Essentra Regulatory News (ESNT)

ESSENTRA PLC

("the Company")

A leading global provider of essential components and solutions

RESULTS FOR THE FULL YEAR ENDED 31 DECEMBER 2017

"STABILITY SUCCESSFULLY RESTORED, STRATEGY IMPLEMENTATION WELL UNDERWAY"

Summary:

· FY 2017 reflects an improved revenue trend in H2 versus H1, as previously communicated.

− Revenue decrease of 2.0% on a like-for-like1 basis.

o Continued strong result in Component Solutions.

o Material H2 improvement in growth in Filter Products.

o Continued decline in Health & Personal Care Packaging.

− Adjusted operating profit2, 4 down 26.8% (at constant FX) to £85m.

− Basic adjusted EPS2, 4 lower by 30.1% (at constant FX) to 22.1p.

· Net debt of £211m (31 December 2016: £379m).

− Net debt to EBITDA reduced to 1.7x on a continuing basis (31 December 2016: 2.3x).

− Strong operating cash conversion3, 4 of c. 95%.

· Full year dividend unchanged at 20.7p per share.

· Significant improvement in all aspects of business stability, and strategic implementation underway.

Results at a glance:

1 Excludes the impact of acquisitions, disposals and foreign exchange

2 Before amortisation of acquired intangible assets and exceptional operating items

3 Operating cash conversion is defined as adjusted operating cash flow divided by adjusted operating profit

4 Continuing operations, excluding Porous Technologies, in light of the divestment on 6 March 2017

5 Net income is defined as profit after tax

Commenting on today's results, Paul Forman, Chief Executive, said:

"At the time of my inaugural full year results a year ago, I stated that I firmly believed that the fundamental strengths exist across all our businesses which we can build upon, and that the issues of the past were predominantly self-inflicted - and therefore capable of reversal. I also noted that I had already met many excellent colleagues, who were passionate about Essentra and energised for positive change. Twelve months on, that belief in a bright future for our Company is - if anything - even stronger.

Our business underwent significant change during 2017: this was not only in terms of restoring stability across the organisation and addressing skill and capability gaps, but also in developing and articulating clear and data-driven strategies for each of our larger global divisions, together with a clearly defined role for the Group in adding value.

Along with these positive developments, we also experienced a number of challenges: our two sites and 345 colleagues in Puerto Rico were impacted by the devastation caused by hurricane Maria; we took the very tough decision to close our loss-making Newport cartons site; and our Health & Personal Care Packaging division has worked tirelessly to arrest the significant decline in financial performance and customer reputation which was evident at the start of the year. Throughout all, our employees have shown huge dedication, commitment and professionalism, for which the Board and I would like to give our sincere thanks.

I have previously expressed that restoring Essentra to sustainable, profitable growth is not a rapid journey, and we clearly have a lot of work still to do. However, together we have made great progress and tangible improvement in FY 2017, so we are already well on our way."

With effect from 1 January 2018, and consistent with our strategic review, we are now organised into four divisions: Components, Packaging, Filters and Specialist Components.

In our Components business we expect further broad-based growth and a stable margin, through continued focus on building a consistent and "hassle free" proposition. With the bias of our Filters business towards innovative special filters, and the exposure of Specialist Components to broad industrial end-markets, the revenue and margin outlook for each of these divisions is stable. Having stabilised our Packaging business - together with certain one-time factors having been addressed in 2017 - we anticipate improving year-on-year revenue and margin trends as we start to regain "share of wallet" based on demonstrably improved customer service metrics.

Accordingly, as we continue to drive our stability agenda, for the total Group we expect a return to like-for-like revenue growth and margin expansion in 2018.

Unless otherwise stated, the FY 2017 results and narrative contained herein reflect the performance of the Essentra Group on a continuing operations basis (ie, excluding Porous Technologies, which was divested on 6 March 2017).

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 in FY 2017 were:

Re-translating at FY 2017 average exchange rates increases the prior year revenue and adjusted operating profit by £53.0m and £6.9m 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 2017 LFL results are adjusted for the divestment of the Bristol consumer packaging site on 5 June 2017.

