ESSENTRA PLC
("Essentra" or the "Company")

RESULTS FOR THE FULL YEAR ENDED 31 DECEMBER 2022

A year of business transformation. Well-set for growth

 

Overview

·     A strategically transformational year for Essentra

·    Disposals of the Filters and Packaging businesses completed in Q4 2022, resulting in a market leading pure-play Components business and commitment to return c.£150m to shareholders

·   The Group announced the acquisition of Wixroyd in December 2022, in line with the stated strategy of acquiring bolt-on acquisitions

·     FY 2022 performance of the continuing business in line with the Board's expectations

·     FY 2023 Board expectations are unchanged

 Components financial highlights²

·     Revenue growth of 12.0%, to £337.9m, 9.5% on a constant currency basis

·     Adjusted¹ operating profit growth of 12.0% to £63.7m, before central costs

·     Adjusted¹ operating margin increases on a constant currency basis to 18.9% before central costs, driven by strong pricing delivery offsetting inflation, and management of our cost base

·    Pro-forma³ adjusted operating profit of £43.0m (2021: £40.3m), after allocating on-going central service costs of £20.7m

·     Adjusted¹ operating cash flows of £20.2m (2021: £17.8m) and cash conversion of 80% (2021: 67%)

·     Strong balance sheet to support investment in organic and inorganic growth

Group Reported financial highlights²

·    Operating loss of £11.3m (2021: £7.7m profit) after recognising central costs previously allocated to the discontinued operations, and including adjusting items and amortisation of acquired intangibles

·   Discontinued post-tax loss of £152.7m (2021: £33.2m profit), including the impairment of goodwill and other intangibles for the Packaging business of £182.7m

·     Group net cash inflow from operating activities of £64.0m (2021: £63.2m)

Ordinary dividend and shareholder return

·     Year-end net funding surplus of £113.8m (incl. IFRS lease liabilities) after the acquisition of Wixroyd

·    £150m capital return announced, consisting of £90.0m special dividend (29.8p per share) and £60.0m share buyback

·     Recommended final ordinary dividend of 1.0p per share, FY 2022 3.3p per share

Outlook

·     The Board's expectations for 2023 remain unchanged

·    The business has the ability to manage volume impacts through implementation of pricing actions, and careful cost management, validated by historical through-cycle margin resilience

·    Distributors have continued to show signs of destocking impacting the US in particular, whilst there are improvements in China, and Europe continues to be robust. To date, new order intake is c.8% ahead of 2022 on a like-for-like basis

·     Our strong balance sheet will drive investment in value enhancing bolt-on M&A opportunities; we have a strong pipeline that we are actively managing

·     A robust and differentiated business model, with the expectation of making further progress against the medium-term targets shared at the Capital Markets Event in November 2022

^{1 Refer to Note 16 of the Consolidated Financial Statements for definition of Adjusted performance measures}

^{2 Prior year has been re-presented to remove the disposed Packaging and Filters businesses. See Note 1 to the Consolidated Financial Statements}

^{3 Pro-forma operating profit is an additional Alternative Performance Measure, which has been used to present the continuing Components business on a standalone basis, using historical cost allocation methodologies. The Components adjusted operating profit has been adjusted for the central service costs that are allocated to continuing operations}

 

 

Commenting on the Full Year results, Scott Fawcett, Chief Executive, said:

"2022 saw the conclusion of a transformational chapter and I am excited to be leading Essentra on the next stage of our strategy, as a leading global manufacturer and distributor of industrial components.

While 2022 brought a number of changes for the organisation as a whole, it has laid the foundations to capture future growth opportunities. We have continued to invest organically and inorganically, supporting the business to make progress commercially, whilst maintaining strong operating margins.

We have remained focussed on serving our customers, and enhancing our hassle-free proposition. Our NPS has improved by 11 points to 34, and we continue to invest in digitalisation and cross-selling tools. I am proud of our people who are working hard to deliver for customers, and delighted that we received an industry leading employee engagement score of 83%, in our most recent survey.

We are focussed on strong profit margins and managing our cost base and we are pleased to see new order intake to date c.8% ahead of 2022 on a LFL basis. We will continue to invest in organic growth initiatives as well as value accretive bolt-on M&A, for which our pipeline is active. Our expectations for 2023 are unchanged."

 

Results at a glance:

	FY 2022	FY 20214	% change Actual FX	% change Constant FX
Continuing operations
Revenue	£338m	£302m	+12	+10
Components adjusted1 operating profit	£64m	£57m	+12	+12
Central service costs allocated to continuing operations	£(21)m	£(17)m	+25	+23
Pro-forma adjusted1 operating profit7	£43m	£40m	+7	+7
Central service costs allocated to discontinued operations	£(18)m	£(14)m	+29	+22
Adjusted1 operating profit	£25m	£26m	-5	-1
Adjusted1 pre-tax profit	£7m	£12m	-37	-36
Adjusted1 net income2	£6m	£11m	-49	-48
Adjusted1 basic earnings per share	1.9p	3.7p	-49	-48
Continuing operations
Reported operating (loss) / profit	£(11)m	£8m	n/a	n/a
Reported pre-tax (loss) / profit	£(29)m	£(7)m	n/a	n/a
Reported net (loss) / profit2	£(31)m	£(5)m	n/a	n/a
Reported (loss) / profit per share	(10.3)p	(1.6)p	n/a	n/a
Reported net cash inflow / (outflow) from operating activities	£4m	£(3)m	n/a	n/a
Free cash flow3	£6m	£(1)m	n/a	n/a
Total Group
Dividend per share	3.3p	6.0p	-45	n/a
Net funding surplus / (debt)6	£114m	£(235)m	n/a	n/a
Net funding surplus / (debt) to adjusted EBITDA5,6	2.3x	(1.7)x	n/a	n/a

 

^{1 Refer to Note 16 of the Consolidated Financial Statements for definition of Adjusted performance measures}

^{2 Net income is defined as profit / (loss) after tax
3 A reconciliation of free cash flow on continuing operations is set out in the Financial Review section}

^{4 Prior year has been re-presented to remove the disposed Packaging and Filters businesses. See Note 1 to the Consolidated Financial Statements}

^{5 EBITDA is defined as operating profit before depreciation (and other amounts written off property, plant and equipment), share option expense, intangible amortisation and adjusting items. For 2022 EBITDA is calculated on a continuing basis and for 2021 on a total Group basis}

