Essentra Regulatory News (ESNT)

ESSENTRA PLC(the "Company")

A leading global provider of essential components and solutions

RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2020

Resilient performance through HY with improving revenue and order trends across all three global divisions in Q2

Summary:

· Trading trends in all three divisions improving through Q2

Ø COVID-19 pandemic (the "pandemic") had a significant impact on underlying markets in which Components operates, but revenue and order intake trend improved through Q2

Ø Resilient performance in Packaging division with new business secured during HY 2020 and the division delivered growth in May and June

Ø Filters division made strong progress on game changers with commencement of new outsourcing contracts in Q2 helping to return division to growth in June

· High level of engagement and resilience in the Essentra Family has helped maintain operational performance and support our customers throughout HY 2020

· All 71 manufacturing and warehouse facilities are fully operational

· Strong underlying liquidity (cash on hand plus undrawn available facilities less JV partner share of cash) position maintained throughout HY 2020 (and improved since the pandemic began)

· HY 2020 results displayed a resilient performance, notwithstanding the impacts of the pandemic

Ø Revenue decline of 11.7%, to £448.4m (at constant FX)

§ -8.5%, on a like-for-like1 (LFL) basis; pandemic impact predominantly felt in Q2

§ Improving trading trends seen as Q2 progressed - with the month of June being only -0.5% on a LFL basis

Ø Adjusted2 operating profit down 40% (at constant FX) to £29.0m. Portfolio simplification successfully completed in HY 2019 accounted for £6.0m of the £19.3m decline, with the remaining decline mainly driven by volume gearing effect

Ø Reported operating profit of £15.6m versus £60.1m in HY 2019 (prior half year figures included gains of £19.5m made on business disposals)

Ø Adjusted2 basic EPS lower by 49% (at constant FX) at 6.2p (HY 2019: 12.0p)

Ø Reported basic EPS of 2.3p compares to 11.6p in HY 2019

· Net debt of £297.0m (FY 2019: £284.4m), with net debt / EBITDA at 2.5x (on a covenant3 basis net debt / EBITDA ratio is 2.3x)

1 Excludes the impact of acquisitions, disposals and foreign exchange

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

3 Calculated as: Net Debt excluding IFRS 16 plus JV partner share of cash / EBITDA excluding IFRS 16 adjusted to include FY impact of acquired businesses

Results at a glance:

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

2 Net income is defined as profit after tax, before minority interests3 A reconciliation of free cash flow is set out in the Financial Review

Statutory to Adjusted Reconciliation:

1 - 2019 Adjusted figures are presented at constant FX rates

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

"The first half of 2020 really has been an unprecedented period and I am very proud of how the Company has responded during these challenging times. From the onset of the pandemic, we focused our energies on our initial three main priorities - employee physical and emotional wellbeing, continued high levels of customer support, and cash conservation. Indeed, with the advent of our newer fourth priority - building for our future - we are now focusing on ensuring that we are best placed to successfully emerge from the pandemic.

I would like to whole-heartedly thank all of our employees, whose dedication and resilience have been outstanding. Our people really have gone above and beyond in order to ensure that the world-class level of service that our customers are used to is maintained, despite the challenging circumstances presented by the pandemic.

The strength of our three distinct business models has been clearly demonstrated in this half year. Whilst customer demand in Components was impacted by the crisis, the breadth of our portfolio, global footprint and flexible manufacturing have all helped to reduce its impact. In both Packaging and Filters, underlying customer demand has remained robust and despite some supply chain disruption, both divisions delivered growth towards the end of the half year.

I am pleased that we have delivered a resilient overall revenue and margin performance, backed up by robust cash generation and an improved liquidity position. Despite the immediate challenges posed by this pandemic, we have continued to pursue strategic initiatives that will drive medium to long term growth.

The fundamentals of our Company remain sound, and I am fully confident that the we will emerge from this unprecedented situation as an even better and stronger organisation."

Heading into H2 2020, the macro economic environment continues to remain uncertain. 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.

We have delivered a resilient financial performance in the first half of the financial year, despite the pandemic. Although the timing and profile of recovery remains uncertain - and barring a major second wave to the pandemic - based on recent trading and internal forecasts, our current expectation for the year to 31 December 2020 is that the resilient performance seen to date will continue with revenue and adjusted operating profit within current range of analyst expectations.

