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 2019

Group materially simplified, with all three global divisions well set for growth and robust performance in line with expectations

Summary:

·; FY 2019 results build on positive underlying momentum seen since inflection point of H2 2018

Ø Like-for-like revenue decline of 0.7%

§ +1.5%, on an underlying basis

Ø Adjusted operating profit down 5.4% (at constant FX) to £87.5m notwithstanding portfolio simplification successfully completed during the year; adjusted operating margin +10bps to 9.0% (at constant FX)

§ Adjusted operating profit +2.0%, on an underlying basis

Ø Reported operating profit of £80.0m versus £47.2m in 2018

Ø Adjusted basic EPS lower by 9.7% (at constant FX) at 21.3p (2018: 23.5p)

Ø Reported basic EPS of 14.7p compares to 9.3p in 2018

·; Net debt of £284.4m, with net debt / EBITDA to 2.0x (after applying IFRS 16)

Ø Net debt of £233.7m and net debt / EBITDA of 1.9x before applying IFRS 16

·; Full year dividend maintained at 20.7p per share

·; Further good progress on all key metrics of the stability programme.

·; Simplification of the portfolio, allowing the Specialist Components division to be dissolved at the end of Q3 2019.

− Funds used in part for two value-creating acquisitions, plus JV partner buy out in Filters Dubai

·; Further strategic, financial and operational progress expected in FY 2020

Results at a glance:

1 FY 2018 results are unadjusted for IFRS 16 (see Basis of Preparation)

2 Y-o-Y changes are calculated by comparing data for FY 2019 after applying IFRS 16 with data for FY 2018 (which is unadjusted for IFRS 16)

3 Before amortisation of acquired intangible assets and exceptional and other adjusting items

4 Net income is defined as profit after tax, before minority interests5 A reconciliation of free cash flow is set out in the Financial Review

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

"Essentra continued to make meaningful strategic, financial and operational progress, delivering underlying revenue and operating margin growth despite challenging trading conditions. In Components, as anticipated, the underlying market conditions weakened, but the division delivered revenue marginally above prior year on a like-for-like basis (excluding the Reid Supply business transfer), along with a stable operating margin, as well as a record NPS of 41 and a new website platform in 10 countries. 2019 was Packaging's best overall performance since 2015, and the division's acquisition during the year, Nekicesa, performed well. During the year, Packaging saw further development of value-added services and progress in key service metrics. The Filters division delivered well against all three game changers, especially the establishment of the China Joint Venture and a six-year outsourcing agreement. Filters also maintained outstanding service levels and accelerated its product innovation.

As noted in our HY 2019 results announcement, Essentra has been fully cooperating in the investigation of certain Group companies' (in the Filters division) export activities within the framework of US laws. A comprehensive investigation has been carried out to fully understand the root cause of the issues. We have made a very significant investment of both time and money which has strengthened and further enhanced our processes around potential future issues of this nature.As we enter 2020 the macroeconomic environment continues to look uncertain, exacerbated by COVID-19. However, we begin the year as a more focused business, ready and well-equipped to face the challenges and opportunities ahead. In 2020 we will continue to invest in our business and support growth in all three divisions.” 

Heading into 2020, the macro economic environment remains uncertain, exacerbated by COVID-19. However, while our Components division is more exposed to industrial segments with a certain degree of cyclicality, much of our Group serves end-markets which are non-cyclical in nature. Accordingly, we will continue to drive the agenda and deliver the stated objectives for each of our divisions, and we expect to make further strategic, financial and operational progress in 2020.

IFRS 16. The results for FY 2019 have been prepared under IFRS 16 which came into effect from 1 January 2019. The Company has adopted IFRS 16 for FY 2019 and has elected not to restate FY 2018, consistent with IFRS accounting standards. The impact of reporting under IFRS 16 is set out in note 1 to the Consolidated Financial Statements.

