Essentra Regulatory News (ESNT)

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

A leading global provider of essential components and solutions

RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2022

A strong H1 2022 performance with strategic progress

1 Continuing Operations excludes the Packaging division, which has been reported under IFRS 5 as a discontinued operation at the HY 2022 results

2 Excludes the impact of acquisitions, disposals and foreign exchange

3 Before amortisation of acquired intangible assets and adjusting items. Further details can be found in Note 3 of the condensed consolidated interim financial statements

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

"We have made significant progress on our journey to reposition Essentra as a leading manufacturer and distributor of components, with the announced sale of Packaging to MM Group. This transaction will further strengthen our balance sheet and give Components the flexibility to accelerate investment in growth opportunities.

The strategic review of Filters is progressing well, and the Board remains focused on maximising shareholder value. We will provide a further update towards the end of Q3 2022. The Company has delivered a strong first half; the Components and Filters divisions have delivered double digit H1 growth, including margin expansion and we continue to see strength in our order book, providing encouragement as we move into the second half.

Whilst we are mindful of the wider macroeconomic uncertainty, the Group remains well positioned with organic and inorganic growth opportunities, strong order books and a robust balance sheet. We expect to deliver adjusted operating profit in line with the Board's expectations."

Results at a glance:

1 Before amortisation of acquired intangible assets and adjusting items. Further details can be found in Note 3 of the condensed consolidated interim financial statements

2 Net income is defined as profit / (loss) after tax, before non-controlling interests3 A reconciliation of free cash flow is set out in the Financial Review

4 The results of the Packaging division are presented as results from a discontinued operation and the comparative information has been restated accordingly. See note 1 and 16 of the condensed consolidated interim financial statements for further details of restatements

5 EBITDA is defined as operating profit before depreciation (and other amounts written off property, plant and equipment), share option expense, intangible amortisation and adjusting items

Statutory to Adjusted Reconciliation: Continuing operations

1 Adjusted operating profit, adjusted pre-tax profit and adjusted net income relate to continuing operations

2 The results of the Packaging division are presented as results from a discontinued operation and the comparative information has been restated accordingly. See note 16 of the condensed consolidated interim financial statements

In Q4 2021, Essentra set out its strategic goal to become a pure-play Components business, maximising shareholder value and the potential of each business. The strategic reviews of Packaging and Filters ran in parallel, and in June 2022, the Company announced the sale of Packaging to MM Group, which is expected to complete in Q4 2022.

The Board remains focused on maximising shareholder value with the strategic review of Filters. The strategic review is progressing well, and a further update is expected in Q3 2022.

The disposal of the Packaging business has a material impact on the presentation of the Group's condensed consolidated financial statements for the six months ended 30 June 2022. See note 1 and note 16 for further details.

Packaging has met the International Financial Reporting Standards ("IFRS") criteria to be classified as held for sale in the half year results. Operations have therefore been classified as discontinued. Components and Filters businesses represent the continuing operations of Essentra, together with central services. The comparative period financial statements have been restated.

As a result of meeting the IFRS 5 (non-current assets held for sale and discontinued operations) definition as held for sale, the Company has measured the Packaging business at the lower of its carrying amount and fair value less costs to sell, consequently recognising a discontinued operations impairment charge of £181.6m as an adjusting item.

Given the challenging business and macroeconomic backdrop that the business currently faces, and the level of interest the sale of the Packaging business received, the Board believes MM Group's offer is attractive, and in the best interest of shareholders, unlocking value today. Furthermore, the Board believes its decision to transform the Group into a pure-play Components business will present significant opportunities to accelerate growth and expand market share.

The sale of Packaging is expected to complete in Q4 2022 and, as further explained in the Class 1 Circular for the transaction (which was approved by the Company's shareholders on 8 August 2022), the Board intends to use the proceeds to reduce the Company's debt and contribute £5m to Essentra's defined benefit pension schemes. Following the conclusion of the Filters strategic review, the Board intends to return a proportion of the residual net transaction proceeds to shareholders, after allowing for sufficient flexibility of the Components business to pursue value creating opportunities. The timing, quantum and method of return will be subject to the Board's consideration at the appropriate time.