On a divisional basis, the outlook for H2 suggests that; Components will see a continuation in the improvement on LFL trends, Filters will see a continued trend of year-on-year growth driven in part by outsourcing contract volumes, and in Packaging - due to some recent softness seen in certain end markets owing to a supply chain adjustment resulting from a reduction in prescriptions and surgeries through lockdown periods - Q3 should be broadly flat with a return to growth anticipated for Q4​.

The HY 2020 interim dividend is cancelled. However, the Company's strong operating cash flow position, coupled with the Board's recognition of the importance of dividends to all shareholders, means that the Board will keep under review the possibility of a resumption of dividends for FY 2020.

The Company has a dedicated COVID-19 section within its corporate website, where regular updates are being posted (please see https://www.essentraplc.com/about-us/covid-19-approach/groupwide-approach).

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 HY 2020 were:

Re-translating at HY 2020 average exchange rates increases the prior year revenue and adjusted operating profit by £1.1m and £0.0m respectively.

Like-for-like ("LFL"). The term "like-for-like" describes the performance of the continuing business on a comparable basis, adjusting for the impact of acquisitions, disposals and foreign exchange. The HY 2020 LFL results are adjusted for the acquisition of the Innovative Components business on 26 June 2019, the acquisition of Nekicesa Packaging on 6 September 2019, the divestment of the Pipe Protection Technologies business on 14 January 2019, the divestment of the Extrusion business on 11 June 2019, the divestment of the Speciality Tapes business on 28 June 2019 and finally the divestment of the Card Solutions business on 23 July 2019.

Adjusted basis. The term "adjusted" excludes the impact of amortisation of acquired intangible assets and exceptional and other adjusting items, less any associated tax impact. In HY 2020, amortisation of acquired intangible assets was £10.9m (HY 2019: £11.1m), and there was an exceptional pre-tax charge of £2.5m (HY 2019: credit of £22.9m). This exceptional net charge mainly relates to external professional costs associated with certain corporate development activities which are still in progress, integration costs for recent acquisitions, professional fees and £0.2m of external advisory and consultancy costs in relation to the review of the compliance of certain group companies' export activities with US laws, as previously disclosed in the 2019 Annual Accounts. This is offset by a £1.4m release of excess provision held for potential penalties in relation to this activity as the Company does not anticipate any significant enforcement action. Further details on exceptional and other adjusting items are shown in note 3 to the condensed consolidated interim financial statements.

Constant FX, LFL and adjusted measures are provided to reflect the underlying financial performance of Essentra. For further details on the performance metrics used by Essentra, please refer to pages 16 to 19 of the 2019 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.

The HY 2020 result for the Group was resilient. Whilst Q1 trading was largely unaffected by the pandemic, as expected the impact was more profound in Q2, however trading trends have been improving through the course of Q2.

HY 2020 revenue decreased 11.5% (-11.7% at constant exchange) to £448.4m. On a LFL basis, revenue decreased 8.5%. The pandemic had a significant impact on the underlying markets in which Components operates, but the revenue and order intake trend improved through Q2. There was a resilient performance in Packaging, with new business secured during the half year and the division delivered growth in May and June. The Filters division made strong progress on game changers with the commencement of new outsourcing contracts in Q2 helping to return the division to growth in June.

On an adjusted basis, operating profit was down 40.0% (-40.0% at constant FX) at £29.0m. The 300bps drop in the margin (300bps at constant FX) to 6.5% was largely driven by the disposal of various businesses in HY 2019 (£6.0m of the £19.3m decline), volume gearing effect from the revenue decline, which was exacerbated by temporary manufacturing inefficiencies caused by pandemic related issues, as well as the HY 2019 period including a one-time benefit (in Packaging) of £1.7m from the release of provisions.

Including amortisation of acquired intangible assets of £10.9m and an exceptional pre-tax charge of £2.5m, operating profit as reported was £15.6m (HY 2019: £60.1m); HY 2019 included gains of £19.5m made on business disposals.

