TIDMESNT
RNS Number : 2085F
Essentra plc
18 March 2022
ESSENTRA PLC
("Essentra" or the "Company")
A leading global provider of essential components and
solutions
RESULTS FOR THE FULL YEARED 31 DECEMBER 2021
Strong trading performance with accelerated growth in Q4.
Strategic reviews are progressing in line with expectations with
focus on becoming a pure play Components business
Summary:
-- The strategic reviews of both the Filters and Packaging
divisions are progressing in line with expectations
-- FY 2021 results displayed a strong performance with operating
profit within the range of analyst forecasts, demonstrating
Essentra's strong market positions, clear market share gain
strategy and agile operations:
-- Revenue increase of 8.4% on a like-for-like(1) ("LFL") basis
-- Adjusted(2,3) operating profit up 46.5% (at constant FX) to GBP83.9m
-- Reported(3) operating profit of GBP49.7m versus GBP11.6m in 2020
-- Adjusted(2,3) basic EPS 54.6% higher (at constant FX) at 18.2p
-- Reported(3) basic EPS of 8.9p compares to 1.2p loss in 2020
-- Adjusted(2,3) operating cash flow GBP64.5m in 2021 (2020: GBP86.7m)
-- Strong performance across the Group for the FY:
-- Components delivered a strong trading performance with
revenue +21.7% on a LFL constant currency basis. Successful
navigation of ongoing supply chain disruptions and mitigation of
inflationary cost increases, whilst satisfying accelerated demand,
resulted in operating profit increasing to GBP56.9m with 100bps
margin expansion to 18.9% on a constant currency basis
-- Packaging revenue declined 3.6% on a LFL constant currency
basis due to the ongoing impact of the pandemic on prescription and
elective surgery volumes. Operating profit reached GBP15.4m with
40bps margin expansion to 4.2% on a constant currency basis. A Q4
margin of 7.9% was achieved as a result of uplifted trading
performance and timing related one-off benefits. Strong customer
relationships and signs of market recovery have resulted in
encouraging order book trends
-- Filters sales grew 12.9% on a constant currency basis
underpinned by growing volumes of outsourced contract business
wins. There has been an increased commercial interest in
proprietary ECO and Tobacco Heating Products ("THP"). Operating
profit increased to GBP28.2m with margin expanding 50bps to 9.5% on
a constant currency basis
-- Accelerated revenue growth seen in all three divisions in Q4
on a LFL basis. Continued momentum seen in early 2022 with sales on
a YTD basis continuing to grow compared to the same period last
year
-- Stability of our balance sheet has provided optionality to
invest in capex, M&A activity and working capital
requirements
-- Net debt of GBP234.7m (2020: GBP210.4m), with net debt to
EBITDA at 1.7x (2020: 1.8x) and 1.5x excluding lease liabilities
(unchanged from 2020)
-- Given the Group's continued strong performance and financial
position, the Board has recommended a final dividend of 4.0p per
share, making a total dividend distribution for the year of 6.0p
(2020: 3.3p), aligned with our progressive dividend policy
-- A non-cash change to the Group's accounting policy driven by
IFRIC relating to the de-recognition of certain software assets
from the balance sheet totals GBP11.8m in 2021 and GBP16.9m
relating to 2020 and prior years
(1 Excludes the impact of acquisitions and foreign exchange)
(2 Before amortisation of acquired intangible assets and
adjusting items. Further details can be found in Alternative
Performance Measures section)
(3 Prior year restatement required for the adoption of IFRIC
agenda decision on cloud-based software arrangements. See note 1 to
the Consolidated Financial Statements)
Results at a glance:
FY 2021 FY 2020 FY 2020 % change % change
(restated) (as previously Actual Constant
(4) reported) FX FX
-------- ------------ ---------------- ---------
Revenue GBP960m GBP897m GBP897m +7 +13
Adjusted(1) operating
profit GBP84m GBP62m GBP62m +35 +47
Adjusted(1) pre-tax profit GBP67m GBP47m GBP46m +45 +61
Adjusted(1) net income(2) GBP56m GBP38m GBP37m +49 +66
Adjusted(1) basic earnings
per share 18.2p 13.2p 13.1p +38 +55
Dividend per share 6.0p 3.3p 3.3p +82 n/a
Net debt (including lease GBP235m GBP210m GBP210m +12 n/a
liabilities)
Net debt (excluding lease GBP177m GBP149m GBP149m +18 n/a
liabilities)
Net debt to EBITDA (including
lease liabilities) 1.7x 1.8x 1.8x n/a n/a
Net debt to EBITDA (excluding
lease liabilities) 1.5x 1.5x 1.5x n/a n/a
Free cash flow(3) GBP37m GBP67m GBP57m n/a n/a
Reported operating profit GBP50m GBP12m GBP22m +328 +516
Reported pre-tax profit/(loss) GBP33m GBP(4)m GBP6m n/a n/a
Reported net income(2) GBP28m GBP(2)m GBP6m n/a n/a
Reported basic earnings
per share 8.9p (1.2)p 1.7p n/a n/a
(1 Before amortisation of acquired intangible assets and
adjusting items.) (Further details can be found in Alternative
Performance Measures section)
2 Net income is defined as profit / (loss) after tax, before
non-controlling interests 3 A reconciliation of free cash flow is
set out in the Financial Review
(4 Prior year restatement required for the adoption of IFRIC
agenda decision on cloud-based software arrangements. See note 1 to
the Consolidated Financial Statements)
Statutory to Adjusted Reconciliation:
31 December Amortisation
2021 of acquired
intangible Adjusting LFL /
Reported Acquisitions assets items Tax on adjustments FX Adjusted(1)
--------- ------------- ------------- ----------- ------------------- ---
Revenue GBP960m GBP(45)m - - - - GBP915m
Operating GBP50m - GBP22m GBP12m - - GBP84m
profit
Pre-tax GBP33m - GBP22m GBP12m - - GBP67m
profit
Net income GBP28m - GBP22m GBP12m GBP(6)m - GBP56m
------------ --------- ------------- ------------- ----------- ------------------- --- -------------
31 December Amortisation LFL(2)
2020 of acquired Adjusting Tax on /
Reported intangible items adjustments Adjusted(1,2)
(restated) Acquisitions assets (restated) (restated) FX (restated)
------------ ------------- ------------- ------------- -------------- ---------
Revenue GBP897m GBP(9)m - - - GBP(44)m GBP844m
Operating GBP12m - GBP23m GBP28m - - GBP62m
profit
Pre-tax GBP(4)m - GBP23m GBP28m - - GBP47m
profit/(loss)
Net income/ GBP(2)m - GBP23m GBP28m GBP(11)m - GBP38m
(expense)
--------------- ------------ ------------- ------------- ------------- -------------- --------- ---------------
(1) (Adjusted operating profit, adjusted pre-tax profit and
adjusted net income relate to total Group)
(2 Prior year restatement required for the adoption of IFRIC
agenda decision on cloud-based software arrangements. See note 1 to
the Consolidated Financial Statements)
Commenting on today's results, Paul Forman, Chief Executive,
said:
"2021 saw the start of a new and transformational chapter in
Essentra's journey; we have set out a clear direction for the
Company to become a pure play Components business over time and
announced strategic reviews of the Filters and Packaging divisions,
thereby ensuring we create three strong stand-alone global
businesses. I believe this next chapter will present even more
positive opportunities for our businesses and our people.
While the strategic announcements dominated the focus of the
organisation as the year drew to a close, 2021 as a whole was also
a year of continued business investment, strategic delivery and
strong financial performance.
Despite the challenges arising from the pandemic and supply
chain headwinds, we have seen an improving revenue trend throughout
the year, which has continued into the start of 2022 with all three
global divisions well-positioned for growth with strong order
books.
Essentra has no significant operations or employees in Ukraine
or Russia and our sales to these markets are de minimis in the
context of the Group. All sales to Russia have been suspended and
will continue to be suspended until further notice.
Our thoughts are with everyone whose lives have been affected by
these appalling events. We are doing all we can to extend support
to affected colleagues and providing support to the humanitarian
relief effort."
Strategic Reviews
In Q3 2021, Essentra set out its strategic goal to become a pure
play Components business, maximising shareholder value and the
potential of each business.
Over the last few years, Essentra has simplified its portfolio
into three global businesses, each with leading market positions
and a clear purpose and strategy. These businesses all have strong
prospects and the potential to deliver compelling returns for
investors, but are at different stages of their development and
have limited synergies.
The strategic reviews of the Filters and Packaging divisions,
previously announced by the Board, are running in parallel and are
progressing in line with expectations.
The Board remains focused on maximising shareholder value and
will provide further updates as appropriate.
Sustainability
In 2021, the Group made continued progress towards achieving
sustainability goals in all divisions, working towards the goal of
"class-leading sustainability" we set out in 2020.
In Components, we have increased the use of post-consumer
recycled content materials to 8.5% from c.2% in 2020 (target of 20%
in 2025); in Packaging we continue to introduce alternative
materials and 96% of our paper and board material come from
sustainably managed sources; in Filters, we continue the
development and commercialisation of our ECO range.
The Group also saw further reduction of normalised Greenhouse
Gas emissions to 18.4% below the 2019 baseline, well on track for
our target of 25% reduction by 2025.
The number of zero waste to landfill manufacturing sites
increased to 22 sites this year, with the aim of certifying all
sites by 2030. We saw waste volumes decline by 10.9% in 2021,
targeting 20% reduction by 2030, compared to the 2019 baseline. The
reductions in 2021 have been achieved as a result of improved
tracking of waste and continuous improvement projects on sites.
Further details regarding our sustainability strategy will be
published within our 2021 Annual Report.
Ukraine and Russia
Essentra has no significant operations or infrastructure in
Russia or Ukraine and no employees in either country. Sales to
these markets are around 2% of total revenue. All sales to Russia
have been suspended and will continue to be suspended until further
notice.
The Company is supporting the humanitarian relief effort in
Ukraine with fundraising and other events happening across our
businesses. Essentra has made a donation of GBP100,000 to the
Disasters Emergency Committee ("DEC") Ukraine Appeal.
The Company's thoughts are with the Ukrainian people at this
incredibly difficult time and our hopes are for peace to be
restored as swiftly as possible.
Outlook Statement
Essentra has made a strong start to the year, with sales and
order book ahead of 2021. Whilst the external environment remains
challenging due to global supply chain disruptions and continued
impact of cost inflation, the Group has demonstrated its ability to
manage these challenges in the past, and will continue to implement
pricing actions alongside local cost mitigation activities.
We expect Components to grow from market share gains through
enhanced digital customer experience and cross-selling activities,
as well as from continued underlying market recovery; Packaging to
return to historic levels of growth as prescriptions and elective
surgery volumes recover; and Filters should see strong growth
enabled by the ramp up of China JV and outsourcing contracts.
It is worth noting that the recent GBP appreciation,
particularly against USD, EUR and TRY continues to cause a
translational exchange headwind.
Restatement of Comparatives
During 2021 the Group has changed its accounting policy related
to the capitalisation of certain software costs. This change
follows the IFRS Interpretation Committee's agenda decision
published in April 2021 and relates to the capitalisation of costs
of configuring or customising application software under "Software
as a Service" ("SaaS") arrangements.
Due to the level of spend incurred in relation to these
arrangements, the Group's accounting policy has been reviewed
retrospectively to align with the IFRIC guidance recently issued in
relation to cost of configuring and customising SaaS arrangements
previously capitalised.
This change in accounting policy led to adjustments amounting to
a reduction in assets of GBP16.9m and GBP6.9m recognised in the 31
December 2020 and 1 January 2020 balance sheets respectively.
Customisation and configuration costs for SaaS arrangements of
GBP11.8m and GBP10.5m were charged to operating expenses for 2021
and 2020 respectively. Of these, GBP11.8m (2021) and GBP10.4m
(2020) relate to major SaaS arrangements and are therefore
presented within adjusting items with regards to the Group's
adjusted operating profit.
See note 1 to the Consolidated Financial Statements for further
details.
Alternative Performance Measures
Constant foreign exchange rates. Movements in exchange rates
relative to sterling affect actual results as reported. The
constant exchange rate basis ("constant FX") adjusts the
comparative to exclude such movements, to show the underlying
performance of the Company. The principal exchange rates for
Essentra were:
-------- Average -------- -------- Closing --------
FY 2021 FY 2020 FY 2021 FY 2020
--------- --------------------- -------------------- -------------------- --------------------
US$:GBP 1.38 1.29 1.35 1.37
EUR:GBP 1.16 1.13 1.19 1.12
--------- --------------------- -------------------- -------------------- --------------------
Re-translating at FY 2021 average exchange rates decreases the
prior year revenue and adjusted operating profit by GBP43.8m and
GBP5.0m respectively.
Like-for-like ("LFL"). The term "like-for-like" describes the
performance of the continuing business on a comparable basis,
adjusting for the impact of acquisitions, disposals and foreign
exchange. The FY 2021 LFL results are adjusted for acquisition of
3C! Packaging, Inc. on 17 September 2020, the acquisition of
Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd ("Hengzhu") on 2
August 2021 and the commencement of production in the China Joint
venture in July 2021.
Additionally, when 2021 LFL performance is compared against
2019, then the following are also adjusted for: the acquisition of
the Innovative Components business on 26 June 2019, the acquisition
of Nekicesa Packaging on 6 September 2019, the divestment of the
Pipe Protection Technologies business on 14 January 2019, the
divestment of the Extrusion business on 11 June 2019, the
divestment of the Speciality Tapes business on 28 June 2019 and
finally the divestment of the Card Solutions business on 23 July
2019.
Adjusted basis. The term "adjusted" excludes the impact of
amortisation of acquired intangible assets and adjusting items,
less any associated tax impact. In FY 2021, amortisation of
acquired intangible assets was GBP22.4m (2020: GBP22.6m), and there
was a pre-tax charge for adjusting items of GBP11.8m (2020:
GBP28.1m). In the current year, a charge for adjusting items of
GBP11.8m is driven by major software as a service ("SaaS")
development expenditure; GBP2.8m from strategic initiatives that
have resulted in the proposed closure of certain sites in 2021 (net
of gain on disposal of fixed assets), as well as corporate
projects, and GBP2.0m on acquisition related transaction and
integration costs. This was offset by a release of provisions and
deferred considerations from previous acquisitions and disposals of
GBP4.8m. Further details on adjusting items are shown in note 3 to
the Consolidated Financial Statements.
Constant FX, LFL and adjusted measures are provided to reflect
the underlying financial performance of Essentra. For further
details on the performance metrics used by Essentra, please refer
to pages 27 to 30 of the 2020 Annual Report.
Adjusted operating cash flow. Adjusted operating cash flow is
net cash flow from operating activities, excluding income tax paid,
pensions adjustments, and cash flows relating to adjusting items,
less net capital expenditure. It is a measure of the underlying
cash generation of the business. Net capital expenditure is
included in this measure as management regard investment in
operational assets (tangible and intangible) as integral to the
underlying cash generation capability of the Company.
Operating Review
The FY 2021 result for the Group was strong with an accelerated
Q4 performance notwithstanding the macroeconomic uncertainty and
global supply chain disruptions. Overall, FY 2021 revenue increased
by 7.0% (12.6% at constant exchange) to GBP959.7m, whilst on a LFL
constant currency basis, revenue increased by 8.4% (1.4% vs
2019).
On an adjusted basis, operating profit was up 34.7% (46.5% at
constant FX) at GBP83.9m, which has been driven by a recovery in
trading volumes and also demonstrates the effective mitigation of
supply chain disruption and cost inflation through focused pricing
activities, as well as cost saving programmes. Adjusted operating
margin improved by 180 bps (200bps at constant FX) to 8.7% and is
also now slightly ahead of 2019 levels.
Including amortisation of acquired intangible assets of GBP22.4m
and a pre-tax charge from adjusting items of GBP11.8m, operating
profit as reported was GBP49.7m (2020: GBP11.6m).
Net finance expense was above the prior year at GBP16.5m (2020:
GBP15.7m), this was mainly driven by an increase in interest
charged on net debt and leases. The effective tax rate on
underlying profit before tax (before adjusting items) was 16.6%
(2020: 19.1%). The reduction in the tax rate is driven by a one-off
tax credit from the revaluation of UK deferred tax assets as a
result of the increase in UK corporate income tax. The underlying
effective tax rate for the Group without this credit is 19.7%,
which is within our forecast tax rate range of 19% to 20%.
On an adjusted basis, net income of GBP56.2m was up 49.1% (65.9%
at constant FX) and adjusted basic earnings per share increased to
18.2p. On a total reported basis, net income of GBP28.3m and basic
earnings per share of 8.9p compared to net loss of GBP1.5m and loss
per share of 1.2p respectively in 2020.
Adjusted operating cash flow was GBP64.5m (2020: GBP86.7m),
equating to a cash conversion of 77% compared to 139% in 2020. This
includes an outflow of net working capital for the year of GBP29.9m
(2020: GBP6.2m inflow). The increase in net working capital to
GBP129.7m (2020: GBP108.1m) was predominately due to higher
inventory and receivables levels, supporting growth and increased
trading volumes as well as helping with our mitigation of supply
chain disruption. Our average net working capital to sales ratio
improved by 140bps to 12.8% when compared to 2020 and 2019
levels.
Business Review
Summary growth in revenue by Division
% growth LFL Acquisitions Foreign Exchange Total Reported
------ ------------- -----------------
Components +21.7 +3.0 -6.4 +18.3
Packaging -3.6 +7.4 -4.0 -0.2
Filters +11.7 +1.2 -6.7 +6.2
Total +8.4 +4.2 -5.6 +7.0
------------ ------ ------------- ----------------- ---------------
The following review is given at constant exchange rates and on
an adjusted basis, unless otherwise stated.
Components
2021 % growth % growth
GBPm Actual FX Constant FX
------ -----------
Revenue 301.7 +18.3 +24.7
Adjusted(1) operating
profit 56.9 +25.1 +31.2
Adjusted(1) operating 18.9% +110bps +100bps
margin
----------------------- ------ ----------- -------------
(1) (Before amortisation of acquired intangible assets and
adjusting items.)
Revenue for the year increased by 24.7% to GBP301.7m. Adjusting
for the acquisition of Hengzhu, LFL revenue was +21.7%. The
division has seen a strong quarterly trading performance recovery
during the course of the year and has been trading consistently
ahead of 2019 pre-pandemic revenue levels from Q2 onwards.
The division has continued to rebound with the positive momentum
seen in the first half of 2021 continuing through to H2 despite
tougher comparatives. The business has recorded LFL revenue per
trading day adjusted growth of 28.5% in Q3 and 18.7% in Q4. When
compared to Q3 and Q4 of 2019, current year trading is up 14.2% and
14.9% respectively on a LFL revenue per trading day adjusted
basis.
Consistent with the commitment to providing customers with a
"hassle-free" experience, the division has continued progress on
its digital journey. After the Asia roll out of the new digital
platform in H1, three further countries are now live, with Turkey
and Thailand to follow in 2022, completing the global roll out of
the new digital platform (Europe and North America went live in
prior years). The platform provides the division with the ability
to promote an expanding range of products from both organic and
acquisition activities, with improved cross selling functionality.
Further developments have taken place in H2 such as advanced
intelligence functionality using digital data to enhance
personalisation and digital effectiveness. We continue to see
success in our category management approach using global category
expertise rather than a regionally bound approach.
As highlighted during the half year results, the growth in
Components has been delivered against a backdrop of supply chain
challenges which has continued into H2 where further disruption and
inflationary headwinds have been faced. These supply chain
challenges have been compounded by a strong rebound in demand seen
in the market alongside labour availability and inflation headwinds
in the US.