Adjusted basis. The term "adjusted" excludes the impact of amortisation of acquired intangible assets and exceptional operating items, less any associated tax impact. In FY 2017, amortisation of acquired intangible assets was £22.9m (FY 2016: £30.2m), and there was an exceptional pre-tax charge of £56.2m (FY 2016: £128.5m) mainly relating to costs associated with the closure of the folding cartons site in Newport, UK, the strategic review of the Company and the simplification of the organisational structure - including the departure of certain senior management - during the year. Further details on exceptional 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 page 14 of the 2016 Annual Report.

Cash flow. Adjusted operating cash flow is presented to exclude the impact of tax, exceptional items, interest and other items not impacting operating profit. Net capital expenditure is included in this measure as management regards investment in operational assets as integral to the underlying cash generation capability of the Company.

With effect from 1 January 2018, the Company is now organised into four divisions. A restatement of the FY 2017 revenue and adjusted operating profit on this basis is set out in note 16 to the Consolidated Financial Statements.

FY 2017 revenue increased 2.9% (-2.3% at constant FX) to £1,027.3m, with a LFL decline of 2.0%. The underlying result reflected the continuation of the trends reported in the 23 October 2017 trading update, with a continued strong result in Component Solutions and a significant H2 improvement in Filter Products offset by a decline in Health & Personal Care Packaging.

On an adjusted basis, operating profit was down 22.2% (-26.8% at constant FX) at £84.6m. The 270bps reduction in the margin (-280bps at constant FX) to 8.2% largely arose in Health & Personal Care Packaging, owing to the profit drop-through from lower revenue, a material loss at the Newport folding cartons facility and the costs associated with disruption to the sites in Puerto Rico further to hurricane Maria - as well as a less profitable revenue and segment mix in Tapes.

Including amortisation of acquired intangible assets of £22.9m and an exceptional pre-tax charge of £56.2m - mainly relating to costs associated with the closure of the folding cartons site in Newport, the strategic review of the Company and the simplification of the organisational structure (including the departure of certain senior management) during the year - operating profit as reported was £5.5m (2016: operating loss of £(50.0)m).

Net finance expense was below the prior year at £10.4m (FY 2016: £12.5m), due to a lower average net debt position. The effective tax rate on underlying profit before tax (before exceptional operating items) was unchanged at 20.0% (FY 2016: 20.0%).

On an adjusted basis, net income of £59.2m was down 23.0% (-28.8% at constant FX) and basic earnings per share declined by 24.4% (-30.1% at constant FX) to 22.1p. Reflecting the post-tax profit and exceptional gain on sale relating to the Porous Technologies business which completed on 6 March 2017, on a total reported basis, net income of £115.8m and earnings per share of 43.7p compared to a net loss of £39.6m and a loss per share of 15.4p in FY 2016.

Adjusted operating cash flow was 21.4% lower than the previous year at £80.0m (FY 2016: £101.8m), largely due to the reduction in adjusted operating profit: this equated to operating cash conversion of 94.6% (FY 2016: 93.7%). Adjusted free cash flow of £56.4m compared to £74.5m in FY 2016, a decrease of 24.3%.

Summary growth in revenue by Division

*Pipe Protection Technologies

The following review is given at constant exchange rates and on an adjusted basis, unless otherwise stated.

Component Solutions

Revenue increased 8.0% to £343.1m, driven by growth in Components and recovery in Pipe Protection Technologies. Excluding PPT, revenue increased 3.3%.

The result in Components was broad-based across geographic regions, with a continued strong performance in Continental Europe and Asia underpinned by a return to growth in the Americas and the UK, further to operational and commercial improvement initiatives implemented in both markets. The increase in Europe was supported by further service improvements at the regional manufacturing hub in Kidlington, UK, with better management of inventory levels helping to reduce overall net working capital. Trading in the Americas benefited from a more defined segmentation of the customer base and product offering - particularly in the Maintenance, Repair & Overhaul ("MRO") segment further to the roll-out of 4,000 new mechanical components towards the end of the prior year - while growth in Asia was driven by electronics and general industrial mid-sized customers.