Net finance expense was above the prior year at £7.7m (HY 2019: £7.0m), this was partly driven by a proactive draw down made from our RCF as a counter measure to the pandemic impact, resulting in a higher interest charge.  The effective tax rate on underlying profit before tax (before exceptional and other adjusting items) was 19.2% (HY 2019: 20.0%). This reduced tax rate is driven by a change in the geographical split of profits across the Company.

On an adjusted basis, net income of £17.2m was down 48.0% (48.4% at constant FX) and adjusted basic earnings per share decreased by 48.3% (48.5% at constant FX) to 6.2p. On a total reported basis, net income of £7.0m and earnings per share of 2.3p compared to £32.2m and 11.6p respectively in HY 2019.

Adjusted operating cash flow was 39.6% lower than the previous year at £22.1m (HY 2019: £36.6m), this equated to an operating cash conversion of 76% in the half year. Adjusted free cash flow of £11.5m compared to £22.6m in HY 2019. The decline in both adjusted operating cash flow and adjusted free cash flow was mainly due to aforementioned lower level of profitability in the Group. Additionally, cash flow was also impacted by a relatively consistent level of capex spend in both current and prior periods (current year planned capex savings will crystallise in H2).

As announced on 16 July 2020, a Deferred Prosecution Agreement was entered into with the US Department of Justice and a fine of $666,543.88 paid to settle certain sanctions violations by the Filters business in Dubai. As previously advised, the Company has made a voluntary disclosure to the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC"), with regards to certain other historical transactions by the Filters business dating as far back as 2015. The Company has co-operated extensively with OFAC and does not anticipate any significant enforcement action being taken by OFAC. The Company continues to embed its enhanced sanctions compliance programme.

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 for the HY decreased 10.2% to £129.7m. Adjusting for the acquisition of Innovative Components on 26 June 2019, like-for-like revenue was -12.8%. Within the Group, Components is the division which is more exposed to industrial cyclicality. Hence, with the pandemic taking hold towards the end of March, to fully understand LFL performance for the HY, Q1 and Q2 should be considered separately, as performance varied significantly between these two periods.

LFL revenue was 5% down in Q1. This was reflective of the pandemic causing disruption in China earlier than in rest of the world (though the underlying Chinese business was back on track by the end of the quarter), a soft end-market backdrop in the US and wider spread disruption from the pandemic beginning to be felt towards the end of the quarter. Europe was only marginally down on prior period, as wider spread impact from the pandemic late in Q1 was offset by more robust trading earlier in the year.

LFL revenue in Q2 was down 20%. The start of Q2 saw an accelerated slowdown in customer demand, with LFL revenue -24% on prior year in April. May and June showed an improvement from the April low. During this period, Asia fared considerably better than Europe and Americas, as the epicentre for the pandemic shifted from East to West.

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 continued 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 has continued in 2020 with a further eight countries going live. The platform provides greater ease of navigation for customers, a better ability to compare products, and improved visibility in search engines such as Google. Since the outbreak of the pandemic, we are seeing increased levels of online customer activity, driven by new customer engagement, accelerating the 'shift to digital'. Indeed, albeit small, in the month of June a new record was set for revenue generated online. Moreover, 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. The first stages of cross sell functionality have gone live on the website, and further developments are in progress including the use of AI. In order to complement this increased functionality in our website, the division has carried out an extensive 'cross selling' training programme for sales staff, to drive even better knowledge and expertise of the division's full product portfolio.

Having suffered some logistical delays due to the pandemic, the German warehouse project is on course to open at the end of Q3 2020. This will not only further improve service levels through the division's supply chain in Europe, but will also provide a key mitigation against a hard Brexit.

Adjusted operating profit decreased by 26.4% to £23.9m, equating to a margin of 18.4% (HY 2019: 22.5%). This 410bps dilution reflected the aforementioned volume impact of a softer macro environment along with the dilutive impact of the acquired business (Innovative Components), partially being offset by continued successful pricing management and cost control actions.

Packaging

* Adjusted basis

Revenue increased 3.9% to £185.3m. Excluding the acquisition of Nekicesa Packaging on 6 September 2019, LFL revenue decline was -3.0%. As with Components, performance in Q1 and Q2 was quite varied, though underlying demand has remained robust throughout the half year.

