Essentra Regulatory News (ESNT)

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

RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2023

A resilient half year performance. FY 23 expectations unchanged.

Results at a glance

Financial and operational resilience

· H1 2023 performance in line with expectations

· Revenue decline of 5.5% to £166.3m (H1 20222: £175.9m)

· Adjusted1 operating profit increase to £23.0m (H1 20222: £15.1m)

· Pro-active and disciplined management of costs

· Strong pricing maintained, offsetting inflation

· Wixroyd integration on track, unlocking new cross-sell opportunities across Europe

· Central corporate costs resized as Essentra transitions to a pure-play business. Remain on track to deliver the previously guided run rate of c.£13m

Strong balance sheet, enabling investment in organic and inorganic growth

· Adjusted1 operating cash flow of £20.5m, cash conversion of 89.1%

· Reported net cash inflow from operating activities £8.9m (H1 2022: outflow £6.4m)

· Net debt of £8.3m, representing leverage of 0.2x EBITDA3,4 (incl. IFRS 16 lease liabilities of £21.2m) providing significant headroom for investment

· Bolt-on acquisition pipeline is actively being managed supporting further value-enhancing M&A

· Delivering on the commitment to return £150m to shareholders. £89.8m special dividend paid in April 2023, and 27% of the £60m share buyback programme completed in H1

· Interim ordinary dividend of 1.2p per share, in line with the Company's previously stated policy

Outlook for FY 2023 unchanged

· The Board's expectations for FY 2023 remain unchanged

· The business remains resilient and has the ability to manage volume impacts, through implementation of pricing actions, and careful cost management

· Essentra remains focussed on enhancing its hassle-free customer proposition, delivering strong profit margins, and continues to invest in growth initiatives, whilst delivering on its sustainability goals

· Management re-affirm confidence in the medium-term targets outlined at the Capital Markets Event in November 2022

Commenting on the half year results, Scott Fawcett, Chief Executive, said:

"Essentra has shown financial and operational resilience in its first half year as a pure-play Components business, making further progress towards our medium-term targets, despite the macro-economic backdrop.

We continue to demonstrate the strength of our business model, which is underpinned by our global footprint, the breadth of our offer across a wide range of end-markets and our focus on our hassle-free customer proposition.

Wixroyd, acquired at the end of 2022, is performing well, and is enhancing Essentra's capabilities in hardware components, unlocking new cross-sell opportunities as products are launched into Europe.

We expect to make further progress in the second half of the year, supported by continued cost management initiatives, maintaining our pricing actions, and delivering new business wins. Our strong balance sheet supports organic growth and further investment in disciplined, value enhancing M&A. Our expectations for 2023 remain unchanged."

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 16 August 2023 at Deutsche Bank, 1 Great Winchester St, London EC2N 2DB.

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. 

Enquiries

Notes:

1 On a continuing operations basis, 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 The Group disposed of the Packaging and Filters businesses during the year ended 31 December 2022. The results of these operations have been re-presented as discontinued operations. See note 12 for further detail

3 EBITDA is defined as operating profit before depreciation (and other amounts written off property, plant and equipment), share option expense, intangible amortisation and adjusting items. For 2023 EBITDA is calculated on a continuing basis and for 2022 on a total Group basis

4 Presented on a last twelve months basis including lease liabilities. £12.9m net funding surplus when excluding lease liabilities; 0.3x net funding surplus to EBITDA (H1 2022: 1.9x net debt to EBITDA excluding lease liabilities). For 2023 EBITDA is calculated on a continuing operations basis and for 2022 on a total Group basis

5 The 2023 interim dividend has been calculated on the earnings of the continuing operations of the business. The 2022 interim dividend of 2.3 pence per share was calculated on the Group earnings which included the earnings now reported as discontinued operations

6 A reconciliation of free cash flow and net cash inflow from operating activities on continuing operations is set out in the Financial Review section

Notes to Editors

About Essentra plc

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

Headquartered in the United Kingdom, Essentra's global network extends to 28 countries worldwide and includes over 3,000 employees, 13 manufacturing facilities, 24 distribution centres and 33 sales & service centres serving c.74,000 customers with a rapid supply of low cost but essential products for a variety of applications in industries such as equipment manufacturing, automotive, fabrication, electronics, medical and renewable energy.

