Zotefoams PLC

LSE:ZTF

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, and welcome to the Zotefoams plc interim results investor presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. Have the company review all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand over to David Stirling, CEO. Good afternoon.

[David Stirling, executive]

Good afternoon, everyone, and welcome to our interim results. I'm joined by Gary, our CFO, and we'll just dive straight in. So we think about the business in 3 separate business units, polyolefin foams and high-performance products or HPP, both of which are manufactured using a unique auto class technology from facilities in the U.K., in Kentucky, North America and Poland. All of our HPP products, the foams are manufactured in the U.K. and the U.K. facility also makes polyolefin foams as to Kentucky and Poland.

Extrusion technology is a very small part of our business in terms of revenues, but more so in terms of cost, we are investing quite significantly to develop some application spin-offs from that technology, and we'll cover that later. The business strategy is one of applying those unique technologies into chosen markets where we think we have the opportunity to be a market leader. And that is based around creating differential advantage that benefits us and our customers.

Our strategy is one of organic growth. We have, in the past, done some very small bolt-on acquisitions, but really, it's about organic growth in these interesting markets. There's plenty of interesting markets out there. In the period, 6 months to June this year, we increased revenue by 9%. Our high-performance foams were up 11% and our polyolefin foams up 10%. What's not there is MuCell. It's a very small number, and we'll cover that later on.

With those better sales and better pricing, we've improved the gross margin, up nearly 400 basis points to 32.8% and a very large increase, 30% increase in profit before tax. As I said earlier, we are investing significantly in our MuCell ReZorce application. And if we exclude those costs, our profit before tax increased by 49% to GBP 9.4 million.

Earnings per share, up 22%. We have strong cash generation. We've paid back in the last 12 months GBP 10 million of debt. And the interim dividend increased by 4.5% or just over basically showing the confidence that we have in the business currently and our very strong cash generation and relatively low debt levels with a multiple of 1.1.

Strategic highlights. One is how we've actually delivered that top line, bottom line, that margin recovery basically through realignment of our selling prices with the cost over the last couple of years. The cost base has really jumped all over the place with rising energy costs. Polymer costs going up very rapidly from Lowe's experience due to COVID and really well overshooting the long-term average now realigned with that long-term average.

And of course, labor costs, we're seeing that coming through the system now as well as a whole load of other industrial inflation in freight and associated costs along with supply chain disruptions. So to have a period where those input costs are basically moderated, the selling prices have caught up and are now appropriately balanced with them, particularly in our polyolefin business, we'll see that margin recovery very strongly.

In our high-performance business, we're feeling very good about the aviation market. Again, not shown through there in the first half numbers, but that's just a timing-related issue. And with Nike, who are about 1/3 of our business now, we have an exclusivity agreement, we supply foams for high-end running shoes, because the materials that we make have really good energy return better than anything else in the market. And that exclusivity agreement we have extended for another 6 years to the end of 2029, showing very strong alignment between us and Nike.

And then finally, strategically, we have been developing the resource barrier material for consumer packaging. We've really focused that around cartons, where we believe we've got a significantly different product that is in the market with a better carbon footprint. And to commercialize that, we've signed a joint development agreement with the world-leading packager of beverages. And that's looking basically to jointly develop into a commercial trial in the first quarter next year with an European retailer. I've got an example of that package type that you see hopefully on the shareholders in a few months' time. And at the appropriate point, I'll switch to camera and a quick look.

Just to let you know the profit we have delivered, I said, excluding the resource-specific costs, we've shown those there. So you can see exactly how much we're spending. It's a decent amount of money. We believe this is a high opportunity project. It is higher risk for Zotefoams for a number of reasons. But as we look at this, the technology really does something very different in the market, and there's a lot of interest in it. So we're working there and we believe.

The shape of the business is very similar to we have seen in the past, geographically diversified industrially or by markets, again, diversified. That's a 6-month old slide on the bottom left, but not changed significantly in the first half of this year. And really, we've delivered that growth through -- if you think about pricing within the polyolefin foam business, volumes in our HPP business and both with an FX, foreign exchange tailwind from the U.S. dollar predominantly.

I'll hand over to Gary to talk us through the financial review, and I'll come back to talk in a bit more detail about the business unit segments.

[Gary McGrath, executive]

Thanks, David. I'll start with the income statement abbreviated. And just a reminder, we do share adjusted numbers here, which is often for our analyst community. The impact is very minimal versus our reported numbers, it's about GBP 130,000 this year, not a lot different GBP 120,000 last year. So pretty minimal impact larger perhaps on business, I guess, but -- and this really -- the adjustment is really to take out the impacts of amortization of acquired intangibles. And for us, the acquired intangibles are assets that will form part of the MuCell acquisition many years ago. And so we started to get to there.