LFL performance in Q1 was -5.2%. This was reflective of a tough prior year comparative - Q1 2019 was bolstered by short term customer demand on the back of the new regulatory requirements as prescribed by the Falsified Medicines Directive, which took effect in Europe in early 2019. Additionally, growth was somewhat hindered by specific customer supply chain issues impacting Americas growth rates in Q1 2020.

LFL performance in Q2 was -0.9%. Early in the quarter, the division was impacted by some pandemic induced supply chain performance issues and facility closures. However, the facility closures were rectified from May and the division delivered positive revenue growth in May and June.

During the pandemic, the combination of maintained high levels of service, along with a clear key account management structure, has meant that dialogue with customers has continued to be further strengthened and deepened, with the division collaborating with its customers to help meet a range of needs and objectives during these unprecedented times. The division has been awarded more than $5m (annualised) of new business as a result of its focus on supporting customers.

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 capex spent in order to facilitate a newly won contract to supply the full suite of packaging for a COVID-19 anti-viral medicine. As industry trends (such as patient adherence and serialisation) and legislative requirements continue to evolve, the division is well placed to respond to customer needs that require even greater agility and value-added solutions from their packaging suppliers.

Adjusted operating profit decreased 38.7% to £4.9m, equating to a margin of 2.6% (180 bps decline). This was largely driven by the volume gearing effect from the revenue decline, which was exacerbated by temporary manufacturing inefficiencies caused by pandemic related issues. Additionally, prior period had a one-time benefit of £1.7m from the release of provisions.

Filters

* Adjusted basis

Total Filters divisional revenue was 11.2% down on the prior year period, of which the core Filters business (division excluding Tear Tapes) was down by 10.4%. This performance was broadly in line with revised expectations, given two short term factors; namely, the impact from government enforced facility closures in India and Paraguay (which have been fully operational since 4 May 2020), and the continued effect on prior period comparatives due to business disruption in the Middle East following the sanction compliance issues announced in our year end 2019 results.

Additionally, softer trading was also seen in China, due to our lack of local manufacturing presence. This further underlines 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.

In relation to the division's other game changers, the first of our significant outsourcing contracts was secured late last year; and this was supplemented by a second outsourcing award from another multinational company in February 2020. Both contracts are now operational, and invoicing has begun from June. We continue to build our pipeline of next generation products (NGP) opportunities - three patent applications were made for new products during HY 2020. 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. 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.

During the period the division has continued to develop its cross-functional key account management structure, which will help to create a more in-depth understanding of customer needs, develop relevant value propositions and identify mutually beneficial strategic initiatives. This combined with the division's world class service and quality metrics having been maintained, despite any disruptions that have been caused by the pandemic, has further strengthened and deepened customer relationships.

Adjusted operating profit decreased 34.9% to £10.8m, equating to an operating margin of 8.1% (decline of 300 bps). This was largely driven by the volume gearing effect from the revenue decline, which was exacerbated by temporary manufacturing inefficiencies caused by pandemic related issues.

Net finance expense. Net finance expense of £7.7m was £0.7m 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 19.2% (HY 2019: 20.0%). This reduced tax rate is driven by a change in the geographical split of profits across the Company.

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 increase in net working capital was largely due to higher inventory levels, driven mainly by Filters, caused by deliberate contingency builds (given the pandemic backdrop) and also in preparation for the commencement of the division's two outsourcing 'gamechanger' contracts towards the end of the half year. Additionally, there was a noteworthy movement in trade and other payables, which was driven by a conscious effort by the Company to be an ethical and supportive customer to our suppliers by paying invoices early, in order to share some of the burden being felt by our suppliers during these unprecedented times.

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.

Adjusted operating cash flow was 39.6% lower than the previous year at £22.1m (HY 2019: £36.6m), this equated to an operating cash conversion of 76% in the half year (HY 2019: 76%). Adjusted free cash flow of £11.5m compared to £22.6m in HY 2019. The decline in both adjusted operating cash flow and adjusted free cash flow was mainly due to aforementioned lower level of profitability in the Group. Additionally, cash flow was also impacted by a relatively consistent level of capex spend in both current and prior periods (post pandemic planned capex savings will crystallise in H2). Capex spend in the period was mainly driven by the German warehouse project in Components, the Group Business Process Redesign (BPR) project, as well as the aforementioned investments in new machinery for Packaging.

