REG - Essentra plc - Results for the Full Year Ended 31 December 2021
18/03/2022 07:00
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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 YEAR ENDED 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 £83.9m
· Reported(3) operating profit of £49.7m versus £11.6m 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 £64.5m in 2021 (2020: £86.7m)
· 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
£56.9m 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 £15.4m 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 £28.2m 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 £234.7m (2020: £210.4m), 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 £11.8m in 2021 and £16.9m 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 (restated)(4) FY 2020 (as previously reported) % change Actual FX % change Constant FX
Revenue £960m £897m £897m +7 +13
Adjusted(1) operating profit £84m £62m £62m +35 +47
Adjusted(1) pre-tax profit £67m £47m £46m +45 +61
Adjusted(1) net income(2) £56m £38m £37m +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 liabilities) £235m £210m £210m +12 n/a
Net debt (excluding lease liabilities) £177m £149m £149m +18 n/a
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) £37m £67m £57m n/a n/a
Reported operating profit £50m £12m £22m +328 +516
Reported pre-tax profit/(loss) £33m £(4)m £6m n/a n/a
Reported net income(2) £28m £(2)m £6m 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 2021 Reported Acquisitions Amortisation of acquired intangible assets Adjusting items Tax on adjustments FX LFL / Adjusted(1)
Revenue £960m £(45)m - - - - £915m
Operating profit £50m - £22m £12m - - £84m
Pre-tax profit £33m - £22m £12m - - £67m
Net income £28m - £22m £12m £(6)m - £56m
( )
( )
31 December 2020 Reported (restated) Acquisitions Amortisation of acquired intangible assets Adjusting items Tax on adjustments (restated) FX LFL(2) / Adjusted(1,2) (restated)
(restated)
Revenue £897m £(9)m - - - £(44)m £844m
Operating profit £12m - £23m £28m - - £62m
Pre-tax profit/(loss) £(4)m - £23m £28m - - £47m
Net income/ (expense) £(2)m - £23m £28m £(11)m - £38m
(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 £100,000 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 £16.9m and £6.9m recognised in the 31 December 2020 and 1
January 2020 balance sheets respectively.
Customisation and configuration costs for SaaS arrangements of £11.8m and
£10.5m were charged to operating expenses for 2021 and 2020 respectively. Of
these, £11.8m (2021) and £10.4m (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$:£ 1.38 1.29 1.35 1.37
€:£ 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 £43.8m and £5.0m 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 £22.4m
(2020: £22.6m), and there was a pre-tax charge for adjusting items of £11.8m
(2020: £28.1m). In the current year, a charge for adjusting items of £11.8m
is driven by major software as a service ("SaaS") development expenditure;
£2.8m 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 £2.0m on acquisition related transaction and
integration costs. This was offset by a release of provisions and deferred
considerations from previous acquisitions and disposals of £4.8m. 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 £959.7m, 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
£83.9m, 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 £22.4m and a pre-tax
charge from adjusting items of £11.8m, operating profit as reported was
£49.7m (2020: £11.6m).
Net finance expense was above the prior year at £16.5m (2020: £15.7m), 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 £56.2m 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 £28.3m and basic earnings per share of 8.9p
compared to net loss of £1.5m and loss per share of 1.2p respectively in
2020.
Adjusted operating cash flow was £64.5m (2020: £86.7m), equating to a cash
conversion of 77% compared to 139% in 2020. This includes an outflow of net
working capital for the year of £29.9m (2020: £6.2m inflow). The increase in
net working capital to £129.7m (2020: £108.1m) 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
£m Actual FX Constant FX
Revenue 301.7 +18.3 +24.7
Adjusted(1) operating profit 56.9 +25.1 +31.2
Adjusted(1) operating margin 18.9% +110bps +100bps
(1) (Before amortisation of acquired intangible assets and adjusting items.)
Revenue for the year increased by 24.7% to £301.7m. 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 £56.9m, 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
£m Actual FX Constant FX
Revenue 362.4 -0.2 +3.8
Adjusted(1) operating profit 15.4 +11.6 +17.6
Adjusted(1) operating margin 4.2% +40bps +40bps
(1) (Before amortisation of acquired intangible assets and adjusting items.)
Revenue increased 3.8% to £362.4m. On a LFL, constant currency basis the
revenue decline was 3.6% for the year. 3C! Packaging which was acquired in
September 2020 contributed £34.3m 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 £15.4m, 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
£m Actual FX Constant FX
Revenue 295.6 +6.2 +12.9
Adjusted(1) operating profit 28.2 +11.9 +20.3
Adjusted(1) operating margin 9.5% +40bps +50bps
(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 £28.2m, 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 £16.5m was £0.8m above the
prior year period, and is broken down as follows:
£m 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").
