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Delivering
long-term
profitable
growth
Annual Report 2019
Essentra plc
Our purpose is to
provide the parts,
products and services
our customers need to
succeed as businesses
See more online
essentraplc.com
Customer-focused
Operational review
from page 49
Being part of a
sustainable solution
from page 27
Q&A with Mary Reilly
Non-Executive Director
on page 76
Contents
Strategic Report
Essentra at a glance
Chairman’s Statement
Chief Executive’s Review
Investment case
Our business model
Our progress towards
sustainable growth
Our journey to a more
focused divisional structure
Key Performance Indicators
Non-Financial Key
Performance Indicators
How we do business
Financial review
Alternative Performance Measures
Risk management report
Operational review
Group Management Committee
IFC
2
4
8
10
12
14
16
18
20
30
32
34
49
62
ESSENTRA PLC ANNUAL REPORT 2019
65
66
68
82
Directors’ Report
Chairman’s Corporate
Governance Statement
Board of Directors
Corporate Governance Report
Nomination Committee Report
Chairman of the Audit and Risk
Committee’s Letter
Report of the Audit and
Risk Committee
Chairman of the Remuneration
92
Committee’s Letter
Remuneration at a glance
94
Remuneration Report Policy summary 96
101
Annual Report on Remuneration
Other Statutory Information
112
Statement of Directors’
Responsibilities in Respect of
the Financial Statements
117
88
86
119
120
121
Financial Statements
Consolidated Income Statement
Consolidated Statement of
Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of
122
Changes in Equity
Consolidated Statement of Cash Flows 123
Accounting Policies
124
Critical Accounting Judgements
and Estimates
Notes
Essentra plc Company Balance Sheet
Essentra plc Company Statement
of Changes in Equity
Essentra plc Company
Accounting Policies
Essentra plc Company Notes
Independent auditors’ report to
the members of Essentra plc
Independent environmental
assurance statement
Advisers and investor information
132
134
169
187
188
171
173
180
170
Essentra
at a glance
Made up of three global divisions,
Essentra is a leading provider of
essential components and solutions.
Every day we produce and distribute
millions of small but essential products
Specialist Components
This division was dissolved in
Q3 2019 following a strategic
review and the sale of four of
its six businesses.
See Our progress
towards sustainable
growth on page 12
See Operational
review from page 49
Components
Packaging
A leading global manufacturer and distributor
of a comprehensive range of components, used in
diverse industrial applications and end-markets.
One of very few multi-continental suppliers of
a full range of secondary packaging to the
pharmaceutical, personal care and beauty sectors.
Revenue
Adjusted operating profit1
Revenue
Adjusted operating profit1
£283.3m
(2018: £279.8m)
£60.3m
(2018: £61.0m)
£352.7m
(2018: £342.3m)
£15.1m
(2018: £5.4m)
2019 summary
• Throughout a year of macroeconomic uncertainty, the
business continued to deliver “hassle-free” service provision,
with a record Net Promoter Score (“NPS”) of 41
• Overall performance was boosted by continued market
share gains from access hardware product ranges
• The Reid Supply business was reintegrated into the division
2019 summary
• 2019 was Packaging’s best financial and operational
performance since 2015
• Revenue growth well above industry growth rates
• Encouraging business wins and continued improvement in
customer dialogue, underpinned by ongoing stability, key service
metrics and organisational improvements
• Continued investment in digital capabilities; new website
• Expansion of the Design Hub in both the UK and USA, and
platform now deployed in ten countries
dedicated customer project management to support projects
• Continued benefit from Micro Plastics and Hertila
• Ongoing product pipeline development, to meet industry trends
integration synergies. Integration of Innovative Components
on track
and customer needs
• Board’s confidence in division demonstrated through acquisition
• Continued pipeline development to support future inorganic
of Nekicesa Packaging, the integration of which is on track
growth opportunities
• Continued investment targeted at capacity build and efficiency
• First-year milestones of the BPR programme delivered
improvement
to plan
1
Excluding amortisation of acquired intangible assets
and exceptional and other adjusting items.
ESSENTRA PLC ANNUAL REPORT 2019
Our international network
50
principal
manufacturing
facilities
7,552
employees
34
countries
worldwide
4
research
and development
centres
34
sales and
distribution
operations
Filters
Financial highlights
The only global independent provider of filters
and related solutions to the tobacco industry.
Revenue
Adjusted operating profit1
£303.6m
(2018: £299.4m)
£36.2m
(2018: £35.1m)
2019 summary
• The business outperformed the broader tobacco market
and is well positioned for medium- to long-term growth
• Operational KPIs continue to improve to ensure world-class
service provided to our customers
• Deeper understanding of customer needs through
implementation of key account management
• Refocus of Filters innovations teams to provide greater
category focus and roll out of structured pipeline processes
• Integration of the Tear Tapes (TT) business into the division,
upping the operational performance of TT, whilst further
penetrating end-markets such as food and beverage and
consumer
• Joint Venture agreement signed with four Chinese partners
for manufacturing and development facilities based in China
• Significant outsourcing opportunity agreed with
multinational partner
• Four patent applications filed for next generation
product applications
FY 2019
After
applying
IFRS 16
FY 2019
Before
applying
IFRS 16
% change
Actual
FX2
% change
Constant
FX2
FY 20181
Revenue
£974m
£974m £1,026m
Adjusted3 operating
profit
Adjusted3 pre-tax profit
Adjusted3 net income4
Adjusted3 basic earnings
per share
Dividend per share
£88m
£73m
£59m
21.3p
20.7p
£85m
£73m
£59m
21.2p
20.7p
£91m
£80m
£64m
23.1p
20.7p
Net debt
£284.4m £233.7m £240.1m
Net debt to EBITDA
2.0x
1.9x
1.8x
Free cash flow5
£40.7m
£28.6m
£50.2m
Reported operating
profit
Reported pre-tax profit
Reported net income4
Reported basic earnings
per share
£80m
£66m
£41m
£78m
£66m
£41m
£47m
£36m
£28m
14.7p
14.6p
9.3p
-5
-4
-9
-9
-8
–
+18
n/a
n/a
+69
+80
+47
+58
-6
-5
-10
-11
-10
n/a
n/a
n/a
n/a
+66
+76
+46
+58
1 FY 2018 results are unadjusted for IFRS 16 (see Basis of Preparation)
2
Year-on-year changes are calculated by comparing data for FY 2019 after applying IFRS 16 with
data for FY 2018 (which is unadjusted for IFRS 16)
3 Before amortisation of acquired intangible assets and exceptional and other adjusting items
4 Net income is defined as profit after tax, before minority interests
5 A reconciliation of free cash flow is set out in the Financial review on page 31
How we have
performed this year
Revenue
Adjusted operating profit
£974.1m
(2018: £1,025.6m)
£87.5m
(2018: £90.7m)
Adjusted operating margin
Reported operating profit
9.0%
(2018: 8.8%)
£80.0m
(2018: £47.2m)
Adjusted earnings per share
Reported earnings per share
21.3p
(2018: 23.1p)
Dividend per share
20.7p
(2018: 20.7p)
14.7p
(2018: 9.3p)
Cash conversion
82%
(2018: 85%)
Operational highlights
• Stable revenue base, with
underlying growth of 1.5%
• Momentum in financial
recovery continues, with
underlying growth of 2% in
adjusted operating profit
• Maintenance of strong
operating cash conversion
at 82%
• Balance sheet gearing retained
within target range,
notwithstanding significant
business investment
• All divisions on track against
strategic milestones
• Stability agenda continues with
progress on all metrics across
the Group
• Business Process Redesign
(BPR) project progressing well
• Well set for similar progress
in 2020, strategically and
financially
See Financial review
on page 30
Cautionary forward-looking statement
This Annual Report contains 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 any
future≈results or developments expressed or implied by
the forward-looking statement. Each forward-looking
statement speaks only as of the date of this Annual
Report. The Company accepts no obligations to revise
or update publicly these forward-looking statements 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.
