customers lining up to take those products in North America. So the team there are doing the right commercial job now, so when that plant comes on next year, we'll start to fill it with the product immediately. The overall profit up 5% if we exclude MuCell, which at some point, the ReZorce product, it will be separate from Zotefoams. So giving you the underlying foams business profitability is the right thing to do now. And that underlying profitability is up 22% to GBP 17.2 million. Balance sheet is in a good position, dividend up 6%. And the year started well. First quarter 2023 was a record first quarter, and we are ahead of that. We can see footwear demand up. We see T-FIT insulation and the aviation markets, both coming forward. So we expect growth in all of these areas. And we are cautiously optimistic about the polyolefin foams business. The markets are still not brilliant, and it's very early in the year to call the full year. But we are seeing evidence of higher levels of activities and specific programs or applications, which can increase our market share. On the input cost side, things are relatively stable. And overall, we expect another year of good progress. So that's the end of the core slides. So...

[Operator Instructions] I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your Investor Meet company platform. David, Gary, you received a number of questions from investors on today's call. David, just ask you to read out those questions and give a response for its appropriate to do so, and I'll pick up from you at the end.

Yes. So first question is, how can you distinguish between a ReZorce carton and the composite type? There are systems to do that, we have discussed that. There are also more advanced systems coming out on effective around digital watermarking, which will make this even easier. And importantly, fairly easy to kind of apply in structures that don't have the existing recycling systems to distinguish. So the -- there's a huge industry built around cutting waste in the right place. So we are not really concerned about that, particularly as there is so much demand potential out there and we will obviously be more active in the areas where we have best fit initially. So I think what the plans for T-FIT and ZOTEK F? I've covered that. A question from Scott M. What gives you the reason to be optimistic about the underlying demand environment for polyolefins? Well, I think I've covered that as well. We feel that -- we see some green shoots in the market. Some of the specific factors in North America at the back end of last year where customer-specific that have been turned around already. And I think that is, in Europe, we are much more active in driving into the specific projects where we believe there is growth. So I still think the European market and the U.K. market will be somewhat more difficult. It won't give us much help. So we're being cautious, optimistic overall, but with some degree of caution in the European, U.K. markets. Andrew R. What regulatory packaging approvals have you secured so far for ReZorce and what you still need? Well, as long as you can prove the packaging is fit for purpose and sterile, you don't need regulatory approvals in that sense. So the approval, the custodian, if you like, of fitness for purpose is the packaging company that's releasing it. So when that goes out with juice in it, the person selling that is their sign-off. And there are a whole lot of things that you would need to do to prove that. So sterility being one of them. But we know those news are all in hand with our partner and hopefully go. [ Ed T ]. How much scope is to further improve the utilization rates at various plants? Well, we deliberately don't give a very clear number on that, Ed. It's actually extraordinarily complicated thing, given the different machinery over different plants and product mix impacts, et cetera. So I can say that we have got room for growth. And when we look at the plans for the next few years, we can see that we can do that without further investment in big pieces of capacity other than what we're doing in North America. But if the future landscape changes and we see opportunity there, we may well invest in that. But I think we would have to discuss that at the time. Question from [ Dean ], what's the scale of the basketball opportunity? Again, difficult to answer. [indiscernible] very pleased that the reception has had on the products so far. But it's a very different end-user market. The running market is people who run. The basketball market is not people who play basketball necessarily. At the top end is, but the majority of sales would go through to the athleisure market and therefore, how the design, who's wearing it, et cetera, matters. And I think it's great that we're very pleased at it. But I find it a difficult read across from running and certainly, it's still a bit early to tell. So we are very pleased that we're on basketball. We're looking for further product launches coming up, but still too early to tell. And it's not ever going to be as big as running. It's just not -- the structure of the market might firmly use, et cetera, the number of shoes you sell. It's just not going to be as big as running, but it's a very nice layer of demand in the Nike business. Okay. A question from Andrew. Zotefoams has quite significant revenue in China. What are the expectations of opportunities in China moving forward? Well, the Chinese revenue comes largely from -- that's where Nike make some of the footwear. So if they decide they want to make it somewhere else, we'll move somewhere else. If they went more in China, they'll get more in China. So that's not really anything about China or ours. It's more about Nike supply chain. The non-Nike business, we manufacture T-FIT materials in China and we sell all of the other products into China, but is a long way to ship foam to make you really at the premium end, it's not significant. So we don't see China ex-Nike being a big market for foam, but I think we can go back on the growth track on T-FIT in China. So yes, that's where we are. Another question from Andrew or -- sorry?

