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Paul Scott interview with David Stirling, CEO of Zotefoams (ZTF)

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This is the latest in my series of CEO interviews with interesting companies that have passed my 4 key criteria (this is a spin off from the SCVRs) -

  • Issued a recent, positive or in line trading update, and reasonably sound outlook comments,
  • Strong balance sheet (so little to no dilution or insolvency risk – very important in a downturn)
  • Good management (partly subjective!) with a clear strategy, executing well, and a good business model
  • Reasonable or cheap valuation, so a possible buying opportunity (long-term).

I don’t charge any fees for my interviews, so I’m free to ask anything, and I carefully select only companies that I think are good. They’re obviously for general interest, and are never tips, recommendations, nor advice. As you know, our whole ethos here at Stockopedia is about everyone doing your own research amp; taking responsibility for managing your own portfolios.

Zotefoams (LON:ZTF) CEO interview with Paul Scott

Audio is here, or on my podcast platforms (“Paul Scott small caps”)

I’ve typed up a summary of the key points, as follows -

  1. Introduction amp; disclaimers (no fee, no personal holding, not financial advice nor a recommendation, please do your own research)
  2. Description of the company please.
    ZTF is a manufacturer of high value added block foams products – very lightweight, used in lots of industries. Biggest market is high end running shoes for Nike. Markets – huge variety, e.g. aircraft, space, automotive, medical, biotech, pharmaceutical, insulation, military, sports. Range of product properties – e.g. very lightweight, won’t burn. Proprietary foaming process. Manufacturing in UK, US, and Poland. Also MuCell division.
  3. Positive trading updates, despite macro issues. How are you bucking the trend?
    Wide variety of industries. Refocus resources on sectors that are doing better. Challenge is managing raw material amp; energy prices. Successful in engaging with customers, getting price rises through, and managing margins well.
  4. Q3 trading update – revenues up 27% vs strong LY comp, and up 24% YTD, resilient demand. Is this mainly price increases, or volume growth, or a mix of the two?
    Helped by dollar strength, has boosted the top line a bit, 90% sold overseas. Majority of revenue increase is price increases, and improved product mix (higher value products selling faster).
  5. Gross margin – seems quite low, but overheads lean, so decent net margin. Is there scope to raise gross margin?
    We’ve invested in capacity, which was under-utilised. There’s now scope for better gross margins from improved utilisation (of fixed costs). Medium term we’re expecting further margin improvements from better mix of products. The same fixed assets can make all the different ranges of foams.
  6. Input cost inflation – some recent abatement in prices reported by you in Q3 TU. How will it pan out?
    Mixed picture. Polyethylene is now coming down from record highs. Energy costs are an issue. Feels like non-energy industrial price rises have mostly fed through the system now. Input price rises are now more muted. A lot better than it was. Prices still above pre-pandemic level. Main focus is now on managing supply chains, rather than cost management.
  7. Energy prices – are yours fixed?
    We did buy ahead a certain %. Recently we haven’t, as forward prices are now eye-wateringly high, and we don’t want to lock in high prices. Currently we have very little energy spend that is hedged. If energy prices say doubled, would you be able to pass this on? We’re in constant discussions with customers over pricing. We don’t like to automatically pass through price rises, not always sensible. If input costs come down, then customers will ask to unwind price rises. It feels like well into next year before inflation will be settled.
  8. Supply chain issues amp; certainty of supply (re inventories, in and out). How have you managed this?
    We have sensible inventory buffers, not working just-in-time. Very close relationships with raw materials suppliers. Can’t eliminate every risk, but we’re in a good position.
  9. Balance sheet. NTAV is £96m. Heavy capex, and debt has risen, but you’re now turning free cashflow positive. Please talk us through this?
    Yes, major capex, we were capacity constrained in 2018. Needed to expand factory in USA, as UK maxed out, so also added new factory in Poland. Bought new, efficient equipment. Done pre, and during covid. We’ve almost doubled the size of the business (revenues) in the last 5 years. We’re still growing into that larger factory capacity. Cash generation is really strong, and debt is starting to look a lot more comfortable (see Q3 update).
  10. Bank debt – I’m comfortable with your debt because you own the freeholds of your factories. That must make the bank comfortable.
    Equipment we buy lasts a long time (not 5 years, much longer), so we want to own the freeholds. Banks like security too. Good relationship with the bank. We’re in a good spot. Freeholds are not revalued, they’re in the books at cost.
  11. Re-Zorce – this is the blue sky project, looks really interesting, in for free I would say. This sounds exciting, but commercially unproven – tell us more about this project.
    Yes, it’s layers of plastic amp; foam, all from same material, in a thin sheet, feels like paper. Same material as milk bottles, widely recyclable, over amp; over. Properties are high moisture amp; oxygen barriers, so can be used for wide range of food amp; drink packaging, e.g. cartons of fruit juice. Existing cartons are made from varied materials, that are not recyclable. Re-Zorce is 50% lower carbon footprint, much less water amp; energy to make, and end of life is recycled. Also it’s made from recycled materials. Very interesting. At late stages of scale-up for tech development. Can also be used to make sachets, which existing ones are not recyclable as they use multiple materials, e.g. plastic amp; aluminium.
    What are the chances of this becoming a big commercial success? We’re developing the technology, which involves making actual cartons amp; showing them to potential buyers. Execution will be through a partner, because Zotefoams is not in the business of making consumer packaging. Started talking to potential partners. We’ve talked to many brands, supermarkets, which are “almost overwhelmingly positive”, as this is a very big opportunity to meet their environmental targets.
    It sounds like you’re several years away from commercialising this? That’s difficult to call. The market is so big, if the market likes this, it could be growth for many years to come. Let’s take one step at a time. We hope to be updating shareholders over the next 6 months or so, on a regular basis.
    IP protection? We’ve filed a lot of patents. First filed in 2019, granted in the US now. Other countries we’ve filed patents, in progress. We’re coming up with IP ideas all the time, e.g. yesterday! Difficult to gauge how applicable patents are, but we employ a full-time IP manager, and external consultants. IP is central to our business case.
  12. How do you see the outlook, and growth strategy, e.g. acquisitions?
    We’re mainly growing organically. Some segments are performing well, others are still struggling, so we focus on the growth opportunities. I’ve been in the business 25 years, it’s more uncertain in last 2 years than ever. But the world is moving towards us – lightweight, performance products, new products are ideal for us, lots of opportunities.
  13. Thanks, and goodbyes.



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