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 2019 were:

Re-translating at FY 2019 average exchange rates increases the prior year revenue and adjusted operating profit by £15.9m and £1.8m 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 2019 LFL results are adjusted for the acquisition of Nolato Hertila ("Hertila") on 5 July 2018 until 8 February 2019 (further to which it was fully integrated into the existing Components activities in Sweden and no longer separately identifiable), the acquisition of the Innovative Components business on 26 June 2019, the acquisition of Nekicesa Packaging on 6 September 2019, the divestment of the trade and assets of the Swiftbrook paper merchant business on 3 September 2018, the divestment of the Pipe Protection Technologies business on 14 January 2019, the divestment of the Extrusion business on 11 June 2019, the divestment of the Speciality Tapes business on 28 June 2019 and finally the divestment of the Card Solutions business on 23 July 2019.

Underlying. The term "underlying" describes performance on a LFL basis, further adjusting for the closure of the Kilmarnock and Largo consumer packaging sites and the cessation of Speciality Tapes in Nottingham at the end of 2018.

Adjusted basis. The term "adjusted" excludes the impact of amortisation of acquired intangible assets and exceptional and other adjusting items, less any associated tax impact. In FY 2019, amortisation of acquired intangible assets was £22.9m (FY 2018: £22.7m), and there was an exceptional pre-tax credit of £15.4m (FY 2018: charge of £20.8m). This exceptional credit mainly relates to net gains on the divestment of the aforementioned businesses less costs associated, together with the release of provisions with regard to certain site closures; along with acquisition integration costs. There was also an exceptional cost incurred in relation to an investigation involving external professional advisers, of certain Group companies' (in the Filters division) export activities within the framework of US laws, as we previously disclosed in our HY 2019 results. Further details on exceptional and other adjusting items are shown in note 3 to the Consolidated Financial Statements.

Constant FX, LFL / Underlying 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 18 to 21 of the 2018 Annual Report.

Adjusted operating cash flow. Adjusted operating cash flow is presented to exclude the impact of tax, exceptional and other adjusting items, interest and other non-cash items in 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.

In relation to net debt and the cash flow statement, the application of IFRS 16 has the following impact:

·; Depreciation of the lease right-of-use assets is added back to operating profit to arrive at operating cash flows. This increases the Group's EBITDA.

·; Lease liabilities are treated as part of net debt.

·; Payment of the principal amount of leases is treated as a financing cash flow within the cash flow statement. It is not included within the definition of free cash flow under IFRS 16. Such payment does not have an impact on net debt (under IFRS 16).

·; With changes in EBITDA and net debt, the net debt to EBITDA ratio is significantly impacted by the adoption of IFRS 16. The ratio of 1.8x previously reported for the FY 2018 year end (as disclosed in note 19 to the 2018 Annual Financial Statements) will be restated to 2.1x under IFRS 16.

The FY 2019 result for the Group was robust, notwithstanding the significant portfolio rationalisation activities during the year. As disclosed in the HY 2019 results, in aggregate, £105m of revenue and £15m trading profit (on an annualised basis) were disposed during the year, which had significant impact on the year-on-year comparisons.

FY 2019 revenue decreased 5.0% (-6.5% at constant exchange) to £974.1m owing to disposals during the period: on a LFL basis, revenue decreased 0.7% (+1.5% underlying). The underlying result reflected a resilient performance in Components (given the macroeconomic conditions) and a strong performance in Packaging, partially offset by a decline in Filters (which was primarily driven by softer performance in China, and also in markets supplied by the Middle East).

On an adjusted basis, operating profit was down 3.5% (-5.4% at constant FX) at £87.5m; underlying adjusted operating profit up 2.0%. The 20bps uplift in the margin (10bps at constant FX) to 9.0% was driven by the strong revenue performance in Packaging, the impact of price increases in both Components and Packaging, and further operational efficiency gains in all three divisions.

Including amortisation of acquired intangible assets of £22.9m and an exceptional pre-tax credit of £15.4m (mainly relating to net gains on the divestment of the aforementioned businesses less costs associated), operating profit as reported was £80.0m (FY 2018: £47.2m).