The general protection range of caps and plugs increased, with the access hardware offering also continuing to perform well; in addition, components aimed at the consumer electronics segment delivered a strong result in Asia. Further to the successful development of tooling, there was an encouraging revenue contribution in custom injection moulding, particularly in the automotives sector in both Europe and the US. Towards the end of the year, the European catalogue was relaunched, featuring c. 1,000 new products including electromechanical switches and cable management and access hardware solutions.

In December, the acquisition of Micro Plastics was announced for an undisclosed cash consideration. Based in Arkansas, US, Micro Plastics is a leading manufacturer and distributor of nylon fasteners and other plastic components for a wide range of industrial end-markets, including general industrial, automotive and white goods. The transaction not only expands the division's product range and adds manufacturing capacity in the US, but also - with a facility in Monterrey - it provides an entry platform into the attractive Mexican market.

Revenue in PPT increased 115.7% to £28.4m, notwithstanding temporary disruption to the Houston, US facility from Hurricane Harvey; this recovery (from a low base) was as a result of an uplift in the North American rig count, and the consequent impact on drilling activity and demand from the pipe mills, oil & gas service companies and pipe processors. Both the mid- and heavy-duty product ranges, including Tector Plus® and Titan®, performed particularly well as onshore drilling improved, although this was partially offset by the impact of lower investment in offshore explorations and production fields.

Revenue in Extrusion was moderately lower than the prior year. Continuing to benefit from its expertise in complex, technical profiles, the business saw further good growth for its plastic components used in the purification of drinking and processed water in both industrial and municipal installations, as well in the construction industry for swimming pool covers; however, this was offset by a softer performance in extruded finishing parts used in the furniture sector.

Operating profit increased 3.9% to £58.7m, equating to a 70bps decline in the margin to 17.1%: excluding PPT, adjusted operating profit declined 5.2% to £56.1m, with a 160bps decrease in the margin to 17.8%. Further operating efficiency savings, together with a return to profitability in PPT, were offset by measured investment in the Components business, together with a significant increase in raw material costs in early 2017 and a lower margin product mix in Extrusion.

During the year, further operational initiatives were undertaken across the division. These included the transfer of seals activities from Ipoh, Malaysia to Rayong, Thailand, the expansion into a second facility in Turkey and the addition of new injection moulding equipment in Kidlington and Erie, US in Components, and further investment in additional automation and laboratory capabilities in Houston and large tonnage injection moulding machines in Veracruz, Mexico in PPT.

Health & Personal Care Packaging

Revenue decreased 9.0% to £409.5m. Excluding the divestment of the Bristol consumer packaging facility in June 2017, like-for-like revenue reduced 8.5%.

As expected, the performance in health & personal care continued to deteriorate, largely owing to legacy operational issues at certain integration sites in the UK and US which had a disproportionate impact on the results. Specifically, the structural and operational challenges at the folding cartons facility ("IP5") in Newport, UK, were such that a proposal to cease production was confirmed, and the facility was closed at the end of the year. Indeed, notwithstanding the significant improvement efforts of the site management team and employees, IP5 generated a FY 2017 operating loss of £(4.5)m on revenue of £12.2m, and was not anticipated to make a realistic improvement to profitability in the near, or even long, term.

In the autumn, hurricane activity impacted the sites in Largo, US and - more severely - at Guaynabo and Manati in Puerto Rico. While all employees were fortunately safely accounted for and the facilities were left fundamentally intact, the Puerto Rico operations were significantly affected by the infrastructure and supply chain issues which ensued and a reduced level of demand from customers, who themselves faced similar post-hurricane Maria challenges. Although normal output levels were fully restored by the end of the year, management estimates the FY 2017 revenue and adjusted operating profit impact of hurricane activity (ie, including Largo) at £2.5 - 3.0m and £1.5 - 2.0m respectively, net of any recovery from insurance.