For further information, please visit www.essentraplc.com

Cautionary forward-looking statement

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

Revenue in H1 2023 reduced by 5.5% to £166.3m (7.1% decline at constant currency), and 10.4% LFL decline excluding the acquisition of Wixroyd, completed in December 2022. H1 2022 was particularly strong due to significant end-market recovery and easing supply chains.

Essentra demonstrated continued financial resilience in the first half of 2023, making progress against our medium-term targets delivering £23.0m adjusted operating profit and 13.8% adjusted operating profit margin. Pricing actions at the start of 2023 combined with disciplined cost management initiatives have supported margin performance partly offsetting sales volume decline in the period, and will continue to benefit the business in the second half of the year.

As part of our transition to a pure-play Components business, the right-sizing of central corporate costs is progressing, recognising £6.2m of central corporate costs in the period. A one-off cost of £0.9m has been recognised within adjusting items relating to a restructuring of the business following the two disposals and the business remains on track to deliver the previous guided run rate of c.£13m. H1 2022 central corporate costs totalled £20.0m, of which £12.1m related to central corporate costs for the continuing business, and £7.9m of central corporate costs previously allocated to discontinued operations.

The business continues to hold a strong balance sheet, with H1 2023 adjusted EBITDA to net debt leverage of 0.2x including IFRS 16 lease liabilities, and generated £20.5m of adjusted operating cash flow (89.1% cash conversion). Essentra is therefore well placed, with substantial headroom, to support future organic growth opportunities and drive further investment across an active and value-enhancing M&A pipeline.

EMEA

EMEA has seen a broadly flat revenue performance in H1, with evidence of softening towards the end of Q2 2023 in line with macro-economic trends and levels of industrial production. Whilst the consumer products end-market segment has seen a reduction year-on-year, consistent with trends communicated at FY 2022 results, the region has seen an expansion of renewable energy and industrial equipment end-market segments supported by new business wins.

Revenue in H1 2023 was £89.8m, a 0.1% reduction on a constant currency basis. On a LFL trading day adjusted revenue basis and after adjusting for the acquisition of Wixroyd, the region saw a decline of -4.3% in Q1, improving to 0.2% in Q2.

The Wixroyd business, acquired in December 2022, has expanded Essentra's capabilities in hardware components and has performed in line with expectations in H1 2023. Integration is progressing well, with c.750 SKUs being launched into Europe, unlocking new cross-sell opportunities.

The region anticipates the expansion of our access hardware proposition in H2, as well as driving further exposure to machinery and automation end-markets, supported by new product introductions, and the acceleration of cross-selling.

H1 2023 gross margin of 50.3% remains strong, led by pricing offsetting inflation, and pro-active cost control including operational efficiencies, partly mitigating volume decline. The business will continue to sustain pricing actions and disciplined cost management through the second half.

AMERICAS

Consistent with the market environment described in our previous trading update, distributors have continued to destock in the first six months of the year, which has had an impact on the Americas region. Encouragingly, in Q2 2023, end-user channels have seen signs of improvement.

Revenue in H1 2023 was £56.6m, a 12.6% reduction on a constant currency basis. Trading day adjusted revenue saw a decline of 12.2% in Q1 compared to decline of 14.3% in Q2. The business continues to focus on the normalisation of distributor volumes, and driving new business across the customer base, including cross-sell, as well as new customer acquisition.

The region is focussed on the acceleration of near-shoring opportunities, enabled by the opening of the manufacturing facility in Monterrey, Mexico which is commencing operations. This expansion project builds Essentra's manufacturing presence, increasing capacity to support future wider growth plans, and will bring production closer to customer demand.