^{6 Presented including lease liabilities. Net fund surplus excluding lease liabilities £137m; 3.3x net fund surplus to EBITDA (2021: £(177)m net debt, (1.5)x net debt to EBITDA). For 2022 EBITDA is calculated on a continuing basis and for 2021 on a total Group basis}

^{7 Pro-forma operating profit is an additional Alternative Performance Measure, which has been used to present the business on a continuing Components standalone basis, using historical cost allocation methodologies. The Components adjusted operating profit has been adjusted for the central service costs that are allocated to continuing operations}

 

 

Enquiries

Essentra plc Claire Goodman, Investor Relations Manager Jack Clarke, Chief Financial Officer Lucy Yank, Group Communications Director Tel: +44 (0)1908 359100

Teneo Olivia Peters Lisa Jarrett-Kerr   Tel: +44 (0)20 7353 4200

 

Presentation

A copy of these results is available on www.essentraplc.com

There will be a presentation to analysts and investors starting at 09:00 (UK time, registration from 08:30) on Wednesday 29 March 2023 at Peel Hunt LLP, 7th Floor, 100 Liverpool St, London EC2M 2AT.

There are two options for participating in the event:

1.   To attend in person, please e-mail your details to [email protected]

2.   To join the live webcast of the presentation, please pre-register at: http://www.essentraplc.com/en/investors/company-information/webcasts-and-presentations

A recording of the webcast will be made available on the Company's website later in the day. 

 

Notes to Editors

About Essentra plc

Essentra plc is a FTSE 250 company and a leading global provider of essential components and solutions, focusing on the manufacture and distribution of plastic injection moulded, vinyl dip moulded and metal items.

Headquartered in the United Kingdom, Essentra's global network extends to 28 countries worldwide and includes over 3,000 employees, 13 manufacturing facilities, 24 distribution centres and 33 sales & service centres serving c.74,000 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, medical and renewable energy.

For further information, please visit www.essentraplc.com

 

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.

 

Operating Review

Components

	2022 £m	% growth Actual FX	% growth Constant FX
Revenue	337.9	+12.0	+9.5
Adjusted1 operating profit	63.7	+12.0	+12.0
Adjusted1 operating margin	18.9%	0 bps	+50bps

^{1 Refer to Note 16 of the Consolidated Financial Statements for definition of Adjusted performance measures}

 

With approximately 94% of adjusted operating profit generated outside the UK, revenue was positively impacted by c.2.5% currency translation over the period.

Revenue for the year increased by 12.0% to £337.9m, 9.5% growth at constant currency, and 6.5% LFL excluding the acquisitions of Hengzhu and Wixroyd. H1 2022 saw strong demand from most industry sectors and as the Americas and Europe emerged in a post-covid recovery phase, the business also saw inflationary pressures. In the latter part of the year, the business saw local lockdown restrictions persisting in China, and distributor destocking impacting volumes in the US. The devastating impacts of the war in Ukraine, whilst not impacting significantly (c.1% of sales), were felt by the wider market.

Adjusted operating profit increased by 12.0% to £63.7m, equating to an adjusted operating margin of 18.9% (2021: 18.9%). The operating margin reflects disciplined pricing actions, which offset cost inflation for the year. The related profit impact of the reduction in volume through H2 was further offset by mitigating actions, including managing the cost base proactively.

The business continues to respond to risks in the supply chain by adjusting capacity and maintaining a more agile approach, demonstrating the resilience of the business model. Having a global manufacturing and distribution footprint has provided the flexibility to de-risk areas of the supply chain and the ability to increasingly support customers in a volatile environment.

In response to increased inflationary pressures (materials, labour, energy and freight), and to protect margins, the business implemented a series of price increases through 2022, the impact of which offset inflationary costs. In 2023 it is expected that freight and material inflation will ease, with labour cost inflation remaining heightened. Whilst energy inflation continues to rise, the Group's exposure is small. The Group will monitor inflation in 2023, and take pricing actions where it is appropriate to protect profit margins.

Consistent with the commitment to providing customers with a "hassle-free" experience, Components has continued progress on its digital journey. The global roll out of the new digital platform in both Turkey and Thailand has been completed, and the next generation websites are now live in 26 sites and 17 languages. A large majority of the customers' journey starts online, and a strong digital front end has generated more organic traffic and improved customer conversion rates.

As indicated at the HY 2022 results, the roll out of the new ERP system has recommenced. Using learnings from a review of the programme in the latter part of 2021 and early 2022, with new resources, in-house talent and a revised Components focussed approach, there has been a successful deployment in France providing increased confidence in 2023 to accelerate the roll out, starting in Eastern Europe. A phased deployment approach will be adopted, targeting completion of the ERP implementation across all sites before the end of 2024, leading to enhanced pricing and operational efficiencies that will support margin expansion. In 2022, in line with previous guidance, the business incurred implementation costs of c.£12m (reported within adjusting items as a software as a service ("SaaS") development expense). It is anticipated that the business will incur costs of c.£12m in 2023 and £8m-£10m in 2024 to complete the implementation process.

The Group is extremely pleased that the focus on customer service improvements has been reflected in the On Time In Full (OTIF) metric of 78.2% (consistently above 85% in Q4) and the 2022 Net Promoter Score (NPS) improved by 11pts to 34 in the recent annual survey vs 2021. Closely linked to customer satisfaction, employee engagement increased to 83%, above the industry average. In a year of change for the business, having high engagement with the workforce helps to build a strong foundation for future growth.

The Component's service driven distribution model has been enhanced, with the opening of a new Eastern Europe hub in Łódź, Poland in September 2022. As a result, capacity can be built to enable growth in Eastern markets, strengthen service reliability and be more cost effective. The opening of an Eastern Europe hub also reduces dependency on the existing German hub, and provides access to key freight links. In 2023, and as part of the Group's capex guidance, there are plans to expand the manufacturing presence with a new facility in Mexico. This will enable the acceleration of near-shoring opportunities, bringing production closer to customer demand, and increase capacity to support wider growth plans. It is anticipated that the new facility will be operational in H1 2023.

In line with our stated strategy of acquiring bolt-on acquisitions, the Group announced the acquisition of Wixroyd Group (Wixroyd) in December 2022. This was the first acquisition to be announced since outlining the new pure-play Components strategy, and continues a successful track record of acquisitions in the Components business over the last ten years. Wixroyd is a leading UK supplier of industrial parts for the automation sector and will expand Essentra's capabilities in hardware components, creating additional cross-selling opportunities across a range of Essentra's end markets.