Net finance expense was above the prior year at £14.5m (FY 2018: £10.9m), mainly due to interest on leases from having adopted IFRS 16 together with a higher average level of sterling-denominated debt during the period (which was done as a Brexit mitigation initiative). The effective tax rate on underlying profit before tax (before exceptional and other adjusting items) was 19.9% (FY 2018: 19.5%).

On an adjusted basis, net income of £58.5m was down 8.9% (10.9% at constant FX) and adjusted basic earnings per share decreased by 7.8% (9.7% at constant FX) to 21.3p. On a total reported basis, net income of £41.2m and earnings per share of 14.7p compared to £28.1m and 9.3p respectively in FY 2018.

Adjusted operating cash flow was 7.0% lower than the previous year at £71.8m (FY 2018: £77.2m), this equated to an operating cash conversion of 82% in the year. Adjusted free cash flow of £40.7m compared to £50.2m in FY 2018. The decline in both adjusted operating cashflow and adjusted free cash flow was mainly due to an increased cash outflow from net working capital movements (impacted by Brexit related stock build in the Components division, as well as working capital investment in Packaging necessary to fuel business growth) and the impact of the aforementioned business disposals. Additionally, cash flow was also impacted by the investment of £7.1m capex to support the outsourcing deal in Filters.

With effect from 1 January 2019 (i.e. even before the dissolvement of the Specialist Components division) the Group had altered the organisational structure by transferring the Speciality Tapes Express distribution locations in the US from the Components division into the Specialist Components division. Subsequent to the dissolvement of the Specialist Components division, the Tear Tapes business has been transferred into the Filters division and the Reid Supply business has been transferred into the Components division.

A restatement of the FY 2018 revenue and adjusted operating profit on this basis is set out in note 2 to the Consolidated Financial Statements.

Summary growth in revenue by Division

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

Components

* Adjusted basis

Revenue increased 0.7% to £283.3m. Adjusting for the acquisition of Hertila on 5 July 2018 until 8 February 2019 and acquisition of Innovative Components on 26 June 2019, like-for-like growth was -0.6%.

The modest decline in LFL revenue was delivered against a challenging macro environment, which saw weakening markets throughout the year. Global PMI was under 50 for six months of the year, with Europe being affected in particular.

The volume impact from the softer end-market backdrop and greater macroeconomic uncertainty was somewhat offset by successful pricing management. The Reid Supply business was impacted by a softer macro backdrop in the US industrial market, especially the automotive market.

Access Hardware continued to grow with all regions seeing double digit growth. The emergence of new technologies such as charging stations and 5G infrastructure continued to provide good opportunities for further growth in the market. The division has been leveraging its customer base across other product lines to gain market share by cross selling this range. PCB Hardware sales were down in the period, linked to the electronics market declines. Cable management products which serve a broader range of industries performed better. Caps and Plugs (General Protection) suffered a decline, being driven by exposure to automotive markets in particular. Fastener sales were better than prior year, bolstered by good performance from the Micro Plastics acquisition.

Consistent with the commitment to providing customers with a "hassle-free" experience, along with reliable and timely delivery, further commercial and operational initiatives were progressed during the period. Key among these was the roll out of a new digital platform, a critical tool in upgrading the division's online presence. The new digital platform was launched in ten countries in 2019, and the roll out will continue in 2020. The platform provides greater ease of navigation for customers, a better ability to compare products, and improved visibility in search engines such as Google. This platform has given the division the stage on which to promote an expanding range of products that have both been organically introduced and added from acquisitions. Further improving service levels through the division's supply chain, a new distribution hub was opened in Houston, Texas which enables the division to reach more South/Southwestern states in the target delivery time. The German warehouse project is on course to open in Q2 2020. Two new staff training centres have been launched in China and the USA (with a further one planned for the UK), in order to drive even better knowledge and expertise of the division's full product portfolio.