Background here. I'd say the deferred revenue up GBP 5.6 million or 9%, up to GBP 64.5 million, GBP 3.3 million of that is currency benefit. That flows through to gross profit up GBP 4.1 million at GBP 21.2 million, obviously partly led by the group revenue increase, but also by that 390 bps increase that David referred to. Really driving the elements of the gross profit increase are the full year impact of the polyolefin foam price adjustments for 2022. We made 3 during that first year -- first half period. And the final one wasn't until May. So the full year impact there takes effect is visible in our numbers this year. We've seen raw material costs come down similar over the whole year. They've been coming down since they reached a peak during last year, and they've been running around the long-term average for most of this first half.

We have seen them drop off further in July and August, and we -- and I've got a chart that I'll take you through on that later. Energy costs have stabilized at a higher level. They're up 20% versus this time last year, but they are -- we are -- we're pretty much bought ahead for the whole of this year now. So we're pretty confident that is where we will be. We have good visibility over that.

Offsetting some of that sale and mix impact are some costs into the energy labor inflation, as you will imagine, is up across all of our regions. And we've also been increasing our operating investments and our costs in key manufacturing capability, both in Poland as we increase capacity and run that plant more and that's going to be the case this year. And also in the U.S.A., where we've made reference in the past few reporting periods to efficiencies, not operating opportunities, which we've been grasping both by hiring more people, better qualified people and tackling some of the challenges that we've been faced which have a visibility from the COVID time and our ability to work closely with the guys out there.

If you look at costs, distribution admin cost, distribution, not a lot of movement, not very much driven by business activity and labor costs, whereas the administrative costs are around in GBP 2 million, as you can see 29%, GBP 400 million of that is the hedging, where the actual hedging activity proves and benefit -- negative for this first 6 month period. But also we've been investing more higher in our technical cost across the group, primarily the quality department and added to our investment, increased our investment in resource.

That takes us to an adjusted operating profit of GBP 8.6 million, up 29% in the period and a margin of 2%. Interest charge, if you look at the P&L doesn't look like much, GBP 1.1 million to GBP 0.9 billion, but it's actually greater than that. It's actually at GBP 0.5 million. And that's in part due to the fact that last year, in the first half, we took a GBP 300,000 charge as a result of costs that we had capitalized linking to our financing facility that as we renewed the facility last year, we hadn't fully amortized had to take in one go. So the GBP 0.5 million is, of course, related to interest rates almost entirely. We draw down debt both in dollars and in euros. That's the consequence. We do have a little bit of benefit coming through the fact that our leverage has reduced. We get a match system in terms of the margin. So we've got some favorable element there, but of course, the general tide an increase in interest rates across the world have impacted us, too.

That leads us to adjusted profit before tax, up 29%, GBP 7.5 million. Tax charge really is solely related to the change in corporation tax rate. We're now 25% -- some things go on myself list. So that's purely the corporation tax rate, leaving us with adjusted provider tax of 22%. David mentioned EPS, he mentioned interim dividend -- the interim dividend as well, up 4.6% at 2.28p.

If I move on to the related balance sheet. The key observations there, first and foremost, intangible assets moving upwards entirely due to our resource capitalization development costs. PP&E is down. For the first half, our additions are around 1.6 million. That falls well short of what is expected for the year and is shared by the analysts, which is around 10. So the spending will be significantly higher in the second half of the year. But as at this point in the year, we're down, we lower additions are lower the depreciation, plus a bit of FX means as you can see, PP&E is down 4%. That will change in the second half.

Other assets are up driven entirely by our -- by our hedges, and the rebound of those hedges as at June 30. Net working capital, I'll go into the detail of that on the cash flow slide that comes next. But as you can see primarily here, there's little movement in total on the balance sheet this period to the previous period. That is with the net debt. Net debt of GBP 28.3 million, down GBP 10 million on last year, pretty similar up GBP 0.5 million on the year-end position and leverage as a result is at 1.1, down a lot from the 1.2 at the year-end and down quite considerably against the 2.0 that we reported this time last year.

Just a reminder on our debt facility, which we hold with Handelsbanken in the NatWest, GBP 50 million multiyear currency RCF. The leverage of 3.5, so significantly above where we are at the moment, where we really are happy through this -- through the last 5, 7 years of April, it can be the capacity increases. We do retain an accordion of GBP 25 million, which is something an opportunity arise. This particular facility is linked ESG very small financial impacts of that, a few bps up and down based on the improvement of target. We met all of our targets in our first year -- last year, again, which gives us a few big benefit. And that will continue obviously on for the next few years too until the end of the facility, which is -- which is March 2027.