 

Discontinued Operations. The results of the Packaging business and the Filters business have been classified as discontinued operations at 31 December 2022 and comparative information has been re-presented. Financial information relating to these discontinued operations for the period to their respective dates of disposal, is set out in note 13 to the Consolidated Financial Statements. 

Discontinued operations recognised £152.7m post-tax loss (2021: £33.2m profit) for the year, as reported in the Consolidated Income Statement, which includes an impairment of the Packaging business of £182.7m, as disclosed in the HY22 results. Refer to Note 11 to the Consolidated Financial Statements for further information.

 

ESG progress and refreshed framework.  In 2022 Essentra reassessed its ESG framework, and how it could better shape the existing strategy to ensure it was fit for a standalone Components business. The framework is centred on reducing the Company's environmental impact, working with customers and suppliers to innovate sustainable products as well as maintaining the ability to attract and retain talent, maximising colleague engagement and wellbeing. In summary, Essentra have created five pillars to fulfil its sustainability ambitions, linked closely to the UN Sustainable Development Goals, and is committing to additional sustainability targets in 2023, covering each of the Group's ESG pillars, being Planet, Culture, Communities, Components and Customers.

The use of post-consumer recycled content materials has increased, 10.8% of packaging and raw materials are obtained from more sustainable sources compared to c.8.5% in 2021 (target of 20% in 2025). The business saw a Q4 exit rate of c19.0% which provides confidence in achieving a reduction of 20% by 2025 as the Group anticipates reaching this target two years early, in 2023. Throughout the year, a number of products within the Low Density Polyethylene range were manufactured almost entirely from recycled materials. Essentra continues to innovate and build relationships with its customers to recognise further opportunities, and in 2023 will launch a Centre of Excellence to accelerate the testing of recycled and bio based materials, with the additional target of ensuring 100% of packaging is reusable, recyclable or compostable by 2030.

Six new sites were certified as "zero waste to landfill" increasing the total number to 12 sites in 2022 (33%), with the ambition of certifying all sites by 2030. 76% of all waste is now diverted from landfill. 

Essentra saw a further reduction of normalised Greenhouse Gas emissions. In 2022, the Group revised its baseline to include the Hengzhu acquisition in 2021, and compared to 2019 baseline, we have reduced our Components absolute Scope 1 and Scope 2 CO2 emissions by 27% and our emissions intensity by 35%, ahead of the 25% reduction target by 2025.

As part of the revised ESG framework, Essentra will develop a new near-term absolute emissions target for 2030, alongside a Scope 3 emissions target, to reduce our emissions in the value chain. Essentra is also targeting the development of an increased data set, leading to the opportunity to provide customers with accurate information to understand their Scope 3 emissions.

Further details regarding our ESG strategy and commitments will be published within our 2022 Annual Report.

 

Ordinary dividends and Shareholder return. The Board of Directors recommend a final ordinary dividend of 1.0p per share, resulting in a total dividend for FY 2022 of 3.3p (2021: final 4.0p, total 6.0p). In 2022, the dividend has been rebased to account for the earnings of the continuing operations of the business. The Board is committed to a progressive dividend policy going forwards, maintaining dividend cover in the order of three times. The final dividend will be paid on 30 June 2023 to shareholders on the share register of the Company on 19 May 2023. The ex-dividend date will be 18 May 2023. 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 9 June 2023.

As previously disclosed on 2 February 2023, the Company confirms its intention to return approximately £150m of residual net transaction proceeds from the disposals of the Packaging and Filters business including a special dividend of £90m, representing approximately 29.8 pence per ordinary share (the "Special Dividend"). The Company intends to pay the Special Dividend on 27 April 2023 to shareholders on the register of the Company as at 18:00 (UK time) on 21 March 2023. The ordinary shares were marked ex-dividend as of 20 March 2023. The final date for DRIP elections in respect of the Special Dividend will be 4 April 2023.

On 2 February 2023, the Board also confirmed its intention to initiate a share buyback programme of up to £60m. A separate announcement has been released today, 29 March 2023, containing further details, and confirming the launch of the share buyback programme.

 

Board changes. As planned and previously communicated, Nicki Demby retired from her role as Remuneration Committee Chair and Non-Executive Director following the Company's 2022 AGM on 19 May 2022. Ralf Wunderlich has been appointed as Remuneration Committee Chair, adding to his existing role as Sustainability Committee Chair. Following the AGM on 19 May 2022, Dupsy Abiola became a Non-Executive Director and Jack Clarke joined the Board as Chief Financial Officer succeeding Lily Liu.

Following the successful completion of the Group's strategic reviews of the Filters and Packaging divisions, Paul Forman decided to step down from his role as Chief Executive of the Company on 31 December 2022. Paul has been succeeded by Scott Fawcett, previously the Managing Director of Essentra's Components division, and joined the Board on 1 January 2023.

The Board further confirmed on 3 January 2023 that Kath Durrant joined the Board as a Non-Executive Director of Essentra plc.   

 

Outlook.

The Board's expectations for 2023 remain unchanged. The business is able to manage volume impacts through implementation of pricing actions and careful cost management, validated by historical through-cycle margin resilience.

Although we continue to see distributor destocking, trading in Europe continues to be robust and China's reopening will increasingly benefit our business in Asia. To date, new order intake is c.8% ahead of 2022 levels on a LFL basis.

Management is confident Essentra's robust and differentiated business model will enable it to deliver against the medium-term targets shared at the capital markets event in November 2022. Our global manufacturing and distribution footprint, market-leading positions and focus on delivering excellent customer service will support ongoing organic growth and profitability, whilst our strong balance sheet will drive investment in our strong pipeline of value enhancing bolt-on M&A opportunities.

 

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 2022	FY 2021	FY 2022	FY 2021
US$:£	1.24	1.38	1.20	1.35
€:£	1.17	1.16	1.13	1.19

Re-translating at FY 2022 average exchange rates increases the prior year revenue by £7.0m and decreases the adjusted operating profit by £1.0m.

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 2022 LFL results are adjusted for the acquisition of Wixroyd Group ("Wixroyd") on 1 December 2022, and for the acquisition of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd ("Hengzhu") on 2 August 2021. The FY 2022 and FY 2021 results have also been adjusted for the completion of the Packaging business disposal previously announced on 3 October 2022 and the completion of the Filters business disposal previously announced on 5 December 2022.