Adjusted measures
Adjusted results exclude certain items because,
if included, these items could distort the
understanding of Essentra’s performance for the
year and the comparability between periods.
In management’s view, such adjusted performance
measures (“APMs”) reflect the underlying performance of
the business and provide a more meaningful comparison
of how the business is managed and measured on a
periodic basis. Our APMs and KPIs are aligned to our
strategy and business segments, and are used to measure
the performance of the Company and form the basis
of the performance measures for remuneration.
See page 16 for KPIs and page 32 for APMs.
ESSENTRA PLC ANNUAL REPORT 2019 1
STRATEGIC REPORTDIRECTORS’ REPORTFINANCIAL STATEMENTS Strategic Report
Chairman’s Statement
Energised
to deliver
our purpose
Another exciting opportunity, from the
Board’s perspective, is that the Company
is about to embark upon the manufacture
of filters in China working alongside our
Joint Venture partners. The Agreement,
signed towards the end of 2019, cements
a number of changes within the division
during the year, including the acquisition
of the minority stake of the business in
Dubai and the announcement of a
material multi-year outsourcing contract.
During the year I have personally travelled
to a number of Essentra sites, in the UK,
Europe, Asia and the USA, as have my
Non-Executive Director colleagues; in
total we have visited 11 sites. I enjoy meeting
employees to discuss their thoughts and
views and experience first hand the culture
of the businesses, which is of utmost
importance to the Board. This is particularly
pertinent as we encourage our Voice of
the Employee programme – discussed
further in the Corporate Governance
Report.
Our global Future Leaders programme
continues to expand and we have recruited
some very talented people. On a recent trip
to Greensboro I was able to spend half a
day with these future leaders, as part of
their training and development week, and
so informally met them all to discuss the
programme and their views on Essentra;
I was very impressed with their confidence
and grasp on the attributes of good
management skills.
In last year’s Annual Report I was able
to provide details of the successful
stabilisation of the organisation across
a number of levels. During 2019 progress
continued to be made in the delivery
of our strategic objectives and Essentra
is starting to demonstrate sustainable
growth – the third chapter in
Essentra’s roadmap.
A particular highlight of the year has been
the refining of the business portfolio. The
four disposals which took place were in line
with the Company’s strategy and were
necessary to enable more focus on the
growth businesses, both in terms of resource
and investment allocation, improving the
long-term sustainable value of the
Company. The Board considered the
disposal proposals for each, carefully taking
into consideration the future prospects of
each business and concluded that they were
better placed to progress and remain
successful if placed with new owners who
had the resources and capability to grow
these businesses, which would be beneficial
to their stakeholders, and our employees.
The acquisition within the Components
division – Innovative Components – has
enabled the division to expand into a new
territory, Costa Rica, along with its
increasing presence in the USA. The Board
was also pleased to approve the acquisition
of Nekicesa Packaging in Spain which clearly
reinforces the turnaround of the Packaging
division since 2017. It is pleasing to see both
businesses performing well.
2 ESSENTRA PLC ANNUAL REPORT 2019
Culture
and values
In 2019 the Board continued to
deepen its understanding of
Essentra’s working culture and
witnessed the Six Principles
become further embedded.
See How we do business
from page 20
Make it Work
awards page 26
In early 2019 all Non-Executive Directors
attended the Leadership Conference in
Barcelona, Spain, which was attended
by 100 of the Company’s senior managers.
During the conference we took part in
the discussion on the continuation of work
around the strategic objectives. We also
visited the two separate facilities based
in Barcelona, namely Packaging and
Components and participated in a panel
discussion with a Q&A session. The lively
debate and contribution from Essentra’s
senior managers continues to be hugely
encouraging. One of the most positive
elements of the conference that myself
and my Board colleagues experienced
was the Make it Work Awards and meeting
the recipients of the Awards.
Strategic Report “The Board is pleased to
support the Voice of the
Employee activity and
looks forward to hearing
more employee thoughts
during 2020”
Paul Lester, CBE
Chairman
The Board regularly discusses the make-
up of the Group’s workforce, from
management succession and talent plans
to the employee engagement survey. It
was good to see that the 2019 engagement
levels have continued to increase from
prior years. The details of the results and
subsequent actions plans – with follow-ups
– are a regular agenda item for the Board.
The commitment to our employees is
further demonstrated by the appointment
of a new Human Resources Director in
early 2019, who has successfully invigorated
this Enabling Function and introduced a
new HR strategy which is aligned with
the Essentra business strategy. It has a
balance of culture and process initiatives,
structured around the employees to ensure
the best possible experience can be gained
by working for Essentra.
Nicki Demby joined the Board as a Non-
Executive Director, Chairman designate for
the Remuneration Committee, in June 2019,
and is already making a strong contribution.