International Accounting Standards ("IAS") 29, Financial Reporting in Hyperinflationary Economies, has been applied to the Components business in Turkey. There has been more than a 100% increase in the consumer price index in Turkey between 2019 and 2022. As a result of IAS 29, an increase in net assets of c.£18m and a c.£2m increase in profit before tax has been recognised within the half year results. The Components business in Turkey contributes c.3% revenue to the continuing Group.

Constant foreign exchange rates. Movements in exchange rates relative to sterling affect actual results as reported. The constant exchange rate basis ("constant currency") adjusts the comparative to exclude such movements, to show the underlying performance of the Company.

The principal exchange rates for Essentra were:

Re-translating at HY 2022 average exchange rates increases the prior year revenue and adjusted operating profit on a continuing operations basis by £3.3m and £nil 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 2022 LFL results are adjusted for the acquisition of Jiangxi Hengzhu Electrical Cabinet Lock Co., Ltd ("Hengzhu") on 2 August 2021.

Adjusted basis. The term "adjusted" excludes the impact of amortisation of acquired intangible assets and adjusting items, less any associated tax impact. On a continuing basis, H1 2022 amortisation of acquired intangible assets was £5.0m (2021: £4.2m), and there was a pre-tax charge for adjusting items of £19.3m (2021: £2.8m). This included reorganisation of the remaining Group (£13.1m) and investment in major Software as a Service ("SaaS") projects (£6.2m).

Discontinued operations amortisation of intangible assets totalled £6.6m and there were adjusting item expenses of £193.6m, driven by impairment of goodwill £181.6m, separation costs in relation to Packaging (£9.6m) and other impairments and reorganisation expenses (£2.4m). For more information on the performance of discontinued operations, see note 16 to the condensed consolidated interim financial statements.

Adjusted operating cash flow. Adjusted operating cash flow is net cash flow from operating activities, excluding income tax paid, pensions adjustments, and cash flows relating to adjusting items, less net capital expenditure. It is a measure of the underlying cash generation of the business. Net capital expenditure is included in this measure as management regard investment in operational assets (tangible and intangible) as integral to the underlying cash generation capability of the Company.

Constant currency, LFL and adjusted measures are provided to reflect the underlying financial performance of Essentra. For further details on the performance metrics used by Essentra, please refer to pages 20 to 23 of the 2021 Annual Report.

On a continuing operations basis, the H1 2022 result was strong, with double digit revenue growth and margin expansion in the Filters and Components divisions. H1 2022 revenue increased by 18.4% (17.0% at constant currency) to £340.8m, whilst on a LFL constant currency basis, revenue increased by 14.0% compared to H1 2021.

On an adjusted basis, continuing operating profit was up 43.5% (43.8% at constant currency) to £35.3m, which has been driven by increased trading volumes, effective management of supply chain disruption and cost inflation through focused pricing activities, as well as cost saving programmes. Adjusted operating margin improved 190bps to 10.4% on a constant currency basis (8.5% H1 2021).

Including amortisation of acquired intangible assets of £5.0m and a pre-tax charge from adjusting items of £19.3m, continuing operating profit was £11.0m (2021: £17.6m).

The Group has discontinued operations as a result of Packaging sale to MM, which had revenue of £205.6m and adjusted operating profit of £6.7m (£3.9m after allocating central costs). The operating loss as reported was £193.5m, a result of an impairment charge of £181.6m and other adjusting items of £12.0m.

Net finance expense for continuing operations was higher than the prior year at £11.9m (2021: £6.5m). This increase was driven by a one-off revaluation of the US loan notes associated with the disposal of the Packaging business.

The effective tax rate on continuing underlying profit before tax (before adjusting items) was 26.5% (2021: 8.7%). The increase in the tax rate is driven by the one-off non-cash benefit on the remeasurement of deferred tax assets in 2021 as a result of the enacted change in UK Corporation Tax rates and significant reductions in central tax provisions in 2021.