However, beyond these issues, the focus and remedial action of the senior management team on the integration challenges of the prior year led to a reduction in the rate of revenue decline in FY 2017 when compared to H2 2016, and key service and quality metrics improved progressively during the year in both the US and Europe. These demonstrable and consistent improvements have been noted by customers, and have facilitated a significantly enhanced dialogue about how Essentra can collaborate to help them meet a range of needs and business objectives.

This enhanced customer sentiment was reinforced by encouraging new business wins during 2017, as well as certain multiyear, multiproduct global framework agreements with international blue-chip healthcare companies which were signed towards the end of the year. In addition, the range of "freshness" labels - which can be tailored to meet specific requirements, and help to keep a product as fresh as possible for as long as possible - continued to perform well, with growth underpinned by further demand from an existing customer.

The result in Tapes reflected gains in the appliance sector for speciality tapes and in the food segment for tear tapes, being offset respectively by softness in point of purchase and continued weakness in tobacco.

While the focus in 2017 was on stabilising the division and restoring a platform from which to grow, nonetheless it was a year of further pipeline development and commercialisation of recently-launched products. This included the serialised carton and label offering, as well as large format literature and the range of fibre-tear, void-release and frangible labels which allow consumers to easily identify if packaging has been interfered with. In addition, the Design Hub continued to leverage its capabilities in providing customers with value-added solutions, including working with an international pharmaceutical customer in the successful redesign of their range of folding cartons.

Further to the strategic review, and reinforcing the Company's intention to focus on specialist secondary packaging for the health & personal care sectors, a global divisional organisation with leadership under a single functional team was created in October. This will allow the business to serve its multinational customers better and with greater alignment, and to leverage its scale in innovation, best practice transfer and talent development. As a result, Essentra will be even better positioned to pursue a clear strategic direction with common purpose, and to provide our customers with a consistent global value proposition.

Operating profit decreased 80.2% to £7.2m, equating to a margin of 1.8%. The 630bps decline in the margin was due to the volume gearing effect of revenue decline, the previously mentioned ongoing losses at the IP5 site and disruption in Puerto Rico, together with a less profitable revenue and segment mix in Tapes.

In 2017 - and consistent with the previously communicated incremental capital expenditure requirement of £20m over three years - there was substantial investment to rebuild operational capability across the division, both to help unblock production "bottlenecks" and to support growth opportunities. This included new gluing lines in Charlotte, US and Barcelona, Spain, an upgraded press at Moorestown, US, large format folding equipment in Greensboro and Indianapolis, US, Manati, Puerto Rico and Wolfen, Germany and enhanced digital capability at Glasnevin, Ireland; standardised colour management technology was also introduced at site level helped to underpin the improvements in quality metrics made during the year. Indeed, the significant focus on operational efficiency in general during the year resulted in the establishment of a wide range of process capabilities - from quality and Sales & Operations Planning to procurement and waste reduction - has helped to stabilise the division and to provide solid foundations from which to build in the future and to help drive profitability back towards an industry average operating margin level over the medium term - as per the Company's strategic objective.

Filter Products

Revenue decreased 3.4% to £277.5m, largely owing to the pass-through of raw materials savings in the form of lower pricing. Underlying volumes were modestly below FY 2016 - reflecting an improved performance in the second half - but a particularly strong result in capsules and growth in flavoured filters contributed to a positive mix effect.

While the nature of outsourcing in the tobacco industry implies a certain degree of pipeline volatility, nonetheless the acknowledged capabilities of the business - in terms of delivering value-added filters which meet the evolving requirements of our customers - continued to be successfully commercialised during the year. Joint development initiatives with multinational customers for higher value capsule products were particularly successful, as well as innovative variants of our Combined Performance Superior™ filter, which combine a high level of visual differentiation with enhanced efficiency. Following a weaker performance in FY 2016 owing to softer underlying market conditions, the business in China rebounded strongly, supported by recent Superslim and shaped filter launches to meet the growing consumer trend for smaller diameter and increasingly complex formats. Overall, therefore, the division maintained its track record of supporting customers in the development of bespoke solutions tailored to their specific needs as they seek to respond to global market trends.