Given the impact on customer service caused by supply chain
disruption, we were disappointed but not surprised that our net
promoter score ("NPS") fell to 23. However, our sales growth rate
indicates the strength of underlying market and our ability to gain
market share even in challenging times. Our backlog, which peaked
in August 2021, has shown substantial improvement over the last six
months as we continue to drive service improvements.
In response to increased inflationary pressures (materials,
labour and freight), and to protect our margins, the business
implemented a second tranche of price increases in Q3. In 2022, the
division will continue to monitor supply chain headwinds and drive
proactive remediation actions.
We have successfully taken steps to streamline our operational
footprint with the closure of two manufacturing sites in the US,
and one in Europe, previously identified in 2020, which will
deliver overall improvements in cost to serve.
The Components division has made solid progress towards meeting
sustainability targets in 2021. We have made strong advances
towards achieving the target of using 20% recycled or renewable
polymer raw materials by 2025, finishing the year with a Q4 run
rate of recycled material consumption of c.10% of total material.
Our investment in research and development across this field
continues to be a key area of focus and will enable further
implementation of projects to deliver our 2022 goals.
We have continued to invest in our BPR programme during the
year, which has not been without its challenges. After going live
with our first operational site in Spain in July, we have conducted
a review of activity and lessons learnt through implementation as
well as enhancing resources for the project, with a new structure
in place at the end of 2021. We now have a solid foundation to
progress the roll out in 2022.
Adjusted operating profit increased by 31.2% to GBP56.9m,
equating to a margin of 18.9% (2020: 17.8%). The 100bps improvement
(at constant currency) reflects the improved trading volumes
throughout the year, tempered by inflationary input cost pressures
which we were able to mitigate through price increases in the
second half of the year.
Packaging
2021 % growth % growth
GBPm Actual FX Constant FX
------ -----------
Revenue 362.4 -0.2 +3.8
Adjusted(1) operating
profit 15.4 +11.6 +17.6
Adjusted(1) operating 4.2% +40bps +40bps
margin
----------------------- ------ ----------- -------------
(1) (Before amortisation of acquired intangible assets and
adjusting items.)
Revenue increased 3.8% to GBP362.4m. On a LFL, constant currency
basis the revenue decline was 3.6% for the year. 3C! Packaging
which was acquired in September 2020 contributed GBP34.3m revenue
in 2021.
Throughout 2021, healthcare market demand has continued to be
impacted by the pandemic, especially for certain segments (cold and
flu treatments, hospitals and over-the-counter). The ramp up of
COVID-19 vaccines and anti-viral treatments have marginally offset
lower overall demand and we started to see improvements to our
order books through H2. We are proud to have continued to support
several customers in supplying critical COVID-19 treatments and
vaccines across the year.
The US healthcare market started to recover from Q2 whilst the
European market, due to further headwinds of new variants and
continued lockdowns, did not start to show an improvement until the
end of Q3. Recovery within both markets was reflected in Q4, with
LFL growth of +2.1% as activity picked up, providing signs of
optimism of market demand recovery and reflecting labour
stabilisation and retention in the US.
Throughout 2021, we have continued to provide our customers with
a reliable service for their critical products and customer
relationships have strengthened further. We were delighted to
receive positive feedback from our customers, including a COVID-19
supplier award from our largest UK pharmaceutical customer.
We have made significant progress with our sustainability
credentials, with more than half of our manufacturing sites now
classified as zero waste to landfill and 96% of paper and board
material used is now from FSC or PEFC certified suppliers.
Sustainability has risen up our customers' agenda significantly and
we are collaborating with them on a pipeline of sustainable product
innovations. Our Re*flect alternative to metalised polyester board
("METPOL") is a great example of delivering an innovative product
to support our customers' sustainability goals, and we have been
able to grow a sustainable innovative product offering through
ClearCode technology (acquired from 3C! Packaging). The Packaging
division was recognised for its approach to sustainability at the
2021 Pro Carton awards, receiving a Gold in the Carton Excellence
awards for its cosmetics carton for an exclusive online skincare
brand in Q3.
Strategic cost reduction initiatives, in particular the closure
of our Portsmouth (UK) and Moorestown (USA) sites in H1, have
supported margin improvement through the year, and when market
recovery enables us to benefit from operational leverage we are
confident in our ability to see margins improve. In response to
input cost increases in H1, pricing actions were implemented
through the second half of the year. Our Q4 margin exit rate of
7.9%, has been delivered with support of self-help actions, and
timing related benefit alongside signs of market recovery, and we
continue our journey towards achieving industry standard
margins.
Adjusted operating profit increased 17.6% to GBP15.4m, equating
to a margin of 4.2% (40bps constant currency improvement). This was
largely driven by the continued delivery of savings originating
from gross margin initiatives, procurement and organisational
changes made in the prior year, offset by lower sales volumes.
Filters
2021 % growth % growth
GBPm Actual FX Constant FX
------ -----------
Revenue 295.6 +6.2 +12.9
Adjusted(1) operating
profit 28.2 +11.9 +20.3
Adjusted(1) operating 9.5% +40bps +50bps
margin
----------------------- ------ ----------- -------------
(1) (Before amortisation of acquired intangible assets and
adjusting items.)
Total Filters divisional revenue was 12.9% up on the prior year,
of which the core Filters business (excluding Tapes business) was
up by 14.2%.
The second half of 2021 continued to gain momentum versus 2020
despite tougher quarterly comparatives. Q3 was up by 2.8% and Q4
22.7% on a constant currency basis. Accelerated growth has been
driven by increased sales into the Chinese market, a number of
outsourcing contract business wins and the increase in sales of
capsule filters. Sales price increases have also supported in
protecting against cost inflation (raw materials and freight).
In relation to the division's 'game changers', the previously
announced outsourcing contracts are now operating with full
production volumes being achieved. Significant investments into
driving outsourcing contracts has led to tangible results,
including securing two multi-year outsourcing contracts with two
Multi-National Companies ("MNCs"). Our pipeline of outsourcing
contract opportunities built in 2021 should continue to deliver
growth in 2022 and have been achieved across the range of our
customer base (MNC, Monopoly and Independents), primarily for
manufacture in EMEA and Asia.
The China JV continues to provide a great platform to capture
opportunities available in the world's largest tobacco market which
is also shifting towards speciality products. Production volumes
have ramped up through H2 and annualised exit rate is on track with
expectation.
We continue to focus on innovation, and our pipeline of ECO and
next generation products ("NGP"). There are c.52 ongoing projects
with major tobacco customers on sustainable filter products
including two projects in commercial production phase. The division
remains uniquely positioned to be a key global player in the
outsourced filter market using strong technological knowledge and
we remain pleased with the increased levels of interest the market
is showing towards these new products. As previously reported in
December 2020 the division launched three proprietary products (ECO
Sensation, ECO Cavitec and ECO Cavitec Sensation), which are
intended to meet EU Single Use Plastics Directive initiatives for
plastic-free and biodegradable products. Three further patents have
been filed for the products to extend our ECO range and both ECO
Flute and ECO Active have been launched commercially.
The Tapes business has continued to develop its key account
management structure, growing a deeper understanding of customer
needs, and supporting development of relevant value
propositions.
Despite disruptions that have been faced through the year the
division as a whole has maintained world class service and quality
metrics, further deepening customer relationships, driving
productivity and efficient use of materials.
Adjusted operating profit increased 20.3% to GBP28.2m, equating
to an operating margin of 9.5% (50bps improvement at constant
currency). This was largely driven by the volume gearing effect
from the revenue increase and mix of outsourcing contracts, netted
off against costs incurred for the set up for the China JV.
Financial Review
Net finance expense. Net finance expense of GBP16.5m was GBP0.8m
above the prior year period, and is broken down as follows:
GBPm 2021 2020
-----
Net interest charged on net
debt 10.9 10.3
Amortisation of bank fees 1.1 0.7
Net IAS 19 pension finance charge 0.6 0.7
Interest on leases 2.8 2.4
Net other finance expense 1.1 1.6
Total net finance expense 16.5 15.7
----------------------------------- ----- -----
Tax. The effective tax rate on underlying profit before tax
(before adjusting items and amortisation of acquired intangible
assets) was 16.6% (2020: 19.1%). As disclosed at the HY, this
reduced tax rate is primarily driven by a one-off non-cash benefit
on the remeasurement of deferred tax assets as a result of the
enacted change in UK corporate tax rates. The underlying effective
tax rate for the Group without this credit is 19.7%, which is
within the Group's forecast tax rate range of 19% to 20%.
Net working capital. Net working capital is defined as
Inventories plus Trade & Other Receivables less Trade &
Other Payables, adjusted to exclude Deferred Consideration
Receivable / Payable, Interest Accruals and Capital Payables
("Adjustments").
GBPm 2021 2020
--------
Inventories 128.7 102.6
Trade & other receivables 175.2 154.2
Trade & other payables (180.9) (155.4)
Adjustments 6.7 6.7
Net working capital 129.7 108.1
--------------------------- -------- --------
The increase in net working capital was predominately due to
higher inventory and receivables levels, which were driven by
enhanced trading volumes combined with a build of inventory, to
mitigate supply chain disruption and support sales growth.
Cash flow. Adjusted operating cash flow is net cash flow from
operating activities, excluding income tax paid, pensions
adjustments, and cash flows relating to adjusting items, less net
capital expenditure. It is a measure of the underlying cash
generation of the business. Net capital expenditure is included in
this measure as management regard investment in operational assets
(tangible and intangible) as integral to the underlying cash
generation capability of the Company.
Adjusted operating cash flow was 26% lower than the previous
year at GBP64.5m (2020: GBP86.7m), which equated to an operating
cash conversion of 77% in the year (2020: 139%). Free cash flow was
GBP36.7m compared to GBP67.3m in 2020. In addition to working
capital movements, the decrease in free cash flow was also due to
payments of pension contributions that were previously deferred, as
well as an increase in tax payments in 2021 following an increase
in Group profits.
In 2021, there was a GBP2.5m net increase in cash and cash
equivalents to GBP136.3m (2020: increase of GBP65.3m to
GBP135.8m).
GBPm 2021 2020(1) (restated) 2020 (as
previously
reported)
------- -------------------
Adjusted operating profit 83.9 62.3 62.0
Depreciation and amortisation of
non-acquired intangible assets 39.2 39.8 40.2
Right-of-use asset depreciation 12.0 12.0 12.0
Share option expense / other movements 0.6 0.6 0.6
Change in working capital (29.9) 6.2 6.2
Net capital expenditure (excluding
disposal proceeds relating to adjusting
items) (41.3) (34.2) (44.7)
Adjusted operating profit 64.5 86.7 76.3
Tax(2) (12.4) (7.5) (7.5)
Cash outflow in respect of adjusting
items(2) (25.4) (21.5) (11.1)
Pension obligations (4.8) 0.9 0.9
Add back: net capital expenditure
(excluding disposal proceeds relating
to adjusting items) 41.3 34.2 44.7
Net cash inflow from operating activities 63.2 92.8 103.3
Adjusted operating cash flow 64.5 86.7 76.3
Tax(2) (12.4) (7.5) (7.5)
Net interest paid (10.6) (12.8) (12.8)
Pension obligations (4.8) 0.9 0.9
Free cash flow 36.7 67.3 56.9
Net increase in cash & cash equivalents 2.5 65.3 65.3
-------------------------------------------- ------- ------------------- ------------
(1 Restated for the adoption of IFRIC agenda decision on
cloud-based software arrangements. See note 1 of the Consolidated
Financial Statements)
(2 Tax paid excludes the tax paid/received in relation to
adjusting items. This is included within the cash outflow in
respect of adjusting items)
Net debt. Net debt at the end of the period was GBP234.7m, a
GBP24.3m increase from 1 January 2021 (including lease
liabilities). The overall increase was mainly driven by free cash
flow generated, being netted off against cash paid for the
acquisition of Hengzhu. In 2021 we also resumed dividend payments
resulting in a cash outflow of GBP16.0m.
The Group's financial ratios remain healthy. The ratio of net
debt to EBITDA including lease liabilities was 1.7x (31 December
2020: 1.8x). Net debt to EBITDA excluding lease liabilities was
1.5x (31 December 2020: 1.5x). Interest cover was 5.3x (31 December
2020: 4.2x).
GBPm 2021
Net debt as at 1 January 2021 210.4
Free cash flow (36.7)
Cash outflow in respect of adjusting items 16.9
Foreign exchange 3.0
Acquisitions - net cash paid 14.6
Capital contributions from non-controlling
interests in the China JV (3.1)
Dividends to non-controlling interests 1.5
Dividends to equity holders 16.0
Lease liability movements 9.0
Lease liabilities acquired through business
combinations 2.0
Amortisation of pre-paid facilities 1.1
Net debt as at 31 December 2021 234.7
----------------------------------------------- -------
Refinancing activities . One of the main sources of funding for
the Company is a Revolving Credit Facility ("RCF") provided by a
group of eight highly-rated banks, which as at the end of 2020 was
set to mature in November 2022. Subsequently in January 2021, we
agreed an extension to the majority of the existing facility based
on new terms with six of the eight banks (totalling GBP225.0m),
maturing in November 2023. In October 2021 we completed the total
refinancing of our RCF, with the same banking group and a new
five-year term, expiring in October 2026 for a commitment of
GBP275m.
In addition to the above, in July the Company agreed the issue
of US $250 million of medium and long-dated private placement debt.
The issue comprises US $80 million notes due 2028, US $85 million
notes due 2031, and US $85 million notes due 2033. The covenants on
the notes are in line with those on the Company's existing private
placement notes and its bank revolving credit facility. As
indicated at the half year, the proceeds have been used to repay
GBP and Euro debt drawn under our RCF, thereby diversifying the
Company's source of debt finance and lengthening its maturity
profile.
Pensions. As at 31 December 2021, the Company's IAS 19 net
pension net surplus was GBP9.0m (2020: net liability of GBP23.9m).
This reduction in the liability is mainly a result of an actuarial
gain (driven by an increased discount rate) being netted off
against a negative return of plan assets.
Dividends . In keeping with the Company's progressive dividend
policy, the Board of Directors recommends a final dividend of 4.0
pence per 25 pence ordinary share (FY 2020: 3.3p). The final
dividend will be paid on 1 June 2022 to equity holders on the share
register on 22 April 2022: the ex-dividend date will be 21 April
2022. Essentra operates a Dividend Re-Investment Programme
("DRIP"), details of which are available from the Company's
Registrars, Computershare Investor Services PLC: the final date for
DRIP elections will be 11 May 2022.
Board changes. As planned and previously communicated, Tommy
Breen retired as a Non-Executive Director and Senior Independent
Director with effect from the conclusion of the Annual General
Meeting ("AGM"), held on Thursday 21 May 2021. Mary Reilly became
Senior Independent Director upon Tommy's retirement, adding to her
already existing role as Chair of the Audit & Risk Committee
and Board Employee Champion.
Nicki Demby has advised the Board that she will be retiring from
her role as Remuneration Committee Chair and Non-Executive Director
with effect following the Company's 2022 AGM on 19 May 2022. Nicki
joined the Board in 2019 and has made a significant contribution,
in particular her focus and expertise when dealing with
remuneration has provided the Board the assurance needed. Ralf
Wunderlich has been appointed as Remuneration Committee Chair,
providing continuing scrutiny and oversight of reward and
remuneration during this time of change, adding to his existing
role as Sustainability Committee Chair.
Adrian Peace was appointed as a Non-Executive Director with
effect from 28 June 2021. Adrian is also a Board Employee Champion
for the North American region. Adrian brings extensive experience
in US and Global markets having operated in a range of businesses
including light and heavy manufacturing, distribution and services
sectors. Between Mary Reilly, Ralf Wunderlich and Adrian Peace our
Board Employee Champions are now able to better cover our global
footprint.
Dupsy Abiola was appointed as Essentra's first Board Trainee,
Non-Executive Director on 29 July 2021. The purpose of the role is
to help to develop a wider pool of candidates for Board positions.
This appointment has been a success, and Dupsy has agreed to become
a Non-Executive Director and will stand for election at the 2022
AGM on 19 May 2022. Given the success of the Board Trainee
position, the Board intend to continue the scheme following the
conclusion of the strategic reviews.
In November 2021, the Company announced that Lily Liu informed
the Board that she would leave the Company to take up a new role as
Chief Financial Officer with Synthomer plc and that a search for
her successor, as Chief Financial Officer for the Essentra
Components business, had commenced. On 14 March 2022, the Board has
separately announced that Jack Clarke will join the Board as Chief
Financial Officer Designate with effect from 4 April 2022 and stand
for election at the 2022 AGM on 19 May 2022. The Board is delighted
to have recruited Jack to succeed Lily and they will work closely
together during the coming months to ensure a smooth transition.
Lily will remain focused on the strategic reviews and her leaving
date will be announced separately. Jack brings extensive experience
having previously been the CFO of Marshalls plc from 2014 until
2021. Prior to Marshalls plc, Jack was CFO of AMEC E&I from
2010 to 2014.
Treasury policy and controls. Essentra has a centralised
treasury function to manage funding, liquidity and exposure to
interest rate and foreign exchange risk. Treasury policies are
approved by the Board and cover the nature of the exposure to be
hedged, the types of derivatives that may be employed and the
criteria for investing and borrowing cash. Essentra uses
derivatives only to manage currency and interest rate risk arising
from the underlying business activities. No transactions of a
speculative nature are undertaken. Underlying policy assumptions
and activities are reviewed by the Treasury Committee.
Controls over exposure changes and transaction authenticity are
in place, and dealings are restricted to those banks with the
relevant combination of geographical presence, expertise and
suitable credit rating.
Foreign exchange risk. The majority of Essentra's net assets are
in currencies other than sterling. The Company's normal policy is
to reduce the translation exposure and the resulting impact on
shareholders' funds through measures such as borrowing in those
currencies in which the Group has significant net assets. At 31
December 2021, Essentra's US dollar-denominated assets were
approximately 53% hedged by its US dollar-denominated borrowings,
while Essentra's euro loan was repaid in the year and so the euro
denominated assets were no longer hedged by any euro denominated
borrowings.
The majority of Essentra's transactions are carried out in the
functional currencies of its operations, and therefore transaction
exposure is limited. However, where such exposure does occur,
Essentra uses forward foreign currency contracts to hedge its
exposure to movements in exchange rates on its highly probable
forecast foreign currency sales and purchases over a period of up
to 18 months.
Management of principal risks. The Board considers risk
assessment, identification of mitigating actions and internal
controls to be fundamental to achieving Essentra's strategic
objectives. Our principal risks are detailed later in this
document.
Extension of Audit Partner's Tenure
The Board advises that it has agreed the extension of Nicholas
Stevenson's tenure as the Company's audit engagement leader for a
sixth and final year in 2022.
Pursuant to the Financial Reporting Council's Ethical Section 3
to safeguard audit quality, audit engagement partners for public
companies are required to rotate after five years. Both the Audit
and Risk Committee ("ARC") and PwC believe that the extension of
Nicholas Stevenson's tenure as audit engagement leader is
acceptable due to the exceptional arrangements that the strategic
reviews present. Ethical Standard 3 allows for this period to be
extended by a further two years with shareholder notification.
PwC have put in place additional safeguards to ensure that any
threat to independence arising from his familiarity with the audit
and the Company are sufficiently safeguarded. The ARC reviewed
these arrangements and agreed they were satisfied that the
additional arrangements provided robust checks and maintained the
integrity of the audit.
Enquiries
Essentra plc Tulchan Communications LLP
Lily Liu, Chief Financial Officer Martin Robinson
Lucy Yank, Group Communications Olivia Peters
Director Tel: +44 (0)20 7353 4200
Claire Goodman, Group Investor
Relations Manager
Tel: +44 (0)1908 359100
Presentation
A copy of these results is available on www.essentraplc.com
The Full Year Results presentation to analysts and investors
will start at 08:30 (UK time), and will be held virtually.