Lorraine Trainer will be retiring as a Non-
Executive Director from Essentra after the
2020 AGM. Lorraine will have served on the
Essentra Board for seven years and in
addition to good counsel on the commercial
aspects of the Company, Lorraine has also
overseen a number of changes to the
Company’s Remuneration Policy and been
instrumental in ensuring employee culture
remains high on the Board’s priorities and
agenda, and we wish her well.
In January Mary Reilly was appointed as
the Board Employee Champion and in this
role she has visited a number of sites in
order to meet employees and bring back
to the Board their thoughts and questions.
In recognition of the number of global sites
within the Group, we found that Mary has
needed some support and Ralf Wunderlich
was appointed as the second Board
Employee Champion, from 1 November.
Ralf will join Mary and provide additional
resource for this important Board activity.
Towards the end of 2019 a new Board
Sustainability Committee was formed
which elevates the previous Group
Sustainability Committee to Board level
and underscores the increasing importance
that both the Board and the Company’s
stakeholders are placing on this issue.
Ralf has been appointed to the Chair of
this Committee which held its first meeting
in December 2019 where it formalised its
purpose and objectives and I look forward
to reporting on its work and progress
during 2020.
The Board continues to be committed
to achieving and maintaining the highest
standards of occupational health, safety
and environmental protection. When
Board members visit Essentra sites they
are required to undertake a health and
safety “walk” around the site to focus on
these important matters. The Board fully
endorses the priority which these critical
workplace practices are given under Paul
Forman’s leadership.
Section 172 Director Duties
The Directors continue to have regard to
the interests of the Company employees
and other stakeholders, including the
impact of its activities on the
community, environment and the
Company’s reputation, when making
decisions. The Directors, acting fairly,
between members and acting in good
faith, consider what is most likely to
promote the success of the Company
for its members and stakeholders in
the long-term.
Please see further information on how
the Directors had regard to the matters
set out in relation to S172 and the
principal decisions made by the Board
can be found from page 70.
The continued focus on the growth
businesses within the Group,
strengthening of the management
team’s capability and our global
footprint positions Essentra well
for the foreseeable future.
Paul Lester, CBE
Chairman
28 February 2020
CHAIRMAN’S STATEMENT
ESSENTRA PLC ANNUAL REPORT 2019 3
STRATEGIC REPORT Delivering operational stability for our
customers is fundamental to our purpose
– to provide the parts, products and services
our customers need to succeed as businesses.
Our ability to deliver products On Time and
In Full (“OTIF”) remains a key customer
measure as does decreasing product
quality incidents, and we continue to make
excellent progress against both measures.
Thanks to continued investment we have
also seen the reduction in major IT
incidents and lost business hours as a result
of IT issues. As IT can be a source of
frustration for our people, this development
is not only helping to increase employee
engagement but also allowing our IT team
to focus on other issues that are crucial to
our future, such as our preparedness
against cyber attack as well as proactive
commercial projects, such as the roll-out
of the Component’s website.
During the year we continued to invest in
health and safety capability, continuing
training and communications as well as
upgrading our machine guarding. As a
result we have seen a further reduction in
Lost Time Incidents, lost hours and severity
versus 2018. As an organisation we
continue to make safety a non-negotiable
priority. In early December we held our
Chief Executive’s Review
Delivering
long-term
profitable
growth
2019 marked the start of the third
chapter of our journey; with stability
and clear strategies restored, we have
worked to create three global business
divisions focused on long-term growth
while continuing to build a winning,
engaged and diverse team and
delighting our customers.
Protecting and enhancing our
licence to operate
While the focus of the first chapter of
our journey, stability has remained a
priority as we have moved forward;
indeed it is the foundation on which
our progress is built.
Adjusted earnings per share
21.3p
(2018: 23.1p)
Paul Forman
Chief Executive
Employee
engagement
Up to
78%
(75% in 2018)
4 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Aligning the shape of the
organisation to our ambition
In 2019 all our divisions continued to make
progress against the strategies set out in
2017, but the most visible strategic
development for Essentra in 2019 was the
simplification of our corporate structure;
moving from nine businesses across four
divisions into three global divisions. This
followed the sale of four of the six
businesses that made up the Specialist
Components division and the transfer of
Reid Supply and Tear Tapes into the
Components and Filters divisions
respectively. The decision to sell Pipe
Protection Technologies, Extrusion,
Speciality Tapes and Card Solutions has
ensured that we are able to focus our
resource on the areas of the business that
create the best value for customers and
shareholders and has provided these
businesses with a strong platform for
future growth.
In 2019 we also added to our portfolio with
some significant value-creating acquisitions
aligned with our new focused structure.
These acquisitions build on the successful
integration of Micro Plastics and Hertila in
2018, which are both performing in line with
expectations. In June we announced the
purchase of Innovative Components in the
USA, which builds on the Components
division product offering in the USA,
providing range opportunities in Europe and
Asia and manufacturing capability in Costa
Rica. This was followed in September with the
purchase of Nekicesa in our Packaging
division helping to establish us as a leading
player in Spain, an attractive packaging
market. In November we announced a new
Filters Joint Venture in China, the world’s
largest tobacco market, this followed the
purchase of the remaining 49% minority
interest of our Joint Venture in Dubai earlier
in the year. As we look forward to 2020 we
continue to ensure we are well placed for
inorganic opportunities, where they can
move our business into complementary
product categories or end-markets, or
further our geographic distribution capability.
first global Safety Week which was an
opportunity to reinforce every employee’s
role in taking responsibility for driving
improvements and embedding a safety
culture throughout the business.
We have also continued to focus on
improved risk management, governance
and financial controls. During 2019, the
Group fully cooperated with an
investigation into some sanctioned market
compliance failures in the Filters business.
Essentra is committed to doing business
the right way in order to maintain and earn
the trust of all its stakeholders. As such,
during the year we began a process to
refresh our compliance programme,
focusing on creating a strong compliance
culture and this will be rolled out
throughout the Company in 2020. In order
to further embed future stability and
reduce operational risk, in January 2019 we
launched a five-year Business Process
Redesign (“BPR”) programme which
combines business model redesign and
Enterprise Resource Planning. While a
significant investment for the Company,
the quantifiable benefits of the BPR
programme are estimated to offset the
cost, and we remain focused on risk
mitigation throughout the project.