In FY 2017, the Scientific Services laboratory continued to leverage its extensive experience and expanded portfolio of accredited testing methods for both traditional tobacco and non-tobacco products, to ensure the delivery of high-quality analysis which remains at the forefront of industry trends and evolving regulatory requirements.

Beyond traditional tobacco products, the division continued to develop its Next Generation Product capabilities during the year. While these remained a very modest contributor to divisional revenue in FY 2017, nonetheless Essentra has product offerings in both e-cigarettes (which are located at the Greensboro, US site) as well as Heat Not Burn (where the Company is already a provider of filters to one of the multinationals), and management believes that the business is well-positioned to support customers as these nascent segments continue to rapidly evolve.

Operating profit decreased 12.6% to £34.8m, and the margin declined by 140bps. Further efficiency improvements and productivity gains were offset by the impact of modestly lower volume, and a timing effect relating to the pass through of acetate tow material costs in the first half of the year.

Reinforcing its commitment to maintaining a flexible and competitive global manufacturing base, the division benefited from a number of operational initiatives in FY 2017. The previously-communicated transfer of a certain line of business to Asia from the US was successfully completed, further to which the Greensboro site was "right-sized" not only to maintain its capability in traditional tobacco filters but also to become the production hub for Essentra's e-cigarette offering. In addition, following the transfer of European activity from Jarrow, UK in 2016, quality and service metrics significantly improved in Hungary, with a new development centre also being established to serve customers in the region.

Continuing to respond to customer requirements, additional capacity for capsule filters was added in Indonesia, Thailand and Dubai, to ensure that the division remains at the forefront of these innovative segments in the growth markets of Asia and the Middle East, with additional technical and development capability also being extended in the region.

Net finance expense. Net finance expense of £10.4m was below the prior year period, and is broken down as follows:

Positive numbers represent net finance expense, negative numbers reflect net finance income

Tax. The effective tax rate on underlying profit before tax (before exceptional operating items) was 20.0% (FY 2016: 20.0%).

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").

The decrease in net working capital was largely due to a reduction in accounts receivable. The net working capital / revenue ratio was 15.1% (FY 2016: 16.3%, at constant FX).

Cash flow. Adjusted operating cash flow is presented to exclude the impact of tax, exceptional items, interest and other items not impacting operating profit. Net capital expenditure is included in this measure as management regards investment in operational assets as integral to the underlying cash generation capability of the Company.

Adjusted operating cash flow was £21.8m lower than versus the prior year period, at £80.0m, largely due to the reduction in adjusted operating profit and an £8.0m increase in net capital expenditure. Adjusted free cash flow of £56.4m compared to £74.5m in FY 2016.

Net debt. Net debt at the end of the period was £210.6m, a £168.7m decrease from 1 January 2017, primarily due to the completion of the divestment of the Porous Technologies business and strong underlying cash flow generation.

The Company's financial ratios remain strong. The ratio of net debt to EBITDA as at 31 December 2017 was 1.7x (31 December 2016: 2.3x) and interest cover was 9.0x (31 December 2016: 9.0x).

Balance sheet. At the end of 2017, the Company had shareholders' funds attributable to Essentra equity holders of £612.3m (2016: £595.4m), an increase of 2.8%. Net debt was £210.6m (2016: £379.3m) and total capital employed in the business was £831.0m (2016: £982.0m).

This finances non-current assets of £868.1m (2016: £885.3m), of which £283.1m (2016: £285.9m) is tangible fixed assets, the remainder being intangible assets, deferred tax assets, retirement benefit assets and long-term receivables. The Company has net working capital of £124.4m (2016: £136.0m), current provisions of £4.8m (2016: £1.2m) and long-term liabilities other than borrowings of £105.4m (2016: £105.4m).

Pensions. As at 31 December 2017, the Company's IAS 19 net pension liability was £13.4m (FY 2016: £23.1m). The net liability has been calculated after updating the asset values and certain assumptions as at 31 December 2017.

Dividends. The Board of Directors recommends a final dividend of 14.4 pence per 25 pence ordinary share (2016: 14.4 pence). The final dividend will be paid on 1 May 2018 to equity holders on the share register on 16 March 2018: the ex-dividend date will be 15 March 2018. 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 10 April 2018.