 

Adjusted basis.  The term "adjusted" excludes the impact of amortisation of acquired intangible assets and adjusting items, less any associated tax impact. In FY 2022, amortisation of acquired intangible assets was £10.4m (2021: £8.6m), and there was a pre-tax charge for adjusting items of £26.0m (2021: £10.1m). In the current year, the adjusting items include £12.4m major software as a service ("SaaS") development expenditure (the majority of which is relating to the ERP implementation); £10.4m from strategic review and restructuring activities to right-size Components following the disposal of Filters and Packaging, and £2.0m relating to legacy pension scheme costs. Further details on adjusting items are shown in Note 3 to the Consolidated Financial Statements.

 

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.

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 20 to 23 of the 2021 Annual Report.

 

Statutory to Adjusted Reconciliation for continuing operations:

31 December 2022	Reported	Acquisitions	Amortisation of acquired intangible assets	Adjusting items	Tax on adjustments	FX	LFL3 / Adjusted1
Revenue	£338m	£(17)m	-	-	-	-	£321m
Operating (loss)/ profit	£(11)m	-	£10m	£26m	-	-	£25m
Pre-tax (loss)/  profit	£(29)m	-	£10m	£26m	-	-	£7m
Net (loss) / income	£(31)m	-	£10m	£26m	£1m	-	£6m

^{Values are presented on a rounded basis}

 

 

31 December 20212	Reported	Acquisitions	Amortisation of acquired intangible assets	Adjusting items	Tax on adjustments	FX	LFL3 / Adjusted1
Revenue	£302m	£(8)m	-	-	-	£7m	£301m
Operating (loss) / profit	£8m	-	£9m	£10m	-	-	£26m
Pre-tax (loss) / profit	£(7)m	-	£9m	£10m	-	-	£12m
Net (loss) / income	£(5)m	-	£9m	£10m	£(3)m	-	£11m

^{Values are presented on a rounded basis}

 

^{1 Refer to Note 16 of the Consolidated Financial Statements for definition of Adjusted performance measures}

^{2 Prior year has been re-presented to remove the disposed Packaging and Filters businesses. See Note 1 to the Consolidated Financial Statements}

^{3 Like-for-like has been adjusted for the acquisitions of Hengzhu and Wixroyd}

 

IAS 29: Turkey Hyperinflation. International Accounting Standards ("IAS") 29, Financial Reporting in Hyperinflationary Economies, has been applied to the Components business in Turkey. There has been more than a 100% increase in the Consumer Price Index in Turkey between 2019 and 2022. As a result of IAS 29, an increase in net assets of c.£18m and a c.£3m increase in profit before tax has been recognised within the Full Year results. The Components business in Turkey contributes c.6% revenue to the continuing Group.

 

Net finance expense. Net finance expense of £17.8m was £3.0m higher than the prior year period, and is broken down as follows:

	2022 £m	20211 £m
Net interest charged on net debt	14.5	10.9
Amortisation and write-off of bank fees	4.7	1.1
Net IAS 19 pension finance charge	-	0.4
Interest on leases	1.5	1.4
Net other finance income	0.3	1.0
Monetary gain on hyper-inflation	(3.2)	-
Total net finance expense	17.8	14.8

^{1 Prior year has been re-presented to remove the disposed Packaging and Filters businesses. See Note 1 to the Consolidated Financial Statements}

The interest expense is expected to reduce in 2023 as a result of the Group reducing US private placement ("USPP") debt in January 2023, using a portion of the disposal proceeds to repay $247m of the $350m USPP notes initially held.

Tax. The effective tax rate on underlying profit before tax (before adjusting items and amortisation of acquired intangible assets) was 21.5% (2021 re-presented: 3.2%). The underlying effective tax rate for 2022 is within the continuing operations of the 2022 forecast tax rate range of 21% to 22%. Consistent with the disclosure of tax rates at HY 2022, this increased tax rate compared to the prior year is primarily driven by the one-off non-cash benefit on the remeasurement of deferred tax assets in 2021 (as a result of the enacted change in UK Corporation Tax rates) and significant reductions in central tax provisions in 2021.

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").

Continuing	2022 £m	20211 £m
Inventories	65.0	54.2
Trade & other receivables	66.4	54.6
Trade & other payables	(91.5)	(75.5)
Adjustments	4.3	5.6
Net working capital	44.2	38.9

^{1 Prior year has been re-presented to remove the disposed Packaging and Filters businesses. See Note 1 to the Consolidated Financial Statements}

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 in H1, driven by an increased focus on serving customers and rebuilding stock levels after the pandemic.

 

Adjusted operating cash flow from continuing operations. Adjusted operating cash flow from continuing operations was 13% higher than the previous year at £20.2m (2021: £17.8m), which equated to an operating cash conversion of 80% in the year (2021: 67%). Free cash flow was £5.7m compared to £0.9m outflow in 2021.

 

 

Continuing operations	2022 £m	2021 £m
Adjusted operating profit	25.1	26.4
Depreciation and amortisation of non-acquired intangible assets	16.6	14.9
Right-of-use asset depreciation    Share option expense / other movements	5.6 (0.1)	5.4 (1.2)
Change in working capital	(14.2)	(15.0)
Net capital expenditure (excluding disposal proceeds relating to adjusting items)	(12.8)	(12.7)
Adjusted operating cash flow	20.2	17.8
Tax1	1.7	(4.7)
Cash outflow in respect of adjusting items1,2	(30.4)	(23.9)
Pension contribution2	-	(4.8)
Add back: net capital expenditure (excluding disposal proceeds relating to adjusting items)	12.8	12.7
Net cash inflow / (outflow) from operating activities	4.3	(2.9)
Adjusted operating cash flow	20.2	17.8
Tax1	1.7	(4.7)
Net interest paid	(16.2)	(9.2)
Pension contribution2	-	(4.8)
Free cash flow	5.7	(0.9)

^{1 Tax paid excludes the tax paid/received in relation to adjusting items. This is included within the cash outflow in respect of adjusting items}

^{2 Pension contribution of £0.7m for legacy pension schemes has been included within cash outflow in respect of adjusting items}

Net funding surplus / debt.  Net funding surplus at the end of the period was £113.8m compared to net debt of £234.7m in 2021 (including lease liabilities). The overall increase was driven by proceeds received for the disposal of the Filters and Packaging businesses and free cash flow generated, less cash paid for the acquisition of Wixroyd.