Three steps to long-term success
G R O W TH
STR ATEG Y
STABILITY
Chapter 3
Mid-2019 onwards
Chapter 2
Mid-2018 onwards
Chapter 1
Early 2017 onwards
Details on Our progress
towards sustainable
growth can be found
on page 12
2019 priorities
• Restoration of revenue and
profit growth
• Creation of more focused
portfolio of business
• Embedding our purpose to
provide the parts, products
and services our customers
need to succeed as businesses
• Continue to build a winning,
engaged and diverse team
with a shared sense of purpose
• Increase market share and
roll-out of new website in
Components
• Turnaround in the Packaging
division, stabilising the
business in terms of service,
quality and safety and
restoring revenue and profit
growth
• Development in each of the
three stated “game changers”
in Filters
ESSENTRA PLC ANNUAL REPORT 2019 5
STRATEGIC REPORTCHIEF EXECUTIVE’S REVIEW Chief Executive’s Review continued
Key highlights 2019
• Divestment of
the Pipe Protection
Technologies
(PPT) business
• Divestment of the
Extrusion business
• Divestment of the
Speciality Tapes business
• Acquisition of Innovative
Components, USA and
Costa Rica
• Acquisition of
remaining 49%
minority interest
in the Filters Joint
Venture in Dubai
• Leadership
conference
in Barcelona,
Spain
• Divestment of the Card
Solutions business
2019
January
March
April
June
July
Building a winning, engaged
and diverse team
Our people continue to be at the heart
of our journey and our success in 2019
would not have been possible without
their commitment, passion and energy.
The arrival of a new Group Human
Resources Director in January instigated
the development of a powerful HR
strategy which is already having a huge
positive impact on the organisation.
The appointment of Mary Reilly and
most recently Ralf Wunderlich as Board
Employee Champions is also helping to
ensure the voice of the Employee is heard
around the Board table, enabling all
of us to better understand the impact
that Board-level decisions can have
on the workforce.
Inevitably the changes we made to the
shape of our business during the year
resulted in some of our people moving to
a new employer and some new employees
joining Essentra. For those leaving, we
believe that they will, along with businesses
we sold, be better developed by new
owners and continue to thrive under new
leadership. For those joining, we believe
they are doing so at an exciting time in our
development and we are drawing on their
expertise and fresh perspectives as we
integrate them into the Essentra family.
In 2019 we also continued to make progress
on the diversity and inclusion agenda, one
to which I, the Board and Group
Management Committee are passionately
committed. In September we held our first
Group-wide Inclusion Week with a range of
co-ordinated activities across our global
sites, building on a number of initiatives
throughout the year.
I am delighted that these efforts have
contributed to a further uplift in our
employee engagement from 75% in 2018
to 78% in 2019 and an almost 10
percentage point increase from 2017 (69%).
This score puts us ahead of the global and
manufacturing industry averages, a first
for Essentra. Furthermore, we maintained
our market-leading participation rate
(90%) and at a Group-wide level we
improved our result against all questions
in the survey; no areas decreased.
Creating a more sustainable
world for future generations
Essentra’s global reach spans thousands
of employees, clients and suppliers.
This scale represents both commercial
opportunity as well as responsibility;
a responsibility to our people, the
communities in which we operate and
the wider environment. Environmental and
Social Governance (“ESG”) is crucial to our
ability to maintain stability, deliver our
strategies and ensure growth. Good
management of this topic is therefore
critical to meeting the
increasing expectations of all our
stakeholders including employees,
customers and investors.
6 ESSENTRA PLC ANNUAL REPORT 2019
“We are proactively
working across all
divisions to offer
our customers
products that serve
their requirements
whilst minimising
the impact on the
environment”
See page 27 for details
on sustainability
Strategic Report • Specialist Components
division dissolved, Reid
Supply and Tear Tapes
businesses transferred
internally
• Acquisition of Nekicesa
Packaging, Spain
• Make it Work Awards
2020 nominations opened
• 2019 employee survey
launched
• Filters division delivered
its first significant
outsourcing deal
• Signed an
agreement for
the establishment
of a new Filters
JV, China
September
October November
In 2019 we further developed the
sustainability strategy established in 2018
around four pillars: People & Communities;
Energy & Climate Change; Responsible
Material Usage; and Responsible Supply
Chain. During the year we communicated
this strategy internally under the concept
of “small changes – big impact”,
underlining and encouraging everyone’s
role in contributing to the sustainability
agenda. We also recognised ESG as a
Principal Risk, encompassing the issues of
waste management, our carbon footprint,
single-use plastics and climate change.
To further underscore the importance the
Board places in this topic, the Group
Sustainability Committee created in 2018
was elevated to a Board committee in 2019.
Furthermore, we are proactively working
across all divisions to offer our customers
products that serve their requirements
whilst minimising the impact on the
environment. We are considering the
greenhouse gas emissions (“GHG”)
associated with products as well as the
waste created throughout the product’s
life cycle. From the raw materials we buy,
throughout the process of transformation
and end of life of the final product, there
are opportunities for improvement in each
stage of the product lifecycle.
See Operational review
from page 49
Group Management
Committee
It was an honour to
lead a more balanced
and diverse Group
Management
Committee in 2019.
During the year the
team has worked
together well: meeting
challenges head-on
and making the most
of opportunities (Read
their biographies on
page 62.)
Our third chapter
brought to life
Over 2019 Essentra continued to make
meaningful strategic, financial and
operational progress; delivering sustained
underlying revenue and operating margin
growth despite challenging trading
conditions. The 2019 result for the Group
was robust, notwithstanding significant
portfolio rationalisation activities
undertaken during the year which have
had a significant impact on year-on-year
comparisons and KPIs. In Components
revenue and margins were held steady
despite market declines and a record
NPS of 41 was delivered alongside the
roll-out of a new website platform in ten
countries. 2019 was Packaging’s best overall
performance since 2015. The division’s first
acquisition, Nekicesa, performed well
and the year saw further development
of value-added services and progress in
key service metrics. The Filters division is
well set for short and long-term growth
given success against all three “game
changers”, such as the establishment
of the China Joint Venture and a six-year
outsourcing opportunity.
Looking forward with
strength and ambition
Despite this solid performance, 2019
was not without its challenges.
Brexit and a more uncertain broader
macroeconomic environment has required
us to undertake regular reviews and
introduce some mitigating actions. As we
enter 2020 the environment continues to
look uncertain. However, we begin the year
a more stable and focused business, ready
and well-equipped to face the challenges
and opportunities ahead. In 2020 we will
continue to invest in our business and
support growth in all three divisions
through acquisitions and continued
investments such as IT stability and
our people agenda.