Board changes. Following the Company's Annual General Meeting on 20 April 2017, Peter Hill and Colin Day retired from the Board. On 22 June 2017, Mary Reilly and Ralf K. Wunderlich were announced as Non-Executive Directors of Essentra with effect from 1 July 2017.

On 15 December 2017, it was announced that Terry Twigger will step down from his current roles as Senior Independent Director ("SID") and Chairman of the Audit Committee, and will retire from the Board of Essentra following the Company's Annual General Meeting on 19 April 2018. Terry will be succeeded as SID by Tommy Breen, and as Audit Committee Chairman by Mary Reilly. 

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. The treasury function is subject to periodic independent reviews by the Group Assurance department. 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. As at 31 December 2017, Essentra's US dollar-denominated assets were approximately 36% hedged by its US dollar-denominated borrowings, while its euro-denominated assets were approximately 65% hedged by its 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.

Impact of US tax legislation

Essentra notes the enactment of the Tax Cuts and Jobs Act in the United States on 22 December 2017, which has reduced the statutory rate of US Federal corporate income tax to 21% with effect from 1 January 2018. While the full implications of this new US tax legislation on the Company are still being reviewed, Essentra estimates that the Group's effective tax rate for the year ending 31 December 2018 will only be marginally impacted by the enactment of this new Act.

In the Components business, further broad-based growth and a stable margin is expected, through continued focus on building a consistent and "hassle free" proposition. With the bias of the Filters business towards innovative special filters, and the exposure of Specialist Components to broad industrial end-markets, the revenue and margin outlook for each of these divisions is stable. Having stabilised the Packaging business - together with certain one-time factors which have been addressed in 2017 - improving year-on-year revenue and margin trends are anticipated, as the division starts to regain "share of wallet" based on demonstrably improved customer service metrics.

Accordingly, as the stability agenda continues to be driven, for the total Group, a return to like-for-like revenue growth and margin expansion in 2018 is expected.

Enquiries

Presentation

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

There will be a presentation for analysts and investors at 08:30 (UK time, registration from 08:00), which will be held at The Auditorium, Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB.

There are three options for participating in the presentation:

· Attend in person

· View a live webcast of the presentation at http://www.essentraplc.com/en/investors/company-information/webcasts-and-presentations

· Dial in to the live webcast of the presentation, using the following details:

A recording of the presentation will be made available on the website later in the day. A replay will additionally be available as follows:

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 four divisions from the start of 2018 - reflecting the Company's strategic review - 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.

Essentra Components

Essentra Components is a global market leading manufacturer and distributor of plastic injection moulded, vinyl dip moulded and metal items. Operating in 27 countries worldwide, nine manufacturing facilities and 24 logistics centres serve more than 90,000 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.

Essentra Packaging

Essentra Packaging is one of only two multi-continental suppliers of a full secondary packaging range to the health and personal care sectors, with 25 facilities across four 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. The nine worldwide locations, including a dedicated Technology Centre supported by three regional development facilities, provide 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 e-cigarette and Heat Not Burn solutions to the rapidly evolving market for Next Generation Products.  

Essentra Specialist Components

Essentra Specialist Components comprises the Company's six smaller businesses. These activities largely have strong positions in the markets in which they operate, although they have little overlap with each other or with Essentra's larger three global divisions.

The Extrusion business is a leading custom profile extruder located in The Netherlands which offers a complete design and production service. One of the first companies to extrude plastics, Essentra is now one of Europe's most advanced suppliers of co-extrusion and tri-extrusion to all branches of industry.

The Pipe Protection Technologies business specialises in the manufacture of high performance innovative products from commodity resins to engineering-grade thermoplastics and polymer alloys, largely for use in the oil and gas industry. Locations in four countries, combined with a wide distributor network, serve customers around the world.

The Speciality Tapes business has expertise in coating multiple adhesive systems in numerous technologies, with close to 3,000 tape products available for same-day shipping and predominantly for point of purchase and white goods applications.