H1 2023 gross margin of 37.1% saw a 20bps reduction on the prior year on a constant currency basis, and the region will continue to sustain pricing actions and disciplined cost management through the second half.

APAC

In keeping with the market environment outlined in previous trading updates, APAC performance has been driven by the market dynamic in China, which has seen a steady and gradual improvement with recovery initially seen from the end of the first quarter. The consumer products end-market segment has contracted compared to the previous year, although remains the largest end-market segment. The renewables end-market segment has more than doubled year-on-year, supported by new business wins, including solar projects.

Revenue in H1 2023 was £19.9m, a 18.3% reduction on a constant currency basis. Trading day adjusted revenue saw a decline of 27.5% in Q1, improving to a decline of 10.5% in Q2.

The region continues to explore commercial opportunities in emerging Asia markets, notably Vietnam, and anticipates that the integration of the Hengzhu business acquired in 2021 will accelerate, encouraged by the lifting of pandemic related restrictions in China, with access hardware solutions being an enabler of cross-selling.

H1 2023 gross margin of 34.2% saw a 20bps reduction on the prior year on a constant currency basis. The focus remains on disciplined cost management and operational excellence to maintain profit margins through H2.

Group strategy and medium term targets. Essentra is a leading global provider of essential components and solutions, focusing on the manufacture and distribution of injection moulded, vinyl dip moulded and metal items. We have a unique business model, in a highly fragmented market, combining manufacturing and distribution, enabling breadth and depth of product offer. The business is diversified, with a high margin and scope to expand through scale and operational effectiveness. With strong returns, and cash conversion, the business is able to further drive growth through value enhancing M&A and has a disciplined approach to acquisitions, integrating ten acquisitions in the previous twelve years.

In November 2022, Management laid out a clear strategy to drive organic growth and market share gains. The ambition of the business is to double the revenue and triple operating profits in the medium term, with clear metrics to achieve our strategy:

Medium-term financial targets:

· Organic revenue >5% CAGR

· Total revenue >10% CAGR

· Adjusted operating margin c.18%

· Operating cash conversion >85%

· Net debt to EBITDA

Supported by:

· A clear strategy to drive market share gains, supported by a leading market position in a highly fragmented market

· Margin expansion from scale, operating efficiencies, and pricing initiatives

· A highly cash generative business with continued focus on working capital management

· A strong financial framework and balance sheet to pursue value enhancing bolt-on M&A

Our "hassle-free" customer experience. Our two closely linked customer experience KPIs continue to show good progress, and are aligned with our commitment to a "hassle-free" proposition. Monthly post-purchase questionnaire metrics indicate a continued improvement year-on-year (ahead of the publication of the annual customer survey that is expected to take place in H2), and we have seen an improvement in on-time-in-full performance ("OTIF") compared to H1 2022, which is aligned with the prior year exit rate (in excess of 82%). We maintain the expectation that OTIF service levels will return to pre-pandemic levels by the end the of the year.

The business continues to make further digital progress, continuing to enhance the next generation websites, that are live in 26 countries. Supported by the new digital hub in Turkey that was established in 2022, new functionalities have been launched, including "my account" and continued AI developments that will improve organic traffic and customer conversation rates for the majority of customers' that start their journey online.

ERP implementation progress. The business continues to make progress with the ERP implementation, following a phased approach. We maintain the expectation that the platform will be deployed across all five Eastern Europe sites including the distribution hub in Poland in 2023 and we will continue to make improvements in our live countries in Spain and France. Continuous improvements will benefit future site deployments, whilst maintaining focus on a "hassle-free" customer experience. It is anticipated that up to £12.0m will be spent in 2023 in line with previous guidance. As of the half year, £4.9m adjusting items have been recognised, relating to Software as a Service ("SaaS") costs.

ESG progress. Essentra continues to focus on the five pillars of its ESG strategy as previously announced at the Capital Markets Event in November 2022, comprising of Planet, Culture, Communities, Components and Customers, and has made excellent progress towards the mid-term targets in H1 2023.