On the cash flow, on the cash flow. Again, good profit performance drives as the starting point for cash flow movement and the good cash generation. I mentioned the actual working capital position is pretty similar to last year. And indeed, the movement in working capital was similar from January to June this year as it was last year, around GBP 6.5 million versus GBP 5.8 million last year. But as you can see, the main thing is quite different. The primary driver in this first 6-month period is inventory, and that really relates to 2 particular factors.

Firstly, this time last year, we experienced quite a lot of scarcity in critical key high-value raw materials for AZOTE business, which has obviously has not been able to deliver. We've taken that on board. We've ensured that we build safety stocks for these high-margin AZOTE opportunities, and that's really driven a good million pounds worth of inventory build this year.

On top of that, for the last 4 years pretty much since the start of COVID, we have not -- we pretty much have not bought any PBS, any of the key raw material that goes into the aviation space. We had sufficient the market fell significantly and we've been drawing on that inventory through COVID and up until now. This year is the first year we're purchasing PBS materials again. That particular purchase came in just before the half year. And as a result, time related, we have a significant boost in that inventory.

So good news because it means that we've got another market recovery, David will talk about that, and we're replenishing stocks to meet that. That gives us cash generated from operations of GBP 5.8 million, up slightly on last year.

Income -- interest and income tax, I think that's evident high interest rates, higher interest charges, higher income tax being paid. In the last couple of years, we have had some rebates that have reduced the overall tax pay, we've repaid now. There's no that in this first 6 month period.

Moving on then, as I said, you can see the capital there, you can see the 1.6 I referred to PPE, which is -- which will increase in the second half, you can see the increase in the intangibles, most of which is the resource investment.

I'll move on then to my final slide, which is a slide I've been presenting over the last few periods. And that is where I look at maybe the key 3 key areas of cost and influence around the business, slightly amended the look at the chart for those that recorded over the last few periods, they're still saying spending the same messages is LDPE, polyolefin foam primary raw material and the evolution of that over the past few years. The blue is the core ethylene price and the red is the spread giving you the total price that we've been paying for LDPE over the past years.

You can see a spike in the increase up to EUR 2,250 a tonne, which we reached around mid-year last year, which compares to the historical average of around 1-3, EUR 1,300, EUR 1,400. You can see that came down rapidly towards the beginning of this year and stay fairly stable, up until about now. And so we've kind of had a kind of the average price to be through this year, it's been very similar to what we've historically experienced.

But you can see that as at today and indeed through July, August, and that the spread is very low, and we're benefiting from that, but we expect that to recover that is not a sustainable margin we would expect from the producers. So we expect that to return probably in Q4. The energy costs sort of our 3 main sites are, of course, our autoplay technology class, the 3/4 of our entire energy is consumed on site here in Croydon.

As I said, those prices have stabilized. They're about 20% higher this 6-month crude versus purchased ahead. We weren't doing that last year. It was very difficult to be doing that last year. But this year, we've got more visibility and it's more the prices are relativize -- and consequently, we expect those prices to remain at around the 20% above last year position.

Then the final of the 3 primary influencers is the foreign exchange. Most of you know, we are very -- we very much invoiced outside of sterling. 90% of our invoices are either in dollar or in euro. The euro is historically remains naturally hedged. We invoiced all of our AZOTE business into Europe in euros, and we purchased all of that LDPE in euros and we purchased quite a bit of HPP in euros, too, so the consequence is a natural hedge. That's different with HPP, where almost all of the invoice, all of the products are invoiced in dollars, and we are only a small share and it's a part of our footwear business, only a small part of that is purchased in dollars. So we're very long on the dollar and take the benefits and the hits subject to where the exchange rate is moving.

We had a 5% average decrease in the exchange rate this half versus last half, that should rate GBP 3.3 million of revenue benefit, GBP 1.1 million of PBT impact after the GBP 400,000 of hedging costs that I referred to earlier.

And with that, I will pass back to David.

[David Stirling, executive]

Thanks, Gary. So business review, as I said, we think about the business on a 3 main business units. The first of those, which is 50% of group sales is our AZOTE polyolefin. Gary talked quite a lot about the cost side of it. So focus on the revenue side, up 10%, where we have easily achieved that by selling prices and product mix with a little bit of help from currency, offset by falling volumes.