The Tear Tapes business is globally recognised as the leading manufacturer and supplier of pressure-sensitive tear tapes, which are largely used in the tobacco, food and drink and specialist packaging sectors.

The Industrial Supply business provides a wide range of branded hardware supplies to a broad base of industrial customers, largely located in the US Mid-West.

The Security business is a leading European provider of ID card printers, systems and accessories to direct and trade customers.

Headquartered in the United Kingdom, Essentra's global network extends to 33 countries and includes c. 8,000 employees, 49 principal manufacturing facilities, 66 sales & distribution operations and 4 research & development centres. For further information, please visit www.essentraplc.com. 

Consolidated Income Statement

for the year ended 31 December 2017

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2017

Consolidated Balance Sheet

at 31 December 2017

Consolidated Statement of Changes in Equity

for the year ended 31 December 2017

Consolidated Statement of Cash Flows

for the year ended 31 December 2017

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 2017 but is extracted from the 2017 Annual Report.

The Annual Report for 2017 will be delivered to the Registrar of Companies in due course. The auditors' report on those accounts was 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 have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the European Union ("EU") in accordance with EU law (IAS Regulation EC 1606/2002) ("adopted IFRS") and International Financial Reporting Standards as issued by the International Accounting Standards Board, and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

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.

On 25 August 2016, Essentra entered into a sale and purchase agreement with Filtration Group to dispose of the Group's entire operations in Porous Technologies. The transaction completed in March 2017. The results of Porous Technologies are presented as results from a discontinued operation in the income statement. The assets and liabilities of Porous Technologies have also been presented as held for sale on the balance sheet as at 31 December 2016.

Changes in accounting policies

In the current financial year, Essentra adopted the following pronouncements:

· amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses: these amendments clarify how to account for deferred tax assets related to debt instruments measured at fair value.

· amendments to IAS 7 Disclosure Initiative require disclosure of information about changes in liabilities arising from financing activities, including cash flows and non-cash changes. As Essentra provides disclosure on reconciliation of individual elements of net debt, these amendments did not have a significant impact.

The adoption of these amendments did not have an impact on the Group in relation to measurement, recognition and presentation. Other than these, the accounting policies and presentation in this set of financial statements are consistent with those applied in the prior years.

2. Segment analysis

In accordance with IFRS 8, Essentra has determined its operating segments based upon the information reported to the Group Management Committee.

These segments are as follows:

Component Solutions consists of the Components business, the Extrusion business, the Pipe Protection Technologies business and the Security business. The Components business is a global market leading manufacturer and distributor of plastic injection moulded, vinyl dip moulded, and metal items. The Extrusion business is a leading custom profile extruder located in the Netherlands which offers a complete design and production service. The Pipe Protection Technologies business specialises in the manufacture of high performance innovative products from commodity resins to engineering-grade thermoplastics and polymer alloys for use in a range of end-markets. The Security business has been at the forefront of ID technology for over 30 years, and has access to the widest portfolio of products and services, including printers, software and consumables from leading manufacturers.

Health & Personal Care Packaging consists of the Health & Personal Care Packaging business and the Speciality Tapes business. Health & Personal Care Packaging is a leading global provider of packaging and authentication solutions to a diversified blue-chip customer base in the health & personal care, consumer and specialist packaging sectors, and to the paper and board industries. The Speciality Tapes business has expertise in coating multiple adhesive systems in numerous technologies.

The Filter Products business is the only global independent provider of filters and related solutions to the tobacco industry, and supplies not only standard filters but also special variants which provide innovative solutions that meet the consumer-driven demands of the sector against a backdrop of ongoing legislative changes.

Discontinued operations represent the Porous Technologies business, a leading developer and manufacturer of innovative custom fluid-handling components used in a variety of end-markets, engineered from a portfolio of technologies that included bonded and non-woven fibre, polyurethane foam and porous plastics. The Porous Technologies business was disposed of on 6 March 2017 and the results are presented as results from discontinued operations in both the current and prior period. The assets and liabilities of Porous Technologies have also been presented as held for sale on the balance sheet at 31 December 2016. No finance income or expense related to discontinued operations, and the income tax expense related to discontinued operations amounted to £24.9m (2016: £3.9m).