Renewable energy consumption globally has increased to over 40% (FY 2022: 31%) including the renewable energy generated at our Rayong site in Thailand, which commenced operation in Q1 2023. This has had a beneficial impact on our emissions intensity, which is tracking at 44.5T CO2e per GBP million of revenue at the half year. (FY 2022: 58.4T).

As shared at the full year results announcement, Essentra achieved its 2025 emissions reduction target at the end of 2022, and has committed to the Science Based Targets initiative. We anticipate that new targets will be submitted for validation in Q3 2023 including short-term and net zero targets for our scope 1, 2 and 3 emissions.

In terms of our waste reduction targets, five additional sites are on target to reach zero waste to landfill by end of 2023, which will bring our total to 17 sites, representing just under 50% of our global footprint.

Essentra has continued to expand the range of products that are made using more sustainable materials, over 3,900 products contain recycled content across the product offering. The business remains confident in achieving the previously set target of 20% (of raw materials from sustainable sources by 2025 across our polymer ranges) earlier than initially targeted, achieving in excess of 20% at the half year and is developing the next set of targets to build on this progress. Our new centre of excellence, which will be open in Kidlington in Q3 2023, is a dedicated facility for trialling and showcasing new and innovative materials.

We have progressed our Communities ESG pillar throughout the period, and have applied to join the UN Global Compact, a strategic initiative that supports global companies that are committed to responsible business practices. Essentra has also committed to increasing engagement with retail shareholders through membership of The Engagement Appeal ("TEA"). TEA's objective is to increase interaction between corporate firms and their retail investors and Essentra looks forward to supporting and growing The Engagement Appeal movement.

Management changes. To support the Company's transition to a pure-play Components business and achievement of our medium-term targets, the Company has made changes to the Group Executive Committee ("GEC").

Gabriele Hannen was appointed as Chief Strategy Officer in March 2023, having joined Essentra in 2019 as Finance Director for the Components business. Gabriele has previously held a variety of Finance and wider leadership roles with a focus on business growth and change. In this role, Gabriele will support the delivery of both short-term performance and long-term strategic objectives, including the delivery and implementation of the new ERP platform.

Stuart Payne has been appointed as Asia Managing Director on a secondment basis, effective from 1 June 2023. Stuart joined Essentra in 2021 and has a broad experience that will help lead the APAC business to deliver its financial and non-financial goals for 2023.

Catherine Lynch has been appointed to the role of Chief People Officer, joining the Company in August 2023, bringing a wealth of experience across a variety of sectors and involvement in transformation projects and acquisitions, most recently at Rentokil. Catherine is a Non-Executive Director and Remuneration Committee Chair at Staffline Plc, an AIM listed business. Oshin Cassidy, Group HR Director, who played a pivotal role during the strategic review, left the Company at the end of June 2023.

Shareholder returns. The Board announced a £60m share buyback programme in February 2023, funded through the residual net transaction proceeds from the disposals of its Filters and Packaging businesses, which completed in Q4 2022.

During the period, a total of 8.37m shares were purchased, at an average purchase price of 193.7 pence per share, totalling £16.2m. The programme is c.27% complete as of 30 June 2023. Of the shares purchased, 4.14m were transferred into treasury, and 4.23m have subsequently been cancelled, which represented 1.4% of the issued share capital of the Company (excluding treasury shares) when the programme commenced.

As previously announced, the Company paid a special dividend of £89.8m, representing approximately 29.8 pence per ordinary share, on 27 April 2023.

Ordinary Dividend. The Board of Directors has declared a 2023 interim dividend of 1.2 pence per share. The interim dividend is in line with the Board's commitment to a progressive dividend policy maintaining dividend cover in the order of three times earnings. The interim dividend has been calculated on the earnings of the continuing operations of the business (2022 interim dividend of 2.3 pence per share was calculated on the Group earnings, which includes the earnings that are now reported as discontinued operations).