The falling volumes really related to Continental Europe and Rest of World, whereas North America and the U.K. were relatively flat. And if you've been following the news, I think the relatively soft European industrial economy in the second quarter. It will be no surprise to you. We have got a bit of product mix changes in there. As our prices have gone up over the period, customers have come back to us and said, what can we do? And often that is we'll buy a light event form, of course, less. We use less raw materials. It's got our lower carbon footprint or we've got phones with recycled content, et cetera, where these are -- take a little while to substitute the more premium materials because people need to adjust their equipment or they need to specify them or test them or whatever.

But that's sort of happening now as people look for the better value, lower carbon footprint materials. So that right product as well as the right price is very much part of our agenda just now. And as we see industrial deflation, that applies to us. We had put our prices up, not this year, but throughout last year, and we're seeing the full period benefit of that this year in polyolefin along with the different cost base.

We have actually now started removing some of the surcharges we put on in pricing. Sometimes that's been replaced by a fixed price. Sometimes it's just being removed depending on the margins, the application in the marketplace, et cetera. So what we've seen is the segment profit margin grow very significantly up to 13.2%, which is a fairly decent performance and it's in line where it's been in the past there.

If we go into our high performance products, which are 41% of group sales, different story here, revenue up 11%, primarily driven by sales volume. And again, a bit of currency tailwind, not really pricing increases in these segments in the period. We are seeing some increases in raw material prices and the more technical materials coming through the back end of this year. And our pricing is being adjusted through in, for example, the aviation sector, but more likely to impact 2024 than this year.

Overall, that 11% growth. Footwear, up 14% and footwear now is 35% of group sales. With Nike, we have a clear contract where prices are adjusted every 6 months in relation to our input costs and FX. So that's something where the margin moves around a little bit just depending on timing, but in the period was fairly similar to the last period. Aviation, down a little about 9% in sales, not concerned about that at all. That's really to do with timing and offtake. What we're seeing in the segment is that we're having higher aviation build rates, particularly with us, we are more exposed to Boeing. They've got high order books, those build rates are still not really where pre-pandemic mainly because of supply chain constraints, not from us but from other people. And therefore, we are seeing that increasing in a very full forward pipeline on that, it's looking good.

T-FIT Insulation sales up 9%. 2 major markets there are China and India. China is -- has been a bit start because of the economy there. So it's -- but I was saying to someone earlier, I've never turned up for a long, long time and said the economy smooth right across the world, just not. So we take the bumps in the road as they come.

I think overall segment margin pretty much in line with where we were last year and the profit growing in line with the revenue. And then finally, to talk about the MuCell business. Really, it's authority of refocusing. We've taken most of the people there and focus them on our resource technology, the existing MuCell licensees and some new customers in very specific markets where we know the technology works are being serviced, but majority of the team are now focusing on the resource projects. So it's really think of it as a development business where the course of the important thing and the timing of bringing that technology to market is important.

So what we've been doing, we've been working on formulations. We've been working on the scale up. We've been working on the downstream processing of our technology and lining up commercial partners. So we have our facility in Denmark, which we brought into the group less than a year ago, and that will be used to manufacture the resource sheet, the base sheet of the material. And then we will print and create a carton preform and sell that to a packaging company, the packaging company turns into carton to reduce and sales to retailer.

So we have got a European retailer on board for quarter 1 trials next year in market. We've got a global leader in the packaging market signed up as a joint development partner who will supply into that market and also help us with the challenges of putting our products through existing packaging machinery. And that's particularly important because our technology has been designed to use existing packaging machinery where possible to allow the infrastructure to support the resource introduction longer term.

So it is primarily a high-risk, high reward opportunity, but the market -- global market for beverage cartons is enormous. It's about 300 billion cartons a year. We wouldn't be suitable for every such product, but a very, very significant part of the market is in scope for us. And we have, in fact, other technologies that we could use in various other parts of the packaging market, but we've decided at this point really to focus on the carton market. So that's the story of the the business units.

If we just look at 2 more slides, and I'll talk about the outlook. So just to remind everyone, we have got a very good sustainability proposition at Zotefoams. We've got a nitrogen-based forming process, which makes very good use of the polymers that we buy in. Our products are primarily used in avoiding emissions. We make foams which are lighter and those foams are used for protection, installation those types of things. 85% of our revenues are from products considered green by FTSE Russell definition. We build ESG and sustainability into all our decision-making around the business. So that's ended in some of our ESG scoring recently. So we're coming out very high ratings across MSCI, the London Stock Exchange green economy mark, et cetera, meaning that very much in the wheelhouse for investors with sustainability funds or benchmark criteria there.

