Zotefoams plc (ZTF) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Zotefoams plc investor presentation. [Operator Instructions] Before we begin, I would like to submit the following pool. I would now like to hand you over to Ronan Cox, CEO. Good afternoon, sir.

Thank you very much, Lily, and good afternoon, everyone, and thank you for joining us for the Zotefoams's 2026 Interim Results. I am Ronan Cox, Group CEO, and I'm joined here by Nick Wright, our Group CFO. Today, I'll begin with the business performance and the strategic context. Nick is going to take you through the financials in detail. We'll cover the strategic progress together, and I will close on the outlook before we take your questions. So if we go to the next slide, please, Lily. I'll take the disclaimer as read, and then we move on. And just quickly on business performance, let me start with how the business performed in the first half. And if we go on again, Lily. Next slide, please. Thank you. So the first half really shows diversification and disciplined execution working together. That is the key message here. Sorry, I think that we are probably a few slides ahead. Can we go back, Lily, please? Yes. There we go. That's the one. Thank you. So diversification and disciplined execution working together. Group revenue was up 23% to GBP 95.2 million. It's really important to be clear about the quality of the growth. It includes the first full half year contribution from OKC, and that was acquired growth. So on an organic basis, revenue grew by 4% or 6% on a constant currency basis. And the important point is that growth was broad. And non-footwear markets were particularly strong with doubling of Asia and the contribution of OKC together more than offset that footwear normalization that we have been signaling for quite some time after an exceptional run starting at around about Q4 2024 following the whole way through in 2025, that normalization has come in 2026 and H1. The mix that we've seen in H1 is why profitability has improved. Adjusted operating profit was up 34% to GBP 16.3 million. And the adjusted operating margin improved 130 basis points to 17.1%. Adjusted earnings per share were up nearly 29% and the balance sheet is really strong with leverage sitting just about 1x and a new GBP 90 million multicurrency revolving credit facility is in place. And indeed, we have increased our interim dividend by just over 5%. In short, what I would say is that the group has absorbed really significant footwear normalization, but still delivered really strong revenue and profit and margin growth. For me, this is the proof point of the strategy. And if we go to the next slide, please, then. And this is a brief reminder of that strategy and a brief reminder of where we are going. So expanding beyond the core is moving from execution to impact. So the strategy that we laid out as much as 1.5 years ago at our Capital Markets Day is now starting to have impact. Health and safety remains the foundation of everything that we do around it sits our priorities. But with so much going on across the group, as I said, health and safety is incredibly important for us as we're installing batteries, upgrading facilities. It is our #1 priority. And as I say, around that, our priorities are about getting closer to customer, around driving innovation and sustainability leadership with a much sharper industry and customer focus and then driving that disciplined M&A beyond the core with high-performing teams. I think the thread that connects all of this is the shift from selling a product to serving industries, moving up the value chain and building capability closer to where our customers are. So if we then start to go into the different regional performances, we go to the next slide, please. Thank you. We're going to start with EMEA. EMEA delivered record revenue, up almost 20% with non-footwear growth more than offsetting the anticipated footwear normalization that I mentioned earlier. Transport and Smart Technologies really continue to build on strong momentum that we've seen towards the end of last year, including a growing aerospace and indeed a growing space business, which are both key drivers for the underlying growth. That footwear normalization was as expected after that exceptional demand that started in and around Q4 2024 and continued the whole way through 2025. Revenue was GBP 28.5 million in footwear. So it was not insignificant, but that was down 23%. The one thing I really want to stress is that the long-term opportunity in footwear is intact and indeed, the shift of production to Vietnam is central to that long-term growth opportunity. OK Company contributed just under GBP 15 million in its first full half, and that was ahead of plan, and it was earnings accretive with some early cross-selling wins being registered in H1. Margin improved modestly to 22.8%, reflecting really good cost discipline. There was some partial offset from mix and wage inflation and indeed higher input costs with some of the headwinds that we've seen from the conflict in the Middle East. But again, great discipline to see those margins nudging up. And our Global Innovation Hub at Croydon is progressing