There are two options for participating in the event:
1) View and listen in to a webcast of the presentation, which can be accessed at https://www.essentraplc.com/en/investors/company-information/webcasts-and-presentations
Please note that this option will not allow you to ask any
questions - it will be listen only mode.
2) If you wish to ask a question, or are unable to listen to the
audio via the webcast, please dial in to the audio conference call
using the details below:
Dial-in number: +44 (0)207 192 8338 (UK / international
participants)
+1 646 741 3167 (US participants)
Toll-free number: 0800 279 6619 (UK participants)
+1 877 870 9135 (US participants)
Event Plus Passcode: 7070958
A recording of the presentation will be made available on the
website later in the day. A replay will additionally be available
as follows:
Replay number: +44 (0)333 300 9785 (UK / international
participants)
+1 917 677 7532 (US participants)
Toll-free number: 0808 238 0667 (UK participants)
+1 866 331 1332 (US participants)
Replay access code: 7070958
Replay available: For 7 days
Cautionary forward-looking statement
These results contain forward-looking statements based on
current expectations and assumptions. Various known and unknown
risks, uncertainties and other factors may cause actual results to
differ from future results or developments expressed or implied
from the forward-looking statements. Each forward-looking statement
speaks only as of the date of this document. The Company accepts no
obligation to revise or update these forward-looking statements
publicly or adjust them to future events of developments, whether
as a result of new information, future events or otherwise, except
to the extent legally required.
Notes to Editors
About Essentra plc
Essentra plc is a FTSE 250 company and a leading global provider
of essential components and solutions. Organised into three global
divisions, Essentra focuses on the light manufacture and
distribution of high volume, enabling components which serve
customers in a wide variety of end-markets and geographies.
Headquartered in the United Kingdom, Essentra's global network
extends to 34 countries and includes 8,327 employees, 47 principal
manufacturing facilities, 28 sales & distribution operations
and two research & development centres. For further
information, please visit www.essentraplc.com.
Essentra Components
Essentra Components is a global market leading manufacturer and
distributor of plastic injection moulded, vinyl dip moulded and
metal items. Operating in 25 countries worldwide, 13 manufacturing
facilities and 23 sales & distribution centres serve more than
79,000 customers with a rapid supply of low cost but essential
products for a variety of applications in industries such as
equipment manufacturing, automotive, fabrication, electronics and
construction. The division also includes the Reid Supply business,
which provides a wide range of branded hardware supplies to a broad
base of industrial customers, largely located in the US
Mid-West.
Essentra Packaging
Essentra Packaging is one of only two multicontinental suppliers
of a full secondary packaging range to the health and personal care
sectors, with 23 facilities across three geographic regions. The
division's innovative products include cartons, leaflets,
self-adhesive labels and printed foils used in blister packs, which
help customers to meet the rapidly-changing requirements of these
end-markets and can also be combined with Essentra's authentication
solutions to help the fight against counterfeiting.
Essentra Filters
Essentra Filters is the only global independent cigarette filter
supplier. Currently headquartered in Singapore, the division has 12
sites across nine countries, including two innovation centres,
providing a flexible infrastructure strategically positioned to
serve the tobacco sector. The business supplies a wide range of
value-adding high-quality innovative filters, packaging solutions
to the roll your own segment and analytical laboratory services for
ingredient measurement to the industry: Essentra's offering also
includes Heat Not Burn and e-cigarette solutions to the rapidly
evolving market for Next Generation Products. The division also
includes the Tear Tapes business, which is globally recognised as
the leading manufacturer and supplier of pressure-sensitive tear
tapes, that are largely used in the tobacco, e-commerce, food and
beverage and specialist packaging sectors.
Consolidated Income Statement
For the year ended 31 December 2021
(restated)*
Note 2021 2020
GBPm GBPm
------------------------------------------------------ ---- ------ -----------
Revenue 2 959.7 896.5
Operating profit 49.7 11.6
Finance income 4 2.8 1.9
Finance expense 4 (19.3) (17.6)
------------------------------------------------------ ---- ------ -----------
Profit/(loss) before tax 33.2 (4.1)
Income tax (charge)/credit (4.9) 2.6
------------------------------------------------------ ---- ------ -----------
Profit/(loss) for the year 28.3 (1.5)
------------------------------------------------------ ---- ------ -----------
Attributable to:
Equity holders of Essentra plc 26.9 (3.3)
Non-controlling interests 1.4 1.8
------------------------------------------------------ ---- ------ -----------
Profit/(loss) for the year 28.3 (1.5)
------------------------------------------------------ ---- ------ -----------
*See change of accounting policies within note
1 for further details of the prior year restatement.
Earnings per share attributable to equity holders
of Essentra plc:
Basic 5 8.9p (1.2)p
------------------------------------------------------ ---- ------ -----------
Diluted 5 8.9p (1.2)p
------------------------------------------------------ ---- ------ -----------
Earnings per share from continuing operations
attributable to equity holders of Essentra plc:
Basic 5 8.9p (1.2)p
------------------------------------------------------ ---- ------ -----------
Diluted 5 8.9p (1.2)p
------------------------------------------------------ ---- ------ -----------
Adjusted profit measure:
GBPm GBPm
Operating profit 49.7 11.6
Amortisation of acquired intangible assets 22.4 22.6
Adjusting items 3 11.8 28.1
------ -----------
Adjusted operating profit 83.9 62.3
------ -----------
See note 15 for further details of the adjusted
profit measure.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2021
(restated)*
2021 2020
Note GBPm GBPm
---------------------------------------------------- ---- ------ -----------
Profit/(loss) for the year 28.3 (1.5)
Other comprehensive income:
Items that will not be reclassified to profit
or loss:
Remeasurement of defined benefit pension schemes 9 28.5 (6.7)
Deferred tax (expense)/income on remeasurement
of defined benefit pension schemes (7.9) 2.1
----------------------------------------------------- ---- ------ -----------
20.6 (4.6)
Items that may be reclassified subsequently
to profit or loss:
Effective portion of changes in fair value
of cash flow hedges:
Net change in fair value of cash flow hedges
transferred to the income statement (1.8) (0.5)
Ineffective portion of changes in fair value
of cash flow hedges transferred to the income
statement (0.5) -
Effective portion of changes in fair value
of cash flow hedges 0.9 0.1
Foreign exchange translation differences:
Attributable to equity holders of Essentra
plc:
Arising on translation of foreign operations (23.4) (9.3)
Arising on effective net investment hedges (0.4) (3.3)
Income tax income/(expense) 0.4 (0.5)
Attributable to non-controlling interests (0.1) (0.5)
----------------------------------------------------- ---- ------ -----------
(24.9) (14.0)
Other comprehensive expense for the year,
net of tax (4.3) (18.6)
Total comprehensive income for the year 24.0 (20.1)
----------------------------------------------------- ---- ------ -----------
Attributable to:
Equity holders of Essentra plc 22.7 (21.4)
Non-controlling interests 1.3 1.3
----------------------------------------------------- ---- ------ -----------
Total comprehensive income for the year 24.0 (20.1)
----------------------------------------------------- ---- ------ -----------
* See change of accounting policies within
note 1 for further details of the prior year
restatement.
Consolidated Balance Sheet
At 31 December 2021
================================================================================================================
(restated)* (restated)*
31
December 31 December 1 January
2021 2020 2020
Note GBPm GBPm GBPm
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Assets
Property, plant and
equipment 6 254.3 262.5 273.5
Lease right-of-use
asset 8 50.4 52.7 43.4
Intangible assets 7 483.5 502.4 481.9
Long-term receivables 5.2 4.7 5.6
Derivative assets 0.7 - -
Deferred tax assets 11.6 20.6 15.2
Retirement benefit
assets 9 34.1 12.6 16.9
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Total non-current assets 839.8 855.5 836.5
Inventories 128.7 102.6 113.1
Income tax receivable 1.5 3.7 7.0
Trade and other receivables 175.2 154.2 166.9
Derivative assets 0.5 0.3 0.8
Other financial assets - - 6.2
Cash and cash equivalents 136.3 135.8 70.4
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Total current assets 442.2 396.6 364.4
Total assets 1,282.0 1,252.1 1,200.9
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Equity
Issued share capital 10 75.6 75.6 66.0
Merger relief reserve 385.2 385.2 298.1
Capital redemption
reserve 0.1 0.1 0.1
Other reserve (132.8) (132.8) (132.8)
Cash flow hedging reserve (1.5) (0.1) 0.3
Translation reserve (47.5) (24.1) (11.0)
Retained earnings 333.6 300.8 307.1
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Attributable to equity
holders of Essentra
plc 612.7 604.7 527.8
Non-controlling interests 16.2 13.3 7.7
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Total equity 628.9 618.0 535.5
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Liabilities
Interest bearing loans
and borrowings 313.3 285.2 249.0
Lease liabilities 11 46.1 49.1 39.3
Retirement benefit
obligations 9 25.1 36.5 34.3
Provisions 2.5 8.0 6.0
Other financial liabilities 5.6 1.2 3.4
Other payables - 2.2 -
Deferred tax liabilities 45.3 45.5 45.3
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Total non-current liabilities 437.9 427.7 377.3
Interest bearing loans
and borrowings - - 60.7
Lease liabilities 11 11.6 11.9 11.4
Derivative liabilities 0.1 0.5 0.3
Income tax payable 21.5 33.1 37.9
Trade and other payables 180.9 155.4 174.5
Provisions 1.1 5.5 3.3
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Total current liabilities 215.2 206.4 288.1
Total liabilities 653.1 634.1 665.4
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
Total equity and liabilities 1,282.0 1,252.1 1,200.9
---- ------------------------------------------------ ---------- -------- ----------- ---------------------
* See change of accounting policies within note 1 for
further details of the prior year restatement.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2021
2021
--- --------------------------- ------- ------- ---------- -------- ----------- ------------------------------------------------
Cash flow
hedging and
Merger Capital cost of Non-
Issued relief redemption Other hedging Translation Retained controlling
capital reserve reserve reserve reserves reserve earnings interests Total equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--- --------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
At 1 January 2021
(restated*) 75.6 385.2 0.1 (132.8) (0.1) (24.1) 300.8 13.3 618.0
Profit for the year 26.9 1.4 28.3
Other comprehensive expense (1.4) (23.4) 20.6 (0.1) (4.3)
--------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
Total comprehensive income
for the year - - - - (1.4) (23.4) 47.5 1.3 24.0
Equity issue to
non-controlling interest 3.1 3.1
Share option expense 0.8 - 0.8
Tax relating to share-based
incentives 0.5 - 0.5
Dividends paid 13 (16.0) (1.5) (17.5)
--------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
At 31 December 2021 75.6 385.2 0.1 (132.8) (1.5) (47.5) 333.6 16.2 628.9
--------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
2020 (restated(*) )
--- --------------------------- ------- ------- ---------- -------- ----------- ------------------------------------------------
Cash flow
hedging and
Merger Capital cost of Non-
Issued relief redemption Other hedging Translation Retained controlling
capital reserve reserve reserve reserves reserve earnings interests Total equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--- --------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
At 1 January 2020 66.0 298.1 0.1 (132.8) 0.3 (11.0) 312.4 7.7 540.8
(as previously reported)
Prior period restatement (5.3) - (5.3)
--------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
Restated total equity at
the beginning of the
financial year 66.0 298.1 0.1 (132.8) 0.3 (11.0) 307.1 7.7 535.5
--------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
Loss for the year
(restated(*) ) (3.3) 1.8 (1.5)
Other comprehensive expense (0.4) (13.1) (4.6) (0.5) (18.6)
--------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
Total comprehensive loss
for the year - - - - (0.4) (13.1) (7.9) 1.3 (20.1)
Issue of share capital 9.6 87.1 - - 96.7
Equity issue to
non-controlling interest - 5.0 5.0
Share options exercised 0.1 - 0.1
Share option expense 1.2 - 1.2
Tax relating to share-based
incentives 0.3 - 0.3
Dividends paid 13 - (0.7) (0.7)
--------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
At 31 December 2020
(restated*) 75.6 385.2 0.1 (132.8) (0.1) (24.1) 300.8 13.3 618.0
--------------------------- ------- ------- ---------- -------- ----------- ----------- -------- ----------- ------------
(*) See change of accounting policies within note 1 for further details of the prior year
restatement..
Consolidated Statement of Cash Flows
For the year ended 31 December 2021
(restated)*
Note 2021 2020
GBPm GBPm
-------------------------------------------------- ---- ------- -----------
Operating activities
Profit/(loss) for the year 28.3 (1.5)
Adjustments for:
Income tax expense/(credit) 4.9 (2.6)
Net finance expense 4 16.5 15.7
Intangible amortisation 7 25.0 25.1
Adjusting items 3 11.8 28.1
Depreciation of property, plant and
equipment 6 36.6 37.3
Lease right-of-use asset depreciation 8 12.0 12.0
Profit on lease termination - (2.0)
Impairment of fixed assets 0.5 0.1
Share option expense 0.8 1.2
Hedging activities and other movements (0.5) 1.3
(Increase)/decrease in inventories (28.3) 9.6
(Increase)/decrease in trade and other
receivables (27.9) 14.9
Increase/(decrease) in trade and other
payables 26.3 (18.3)
Cash outflow in respect of adjusting
items (25.6) (21.3)
Adjustment for pension contributions (4.8) 0.9
Movement in provisions (0.2) -
-------------------------------------------------- ---- ------- -----------
Cash inflow from operating activities 75.4 100.5
Income tax paid (12.2) (7.7)
-------------------------------------------------- ---- ------- -----------
Net cash inflow from operating activities 63.2 92.8
-------------------------------------------------- ---- ------- -----------
Investing activities
Interest received 0.4 1.9
Acquisition of property, plant and equipment (38.5) (30.9)
Proceeds from sale of property, plant
and equipment 8.9 0.4
Payments for intangible assets (3.2) (3.7)
Acquisition of businesses net of cash
acquired 12 (14.6) (41.2)
Proceeds from sale of businesses net
of cash disposed 11 - 5.0
Short-term investments - 0.6
-------------------------------------------------- ---- ------- -----------
Net cash outflow from investing activities (47.0) (67.9)
-------------------------------------------------- ---- ------- -----------
Financing activities
Interest paid (11.0) (14.7)
Dividends paid to equity holders (16.0) -
Dividends paid to non-controlling interests (1.5) (0.7)
Arrangement fee paid for financing facilities (4.4) -
Repayments of long-term loans (182.5) (352.9)
Proceeds from long-term loans 211.4 318.8
Lease liability principal repayments (12.8) (11.9)
Proceeds from equity issue - 100.0
Costs incurred in equity issue - (3.3)
Proceeds from equity issue to non-controlling
interests 3.1 5.0
Proceeds from sale of employee trust
shares - 0.1
-------------------------------------------------- ---- ------- -----------
Net cash (outflow)/inflow from financing
activities (13.7) 40.4
-------------------------------------------------- ---- ------- -----------
Net increase in cash and cash equivalents 11 2.5 65.3
-------------------------------------------------- ---- ------- -----------
Net cash and cash equivalents at the
beginning of the year 135.8 70.4
Net increase in cash and cash equivalents 2.5 65.3
Net effect of currency translation on
cash and cash equivalents (2.0) 0.1
-------------------------------------------------- ---- ------- -----------
Net cash and cash equivalents at the
end of the year 11 136.3 135.8
-------------------------------------------------- ---- ------- -----------
* See change of accounting policies within note
1 for further details of the prior year restatement.
1. Basis of preparation
The financial information set out in this document does not
constitute statutory accounts for Essentra plc for the year ended
31 December 2021 but is extracted from the 2021 Annual Report.
The Annual Report for 2021 will be delivered to the Registrar of
Companies in due course. The auditors' report on those accounts are
unqualified and neither drew attention to any matters by way of
emphasis nor contained a statement under either section 498(2) of
Companies Act 2006 (accounting records or returns inadequate or
accounts not agreeing with records and returns), or sec on 498(3)
of Companies Act 2006 (failure to obtain necessary information and
explanations).
The consolidated financial statements of the Essentra plc group
have been prepared in accordance with UK-adopted International
Accounting Standards and with the requirements of the Companies Act
2006 as applicable to companies reporting under those
standards.
On 31 December 2020, IFRS as adopted by the European Union at
that date was brought into UK law and became UK-adopted
International Accounting Standards, with future changes being
subject to endorsement by the UK Endorsement Board. Essentra
transitioned to UK-adopted International Accounting Standards in
its consolidated financial statements on 1 January 2021. This
change constitutes a change in accounting framework. However, there
is no impact on recognition, measurement or disclosure in the
period reported as a result of the change in framework.
The financial statements are prepared under the historical cost
convention except for derivatives which are stated at fair value
and retirement benefit obligations which are valued in accordance
with IAS 19 Employee Benefits.
The preparation of financial statements that conform with
adopted IFRS requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of income and
expense during the reporting period. Although these estimates are
based on management's best knowledge of the amount, event or
actions, actual results may ultimately differ from those
estimates.
For the purposes of these financial statements "Essentra" or
"the Group" means Essentra plc ("the Company") and its
subsidiaries.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised and future periods if
relevant.
Going Concern
At 31 December 2021, the Group's external financing arrangements
amounted to GBP534.3m, comprising United States Private Placement
Loan Notes ("USPP") of US$350.0m (with a range of expiry dates from
November 2024 to July 2033) and a multi-currency revolving credit
facility ("RCF") of GBP275.0m (expiring in October 2026). Of the
total facility of GBP534.3m, only GBP14.8m is expiring before
2026.
The amount drawn under the RCF as at 31 December 2021 was
GBP59.2m, with the available undrawn amount at GBP215.8m. The
facility is subject to two covenants, which are tested
semi-annually: net debt to EBITDA (leverage) and EBITA to net
finance charges. The financial covenants require the net debt to
EBITDA ratio to be less than 3.0x and interest cover to be greater
than 3.5x. Despite the significant economic and operational
challenges in the recent years, the Group has not sought to change
either of the two covenants. The Directors believe that the Group
is well placed to manage its business risks and, after making
enquiries including a review of forecasts and predictions, taking
account of reasonably possible changes in trading performances and
considering the existing borrowing facilities, including the
available liquidity, have a reasonable expectation that the Group
has adequate resources to continue in operational existence for at
least the next 18 months following the date of approval of the
financial statements, and no breaches of covenants are
expected.
The uncertainty as to the future impact on the Group of the
Covid-19 pandemic has been considered as part of the Group's
adoption of the going concern basis, taking into account the
experience during the recent years and the most recent
circumstances. The Group demonstrated resilient operational
capability and ability to continue supporting the customers, as
well as ability to raise additional financing and renew borrowing
facilities. As at 31 December 2021 and as at the date of approval
of these financial statements, all of the Group's manufacturing and
distribution facilities are operational and have resumed to
pre-pandemic levels of operating capacity. Across the Group, supply
chain is being proactively managed, as are operating costs and the
timing of capital expenditure and significant cash spends.
As part of the going concern assessment, the Board has also
considered a downside scenario that reflects a continuing level of
operational and commercial challenges experienced in the recent
years, which we consider to be severe but plausible. Included
within the severe yet plausible downside scenario are the potential
significant costs of strategic reviews which are ongoing and
possible impact of foreign exchange fluctuations. The directors
have also considered scenarios which incorporate the potential
outcomes of the strategic reviews and the potential impact of the
group's previously announced intentions to move to be a pure play
components business over time. The results of these scenario show
that there is sufficient liquidity in the business for a period of
at least 18 months from the date of approval of these financial
statements, and do not indicate any covenant breach during the test
period. The severe downside scenario includes assumptions for the
similar extent of operational disruptions as seen in 2021. Set
against this were mitigating actions including tight management of
capital expenditure, sales and general overhead, and working
capital. Overall level of liquidity (defined as available undrawn
borrowing facility plus cash and cash equivalent) at the end of
December 2021 was GBP352.1m, which was significantly higher than
the GBP287.0m as at 31 December 2020. Further information on the
Group's borrowing facilities, cash resources and other financial
instruments can be found in notes 11 and 17 to the financial
statements.