The underlying effective tax rate for the continuing Group is adversely impacted by the accounting treatment for consolidation adjustments between the continuing and discontinued operations, net of a favourable impact of IAS29 (hyperinflation accounting). Excluding these significant impacts the continuing Group's underlying effective tax rate would be 21.4% which is within our forecast tax rate range of 21% to 22% (on a continuing operations basis). The previously disclosed forecast tax range including the Packaging division was 19%-20% with the movement a result of some lower tax jurisdictions in the Packaging division.

On a continuing adjusted basis, net income of £17.2m was up 4.2% (2.2% at constant currency) and adjusted basic earnings per share was 5.3p. On a continuing reported basis, net loss of £4.6m and basic earnings per share of 1.9p loss compared to a net gain of £11.4m and earnings per share of 3.6p respectively in 2021.

Continuing adjusted operating cash flow was £15.9m (H1 2021: £17.7m), equating to a cash conversion of 45% compared to 72% in H1 2021. This includes an outflow of net working capital for the year of £24.0m (H1 2021: £10.7m). The increase in net working capital on continuing operations to £115.1m (H1 2021: £82.1m) was predominately due to higher inventory and receivables levels, supporting growth and increased trading volumes. Our average net working capital to sales ratio increased to 15.3% compared to 14.8% on a continuing operations basis in 2021.

Essentra has made a strong start to the year, with sales and order book ahead of 2021. Whilst the macroeconomic environment remains uncertain, Essentra continues to manage cost inflation and supply chain challenges. We are proactively protecting margins through pricing actions and cost mitigation activities.

We expect Components to take market share due to its enhanced digital customer experience and cross-selling activities. Filters should see strong growth from the ramp up of the China JV entering its second year of production, as well as continued outsourcing contract wins.

The Packaging sale to MM Group is expected to complete in Q4 2022, and we will provide an update on the strategic review of Filters towards the end of Q3 2022. After the completion of Packaging, we expect to hold a small net cash position (excluding lease liabilities) and will review this position moving forward after both strategic reviews have concluded.

The continuing Group expects to deliver adjusted operating profit in line with the Board's expectations.

Summary growth in revenue by Division

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

Components

1 Before amortisation of acquired intangible assets, adjusting items and includes an allocation of certain functional costs

Components has delivered strong growth and margin expansion in H1 alongside a backdrop of headwinds including inflationary cost pressures and the return of temporary local lockdowns in China. In response to increased inflationary pressures (materials, labour and freight), and to protect our margins, the division has passed through price increases to customers. The business continues to monitor and review price increases through H2.

Revenue for the year increased by 18.6% to £175.9m on a constant currency basis (LFL 12.7%). LFL revenue per trading day adjusted growth of 15.9% in Q1 and 9.3% in Q2.

Adjusted operating profit increased by 33.7% to £35.9m, equating to a margin of 20.4% (2021: 18.2%). The 230bps improvement (at constant currency) reflects the improved trading volumes and success in implementing price increases to offset inflation.

As noted previously, Turkey has experienced an accelerated rate of inflation. We are mindful of the needs of our people and have responded by adjusting wage inflation at our manufacturing facility in Istanbul. We have reviewed our domestic pricing regularly to mitigate cost increases, and continue to ensure that pricing within the export market for goods manufactured in Turkey remains competitive. Our actions to date have ensured underlying operating margins in Turkey remain stable.

We are pleased to see positive progress in customer service levels through H1. Whilst we continue to face supply chain challenges across the division, our backlog, which peaked in August 2021, has shown substantial improvement in the first six months of the year. A reduction of c.70% of the exceptional backlog levels, indicates a return to normalised levels of order book backlog. In 2022, the business is supported by a strong new order intake, and closing order book. Our on time in full ("OTIF") metric is also recovering since the start of the year, as we continue to drive service improvements.