And in particular, if we think about the resource product, what I'll do, Paul, is if we can just switch the screen off or set. I have here an example. This is actually a resource carton, and it's made with our material. It looks a lot like how you'd expect to see in the shelf, the standard plastic top. This can be thrown in the recycling bin along with your high-density polyethylene milk carton. You put in the recycling bin with the milk carton, it will be recycled in the HPP polymer stream. And that's something that we've already validated that carton is made with 30% recycled content. And the product, if it is recycled, we can use our recycle to make that carton again.

The product we've had validated by an external consultant, having about a 50% lower carbon footprint than competitive product out there, comprised of all, I say all legislation, that's a broad clever. I wouldn't say that. This legislation is different in every region, et cetera. But the way legislation is going it's really trying to look at making materials recyclable in a circular way, so back into themselves the same use. And we are certainly aligned with that.

We have a pilot facility, as I mentioned in Denmark. We have a technical team based out of North America and open Massachusetts. And we are looking to see how we commercialize this, and that may involve a strategic partner because this is something where the market is so big. And on a global basis, this is definitely an opportunity where if we are successful, Zotefoams cannot or would not want to expect to do that alone.

So that's the business as we see it. So key messages, very good revenue growth, strong PBT up 30%. Our operating profit is up 49% of the underlying foam business. The 2 major things that we're working on Nike footwear and the resource we've signed milestone agreements there to support those good strong cash generation and dividend up.

If we look at the full year, we are reaffirming that we remain confident that we can deliver our full year market expectations. We've had a good start to the year. It was nice to have money in the bank, if you like. The short-term outlook is tempered somewhat by the industrial outlook and markets. You won't be surprised to hear that, but that's okay, because in some of the other markets like aviation, we are back-end loaded. So it feels like we're taking a cautious but responsible approach to the market today.

And in those expectations, we do think we'll get a little bit of a headwind from the dollar around 1.28 compared to the first half. And we may get -- we expect to get some benefit from the lower polymer costs just for a short period, but through the end of this year before the return to a more normal level. So in line -- trading in line with market expectations and lots to look forward to good progress within the business.

So that's -- that's the end of my -- Gary's presentation. We are happy to take questions. So I'll turn it over to Paul.

[Operator]

[Operator Instructions] Just while the teams take a few moments to review those questions submitted today, I'd like to remind you the recording presentation, along with a copy of the slides and the published Q&A can be accessed via investor dashboard. David, Gary have several presubmitted questions. So perhaps we can start off the Q&A session with those, if I may. The first one, readjust follows, what rival firm supply do adidas use in their shoes?

[David Stirling, executive]

So adidas use something called Boost. It's a thermoplastic elastomer made by polymer called BASA, German company who developed some proprietary foaming technology for that. It basically turns it into a little balls for a bit like if we entail together. So it's a very different process and it's the major polymer manufacturer, major chemical company actually performing their own polymer. .

[Operator]

That's great. We've got here is what sort of margins do you hope to achieve with resource still appreciate it's sort of early in that process?

[David Stirling, executive]

It is. I think I'd rather pass on that. I think it's a bit early to really see that. But what I will say is that you -- there are a whole lot of different drivers of this technology in different parts of the market globally. And so in some parts of the market, be much more accepting of our product and a much higher value proposition than potentially others depending on legislation, consumer preferences, et cetera, et cetera.

So I think it's too early to give an answer to that. But what I would say is that typically, as you are growing and scaling up a business, the money goes to invest in scale rather than bottom line profit. So we will see how that pans out. But we are looking very seriously for industrial partner to -- our partners to join us in this journey.

[Operator]

That's great. We've got one here about electric back casings, any developments with foam linings on that front.

[David Stirling, executive]

I think I used this as an example in 1 of the other presentations maybe a year ago or 6 months ago. a whole load of industrial markets that we're looking at electric vehicle batteries is one of them. We do have some business in Asia in relation to that, but it's not a major part of our business at the moment. So it's -- thinking about it developing into but not a major contributor at the moment. .

[Operator]

That's great. The last thing I've got here is are you aiming for Mainland China?

[David Stirling, executive]

Personally or not.

[Operator]

I guess that's from your operational point of view on operations.

[David Stirling, executive]

Well, in that context, no, we've not said that we are -- I think we've putting another foam plant somewhere is a very significant investment. And one of the things we consider is that the ability to protect the intellectual property versus the market and the growth rates, et cetera. So not at the moment. We do have a facility in Kunshan, which is about our South Shanghai, taking our foams and manufacturing insulation products for the local market, but no plans to go in there as a format of polymers at the moment. .