These downside scenarios indicate that the Group is more
sensitive to a decline in profit than a contraction in cash flows
given the importance of this metric to the Group's covenant
compliance. However, management have carried out reverse stress
tests which indicated that an overall reduction in adjusted
operating profit of approximately 60% from the 2021 result would be
required to result in a breach in covenants over the testing
period. This level of reduction is outside the range of outcomes
that the directors would consider plausible.
The severe but plausible scenario does not indicate a material
uncertainty which may cast significant doubt over the Company's and
Group's ability to continue as a going concern. Based on these the
Directors have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the
foreseeable future, and accordingly have adopted the going concern
basis in preparing the consolidated financial statements. This
disclosure has been prepared in accordance with the Financial
Reporting Council's UK Corporate Governance Code.
Changes in accounting policies
Software as a service ("SaaS") arrangements
During 2021, the Company has changed its accounting policy
related to the capitalisation of certain software costs; this
change follows the IFRS Interpretation Committee's agenda decision
published in April 2021 and relates to the capitalisation of costs
of configuring or customising application software under "Software
as a Service" ("SaaS") arrangements.
The Group's accounting policy has historically been to
capitalise costs attributable to the configuration and
customisation of SaaS arrangements as intangible assets on the
balance sheet, irrespective of whether the services were performed
by the SaaS supplier or third party. Following the adoption of the
above IFRIC agenda guidance, current SaaS arrangements were
identified and assessed to determine if the Group has control of
the software. For those arrangements where we do not have control
of the developed software, to the extent that the services were
performed by third parties and those services are distinct from the
SaaS arrangement, the Group derecognised the intangible asset
previously capitalised. Amounts paid to the supplier in advance of
the commencement of the service period, for configuration or
customisation, services which are not distinct from the SaaS
arrangement, are treated as a prepayment. Any costs incurred which
resulted in a software asset from which the Company has control,
i.e. the power to obtain the future economic benefits and to
restrict others' access to those benefits, continue to be
capitalised as an intangible asset.
The costs written off are presented within operating profit in
the consolidated income statement. Given the significant impact of
this policy change, in presenting the Group's adjusted operating
profit, configuration and customisation costs of significant SaaS
arrangements are presented as part of adjusting items (see note 3)
in order to present an alternative performance measure that
excludes the impact of such costs which, in the view of management,
represent investments in upgrading the Group's technological
capability including costs associated with current implementation
of a cloud-based enterprise resource planning ("ERP") system within
the Group. Configuration and customisation costs of non-significant
SaaS arrangements are included within adjusted operating
profit.
In addition, cash flows relating to the customisation and
configuration costs of SaaS arrangements are presented as part of
operating activities in the consolidated cash flow statement. In
relation to the Group's adjusted performance measures for cash
flows, the cash outlay relating to customisation and configuration
cost of major SaaS arrangements is presented as a cash outflow for
adjusting items, corresponding to the treatment of such costs with
regards to adjusted operating profit. This change impacts the
Group's adjusted operating cash flow and free cash flow.
This change in accounting policy led to adjustments amounting to
GBP16.4m and GBP4.4m reduction in the intangible assets recognised
in the 31 December 2020 and 1 January 2020 balance sheets
respectively, as well as GBP0.5m and GBP2.5m reduction in property,
plant and equipment. Customisation and configuration costs for SaaS
arrangements of GBP11.8m and GBP10.4m were charged to operating
expenses for 2021 and 2020 respectively that relate to major SaaS
arrangements and therefore are presented within adjusting items
with regards to the Group's adjusted operating profit.
Customisation and configuration costs for non-significant SaaS
arrangements were included within adjusted operating profit and
amounted to GBPnil and GBP0.1m for 2021 and 2020 respectively.
Accordingly, the prior period balance sheet and consolidated
income statement have been restated in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
The tables below show the impact of the change in accounting policy
on previously reported financial results and position.
i) Impact on the consolidated As previously Impact
balance sheet reported of restatement Restated
31 December 31 December
2020 2020
GBPm GBPm GBPm
------------------------------- -------------- ---------------- ------------
Property, plant and equipment 263.0 (0.5) 262.5
Intangible assets 518.8 (16.4) 502.4
Deferred tax assets 16.8 3.8 20.6
Other assets and liabilities (167.5) - (167.5)
Net assets 631.1 (13.1) 618.0
-------------------------------- -------------- ---------------- ------------
Retained earnings 313.9 (13.1) 300.8
Other equity balances 317.2 - 317.2
-------------------------------- -------------- ---------------- ------------
Total equity 631.1 (13.1) 618.0
-------------------------------- -------------- ---------------- ------------
As previously Impact
reported of restatement Restated
1 January 1 January
2020 2020
GBPm GBPm GBPm
------------------------------- -------------- ---------------- ----------
Property, plant and equipment 276.0 (2.5) 273.5
Intangible assets 486.3 (4.4) 481.9
Deferred tax 13.6 1.6 15.2
Other assets and liabilities (235.1) - (235.1)
Net assets 540.8 (5.3) 535.5
-------------------------------- -------------- ---------------- ----------
Retained earnings 312.4 (5.3) 307.1
Other equity balances 228.4 - 228.4
-------------------------------- -------------- ---------------- ----------
Total equity 540.8 (5.3) 535.5
-------------------------------- -------------- ---------------- ----------
ii) Impact on consolidated income
statement and statement of comprehensive As previously Impact
income reported of restatement Restated
2020 2020
GBPm GBPm GBPm
------------------------------------------- -------------- ---------------- ---------
Operating profit 21.7 (10.1) 11.6
------------------------------------------- ------------------ ---------------- ---------
Profit before tax 6.0 (10.1) (4.1)
Tax credit 0.3 2.3 2.6
------------------------------------------- ------------------ ---------------- ---------
Profit/(loss) for the year 6.3 (7.8) (1.5)
------------------------------------------- ------------------ ---------------- ---------
Attributable to owners of the
Company 4.5 (7.8) (3.3)
Non-controlling interest 1.8 - 1.8
------------------------------------------- ------------------ ---------------- ---------
Total comprehensive income/(expense)
for the year 6.3 (7.8) (1.5)
------------------------------------------- -------------- ---------------- ---------
Alternative performance measures - Profit
Operating profit 21.7 (10.1) 11.6
Adjusting items 17.7 10.4 28.1
Amortisation of acquired intangible
assets 22.6 - 22.6
------------------------------------- ----- ------- -----
Adjusted operating profit 62.0 0.3 62.3
------------------------------------- ----- ------- -----
iii) Impact on earnings per share As previously Impact
reported of restatement Restated
2020 2020
Basic earnings per share 1.7p (2.9)p (1.2)p
Diluted earnings per share 1.6p (2.8)p (1.2)p
------------------------------------- -------------- ---------------- ---------
Adjusted basic earnings per share 13.1p 0.1p 13.2p
Adjusted diluted earnings per share 13.0p 0.1p 13.1p
------------------------------------- -------------- ---------------- ---------
iv) Impact on consolidated statement As previously Impact
of cash flows reported of restatement Restated
2020 2020
GBPm GBPm GBPm
-------------------------------------- ------------------ ---------------- ---------
Net cash inflow from operating
activities 103.3 (10.5) 92.8
Net cash outflow from investing
activities (78.4) 10.5 (67.9)
Net cash inflow from financing
activities 40.4 - 40.4
Net increase in cash and cash
equivalents 65.3 - 65.3
--------------------------------------- ------------------ ---------------- ---------
Alternative performance measures
- Cash flows
Cash outflow in respect of adjusting
items (10.9) (10.4) (21.3)
Adjusted operating cash flow 76.3 10.4 86.7
Free cash flow 56.9 10.4 67.3
--------------------------------------- ------------------ ---------------- ---------
There was no impact on the overall level of cash and cash
equivalent.
Other pronouncements
The Group adopted the following new pronouncements during 2021,
which did not have a material impact on the Group's financial
statement:
-- Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS
7, IFRS 4 and IFRS 16) , which address the effects of the reform on
a company's financial statements that arise when an interest rate
benchmark used to calculate interest on a financial asset is
replaced with an alternative benchmark
-- Amendments to UK and Republic of Ireland accounting standards
as a result of the UK's exit from the European Union
-- Amendment to IFRS 16, which clarifies the extension of the
practical expedient where the lessee is not required to assess
whether eligible COVID-19 related rent concessions are lease
modifications.
-- Amendments to IAS 1, which address the presentation of
financial statements on classification of liabilities
-- Revised Conceptual Framework for Financial Reporting
(Amendments to IFRS 9, IAS 39 and IFRS 7)
The following standards and amendments issued before 31 December
2021 with an effective date on or after 1 January 2022 have not
been early adopted by the Group, they do not have a material impact
on the Group's financial statement:
-- Amendment to IAS 12 - deferred tax related to assets and
liabilities arising from a single transaction
-- A number of narrow-scope amendments to IFRS 3, IAS 16, IAS 37
and some annual improvements on IFRS 1, IFRS 9, IAS 41 and IFRS
16
2. Segment analysis
In accordance with IFRS 8, Essentra has determined its operating
segments based upon the information reported to the Group
Management Committee.
The operating segments are as follows:
Components is a global market leading manufacturer and
distributor of plastic injection moulded, vinyl dip moulded and
metal items.
Packaging is one of only two multi-continental suppliers of a
full secondary packaging range to the health and personal care
sectors.
Filters is the only global independent supplier of innovative
cigarette filters and related solutions to the tobacco
industry.
The adjusted operating profit/loss presented for each operating
segment includes the effect of allocation of certain functional
costs such as finance, human resources, legal and IT, as well as
costs relating to management of the divisions on an internal
management methodology.
2021
---------- --------- ------- ------------ ------------------
Central
Services
Components Packaging Filters Eliminations (2) Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---------- --------- ------- ------------ --------- -------
External revenue 301.7 362.4 295.6 - - 959.7
Total revenue 301.7 362.4 295.6 - - 959.7
Operating profit/(loss)
before intangible
amortisation
and adjusting
items 56.9 15.4 28.2 - (16.6) 83.9
Amortisation
of acquired
intangible assets (8.6) (13.8) - - - (22.4)
Adjusting items (0.4) 1.6 (3.3) - (9.7) (11.8)
------------------------ ---------- --------- ------- ------------ --------- -------
Operating profit/(loss) 47.9 3.2 24.9 - (26.3) 49.7
------------------------ ---------- --------- ------- ------------ --------- -------
Segment assets 172.4 219.9 199.7 - 21.8 613.8
Intangible assets 158.9 297.1 23.0 - 4.5 483.5
Unallocated
items(3) - - - - 184.7 184.7
------------------------ ---------- --------- ------- ------------ --------- -------
Total assets 331.3 517.0 222.7 - 211.0 1,282.0
------------------------ ---------- --------- ------- ------------ --------- -------
Segment liabilities 74.2 77.7 66.7 - 29.2 247.8
Unallocated
items(3) - - - - 405.3 405.3
------------------------ ---------- --------- ------- ------------ --------- -------
Total liabilities 74.2 77.7 66.7 - 434.5 653.1
------------------------ ---------- --------- ------- ------------ --------- -------
Other segment
items
Capital expenditure
(cash spend) 9.1 14.8 13.9 - 3.9 41.7
Depreciation
of property,
plant and equipment 7.2 13.8 10.5 - 5.1 36.6
Average number
of employees 2,708 3,476 1,715 - 287 8,186
------------------------ ---------- --------- ------- ------------ --------- -------
2020
---------- --------- ------- ------------ ------------ -------
Central
(restated)(1) Components Packaging Filters Eliminations Services(2) Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ ---------- --------- ------- ------------ ------------ -------
External revenue 255.0 363.2 278.3 - - 896.5
Total revenue 255.0 363.2 278.3 - - 896.5
Operating profit/(loss)
before intangible
amortisation
and adjusting
items 45.5 13.8 25.2 - (22.2) 62.3
Amortisation
of acquired
intangible assets (8.9) (13.6) (0.1) - - (22.6)
Adjusting items (9.3) (9.1) 0.9 - (10.6) (28.1)
------------------------ ---------- --------- ------- ------------ ------------ -------
Operating profit/(loss) 27.3 (8.9) 26.0 - (32.8) 11.6
------------------------ ---------- --------- ------- ------------ ------------ -------
Segment assets 149.1 218.5 186.6 - 22.5 576.7
Intangible assets 158.2 316.0 22.6 - 5.6 502.4
Unallocated
items (3) - - - - 173.0 173.0
------------------------ ---------- --------- ------- ------------ ------------ -------
Total assets 307.3 534.5 209.2 - 201.1 1,252.1
------------------------ ---------- --------- ------- ------------ ------------ -------
Segment liabilities 60.4 85.8 56.7 - 30.4 233.3
Unallocated
items (3) - - - - 400.8 400.8
------------------------ ---------- --------- ------- ------------ ------------ -------
Total liabilities 60.4 85.8 56.7 - 431.2 634.1
------------------------ ---------- --------- ------- ------------ ------------ -------
Other segment
items
Capital expenditure
(cash spend) 10.6 11.0 8.5 - 4.4 34.5
Depreciation
of property,
plant and equipment 7.3 13.4 10.7 - 5.9 37.3
Average number
of employees 2,355 3,498 1,674 - 276 7,803
------------------------ ---------- --------- ------- ------------ ------------ -------
(1) See change of accounting policies within note 1 for further
details of the prior year restatement.
(2) Central Services includes executive and non-executive management,
group finance, tax, treasury, legal, group assurance, human
resources, information technology, corporate development, investor
relations and other services provided centrally to support the
operating segments.
(3) The unallocated assets relate to income and deferred tax
assets, retirement benefit assets, derivatives, short-term investments,
loan receivables and cash and cash equivalents. The unallocated
liabilities relate to interest bearing loans and borrowings,
retirement benefit obligations, derivatives, deferred tax liabilities
and income tax payable. Intersegment transactions are carried
out on an arm's length basis.
Net finance expense of GBP16.5m (2020: GBP15.7m) and income
tax charge of GBP4.9m (2020: credit of GBP2.6m) cannot be meaningfully
allocated by segment.
No customer accounted for more than 10% of revenue in either
2021 or 2020. Analysed by destination, revenue to Europe & Africa
is GBP453.1m (2020: GBP443.2m), revenue to Americas is GBP296.3m
(2020: GBP277.2m) and revenue to Asia and Middle East is GBP210.3m
(2020: GBP176.1m). Revenue to the UK is GBP70.8m (2020: GBP81.5m),
with other significant countries being the USA with revenue
of GBP231.0m (2020: GBP210.4m), Ireland GBP51.2m (2020: GBP49.5m)
and Germany GBP47.8m (2020: GBP48.9m). Non-current assets in
the UK total GBP145.6m (2020: GBP167.9m), with the other significant
location being the USA with GBP309.8m (2020: GBP321.6m).
3. Adjusting items
=======================================================================================================
(restated)*
2021 2020
GBPm GBPm
---- ----------------------------------------------------------------------- --- ------ -----------
(Gains)/losses and transaction costs relating
to acquisitions and disposals of businesses(1) (3.4) 5.7
Acquisition integration and restructuring costs(2) 0.6 0.5
Customisation and configuration costs of significant
software as a service ("SaaS") arrangements (3) 11.8 10.4
Other(4) 2.8 11.5
---------------------------------------------------------------------------- ------ -----------
Adjusting items 11.8 28.1
---------------------------------------------------------------------------- ------ -----------
* See change of accounting policies within note
1 for further details of the prior year restatement.
Adjusting items are separately presented from other items by
virtue of their nature, size and/or incidence (considered for
each operating segment). They are identified separately in order
for the reader to obtain a clearer understanding of the underlying
results of the ongoing Group's operations, by excluding the impact
of items which, in management's view, do not form part of the
Group's underlying operating results, such as gains, losses or
costs arising from business acquisition and disposal activities,
significant restructuring and closure costs and other items which
are non-recurring or one-off in nature (such as the costs of
fundamental strategic reviews and reorganisation). Operating
profit before adjusting items and acquired intangible amortisation
is called adjusted operating profit, which forms the primary
basis of management's review and assessment of operational performance
of the Group's businesses.
(1) (Gains)/losses and transaction costs relating to acquisitions
and disposals of businesses are made up of a credit of GBP4.4m
in relation to the reversal of certain claim provisions in relation
to prior disposals, following the conclusion of negotiation with
the purchasers; a gain of GBP0.4m in relation to a prior acquisition
for claims made against the vendor. These are offset by acquisition-related
costs of GBP1.0m in relation to the acquisition of Jiangxi Hengzhu
Electrical Cabinet Lock Co., Ltd ("Hengzhu"); GBP0.2m of costs
in setting up the Filters China joint venture, and GBP0.2m related
to costs incurred in pursuit of acquisition targets.
In 2020, there was a GBP0.3m gain relating to a VAT refund on
the costs of a previous business disposal, GBP0.1m consisting
of acquisition costs in relation to Innovative Components, GBP0.1m
costs incurred in establishing the China JV and GBP1.2m costs
incurred in acquiring 3C! Packaging, Inc. ("3C!"). The remaining
GBP4.6m cost related to external professional costs associated
with certain development activities during the year.
(2) Acquisition integration and restructuring costs are made up of
GBP0.3m for the integration of the 3C! business, acquired in
2020, and GBP0.3m for the integration of Hengzhu into the existing
business.
In 2020, GBP0.3m of costs were incurred in the integration of
Nekicesa, acquired in 2019, and 3C! acquired in 2020, into the
existing business. The remaining GBP0.2m was incurred as a result
of restructuring activities within the Filters division as a
result of the integration of the newly established Filters China
joint venture in the existing business.
(3) In accordance with the revised accounting policy in relation
to the customisation and configuration costs of software as a
service ("SaaS") arrangements (see the note 1 within change of
accounting policies), costs of significant SaaS arrangements
which, in the view of management, represents investment in upgrading
the Group's technological capability, were expensed as adjusting
items. In the current the year, costs of GBP11.8m (2020: GBP10.4m)
were attributable to major SaaS projects and relate primarily
to the costs of implementing a new cloud-based enterprise resource
planning ("ERP") system within the Group.
(4) Other adjusting items in 2021 of GBP2.8m relate
to:
* GBP3.2m of professional and advisory fees in relation
to strategic reviews of the Group's Filters and
Packaging businesses as announced in October and
November 2021, in which the Group set out the
strategic goal of becoming a pure play global
Components business in the future. The Board of
Directors has decided to review the full range of
strategic options for the Filters and Packaging
businesses. It is anticipated that the strategic
reviews are likely to conclude in the second quarter
of 2022 at the earliest.
* GBP0.9m of advisory costs in relation to a strategic
review of the Group's operational structure and cost
profile, and certain redundancies in enabling
functions as part of the review.
* GBP4.3m profit on disposal of Moorestown property
following the restructuring activities in the
Packaging division initiated in 2020.
* GBP1.8m restructuring costs in the Packaging Division,
involving management restructuring and redundancies
at various European sites, offset by a credit from
the release of a property provision in relation to
prior year restructuring following a favourable
outcome of negotiation.
* GBP2.5m cost in relation to Filters restructuring,
including rationalisation of the division's R&D
facilities in the US and the UK and restructuring
activities to rationalise the Tear Tapes operations.