Can I take that one?

Yes, go ahead. Thanks.

Yes. So a question around, first of all, headroom, it doesn't. So it's fundable out of our cash flow. We won't be at a reduction of GBP 10 million. We -- the analysts have us in remaining a leverage of around 1.3 to 1.5 with the investment we're putting into ReZorce and LP this year. We will definitely have more than GBP 10 million headroom. We have [ 90 ] at the moment. I mean if you look -- I think the analyst had about GBP 34 million debt, which will be GBP 16 million headroom thereabout. So that is not a consideration. And as we go -- and obviously depends upon how ReZorce comes out. But if ReZorce is out of the way, then we also have a profile of debt reduction that's quite rapid given the cash generation that we're able to generate. In terms of the particular areas, I mean, it's name them, right? We have automotive, which is going pretty strong. We see further opportunities there. We have a graphic solution and a large customer that are on the verge of or have opportunity to grow quite significantly. We also have our own internal business. So we have a subsidiary of our U.S. business that deals with industrial installers, and we see quite significant opportunity in that market, which would certainly help. It's about -- and on top of that, it's very important as we look forward, that this particular vessel will give us the optionality to actually to make HPP products in the States. So the HPP vessels have the versatility. The existing LP is quite restricted in that capability. And so by having this additional vessel, it will allow us to consider footwear or aviation manufacturer going forward, which would not be the case at the moment. And I think if I just stay with Scott, I'll answer the here's one more finance one, David, in respect to kind of a stable wage cost inflation this year, I will stab at 5%.

Okay. And there was also a question about foundries.

Absolutely not. I think just to answer that, we have -- we will fund -- we were able to fund this. We have a strong balance sheet. We will have a strong balance sheet at the end of the year, we will be able to fund this investment -- these investments through our operating cash flow. And we -- as I said, we expect with resolution of the MuCell/ReZorce opportunity, we expect that to start. And if you look at -- if you do have access to the some of our brokers notes, you can see that by '26, we're starting to turn away quite rapidly at the debt.