The Group's financial ratios remain healthy. The ratio of net funding surplus to EBITDA (on a continuing basis) excluding lease liabilities was 3.3x (2021: net debt 1.5x on total group basis). Net funding surplus to EBITDA (on a continuing basis) including lease liabilities was 2.3x (2021: net debt 1.7x on a total group basis).

	2022 £m
Net debt as at 1 January 2022	(234.7)
Free cash flow	5.7
Cash flow from discontinued businesses	31.3
Cash outflow in respect of adjusting items	(30.4)
Foreign exchange	(30.5)
Disposal - net proceeds received after costs to sell	385.4
Lease liabilities disposed through business disposals	37.6
Acquisitions - net of cash acquired	(27.9)
Dividends to non-controlling interests	(1.9)
Dividends to equity holders	(19.0)
Lease liability movements	(10.1)
Movement in loan hedging derivatives	14.8
Revaluation of loans	(1.7)
Arrangement fee written off	(3.2)
Amortisation of pre-paid facilities	(1.6)
Net funding surplus as at 31 December 2022	113.8

 

Financing activities. One of the main sources of funding for the Company is a Revolving Credit Facility ("RCF") provided by a group of six highly-rated banks. In October 2021 Essentra completed the total refinancing of its RCF and a new five-year term, expiring in November 2025 for a commitment of £275m. In October 2022, following bank consent and as part of the strategic review, the decision was taken to reduce the RCF facility to £200m, maintaining the same terms. As of 29 March 2023, the RCF is undrawn.

In addition to the above and prior to the strategic reviews, the Company held $350m of medium and long-dated USPP debt  with an average coupon rate of 4.2%. Following receipt of the proceeds from the disposal of Filters the medium-term dated notes were repaid in January 2023, totalling $100m. Following receipt of the proceeds from the disposal of Packaging, in January 2023, the longer term dates notes were partly repaid at par plus accrued interest, resizing the total USPP debt to $103m.

Pensions. As at 31 December 2022, the Company's IAS 19 net pension net liability was £10.6m (2022: net surplus of £9.0m). During the year, and as recognised at the HY 2022 results, the senior section of the pension scheme purchased a buy-in policy, significantly de-risking a proportion of the UK pension scheme against future funding deficits. An actuarial loss of £7.1m was recognised through reserves.

 

Central Service Costs

	2022 £m		2021 £m
Central service costs attributable to the continuing operations	(20.7)		(16.6)
Central service costs allocated to discontinued operations1	(13.7)		(13.9)
Central service costs unallocated following disposal2	(4.2)	-
Total	(38.6)		(30.5)

^{1 13.7m central service costs incurred in 2022 (2021: £13.9m) were allocated to the Packaging and Filters businesses. After disposal, these costs have been recognised within the continuing operations of the Group. Further details on segmental reporting is in Note 2 to the Consolidated Financial Statements.}

^{2. £4.2m relates to unallocated central service costs following disposal of the Packaging and Filters businesses. After disposal, these costs have been recognised within the continuing operations of the Group. Further details on segmental reporting is in Note 2 to the Consolidated Financial Statements.}

 

 

In 2022, the Group recognised £20.7m of central overheads that were attributable to the continuing operations. Whilst this is an increase on £16.6m reported in 2021, the prior year central costs included a number of one-off items in nature totalling c.£4.0m.

As part of the strategic review and transition to a pure-play Components business, actions have been taken to right-size the central service costs moving forward, with the intention of reaching a normalised central service cost position towards the end of 2023.

Central service costs allocated to Packaging and Filters businesses, have remained within the continuing operations of the group and reported within the FY 2022 continuing operations financial statements. Costs that would have previously been allocated to discontinued operations total £17.9m (2021: £13.9m).

 

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. The Company intends on using derivatives to manage foreign currency and interest rate risk arising from underlying business activities. Whilst some transactions may be of a more speculative nature, they are in place with the view to manage exchange rate risk only. 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.

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. The Group's principal risks are detailed later in this announcement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Management Report

 

RESPONDING TO CHANGE IN 2022

During the last two years, the Company has had to navigate and manage the disruption caused by the pandemic, the war in Ukraine as well as disruption across our supply chain and workforce. These challenges largely affected the industry as a whole, although our response was very specific to the needs of Essentra. In 2022, the Company's risk agenda was focused as much internally - as we delivered the strategic reviews of the Packaging and Filters divisions - as it was at the broader disruptive economic and geopolitical environment.

The risk management lessons we learnt during 2020 and 2021 resulted in us being well placed to evolve our process to meet the emerging needs of the business. The strategic reviews of the Packaging and Filters businesses, as well as broader disruption to the business, resulted in further evolution of our risk management framework. This framework is now aligned to the needs of Essentra as a pure-play global Components business. The framework 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 announcements in late 2021 in relation to the strategic reviews, we have undertaken a series of in-depth risk workshops and reviews with former and current leadership and with the support of external advisers. These efforts have, following consultation with the ARC and Board, resulted in new portfolio of Principal and Emerging Risks which are aligned to our new strategic direction as a pure-play Components business. The following pages reflect the output of these discussions with four Principal Risks having been retired (in relation to: Achieving Acceptable Returns in the Packaging Business, Tobacco Industry Dynamics, Internal Process and Control and the delivery of the Strategic Reviews) and two new risks added (to reflect the need to deliver on M&A and on the Execution of the Strategic Plan). Other risks have been reviewed and have evolved, to a greater of lesser extent, to reflect the current nature of the risk and our approach to mitigation.

Looking ahead to 2023, we anticipate that macroeconomic uncertainty 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 this in a manner that protects profitability efficiently and effectively. Additionally, we continue to analyse and assess the Emerging Risk landscape, with particular focus on potential sources of disruption and our use of plastic as a raw material, to ensure the Company's risk management practices continue not only to protect stakeholder value but to support its creation in line with our strategic growth objectives. Despite this focus on mitigating the impacts of an increasing range of disruptive risks, we continue to pay 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.

We continue to see economic disruption across our business, but 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.

 

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 2022 in evolving our risk management processes as our strategic reviews progressed; we continue to ensure they are aligned with FTSE 250 upper quartile practice. Particular focus was placed on reviewing our portfolio of Principal and Emerging Risks in the light of our new strategic focus and an increasingly dynamic operating environment.

 

 

RISK MANAGEMENT FRAMEWORK

A refreshed risk management framework was introduced in 2021. As the strategic reviews progressed in 2022, this framework has evolved to meeting the changing needs of the business. The framework was developed to support the Company in identifying and managing risk within defined appetite levels, at both a strategic and an operational level.  The current framework was designed to provide the GEC 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 2022, the challenges the Company faced included ongoing 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 this dynamic and disruptive 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 communities, our reputation, regulatory compliance, market and financial performance and therefore the achievement of our strategic objectives.