at pace. This is going to strengthen the research and development of the innovation that supports all of the group growth. If we go to the next slide, please, Lily. And touching on North America. North America really was a standout with revenue up 29% and the segment margin up a whopping 930 basis points to 17.6%. So growth was broad, and it was across both Transport and Smart Technologies and Construction & Other Industrial. And new business and key account wins were really important here. And on top of that, we had record manufacturing output growth at both Walton, which is in Kentucky and Tulsa and Oklahoma. You'll see one of the pictures there is celebrating the opening of the LP2 investment with the Lieutenant Governor in Kentucky. We did that last month. So that big investment that we went through in '25 and started to commission properly in '26, really taking traction and helping us significantly. Also in North America, we've got a fully reshaped commercial organization that in of itself is driving stronger customer engagement and it's really helping us to grow the commercial pipeline here. I would also say that the margin step-up reflects the new operational leadership that we have in North America. So fundamentally better performance out of the factory with higher volumes, better mix, stronger operational gearing. And that operational gearing, we've said for a very long time. Gearing in our factories is really important. Volumes really help the profitability. And that was helped by that second low-pressure vessel that, as I said, is now fully operational, and we commissioned it fully in the last couple of months. So moving to the next slide, please, on Asia. Asia is and continues to be a small business today, but it is strategically very important for us. Even with the existing small business there, revenue more than doubled to GBP 3.9 million, driven principally by that construction and other industrial demand. Most of the legacy demand in Asia is around that Construction & Other Industrial market coming from T-FIT, mainly in China and indeed in India. But the bigger story is the platform that we're building in Asia. The bigger story is the Vietnam footwear facility, and that is very much on track for first stage trial from October, so in a couple of months' time. Autoclaves are on site. I'll come into more detail on Vietnam later in the presentation, but you'll see a picture here. There will be a bigger picture later on in the presentation. Autoclaves are on site. And the South Korea Footwear Innovation Center has been opened. It is operational. It's already hosting customers, deepening collaboration with those key customers and footwear partners. So still more installation to do there, and I'll touch on that as well later in the presentation, but still already incredible progress. And then if we turn to the next slide, please, Lily, touching on vertical performance. The profile of the business is more balanced. So what we've seen is Transport and Smart Technologies growing by 76% from the largest vertical, as I said, supported by those sort of industries like aerospace, space, automotive. And then we have Construction & Other Industrial, which grew 41%, the largest part of that growth coming from North America and a reasonable amount coming from that doubling of sales coming in Asia. Consumer and Lifestyle was down 19%, and that is the full reflection of the normalization of that footwear demand after that 2025 exceptional run. The long-term opportunity remains in Vietnam, and that is really, really important. We are still very confident. We're not stepping away from that. So that long-term opportunity still exists and will be realized as we commission and optimize the facility there. This rebalancing of the portfolio is exactly the strategy that we put in place, and it is exactly the strategy actually starting to deliver. This is what we designed, and this is what we are achieving what we designed. So with that context, let me hand over to Nick, who's going to take you through the financials in more detail. Over to you, Nick.

Thank you, Ronan, and good afternoon, everyone. If we go to the next slide, 2026 has started well with a strong performance that demonstrates the growing breadth and resilience of our business. Ronan has already covered revenue and adjusted profit. So in terms of a few other key items on this slide, adjusted profit before tax increased 34% to GBP 15.3 million. Adjusting items totaled GBP 1.3 million, GBP 0.9 million of this is noncash amortization of acquired intangibles. Adjusted earnings per share increased 29% to [ 25.7p ]. And finally, we have proposed an interim dividend of [ 2.63p ] per share, an increase of 5%. These headlines reflect the momentum in our business and the benefits of diversification alongside disciplined execution. So let me take you through the financial performance in more detail on the next slide. Group revenue increased 23% to GBP 95.2 million. But more significantly, gross profit grew 26% to GBP 33.9 million, demonstrating strong cost control. This includes our rapid response to the conflict in the Middle East. The war in Iran has resulted in higher raw materials and