[Operator]

That's great. That concludes those presubmitted questions. You can see we've had several questions come through during the meeting itself. So just a click on that Q&A tab, perhaps start at the top and we go through and just read out those were appropriate to do so and I pick.

[David Stirling, executive]

So the first question is from Andrew. A lot of questions from Andrew. Does the joint development agreement that you recently announced contained exclusivity provisions and does it solely relate to beverage cartons. So yes, it's truly related to beverage cartons. And we haven't disclosed any other details on that, but I wouldn't take that as a yes or a no, Andrew. So just I'm not liberty to go through that.

What is the GDA partner contributing to the resource project? Well, essentially, we are making a product that can go into a packaging machine and be turned to carton with juice, for example. So all of that downstream technology is today focused on a particular with liquid paperboard, carton and to prove that our technology can go down the selling line in a external environment, we can foamed it, we can seal it, we can put the cap on all under existing machine operating conditions. That's what the partner is looking at. So -- and we're doing it in conjunction with them

Next question is your energy cost hedged wholesale energy prices have reduced significantly since last year, so we were energy cost good down next year. Gary, do you want to...

[Gary McGrath, executive]

Andrew said one afterwards.

[David Stirling, executive]

I'll do, just as I come. We'll jump around.

[Gary McGrath, executive]

Is before this one. This is that pie, right? As your energy cost hedges, so we actually purchased forward. So they're not theoretically hedges. The -- we are just buying ahead. We have a proven program with our energy supplier as we get closer, clearly, we lift the level of purchasing subject to forward pricing mechanisms, which weren't favorable last year.

So I think we're not hedged, we just purchased, right? And we have then -- obviously, we have to certain limits within -- we've got a commitment on manufacturing use and utilize that amount of energy. So also energy prices have reduced versus all your energy costs go down next year. Is that coming down, yes, because we're only -- because we've got an x amount, we're almost 100% for this year. We've got say level of percentage deteriorating through maybe the first half of next year. And then we're pretty exposed i.e. or we have opportunity in the second half of next year. So we will capture the benefits of the movement down. We just soften the impacts of the price going up or down, but our forward hedging -- forward purchasing strategy.

[David Stirling, executive]

Okay. We really are taking these in order to come. So we're jumping out back to resource. What is the approximate planned scale of the in-market trials for the European retail partner?

It's in the tens of thousands, and that's sufficient for them to judge that they've been stability problems, no leakage problems, consumer reaction, the normal things you'd expect. So at that level, it's our -- these on a machine for us. It's not much more than that. So we've got plenty of ability to scale beyond that, but it's a controlled size trial, which is perfect for us, I think.

So next question, [indiscernible] Do you want to...

[Gary McGrath, executive]

How much more would you pay an interest if you had to refinance all your debt tomorrow, ignoring the benefit of any fixed hedges held now. I don't know because I haven't gone out to market to find out what the current options are. I would imagine they're way -- they're higher I mean we -- our mechanisms are ratcheted margin above base. So base is base, right, that would be the same. But I imagine that we probably -- we refinanced in February last year. We have banks that are familiar with us. I would hope, therefore, a range of lower risk, but obviously, there will be some underlying factors that might drive their internal decision-making and offers to put it up a bit. I can't predict that. I don't know. I'm not in that game.

So it's hard to say, certainly as far as hedges, I'm not quite sure. That doesn't mean back much to the difference. I mean in the grand scheme of things with [indiscernible] there, we've got FX hedges in the might give us might secure a couple of million one way or the other of revenue, making very little impact on the actual numbers. So not sure that's the answer, but not a lot -- it's not a lot of impact from hedges, and I don't really know what the banks are offering at the moment in terms of rates, it's hard to know.

But it feels hard to believe we get a better deal. We've got a very good deal. We timed it really well. So I think we've got through 27, and I'll worry about it but neater.

[David Stirling, executive]

All right. Next question from Nicolas C. The price pressure from customers with falling cost or can you hold on to selling price. So there are certain parts of the polyolefin market where customers are looking at current polymer prices and saying, you guys price aren't matched to that. The polymer price has come down. You haven't changed your prices. So we are under discussion about what the right price is. But energy costs are higher, labor costs are higher and other inflationary costs are in there.

So it's not all about that one easy to get to polymer cost. So -- but we have price discussions with customers all the time. And so it's about getting that right. In some cases, I would expect that we would either switch to different products or right price. But these are -- it's against the backdrop of a polymer price, which is currently low compared to the long run average.

And as Gary said, the margin over ethylene is almost 0 at the moment. So that's not sustainable for the polymer price producers. And therefore, we fully expect that polymer price to jump up again.