The division continues to deliver progress on its digital journey, consistent with the commitment to provide customers with a "hassle-free" experience. The division has taken further steps to digitise the customer experience journey in 2022 and we continue to see increased engagements with the websites that have been deployed. Developments this year include the launch of our website in Turkey as we move our focus to enhancements and improvements. The integration of Artificial Intelligence activities in our sales and marketing teams has continued and we are driving commercial effectiveness through the deployment of predictive marketing programmes. Furthermore, we have recently established a new Digital Hub in Istanbul, where we are focusing the recruitment of new digital talent.

We continue to review the approach taken with Business Process Redesign ("BPR"), and recognise an initial delay in H1 as we continue to stabilise and re-develop the programme with a pure-play Components model in mind. With support from the new programme team that were put in place towards the end of 2021, we will recommence the roll out in EMEA in H2 as well as commencing the implementation and planning stages in AMERS, as we look towards a Q1 2023 roll out in this region.

The Components division continues to make excellent progress towards meeting its sustainability targets. Our investment in research and development continues, and we are pleased to share that our Kidlington, Oxford facility has achieved a 50/50 balance of virgin and post-consumer recycled plastics within its Low-Density Polyethylene ("LDPE") product range. Across the whole division we continue to take steps towards achieving the target of using 20% recycled or renewable polymer raw materials by 2025, finishing Q2 2022 with an exit run rate of recycled material consumption of c.11% of total material (c.10% end of Q4 2021).

Filters

1 Before amortisation of acquired intangible assets, adjusting items and includes an allocation of certain functional costs

The Filters division saw revenue growth of 15.4% compared to the prior year on a constant currency basis. The core Filters business (excluding Tapes business) was up by 16.5%.

The division has continued to see strong growth momentum in 2022. Q1 was up by 15.9% and Q2 14.9% on a constant currency basis. The growth has been driven by increased outsourcing contract business, as well as supporting our multi-national companies ("MNCs") with their business continuity plans ("BCP"), supporting optionality as supply and demand adjusted to events such as Russia's invasion of Ukraine as well as the pandemic. Sales into the Chinese market have grown, with the support of the Joint Venture which has now been operational for twelve months contributing c.6% to the sales growth in H1. Prices have been reviewed and adjusted, supporting in the protection of margin against cost inflation (raw materials and freight).

In relation to the division's 'game changers', the pipeline of outsourcing contract opportunities built in 2021 has continued to support growth in 2022. Significant investment has led to the securing of new outsourcing contracts across the range of our customer base (MNC, Monopoly and Independents), primarily for manufacture in EMEA and Asia, leading to contracted business growth of 19.0% in H1 2022 compared to the prior year.

The China JV production volumes have continued to increase through 2022, with the JV reaching profitability in June 2022, a major milestone twelve months after production officially commenced, and continues to operate in line with expectations. The JV is a great platform to capture opportunities available in the world's largest tobacco market, which is also shifting towards speciality products, and will be further enhanced by future investment in the China Development Centre.

Our pipeline of ECO and next generation products ("NGP") continues to gain commercial interest, with a further three new commercial contracts gained in H1 2022 for ECO products. The division remains uniquely positioned to be a key global player in the outsourced filter market using strong technological knowledge. We remain pleased with the increased levels of interest the market is showing towards these new products which are intended to meet EU Single Use Plastics Directive initiatives for plastic-free and biodegradable products.

The Tapes business has continued to develop its key account management structure, growing a deeper understanding of customer needs, and supporting development of relevant value propositions in paper and board. For the first time, the Tapes business has over 50% of business in non-tobacco.

As well as strong financial performance, and commercial progress in H1 2022, the division as a whole has maintained world class service and quality metrics, strengthening customer relationships, driving agility through the supply chain.

Adjusted operating profit increased 27.2% to £15.1m, equating to an operating margin of 9.2% (90bps improvement at constant currency), largely driven by the volume gearing effect from the revenue increase and favourable mix of outsourcing and BCP volumes, whilst pricing actions are successfully mitigating inflationary pressures.