In 2020 we will also be focusing on ensuring
that we are living our purpose – to provide
the parts, products and services our
customers need to succeed as businesses
– in every part of the organisation as well
as nurturing and growing our talent so
that we are better able to do so. I remain
incredibly proud of the progress we are
making to instil focus, embed our purpose,
build our team and create growth, and am
hugely confident as we move onwards on
our journey.
Paul Forman
Chief Executive
28 February 2020
ESSENTRA PLC ANNUAL REPORT 2019 7
STRATEGIC REPORTCHIEF EXECUTIVE’S REVIEW Investment
case
Our key strengths...
Balanced and
focused portfolio
Following portfolio rationalisation
in 2019, the Group is a more
focused portfolio having been
reduced from nine to three
businesses, serving multiple
end-markets with a broad
differentiated range of products
and services.
The variety of end-markets
served along with the mixture
of cyclical and non-cyclical
industries in which our businesses
operate, combine to form a
balanced growth portfolio with
strategic opportunities both for
our businesses individually and
the Essentra Group.
Execution of
clearly defined
growth strategy
We have a clear, market-driven
strategy for each of our divisions.
They operate in sizeable end-
markets that present opportunities
for future growth, and in which we
are fundamentally well-positioned
to drive long-term growth and
margin expansion.
The execution capability of our
management team and businesses
ensures we are well positioned to
deliver on our divisional strategies
capitalising on both organic and
inorganic growth opportunities,
continuing to deliver on the
potential of our Packaging
division in terms of both revenue
and margin expansion, robust
organic and inorganic growth
in Components and further
developing opportunities
with Filters division’s stated
“game changers”.
Customers at the
centre of what we do
Our market-leading positions help
us to develop and maintain a close
relationship with a wide portfolio
of blue-chip customers, who are
successful leaders in their
respective markets.
Our customer-focused proposition
combined with high standards
of service and supply demanded
by such customers help to drive
continuous improvement
across Essentra.
Our dynamic operating models
and hassle-free customer
proposition enable us to partner
and add value to customers of
all sizes.
Our manufacturing and distribution
expertise add value in response
to customer demands, and our
innovative capabilities drive
collaboration and joint
development of new products and
services with key strategic partners.
8 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report In order to create sustainable
long-term value, we seek to
responsibly, effectively and
efficiently manage our portfolio
of global leading and diverse
businesses, with a clearly
articulated role for the Group
underpinned by robust financial
and capital allocation policies.
Strong
financial position
with robust
balance sheet
Our strategy calls for a
significant focus on cash flow
generation, which is evidenced in
well-defined financial and capital
allocation policies and a strong,
robust balance sheet.
Proven sustainable
business model
We have a well-invested and flexible
international sourcing, supply chain
and production infrastructure and
remain committed to investing in
scalable processes. This provides
businesses across Essentra the
opportunity to use existing
infrastructure and management to
exploit new opportunities efficiently
and cost-effectively.
Our extensive international
manufacturing and distribution
network ensures the delivery of
cost-competitive and high-quality
products in response to customers’
requirements. High levels of service
and broad geographic reach are an
important competitive differentiator.
Our people are highly engaged and
talented. With investment already
made in key systems, ensuring
operational stability, our stable
operating environment and
committed, engaged workforce are
key enablers in the delivery of our
future growth strategy.
Investment in
innovation
capabilities
The continued successful launch
and commercialisation of new
products and services is a key
driver of our growth.
Investment in research and
development, supported by the
identification of additional product
sourcing opportunities and range
development, enhance our
competitive positions.
Working together with our
customers to innovate, solve
problems and drive solutions
is core to what we do; central to
this is providing solutions through
innovation to meet an increasing
demand for environmentally
responsible products.
Robust quality systems maintained
to internationally accredited
standards assist the fulfilment of
customers’ demands.
INVESTMENT CASE
ESSENTRA PLC ANNUAL REPORT 2019 9
STRATEGIC REPORT Strategic Report
Our business
model
Our purpose
is to provide the
parts, products
and services our
customers need
to succeed as
businesses
What we do
How we do it
We manufacture
Whether it is a tiny but critical
component or a bespoke
solution to a complex need,
we have the skills and capability
to manufacture a wide range
of products.
We partner
We take a long-term
partnership approach with
suppliers and customers so we
can deliver what our customers
need, when they need it.
We distribute
Our global scale and market
knowledge mean that we are able
to anticipate and meet the needs
of our customers, whether large or
small, in a wide variety of end-
markets and geographies.
See Operational
review from
page 49
Our products and services
are delivered by a team of
thousands, framed by our
values; our Six Principles.
A winning, engaged team
Freedom to operate
(within a framework)
Delivery
(keep our promises)
Openness, honesty
and integrity
Safety, respect
and diversity
Energy for change
See How we
do business
from page 20
Our competitive
advantage
We are well positioned to
responsibly and effectively
manage our portfolio of global
leading, diverse activities in
order to create sustainable
long-term value.
Market-leading positions
We have market-leading
positions in the majority
of our served markets
providing us with the scale
and expertise necessary to
deliver for our customers.
Passion and skill of
our employees
Our people are our greatest
asset. We take personal
ownership of what we do
each day and pride in what
we help to achieve as a team.
Strength of customer
relationships
Deep customer relationships and
expert customer service is at the
heart of what we do. Ensuring we
anticipate and deliver on our
customer needs is crucial to our
success as a business.
Diverse and market-leading
product and service ranges
We invest in product
research and robust quality
systems in order to deliver
product innovation
and range development.
Global footprint
with local execution
Our comprehensive international
production and distribution
footprint can be flexed to
respond to customers’ needs,
whether they be product, service,
cost or supply chain driven.
10 ESSENTRA PLC ANNUAL REPORT 2019
Who we serve
Automotive
Equipment
manufacturing
Fabrication
Electronics
Construction
Pharmaceutical
Personal Care
and Beauty
Tobacco
Retail POP/
Paper and Board
Food and
Beverage
Creating value for
our stakeholders
Essentra is built on diversity. Of parts, products
and services. Of customers, partners and markets.
Of people, perspectives and ideas.
Our customers
We put our customers first,
partnering with them and
delivering On Time and In Full
(“OTIF”).