The interim dividend will be paid on 27 October 2023 to shareholders on the share register at the record date, being 22 September 2023. The ex-dividend date will be 21 September 2023. Essentra operates a Dividend Re-Investment Programme ("DRIP"), details of which are available from the Company's Registrars, Computershare Investor Services PLC. The final date for DRIP elections will be 6 October 2023.

Outlook. Guidance for 2023 remains unchanged. The business has historically shown resilience through the cycle and continues to manage volume impacts through disciplined cost management and pricing actions.

Whilst we continue to see distributor destocking and changes in the European macro-economic environment, profitability continues to be robust as we move into H2 2023 and China's reopening is showing a steady improvement, benefitting our business in Asia.

Management retains confidence that Essentra's robust and differentiated business model will support continued delivery against the medium-term targets shared at the capital markets event in November 2022. Essentra's global manufacturing and distribution footprint, market-leading positions and focus on delivering excellent customer service will support ongoing organic growth and profitability, whilst the continued strength of our balance sheet will drive disciplined investment in our strong pipeline of value enhancing bolt-on M&A opportunities, which is being actively managed.

Discontinued Operations. The results of the Packaging business and the Filters business have been classified as discontinued operations at 31 December 2022 and comparative information for H1 2022 has been re-presented. Discontinued operations recognised a £0.8m post-tax loss (H1 2022: £178.4m loss) for the period, as reported in the Condensed Consolidated Income Statement. Refer to note 12 in the Condensed Consolidated Interim Financial Statements for further information.

Constant foreign exchange rates. The constant exchange rate basis ("constant FX") adjusts the comparative to exclude the effect of currency movements, to show the underlying performance of the Company. The principal exchange rates for Essentra were:

Re-translating at H1 2023 average exchange rates increases the prior year revenue by £3.0m, increases prior year gross profit by £1.2m and increases prior year operating profit by £0.3m.

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 H1 2023 LFL results are adjusted for the acquisition of Wixroyd Group ("Wixroyd") on 1 December 2022. The H1 2022 results have been adjusted for the completion of the Packaging business disposal previously announced on 3 October 2022 and the completion of the Filters business disposal previously announced on 5 December 2022.

Adjusted basis. The term "adjusted" excludes the impact of amortisation of acquired intangible assets and adjusting items, less any associated tax impact. In H1 2023, amortisation of acquired intangible assets was £5.7m (H1 2022: £5.0m), and there was a pre-tax charge for adjusting items of £7.0m (H1 2022: £9.1m). In the current year, the adjusting items include £4.9m major software as a service ("SaaS") development expenditure (the majority of which is relating to the ERP implementation); £0.9m from restructuring activities to right-size the Group following the disposal of Filters and Packaging, and £0.8m relating to legacy pension scheme costs. A further £0.4m was incurred relating to the acquisition of Wixroyd. Further details on adjusting items are shown in note 3 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 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 17, 20-21 and 25 of the 2022 Annual Report.

IAS 29: Turkey Hyperinflation. International Accounting Standard ("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 2023. As a result of IAS 29, a reduction in net assets of £2.4m and a reduction in profit before tax of £0.8m has been recognised within the 2023 half year results. The Components business in Turkey contributes c.8% revenue to the Group.

Statutory to Adjusted Reconciliation:

Values are presented on a rounded basis

Values are presented on a rounded basis

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

2 Prior year has been re-presented to remove the disposed Packaging and Filters businesses. See note 1 to the Condensed Consolidated Interim Financial Statements

3 Like-for-like has been adjusted for the acquisition of Wixroyd

Net finance expense. Net finance expense of £nil compared to £11.7m in the prior year period, and is broken down as follows:

1 Prior year has been re-presented to remove the disposed Packaging and Filters businesses. See note 1 to the Condensed Consolidated Interim Financial Statements

The reduction in net finance expense is led by the previously communicated changes to the Company's main sources of funding after the strategic review process. H1 2022 also includes a one-off item, related to loan revaluations associated with discontinued activities (£6.1m).