In line with its strategic objective of complementing organic growth with value-creating transactions, on 26 June 2019 the acquisition of Innovative Components was announced. As a leading provider of knobs, pins and handles, Innovative Components both strengthened and extended the division's product range whilst adding further valuable manufacturing capacity in the Americas. The integration of Innovative Components is on track with expectations.

Adjusted operating profit decreased 1.1% to £60.3m, equating to a margin of 21.3%. This 40bps dilution reflected the aforementioned volume impact of a softer macro environment along with the dilutive impact of acquired and re-integrated businesses, partially being offset by successful pricing management. On a LFL basis, excluding the Reid Supply business transfer, OP margin is broadly flat with prior year. 

Packaging

* Adjusted basis

Revenue increased 1.7% to £352.7m. Excluding the divestment of the trade and assets of Swiftbrook, Ireland on 3 September 2018 and acquisition of Nekicesa Packaging on 6 September 2019, like-for-like revenue growth was 0.3% (+5.6% underlying).

As expected the first half of the year was particularly strong reflecting both weaker comparatives in 2018 and short term customer demand on the back of Brexit uncertainties in the UK. Growth in the second half was somewhat hindered by specific customer supply chain issues impacting Americas growth rates in Q4.

Europe and the Americas grew in the year as both quality improved and lead time reduced.

Complex literature continued to perform strongly across all geographies and was boosted by good growth in both folding cartons and labels. The division also successfully supported customers with artwork generation and in their supply chain management, to ensure they were well placed to meet the new regulatory requirements as prescribed by the Falsified Medicines Directive, which took effect in Europe in early 2019. In combination with the benefits from the clear key account management structure which was established in the prior year, the dialogue with customers thus continued to be further strengthened and deepened, with the division collaborating to help meet a range of needs and objectives.

During the period, there was further investment in machine upgrades and value-added service capabilities to underpin the ongoing improvement in both commercial and operational effectiveness. This incremental investment included complex literature folding equipment in response to increasing demand trends, as well as the ongoing roll out of colour management technology across the site footprint, which has contributed to a further material reduction in quality-related issues. New equipment and people were also added to the Design Hub in the USA, while the recent additional digital / hybrid carton and label printing capability is allowing the division to better respond to the increasing requirement for smaller batch manufacturing in a cost-effective manner. As industry trends (such as patient adherence and serialisation) and legislative requirements continue to evolve, the division is therefore well placed to respond to customer needs as they require even greater agility and value-added solutions from their packaging suppliers.

Adjusted operating profit increased 185.6% to £15.1m, equating to a margin of 4.3%. This was largely driven by the volume gearing effect from the revenue growth, boosted by price increases (to offset higher raw material costs), a one-time benefit of £1.7m from the release of previous provisions, the impact of improved operational efficiencies crystallising as savings and the benefit of closing the loss-making Kilmarnock and Largo facilities. On an underlying basis, the margin was ahead by 200bps per our expectation. 

Filters

* Adjusted basis

The modest year on year decline was partially caused by softer trading in China, which has been impacted due to our lack of local manufacturing presence. This further underlies the importance of the creation of the JV in China - which will give the division that local manufacturing presence, and thus provide a great platform to capture the market opportunities available in China. Secondly, the division was faced with challenging trading conditions in certain markets supplied out of the Middle East - in response to the sanction compliance failings, revenue was impacted, with some orders being delayed and certain relationships being terminated.

Specialty filters, especially those including a flavour capsule, continue to underpin the performance of the division. During the period, the division continued to build upon its proven track record of developing innovative products which meet the evolving needs of customers. In the combustible market, there was further demand for products which incorporate one or more capsules and / or are visually differentiated (such as tube filters), particularly from the independent segment. At the same time, the consumer trend in China for smaller diameter and increasingly complex formats continued to increase, with good growth in the "slim" products segment. As an innovation leader, the division is well placed to play a leading role in developing biodegradable filters. The division has projects ongoing in collaboration with customers and suppliers and this could create a number of opportunities in the medium to long-term.