In HY 2020, there was a £87.2m net increase in cash and cash equivalents to £160.2m (HY 2019: increase of £118.4m to £185.1m).

* 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 £297.0m, a £12.6m increase from 1 January 2020 (after applying IFRS 16), primarily due to foreign exchange.  Additionally, it should be noted that an increase in lease liability movements (driven by a new lease for the aforementioned Components Germany warehouse project along with a recently extended lease on our Components Turkey facility) broadly nets off the free cash inflow generated from operating activities.

* Includes exceptional tax paid on business disposals

** Excludes £5.0m cash received from the settlement of the promissory note as this already excluded part of net debt

The Company's financial ratios remain healthy. The ratio of net debt to EBITDA as at 30 June 2020 was 2.5x (31 December 2019: 2.0x) and interest cover was 4.8x (31 December 2019: 6.6x).

Pensions. As at 30 June 2020, the Company's IAS 19 net pension liability was £24.6m (FY 2019: £17.4m), 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 30 June 2020.

Dividends. Earlier in the year, in light of the unprecedented uncertainty due to the pandemic, the Company announced that the Board had concluded that all reasonable steps should be taken to conserve cash and, accordingly, decided to cancel the 2019 final dividend. The Board has since considered the overall dividend payment for this financial year and, taking into consideration the interests of all stakeholders, concluded that it remains prudent for there not to be a resumption of dividend payments at this stage, hence the HY 2020 interim dividend is cancelled. However, recognising the importance of dividends to all shareholders, Board will keep under review the possibility of a resumption of dividends for FY 2020.

Board changes. As reported in the FY 2019 results announcement, Lorraine Trainer stepped down as a Non-Executive Director and Chair of the Remuneration Committee, following the Company's 2020 Annual General Meeting on 21 May 2020. Lorraine has been replaced as Chair of the Remuneration Committee by Nicki Demby, who has been with the Company since 1 June 2019.

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 30 June 2020, Essentra's US dollar-denominated assets were approximately 31% hedged by its US dollar-denominated borrowings, while its euro-denominated assets were approximately 33% 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.

Now that the European Union (Withdrawal Agreement) Act has come into force, the Company's focus has shifted to preparing the business for the end of the transition period in December 2020. As previously noted, the Company has already put in place various actions to mitigate the impact of Brexit, including alternative supply routings, changing supply networks and implementing stock builds to minimise supply chain disruption. Our focus continues to be on detailed planning, supporting any affected staff and ensuring appropriate customs processes and documentation are in place. Overall, we do not foresee any material impact to the Company.

 In 2019 the Company embarked on a business process redesign project, supported by implementation of a new ERP system. This project supports the strategic growth agenda of the divisions, along with improving process efficiencies and business controls. The focus in 2019 was on scoping and process design for the Components division, as well as finance and procurement functions. In 2020, project activity has been focused on system design, development and deployment - Finance and Procurement processes have recently 'gone live' for main headquarters' entities. The planned roll-out to the first Components locations has been delayed due to pandemic-induced travel restrictions, with the first Components site now expected to 'go live' in Q1 2021.

Over the cycle, the tangible benefits of the BPR programme are estimated to offset the cost. 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.

Enquiries

Presentation

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

The Half Year Results presentation to analysts and investors will start at 08:30 (UK time), and will be held virtually.

There are two options for participating in the event:

1) View and listen in to a webcast of the presentation, which can be accessed at https://www.essentraplc.com/en/investors/company-information/webcasts-and-presentations

Please note that this option will not allow you to ask any questions - it will be listen only mode.

2) If you wish to ask a question, or are unable to listen to the audio via the webcast, please dial in to the audio conference call using the details below:

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

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 84,000 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.

Risk Report

Our risk management activities aim to improve performance, encourage innovation and support the achievement of our strategic objectives. In doing this we take a balanced approach that puts risk management at the core of the senior management agenda, which is where we believe it should be.