Discontinued Operations - Packaging

1 Before amortisation of acquired intangible assets, adjusting items and includes an allocation of certain functional costs

Packaging divisional revenue was 9.5% up on the prior year at constant currency. Growth in H1 continues to be driven by underlying market recovery, as seen towards the end of 2021.

Adjusted operating margins reduced in H1 by 320bps to 1.9% compared to H1 2021. The business faced inflationary cost pressures at the start of 2022 and incurred a delay in passing through cost inflation to customers. During Q2, cost inflation was fully passed through to customers supporting the recovery of operating margins.

Further information relating to financial performance of discontinued operations can be found in note 16 to the condensed consolidated interim financial statements.

Net finance expense. Net finance expense from continuing operations of £11.9m was £5.4m above the prior year comparative. The Group incurred a one-off interest expense of £6.1m relating to the revaluation of the US private placement notes to be repaid in association with the disposal of the Packaging business. The Group also incurred an increase in net interest charged on net debt due to higher market interest rates during the period.

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 predominately due to higher inventory and receivables levels, which were driven by enhanced trading volumes combined with a build-up of inventory, to mitigate supply chain disruption, protecting service levels supporting sales growth. Moving through the second half, working capital levels are expected to unwind, and reduce.

Cash flow. Adjusted operating cash flow is net cash flow from operating activities, excluding income tax paid, pensions adjustments, and cash flows relating to adjusting items, less net capital expenditure. It is a measure of the underlying cash generation of the business and is presented below to exclude cash flow on discontinued operations. Net capital expenditure is included in this measure as management regard investment in operational assets (tangible and intangible) as integral to the underlying cash generation capability of the Company.

Adjusted operating cash flow on continuing operations was 10% lower than the previous year at £15.9m (2021: £17.7m), which equated to an operating cash conversion of 45% in the year (2021: 72%). Free cash flow was £9.3m compared to £1.1m in 2021. The improvement in free cash flow was due to lower pension contributions and lower underlying tax payments.

In H1 2022, for the total Group there was a £11.5m net increase in cash and cash equivalents to £153.6m (2021: decrease of £0.4m to £132.5m).

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

Net debt. Net debt at the end of the period was £309.9m, a £75.2m increase from 1 January 2022 (including lease liabilities). The overall increase was driven by foreign exchange movement on USPP loan notes, adjusting items linked to strategic review activity, dividend payments and working capital outflows to support revenue growth.

The Group's financial ratios remain within an acceptable range. The ratio of net debt to EBITDA including lease liabilities was 2.1x (30 June 2021: 1.7x). Net debt to EBITDA excluding lease liabilities was 1.9x (30 June 2021: 1.5x). Interest cover was 4.3x (30 June 2021: 4.9x).

The Company has a commitment to repay a portion of USPP loans 60 days after receipt of funds and completion of the Packaging sale. As a result, a reclassification of USPP 2017 and 2019 loan notes is required, and a total c.£174m has been reclassified to current liabilities for the interim period ended June 2022.

Linked to the early repayment of these loan notes, an accelerated net finance charge for £6.1m has been recognised, with the overall impact on net debt being £4.1m.

Pensions. As at 30 June 2022, the Company's IAS 19 pension net surplus was £0.2m (FY 2021: net surplus of £9.0m). During the period the senior section of the pension scheme purchased a buy-in policy, significantly de-risking a proportion of the UK pension scheme against future funding deficits. An actuarial loss of £7.1m was recognised through reserves.

Dividend. In keeping with the Company's progressive dividend policy, the Board of Directors recommends an interim dividend of 2.3 pence per 25 pence ordinary share (HY 2021: 2.0p). The interim dividend will be paid on 28 October 2022 to equity holders on the share register on 23 September 2022, the ex-dividend date will be 22 September 2022. Essentra operates a Dividend Re-Investment Programme ("DRIP"), details of which are available from the Company's Registrars, Computershare Investor Services PLC. The final date for DRIP elections will be 7 October 2022. The Board will review the dividend policy on completion of both strategic reviews, ensuring that the policy is appropriate for the continuing Group.