Beyond traditional combustible filters, there was further progress in next generation products (NGP). Although a relatively small contributor to divisional revenue and operating profit, the division continued to work with various multinationals and independents to advance their respective potential - or next phase - Heat Not Burn offers. In addition, the Scientific Services unit performed well, further building on its extensive experience and range of accredited testing methods for both combustible and NGP products.

Consistent with the divisional strategic objective of continuous improvement in innovation capabilities and customer relationships, the division undertook certain important commercial initiatives during the period. First, the Global Innovations organisation was refocused and strengthened, to provide a clear distinction between combustibles and NGP new product development; not only will this enable even more value-added solutions and greater efficiency, it will also facilitate the identification of new customer opportunities as the industry continues to rapidly evolve. Additionally, the division embarked upon the implementation of a full, cross-functional key account management structure which - in conjunction with the restructuring of the Innovations team - will help to create a more in-depth understanding of customer needs, develop relevant value propositions to meet their respective needs and identify mutually beneficial strategic initiatives.

In relation to the game changers, agreement was reached with a number of Chinese partners to establish a joint venture, which will design, manufacture and market tobacco filters in China. We continue to build our pipeline of NGP opportunities - four patent applications were made for new products. Our first significant outsourcing contract was secured during the year; this has been supplemented by a second outsourcing award from another multinational company in February 2020.

Adjusted operating profit decreased 1.3% to £36.2m, with operating margin unchanged at 11.9% (on a constant FX basis). This was driven by efficiency improvements and productivity gains resulting from the division's world-class operational metrics, being partially offset by the dilutive impact of the recently integrated Tear Tapes business.

Specialist Components

* Adjusted basis

The Specialist Components division was dissolved at the end of Q3 2019. The remaining Tear Tapes and Reid Supply businesses were absorbed into the Filters and Components divisions respectively owing to the complementary nature of the end-markets that they serve.

Net finance expense. Net finance expense of £14.5m was £3.6m above the prior year period, and is broken down as follows:

Tax. The effective tax rate on underlying profit before tax (before exceptional and other adjusting items and amortisation of acquired intangible assets) was 19.9% (FY 2018: 19.5%).

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 business divestments within Specialist Components offset by increases in Components and Packaging. The average net working capital / revenue ratio was 14.3% (FY 2018: 13.7%, at constant FX). The increase in the NWC ratio was driven by the impact of adopting IFRS 16 (which accounted for 20bps of the overall 60bps movement), with the remainder being driven by Brexit related stock building in the Components division and an increase in working capital in the Packaging division being used to fuel business growth. The movement in trade and other payables is driven by the release and utilisation of certain accruals and deferred income.

Cash flow. Adjusted operating cash flow is presented to exclude the impact of tax, exceptional and other adjusting items, interest and other non-cash items in 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. In FY 2019, net capital expenditure excludes £0.3m of exceptional property, plant and equipment ("PP&E") disposal proceeds realised during site closures.

Adjusted operating cash flow was 7.0% lower than the previous year at £71.8m (FY 2018: £77.2m), this equated to an operating cash conversion of 82% in the year. Adjusted free cash flow of £40.7m compared to £50.2m in FY 2018. The decline in both adjusted operating cash flow and adjusted free cash flow was mainly due to an increased cash outflow from net working capital movements (impacted by Brexit related stock build in the Components division, as well as working capital investment in Packaging necessary to fuel business growth) and the impact of the aforementioned business disposals. Additionally, cash flow was also impacted by the investment of £7.1m capex to support the outsourcing deal in Filters.

In FY 2019, there was a £5.1m net increase in cash and cash equivalents (FY 2018: £14.5m).

* Tax paid excludes the exceptional tax paid on business disposals. This is included within the cash outflow in respect of exceptional and other adjusting items

Net debt. Net debt at the end of the period was £284.4m, a £15.1m reduction from 1 January 2019 (after applying IFRS 16), primarily due to proceeds from Specialist Components disposals and free cash flow generation, partially offset by cost of acquisitions, dividend payments and cash exceptional and other adjusting items.