Our risk management framework continues to evolve in line with best practice to ensure that it supports the Company's ongoing growth and strategic objectives. A robust, but flexible, approach to the management of risk is fundamental to the continued success of the Company. There is a risk management framework for identifying and managing risk within defined appetite levels, in relation to both operations and strategy. The framework has been designed to provide the Group Risk Committee ("GRC") and the Board with a clear line of sight over Principal, Key and Emerging Risks and enables them to manage risks within the Company.

COVID-19

The COVID-19 pandemic has become a worldwide crisis, and at the date of this report the situation is still evolving. As a result of COVID-19 the Company's risk landscape has changed. We have considered the impact of COVID-19 on our Principal and Emerging Risks and we have reviewed our risk profile and appetite. Where needed we have identified additional mitigating actions as part of continued focus on risk management.

The significant increase in employees working at home has increased our Cyber Security risk. We have an ongoing communication and awareness programme to remind all users of the associated risks and have issued advice on secure home working best practices. We have also introduced stronger authentication for remote access services to reflect changing IT Security threats.

Increasingly, especially given recent COVID-19 related events, the mental and emotional health and wellbeing of our employees is becoming a focus. Staff are being asked to work in different ways, with different teams, often remotely, and this creates a new and different set of challenges which employees need to respond to. A comprehensive wellbeing support programme was launched to support people to work remotely as well as manage the personal impact of COVID-19.

We have experienced multi-site disruption given our global footprint. COVID-19 also brought the challenge of a disruptive supply chain across a number of our sites. We have been successful in securing alternative sources of supply for key raw materials and supply guarantees. These actions have mitigated this risk.

Principal Risks

Our Risk Management approach in relation to COVID-19 has been to consider the completeness and appropriateness of our Principal Risks. As part of our approach we have considered the impact on each of our Principal Risks and our risk appetite. Where necessary we have identified suitable mitigating actions.

A number of our risks have been amplified as a result of COVID-19. Additionally, one new Principal Risk has been added to acknowledge the impact cyclical industrial downturns may have on our Components Division. The table below sets out movements in our Principal Risks.

Emerging Risks

The Emerging Risks we identified in 2019 continue to apply with geopolitical change and technology disruptors being amplified as a result of COVID-19.

The Group's risks are continually reviewed and reassessed through a bottom up and top down process as well as input from external sources with escalation and reporting to the Board. The process fully considers all relevant internal and external factors and captures those risks which are current but have not yet fully crystallised, as well as those which are expected to crystallise in future periods.

The Emerging Risks remain broadly unchanged to those set out in the 2019 Annual Report and Accounts. An additional Emerging Risk in relation to the changing structure of the debt market has been identified. Further detail is set out in the table below:

Further detail on these risks and how they are managed is available in the 2019 Annual Report and Accounts.

1. Basis of preparation

Except as described below, the accounting policies applied in these condensed consolidated interim financial statements are the same as those applied in the Group's consolidated financial statements as at and for the year ended 31 December 2019 which comply with International Financial Reporting Standards as adopted by the EU and also in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure and Transparency Rules ('DTR') of the Financial Conduct Authority. The financial statements have been reviewed not audited.

The financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

The preparation of the condensed consolidated interim financial statements requires management to make estimates and assumptions that affect the reporting amounts of revenues, expenses, assets and liabilities at 30 June 2020. If in the future such estimates and assumptions, which are based on management's best judgement at the date of the condensed set of financial statements, deviate from the actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change.

The comparative figures for the financial year ended 31 December 2019 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

For the purpose of the condensed consolidated interim financial statements 'Essentra' or 'the Group' means Essentra plc ('the Company') and its subsidiaries.

Income tax expense is recognised based upon the best estimate of the weighted average income tax rate on profit before tax and exceptional and other adjusting items expected for the full financial year, taking into account the weighted average rate for each jurisdiction.

Going concern

At 30 June 2020, the Group's financing arrangements amounted to £507.9m, comprising United States Private Placement (USPP) of US$100.0m (with a range of expiry dates from November 2024 to April 2030), a multi-currency revolving credit facility (RCF) of £376.6m (expiring in November 2022), and a bridging loan facility of £50.0m (whose term under the Company's option is up to October 2021, with a further option to be extended for a further six months at lenders' discretion). Subsequent to 30 June 2020, the bridging loan facility reduced to £24.0m following a voluntary repayment made by the Company in July 2020.