£m 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 £64.5m
(2020: £86.7m), which equated to an operating cash conversion of 77% in the
year (2020: 139%). Free cash flow was £36.7m compared to £67.3m 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 £2.5m net increase in cash and cash equivalents to
£136.3m (2020: increase of £65.3m to £135.8m).
£m 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 (41.3) (34.2) (44.7)
items)
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 41.3 34.2 44.7
adjusting items)
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 £234.7m, a £24.3m 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 £16.0m.
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).
£m 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 £225.0m), 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 £275m.
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 £9.0m (2020: net liability of £23.9m). 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 Director Olivia Peters
Claire Goodman, Group Investor Relations Manager Tel: +44 (0)20 7353 4200
Tel: +44 (0)1908 359100
Presentation
A copy of these results is available on www.essentraplc.com
(http://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
(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
£m £m
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:
£m £m
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 £m £m
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 (7.9) 2.1
schemes
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 (1.8) (0.5)
statement
Ineffective portion of changes in fair value of cash flow hedges (0.5) -
transferred to the income statement
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 £m £m £m
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
Issued capital Merger relief reserve Capital redemption reserve Other reserve Cash flow hedging and cost of hedging reserves Translation reserve Retained earnings Non- controlling interests Total equity
£m £m £m £m £m £m £m £m £m
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(*))
Issued capital Merger relief reserve Capital redemption reserve Other reserve Cash flow hedging and cost of hedging reserves Translation reserve Retained earnings Non- controlling interests Total equity
£m £m £m £m £m £m £m £m £m
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
£m £m
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
£534.3m, 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 £275.0m (expiring in
October 2026). Of the total facility of £534.3m, only £14.8m is expiring
before 2026.
The amount drawn under the RCF as at 31 December 2021 was £59.2m, with the
available undrawn amount at £215.8m. 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 £352.1m, which was significantly higher than the
£287.0m 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 £16.4m and
£4.4m reduction in the intangible assets recognised in the 31 December 2020
and 1 January 2020 balance sheets respectively, as well as £0.5m and £2.5m
reduction in property, plant and equipment. Customisation and configuration
costs for SaaS arrangements of £11.8m and £10.4m 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 £nil and £0.1m 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 balance sheet As previously Impact of restatement Restated
reported
31 December 2020 31 December 2020
£m £m £m
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 reported Impact of restatement Restated
1 January 2020 1 January 2020
£m £m £m
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 As previously reported Impact of restatement Restated
comprehensive income
2020 2020
£m £m £m
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 reported Impact 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 of cash flows As previously reported Impact of restatement Restated
2020 2020
£m £m £m
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
Components Packaging Filters Eliminations Central Services (2) Total
£m £m £m £m £m £m
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
(restated)(1) Components Packaging Filters Eliminations Central Services(2) Total
£m £m £m £m £m £m
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 £16.5m (2020: £15.7m) and income tax charge of £4.9m
(2020: credit of £2.6m) 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 £453.1m (2020:
£443.2m), revenue to Americas is £296.3m (2020: £277.2m) and revenue to
Asia and Middle East is £210.3m (2020: £176.1m). Revenue to the UK is
£70.8m (2020: £81.5m), with other significant countries being the USA with
revenue of £231.0m (2020: £210.4m), Ireland £51.2m (2020: £49.5m) and
Germany £47.8m (2020: £48.9m). Non-current assets in the UK total £145.6m
(2020: £167.9m), with the other significant location being the USA with
£309.8m (2020: £321.6m).
3. Adjusting items
(restated)*
2021 2020
£m £m
(Gains)/losses and transaction costs relating to acquisitions and disposals of (3.4) 5.7
businesses(1)
Acquisition integration and restructuring costs(2) 0.6 0.5
Customisation and configuration costs of significant software as a service 11.8 10.4
("SaaS") arrangements (3)
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 £4.4m 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 £0.4m in relation to
a prior acquisition for claims made against the vendor. These are offset by
acquisition-related costs of £1.0m in relation to the acquisition of Jiangxi
Hengzhu Electrical Cabinet Lock Co., Ltd ("Hengzhu"); £0.2m of costs in
setting up the Filters China joint venture, and £0.2m related to costs
incurred in pursuit of acquisition targets.