* Includes exceptional tax paid on business disposals

The Company's financial ratios remain strong. The ratio of net debt to EBITDA as at 31 December 2019 was 2.0x (31 December 2018: 2.1x) after applying IFRS 16 (1.9x before applying IFRS 16), and interest cover was 6.6x (31 December 2018: 7.9x) after applying IFRS 16.

Pensions. As at 31 December 2019, the Company's IAS 19 net pension liability was £17.4m (FY 2018: £13.9m), as a result of a change in discount rate partially offset by an increase in asset valuations. The net liability has been calculated after updating the asset values and certain liability assumptions as at 31 December 2019.

The Company concluded the triennial valuation of the two closed defined benefits sections of the Essentra UK Pension Plan with the Trustees of the Plan, with a settlement of £1m to be paid in three equal payments. The first one took place in December 2019, and the remaining two will be paid in June and December 2020.

Dividends. The Board of Directors recommends a final dividend of 14.4 pence per 25 pence ordinary share (2018: 14.4 pence). The final dividend will be paid on 1 June 2020 to equity holders on the share register on 24 April 2020: the ex-dividend date will be 23 April 2020. 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 7 May 2020. The Board recognises that free cash flow generated by the continuing operation in 2019 (following the successful divestments), was short of the dividend payment amount. However, the Company will aim to rebuild dividend cover as it continues to make strategic, financial and operational progress.

Board changes. As reported in the FY 2018 and HY 2019 results announcement, with effect from 1 June 2019, the Board appointed Nicki Demby as a Non-Executive Director and Remuneration Committee Chairman Designate. Lorraine Trainer has advised the Board of her intention to step down as a Non-Executive Director and Chairman of the Remuneration Committee following the Company's 2020 Annual General Meeting, and will work closely with Nicki in the meantime to ensure a smooth transition of responsibilities.

Treasury policy and controls. Essentra has a centralised treasury function to manage funding, liquidity and exposure to interest rate and foreign exchange risk. Treasury policies are approved by the Board and cover the nature of the exposure to be hedged, the types of derivatives that may be employed and the criteria for investing and borrowing cash. Essentra uses derivatives only to manage currency and interest rate risk arising from the underlying business activities. No transactions of a speculative nature are undertaken. Underlying policy assumptions and activities are reviewed by the Treasury Committee.

Controls over exposure changes and transaction authenticity are in place, and dealings are restricted to those banks with the relevant combination of geographical presence, expertise and suitable credit rating.

Foreign exchange risk. The majority of Essentra's net assets are in currencies other than sterling. The Company's normal policy is to reduce the translation exposure and the resulting impact on shareholders' funds through measures such as borrowing in those currencies in which the Group has significant net assets. As at 31 December 2019, Essentra's US dollar-denominated assets were approximately 46% hedged by its US dollar-denominated borrowings, while its euro-denominated assets were approximately 32% 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.

Management of principal risks. The Board considers risk assessment, identification of mitigating actions and internal controls to be fundamental to achieving Essentra’s strategic objectives. Our principal risks are detailed later in this document.

The Company is experiencing some direct impact on demand from COVID-19, but only c3% of the Company’s revenues come from China.

The health and safety of the Company's employees and visitors is a top priority. The Company is closely monitoring the situation every day. The Company issues regular updates to its employees, including travel advice. This is supplemented by local guidance on a location-by-location basis, incorporating local government advice. All facilities are being provided with basic hygiene supplies. Many offices are utilising home working.

The Company's Components site in Ningbo, China is ramping up production after the Chinese new year break and employees on site have been provided with detailed guidance on day-to-day healthcare, in agreement with local authorities. The site is expected to be fully operational in the week commencing 2 March 2020.

The Company continually assess the risks it is exposed to, and has a well-established risk mitigation process in place. One of the risks that has been assessed at length is that of supply chain disruption - hence if COVID-19 were to directly (and materially) start affecting our supply chain, we have identified mitigations in place. Regarding the newly established Filters JV in China, there is a possibility of progress delay due to travel restrictions.The Company will continue to monitor the situation closely for direct and potential indirect impacts across all the regions that it operates in.