If we go back sort of pre-COVID, polymer price for a long time moved in a range plus or minus EUR 100 a tonne and EUR 150 a tonne. And Zotefoams just absorbed the swings and roundabouts of that give our customers stable pricing. So that's the intent. We would hope to get back to that so that, that allows the customers to get on with like developing their business with a kind of fixed price.

It's very difficult for them to constantly reprice their customers. There are a few exceptions to that, like the automotive industry. We're much more focused on that goes down. We want our cost reduction. If it goes up don't come and ask for a price increase. So we manage that in a different way. But it is something which is a fairly active dialogue at the moment, but it has been for 2 years.

Michael, why is MuCell revenue reduced by 44%, if it's due to already sold technology from the previous year?

I think if you look at it as a percentage, Mike, you see quite a big number. If you look at it as an absolute, it's not that big a number. But the main movement in that is the -- we had 1 customer of ours whose customer had an intent to switch to a product and backtrack on that intent. And so our customer wasn't able to or wasn't willing to continue to pay the fees to maintain the exclusive license position for that. We've seen this before. I think it's -- my understanding of that is I can't really tell much because of confidentiality, but as a major FMCG company who were offered a lower carbon footprint, recyclable product and decided to go with a higher carbon footprint, non-recyclable product because it was a bit cheaper despite espousing quite green credentials.

So I've seen that before. I have no doubt see it again, but it might be something that comes back in the future, we'll see.

question from [indiscernible] What the products described make no mention ZOTEK end commercial development. How is that going?

Well actually, we're seeing right now quite a lot of interest in ZOTEK and again, particularly in body protection type applications and some other things. So it's pretty busy right now in development, but it's relatively compared to the rest of the business, small in revenue at the moment. It's still an active range of products.

I think we've done a good work to improve those products in terms of performance. And -- and we have been through, for example, testing for various applications and it's failed in some areas, we've redeveloped in past. So it's is constantly moving forward towards the target. And it's been -- it's a high interest a lot of people, it's not quite friend, it's niche yet, but I'm relatively a bit more hopeful about that than I was 6 months ago.

Scott, can you give us some detail on wage inflation in each region and what you expect going forward?

I think, Scott, we have the main body of people at Zotefoams is employed in the U.K. And we don't give any specific numbers on pay inflation, but it's sort of between 5 and 10 that we've seen from April, in the U.S., in Poland and China, wage inflation is not significantly different than it is in the U.K., maybe a little bit more important because the economy is doing really well and workers from high demand.

But the other area is it's in that high single-digits range. Paul, what does the look for volumes in half 2, given the drop in half 1. We also said, we expect a bit of weakness through Q3, particularly in the Continental Europe industrial markets within the AZOTE business. It is a seasonal business, AZOTE anyway. Quarter 3 is usually softer, mainly because of European holidays. I think it's a bit early to see about Q4, but we are continuing to run quite hard and do some inventory because we actually believe Q4 might end up being quite busy.

So we'll see about that, but Q3 certainly feels like the economies are a little bit softer and maybe a little bit of inventory coming out of the system, which, if it reverses, can reverse quite quickly and end up with demand coming through on us with short notice. So we'll see about that.

Again, Paul, there's still growth opportunities around non running sports EG golf shoes. Well, golf shoes are nevere going to take a lot of home, but the more general point is are we going to nonrunning. Nike's next biggest category is basketball. We are being specified on basketball shoes. And those shoes, I believe, are scheduled to be launched next year. So yes, is the answer to that. The company's ROCE is low single digit. What's a long-term aim on that. Gary?

[Gary McGrath, executive]

Yes. Well, certainly, low single low -- is low half single digit, almost single single. We -- before our capital investment, it was around 14%, 15%. We put a lot of capacity in. That doesn't get field the way and it had a purpose to accommodate our growth plans and our increasing shift to a strategic shift towards high-performance products with higher margins.

We're not -- we're on our journey through that. You don't put capacity in the bag straightaway. So the weight our expectations are through the coming years that that we field a glance with capacity that gives us a couple of percent that we increasingly mix enrich either after laser or across from top -- as into specified as into HPP. That gives another few percent. MuCell will resolve itself and resolve MuCell with a GBP 2 million half year. So if you look at last year's loss, that's a good 1.5%, 2% movement.

And then other smaller elements within -- so you take those at 6%, 7%, 8%, 9% that we're at [ 16%, 17% ]. And so we see a clear -- we have a clear strategy to increase that obviously, something can come up with a growth company, opportunities to come up that requires capital that might drop it back. But fundamentally, we see this business as being certainly above 15%.