At 30 June 2020, £108.0m of the RCF facility was undrawn. The facility is subject to two covenants, which are tested semi-annually: net debt to EBITDA (leverage) and EBITA to net finance charges. Despite the current macro-economic uncertainty, the Group has not sought to change either of the two covenants. The Directors believe that the Group is well placed to manage its business risks and, after making enquiries including a review of forecasts and predictions, taking account of reasonably possible changes in trading performances and considering the existing banking facilities, including the available liquidity, have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least the next 12 months following the date of approval of the financial statements, and no breaches of covenants are expected.

The uncertainty as to the future impact on the Group of the current COVID-19 outbreak has been considered as part of the Group's adoption of the going concern basis. As at 30 June 2020 and as at the date of approval of these financial statements, all of the Group's 71 manufacturing and distribution facilities are operational and have broadly resumed to pre-pandemic levels of service. Across the Group, public health measures advised by governments are being followed in support of their efforts to contain the spread of the virus, and the supply chain is being proactively managed as are operating costs and the timing of capital expenditure. The Board has also resolved not to recommend a final dividend for the year ended 2019 and will consider future dividends as and when conditions stabilise and normalise.

As part of the going concern assessment, the Board has also considered a downside scenario that reflects the current unprecedented uncertainty in the global economy and which it considers to be severe but plausible. The results of this scenario show that there is sufficient liquidity in the business for a period of at least 12 months from the date of approval of these financial statements, and do not indicate any covenant breach during the test period. The scenario includes an assumption for the impact of a 'second wave' of localised outbreaks. Set against this were mitigating actions including, the cancellation of the 2019 final dividends, and tight management of capital expenditure, sales and general overhead, and working capital. Since the first Covid-19 external announcement issued by the Company, the Group has been cash generative and hence the liquidity position has further improved. Overall liquidity (defined as available undrawn borrowing facility plus cash and cash equivalent excluding the amount attributable to non-controlling interests) at the end of June was approximately £260m - this has been achieved by diligent cash flow management in the Company.

The severe but plausible scenario does not indicate a material uncertainty which may cast significant doubt over the Company's and Group's ability to continue as a going concern. Therefore, the Directors continue to adopt the going concern basis of accounting in preparing the interim financial statements.

Further information on the Group's borrowing facilities, cash resources and other financial instruments can be found in notes 9 and 13 to the interim financial statements.

Critical Accounting Judgements and Estimates

The following provides information on those policies that management considers critical because of the level of judgement and estimation required which often involves assumptions regarding future events which can vary from what is anticipated. The Directors believe that the financial statements reflect appropriate judgements and estimates and provide a true and fair view of Essentra's performance and financial position.

Accounting Estimates

i Business combinations and intangible assets

IFRS 3 requires the identification of acquired intangible assets as part of a business combination. The methods used to value such intangible assets require the use of estimates and judgements such as customer attrition, cash flow generation from the existing relationships with customers and returns on other assets. Future results are impacted by the amortisation periods adopted and changes to the estimated useful lives would result in different effects on the income statement and balance sheet.

Goodwill is not amortised but is tested at least annually for impairment, along with the finite-lived intangible assets and other assets of the Group's cash generating units. Tests for impairment are based on discounted cash flows and assumptions (including discount rates, timing and growth prospects) which are inherently subjective. Judgement is also required in identifying the events which indicate potential impairment, and in assessing fair value of individual assets when allocating an impairment loss in a cash-generating unit or groups of cash-generating units. The Group performs various sensitivity analyses in respect of the tests for impairment, as detailed in note 7.

The useful lives of the Group's finite-lived intangible assets are reviewed following the tests for impairment at least annually.