* GBP1.3m net credit relating to Components
restructuring, comprising GBP0.6m costs in relation
to restructuring activities within the Components
Europe and Americas businesses, offset by a GBP0.6m
credit relating to the reversal of certain prior
provisions, and a GBP1.3m credit relating to
adjustments on the carrying value of lease
right-of-use assets.
Other adjusting items in 2020 of GBP11.5m relate
to:
* GBP7.6m costs relating to restructuring activities
within the Packaging division. These relate to costs
incurred in the re-evaluation of the divisional
footprint, which resulted in the announced closure of
manufacturing facilities in Portsmouth, UK, and
Moorestown, USA, as well as additional workforce
rationalisation costs.
* GBP2.1m of cost in relation to restructuring
activities within the Components Europe business
following a review of the operational footprint of
the region. This comprises GBP0.6m costs incurred in
the transfer of manufacturing activities out of
Åstorp, Sweden into Barcelona and GBP1.5m
incurred
* on moving the warehousing capabilities of certain
central northern European (Bergeijk in the
Netherlands, Geretsried in Germany and Bratislava in
Slovakia) into the newly established North European
Distribution Hub in Nettetal, Germany.
* GBP2.5m of cost in relation to restructuring
activities within the Components Americas business
following a review of the operational footprint of
the region. The review has resulted in the
announcement of closures of manufacturing sites in
Schaumburg, Illinois, and Melbourne, Arkansas and the
transfer of production to the Components site to
Flippin, Arkansas, as well as the exit of three
smaller warehousing and distribution express sites in
Edison in New Jersey, Elgin in Illinois and Los
Angeles in California.
* GBP1.2m credit in relation to the review of the
compliance of certain group companies' export
activities with US laws, as previously disclosed in
the 2019 Annual Report. This comprises GBP0.2m of
external advisory and consultancy costs, offset by a
GBP1.4m release of excess provision held for
potential penalties in relation to this activity as
the Company does not anticipate any significant
enforcement action.
* GBP0.5m of external advisory costs in relation to a
strategic review of the Group's operational structure
and cost profile, following the significant
structural changes in recent years.
The tax effect of the adjusting items is a credit of GBP1.2m
(restated 2020: credit of GBP6.4m).
4. Net finance expense
2021 2020
GBPm GBPm
------
Finance income
Bank deposits 0.4 0.8
Other finance income* 2.2 0.8
Net interest on pension scheme assets 0.2 0.3
2.8 1.9
Finance expense
Interest on loans and overdrafts (11.3) (11.1)
Amortisation of bank facility fees (1.1) (0.7)
Other finance expense* (3.3) (2.4)
Net interest on pension scheme liabilities (0.8) (1.0)
Interest on leases (2.8) (2.4)
(19.3) (17.6)
Net finance expense (16.5) (15.7)
*Included within Other finance income is GBP2.2m (2020: GBP0.4m)
relating to exchange gains on cash, borrowings and leases.
Included within Other finance expense is GBP3.1m (2020: GBP1.9m)
relating to exchange losses on cash, borrowings and leases.
5. Earnings per share
(restated)*
2021 2020
GBPm GBPm
------
Earnings
Earnings attributable to equity holders of Essentra
plc 26.9 (3.3)
Adjustments
Amortisation of acquired intangible assets 22.4 22.6
Adjusting items 11.8 28.1
34.2 50.7
Tax relief on adjustments (6.3) (11.5)
Adjusted earnings 54.8 35.9
Weighted average number of shares
Basic weighted average ordinary shares outstanding
(million) 301.0 272.7
Dilutive effect of employee share option plans
(million) 1.3 2.0
Diluted weighted average ordinary shares (million) 302.3 274.7
Earnings per share (pence)
Basic earnings per share 8.9p (1.2)p
Adjustment 9.3p 14.4p
Adjusted basic earnings per share 18.2p 13.2p
Diluted earnings per share 8.9p (1.2)p
Adjusted diluted earnings per share 18.1p 13.1p
*See change of accounting policies within note
1 for further details of the prior year restatement.
Adjusted earnings per share is provided to reflect the underlying
earnings performance of Essentra.
The basic weighted average number of ordinary shares in issue
excludes shares held in treasury and shares held by an employee
benefit trust.
6. Property, plant and equipment
2021
Fixtures,
Land Plant fittings
and buildings and machinery and equipment Total
GBPm GBPm GBPm GBPm
Cost
Beginning of year 84.8 387.2 78.4 550.4
Acquisitions
(note 12) (0.5) 2.4 0.1 2.0
Additions 2.1 31.8 4.9 38.8
Disposals (4.2) (20.6) (3.2) (28.0)
Currency
translation (2.8) (14.3) (1.3) (18.4)
End of year 79.4 386.5 78.9 544.8
Accumulated
depreciation and
impairment
Beginning of year 17.2 226.0 44.7 287.9
Charge in period 3.2 25.3 8.1 36.6
Disposals (0.8) (19.2) (3.2) (23.2)
Impairment 0.2 0.5 - 0.7
Currency
translation (1.8) (8.9) (0.8) (11.5)
End of year 18.0 223.7 48.8 290.5
Net book value at
end of year 61.4 162.8 30.1 254.3
(restated)*
2020
Fixtures,
Land Plant fittings
and buildings and machinery and equipment Total
GBPm GBPm GBPm GBPm
Cost
Beginning of year 81.9 384.8 76.3 543.0
Acquisitions 1.5 4.9 0.3 6.7
Additions 2.2 18.9 6.8 27.9
Disposals (0.7) (14.5) (4.2) (19.4)
Currency
translation (0.1) (6.9) (0.8) (7.8)
End of year 84.8 387.2 78.4 550.4
Accumulated
depreciation and
impairment
Beginning of year 13.4 215.4 40.7 269.5
Charge in period 3.7 25.5 8.1 37.3
Disposals (0.5) (14.2) (4.1) (18.8)
Impairment 0.2 1.7 0.1 2.0
Currency
translation 0.4 (2.4) (0.1) (2.1)
End of year 17.2 226.0 44.7 287.9
Net book value at
end of year 67.6 161.2 33.7 262.5
*See change of accounting policies within note 1 for further details
of the prior year restatement.
Included within land and buildings, plant and machinery and fixtures,
fittings and equipment are assets in the course of construction
of GBP1.1m (2020 restated : GBP1.8m) which were not depreciated
during the year.
Contractual commitments to purchase property, plant and equipment
amounted to GBP0.4m at 31 December 2021 (2020: GBP1.4m).
Property, plant and equipment with a net book value of GBP1.1m (2020:
GBP2.5m) was impaired by GBP1.1m (2020: GBP2.0m) to a recoverable
amount of GBPnil (2020: GBP0.5m), which represented fair value less
cost to sell. GBP0.8m (2020: GBP1.9m) of this impairment relates
to restructuring projects and has been charged to adjusting items.
Furthermore, GBP0.4m (2020: GBPnil) has been written back to a recoverable
amount of GBP0.4m (2020: GBPnil) and this has been charged to adjusting
items.
7. Intangible assets
2021
Other
Customer intangible
Goodwill relationships assets Total
GBPm GBPm GBPm GBPm
Cost
Beginning of year 356.0 424.4 23.1 803.5
Acquisitions
(note 12) 4.5 8.6 - 13.1
Additions - - 3.2 3.2
Currency
translation (5.6) (9.8) 0.1 (15.3)
End of year 354.9 423.2 26.4 804.5
Amortisation and
impairment
Beginning of year 27.8 264.3 9.0 301.1
Charge for the
year - 22.2 2.8 25.0
Impairment - - 0.3 0.3
Currency
translation 0.1 (5.6) 0.1 (5.4)
End of year 27.9 280.9 12.2 321.0
Net book value at
end of year 327.0 142.3 14.2 483.5
(restated)* (restated)*
Other
Customer intangible 2020
Goodwill relationships assets Total
GBPm GBPm GBPm GBPm
Cost
Beginning of year 339.0 402.1 19.3 760.4
Acquisitions 20.9 25.4 - 46.3
Additions - - 3.7 3.7
Currency
translation (3.9) (3.1) 0.1 (6.9)
End of year 356.0 424.4 23.1 803.5
Amortisation and
impairment
Beginning of year
(restated)* 28.3 243.8 6.4 278.5
Charge for the
year (restated)* - 22.3 2.8 25.1
Currency
translation (0.5) (1.8) (0.2) (2.5)
End of year 27.8 264.3 9.0 301.1
Net book value at
end of year 328.2 160.1 14.1 502.4
* See change of accounting policies within note
1 for further details of the prior year
restatement..
Included within other intangible assets are assets in the course
of construction of GBP0.9m (2020 restated: GBP1.1m) which were
not amortised during the year.
Salary costs of GBP0.7m (2020: GBP1.1m) were capitalised as part
of other intangible assets during the year.
Other intangible assets principally comprise trade names acquired
with Reid Supply, developed technology acquired with Richco, order
backlog, software development and e-Commerce development costs.
The e-Commerce development and software development costs were
not acquired through a business combination, and their amortisation
is included within operating profit before amortisation of acquired
intangibles and adjusting items. Amortisation charged on other
intangible assets is included within operating profit before amortisation
of acquired intangibles and adjusting items.
The weighted average remaining useful lives of customer relationships
and other intangible assets at the end of the year were 9.0 years
and 5.2 years (2020: 8.1 years and 5.8 years) respectively.
Essentra tests intangible assets annually for impairment, or more
frequently if there are indications of impairment. A discounted
cash flow analysis is computed to compare the discounted estimated
future operating cash flows to the net carrying value of the goodwill
and other intangible and tangible assets for each cash generating
unit or group of cash generating units as appropriate.
Goodwill is allocated to groups of cash generating units, being
the operating segments, as follows:
Goodwill
2021 2020
GBPm GBPm
Components 96.8 95.3
Packaging 208.5 211.2
Filters 21.7 21.7
327.0 328.2
Intangible assets, apart from goodwill, are allocated to the businesses
to which they relate as shown below:
Customer relationships
and other intangible
assets
2021 2020
Business Operating segment GBPm GBPm
Components -
Businesses of
former
Moss and Skiffy Components 8.8 10.3
Components -
Businesses of
former
Richco Components 15.3 18.4
Components -
Business of
former
Mesan Components 1.4 3.0
Components -
Business of
former
Abric Components 6.7 8.1
Components -
Business of
former
Micro Plastics Components 3.7 4.0
Components -
Industrial
Supply Components 1.6 2.5
Components -
Innovative
Components Components 6.6 7.2
Components -
Hengzhu Components 8.8 -
Components -
e-Commerce
development
costs Components 6.3 5.6
Components -
other
businesses Components 3.0 3.9
Packaging -
Americas Packaging 45.5 50.3
Packaging - Asia Packaging 1.1 1.3
Packaging -
Europe Packaging 38.2 49.0
Packaging -
Nekicesa Packaging 3.7 4.2
Filters Filters 1.3 0.9
Not allocated to
divisions -
software and
development
costs Central 4.5 5.5
156.5 174.2
At 31 December 2021, management has performed an impairment review
of the assets in each division. Following the impairment assessment,
no impairment loss was recognised in 2021.
The impairment assessment for intangible assets (excluding goodwill)
and property, plant and equipment is performed on the cash generating
units within the divisions. The cash generating units are primarily
the manufacturing sites. Goodwill is tested at the divisional
level, which is the level that management monitors goodwill at.
The recoverable amount is estimated on the basis of value in use,
i.e. discounted cash flow projection expected to be generated
by the group of cash generating units. For assets in the cash
generating units assessed to be impaired, their fair value less
costs to sell is also considered in determining the impairment
loss to be recognised, if any. In these cases, the fair value
less costs to sell is based on estimated market prices reflecting
the age and condition of the asset.
The impairment tests for goodwill and intangible assets are based
on the Board approved business plan (the "Plan"). Cash flow projections
are over five years using the approved annual budget for the first
year and subsequent years based on the Group and Divisional Strategic
Plan. The Group's impairment test incorporates the following assumptions:
* The key assumptions in the cash flow projections for
the Plan are the revenue growth and operating margin
for each division. Operating margin is primarily
based on historical levels achieved, adjusted by
targets set for revenue expansion and cost control
and reduction for each individual division within the
Plan period. The key assumptions underlying the
estimation of cash flow projections for value in use
are operating profit margin and revenue growth
assumptions. The values assigned to these assumptions
represent management's assessment of market condition
and scope for cost and profitability improvement,
taking into account realisable synergies resulting
from integration activities. The compound annual
revenue growth rate assumption across all three
divisions for the next five years ranges from 5.3% to
8.5%. The average operating profit margin assumption
for the next five years included within the Packaging
division impairment assessment ranges from 6.9% to
10.9%. In respect of Components and Filters, the
combined average operating profit margin over the
five year forecast period is assumed to improve by
300 bps from 2021
* In relation to the test for the Components and
Filters divisions, cash flows beyond the first year
of the model are based on the approved annual budget
with growth rates specific to each business applied
to revenue of up to 5.8%
* The estimated cash flows are discounted using a
pre-tax discount rate based upon Essentra's estimated
post-tax weighted average cost of capital of 6.5%
(2020: 7.3%). The specific pre-tax discount rates
applied for each group of cash generating units to
which significant goodwill is allocated are as
follows: 7.8% for Packaging, 8.4% for Components and
7.7% for Filters (2020: 8.8% for Packaging, 9.4% for
Components and 9.7% for Filters)
* In relation to the test for the Packaging division,
management carried out a detailed assessment of the
growth and profit margin assumptions for each of the
next four years after the Plan period, and applied a
terminal growth rate of 1.8% p.a. (2020: 1.5%)
subsequently. The growth and profit margin
assumptions are based on management's assessment of
market condition and scope for cost and profitability
improvement, taking into account realisable synergies
following the recent integration and reorganisation
activities. The operating profit assumptions include
an estimate for the impact of the key risks but not
the opportunities from climate change and includes
costs and risks related to meeting environmental,
social and governance targets
The Packaging division impairment test has historically been the
most sensitive to changes in assumptions, therefore management
have performed additional sensitivity analysis to assess the robustness
of the current headroom the recoverable amount has above the carrying
amount. The following change to key assumptions will cause the
carrying amount to exceed the recoverable amount in the Packaging
division:
* An increase in discount rate of 380 basis points
* A reduction of 600 basis points in the operating
profit margin in the terminal year
* A reduction of 510 basis points in the terminal
growth rate
Management considered the following reasonably possible changes
in the key assumptions, and the associated impact on the impairment
assessment, in relation to the Packaging division:
* A 1.0% increase in discount rate would reduce
headroom to GBP229.3m
* A 1.0% reduction in the terminal growth rate would
reduce headroom to GBP251.2m
* A 1.5% reduction in each year's growth rate would
reduce headroom to GBP337.5m
* A 2.0% reduction in operating profit margin in the
terminal year would reduce headroom to GBP253.7m
8. Lease right-of-use assets
2021
Fixtures,
Land and Plant and fittings
buildings machinery and equipment Total
GBPm GBPm GBPm GBPm
Cost
Beginning of year 102.0 13.9 0.4 116.3
Additions, extensions and surrenders 8.2 1.8 - 10.0
Terminations (6.3) (1.7) - (8.0)
Acquisitions (note 12) 2.0 - - 2.0
Currency translation (5.4) (0.6) - (6.0)
End of year 100.5 13.4 0.4 114.3
Accumulated depreciation
Beginning of year 57.7 5.7 0.2 63.6
Charge for the year 9.0 2.9 0.1 12.0
Terminations (6.0) (1.3) - (7.3)
Impairment writeback (1.1) - - (1.1)
Currency translation (3.0) (0.3) - (3.3)
End of year 56.6 7.0 0.3 63.9
Net book value at end of year 43.9 6.4 0.1 50.4
2020
Fixtures,
Land and Plant and fittings
buildings machinery and equipment Total
GBPm GBPm GBPm GBPm
Cost
Beginning of year 84.4 14.6 0.2 99.2
Additions, extensions and surrenders 19.5 2.2 0.2 21.9
Terminations (2.5) (2.9) - (5.4)
Acquisitions 2.5 - - 2.5
Currency translation (1.9) - - (1.9)
End of year 102.0 13.9 0.4 116.3
Accumulated depreciation
Beginning of year 50.2 5.5 0.1 55.8
Charge for the year 8.8 3.1 0.1 12.0
Terminations (2.3) (2.9) - (5.2)
Impairment 1.7 - - 1.7
Currency translation (0.7) - - (0.7)
End of year 57.7 5.7 0.2 63.6
Net book value at end of year 44.3 8.2 0.2 52.7
During the year there was an impairment write back of GBP1.1m (2020:
impairment of GBP1.7m). This GBP1.1m impairment write back is disclosed
in adjusting items section of note 3. The assets were uplifted
to their recoverable amount, which represented their fair value.
Contractual commitments to lease property, plant and equipment
amounted to GBPnil at 31 December 2021 (2020: GBP4.0m).
For the year ended 31 December 2021 the weighted average lessee's
incremental borrowing rate applied to the lease liabilities was
5.2% (2020: 5.1%).
9. Employee benefits
Post-employment benefits
Pension costs of the defined benefit schemes are assessed in
accordance with the advice of independent professionally qualified
actuaries. Full triennial actuarial valuations were carried out on
the principal European defined benefit schemes as at 5 April 2021
and annual actuarial valuations are performed on the principal US
defined benefit schemes. The assets and liabilities of the defined
benefit schemes have been updated to the balance sheet date from
the most recently completed actuarial valuations taking account of
the investment returns achieved by the schemes and the level of
contributions.
The amounts included in the consolidated financial statements
are as follows:
2021 2020
GBPm GBPm
Amounts expensed against operating profit
Defined contribution schemes 6.9 7.2
Defined benefit schemes - current service cost 1.5 1.6
Defined benefit schemes - curtailment gain (0.2) (0.4)
Other post-employment obligations 0.4 0.5
Total operating expense 8.6 8.9
Amounts included as finance (income)/expense
Net interest on defined benefit scheme assets
(note 4) (0.2) (0.3)
Net interest on defined benefit scheme liabilities
(note 4) 0.8 1.0
Net finance expense 0.6 0.7
Amounts recognised in the consolidated statement
of comprehensive income
Return on defined benefit scheme assets excluding
amounts in net finance income 0.6 (32.4)
Impact of changes in assumptions and experience
to the present value of defined benefit scheme
liabilities (29.1) 39.1
Remeasurement of defined benefit schemes (28.5) 6.7
Curtailment gain of GBPnil (2020: GBP0.4m) in relation to
defined benefit schemes has been included within adjusting items
(see note 3).
During 2015, the principal defined benefit pension schemes in
the UK and the US were closed to future accrual. Following the
closure of the Group's principal defined benefit pension schemes to
future accruals, the schemes are funded by the Group's subsidiaries
and employees are not required to make any further contribution.
The funding of these schemes is based on separate actuarial
valuations for funding purposes for which the assumptions may
differ from those used in the valuation for IAS 19 purposes.
The principal assumptions used by the independent qualified
actuaries for the purposes of IAS 19 are as follows:
2021 2020
Europe US Europe US
Increase in salaries (pre-2010)(1) n/a n/a n/a n/a
Increase in salaries (post-2010)(1) n/a n/a n/a n/a
Increase in pensions(1)
at RPI capped at 5% 3.1% n/a 2.70% n/a
at CPI capped at 5% 2.7% n/a 2.20% n/a
at CPI minimum 3%, capped
at 5% 3.3% n/a 3.10% n/a
at CPI capped at 2.5% 2.2% n/a 1.90% n/a
Discount rate 1.9% 2.8% 1.30% 2.45%
Inflation rate - RPI 3.2% n/a 2.70% n/a
Inflation rate - CPI 2.7% n/a 2.20% n/a
(1) For service prior to April 2010, pension at retirement is
linked to salary at retirement. For service after April 2010,
pension is linked to salary at April 2010 with annual increases
capped at 3%.