OTIF for 2019 (%)
1
2
3
1 Components
2 Packaging
3 Filters
94.3
96.6
98.5
Our people
We prioritise safety,
employee engagement,
diversity and inclusion,
creating an environment
where our people feel
respected with space to
learn and grow.
Employee engagement
78%
(2018: 75%)
Our communities
We get behind local good
causes while minimising our
environmental impact on
the wider world around us.
Reduction in
waste to landfill
39.7%
(2019 vs 2018)
Our shareholders
We deliver shareholder
value through the strength
of our balance sheet,
customer relationships
and market positions.
Return on invested capital
(%)
2019
2018
2017
9.3
9.6
8.6
Our suppliers
We partner with a range of
suppliers so that we can
provide our customers with
a range of products across
each of our divisions.
Governments and
regulators
Wherever we operate
we are committed to
conducting business in
line with the appropriate
laws and regulations.
OUR BUSINESS MODEL
ESSENTRA PLC ANNUAL REPORT 2019 11
STRATEGIC REPORT Our progress towards
sustainable growth
2019 signalled
the start of the third
chapter of our journey –
creating a more focused
portfolio and
delivering growth
Stability
2017
2018
2020
Progress in 2019
• Employee survey undertaken with
market-leading response rate
maintained and uplift in engagement
from 75% to 78%
• Arrival of a new Human Resources
(“HR”) Director, creation of new
people strategy and investment in a
new HR system
• Ongoing improvements in diversity and
inclusion, evidenced in engagement scores
• Continued focus on safety culture and
further improvement in KPIs
Priorities in 2020
• We will deliver continued improvement
in all key quality and service metrics
• We will continue to build a winning,
engaged and diverse team with a
strong focus on safety
• We will further strengthen and embed
a robust compliance framework and
processes, as well as a strong
compliance culture
• The BPR programme will start to impact
the day-to-day experience of both our
employees and customers
• Continued improvement in all key quality
• We will continue to invest in IT stability,
and service metrics
machine upgrades and our talent
• Launch of the BPR programme
• Good progress on IT stability
and upgrade/rebuild capability
Main challenge in 2019
• Maintaining and improving engagement
during a year of organisational change
Key performance indicators we use
• On Time and In Full (“OTIF”)
• Employee engagement
• Lost-Time incidents (“LTIs”)
and number of days lost
• Operating cash flow
What we said we would do
• Continue employee engagement surveys
and act on the feedback
• Continue to drive and enhance
talent management and
development programmes
• Drive ongoing improvements in diversity
and inclusion
• Continue to improve risk management
towards best practice levels
• Embed new Health, Safety and
Environment information management
system
• Maintain key quality and service metrics
at least at industry-level standards
• Drive strategic investment in Business
Process Redesign (“BPR”)
• Continue to focus on cash generation
Strategy
What we said we would do
• Continue to drive deeper customer
relationships across the Group
• Identify and develop value-adding
innovation opportunities, for both
products and services
Progress in 2019
• Significantly progressed key strategic
initiatives in each of the three divisions
• Divestment of Pipe Protection
Technologies, Extrusion, Speciality
Tapes and Card Solutions
• Make further improvement in
• Specialist Components division dissolved
innovation focus and new product
pipeline management
• Continue to develop our commercial
capabilities
• Continue to embed and refine Sales and
Operations Planning processes
• Further refine Continuous Improvement
and other operational improvement
initiatives
• Continue to invest in upgrading equipment,
especially in Packaging and IT
and transfer of Tear Tapes and Reid
Supply to Filters and Components,
respectively
• Group Sustainability Committee
uplifted to a Board Committee
underscoring importance attached to
Environmental and Social Governance
• Continued to develop key account
management, sales effectiveness
and pricing programmes
Main challenge in 2019
• Pace and volume of our
divestment programme
12 ESSENTRA PLC ANNUAL REPORT 2019
Priorities in 2020
• We will remain focused on our purpose
to provide the parts, products and
services our customers need to
succeed as businesses
• We will continue to drive our divisional
commercial strategies to serve our
customers effectively
• Diversity and Inclusion Steering Group
will continue to develop improvements
in our policies and culture
• We will invest in research, development
and innovation, in particular with a view
to minimising the impact our processes
and products have on the environment
Key performance indicators we use
• Net Promoter Score
• Customer complaints
• Quality incident rates
Strategic Report See Our journey to a more
focused divisional structure
from page 14, Key Performance
Indicators from page 16 and
Operational reviews from page 49
Growth
2017
2018
2020
What we said we would do
• Successfully integrate Micro Plastics
and Hertila
Progress in 2019
• Acquisition of Innovative Components
in the Components division
Priorities in 2020
• We will continue to ensure we are well
placed for inorganic opportunities
• Continue to grow and develop talent
• Acquisition of Nekicesa Packaging
• We will be well-prepared for continued
across Essentra
in the Packaging division
macroeconomic uncertainty
• Identify further skill gaps, and attract
appropriate talent to meet future
strategic requirements
• Acquisition of the remaining 49%
interest in the Filters Joint Venture
in Dubai
• Focus on key business capabilities
and continue to progress towards
best-in-class levels
• Continue to develop pipeline of
potential bolt-on acquisition
opportunities in Components
• Facilitate and challenge the next stage
of divisional strategies
• Continue to enhance our enabling
function support to deliver the strategy
• Establishment of new Filters
Joint Venture in China
• Significant multi-year outsourcing
contract in Filters
• Successfully integrated the acquisitions
of Micro Plastics and Hertila
• Launch of a people strategy, with
large focus on talent attraction
and development
• Invested further in research,
development and innovation capabilities
Main challenge in 2019
• Challenging and uncertain
macroeconomic environment
• We will continue to act as a responsible
corporate citizen, embedding the right
culture as well as processes and policies
• We will focus on attracting, retaining
and developing talent
Key performance indicators we use
• Revenue growth
• Operating profit
Transforming
for the future:
Business Process
Redesign
As Essentra has grown, so
has the number of systems
and processes our business
uses. This has added
complexity which has
curtailed our efficiency,
increased cost and
prevented us from serving
our customers as well as
we would like.
The Business Process Redesign
programme is all about
transformation – embracing
the latest thinking and
up-to-date technology to
simplify and standardise
the way we operate.
Our business redefined
Through reduced system
maintenance costs, better
financial controls, enhanced
data and insights, and the
ability to on-board new
acquisitions rapidly.