Over the course of the past year, the Company put in place various actions to mitigate the impact of Brexit, particularly under 'no-deal' scenarios. These included alternative supply routings, changing supply networks and implementing stock builds to minimise supply chain disruption. Now that the Withdrawal Bill has been signed and will come into force, the Company's focus will shift to preparing for an orderly transition in December 2020, depending on the trade deal negotiated with the EU. Even in the event of a hard Brexit, we do not foresee any material impact to the Company. Our focus is now on ensuring staff are supported in gaining Settled Status, where applicable, along with ensuring appropriate customs processes and documentation are in place.

 As mentioned previously, in 2019 the Company embarked on a business process redesign project, supported by implementation of a new ERP system. The aim is that this project supports the strategic growth agenda of the divisions, along with improving process efficiencies and business controls.The first year of the programme focused on the Components division, as well as the finance and procurement functions. The first two phases of the programme (scoping and process design) are now complete for these areas. Project activity is now focused on system design and development, with the expectation that the first locations will 'go live' from mid-year 2020 onwards.

Over the cycle, the tangible benefits of the BPR programme are estimated to offset the cost; the Company is commencing a detailed effectiveness review of its general and administrative costs. With streamlined processes and modern technology, the Company expects to become a much more agile and nimble business, which will not only deliver better service to customers but also allow the better attraction and retention of high quality talent.

Heading into 2020, the macro economic environment remains uncertain, exacerbated by COVID-19. However, while our Components division is more exposed to industrial segments with a certain degree of cyclicality, much of our Group serves end-markets which are non-cyclical in nature.

Accordingly, we will continue to drive the agenda and deliver the stated objectives for each of our divisions, and we expect to make further strategic, financial and operational progress in 2020.

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 three global divisions, Essentra focuses on the light manufacture and distribution of high volume, enabling components which serve customers in a wide variety of end-markets and geographies.

Headquartered in the United Kingdom, Essentra's global network extends to 34 countries and includes 7,552 employees, 50 principal manufacturing facilities, 34 sales & distribution operations and 4 research & development centres. For further information, please visit www.essentraplc.com.

Essentra Components

Essentra Components is a global market leading manufacturer and distributor of plastic injection moulded, vinyl dip moulded and metal items. Operating in 29 countries worldwide, 14 manufacturing facilities and 29 logistics centres serve more than 85,000 customers with a rapid supply of low cost but essential products for a variety of applications in industries such as equipment manufacturing, automotive, fabrication, electronics and construction. The division also includes the Reid Supply business, which provides a wide range of branded hardware supplies to a broad base of industrial customers, largely located in the US Mid-West.

Essentra Packaging

Essentra Packaging is one of only two multicontinental suppliers of a full secondary packaging range to the health and personal care sectors, with 24 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 seven worldwide locations, plus 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 Heat Not Burn and e-cigarette solutions to the rapidly evolving market for Next Generation Products. The division now also includes the Tear Tapes business, which is globally recognised as the leading manufacturer and supplier of pressure-sensitive tear tapes, that are largely used in the tobacco, food and drink and specialist packaging sectors. 

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 2019 but is extracted from the 2019 Annual Report.

The Annual Report for 2019 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 14 January 2019, Essentra disposed of its Pipe Protection Technologies business ("PPT") for US$48.0m (£37.5m), free of cash and debt. The assets and liabilities of PPT had been presented as held for sale on the balance sheet as at 31 December 2018.

Changes in accounting policies

The Group has adopted IFRS 16 Leases from 1 January 2019. The adoption of this standard has a material effect on the Group's financial statements, as disclosed in the Group's 2018 consolidated financial statements. The quantitative impact of IFRS 16 on the Group's retained earnings at 1 January 2019 was a reduction of £5.2m.