transport costs, which we have passed on to customers through surcharges. We have also experienced some supply chain disruption, although none of our goods go through the Strait of Hormuz. Our customers' top priority is typically security of supply. So we've safeguarded that by investing in raw materials where necessary. Gross margin improved 100 basis points to 35.6%. This benefited from the OKC contribution, price increases and surcharges, partly offset by higher raw materials, utility and freight costs and wage inflation. SG&A expenses increased to GBP 17.6 million, largely reflecting the inclusion of OKC as well as the build-out of teams in Asia and innovation. Looking at the breakdown by region. Operating profit in EMEA increased 22% to GBP 16.8 million with a margin of 22.8%. This was driven by OKC and a strong non-footwear performance, partly offset by the normalization of footwear, which was down 23% following exceptional demand last year. In North America, operating profit almost tripled to GBP 3.3 million with margin improving to 17.6%. The second low-pressure vessel is now fully operational. This gives us additional capacity to process higher volumes at marginal cost, driving strong operating leverage. Operating profit in Asia improved to GBP 0.5 million from breakeven last year, and this was driven by Construction and Other Industrial demand in India and China. Asia also absorbed the first half start-up costs incurred in Vietnam and Korea, and we expect Asia to become materially more important as Vietnam comes on stream. Looking at the right-hand side of the slide, net finance charges increased to GBP 1.1 million, reflecting higher average borrowings following the OKC acquisition and our ongoing investment in Asia. Adjusted profit before tax increased 34% to GBP 15.3 million. The tax charge was GBP 2.4 million, an effective tax rate of 15.7%. This is up from 14%, reflecting lower tax deductions from patents and the addition of OKC, which is taxed at 25%. This resulted in adjusted profit after tax of GBP 12.6 million, up 29%. Turning now to cash generation and our balance sheet on the next slide. Cash generated from operations was GBP 8.2 million compared with GBP 15.8 million last year. This is a year of strategic investment, which reflected in both working capital and capital expenditure. Net working capital increased by GBP 14 million. Around half of this reflects higher inventory in the U.K. and U.S., both to maintain customer supply and to manage the transition of footwear from the U.K. to our new site in Vietnam. Receivables also increased due to normal seasonality in OKC and higher activity levels in the U.S. We continue to focus on managing working capital across receivables, payables and inventory. CapEx of GBP 7.2 million mainly relates to investment in Asia and the innovation hub in the U.K. Return on capital employed was 15.8%. Net debt increased to GBP 39.1 million from GBP 31.5 million at the year-end, and this reflects our strategic investments and the deferred consideration paid on OKC. Despite this, our leverage ratio remains below 1x, well below our target of 2x. Following our refinancing in January, we have a new GBP 90 million multicurrency revolving credit facility, giving us liquidity headroom of GBP 50 million. Turning now to the movement in net debt on the next slide. We started the year with net debt of GBP 31.5 million. We generated GBP 8.2 million of cash from operations, invested GBP 7.2 million in CapEx and paid GBP 3 million of deferred consideration on the OKC acquisition. A further GBP 3 million is expected in October with the final GBP 1.3 million in the first half of next year, contingent on OKC delivering its targets. We paid net interest of GBP 0.7 million, tax of GBP 1.4 million and returned GBP 2.6 million to shareholders in dividends. Finally, there was a net outflow of GBP 0.9 million from other items, bringing closing net debt to GBP 39.1 million. So before I conclude, if we move to the next slide, let me remind you of our approach to capital allocation. We deploy capital to drive long-term sustainable growth and create value for our shareholders, and this slide sets out our priorities. First, we are investing in geographic expansion and product innovation, particularly in Asia and the U.K. We are also building a scalable platform to drive efficiency and improve return on capital employed, and this includes digitalization and the deployment of AI. Second, we intend to maintain our progressive dividend policy. And third, we have a disciplined approach with high hurdles for acquisitions in line with our strategy. And fourth, we will return any surplus capital where this represents greater value for shareholders. So in summary, we've delivered strong revenue and profit growth despite the normalization in footwear as we continue to diversify and grow the wider business. We are pleased that OKC is performing ahead of plan. We're making good progress with our strategic investments in Vietnam, South Korea and the U.K. And we've achieved this while maintaining a strong balance sheet with leverage below 1x and significant liquidity headroom. Thank you very much, and I'll now hand back to Ronan.