Our future refreshed
For a more efficient and
empowered employee
experience that liberates
our people’s talents – and
a hassle-free customer
journey that will build a truly
world-class reputation.
Our systems re-engineered
With the introduction of fast,
modern integrated core
technology systems including
Microsoft Dynamics 365.
Our processes realigned.
With upgraded and
standardised best
practices across Finance,
Procurement and Operations,
underpinned by a single
common process template.
OUR PROGRESS TOWARDS SUSTAINABLE GROWTH
ESSENTRA PLC ANNUAL REPORT 2019 13
STRATEGIC REPORT Our journey to a more
focused divisional structure
2019 provided a strategic opportunity
to simplify our portfolio of businesses.
From nine businesses...
These businesses served multiple end-markets
with a very broad and differentiated range
of products and services:
Components
A leading global manufacturer
and distributor of a comprehensive
range of components, used in
diverse industrial applications
and end-markets.
Packaging
One of very few multi-continental
suppliers of a full range of secondary
packaging to the pharmaceutical,
personal care and beauty sectors.
Filters
The only global independent provider
of filters and related solutions to the
tobacco industry.
Pipe
Protection
Technologies
Extrusion
Speciality
Tapes
Card
Solutions
Reid
Supply
Tear
Tapes
Specialist Components
In 2018 the division comprised
Essentra’s six smaller businesses.
14 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report ...to three focused global divisions
In Q3 2019 we dissolved the Specialist Components
division, leaving us with three focused global divisions
each with a strong platform for future growth:
Components
Including Reid Supply
Packaging
Filters
Including Tear Tapes
Our new structure provides
clarity and focus for our
people and wider stakeholders
The sale during 2019 of
four of the six businesses
that made up the
Specialist Components
division was the result of
a strategic review of the
division, ensuring that
we were focusing our
resources on the areas
that create the best
value for customers
and shareholders.
While the decision to
sell was right for those
businesses, what the
review also showed was
that Tear Tapes and Reid
Supply (formerly referred
to as Industrial Supply),
the two remaining
businesses in Specialist
Components, hold real
value for Essentra.
Therefore, these
businesses remain part
of the Essentra Group
but now report into
Filters (Tear Tapes)
and Components
(Reid Supply).
In the case of Tear
Tapes, the business has
strategic strength in the
tobacco industry and is
now able to benefit from
the sector expertise and
customer relationships
already formed in the
Filters division.
Reid Supply was part
of Essentra Components
before the creation
of the Specialist
Components division.
At that time we tried
to integrate the Reid
Supply business too fully
into the Components
business model. We have
learnt from the past and
will focus on back office
synergies which will
enable the Reid Supply
business to thrive and
grow within the
Essentra Group.
In 2019 we also added to
our portfolio with the
acquisition of Innovative
Components, Nekicesa
Packaging and the
remaining stake in our
Filters Joint Venture.
See Operational
review from
page 49
OUR JOURNEY TO A MORE FOCUSED DIVISIONAL STRUCTURE
ESSENTRA PLC ANNUAL REPORT 2019 15
STRATEGIC REPORT Key Performance
Indicators
The delivery of Essentra’s strategic
priorities is underpinned by a focus on
Key Performance Indicators (“KPIs”)
which measure Essentra’s progress in
the delivery of value.
Alignment of KPIs
to executive remuneration
Performance measures
for the executive Annual Bonus Plan
Performance measures for the
executive Long-Term Incentive Plan
Like-for-like revenue growth (%)
Adjusted operating profit1 (£m)
Adjusted earnings per share1 (p)
2019
2018
2017
-0.7
0.2
-2
2019
2018
2017
88
91
85
2019
2018
2017
21.3
23.1
22.1
How we measure it
Revenue at constant exchange rates,
excluding acquisitions and disposals
Why this is important
Measures the ability of the Company
to grow sales by operating in selected
geographies and categories, and offering
differentiated, cost-competitive products
and services
How we measure it
Operating profit at constant exchange
rates, excluding the impact of amortisation
of acquired intangible assets and
exceptional and other adjusting items
How we measure it
Earnings per share at constant exchange
rates, excluding the impact of amortisation
of acquired intangible assets and
exceptional and other adjusting items
Why this is important
Measures the profitability of the Company
Why this is important
Measures the benefits generated for
shareholders from the Company’s overall
performance
Net working capital2 ratio (%)
Adjusted operating cash flow3 (£m)
2019
2018
2017
14.3
13.7
15.1
2019
2018
2017
72
77
80
How we measure it
Average net working capital2 per month,
as a % of revenue
Why this is important
Measures the ability of the Company
to finance its expansion and release
cash from working capital
How we measure it
Adjusted operating profit less non-cash/
other items, net working capital and net
capital expenditure
Why this is important
Measures the cash generation
capability of the Company
Adjusted operating
cash flow (£m)
72
(77 in 2018)
16 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Total
Shareholder
Return (%)
33.5
(-32.3% in 2018)
Dividend
per share (p)
20.7
(20.7 in 2018)
Cash conversion (%)
Dividend per share (p)
2019
2018
2017
82
85
95
2019
2018
2017
20.7
20.7
20.7
How we measure it
Adjusted operating cash flow3
as a percentage of adjusted operating
profit2
Why this is important
Measures how the Company converts
its profit into cash/quality of the
Company’s earnings
How we measure it
Total dividends paid divided by the number
of relevant shares in issue
Why this is important
Measures the amount of cash per share
which the Company returns to shareholders
Return on Capital Employed (%)
Return on Invested Capital (%)
Total Shareholder Return (%)
2019
2018
2017
20.2
22.4
20.8
2019
2018
2017
9.3
9.6
8.6
2019
2018
2017
33.5
-32.3
19.4
How we measure it
Adjusted operating profit1 divided
by (tangible fixed assets and net
working capital)
How we measure it
Adjusted operating profit1 after tax
divided by (capital employed plus
intangible assets)
How we measure it
Total annual increase in value. Based on
the increase in share price and the dividend
paid to shareholders
Why this is important
Measures how effectively the Company
uses its operational assets
Why this is important
Measures the Company’s ability to
effectively deploy capital
Why this is important
Measures the Company’s ability to
generate long-term value
1 Excluding impact of amortisation of acquired intangible assets and exceptional and other adjusting items.
2 As defined in the Financial review on page 30.
3 As defined in the Alternative Performance Measures on page 32.
KEY PERFORMANCE INDICATORS
ESSENTRA PLC ANNUAL REPORT 2019 17
STRATEGIC REPORT Non-Financial
Key Performance
Indicators
Equally important to the delivery of
Essentra’s strategic priorities is a focus
on KPIs which measure our progress
against stated priorities in terms of our
customers, communities and people.