[David Stirling, executive]

Okay. Scott, can you talk a little bit about how you picked the JV partner and any partners approach?

Well, we were looking for a partner who had the right level of expertise, market presence, et cetera, in the packaging business, and specifically carton packaging to support our commercial trials. In the event the partner we have has all of those. So we are very happy working with them, and they're extraordinarily committed at top level to doing this. I think in thinking about these things, you've always got to think about the benefits of really working closely with someone versus the benefits of trying to spread your resources and do different things with different people.

And I feel that we have a really good partner. So -- and we have been talking to either we approach them or they approach us talking to quite a number of people about the resource technology over the past 12 months in a number of aspects, including as potential investors and our partners, and that goes on. So it's a continually changing landscape on that. But I think we -- the team that we have put predominantly focused on getting the end market validation. That's something which could really change the perception of how people think about this opportunity.

Again, what percentage of your cross-linked foams are actually recycled globally, not what kind could be, but what are in practice.

Well, these are for cross-linking foams, Neil, is that it makes them more robust and stable and therefore, long lasting. And most of our applications are in things which are designed for long use. So if you think about car a winger or as a car would last the light of a car for 10 years, it's not designed to be thrown away. So in that manufacturing process, there is scrap. And at the moment, globally a very high percentage not all, but almost all of that scrap is seen as a valuable resource. It's collected and in fact, sold by us and by our customers to people doing other things with it.

So end of life, I find it almost impossible to answer that question because there are so many different applications using our foams. The -- I couldn't begin to tell you how much is recycled. I know it's practically possible, and I know that our process in the cross-linking methods we use or make it easier and more beneficial to recycle than our competitors.

So Scott, over the last 6 months has ReZorce taken more or less management bandwidth and what about the next 6 months?

Well, Scott, we have a dedicated team here. We have brought in people who are ex Tetrapak. We brought in people who are machinery experts. We've got a leader who has got many, many years in the packaging industry, as well as quality expert you used to run on-site is the quality sterility manager for Coca-Cola or PepsiCo, think, sites, et cetera. So we've built a team that has the acquired expertise, who are 100% dedicated here as well as our MuCell guys and the guys in Denmark that we brought into the business last year.

In terms of my time, I'm pretty involved in this. It's a decent amount of my time. And certainly, with Gary and with the Board, it's a subject on every board meeting to a decent extent. So it's something we're taking very seriously, but I think we are properly resourced to deliver this at this stage. And along with our partners who are putting in their people and teams that are very keen.

A decent amount of [indiscernible] here. Okay. And this is the last question. Hadi, how long do you think a reasonable investors should wait before judging the carton investment to be successful?

Okay. Well, I think with all developments, there are kind of critical milestones and value inflection points. So when the patent is issued is one of them when your first preproduction trial comes, when your first market trial comes, when your revenue comes, I think all of these are potentially value inflection points.

I think the big one is in market validation. If we can get tens of thousands of cartons into the market with juice and they are sold through on a retailer then I think that's a big plus. And I don't think the market in the bigger sense, that the packaging market is going to be silent about this because there hasn't really been any contenders to liquid paperboard forever, the new technology hasn't really come out. And we know that they are struggling with some of the challenges on sustainability, recyclability, circularity.

So lots of questions being asked. I'll probably have to get an interview or 2 with packaging news or the grocer or something along the way. So I don't know, is it going to be successful, we certainly believe so. We hope so. We're working towards that.

One of the big questions is what segments of the market really value this and where do we go next. And we are looking to perhaps outline a few options on that over the next 6 months. We're not going to do a market trial and then say what next we will have -- we have plans in place for that.

And final question, I think I may have missed this earlier. Are you progressing discussions with potential partners for other resource applications, i.e., pouches, cartons?

Not at the moment, we are still busy with cartons that we've decided that even though potentially, there are other applications that we are going to focus on the current applications at the moment.

[Operator]

Fantastic. As always for covering every single question we've had through. And of course, any further questions that come along. The team will be able to review those and will publish responses were appropriate to do so on the Investor Company platform.

And David, I don't know if there's any further just to before we conclude today's session. I thank you for running over slightly before we...

[David Stirling, executive]

No, I'm good. Thank you.

[Operator]

Well, look, David, Gary, thanks indeed for updating investors today. Can I please ask investors not to close the session. It should be automatically redirected in order that you can provide your feedback for the team to understand your views and expectations, it only take a few moments to complete is greatly valued by the company. On behalf of the management team of Zotefoams, we'd like to thank you for attending today's presentation, and good afternoon to you all.