Great. Thank you, Nick. We go to the next slide, please. I'm just going to spend a little bit of 5 minutes just talking through strategic progress. So if we go to the next slide, I think the first round of progress is around diversification. Transport and Smart Technologies and OKC are actually driving growth and more than offsetting that footwear normalization. As we mentioned earlier, OKC has contributed just under GBP 15 million in its first full half year, well ahead of plan, and it's an early proof point for disciplined value-accretive M&A. Our approved partner network continues to roll out across both North America and EMEA. And then the cost discipline and productivity gains together with much stronger profitability in North America are really supporting the margins whilst footwear margins are temporarily moderated. If we go to the next slide, and we'll delve into Vietnam. This is the second strand, which is really all about getting closer to the customer. Vietnam, this gives us in-region, scalable footwear optimized manufacturing with a much shorter lead time and a factory that is designed and bottom up for sustainability. We've received all of the permitting required in the business, all of the construction licenses. We started to receive machinery. You see some pressure vessels there in the picture. Hiring is accelerating. And the first injection molding machine has been delivered on site and trials being run through that lab equipment goes in this month. And the first autoclaves that are already there are going to be fully commissioned in September with the first stage trials of product going to our customer to begin in October. And that's really about proving out the efficacy of the whole manufacturing process there. So incredible progress in that facility that's really risen out of the ground and is substantial in nature now. So all on track, which is excellent progress in H1. If we go to the next slide, alongside Vietnam, then we have the South Korea Footwear Innovation Center. And actually, the 2 are completely intertwined. There is no point in doing one without the other. Vietnam needs the innovation center in South Korea to actually make it viable long term to feed it with the innovations that are going to help us get more platforms in the future. So that innovation center accelerates our supercritical foam material development and shortens those footwear development cycles. And we work in this innovation center alongside the key partners. And those are the key partners that are -- they're essentially the Tier 1 shoe manufacturers. The people that work directly with our materials. So at that innovation center, the construction is complete. First injection molding machine is in situ. Almost all of the lab equipment has been installed there. And indeed, we have already been hosting our customers there and the large autoclaves with super high pressure ranges, they're coming in 2027. But that facility is already hosting people, hosting Tier 1 manufacturers who were helping work with new models and new designs for our customers. And then if we go to the next slide, I'm going to hand over to Nick, who's just going to talk you through the U.K. business.

Thank you, Ronan. So turning to our U.K. business. We have continued to invest in automation and process improvement in Croydon. As footwear transfers to Vietnam and we make greater use of our facility in Poland, our U.K. site will carry a higher fixed cost base than the business needs. So today, we have announced proposals to optimize our U.K. business across all functions. This means that Croydon will focus on materials innovation and non-footwear applications for the other 6 key industries. And I want to be clear that we remain committed to our U.K. manufacturing base in Croydon. Croydon is also home to our global innovation hub, which is progressing at pace. The Board has approved starting a collective consultation process, which is expected to affect more than 100 roles. These are proposals at this time. No final decisions have been taken and no decisions on individual roles will be made until the consultation has concluded. And our priority is to consult openly and fairly and to support our colleagues throughout the process. Subject to that consultation, we expect the changes to deliver annualized savings of around GBP 4 million with payback of under a year. The associated one-off costs, including the redundancy and impairment of plant that's no longer required will be treated as adjusting items. These do not change our adjusted expectations for the full year. I will now hand back to Ronan, who will cover our investment in AI and our outlook. Over to you, Ronan.

Brilliant. Thank you, Nick. And as Nick alluded, the final strand of our investment strategy is around AI, which is now starting to drive productivity, innovation and growth rather than sitting on the side of the business. Our customer tools powered by the ZoteIQ engine are already generating leads and giving customers high accuracy material recommendations. This is available on our website today. And then we have ZoteLabs, which is in its beta version, and I'll dig into a bit more detail in a moment, but this is accelerating material innovation through AI-driven recipe design, feasibility scoring. And this is drawing on more than 2.1 million technical files and more than 6 million academic and patent papers. AI is also active in operational planning now in the business. It's improving forecasting. It's improving production efficiency. And all of this is done with a really robust governance framework with our black wall protection ensuring it is secure and responsible. And to bring this to life, I'm going to try to bring it to life with a very short video clip with ZoteLabs in action. If we go to the video. So ZoteLabs, we've developed -- it's a proprietary AI platform that brings together over 100 years of technical knowledge, more than 2 million internal files, millions of scientific publications into a single connected system. We've got Forge. This helps engineers explore new formulations and concepts, and it accelerates early-stage development while capturing really valuable technical expertise and reasoning. The great thing is that