Due to the timescale covered, the assumptions applied may not be
borne out in practice.
The life expectancy assumptions (in number of years) used to
estimate defined benefit obligations at the year-end are as
follows:
2021 2020
Europe US Europe US
Male retiring today at age
65 22.0 20.5 22.5 20.4
Female retiring today at age
65 24.4 22.5 24.3 22.4
Male retiring in 20 years at
age 65 23.2 22.0 23.8 21.9
Female retiring in 20 years
at age 65 25.8 23.9 25.7 23.8
Movement in fair value of post-employment obligations during the
year
2021 2020
Defined Defined Defined Defined
benefit benefit benefit benefit
pension pension pension pension
scheme scheme scheme scheme
assets liabilities Other Total assets liabilities Other Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Beginning of year 312.0 (332.0) (3.9) (23.9) 287.8 (301.2) (4.0) (17.4)
Current service
cost and administrative
expense (1.5) - (0.3) (1.8) (1.6) - (0.5) (2.1)
Past service cost - - - - - - - -
Employer contributions 6.3 0.1 - 6.4 1.1 0.1 - 1.2
Return on plan
assets excluding
amounts in net
finance income (0.6) - - (0.6) 32.4 - - 32.4
Actuarial gain/(losses)
arising from change
in financial assumptions - 18.5 0.3 18.8 - (39.0) 0.2 (38.8)
Actuarial gains
arising from change
in demographic
assumptions - 4.5 - 4.5 - 1.9 - 1.9
Actuarial gains/(losses)
arising from experience
adjustment - 5.8 - 5.8 - (2.2) - (2.2)
Finance income/(expense) 4.7 (5.1) (0.2) (0.6) 6.4 (6.9) (0.2) (0.7)
Benefits paid (16.1) 16.1 - - (12.0) 12.0 - -
Curtailments - - 0.2 0.2 - - 0.4 0.4
Currency translation 1.1 (1.0) 0.1 0.2 (2.1) 3.3 0.2 1.4
End of year 305.9 (293.1) (3.8) 9.0 312.0 (332.0) (3.9) (23.9)
Sensitivity
For the significant assumptions used in determining defined
benefit costs and liabilities, the following sensitivity analysis
gives the estimate of the impact on the measurement of the scheme
liabilities as at 31 December 2021.
(Increase) / decrease in
schemes net liabilities
Europe US Total
GBPm GBPm GBPm
0.5% decrease in the discount rate (20.2) (4.8) (25.0)
1.0% increase in the rate of inflation (15.7) n/a (15.7)
1.0% increase in rate of salary/pension
increases n/a n/a n/a
1 year increase in life expectancy (9.4) (0.3) (9.7)
1 year decrease in life expectancy 9.4 0.3 9.7
0.5% increase in the discount rate 17.7 4.4 22.1
1.0% decrease in rate of salary/pension
increases n/a n/a n/a
1.0% decrease in the rate of inflation 15.3 n/a 15.3
10. Issued share capital
2021 2020
GBPm GBPm
--- ---------- ---------
Issued, authorised and fully paid ordinary
shares of 25p (2020: 25p) each 75.6 75.6
Number of ordinary shares in issue
Beginning of year 302,590,708 264,129,170
Issue of shares during the year - 38,461,538
End of year 302,590,708 302,590,708
The issue of share capital during 2020 was in relation to a placement
offering of 38,461,538 new shares with par value of 25p issued at
260p per share.
At 31 December 2021, the Company held 905,157 (2020: 908,650) of
its own shares with a nominal value of GBP0.2m (2020: GBP0.2m) in
treasury. This represents 0.3% (2020: 0.3%) of the number of ordinary
shares in issue.
11. Analysis of net debt
1 Jan Cash Business Lease Exchange Non-cash 31 Dec
2021 flow combinations additions movements movements 2021
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cash at bank
and
in hand 121.5 4.2 - - (1.8) - 123.9
Short-term
deposits
and
investments 14.3 (1.7) - - (0.2) - 12.4
Cash and cash
equivalents
in the
statement
of cash flows 135.8 2.5 - - (2.0) - 136.3
Debt due after
one year (285.2) (24.5) - - (2.5) (1.1) (313.3)
Lease
liabilities
due within one
year (11.9) 15.6 (0.3) (2.0) 0.3 (13.3) (11.6)
Lease
liabilities
due after one
year (49.1) - (1.7) (8.0) 1.2 11.5 (46.1)
Debt from
financing
activities (346.2) (8.9) (2.0) (10.0) (1.0) (2.9) (371.0)
Net debt (210.4) (6.4) (2.0) (10.0) (3.0) (2.9) (234.7)
The non-cash movements in debt due after one year represent the amortisation
of prepaid facility fees GBP1.1m. The net non-cash movement in lease
liabilities represents lease liability surrender of GBP1.0m due to
renegotiated lease terms, offset by interest on leases GBP2.8m. The
net cash outflow relating to lease liabilities for low value, short-term
and variable lease payments was GBP0.3m (see note 8). During the
year GBP10.5m of lease liabilities moved from due after one year
to due within one year.
1 Jan Cash Business Lease Exchange Non-cash 31 Dec
2020 flow combinations additions movements movements 2020
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Cash at bank
and
in hand 62.6 57.7 0.7 - 0.5 - 121.5
Short-term
deposits
and
investments 7.8 6.9 - - (0.4) - 14.3
Cash and cash
equivalents
in the
statement
of cash flows 70.4 64.6 0.7 - 0.1 - 135.8
Debt due within
one year (60.7) 68.1 (4.1) - (3.3) - -
Debt due after
one year (249.0) (34.0) - - (1.2) (1.0) (285.2)
Lease
liabilities
due within one
year (11.4) 14.3 (0.2) (2.6) - (12.0) (11.9)
Lease
liabilities
due after one
year (39.3) - (2.3) (19.3) - 11.8 (49.1)
Debt from
financing
activities (360.4) 48.4 (6.6) (21.9) (4.5) (1.2) (346.2)
Other financial
assets 5.6 (5.6) - - - - -
Net debt (284.4) 107.4 (5.9) (21.9) (4.4) (1.2) (210.4)
The non-cash movements in debt due after one year represent the amortisation
of prepaid facility fees GBP0.7m. The net non-cash movement in lease
liabilities represents lease liability reduction of GBP2.2m due to
renegotiated lease terms, offset by interest on leases GBP2.4m. The
net cash outflow relating to lease liabilities for low value, short-term
and variable lease payments was GBP0.3m. During the year GBP9.6m
of lease liabilities moved from due after one year to due within
one year.
Included within other financial assets at 1 January 2020 was GBP5.0m
of loan receivables arising from the disposal of Porous Technologies
and GBP0.6m of short-term liquid investments.
12. Acquisitions and disposals
Acquisition of 3C!
On 17 September 2020, Essentra acquired 100% of the share capital
of 3C! Packaging, Inc. ("3C!"). 3C!, headquartered in North Carolina,
USA, is a leading designer and manufacturer of folding cartons,
printed literature, foil and flexible packaging and labels focused
on the pharmaceuticals and healthcare sectors. 3C! is reported under
the Packaging division.
During 2021, Essentra reassessed the fair value adjustments and
made changes to the carrying amount of certain property, plant and
equipment and deferred tax balances. The net impact on goodwill
is an increase of GBP0.6m.
In addition, during 2021 Essentra paid out the remaining deferred
consideration on the acquisition amounting to GBP0.1m.
Establishment of joint venture China Tobacco Essentra (Xiamen) Filters
Co., Ltd.
On 2 April 2020 Essentra plc confirmed that it has completed the
establishment of the new joint venture company, China Tobacco Essentra
(Xiamen) Filters Co., Ltd. Essentra's capital contribution into
this business is US$10.3m, to be paid in three equal instalments
over 18 months following its establishment. As at 31 December 2021,
Essentra has paid all three of these instalments. During 2021, proceeds
from capital contributions from non-controlling interests into this
joint venture company were GBP3.1m.
Acquisition of Innovative Components
On 26th June 2019, Essentra acquired 100% of the share capital of
Innovative Components Inc. and Componentes Innovadores Limitada
(together "Innovative Components"). During 2021, Essentra paid out
the remaining deferred consideration relating to the acquisition
of Innovative Components, amounting to GBP1.8m.
Acquisition of Micro Plastics
On 12 December 2017 Essentra acquired 100% of the share capital
of Micro Plastics Inc. The transaction was settled with cash consideration
of GBP19.7m and deferred consideration of GBP3.7m. During 2021,
GBP1.2m of deferred consideration was paid out to the vendor, with
the remainder to be paid in the future.
Acquisition of Hengzhu
On 2 August 2021, Essentra acquired the majority of the share capital
of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd ("Hengzhu"),
an access hardware manufacturer and distributor in China. Essentra
initially acquired 73% of the business for Yen103m (approximately
GBP11.8m), with the remaining 27% stake subject to put and call
options whereby Essentra may acquire the minority shareholding for
consideration determined by the future operating performance of
the business to 31 December 2022 and capped at a maximum of Yen37.5m
(approximately GBP4.2m) and are exercisable 18 months after the
acquisition. The capped consideration has not changed since acquisition.
The remaining 27% stake does not confer any shareholder right (including
voting right, entitlement to dividends and right to transfer to
other parties) to the vendor shareholder. Therefore it is concluded
that the amount payable under the put option in substance represents
deferred consideration and is accounted for as a financial liability.
No non-controlling interest is recognised in respect of this acquisition.
On acquisition, the assets and liabilities of the business acquired
were adjusted to reflect their fair value to Essentra. Due to the
timing of the transaction, the purchase price allocations and fair
value adjustments are provisional and subject to finalisation for
up to one year from the date of acquisition.
Had the acquisition been completed on 1 January 2021, the contribution
to the Group's revenue and operating profit would have been GBP17.4m
and GBP0.7m higher respectively. Included within the consolidated
accounts are GBP7.2m of revenue and GBPnil of operating profit from
Hengzhu since acquisition.
Included within adjusting items in the consolidated income statement
are GBP1.3m of costs incurred in acquiring the business.
The fair value of assets and liabilities acquired as part of the
acquisition of Hengzhu are detailed below:
Hengzhu
GBPm
Intangible assets 8.6
Property, plant and
equipment 2.2
Lease right-of-use
asset 2.0
Inventories 2.2
Trade and other
receivables 0.2
Trade and other
payables (1.4)
Lease liabilities (2.0)
--- ---------
11.8
Goodwill 3.9
--- ---------
Consideration 15.7
Satisfied by:
Cash consideration 11.5
Deferred consideration 4.2
Cash consideration 11.5
--- ---------
Cash outflow in respect
of the
acquisition 11.5
--- ---------
Goodwill represents the expected operating and financial synergies,
and the value of an assembled workforce. Goodwill is not deductible
for tax purposes.
13. Dividends
Per share Total
2021 2020 2021 2020
p p GBPm GBPm
2020 final: paid 1 June 2021 3.3 10.0
2021 interim: paid 29 October
2021 2.0 6.0
2021 proposed final: payable
1 June 2022 4.0 12.1
14. Related parties
Other than the compensation of key management and the capital
injection into the Filters joint venture entity China Tobacco
Essentra (Xiamen) Filters Co., Ltd. (note 12), Essentra has not
entered into any material transactions with related parties since
the last Annual Report.
ITC Essentra Limited is 50% owned by the Group. The results were
fully consolidated within the Group's financial statements as it is
deemed Essentra has control by virtue of having control of the
board. As at 31 December 2021 the entity had gross assets of
GBP27.6m (2020: GBP24.3m) and gross liabilities of GBP9.9m (2020:
GBP7.4m). Operating profit for the year amounted to GBP5.0m (2020:
GBP4.8m) and movement in cash for the year amounted to GBP0.8m
(2020: GBP1.7m).
China Tobacco Essentra (Xiamen) Filters Co., Ltd is 49% owned by
the Group. The results were fully consolidated within the Group's
financial statements as it is deemed Essentra has control by virtue
of having control of the board. As at 31 December 2021 the entity
had gross assets of GBP20.3m (2020: GBP9.9m) and gross liabilities
of GBP5.4m (2020: GBPnil). Operating loss for the year amounted to
GBP0.8m (2020: GBP0.1m) and movement in cash for the year amounted
to GBP0.2m (2020: GBP9.9m).
15. Adjusted measures
Management reviews the adjusted operating profit and operating cash
flow as measures of the performance of the business. Adjusted operating
profit is stated before amortisation of acquired intangible assets
and adjusting items which are considered not relevant to measuring
the underlying performance of the business.
(restated)*
2021 2020
Note GBPm GBPm
Operating profit 49.7 11.6
Amortisation of acquired intangible assets 22.4 22.6
Adjusting items 3 11.8 28.1
-----------
Adjusted operating profit 83.9 62.3
Finance income 4 2.8 1.9
Finance expenses 4 (19.3) (17.6)
------ -----------
Adjusted profit before income tax 67.4 46.6
Tax on adjusted profit (11.2) (8.9)
------ -----------
Adjusted profit 56.2 37.7
------ -----------
Attributable to:
Equity holders of Essentra plc 54.8 35.9
Non-controlling interests 1.4 1.8
------ -----------
Adjusted profit 56.2 37.7
------ -----------
Basic adjusted earnings per share 5 18.2p 13.2p
-----------
Diluted adjusted earnings per share 5 18.1p 13.1p
-----------
Adjusted operating cash flow is presented to exclude the impact
of tax, adjusting items, interest and other items not impacting
operating profit. Net capital expenditure is included in this measure
as management regards investment in operational assets (tangible
and intangible) as integral to the underlying cash generation capability
of the Company, except amount relating to adjusting items.
(restated)*
2021 2020
GBPm GBPm
Adjusted operating profit 83.9 62.3
Depreciation of property, plant and equipment 36.6 37.3
Lease right-of-use asset depreciation 12.0 12.0
Amortisation of non-acquired intangible assets 2.6 2.5
Share option expense 0.8 1.2
Other non-cash items(1) (0.2) (0.6)
Working capital movements (29.9) 6.2
Net capital expenditure(2) (41.3) (34.2)
------ -----------
Adjusted operating cash flow 64.5 86.7
------ -----------
Reconciliation of cash flows from adjusting
items:
Adjusting items as shown on income statement 11.8 28.1
Non-cash credit/(charge) in adjusting items 6.6 (9.8)
Cash outflow on adjusting items recognised
in the year 18.4 18.3
Utilisation of prior period and acquired accruals
and provisions 7.2 3.0
------ -----------
Cash outflow from adjusting items 25.6 21.3
------ -----------
(1) Other non-cash items comprise impairment of fixed assets GBP0.5m
(2020: GBP0.1m), outflow from hedging activities and other movements
GBP0.5m (2020: inflow of GBP1.3m), less movement in provisions
GBP0.2m (2020: GBPnil) and profit on lease termination GBPnil (2020:
GBP2.0m).
(2) Net capital expenditure within adjusted operating cash flow
excludes GBP8.5m (2020: GBPnil) of property, plant and equipment
disposal proceeds realised during site closures which relate to
adjusting items.
16. Post balance sheet events
The Group has assessed the impact of the current conflict
between Russia and Ukraine. Essentra has no significant operations
or infrastructure in Russia or Ukraine and no employees in either
country. Sales to these markets are around 2% of total revenue. All
sales to Russia have been suspended and will continue to be
suspended until further notice. Essentra has made a donation of
GBP100,000 to the Disasters Emergency Committee ("DEC") Ukraine
Appeal.
17. Financial risk management
Total financial assets and liabilities
The table below sets out Essentra's accounting categories and
fair value for each class of financial asset and liability.
2021 2020
Total Total
Fair Amortised carrying Fair Amortised carrying
value cost value value cost value
GBPm GBPm GBPm GBPm GBPm GBPm
Trade and other
receivables (except
those subject to
factoring) - 169.9 169.9 - 151.8 151.8
Cash and cash equivalents - 136.3 136.3 - 135.8 135.8
Other financial
assets - - - - - -
Interest bearing
loans and borrowings - (313.3) (313.3) - (285.2) (285.2)
Lease liabilities - (57.7) (57.7) - (61.0) (61.0)
Trade and other
payables - (167.7) (167.7) - (143.1) (143.1)
Level 2 of fair
value hierarchy
Derivative assets 1.2 - 1.2 0.3 - 0.3
Derivative liabilities (0.1) - (0.1) (0.5) - (0.5)
Level 3 of fair
value hierarchy
Trade and other
receivables subject
to factoring 4.0 - 4.0 - - -
Trade and other
payables - - - (3.2) - (3.2)
Other non-current
financial liabilities (5.6) - (5.6) (1.2) - (1.2)
(4.5) (228.5) (233.0) (4.6) (201.7) (206.3)
Total trade and other receivables carried at GBP175.2m (2020:
GBP154.2m) include prepayments of GBP6.5m (2020: GBP7.1m) which are
not financial assets and are therefore excluded from the above
analysis. Fair values of forward foreign exchange contracts and
cross currency swaps have been calculated at year end forward
exchange rates compared to contracted rates. These are determined
to be level 2 in the fair value hierarchy. Trade receivables
subject to factoring are measured at fair value through other
comprehensive income. Their fair value is determined based on
management's expectation of recoverable amount, taking into account
expected credit losses and, if material, time value of money.
Included within trade and other payables and other non-current
financial liabilities, which is classified as level 3 in the fair
value hierarchy, is the deferred consideration of GBP5.6m relating
to the acquisitions of Micro Plastics and Hengzhu (2020: GBP4.4m).
The value of deferred consideration is primarily based on the
post-acquisition financial performance of the acquired business,
and reflects management's expectation of the performance during the
earn out period.
During the year, no fair value gain or loss (2020: GBPnil) was
recognised in respect of financial instruments at level 3 fair
value hierarchy, and GBPnil (2020: GBPnil) was settled in cash. No
other fair value gains or losses were recorded in profit or loss
and other comprehensive income. There are no non-recurring fair
value measurements.
Included within interest bearing loans and borrowings are $350m
(2020: $100m) US Private Placement Loan Notes. The Loan Notes are
held at amortised cost with a carrying value of GBP257.7m (2020:
GBP72.6m). The Group estimates that the total fair value of the
Loan Notes at 31 December 2021 is GBP270.5m (2020: GBP78.5m).
18 . Cautionary forward-looking statements
This Report contains forward-looking statements based on current
expectations and assumptions. Various known and unknown risks,
uncertainties and other factors may cause actual results to differ
from any future results or developments expressed or implied from
the forward-looking statements. Each forward-looking statement
speaks only as of the date of this document. The Company accepts no
obligation to publicly revise or update these forward-looking
statements or adjust them to future events or developments, whether
as a result of new information, future events or otherwise, except
to the extent legally required.
19 . Directors' responsibility statement
We confirm that to the best of our knowledge
-- the Group financial statements, which have been prepared in
accordance with International accounting standards in conformity
with the requirements of the Companies Act 2006 and international
financial reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union, give a true and
fair view of the assets, liabilities, financial position and profit
of the Group; and
-- the announcement includes a fair review of the development
and performance of the business and the position of the Group and
company, together with a description of the principal risks and
uncertainties that it faces
On behalf of the Board
Paul Forman Lily Liu
Chief Executive Chief Financial Officer
18 March 2022
Risk Management Report
RESPONDING TO CONTINUED DISRUPTION IN 2021
Whilst 2020 was the year in which we first experienced the
disruption caused by the COVID-19 pandemic, 2021 presented a
different range of risks and challenges to which we needed to react
and adapt. As economies started to emerge from the pandemic we
identified differing forms of disruption from supply chain
constraints to rapidly changing workforce availability.