In 2020, there was a £0.3m gain relating to a VAT refund on the costs of a
previous business disposal, £0.1m consisting of acquisition costs in relation
to Innovative Components, £0.1m costs incurred in establishing the China JV
and £1.2m costs incurred in acquiring 3C! Packaging, Inc. ("3C!"). The
remaining £4.6m cost related to external professional costs associated with
certain development activities during the year.
(2) Acquisition integration and restructuring costs are made up of £0.3m for the
integration of the 3C! business, acquired in 2020, and £0.3m for the
integration of Hengzhu into the existing business.
( ) In 2020, £0.3m of costs were incurred in the integration of Nekicesa,
acquired in 2019, and 3C! acquired in 2020, into the existing business. The
remaining £0.2m 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 £11.8m (2020: £10.4m)
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 £2.8m relate to:
· £3.2m 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.
· £0.9m 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.
· £4.3m profit on disposal of Moorestown property following the
restructuring activities in the Packaging division initiated in 2020.
· £1.8m 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.
· £2.5m 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.
· £1.3m net credit relating to Components restructuring, comprising
£0.6m costs in relation to restructuring activities within the Components
Europe and Americas businesses, offset by a £0.6m credit relating to the
reversal of certain prior provisions, and a £1.3m credit relating to
adjustments on the carrying value of lease right-of-use assets.
( ) Other adjusting items in 2020 of £11.5m relate to:
· £7.6m 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.
· £2.1m of cost in relation to restructuring activities within the
Components Europe business following a review of the operational footprint of
the region. This comprises £0.6m costs incurred in the transfer of
manufacturing activities out of Åstorp, Sweden into Barcelona and £1.5m
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.
· £2.5m 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.
· £1.2m 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 £0.2m of external
advisory and consultancy costs, offset by a £1.4m release of excess provision
held for potential penalties in relation to this activity as the Company does
not anticipate any significant enforcement action.
· £0.5m 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 £1.2m (restated 2020:
credit of £6.4m).
4. Net finance expense
2021 2020
£m £m
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 £2.2m (2020: £0.4m) relating to
exchange gains on cash, borrowings and leases. Included within Other finance
expense is £3.1m (2020: £1.9m) relating to exchange losses on cash,
borrowings and leases.
5. Earnings per share
(restated)*
2021 2020
£m £m
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
Land and buildings Plant and machinery Fixtures, fittings and equipment Total
£m £m £m £m
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
Land and buildings Plant and machinery Fixtures, fittings and equipment Total
£m £m £m £m
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 £1.1m (2020
restated : £1.8m) which were not depreciated during the year.
Contractual commitments to purchase property, plant and equipment amounted to
£0.4m at 31 December 2021 (2020: £1.4m).
Property, plant and equipment with a net book value of £1.1m (2020: £2.5m)
was impaired by £1.1m (2020: £2.0m) to a recoverable amount of £nil (2020:
£0.5m), which represented fair value less cost to sell. £0.8m (2020: £1.9m)
of this impairment relates to restructuring projects and has been charged to
adjusting items. Furthermore, £0.4m (2020: £nil) has been written back to
a recoverable amount of £0.4m (2020: £nil) and this has been charged to
adjusting items.
7. Intangible assets
2021
Goodwill Customer relationships Other intangible assets Total
£m £m £m £m
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)*
Goodwill Customer relationships Other intangible assets 2020
Total
£m £m £m £m
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 £0.9m (2020 restated: £1.1m) which were not amortised during
the year.
Salary costs of £0.7m (2020: £1.1m) 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
£m £m
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 £m £m
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 £229.3m
· A 1.0% reduction in the terminal growth rate would reduce headroom
to £251.2m
· A 1.5% reduction in each year's growth rate would reduce headroom
to £337.5m
· A 2.0% reduction in operating profit margin in the terminal year
would reduce headroom to £253.7m
8. Lease right-of-use assets
2021
Land and buildings Plant and machinery Fixtures, fittings and equipment Total
£m £m £m £m
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
Land and buildings Plant and machinery Fixtures, fittings and equipment Total
£m £m £m £m
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 £1.1m (2020: impairment
of £1.7m). This £1.1m 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 £nil at 31 December 2021 (2020:
£4.0m).
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
£m £m
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 0.6 (32.4)
income
Impact of changes in assumptions and experience to the present value of (29.1) 39.1
defined benefit scheme liabilities
Remeasurement of defined benefit schemes (28.5) 6.7
Curtailment gain of £nil (2020: £0.4m) 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 benefit pension scheme assets Defined benefit pension scheme liabilities Other Total Defined benefit pension scheme assets Defined benefit pension scheme liabilities Other Total
£m £m £m £m £m £m £m £m
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
£m £m £m
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
£m £m
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 £0.2m (2020: £0.2m) in treasury. This
represents 0.3% (2020: 0.3%) of the number of ordinary shares in issue.