Board changes. As planned and previously communicated, Dupsy Abiola was appointed as a Non-Executive Director in March 2022 and Jack Clarke was appointed as Chief Financial Officer in April 2022, and both successfully stood for election at the 2022 AGM.

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

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

Foreign exchange risk. The majority of Essentra's net assets are in currencies other than sterling. The Company's normal policy is to reduce the translation exposure and the resulting impact on shareholders' funds through measures such as borrowing in those currencies in which the Group has significant net assets. At 30 June 2022, Essentra's US dollar-denominated assets were approximately 65% hedged by its US dollar-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.

Enquiries

Presentation

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

There will be a presentation to analysts and investors starting at 09:00 (UK time, registration from 08:30) on Wednesday 17 August 2022 at Peel Hunt LLP, 7th Floor, 100 Liverpool St, London EC2M 2AT.

There are two options for participating in the event:

1. To attend in person, please e-mail your details to investorrelations@essentra.com

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

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

Cautionary forward-looking statement

These results contain forward-looking statements based on current expectations and assumptions. Various known and unknown risks, uncertainties and other factors may cause actual results to differ from future results or developments expressed or implied from the forward-looking statements. Each forward-looking statement speaks only as of the date of this document. The Company accepts no obligation to revise or update these forward-looking statements publicly or adjust them to future events of developments, whether as a result of new information, future events or otherwise, except to the extent legally required.

Notes to Editors

About Essentra plc

Essentra plc is a FTSE 250 company and a leading global provider of essential components and solutions. Organised into three global divisions, Essentra focuses on the light manufacture and distribution of high volume, enabling components which serve customers in a wide variety of end-markets and geographies.

Headquartered in the United Kingdom, Essentra's global network extends to 34 countries and includes 8,327 employees, 47 principal manufacturing facilities, 28 sales & distribution operations and two research & development centres. For further information, please visit www.essentraplc.com.

Essentra Components

Essentra Components is a global market leading manufacturer and distributor of plastic injection moulded, vinyl dip moulded and metal items. Operating in 25 countries worldwide, 1 digital innovation centre, 13 manufacturing facilities 23 sales & distribution centres serve more than 79,000 customers with a rapid supply of low cost but essential products for a variety of applications in industries such as equipment manufacturing, automotive, fabrication, electronics and construction. The division also includes the Reid Supply business, which provides a wide range of branded hardware supplies to a broad base of industrial customers, largely located in the US Mid-West.

Essentra Packaging

Essentra Packaging is one of only two multicontinental suppliers of a full secondary packaging range to the health and personal care sectors, with 23 facilities across three geographic regions. The division's innovative products include cartons, leaflets, self-adhesive labels and printed foils used in blister packs, which help customers to meet the rapidly-changing requirements of these end-markets and can also be combined with Essentra's authentication solutions to help the fight against counterfeiting.

Essentra Filters

Essentra Filters is the only global independent cigarette filter supplier. Currently headquartered in Singapore, the division has 12 sites across nine countries, including two innovation centres, providing a flexible infrastructure strategically positioned to serve the tobacco sector. The business supplies a wide range of value-adding high-quality innovative filters, packaging solutions to the roll your own segment and analytical laboratory services for ingredient measurement to the industry: Essentra's offering also includes Heat Not Burn and e-cigarette solutions to the rapidly evolving market for Next Generation Products. The division also includes the Tear Tapes business, which is globally recognised as the leading manufacturer and supplier of pressure-sensitive tear tapes, that are largely used in the tobacco, e-commerce, food and beverage and specialist packaging sectors.

Risk Report

Our risk management activities aim to drive performance aligned to our purpose, encourage growth through innovation and support the achievement of our strategic objectives. In doing this we take a balanced approach that puts risk management at the core of the senior management agenda. We are committed to managing risks in a proactive and effective manner to protect and enhance value and provide assurance to the Board and our stakeholders.