Tax. The effective tax rate on underlying profit before tax (before adjusting items and amortisation of acquired intangible assets) was 23.5% (H1 2022 re-presented: 21.5%). The underlying effective tax rate for H1 2023 is within the continuing operations FY 2023 forecast tax rate range of 23% to 25%.

Consistent with the disclosure of tax rates at FY 2022, this increased tax rate compared to the prior year is primarily driven by the previously announced increase of the UK income tax rate from 19% to 25% with effect from 1 April 2023, partially offset by a reduction in the Turkish income tax rate from 23% to 20% and a favourable profit mix in the period.

Net working capital. Net working capital is defined as Inventories plus Trade & other receivables less Trade & other payables, adjusted to exclude interest accruals and capital payables ("Adjustments").

1 Prior year has been re-presented to remove the disposed Packaging and Filters businesses. See note 1 to the Condensed Consolidated Interim Financial Statements

The increase in net working capital is predominately due to a reduction in Trade and other payables as a result of re-sizing the cost base in the current year, as well as £9.1m included in the prior year period associated with the cost of disposals. This is partly offset by a reduction in receivables, as well as inventory rebalancing, after an initial inventory build in the prior year period.

Adjusted operating cash flow from continuing operations. Adjusted operating cash flow from continuing operations of £20.5m equated to an operating cash conversion of 89.1% at the half year. Free cash flow was £15.3m compared to an outflow of £3.5m in H1 2022.

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

2 Pension contribution of £2.5m in H1 2023 for legacy pension schemes has been included within cash outflow in respect of adjusting items

3 Statutory cash flows from operating activities can be found in the Condensed Consolidated Interim Financial Statements

Net funding surplus / debt. Net debt at the end of the period was £8.3m compared to a net funding surplus of £113.8m at 31 December 2022 (including lease liabilities). The overall increase in net debt was mainly driven by shareholder capital returns previously communicated at the FY 2022 results, offset by free cash flow generated in the period.

The Group's financial ratios remain healthy. Net debt to EBITDA (on a continuing basis) including lease liabilities was 0.2x (H1 2022: net debt 2.1x on a total group basis). The ratio of net funding surplus to EBITDA (on a continuing basis) excluding lease liabilities was (0.3)x (H1 2022: net debt 1.9x on total group basis).

Pensions. As at 30 June 2023, the Company's IAS 19 net pension net liability was £6.8m (FY 2022: £10.6m). The decrease in the liability is a result of an actuarial gain (driven by an increase in discount rate) being netted off against an adverse return on plan assets.

Treasury policy and controls. Essentra has a centralised treasury function to manage funding, liquidity and exposure to interest rate and foreign exchange risk. Treasury policies are approved by the Board and cover the nature of the exposure to be hedged, the types of derivatives that may be employed and the criteria for investing and borrowing cash. The Company intends to use derivatives to manage foreign currency and interest rate risk arising from underlying business activities. Whilst some transactions may be of a more speculative nature, they are in place with a view to manage exchange rate risk only. Underlying policy assumptions and activities are reviewed by the Treasury Committee. Controls over exposure changes and transaction authenticity are in place, and dealings are restricted to those banks with the relevant combination of geographical presence, expertise and suitable credit rating.

Foreign exchange risk. The majority of Essentra's net assets are in currencies other than sterling. The Company's normal policy is to reduce the translation exposure and the resulting impact on shareholders' funds through measures such as borrowing in those currencies in which the Group has significant net assets. The majority of Essentra's transactions are carried out in the functional currencies of its operations, and therefore transaction exposure is limited. However, where such exposure does occur, Essentra uses forward foreign currency contracts to hedge its exposure to movements in exchange rates on its highly probable forecast foreign currency sales and purchases over a period of up to 18 months.