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 considers the nature and extent of the Principal Risks it is prepared to take in achieving its strategic objectives - its risk appetite - biannually by mapping these risks against a sliding scale from "risk-averse" to "risk-neutral" to "risk-tolerant". This informs the development and focus 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 the year ahead, the Risk Assurance team will support regional and functional leadership teams in the management of their risk processes, specifically in relation to the delivery of strategic projects. In 2022 we paid attention to both the Principal Risks we face as a pure-play Components business and to potential Emerging Risks and also to ensuring clarity across roles and responsibilities for those risks that cut across divisions and enabling functions.

Principal Risks were subject to a series of deep-dive workshops with former and current leadership and the Board.

 

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.

The GRC met four times in 2022, each meeting with a full attendance. The GRC was chaired by the Chief Executive and its membership comprised the GMC members, Head of Risk, Head of Governance and the Group Communications Director. Non-member standing attendees were the Group Health, Safety and Environment Director, the Chief information Security Officer and the Group Financial Controller. Other members of senior management were also invited to present reports on specific risk activities. The Chair of the ARC has a standing invitation to attend all GRC meetings and received copies of the minutes of every meeting. The Chair of the ARC also meets with the Head of Risk on a monthly basis. The work of the GRC has now been subsumed into the GEC; risk is a standing agenda item at every meeting and risk deep dives will held on a quarterly basis and will ensure that all Principal and Emerging Risks are covered at least once per calendar year.

The GEC's (formerly 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 GEC 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 relation to risk to enable the Board to challenge and review the GEC's views on key risks.

The ARC engages directly with the regions and 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 regional and functional 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 GEC now 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 detailed review of Principal Risks was performed as the strategic reviews progressed. This considered risk from both a top-down and bottom-up perceptive as well as through the lens of the geopolitical and economic disruption we see today. All Principal Risks have been assigned a GEC owner, assessed to consider the extent to which they might impact the company's strategic objectives and, as a result, the approach to mitigation defined and documented.

The output from these considerations were presented to the Board along with a proposal for risk appetite, a recommendation of Principal Risks to be included in long-term viability modelling and overall approval.

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 GEC 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 GEC 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 our Long-Term Viability Statement.

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 GEC and Board.

 

 

KEY CHANGES DURING THE YEAR

During 2022 we undertook a fundamental review of our Principal and Emerging Risks as we executed the strategic reviews.

At the Half Year we disclosed the following key changes to our risks:

·     an increase in relation to our 'Exposure to the Cyclical Industrial Market' risk as the Company moved towards being a pure-play Components business

·     an increase in relation to our 'Talent and Workforce Management' risk resulting from the Company's change agenda in relation to the strategic reviews

No new Emerging Risks were noted at the Half Year.

Since our Half-Year disclosure, we continued our review of our Principal and Emerging Risk profiles in the context of our strategic direction. The following key changes have been made since then:

 

Retired Principal Risks:

·     removal of our 'Failure to Achieve Acceptable Returns from the Packaging Division' risk following the sale of that business

·     removal of our 'Tobacco Industry Dynamics' risk following the sale of that business

·     removal of our 'Internal Processes and Control' risk following the completion of our implementation of our Minimum Control Standards. This remains a Key Risk to the business and robust mitigation continues to be in place however we no longer consider it a Principal Risk

·     removal of our 'Strategic Reviews' risk following their completion. Whilst this has been retired as a Principal Risk, we continue to manage the ongoing commitments under the sale agreements including the delivery of transitional services and finalisation of completion accounts

New Principal Risks:

·     a new 'M&A Execution and Integration' risk has been added as a result of the need to reflect the importance of inorganic growth and the need to efficiently and effectively execute transactions and integrations in a difficult macroeconomic environment

·     a new 'Execution of Strategic plan' risk has been added as a result of the need to implement a portfolio of strategic initiatives to meet our growth commitments

Evolving Principal Risks:

·     our former 'Delivery of Strategic Projects' risk, which was largely focused on the delivery of the Business Process Redesign (BPR) project in the Components business has been developed into a 'Digital Transformation' risk which now covers both the BPR project and the underlying digital ecosystem required for our business to succeed

·     our former 'Exposure to the Cyclical Industrial Market - Components' risk has been redefined as a new 'Macroeconomic Environment' risk that considers the impact of the macroeconomic situation on the business more holistically

·     our former 'Talent and Workforce Management' risk has been redefined as 'Leadership Talent & Capability' to reflect the new strategic direction and new leadership team

All other risks have been reviewed and updated to reflect the current nature of the risk and mitigating activities.

 

EMERGING RISKS

We define an 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 GEC 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 series of risk workshops with former Group and divisional leadership have been held as the strategic reviews progressed and were facilitated by the Risk Assurance team, the most recent of which considered the potential sources of disruptive risk.

These workshops formed part of the ongoing cadence of Emerging Risk identification and were followed by further discussion at GRC meetings. Additionally, further assessments of potential Emerging Risks were performed using 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 initially by the GRC and then by the GEC to reach a consensus regarding Emerging Risks that can seriously affect the performance, future prospects or reputation of Essentra. The outputs from these assessments were presented to the Board for approval along with the recommendation to develop appropriate response strategies.

The GEC and the Board have undertaken a rigorous assessment of Emerging Risks during 2022 and have established procedures to closely monitor Emerging Risks on an ongoing basis including:

·     the GEC's terms of reference require it to review the Company's ability to identify Emerging Risks

·     Emerging Risks is a standing agenda item at each GEC 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 a GEC 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.

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. We continue to monitor the situation in Ukraine, the ongoing response of international governments and any potential impact on the Company.

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 Company's risk reporting to the GEC and the Board.

 

 

 

 

 

 

 

 

 

STRATEGIC RISKS

Environmental

Change in risk level: Unchanged

Ownership: Chief Operations Officer

Relevance: Industry general

Description

Formerly a component part of our Environmental, Social, & Governance Principal Risk, this focuses on concerns around the impact of business on the environment which are increasingly fundamental for all companies and stakeholders. Essentra has  specific exposure to:

·     Single Use Plastics: including potential changes in relation to laws and regulations and the need to increase recycled content and product circularity. The business is actively working to incorporate more sustainable materials and believes it has the innovation capability to enable future growth opportunities with the use of such materials.