IFRS 16 Leases which is effective from 1 January 2019, eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model under which a lessee is required to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value, and present depreciation of lease right-of-use assets separately from interest as a result of unwinding of discount on lease liabilities in the income statement.

The Group has performed the impact assessment of adopting this accounting standard, which involved collating information on lease obligations and contractual arrangements across the Group. This data was then used to compare the impact of the new standard under different transitional options.

The Group has decided to select the modified retrospective approach on transition primarily on grounds of practicality. Under this approach, comparative information is not restated and the impact of adopting IFRS 16 is presented as an opening retained earnings adjustment as at 1 January 2019.

Under this transition option a methodology for determining the incremental borrowing rate has been developed to calculate the initial lease liability for each lease. This methodology incorporates three key elements: risk-free rate (reflecting specific country and currency), credit spread (reflecting the specific risk for each subsidiary within the Group) and an asset class adjustment (reflecting the variation in risk between asset categories).

Approximately 85% of the Group's future lease obligations under IAS 17 relate to property leases and as a consequence makes up the majority of the impact of adopting IFRS 16.

The Group has elected not to reassess whether a contract contains a lease at the end of the date of initial application, but to instead apply the requirements of IFRS 16 to contracts that were previously identified as leases under IAS 17 and IFRIC 4. Additionally, the Group has elected not to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4.

The Group has also elected to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application and lease contracts for which the underlying asset is of low value. The Group has leases of certain equipment (e.g. printing and photocopying machines) that are considered of low value.

Transition to IFRS 16

The impact on the balance sheet (increase/(decrease)) as at 1 January 2019 is as follows:

The impact on the income statement for 2019 and the estimated impact on the income statement (increase/(decrease) in profit) for 2018 had IFRS 16 always been in place is as follows:

The estimated impact on the income statement for 2018 has been presented as pro forma comparative information. Under the transition approach selected, comparative information in the income statement has not been restated.

In the financial year ended 31 December 2019, Essentra adopted the following pronouncements:

Other standards and interpretations

The Group also adopted the following new pronouncements during 2019, which did not have any impact on the Group's financial statement:

·; IFRIC 23 Uncertainty over Income Tax Treatments addresses how to reflect uncertainty in accounting for income taxes, providing guidance on considering uncertain tax treatments separately or together, examination by tax authorities, the appropriate method to reflect uncertainty and accounting for changes in facts and circumstances.

·; Amendments to IAS 19 Plan Amendment, Curtailment or Settlement specify that in the event of a plan amendment, curtailment or settlement during a reporting period, an entity is required to use updated information to determine current service cost and net interest for the period following such an event.

Other than these, the accounting policies and presentation in this set of financial statements are consistent with those applied in 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.

The operating segments are as follows:

Components is a global market leading manufacturer and distributor of plastic injection moulded, vinyl dip moulded and metal items.

Packaging is one of only two multi-continental suppliers of a full secondary packaging range to the health and personal care sectors.

Filters is the only global independent supplier of innovative cigarette filters and related solutions to the tobacco industry.

Specialist Components comprised the following smaller businesses of Essentra:

·; 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 the oil & gas industry.

·; The Speciality Tapes business has expertise in coating multiple adhesive systems in numerous technologies, and its products range from foam, magnetic, finger lift and acrylic high bond tapes to hook and loop and non-skid foam.

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

With effect from 1 January 2019 the Group has altered the organisational structure by transferring the Speciality Tapes Express distribution locations in the US from the Components division into the Specialist Components division. In addition in the second half of 2019, the Tear Tapes business has been transferred into the Filters division and the Industrial Supply business has been transferred into the Components division at which point there were no more businesses within the Specialist Components division. As a consequence, segmental information for the year ended 31 December 2018 has been restated to reflect these changes.

During the year ended 31 December 2019, the Group disposed of the Extrusion, Pipe Protection Technologies, Card Solutions and Speciality Tapes businesses. Further details of this can be found in note 12.

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.

As explained within note 1, the comparative information is not restated for IFRS 16.