Management of principal risks. The Board considers risk assessment, identification of mitigating actions and internal controls to be fundamental to achieving Essentra's strategic objectives.

2023 HALF YEAR RISK DISCLOSURE

There have been no material changes to the Company's Principal and Emerging Risks since the publication of the 2022 Annual Report and Accounts. Whilst the macro-economic environment, geopolitical situation and general trading conditions continue to be difficult, the Company remains confident that the mitigations already in place are sufficient to manage the risk within the previously agreed risk appetite.

The Board has established a risk and internal control structure designed to manage the delivery of the Company's strategic objectives. The Risk Assurance team, independent of management, enables and facilitates the risk management process across the Company and acts as the custodian of the Company's risk framework and supports risk management activities.

The Group Executive Committee ("GEC") (formerly the Group Management Committee ("GMC")) has assumed the risk responsibilities previously discharged by the Group Risk Committee ("GRC"). These responsibilities are to focus and co-ordinate risk management activities throughout the Company and to facilitate the appropriate identification, evaluation, mitigation and management of all key business risks. In addition, the GEC reviews the risk appetite and ongoing risk management approach and makes recommendations on risk appetite to the Board and actions required to ensure adequate controls and mitigating actions are in place against identified risks.

As an important part of fulfilling its responsibilities, the Board receives regular reporting from the Chief Executive in relation to risks and exposures to enable the Board to challenge and review the GEC's approach and views on key risks.

The regional and functional leadership teams will undertake regular reviews during the course of the year and engage in facilitated discussions with Risk Assurance to consider the risk environment for their particular functional or geographic area of responsibility, and how these could impact on the achievement of the Company's strategic objectives.

The Board considers the nature and extent of the Principal Risks it is prepared to take in achieving its strategic objectives - its risk appetite - biannually by evaluating these risks against a three-point scale from "risk-averse" to "risk-neutral" to "risk-tolerant". This informs the development and focus of mitigating actions for each of the Principal Risks with a particular focus on risks that are assessed to be outside the agreed appetite.

At a strategic level, the Company's risk management objectives are to:

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

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

· Develop plans to bring any exposures that are outside appetite in line with the agreed appetite

· Ensure that growth plans are properly supported by an eective risk management framework

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

During the period, the Board has considered the Principal and Emerging Risks, as disclosed on pages 54-65 of our 2022 Annual Reports and Accounts, in the context of the objectives noted above and across four risk categories: strategic risks, external risks, operational risks and disruptive risks. These risks are summarised as follows:

Strategic risks

· Macro-economic environment - delivering successfully throughout the economic cycle. Whilst the broad economic environment has low growth rates in many end-markets, the Company continues to manage its cost base to minimise the impact on operating margins

· Environment - our impact on the environment (including single-use plastics) and climate change

· Social - the impact of our business on our stakeholders and the societies in which we operate

· Digital transformation - the delivery of our Business Process Redesign programme, our eCommerce platforms and the integrity and fidelity of our data

· Leadership talent and capability - our ability to attract, retain, develop and motivate the talent we need to be successful

· M&A execution and integration - our ability to successfully deliver on our inorganic growth plans

External risks

· Governance - ensuring legal and regulatory compliance across the broad range of jurisdictions in which we operate

· Cyber event - the impact of a cyber security breach or data breach

Operational risks

· Execution of strategic plan - our ability to deliver on our operational and commercial improvement plans to drive organic growth

· Health and safety performance - ensuring the physical and emotional wellbeing of our people

Disruptive risks

· Operational and supply chain disruption - the impact of disruptive events across our broad operational footprint and diverse supply chains

Emerging risks

· Regulatory change - compliance with changes in the regulatory environment which is complicated by the geographical breadth of the Company's operations

· Technology disruptors - responding to evolving technologies effectively to avoid losing competitive advantage as rivals deploy advanced manufacturing technologies

· Sentiment towards plastic - sentiment is evolving at pace and could affect medium-term demand for many of Essentra's products