·     Climate Change: given the business's operational footprint and, 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 continue to develop 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.

Failure to meet stakeholder expectations on increasing environmental 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 more generally.

Elements of this risk that previously related to the EU packaging directive and to the tobacco industry have been eliminated with the divestment of the Packaging and Filters divisions.

Mitigation

Environmental activities are managed through the work of the Company's ESG Committee (formerly Board Sustainability Committee). This is chaired by a Non-Executive Director, and comprises members from Board, GEC and other senior management. 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 ESG Committee's recommendations, in respect of reducing risk exposure, inform the work of the GEC, global functions and the wider business. Additionally, the Nomination and Remuneration Committees cover aspects of environmental performance.

During the year, as part of refocusing the business to a pure-play Components business, a new Sustainability Strategy team has been created to manage the delivery of the Company's environmental objectives.

Finally, the GEC also continues to evolve our approach to managing climate change risk, and we continue to work to fulfil our reporting obligations under TCFD requirements.

 

 

 

Social

Change in risk level: Unchanged

Ownership: Chief People & Culture Officer

Relevance: Industry general

Description

Formerly a component part of our Environmental, Social, & Governance Principal Risk, this focuses on concerns around the impact of business on our stakeholders and the societies in which we operate. Essentra's risk is focused in two areas:

·     Ethical Supply Chain: the breadth of our operational supply chain results in risks in relation to modern slavery, child labour and safe, hygienic working environments.

·     Diversity and Inclusion: the risk that we are unsuccessful in leveraging the opportunities that a diverse team offers the business. Strong engagement on ethnic and gender diversity and inclusion can also lead to improved cognitive diversity and the avoidance of group-think. Essentra has a global footprint and our diversity helps us serve the geographical markets in which we operate. We believe diversity brings a range of outlooks to decision-making and problem-solving as well as better representing our employee base and the communities in which we operate.

More generally, we remain vigilant in respect of evolving expectations around Essentra's engagement with its internal and external stakeholders more broadly.

Failure to meet our obligations to our internal and external stakeholders and the societies in which we operate more generally could lead to reputational or commercial risk for the Company.

Mitigation

This Principal Risk is addressed in a number of ways. We have a robust "Know Your Supplier" process which continuously screens significant suppliers for restricted parties and adverse media. Additionally, significant suppliers are required to confirm their compliance with Essentra's code of conduct. We are currently reviewing a number of options for enhancing the breadth of our due diligence to better understand and mitigate the risk of modern slavery and child-labour (along with a number of more general ethical and operational considerations) across our entire supply chain rather than just our direct relationships.

We actively engage with our workforce on diversity and inclusion and monitor key metrics at management levels. We continue the work of our Diversity and Inclusion network which includes launching local and global campaigns to promote awareness.

 

Digital Transformation

Change in risk level: Increased

Ownership: Chief Strategy Officer

Relevance: Company specific

Description

Our success is dependent, in part, on our ability to deliver key digital projects on time and within budget to realise their full potential. We continue to invest in, and deliver, our Business Process Redesign programme, our digital eCommerce platforms and in the fidelity of our data to further improve our service offering.

Failure to deliver these key initiatives could adversely affect our ability to maintain a competitive advantage, to deliver our digital strategy and to leverage our data as an asset.

The roll out of the Microsoft Dynamics 365 system as part for the Business Process Redesign continues with significant strides made in Q4 2022. A detailed plan is now in place to accelerate implementation throughout 2023. The completion of this programme will provide a robust platform from which we can further develop our digital capabilities.

Mitigation

In early 2022, we reviewed and strengthened governance arrangements and resources to accelerate delivery of the Business Process Redesign programme. A robust management framework is now in place to support the delivery of our digital transformation, which includes the Business Process Redesign programme, and during the year we opened a new Digital and Data hub in Istanbul. These initiatives are supported by a project management infrastructure.

We continue to maintain a strong focus on the skills and capabilities of our employees in relation to the delivery of our digital projects. This is achieved by providing training and support, as necessary and by mobilising teams which possess the right skills to deliver. In particular, we support project managers' development through a variety of training programmes and professional qualifications.

 

Leadership Talent and Capability

Change in risk level: Increased

Ownership: Chief People and Culture Officer

Relevance: Company Specific

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. Having recently concluded our strategic review, we are now a pure-play Components business. During the review process, the Company has been through a significant level of change and now has a completely new leadership team. The level of change seen coupled with 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 our pure-play Components 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. We continue to see health related disruption in China and there remains a risk that future major health events could result in further labour disruption.

Mitigation

As part of our strategic review activity, the leadership and talent needs of the pure-play Components have been assessed and a new organisation design implemented to support them.

Additionally, a people strategy is in place and is designed 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.

Throughout the strategic reviews, we focused on the retention of existing talent and also, where it did not exist internally, on attracting the external talent necessary to deliver our strategy in this new pure-play environment. We continue to review the organisation for points of failure at which additional cross-training might be necessary to alleviate disruption.

 

 

 

 

 

 

M&A Execution and Integration

Change in risk level: New

Ownership: Chief Financial Officer

Relevance: Company specific

Description

As outlined in the October 2022 Capital Markets Day, M&A is a key part of the Company's growth strategy. There is an inherent risk that there are insufficient available targets to deliver the M&A plan. Additionally, there is a risk that the Company is unable to successfully implement its post-acquisition integration strategy as a result of some of the capability and capacity constraints noted in Leadership Talent and Capability Principal Risk. The nature of this risk differs between bolt-on and transformation acquisitions.

Mitigation

The level of resource available to M&A execution is being reviewed and, if appropriate, increased. The Company maintains and active M&A pipeline and proactively seeks out potential targets. Work is ongoing to refine M&A criteria, strategic priorities, with particular focus on the differing requirements of bolt-on and transformational M&A, and the approach to integration.

 

Macroeconomic Environment

Change in risk level: Decreased

Ownership: Chief Financial Officer

Relevance: Industry general

Description

In previous years, this risk has been called 'Exposure to the Cyclical Industrial Market (Components Division)'. Now the Company has completed its strategic reviews and is now a pure-play Components business, we have re-framed the risk to consider the effect of changes in the macroeconomic environment more generally. The Company 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 Company sells to a broad base of global and regional end markets including automotive, capital goods and electronics. This market and geographical breadth provides a degree of risk diversification; however, as we see from the current economic climate, downturns in industrial production are almost certain to happen, albeit with an uncertain time frame.