Judgement may also be required in determining the fair value of other assets acquired and liabilities (including contingent liabilities) assumed.

ii Pensions

Essentra accounts for its defined benefit pension schemes in accordance with IAS 19. The application of IAS 19 requires the exercise of judgement in relation to the assumptions used and for each assumption there is a range of possible outcomes. In consultation with Essentra's actuaries, management decides the point within those ranges that most appropriately reflects Essentra's circumstances. Small changes to these assumptions can have a significant impact on valuations. The Group performs a sensitivity analysis for the significant assumptions used in determining post-employment costs and liabilities, as detailed in note 18 of the Essentra Annual Report 2019.

iii Taxation

Liabilities for tax contingencies require management judgements and estimates in respect of tax audit issues and exposures in each of the jurisdictions in which it operates. Management is also required to make an estimate of the current tax liability together with an assessment of the temporary differences which arise as a consequence of different accounting and tax treatments. Where management conclude that a tax position is uncertain, a current tax liability is held for anticipated taxes that are considered probable based on the information available.

Included in the tax payable is a liability of £14.6m (31 December 2019: £15.3m) for transfer pricing matters and £19.2m (31 December 2019: £18.7m) for other uncertain tax positions. The movement is due to adjustments for current year transactions including foreign exchange movements, expiry of statute of limitations following the passage of time and agreement reached with tax authorities on previous matters.

Management may engage with professional advisors in making their assessment and, if appropriate, will liaise with the relevant taxation authorities to resolve the matter. The tax liability is reassessed in each period to reflect management's best estimate in light of information available. If the final outcome of these matters differs to the liability held in the financial statements, the difference may impact the income tax expense/(credit) in the year the matter is concluded.

In April 2019, the European Commission issued its decision in a state aid investigation into the Group Financing Exemption in the UK controlled foreign company rules. The European Commission found that part of the Group Financing Exemption, which was introduced in legislation by the UK Government in 2013, constitutes state aid. In common with other UK-based international companies whose arrangements were in line with UK CFC legislation Essentra may be affected by the ultimate outcome of this investigation.

In June 2019 the UK Government and other UK-based international companies, including Essentra, appealed to the General Court of the European Union against the decision. In the meantime, the UK Government is required to follow the decision as it stands and assess the impact on UK companies and ultimately issue collection proceedings. Essentra has responded to an information request from HMRC in regard to this matter and await a response. The potential amount payable for this risk as at 30 June 2020, excluding interest, is estimated to be to between £nil and £16m depending on the outcome of the legal appeal process and the basis of calculation. The final impact on the Group remains very uncertain but based on the current legal analysis the Group does not consider any provision to be required for this risk.

iv) Leases and lease right-of-use assets

A key judgement on application of IFRS 16 is determining the incremental borrowing rates on inception of new leases and on in-life lease modifications. Management considers all factors that incorporate the three key elements: risk-free rate, credit spread and an adjustment to asset class. Increasing or decreasing the incremental borrowing rate by 1% will not have a material impact to the Group.

Another key judgement in determining the right-of-use asset and lease liability is establishing whether it is reasonably certain that an option to extend the lease will be exercised. Distinguishing whether a lease will be extended or otherwise will have a material impact on the value of the right-of-use assets and lease liabilities recognised on the balance sheet, but may not have a material impact on the income statement.

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment.

Accounting Judgements

i Exceptional and other adjusting items

Judgement is required to determine whether items should be included within exceptional and other adjusting items by virtue of their size or incidence. Details of the items categorised as exceptional are disclosed in note 3.

ii Consolidation of subsidiary

Judgement is required to establish whether control exists over an entity in which Essentra holds part of the share capital. Essentra has a 49% shareholding in China Tobacco Essentra (Xiamen) Filters Co., Ltd which has been consolidated as a subsidiary within the consolidated interim financial statements because management have assessed that Essentra has control over the entity to direct the relevant activities (including approval of budgets and capital investments, and appointment of key management personnel) that significantly affect the entity's returns and the ability to use its power to affect those returns, through a majority of membership in the entity's governing body (primarily the board of directors). Subsidiaries are fully consolidated during the period which the Group holds control.

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 was dissolved in 2019, and for the purposes of the comparative information, it comprised the following smaller businesses which were divested in 2019:

· The Extrusion business was a leading custom profile extruder located in the Netherlands which offers a complete design and production service.

· The Pipe Protection Technologies business specialised 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 had expertise in coating multiple adhesive systems in numerous technologies, and its products ranged from foam, magnetic, finger lift and acrylic high bond tapes to hook and loop and non-skid foam.

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

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.