The risk management lessons we learnt during 2020 resulted in us
being well placed to manage our responses to these events quickly
and robustly. However, continuing disruption to business, in all
its forms, indicated a need to perform a thorough review of the
risk management framework. This review concluded in September and
resulted in an updated risk framework which supports the evolution
of our approach and considers risk at both a strategic and an
operational level with a view to improving business resilience over
the short to long term.
Following on from the introduction of our revised risk
framework, an increasingly dynamic risk landscape and the
announcements relating to the strategic reviews, we also performed
an in-depth review of our Principal and Emerging Risks which
comprised consultation with the Board, the Group Risk Committee
("GRC") and the ARC. The following sections reflect the output of
these discussions with one Principal Risk having been retired (in
relation to Macro Economic & Trade Deal Uncertainty) and one
new risk added (to reflect the risks surrounding the strategic
reviews process). Other risks have been reviewed and refined to
reflect the current nature of the risk and our approach to
mitigation.
Looking ahead to 2022, we anticipate that certain pandemic
related risks will remain, at least for the short to medium term;
however, the work put in to our risk management processes and
practices over the past two years means we are well placed to
continue to deal with them efficiently and effectively.
Additionally, as the strategic reviews progress we continue to
analyse and assess the Emerging Risk landscape, with particular
focus on the Components division's processes, to ensure the Group's
risk management practices continue not only to protect stakeholder
value but to support its creation in line with our strategic growth
objectives.
As we have seen recently, there remains a risk that further
variants and subsequent waves of COVID-19 will continue to disrupt
societies, economies and businesses during 2022. Our geographical
breadth, coupled with our ability to flex operating models with a
high degree of agility means we are well placed to maintain
customer service levels whilst managing the threats to our
operations and the wellbeing of our people.
It remains critical for us to continue to scan the horizon for
additional new, emerging or disruptive risks which could
significantly impact our ability to meet our strategic growth
objectives. Despite the focus on mitigating the impacts of an
increasing range of disruptive risks, we have during the year paid
close attention to the increasing momentum associated with the risk
agendas for ESG and climate change along with the potential impacts
of technology-related innovations disrupting our core markets.
RISK MANAGEMENT APPROACH
Our risk management activities aim to drive performance aligned
to our purpose, encourage growth through innovation and support the
achievement of our strategic objectives. In doing this, we take a
balanced approach that puts risk management at the core of the
senior management agenda and more broadly across our operations. We
are committed to managing risks in a proactive, efficient and e
ective manner to protect and enhance value, and provide assurance
to the Board and our stakeholders.
We made significant progress during 2021 in evolving our risk
management processes as we continue to ensure our risk management
processes are aligned with FTSE 250 upper quartile practice. This
included a number of initiatives to start driving the risk
conversation to a site level, support the divisions in their
assessment of risk, to monitor and improve the risk culture and to
further develop the Group's risk framework, enhanced risk reporting
and further embed risk activities to improve risk culture across
the Company. Particular focus was placed on reviewing our portfolio
of Principal and Emerging Risks in the light of an increasingly
dynamic operating environment.
RISK MANAGEMENT FRAMEWORK
A refreshed risk management framework has been developed for
identifying and managing risk within defined appetite levels, at
both a strategic and an operational level. This framework was
designed to provide the GRC and the Board with a clear line of
sight over risk, to enable informed decision-making and to deliver
improved resilience.
Our risk management framework continues to evolve in line with
best practice to ensure that it supports the Company's growth and
strategic objectives. A robust, but flexible, approach to the
management of risk is fundamental to the continued success of the
Company. In 2021, the challenges presented by the COVID-19 pandemic
and economies emerging from it included relocation of employees,
remote working, temporary inaccessibility of some business
locations, raw material shortages, supply chain disruption,
volatile supply and demand, and distribution challenges. A clear
focus was placed on ensuring the continued operation of our risk
management framework in a dynamic environment. Through regular
discussions and virtual workshops with all divisional and enabling
function leadership teams, we ensured clear accountability for the
identification, assessment, and mitigation of risks throughout the
Company.
Risk can present itself in many forms and has the potential to
impact health and safety, the environment, our community, our
reputation, regulatory compliance, market and financial performance
and therefore the achievement of our corporate purpose. By
understanding and managing risk, we provide greater certainty and
confidence to our shareholders, employees, customers, suppliers,
and the communities in which we operate.
The Board confirms its risk appetite bi-annually by mapping its
Principal Risks against a sliding scale from "risk-averse" to
"risk-neutral" to "risk-tolerant" and this informs the development
of mitigating actions for each of the Principal Risks.
At a strategic level, our risk management objectives are to:
-- identify the Company's significant risks and appropriate mitigating actions
-- formulate the risk appetite and ensure that our business
profile and plans are consistent with it
-- ensure that growth plans are properly supported by an e ective risk infrastructure
-- help management teams to improve the control and
co-ordination of risk-taking across the Company.
STRENGTHENING OUR FRAMEWORK
To achieve the objective of implementing FTSE 250 upper quartile
risk management practice, we have made good progress in
implementing our risk management improvement plan in line with best
practice and ISO 31000 guidelines.
In 2021, the Risk Assurance team supported divisional and
enabling functions leadership teams in the management of their risk
processes, specifically in relation to the strategic planning
process. Additionally, a number of risk workshops have been held in
relation to the long-term organisational objective set out in the
strategic review announcements. In 2021 we paid continuing
attention to Emerging Risks and to ensuring clarity across roles
and responsibilities for those risks that cut across divisions and
enabling functions. Principal Risks were subject to deep dives
during the year at Board and GRC meetings.
RISK GOVERNANCE STRUCTURE AND OVERSIGHT
The Board has established a risk and internal control structure
designed to manage the achievement of strategic business
objectives. The Risk Assurance team, separate from line management,
enables and facilitates the risk management process across the
Company and acts as the custodian of the Company's risk
architecture and supports risk management activities. In addition,
all divisions and enabling functions have appointed Risk Champions
to drive risk management practices into their businesses.
The GRC met four times in 2021, each meeting with a full
attendance. The GRC is chaired by the Chief Executive and its
membership comprises the GMC members, Head of Legal, Head of Risk,
Head of Governance and the Group Communications Director.
Non-member standing attendees are the Group Health, Safety and
Environment Director, the Chief information Security Officer and
the Group Financial Controller. Other members of senior management
are also invited to present reports on specific risk activities. We
also welcomed external presentations from subject matter experts on
topics including ESG and sustainability. The Chair of the ARC has a
standing invitation to attend all GRC meetings, attending two in
2021, and receives copies of the minutes of every meeting. The
Chair of the ARC also meets with the Head of Risk on a monthly
basis.
The GRC's responsibility is to focus and co-ordinate risk
management activities throughout the Company and to facilitate the
appropriate identification, evaluation, mitigation and management
of all key business risks. In addition, the GRC reviews the risk
appetite and ongoing risk management approach and makes
recommendations on risk appetite to the Board and actions required
to ensure adequate controls and mitigating actions are in place
against identified risks.
As an important part of fulfilling its responsibilities the
Board receives regular reporting from the Chief Executive in his
capacity as GRC Chair to enable the Board to challenge and review
the GRC's views on key risks.
The ARC engages directly with the divisions and the enabling
functions, including deep dive reviews, as part of fulfilling its
oversight responsibilities in relation to risk management
processes. The ARC, with assistance from Risk Assurance, oversees
compliance with risk management processes and the adequacy of risk
management activities related to the Company's operations.
The divisional and enabling functions leadership teams undertake
regular reviews during the course of the year and engage in
facilitated discussions with Risk Assurance to consider the risk
environment for their particular functional or geographic area of
responsibility and how these could impact on the achievement of the
Company's strategic objectives.
PRINCIPAL RISKS
The GRC has responsibility for enabling the identification and
management of Essentra's Principal Risks. An in-depth assessment
has been undertaken to assess the appropriateness and adequacy of
our Principal Risks. The assessment was performed against the four
risk categories.
As part of the process, divisional and enabling function
leadership teams have also undertaken reviews of this risk
portfolio supported, where necessary, by the Risk Assurance
team.
As part of our top-down process, a review of Principal Risks was
performed by the Board which led to further review and refinement
by the GRC. This top-down assessment required each GRC risk owner
to provide analysis of material changes in the risk they manage and
whether they consider it to have more or less impact during the
course of the year on achievement of our strategic objectives.
These individual responses were consolidated, and the GRC then
discussed and reached a consensus regarding Principal Risks that
can seriously a ect the performance, future prospects or reputation
of Essentra. The outputs from the GRC assessments were then
presented to the Board for approval along with the recommendation
of Principal Risks to be included in the long-term viability
modelling.
The Board believes the Principal Risks are specific to Essentra
and reflect the risk profile of the Company at the current time.
All Principal Risks are managed within their individual risk
appetite.
The Board and GRC evaluate the potential e ects of Principal
Risks materialising over a three-year period to understand how they
could impact the Company's long-term viability. The evaluation is
based on plausible worst-case scenarios.
To make this evaluation, the estimated financial impact of each
Principal Risk crystallising was considered. The Board and GRC
assessed the potential impact on the Company's viability, based on
selected severe plausible risk scenarios. These were developed in
conjunction with senior management. The Principal Risks that were
considered to have a potentially significant impact on the
Company's viability are included in the long-term viability
modelling.
In addition to the Principal Risks, Emerging Risks and wider key
risks have been identified and are being monitored by the Company.
Mitigation actions in response to such risks are an important part
of the divisional and enabling functions risk reporting to the GRC
and Board.
KEY CHANGES DURING THE YEAR
During 2021 we undertook a robust review of our Principal and
Emerging Risks.
At half year we disclosed the following key changes:
-- a decrease in relation to the probability of our
Macro-economic and Trade Deal Uncertainty (including Brexit) risk
manifesting itself
-- an increase in the probability and impact of our
Environmental, Social Governance (ESG) risk resulting from an
increasing stakeholder focus
-- an increase in probability in relation to our Talent and
Workforce Management risk resulting from pandemic related workforce
dynamics
No further Emerging Risks were noted.
Since our half-year disclosure, we undertook further review of
our Principal and Emerging Risk profiles. The following key changes
have been made since our half-year disclosure:
-- removal of Macro-economic and Trade Deal Uncertainty
(including Brexit) as a Principal Risk given the conclusion of the
Brexit process and increasing clarity around trade deals. Broader
disruptive events are now considered under our new Operational and
Supply Chain Disruption Principal Risk
-- addition of a new Principal Risk relating to the ongoing strategic reviews
-- reduction in the risk level associated with our Delivery of
Strategic Projects risk following the successful completion of a
number of acquisitions. The remaining risk largely relates to the
delivery of the BPR programme
-- an increase in the risk level associated with our Cyber Event
(Cyber Attack in 2020) risk as a result of increasing reliance on
our digital supply chain
-- replacement of our Business Continuity Planning and
Management Principal Risk with an Operational and Supply Chain
Disruption risk reflecting the increasingly dynamic nature of
disruptive events
-- a decrease in the risk level for our Internal Process and
Control risk following the completion of the roll out of the
Minimum Control Standard framework
-- a continuing increase in risk level in relation to our Talent and Workforce Management risk
-- removal of Emerging Risks relating to Regulatory Change (now
covered under our Regulatory Governance Principal Risk) and
Evolving conditions of the Debt Market
All other risks have been reviewed and updated to reflect the
current nature of the risk and mitigating activities.
EMERGING RISKS
We define Emerging Risk as a changing risk or a novel
combination of risks for which there is no track record or previous
experience by which the impact, likelihood or costs can be
understood. Its potential impact is viewed as being two years or
more in the future.
We strongly believe that the identification and appropriate
management or mitigation of Emerging Risks is critical to our
long-term success.
Emerging Risks have the potential to increase in significance
and affect the performance of the Company and as such are
continually monitored through our existing risk management
processes. Our risk management process ensures Emerging Risks are
identified and aids the GRC and the Board's assessment of whether
the Company is adequately prepared for the potential opportunities
and threats they present.
The process enables new and changing risks to be identified at
an early stage so we can analyse them thoroughly and assess any
potential exposure.
We undertake a top-down and a bottom-up assessment to identify
Emerging Risks. A risk management workshop with the Board was
facilitated by the Risk Assurance team as part of the ongoing
cadence of Emerging Risk identification; this workshop was followed
by further discussion at GRC meetings. These assessments include
discussion of potential Emerging Risks based on externally sourced
Emerging Risk data. The Company's potential exposure is assessed
against the Board's approved risk measurement criteria. The process
enables new and changing Emerging Risks to be identified at an
early stage so we can analyse them thoroughly and assess potential
exposure.
The preliminary views of Emerging Risks were consolidated and
discussed by the GRC to reach a consensus regarding Emerging Risks
that can seriously a ect the performance, future prospects or
reputation of Essentra. The outputs from the GRC assessments were
presented to the Board for approval along with the recommendation
to develop appropriate response strategies.
The GRC and the Board have undertaken a rigorous assessment of
Emerging Risks during 2021 and have established procedures to
closely monitor Emerging Risks on an ongoing basis including:
-- the GRC's terms of reference require it to review the Group's
ability to identify Emerging Risks
-- Emerging Risks is a standing agenda item at each GRC meeting
and each Emerging Risk will be subject to a deep dive
-- external specialist input will be sought where required
-- identified Emerging Risks have been assigned an owner who is
both a GRC and GMC member. The Emerging Risk owner is responsible
for providing an update on the development of Emerging Risks and
activities in response at each meeting.
The Board can confirm that it has completed a robust assessment
of the Company's Principal and Emerging Risks. The Company
continues to focus on ensuring the adequate mitigation of risks
faced by the Company to ensure alignment with the Board-approved
risk appetite.
We continue to closely monitor the situation in Ukraine, the
response of international governments and any potential impact on
the Group. Essentra has no significant operations or infrastructure
in Russia or Ukraine and the business does not have local currency
exposure. We have processes in place to ensure the Group is
compliant with all relevant international regulations and
sanctions, continue to closely monitor the situation and remain
vigilant to changes in our risk profile resulting from it.
STRATEGIC RISKS
Failure to Achieve Acceptable Returns from the Packaging
Division
Change in risk level: Unchanged
Ownership: Packaging Division Managing Director
Relevance: Company specific
Description
The potential for a failure to deliver improving and, in the
longer-term, industry average returns in the Packaging division has
been a Principal Risk since 2017.
This risk includes the potential of the Packaging business
failing to deliver new business wins, expected cost savings or
acceptable returns. Significant effort has gone into mitigating
this risk since it was first identified in 2017 including supply
chain optimisation, cost savings through continuous improvement
initiatives, strengthening our value proposition, focusing on
effective key account management and delivering in line with
customer expectation on quality and lead times. As such, the
greater part of this risk now relates to the ongoing disruption in
the underlying pharmaceutical market resulting from the ongoing
COVID-19 pandemic with fewer GP visits and reduced demand for
elective surgeries. However, as the world emerges from the pandemic
the approach is moving towards pre-hospitalisation drug-based
treatments which might present some opportunity for the
division.
Stakeholder expectations around the raw materials used in
packaging materials present an opportunity for Essentra Packaging
given the sustainable nature of our product portfolio and our
capability to work with customers to design packaging solutions
with minimal environmental impact.
Mitigation
This Principal Risk is addressed annually with the development
of the business strategy and plan. Both strategy and plan reflect
this risk, and key initiatives are developed to further improve
business performance. Failure to effectively mitigate this risk
might affect the outcome of the strategic reviews.
Key mitigation actions include:
-- delivering our differentiated value proposition to customers
through innovative, high quality products and services
-- innovation focus on smart packaging, patient safety, and sustainability
-- delivering operational excellence through improved
performance on safety, environment sustainability, quality,
manufacturing efficiency, supply chain and continuous improvement
initiatives
-- developing a pricing strategy that minimises the impact of
inflation internally as well as on customers.
The delivery of these actions, and ongoing performance of the
division, are subject to close monitoring and reporting at
divisional and GMC level each month and quarter. The Board also
continues to maintain close oversight across progress of these
actions. Leading and lagging KPIs are used to monitor performance
including order lead times, on-time and in-full order fulfilment,
complaints, achievement of sales plan, recovery of inflation cost
increases through pricing, cost savings and overhead as a
percentage of sales.
Tobacco Industry Dynamics
Change in risk level Unchanged
Ownership: Filters Division Managing Director
Relevance: Company specific
Description
The Filters division supplies filter products and packaging
solutions to manufacturers in the tobacco industry. Changes in the
traditional tobacco market present both opportunities and risks for
the division, notably from our ability to supply sustainable
filters.
Whilst we have a strong market position, the future growth
opportunities may be affected by the longer term dynamics of the
tobacco industry. These include declining combustible markets, a
shift towards Next Generation Products ("NGP") and other tobacco
substitutes. The focus of stakeholders on the environmental and
sustainability elements of tobacco markets provides an additional
area of risk and opportunity for the business.
The social pressures and the evolving regulatory environment
continue to move towards reducing the prevalence of smoking
worldwide and also minimising its environmental impact. This
presents an opportunity for growth through our existing sustainable
product portfolio and new innovations.
The continuing changing trends in global consumption and end
markets for our products requires increased oversight of where our
products are used and a robust framework to ensure regulatory
compliance. Tobacco-related litigation could also affect Essentra;
however, there is no history of the Company being involved in such
a claim.
Mitigation
Essentra seeks to mitigate the risk associated with changes in
tobacco market dynamics by focusing on innovation and by exploiting
potential market growth opportunities. Failure to effectively
mitigate this risk could affect the outcome of the strategic
reviews.
Key mitigation actions include:
-- the establishment of a joint venture, including manufacturing
facilities in China, which is now the world's largest tobacco
market. Production started in this facility in 2021
-- focus on winning further outsourcing contracts
-- ongoing enhancement of innovation capabilities to ensure we
are well positioned for the future of the tobacco market
-- continuous improvement activities to ensure operational KPIs
continue to improve with an ongoing focus on lead time reduction
and quality to ensure our customers continue to get the best
possible service
-- implementation of key account management has provided a more
robust pipeline, as demonstrated by continued outsourcing wins
-- the Tapes business provides new growth opportunities in Food
and Beverage and e-Commerce segments
-- building on lessons learnt to further enhance our compliance
programme and maintain a robust regulatory framework.
Delivery of Strategic Projects
Change in risk level: Decreased
Ownership: Company Secretary and General Counsel
Relevance: Company specific
Description
Our success is dependent, in part, on our ability to deliver key
strategic projects on time and within budget to realise their full
potential. We invest in, and deliver, significant strategic,
operational and capital expenditure projects in order to drive the
business forward, in particular, our ongoing Business Process
Redesign implementation. Additionally, over recent years we have
actively reviewed our portfolio of businesses, engaging in
acquisitions and disposals as appropriate. Failure to deliver such
key projects effectively and efficiently could result in
significantly increased project costs and impede our ability to
execute our strategic plans.
During the year, our ability to deliver complex projects has
been affected by some of the restrictions and other disruptions
relating to the COVID-19 pandemic. This has, however, resulted in
an enhanced capability to deliver projects in a complex and dynamic
environment.
We have recently reviewed and strengthened project governance
arrangements and resources to accelerate delivery of the Business
Process Redesign programme delivery plan. Additionally, further
resources will be deployed to sites during future site
implementations to maintain operational and commercial
stability.
Mitigation
Strategy and Governance:
-- an annual strategic review with the Board and the GMC where
we proactively monitor the market and review our strategy and our
strategic programmes. This process is led by the Strategy and
Commercial Director and, in 2021, has resulted in the commencement
of a strategic reviews of the Filters and Packaging divisions
-- review and approval of key, strategic projects by Board and
GMC, as appropriate, with robust governance and detailed reporting
of project KPIs and key milestones.