A refreshed risk management framework has been developed for identifying and managing risk within defined appetite levels, at both a strategic and an operational level. This framework was designed to provide the Group Risk Committee ("GRC") and the Board with a clear line of sight over risk, to enable informed decision-making and to deliver improved resilience. We continue making significant progress in evolving our risk management processes as we continue to ensure our risk management processes are aligned with FTSE 250 upper quartile practice.

Risk can present itself in many forms and has the potential to impact: health, safety and wellbeing; the environment; our communities; our reputation; regulatory compliance; market and financial performance and, therefore, the achievement of our corporate purpose. By understanding and managing risk, we provide greater certainty and confidence to our shareholders, workforce, customers, suppliers, and the communities in which we operate.

The Board confirms its risk appetite biannually by mapping its Principal Risks against a scale from "risk-averse" to "risk neutral" to "risk tolerant" and this informs the development of mitigating actions for each of the Principal Risks.

At a strategic level, our risk management objectives are to:-

· identify the Company's significant risks and appropriate mitigating actions

· formulate the risk appetite and ensure that our business profile and plans are consistent with it

· ensure that growth plans are properly supported by an effective risk infrastructure

· help management teams to improve the control and co-ordination of risk-taking across the Company.

Responding to continued disruption in 2022

Whilst 2020 was the year in which we first experienced the disruption caused by the COVID-19 pandemic, 2021 and the first half of 2022 presented a different range of risks and challenges to which we needed to react and adapt. The Company now faces differing forms of disruption from supply chain constraints to rapidly changing workforce availability and escalating geopolitical tensions.

The risk management lessons we learnt over the past two years have resulted in us being well placed to manage our responses to these events quickly and robustly. They also resulted in a review and revision of our risk management framework to allow us to better consider risk at both a strategic and an operational level with a view to improving business resilience over the short to long term.

Looking forward, we anticipate that certain pandemic related risks will remain in some of our operational sites and end-markets, at least for the short to medium term; however, the work put in to our risk management processes and practices over the past two years means we are well placed to continue to deal with them efficiently and effectively. Additionally, as the strategic reviews progress we continue to analyse and assess the Emerging Risk landscape, with particular focus on the Components division's processes, to ensure the Group's risk management practices continue not only to protect stakeholder value but to support its creation in line with our strategic growth objectives.

It remains critical for us to continue to scan the horizon for additional new, emerging or disruptive risks which could significantly affect our ability to meet our strategic growth objectives. Despite the focus on mitigating the impacts of an increasing range of disruptive risks, we have during the year paid close attention to the increasing momentum associated with the risk agendas for ESG and climate change along with the potential impacts of the evolving economic and global geopolitical situation.

Principal Risks

The GRC has responsibility for enabling the identification and management of Essentra's Principal Risks. Through the GRC, an assessment has been undertaken to consider the appropriateness and adequacy of our Principal Risks. This assessment required each GRC risk owner to provide analysis of material changes in the risk they manage and whether they consider it to have more or less impact during the course of the year on achievement of our strategic objectives. The responses from this assessment were considered by both the GRC and the Audit & Risk Committee (ARC).

The Board believes the Principal Risks are specific to Essentra and reflect the risk profile of the Company at the current time. All Principal Risks are managed within their individual risk appetite.

Since our 2021 Annual Report and Accounts, one Principal Risk - Failure to Achieve Acceptable Returns from the Packaging Division - has been removed following the announcement of the sale of the Packaging Division, which is anticipated to complete in Q4 2022. We have not identified any new Principal or Emerging risks in the first half of the year. The table below sets out movements in our Principal Risks.

Emerging Risks

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 Risk remains broadly unchanged to those set out in the 2021 Annual Report and Accounts. Further detail is set out in the table below:

Further detail on these risks and how they are managed is available in the 2021 Annual Report and Accounts.