Okay. So diving in [indiscernible] more. Having an opportunity is ReZorce, asks Simon, can you give an idea of the potential this material has and alternatives that are in the market for packages for similar partners? So we work with our global packaging consultancy to look at emerging alternatives, et cetera. Nothing has come out. We've not seen anything like this. The technology is, it's not easy. Once you know what you're doing, we can do it, but people have been trying to do something like this for years and not managed it. So it doesn't mean that there are other alternatives out there, but there's no close alternative. What we do see is we do see the paperboard, the tech packs, et cetera, making incremental improvements on their sustainability claims. And how big an opportunity is it? Well, look, it's not going to be all things to all people. That's certain. I don't think we would necessarily say, well, let's put this into -- I don't know, Nigeria, for example, if they are not actually recycling the end product, it kind of doesn't work. So -- but the markets are extraordinarily big. So we're talking about 100 billion -- sorry, 300 million carton market globally and 1 billion, I mean, 1 billion you're getting quite close to a business that's as big as Zotefoams at that level, not quite but certainly 2 billion or bigger than Zotefoams today, and 2 billion is not even 1% market share. I'm not a great believer in going. It's a very big market. Let's claim 10% market share, that doesn't seem be aggressive. You have to work it bottom up, line by line, where does it makes sense, where it does not makes sense. But the addressable market in areas or geographies within good recycling infrastructure is very large indeed. And if you talk to the retailers, talk to brands, if we have this available now, it would fall into Tetra Pak green system, right? LPB, the current solution is in Tetra Pak Orange system. They don't want it, but they haven't got alternative. Okay. If you look at Sainsbury's, Sainsbury's say, look, we want to reduce plastic. So we're going to -- we're not as interested in that. Do I feel that we have to go and win the war when the battle with Sainsbury's? No, not really. We go with the people that want us for the reasons that we are making the product. So next question from Dean, do you see ReZorce been set up as a separate business with a partner on how did this work? So we may end up selling it. We may end up licensing. We may end up partnering, joint venturing. We can do all of the above and just in different geographies. I think we are capable of doing it all, because from the start, we've looked at the entire supply chain. We have not just looked at how do we do our bit and then throw over the wall to the next guy. So when we are talking about this is how it goes through a filling machine. This is how the cap goes on. This is how the printing works. All of that, we know how to do it, okay? So that gives us the ability to license it. It gives us the ability to partner with a financial partner, because we're not looking for industry expertise, we can bring in the right people to scale the business, et cetera. So I think we're just -- at this point, we are open to the different solutions or different opportunities that may arise for scaling this. One thing we have done, given the lead times on, for example, extrusion equipment, has gone to various extruders companies around the world. So look, would you be interested to manufacturing this so that we could scale quickly. And the answer is yes, in a lot of cases. So that would give us, with the right partner, the ability to scale more quickly than you might think. Okay. Benjie, I've read that even if 90% of plastics is recycled in a closed-loop system that would still result in a greater amount of total plastic use overall than by using LPB, okay? How do we deal with that? Well, I think there's 2 answers to that. One is -- well, that's wrong. Why is it wrong? Well, typically, LPB will use more than 10% plastic. The caps not recycled because it's in there and then the plastic liners are not. And by weight, those are more than 10%. So secondly, we are using recycled content. So if you work out a closed loop, the leakage of a closed loop we are, we believe, lower than 10%. But it does depend on recycling rates. That's definitely true. And we've looked at the life cycle analysis in a number of different ways including different recycling rates. So I think it is a valid challenge. I think we have to make sure that we operate in areas we're recycling is high. But at the same time, it is a much lower carbon footprint. I know the world is antiplastic, but if you actually work out for some intensive forestry does to biodiversity, water usage, carbon, they say we are growing carbon and capturing carbon, actually not true. If you work out what happens when you chop down mature tree and plant sapling, that is not the same. And so I think there are arguments on either side of the debate. But certainly, the not valid argument is what's plastic? That doesn't actually hold up if you look at the detail. And so one of the things that we are doing on launch is coming out with very clear and validatable discussions are on those topics. It's interesting, if you go to a Tetra Pak carton, you might see something like this cap is certified recycled plastic. Go and look what the asset says when certified recycled plastic. What it is, it's virgin plastic. And they make a contribution to other people to subsidize them buying recycled plastic. And then they call their product, certified recycled plastic. What do you think about that? I don't think that's very clear or helpful to the debate around how society is dealing with effectively what is a global sustainability program. So finally, David, is the timing of your retirement like to progress with ReZorce? No. I think it's 2 ways to read that. When I announced I would retire this year, it wasn't linked to any particular business thing out. I always think that if you think about business, you will never retire. You're always 2 years away from retiring because of what's going on. The other interpretation of that question is am I just going to leave the business and hand over? No, I've committed to the Board that I will be available after an incoming CEO comes in to do whatever is necessary for continuity. And if that means I pick up certain projects for a tail I've not got anything to do on the other side. I've not said I'm going to go and take on exact job or something like that. So we will do what's right for the business. And my retirement will not be a -- there's a file. There's a contact list if you go that wouldn't happen.

David, on that note, you've answered every single question that is coming from investors, both yourself and Gary. So thank you once again for your time, and thank you to everybody for engagement. David, Gary, I will shortly redirect those on the call to give you their feedback, which I know is particularly important you both. But before doing so, David, I wonder if I may, just a couple of closing comments just to wrap up with.

Yes. Just look, thanks for listening. Thanks for your support. I hope you find Zotefoams as usual, fairly straightforward and honest where things are going well. We will take the casual part in the back, and we think this don't go well. We will tell you the truth and what we're going to do about it. So it's just a wait. But this is -- I don't know how many more of these calls we have with you, but absolute pleasure to be the Chief Executive of Zotefoams and I think, in particular, we've had a very good year. Lots of interesting things going on, as always, another year of progress. And thank you very much.

That's great. And Harry has just tied in saying, David, getting towards the end of your term. Can I please offer a vote of thanks for all you have done, that's from Harry. Thank you, Harry. Well, David and Gary, thank you once again. Can I please ask investors not to close the session. We're now automatically redirect you for the opportunity to provide your feedback for the company to better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team at Zotefoams plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.