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. Therefore for continuing operations, the adjusted operating profit presented below of £84.9m (2016: £110.4m) differs from the amount presented as operating profit before intangible amortisation and exceptional operating items of £84.6m (2016: £108.7m) as a result of costs allocated to Porous Technologies of £0.3m (2016: £1.7m) under the internal management methodology.

With effect from 1 January 2018, a new organisation structure has been implemented, comprising four different divisions.

2. Segment analysis continued

1 Central Services includes executive and non-executive management, group finance, tax, treasury, legal, group assurance, human resources, information technology, corporate development, corporate affairs and other services provided centrally to support the operating segments

2 The unallocated assets relate to income and deferred tax assets, retirement benefit assets, derivatives 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

3 The average number of employees within discontinued operations over the period from 1 January 2017 until the date of disposal of the Porous Technologies business was 531

3. Exceptional operating items

1 Gains/losses and transaction costs relating to acquisitions and disposals of businesses are made up of a £132.4m net gain on disposal of the Porous Technologies business, £1.3m net loss on disposal of the Health & Personal Care Packaging business in Bristol, £0.5m of costs in relation to the acquisition of Micro Plastics and release of £0.2m of deferred consideration from the acquisition of Abric in 2014. In 2016 transaction costs of £5.0m included £0.3m in respect of the acquisition of Kamsri Printing & Packaging PVT. Ltd based in India, and £4.7m costs in relation to the disposal of Porous Technologies (including costs incurred on corporate reorganisation carried out as part of the closing conditions to complete the transaction, and cost of a claim settlement associated with the exit from Porous Technologies).

2 Acquisition integration and restructuring costs were incurred during 2016 in respect of:

· additional integration costs (primarily employee costs directly associated with the restructuring activities, costs of site closures and directly attributable costs of sites which businesses are transferred into under the integration plan) in relation to the ongoing integration of the Clondalkin SPD business (£4.5m) offset with the gain on disposal of certain properties which were acquired with that business (£1.7m); and

· the costs associated with the closure of the Components site at Xiamen, China, and integration of those operations into other sites in Asia as part of the Components Asia restructuring programme following the Abric acquisition (£1.7m)

3 An impairment charge of £123.9m during 2016 was recognised in respect of the Health & Personal Care strategic business unit (further details are provided in note 7).

4 Other exceptional items in 2017 of £54.6m relate to:

· £35.4m associated with the closure of the folded cartons facility at Newport, comprising £16.7m of property-related costs (in relation to remaining obligations for rent, rates, service charges and dilapidations), £13.6m of asset write-downs (primarily property, plant and equipment) and £5.1m of other costs in relation to redundancy and other closure-related costs; 

· £17.3m in respect of the strategic review undertaken during the period and associated reorganisation cost, including £5.3m in relation to senior management restructuring and £4.7m write-down of IT-related assets which are not in line with the Group's revised strategies. The remaining costs relate to external consultancy and project costs attributable to reviews into the various aspects of the Group's operations, systems and processes under the strategic review; and

· £1.9m relating to the closure and relocation of the security seals production from Ipoh, Malaysia to Rayong, Thailand as a result of the strategic review.

Other exceptional items incurred in 2016 related to further costs of £2.7m associated with the closure of the Filters site in Jarrow and integration of previous Jarrow operations into the Hungary site offset with the net release of property provisions of £1.3m on the disposal of certain properties in Filtration Products (including a £0.5m loss of property disposal in Porous Technologies) and the release of £1.1m provision for contingent deferred consideration in relation to a prior period acquisition. 5 Exceptional tax items of £11.4m in 2017 primarily related to the revaluation of deferred tax balances as a result of tax reform in the US.

The tax effect of the exceptional items is an expense of £16.7m (2016: £24.9m).

4. Net finance expense

5. Earnings per share

Adjusted earnings per share is provided to reflect the underlying earnings performance of Essentra.

For the prior year, the employee share options were not considered as dilutive, as they would increase loss per share from continuing operations.

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