The Company seeks to operate a flexible model whereby changes to its cost base can be quickly made to maintain operating margins against fluctuations in demand. Whilst the Company has been historically successful in managing profitability through the economic cycle, there remains a risk that the necessary changes cannot be executed, or they are not robust enough to minimise the impact on operating margins.

Mitigation

Key mitigating actions being undertaken to protect the Company from future industrial declines include the following:

·     the ongoing optimisation of fixed cost base to minimise the impact of demand fluctuations. Specifically, the Company undertakes continuous reviews of its operating footprint to optimise manufacturing and distribution cost to serve. A new distribution model for EMEA has been implemented which provides the opportunity for us to reduce our distribution footprint while delivering enhanced service levels to our customers, the models for the Americas and Asia are currently being reviewed

·     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.

 

EXTERNAL RISKS

Governance

Change in risk level: Decreased

Ownership: Company Secretary

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, although this has reduced following the conclusion of the Strategic Reviews. 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, enforcement agencies and other stakeholders.

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 GEC 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 Compliance function 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)

·     extensive focus on third party due diligence to take account of lessons learnt from the past

·     the Company's Governance, Risk and Compliance teams which, with support from external advisers, continuously monitors current and forthcoming changes to the regulatory* environment and emerging good practice

·     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: Decreased

Ownership: Chief Digital Information Officer

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 change in ways of working that we have seen over the past few have affected our operational dynamic with significant levels of remote working continuing to be the norm. The Company has invested, as part of our pandemic response, in improvements to protection of mobile devices and remote access.

As we look to the future, maintaining cyber security integrity in a growth environment will be critical; disruptive cyber events remain a serious threat to our digital ecosystem and 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 has evolved to meet the needs of the new Essentra, it aims to mitigate the risks and operational disruption caused by cyber events. The programme includes:

·     endpoint protection (including zero-trust remote access), encryption of data, enhanced cloud-based security tooling and protection, web and email content protection

·     specific focus on mitigating cyber risks in relation to shop-floor IT infrastructure

·     identity and access management

·     continued cyber security awareness training for all employees

·     vulnerability and penetration testing for external IT services and websites.

During the year, specific effort has gone into maintaining the cyber control environment through the separation of the Packaging and Filters divisions and the delivery of transitional services.

 

OPERATIONAL RISKS

Execution of the Strategic Plan

Change in risk level: New Risk

Ownership: Chief Strategy Officer

Relevance: Company specific

Description

The Company outlined ambitious plans during the recent Capital Markets Day underpinned by a number of strategic initiatives. These initiatives include, but are not limited to digital transformation, our approach to cross-selling and product category management. Whilst elements of this strategy are touched upon in other Principal Risks, there is a wider risk in relation to the Company's ability to deliver the initiatives that underpin the growth commitments made to the market. Additionally, there is a risk that the Company suffers from initiative overload and cannot effectively prioritise critical strategic tasks.

Mitigation

The Company's "hassle-free" strategy is in place and is underpinned by ongoing work on Product Category management and our digital transformation. The Company already seeks to drive the cross-selling of products across geographical and market boundaries. This is particularly the case for some of our more recent acquisitions. Work is ongoing to ensure the Company's project portfolio is adequately scoped for the level of resource available and prioritised towards those activities that are critical to achieving strategic objectives.

 

 

Health and Safety Performance

Change in risk level: Unchanged

Ownership: Chief Operations Officer

Relevance: Company specific

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.

As we seek to grow the business both organically and inorganically, we are mindful of the affect this might have on our risk profile. Our approach to integration ensures early deployment of Essentra's safety practices. More generally we continue to drive our safety culture through the 'tone at the top' and across the whole company.

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 GEC and the Board on Health, Safety and Environment (HSE) related matters

·    a Company 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.

During 2023, we aim to make better use of the data held within our Health and Safety management system and develop leading indicators to help identify improvement areas before issues occur. Furthermore, we will continue to drive our safety culture across the organisation

 

 

 

DISRUPTIVE RISKS

Operational and Supply Chain Disruption

Change in risk level: Increased

Ownership: Chief Operations Officer

Relevance: Industry general

Description

We operate a diverse, global operational footprint and supply chain across our business. Ensuring these operations and supply chains are resilient is a fundamental part of maintaining our customer service levels and hassle-free proposition 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 a degree of risk diversification, through alternative manufacturing options elsewhere in the Company. Equally, disruptive events might be broader in nature and impact a number of sites simultaneously, for example an extreme weather event, 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 continuing disruption to our China site as a result of COVID-19 related restrictions and outbreaks.

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 2022, as part of our TCFD activity, we have developed the work performed with external consultants in 2021 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. We also have commenced a number of initiatives to better understand our supply chain and identify and mitigate potential stress points. During the last year we have implemented a new distribution model for EMEA; a warehouse hub is in place in Germany and another recently went live in Poland.

In 2023, work is planned to consider the distribution model in the Americas and Asia, to identify and eliminate single points of failure in our supplier base and to develop resilience plans at a global level.

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.

 

Emerging risk	Risk owner	Risk description	Mitigation
Regulatory change	Company Secretary	The risk that Essentra does not or is unable to comply with changes in the regulatory environment. Governments might react to prevailing economic conditions by increasing taxes and tariffs. Evolving public sentiment on sustainability might result in further legislation with which the Company must comply. The geographical breadth of the Company's operations adds a degree of complexity to this emerging risk.	We continue to proactively monitor and review developments in the regulatory environments in which we operate. This includes leverage the knowledge of those colleagues operating in local markets and seeking external advice.
Technology disruptors	Chief Marketing Officer and Chief Digital Information Officer	The risk that the Company does not manage its response to evolving technologies effectively. This may include losing competitive advantage as rivals deploy advanced manufacturing technologies, artificial intelligence and robotics to strengthen product development, marketing, production, distribution and support functions. In addition, the rapid emergence of alternative materials might affect demand for our products.	We continue to monitor and review developments in the external market through our networks. This includes innovation and futures sessions with existing suppliers. We are also involved in a range of external technical focus groups to support the identification of future technology trends.
Sentiment towards Plastic	Chief Sales Officer and Chief Marketing Officer	Market and stakeholder sentiment towards plastic continues to evolve at pace and could affect medium-term demand for many of Essentra's products.	We continue to work internally and with our supply chain to identify opportunities to reduce the extent to which we use virgin plastic in our products and to use alternative materials.