Covid- supply chain - inflation, page-3

I put these questions to Richard Tegoni:

Hello Richard,

Hopefully you and your team are all well.

I write to you with inflation concerns. I am wondering if you can explain what will happen to SES product pricing and margins should it occur.

Will the price of materials (ie corn) rise and squeeze margins from the bottom?

Will the wholesale price of products to retailers remain the same putting a ceiling on the ability to maintain margins?

Because margins are tight on such a cheap product already, and the products SES sell are already high compared to plastic alternatives, will inflation squeeze future margins in any way?

What is your strategy to combat this?

Once again, thank you for your time.

Mr. Lumin.

Richard's response (& I quote):

"Hi Mr.Lumin,

We are all well in the SECOS camp.

We are due to release our quarterly results in a few weeks so I cannot comment too specifically about our numbers until then.

Corn starch is a very abundant raw material so isn’t being impacted so much by supply or inflation. I do believe inflation impacts around the world are due to supply disruption with a particular impact coming from shipping costs rather than raw material cost pressures specifically. The cost of some of the raw materials inputs into SECOS product have fluctuated over the last 18 months but that was mainly due to the growing demand for compostable products worldwide rather than Covid disruption issues. Everyone is in the same boat regarding logistical costs so from a competitive point of view we do not see an issue. We are seeing many of the raw material suppliers putting on significantly more capacity over the coming year.

I am not sure that I would categorise margins as being tight in our industry. It may seem that way when looking at retail sales products and discounting but SECOS supplies over 20 countries and does so across the full vertically integrated range of products e.g. compostable resins to compostable films to compostable finished products and to retail products both direct and via third parties.

You will find that many of our competitors do not have a fully integrated business models like SECOS with some only trading products without owning any manufacturing assets at all. These companies (I suspect) would be more at risk of margin squeeze. As a manufacturer we can priorities our supply chain to our key customers which does give us a competitive advantage and greater service offering. We have been able to supply largely all our key customers but delays in delivery have occurred from time to time.

Our fully integrated business model and multi country and manufacturing facility strategy has positioned us well during these times. Of course (and as we have already told the market) we have experienced disruption due to Covid which relate more to delays in delivery of our orders and the usual open and close of our operations and that of our customers from time to time. Again, having a multi site manufacturing capability and sales/distributor globally has shielded us greatly from the impacts that have been somewhat more damaging to other businesses. We did grow by over 43% YoY during the height of Covid shutdowns. Disruption has continued during recent months due to Delta but that has been more about pushing deliveries forward. We see no change to our expectation of growing the business this year and have indicated to the market that our growth will be greater in the second half reflecting the timing of new capacity and the impact of Covid on delaying deliveries from one quarter to the next.

I hope that helps.

Regards,

Richard."