with a single click, we can take data from Forge and we can push that into what we call Bench, which is carrying for that design intent and assumptions and rationale. This allows specialist agents to build on each other's work. And we've got an application selector and this application selector really helps them identify opportunities and support customer conversations faster and with greater confidence. And we also have then Academy, and this gives our team the ability to explore those millions of scientific publications in a single environment, helps us discover knowledge and insights at scale that honestly otherwise would have been impossible for the business. And then finally, an area of great impact for us is Gas Lab and Permeate. So our most expensive assets are our gassing equipment. And this is using AI modeling to help reduce unnecessary trials and accelerate this development. Permeate. enables the platform to continuously grow by bringing new knowledge into the system under expert oversight. Together, these capabilities create a platform that protects institutional knowledge, accelerates innovation and actually improves our business with every single interaction. And that's ZoteLabs, it's built today. It's delivering value now and it's creating a more competitive advantage for the future right now. So moving to outlook. We go to the next slide, please. So our first half really underpins our confidence in the full year and indeed in our medium-term ambition. Our full year expectations are unchanged, and the continued momentum supports the delivery in line with market expectations. The business is broader and more balanced with non-footwear, OK Company and Asia offsetting the footwear normalization. And the margin progression is supported by that disciplined execution and a materially stronger North American profitability. The strategic investments in Vietnam, South Korea and indeed the U.K. Global Innovation Hub are on track. And as you've heard from Nick today, we have set out proposals, these are still just proposals to optimize our U.K. business alongside the buildup of Vietnam and the greater use of Poland and the continued investment in innovation, automation and process improvement. It's the right steps to keep the U.K. footprint for the long term. This is about continued investment in our U.K. manufacturing business. This is getting the right footprint for the future. On footwear, I want to be really straight with you. As the production transfers to Vietnam and as we move from foam shape to 3D preforms, we expect footwear revenue to be lower in the second half of 2026 and indeed into 2027 before recovering from 2028. This is not unexpected. This is a planned transition. It is not a change in the long-term opportunity. We remain very confident in the medium-term ambition of revenue above GBP 230 million and operating profit above GBP 40 million by the full year 2029. So while the timing of profit progression will reflect that transition, we are increasingly confident in the materially stronger value creation from 2028 onwards. So that's the presentation. With that, Nick and I will move over to take your questions.

And I see that we've got quite a few in. So let me just have a quick scan through and we'll just go top to bottom, first come, first served. So first question is, will pretax profit be flat in 2027 compared to 2026 due to lower footwear sales and margins balanced by growth in other areas and by cost cutting in the U.K.?

Thank you, Ronan. So we are at the very start of our planning process for 2027 in terms of going through our 3-year -- 5-year plan and moving into our budget process. And therefore, we have not given formal guidance for 2027. That said, we are very cognizant of '27 being a year of transition for the reasons that Ronan has highlighted. But I would hope there would be some modest progress in terms of profitability between 2027 and 2026, but we're in the process of finalizing those plans. As Ronan said, it is a year of transition, and that will be reflected in those plans.

Thanks, Nick. Next question, will the expansion in Vietnam move the revenue concentration back to footwear? Or do you think the foundations away from footwear will grow equally? We want to grow both, that's the bottom line here. Footwear, there's an amazing opportunity, but the strategy is now set that a development of the business in Vietnam, I think it's a key. I can see that business growing materially, but we've also got great avenues for growth in the rest of the business. So we want to grow both. And the success of having a more balanced business, I think that that's the way that we would like to be. But that doesn't mean that we hold back footwear. We press on footwear and we press on everywhere else at the same time. And what is the current spare capacity in the U.S.A.? And do you have line of sight filling that capacity? The capacity is very much dependent on mix. I think that what we have consistently said is that we believe that we could double the revenues in the U.S. so taking it very close to $100 million without having to invest significantly. We think the big pieces of investment have already been made there. So the next question is your 2029 forecast for sales of GBP 230 million, operating profit of GBP 40 million. Does this forecast include M&A? So no, it doesn't. M&A would layer on top of that. And why are you confident of 17.4% operating margins? Well, I think that we can -- a lot of our business is about getting operational gearing. I think we're rightsizing our facilities. And when we optimize, we've got experience with those sort of margins, and we're confident that we can maintain those. And where do you expect footwear operating margins to reach in 2028 compared to, say, H1 2026? I think that's getting to a level of granularity we prefer not to get to, and simply because it can be identified down to one single customer. I think that we can have very healthy margins and give great value at the same time to our key customer there. So I am confident that, that move to Vietnam will be very successful for that business. How do non-footwear operating margins normally compare to footwear operating margins? Nick, do you want to answer that?