11. Analysis of net debt
1 Jan 2021 Cash flow Business combinations Lease additions Exchange movements Non-cash movements 31 Dec 2021
£m £m £m £m £m £m £m
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 £1.1m. The net non-cash movement in lease
liabilities represents lease liability surrender of £1.0m due to renegotiated
lease terms, offset by interest on leases £2.8m. The net cash outflow
relating to lease liabilities for low value, short-term and variable lease
payments was £0.3m (see note 8). During the year £10.5m of lease liabilities
moved from due after one year to due within one year.
1 Jan 2020 Cash flow Business combinations Lease additions Exchange movements Non-cash movements 31 Dec 2020
£m £m £m £m £m £m £m
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 £0.7m. The net non-cash movement in lease
liabilities represents lease liability reduction of £2.2m due to renegotiated
lease terms, offset by interest on leases £2.4m. The net cash outflow
relating to lease liabilities for low value, short-term and variable lease
payments was £0.3m. During the year £9.6m of lease liabilities moved from
due after one year to due within one year.
Included within other financial assets at 1 January 2020 was £5.0m of loan
receivables arising from the disposal of Porous Technologies and £0.6m 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 £0.6m.
In addition, during 2021 Essentra paid out the remaining deferred
consideration on the acquisition amounting to £0.1m.
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 £3.1m.
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 £1.8m.
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 £19.7m
and deferred consideration of £3.7m. During 2021, £1.2m 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 ¥103m (approximately £11.8m), 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
¥37.5m (approximately £4.2m) 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 £17.4m and £0.7m higher
respectively. Included within the consolidated accounts are £7.2m of revenue
and £nil of operating profit from Hengzhu since acquisition.
Included within adjusting items in the consolidated income statement are
£1.3m 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
£m
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 £m £m
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 £27.6m (2020: £24.3m) and gross liabilities
of £9.9m (2020: £7.4m). Operating profit for the year amounted to £5.0m
(2020: £4.8m) and movement in cash for the year amounted to £0.8m (2020:
£1.7m).
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 £20.3m (2020: £9.9m) and
gross liabilities of £5.4m (2020: £nil). Operating loss for the year
amounted to £0.8m (2020: £0.1m) and movement in cash for the year amounted
to £0.2m (2020: £9.9m).
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 £m £m
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
£m £m
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 £0.5m (2020:
£0.1m), outflow from hedging activities and other movements £0.5m (2020:
inflow of £1.3m), less movement in provisions £0.2m (2020: £nil) and profit
on lease termination £nil (2020: £2.0m).
(2 )Net capital expenditure within adjusted operating cash flow excludes
£8.5m (2020: £nil) 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
£100,000 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
Fair value Amortised cost Total carrying value Fair value Amortised cost Total carrying value
£m £m £m £m £m £m
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)
1.2 - 1.2 0.3 - 0.3
Level 2 of fair value hierarchy
Derivative assets
Derivative liabilities (0.1) - (0.1) (0.5) - (0.5)
Level 3 of fair value hierarchy 4.0 - 4.0 - - -
Trade and other receivables subject to factoring
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 £175.2m (2020: £154.2m) include
prepayments of £6.5m (2020: £7.1m) 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 £5.6m relating to the acquisitions of Micro
Plastics and Hengzhu (2020: £4.4m). 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: £nil) was recognised in
respect of financial instruments at level 3 fair value hierarchy, and £nil
(2020: £nil) 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 £257.7m (2020: £72.6m). The Group estimates that
the total fair value of the Loan Notes at 31 December 2021 is £270.5m (2020:
£78.5m).
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 effective 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 effective
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 affect 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 effects 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 affect
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 Risk owner Risk description Controls
Technology disruptors Divisional Managing Directors The risk that Essentra does not manage its response to evolving technologies We continue to monitor and review developments in the external market through
effectively. This may include losing competitive advantage as rivals deploy our networks. This includes innovation and futures sessions with existing
advanced manufacturing technologies, artificial intelligence and robotics to suppliers. We are also involved in a range of external technical focus groups
strengthen product development, marketing, production, distribution and to support the identification of future technology trends.
support functions. In particular, the potential emergence of digital
pharmaceutical literature might adversely affect parts of our packaging
division.
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