Project Management:
-- a portfolio of key strategic projects has been identified and
kept up to date by the Group Project Management Office ("PMO"), to
ensure appropriate focus on, monitoring and control of major
strategic programmes, investments and capital expenditure
projects
-- day-to-day project management capabilities using a recognised
project management methodology have been enhanced during the
year
-- interventions, as required, by Group PMO to initiate course
corrections and undertake remedial actions on programmes and
projects.
M&A:
-- acquisition pipeline management to identify suitable
acquisition targets with best value-creation potential
-- an annual post-investment review and lessons learnt exercise
to identify key learnings to embed into future initiatives
-- use of external advisers to provide expertise, assistance and
rigorous due diligence, as appropriate.
People:
-- maintain strong focus on the capability of our employees.
This is achieved by mobilising teams which possess the right skills
to deliver our strategic programmes
-- support project managers' development through a variety of
training programmes and professional qualifications.
Exposure to the Cyclical Industrial Market (Components
Division)
Change in risk level: Unchanged
Ownership: Components Division Managing Director
Relevance: Company Specific
Description
The Components division serves a broad range of industrial
customers and, as such, is exposed to overall industrial production
trends. Global industrial production has tended to be cyclical in
nature with major economic downturns leading to a downturn in
industrial production. From the global financial crisis in
2008-2009 to the COVID-19 pandemic, economic cycles have affected
demand in these broad industrial markets.
The Components division sells to a broad base of end markets
including automotive, capital goods and electronics. This market
breadth provides a degree of risk diversification; however, future
downturns in industrial production are almost certain to happen,
albeit with an uncertain timeframe.
The Components division seeks to operate a flexible model
whereby changes to its cost base can be quickly made to maintain
operating margins against fluctuations in demand. The risk is that
the business is not able to execute such changes, or they are not
robust enough to minimise the impact on operating margins.
Additionally, the division, given its end-markets, supply chains
and operating model, has a specific exposure to the Operational
& Supply Chain Disruption Principal Risk.
Given the strategic announcement regarding the Group becoming a
pure play global Components business, this risk will become
increasingly prominent.
Mitigation
Key mitigating actions being undertaken to protect the division
from future industrial declines include the following:
-- the ongoing optimisation of fixed cost base to minimise the
impact of demand fluctuations. Specifically, the Components
division undertakes continuous reviews of its operating footprint
to optimise manufacturing and distribution cost to serve. We opened
a new distribution facility in Nettetal, Germany during the year
which provides the opportunity for us to reduce our distribution
footprint while delivering enhanced service levels to our
customers
-- our increased investment in the automation of production and
distribution activities, enabled by robotics, will further help to
reduce fixed costs. We also undertake ongoing reviews of our labour
management practices with a view to striking the right balance
between permanent and temporary employees, so that we are able to
effectively manage our cost base
-- diversification across the market sectors we sell to; both
within the industrial sector and also beyond it. We continue to
develop our product category management approach to better focus on
faster growing and resilient market segments. We continue to
explore M&A and entry opportunities in new markets to further
mitigate this risk.
We continue to invest in our innovation capabilities to secure
new opportunities, develop our use of alternative materials and
diversify our product range.
Environmental, Social and Governance
Change in risk level: Increased
Ownership: Company Secretary and General Counsel
Relevance: Industry general
Description
Environmental, Social and Governance ("ESG") issues are
increasingly fundamental for all companies and stakeholders.
Essentra has specific exposure to tobacco-related regulation,
potential changes in relation to the regulation of single-use
plastics, EU packaging regulations, climate change and multiple
other topics.
Failure to meet stakeholder expectations on increasing
environmental and/or social governance obligations could lead to
reputational or commercial risk for the Company. This includes
risks arising from changing investor attitudes, developing customer
expectations, changing supply chain dynamics, social attitudes
towards the environmental impact of our products (which may impact
on our ability to market them), along with ability to attract and
retain talent, given increasing employee focus on ESG.
The Components division is exposed to ESG risks around the
reduction in single use plastics, but also in relation, in the
longer term, to climate change given the breadth of its operational
footprint. The division is actively working to incorporate more
sustainable materials and believes it has the innovation
capabilities to enable future growth opportunities with the use of
these materials. Similarly, Filters is exposed to single use
plastic legislation and is actively developing new innovative
products including the recently launched ECO range of biodegradable
filters.
Climate change
As part of our TCFD activity, we have worked closely with
third-party consultants to understand the financial impact of
climate-change-related physical risk exposure at key sites across
seven risk areas, under three scenarios. We have identified ten
material risks and opportunities relating to physical events, the
transition of our business resulting from changing customer demands
and the changing input costs relating to raw materials and power.
We can now build mitigation activity and management approaches to
help address these issues into our business continuity management
and planning frameworks, closely linked to existing work with our
insurers.
Mitigation
Governance-related activities are managed through the Company's
comprehensive risk management processes.
Environmental and social topics are managed through the
Sustainability Committee, chaired by a Non-Executive Director, and
including membership from Board and GMC. The role of this Committee
is to:
-- review and assess the Company's exposure to sustainability-related issues
-- assess the Company's responses to these issues
-- understand whether these responses are consistent with the risk appetite of the Company
-- identify potential gaps in approach and high-level approaches to closing those gaps.
The Sustainability Committee's recommendations, in respect of
reducing risk exposure, inform the work of the GMC, the divisions
and the enabling functions.
Additionally, the Nomination and Remuneration Committees cover
aspects of social issues and the Audit and Risk Committee
explicitly covers governance.
During the year, we have also established an ESG Committee which
comprises representatives from the divisions and enabling functions
to monitor and respond to ESG and sustainability-related-topics on
a day-to-day basis.
Additionally, the GRC also continues to evolve our approach to
managing climate change risk, and we have worked with an external
resource in support of fulfilling our reporting obligations under
TCFD requirements.
Talent and Workforce Management
Change in risk level: Increased
Ownership: Group Human Resources Director
Relevance: Industry general
Description
Failure to acquire, retain, develop and motivate the required
management and leadership necessary to evolve our business, develop
our culture and meet future customer needs. The change agenda,
including the recently announced strategic reviews, coupled with
the ongoing impact of COVID-19 on workforce and labour market
dynamics, requires us to continue our focus on retention of key
talent, avoiding burn-out and presenteeism. Additionally, we must
continue to grow the agile skills required to support and build on
our future strategic direction.
The experience of the past two years has clearly indicated the
effect major health events, be they global, regional or country
specific, can have on the availability of resources. There remains
a risk that future major health events could result in further
labour disruption.
Mitigation
Key mitigations include reviewing the people strategy to ensure
it underpins the approach to enhance the employee experience, drive
changes needed and have skilled leaders for the future. This
strategy considers:
-- ensuring the variable pay schemes are adequate to retain key
talent and reward high performance
-- building management capability across the wider team to
ensure we manage through the change journey in an engaged and
considered way
-- talent mapping and succession planning that considers current
and future business requirements
-- developing the health and wellbeing strategy with a specific
consideration of the actions needed to aid retention of our wider
workforce
-- communication with employees is a critical step to ensure
engagement, drive a sense of purpose and belonging across the
workforce
-- assessing what training and support we can provide to future
leaders and managers on resilience and developing their personal
career path in a considered way.
As the COVID-19 pandemic continues, we continue to focus on
retention, but also on attracting the talent necessary to deliver
our strategy in this new, global, working environment. We continue
to review the organisation for points of failure at which
additional cross-training might be necessary to alleviate
disruption.
Strategic Reviews
Change in risk level: New risk
Ownership: General Counsel and Company Secretary
Relevance: Company specific
Description
In October and November 2021, the Company announced strategic
reviews of both the Filters and Packaging divisions. These reviews
have a view to maximising shareholder value through focusing on the
growth potential of pure play global components business whilst
Filters and Packaging benefit from new ownership structures.
Whilst the strategic reviews create significant opportunities
for the respective businesses and our people, the uncertainty, both
internal and external, caused by these announcements creates a
number of potential risks. These include but are not limited
to:
-- a lack of focus on 'business-as-usual' activities
-- poor execution of the review and any resulting decisions
-- talent flight
-- customer, supplier and competitor behaviours, compliance issues
-- adverse investor feedback
The reviews comprise a number of complex projects with
significant interdependencies; however, Essentra is well placed to
deliver them and external/temporary resource has been identified
where there are known capacity and capability gaps.
Mitigation
The key mitigation in place over this Principal Risk is the
governance structure that has been established around the strategic
review programme. A detailed structure is in place, supported by
internal resources and external advisers, to ensure timely
delivery. This structure includes clear leadership and management
support along with a regular cadence of meetings on various
workstreams supported by regular decision board meetings.
A range of external advisers have been engaged to support the
strategic review process and the execution of any decisions that
result from it.
Retention and recruitment strategies are in place to ensure
ongoing leadership and capability.
EXTERNAL RISKS
Regulatory - Governance
Change in risk level: Unchanged
Ownership: Company Secretary and General Counsel
Relevance Industry general
Description
The Company operates across many international jurisdictions and
engages with a wide range of stakeholders, including a diverse
employee, customer and supplier base. Some of our locations are
considered higher risk from a regulatory perspective. We are
required to comply with multiple areas of legislation and
regulation across an increasingly broad range of areas including:
Anti-Trust, Anti-Bribery, Sanctions, Privacy and Environmental,
Social & Governance ("ESG"). Our operations are subject to an
external environment which is seeing an increasing breadth of
emerging regulation and greater levels of scrutiny and oversight
from regulators and enforcement agencies.
Additionally, there remains a risk that we fail to adhere
strictly to the compliance requirements and reporting obligations
set out in the Deferred Prosecution Agreement ("DPA") agreed with
the US Department of Justice ("DoJ") in relation to historical US
sanctions issues in the Filters division.
Failure to manage effectively the scrutiny and oversight and/or
comply with laws and regulations could result in significant fines,
costs or reputational damage to the Company and might adversely
affect our ability to operate in certain jurisdictions.
Whilst the external environment is generating additional
compliance demands, the Company continues to drive continuous
improvements in its approach to managing regulatory and legislative
requirements and overall the level of risk to the Company has
remained the same.
Mitigation
The Company deploys a range of mitigating activities to support
the management of regulatory risk including:
-- a clear "tone from the top" from the Board and GMC on the
importance of ethics and compliance
-- a compliance programme (including employee training) with
which we aim to conform with all applicable laws and regulations
and encourage a culture of openness, honesty and integrity
-- a mechanism that seeks to ensure all employees complete mandatory training on a timely basis
-- improved compliance communication with "Be smart, be sure" campaign
-- continuous improvement of the compliance framework to ensure
an effective and appropriate policies, processes, reporting and
monitoring
-- a Group Compliance Committee that directs and oversees the
Company's implementation of compliance programmes, policies and
procedures which are required to meet legal, compliance and
regulatory requirements (including sanctions)
-- strengthening of divisional resources to embed regulatory
compliance within the businesses and continued investment to drive
better governance
-- extensive focus on third party due diligence to take account of lessons learnt from the past
-- the Company's Legal, Risk and Governance team which, with
support from external advisers, continuously monitors current and
forthcoming changes to the regulatory environment and emerging good
practice
-- the recent enhancement of disciplinary and IT lock-out
processes to help ensure mandatory governance training is completed
on time
-- a "Right to Speak" portal is in place to encourage the reporting of governance issues.
Cyber Event
Change in risk level: Increased
Ownership: Group IT Director
Relevance: Industry general
Description
The Company is dependent on its internal and external IT systems
for day-to-day operations. Should the Company, or its key cloud
service suppliers, be affected by a cyber event (denial of service,
data breach, compromise) resulting from an external or internal
threat, this could result in suspension of critical business
services and loss of data. Subsequently, the Company could receive
fines, suffer reputational damage and be unable to meet customer
expectations (leading to a loss of customer confidence). Prolonged
outages could further erode trust in the business resulting in
long-term reputational damage.
The pandemic continues to affect our operational dynamic with
significant levels of remote working becoming the new normal. The
Company has invested, as part of our pandemic response, in
improvements to protection of mobile devices and remote access.
Disruptive cyber events remain a serious threat to the smooth
running of our business. We continue to invest in our cyber
security programme which includes mitigation and risk reduction
activities across people, process and technology.
Mitigation
The Company has an established cyber security improvement
programme which aims to mitigate the risks and operational
disruption caused by cyber events. The programme includes:
-- endpoint protection, encryption of data, enhanced cloud-based
security tooling and protection, web and email content
protection
-- identity and access management
-- continued cyber security awareness training for all employees
-- vulnerability and penetration testing for external IT services and websites.
OPERATIONAL RISKS
Operational and Supply Chain Disruption
Change in risk level: New Risk
Ownership: General Counsel and Company Secretary
Relevance: Industry general
Description
We operate a diverse, global operational footprint and supply
chain across each of our divisions. Ensuring these operations and
supply chains are resilient is a fundamental part of maintaining
our customer service levels by giving options and alternatives, to
minimise the impact of disruption.
Disruptive events could be focused on particular locations,
driven by single points of failure in our operations or supply
chain, be localised natural events or result from political
conflict. Here, our global footprint provides risk diversification,
through alternative manufacturing options elsewhere in the Group.
Equally, disruptive events might be broader in nature and impact a
number of sites simultaneously, for example via the COVID-19
pandemic, or climate change related issues in the longer term. In
this situation, our global footprint may expose us to a broader set
of potential disruption risks than more focused businesses.
Robust business continuity planning and management practices are
required to minimise the impact on production capability, supply
chain management, customer relationships, reputation, revenue and
profit.
We experienced some minor disruption through COVID-19 related
issues during 2021; however, the vast majority of sites remained
operational throughout the year.
The Company is increasingly reliant on the digital ecosystem
within its supply chain. Some elements are addressed in our
management of our Cyber Event risk and others more broadly by the
continuity planning activities described below.
Additionally, during 2021, as part of our TCFD activity, we have
worked with external consultants to better understand the potential
impact of climate change on our business over the short, medium and
long term, both for physical and transition risks, to enable us
better to embed these considerations in our risk management
processes.
Mitigation
We continue to review and refresh our business continuity
management and planning frameworks and processes.
Mitigating actions that we have in place for single location
issues include:
-- leveraging our global manufacturing footprint to provide alternative manufacturing locations
-- fire and other risk prevention systems
-- assessing and managing operational risks via the enterprise risk management process
-- ensuring comprehensive maintenance plans are in place for key manufacturing equipment
-- ensuring resilience arrangements are in place and are tested
for key operational IT hardware and software
-- maintaining an insurance programme and working closely with
our insurers to ensure complete and comprehensive cover to prevent
losses, along with identifying and pursuing opportunities to
improve site-level resilience to human factor, natural disaster and
fire-related issues
-- performing tests and ensuring any lessons learnt (along with
any learnt from real-world events) are fed back into the planning
process
-- ensuring non-operational employees are equipped to work from
alternative locations should the need arise.
Additional measures to mitigate against multi-site issues
include:
-- enhancing our multi-site capabilities and manufacturing flexibility
-- identifying alternative sources of supply for key raw
materials and supply guarantees where necessary and feasible
-- global, standard site/network assessment approaches for pandemic and other issues.
Internal Processes and Control
Change in risk level: Decreased
Ownership: Chief Financial Officer
Relevance: Company specific
Description
Processes and controls play an important part in our ability to
prevent and detect errors in our management information and also
inappropriate and unethical behaviour. This might include fraud,
deliberate or accidental financial misstatement or improper
accounting practices. If the design, operation or the assurance
over these controls is ineffective, ownership is not defined or
controls are overridden, there is a greater risk of operational
loss and reputational damage.
The changes in ways of working as a result of the COVID-19
pandemic resulted in a greater adoption of remote working
arrangements. In the short term, this created an increased risk
around our capability to maintain a robust system of internal
control. During this year we were able to operate our processes and
controls consistently with this more flexible working
environment.
Mitigation
During the year, we completed the roll out of Minimum Control
Standards ("MCS") across the Group, establishing a consistent
minimum standard of financial controls across the Company.
With the MCS framework roll out complete, the focus has moved to
ensuring the ongoing compliant and effective operation of the
controls. This work has been performed by Group Finance, divisional
finance teams and by the Risk Assurance function who have increased
the level of work performed on the MCS framework at a site level
during the year.
As a result of the ongoing BEIS consultation on audit and
corporate governance, we have created an internal controls team who
will be charged with maintaining the MCS framework and ultimately
enhancing it to a level that will be compliant with the ultimate
conclusion of the review.
Safety, Health and Wellbeing
Change in risk level: Unchanged
Ownership: Group Human Resources Director
Relevance: Industry general
Description
The safety, health and wellbeing of our employees remains one of
our highest priorities.
Essentra has many manufacturing, distribution and administrative
facilities across the world, along with internationally mobile
employees. Manufacturing and distribution can be inherently risky
given the use of industrial machinery and high-speed manufacturing
processes. In addition, the Company must comply with national
safety regulation in multiple jurisdictions.
Should a serious incident occur involving our employees or
visitors, or should there be any breach of safety regulation, there
is a risk of prosecution and considerable reputational damage as
well as potentially significant financial costs.
Increasingly, given the changes and ways of working resulting
from the COVID-19 pandemic and the resulting strain it places on
people, the emotional wellbeing of our leaders, managers and
workforce has an increased focus.
Mitigation
The "tone from the top" continues to reinforce safety, health
and wellbeing behaviours across all of our businesses and
employees. The establishment of appropriate Safety Management
Systems is a high priority for management teams.
Some of the key mitigations which are in place include:
-- regular reporting to the GMC, GRC and the Board on Health,
Safety and Environment ("HSE") related matters
-- a Group HSE policy detailing required standards, governance,
roles and responsibilities at all sites
-- increasing use of the Enabler system to automate our Global
"Stop, Think, Examine, Proceed" ("STEP") programme. This is a
hazard identification and process improvement initiative that
empowers the entire workforce to recognise and address safety
improvement opportunities. Corrective actions are assigned with
clear ownership and targeted completion within 48 hours
-- conducting performance monitoring and Health and Safety
Audits, incorporating reporting and escalation arrangements to
ensure all actions are closed
-- undertaking root cause analysis for any issues identified
through investigation of serious incidents, including near misses
and ensuring lessons learnt are cascaded across the Group
-- embedding our health and wellbeing strategy with a specific
workstream that considers our leaders, managers and employees and
their physical and emotional wellbeing
-- focused HSE events throughout the year to highlight
particular risks and help keep safety at the forefront of our
minds.
With the increased focus on emotional health and wellbeing, we
have introduced awareness training for leaders and managers. We
have developed training materials for employees and are now moving
towards introducing proactive steps for employees to manage their
own wellbeing. Our health and wellbeing strategy, Essentra Thrives,
launched with the introduction of the global assistance programme
for all employees. We are continually looking at areas where we can
enhance the health, safety and wellbeing of our employees.
EMERGING RISKS
Emerging Risk owner Risk description Controls
risk
Technology Divisional The risk that Essentra We continue to monitor
disruptors Managing does not manage its and review developments
Directors response to evolving in the external market
technologies effectively. through our networks.
This may include losing This includes innovation
competitive advantage and futures sessions
as rivals deploy advanced with existing suppliers.
manufacturing technologies, We are also involved
artificial intelligence in a range of external
and robotics to strengthen technical focus groups
product development, to support the identification
marketing, production, of future technology
distribution and support trends.
functions. In particular,
the potential emergence
of digital pharmaceutical
literature might adversely
affect parts of our
packaging division.
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END
FR JRMLTMTIBBLT
(END) Dow Jones Newswires
March 18, 2022 03:01 ET (07:01 GMT)
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