Customers
On Time and In Full (%)
Environment
Safety
CO2 emissions
(tonnes)
Reduced by
6.1%
(2019 vs 2018)
Waste to landfill
(tonnes)
Reduced by
39.7%
(2019 vs 2018)
Number of
sites with zero
waste to landfill
8
(6 in 2018)
Lost-Time
Incidents (“LTIs”)
Reduced by
8%
(33 in 2019
vs 36 in 2018)
Why this is important
Our overriding commitment in the
workplace is the health, safety and welfare
of our employees and all those who visit
Essentra’s operations. Our aim is to be in the
top quartile of manufacturing companies
for the lowest Incident Frequency Rates.
Number of
days lost
Reduced by
13%
(2019 vs 2018)
Why this is important
We recognise that we have a role, and
interest, in environmental stewardship.
This is not just a duty we owe to our
neighbours, but to future generations.
We know that the way we manage our
environmental impacts forms an important
element of our reputation and is a measure
of the quality of Essentra’s businesses.
Why this is important
This is a measure used to quantify the
severity of LTIs. Where incidents do result
in Lost Time, we work hard to minimise the
amount and to support the injured person
in their recovery by offering restricted or light
duties, and through a structured return to
work programme.
Components
2019
2018
2017
Packaging
2019
2018
2017
Filters
2019
2018
2017
94.3
92.4
90.4
96.6
95.6
95.9
98.5
98.5
95.2
Why this is important
Our purpose is to provide the parts,
products and services our customers need
to succeed as businesses. Our ability to
deliver quality products on time and in full
has been a key focus for 2019.
18 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Employee
engagement
Increased by
4%
(2019 vs 2018)
People
Employee
engagement (%)
2019
2018
2017
78
75
69
Why this is important
The happiness and fulfilment of our
people is a key priority. Having more
engaged employees reduces staff
turnover, improves productivity and
helps us serve and retain our customers.
Non-Financial information table
This table follows the requirements of
Companies Act 2016 Sections 414C(7), 414CA
and 414CB and is intended to help stakeholders
understand our position on key non-financial
matters. We have a number of Group policies
and standards which govern our approach to
these matters. These are detailed in this report
in the sections shown.
Board gender
diversity (%)
Group Management
Committee gender
diversity (%)
Management
(Levels 6-8) gender
diversity (%)
2019
Men: 50% (4)
Women: 50% (4)
2018
Men: 57% (4)
Women: 43% (3)
2017
Men: 75% (6)
Women: 25% (2)
2019
Men: 70% (7)
Women: 30% (3)
2018
Men: 73% (8)
Women: 27% (3)
2017
Men: 91% (10)
Women: 9% (1)
2019
Men: 83% (80)
Women: 17% (16)
2018
Men: 87% (82)
Women: 13% (12)
N.B. Different data sources used.
2018 data from employee survey
respondents, 2019 data from HR
system.
Why this is important
The Board is committed to providing all employees with an equal opportunity
to develop and advance, and for everyone to feel safe, respected, valued and
able to thrive as part of a winning, engaged and diverse team.
Reporting requirement
Where to read more in this report
Environmental matters: How we do business
Employees: How we do business
Health and safety: How we do business
Human rights: How we do business
Social matters: How we do business
Anti-Bribery & Corruption: How we do business
Business model: Our business model
Principal risks: Risk management report
27
20
26
24
24
24
10
34
NON FINANCIAL KEY PERFORMANCE INDICATORS
ESSENTRA PLC ANNUAL REPORT 2019 19
STRATEGIC REPORT Our people
Essentra’s people are at the heart of our
strategic change journey. We continue
to make their safety a non-negotiable
priority at all our sites and are working
hard to improve diversity, talent
development and engagement.
Our ambition is for Essentra to be a
great place to work and this is the
reason we created a set of values – the
Six Principles – which were developed
and rolled out during 2017. Our employees
are vital in ensuring we provide quality
products and services to our customers
and operate our business activities
effectively and efficiently. Indeed,
their talent and commitment drive the
innovation that allows Essentra to provide
added value to our customers, enhance
supply chain logistics and reduce the
environmental impact of operations.
Engineering, IT, Toolmaking
and Production Technician
Apprenticeships. There are
currently 60 people on upskill
apprenticeships (43 male/17
female) enrolled on Print,
Management, Warehousing,
Project Management, Sales,
Customer Services, Data
Science, CIMA, ACCA,
Commercial Procurement
& Supply, Product Designer
& Development, HR, Business
Administration and Credit
Controller.
Essentra
Apprenticeship
Programme
(UK)
Apprenticeships are
currently used for people
joining Essentra directly
from school and to upskill
current employees, and are
supported by both national
and local providers. The
programmes are completed
whilst candidates are in a
real job and allow for
behaviours, knowledge and
skills to be developed to
prepare them for progression
within Essentra. There are
currently ten school leavers
on apprenticeships (all male)
enrolled on Print,
How
we do
business
20 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Helping our people achieve
their full potential
The next steps are about developing
our people in their current jobs with
opportunities to strengthen their skills,
experience and knowledge and growing
them beyond their current roles, so they
can thrive and achieve their potential.
Talent is at the top of our agenda and we
are investing at all levels of the organisation.
We are currently revising our leadership
competencies which will underpin all our
management and leadership skills
programmes. In 2020 we will be taking the
first steps in delivering more learning using
digital and online solutions.
The Essentra
Future Leaders
Programme
The programme, rebranded
from the Essentra Graduate
Programme, is a structured
three-year course delivered
while the Future Leader (“FL”)
undertakes a real job from day
one. The FLs are given the
opportunity to learn about
the Essentra business and are
developed in four key areas:
behaviours; business skills;
leadership; and elements
specific to their role.
In the last six months of the
programme, the FLs work in
groups on a business-focused
project and present their
findings to senior leaders of
the business. In 2019 12 FLs
joined the scheme (ten male/
two female) originating from
Europe (nine), the Americas
(two) and Asia (one). They
joined the 20 graduates
already on the Essentra
two-year Graduate
Programme having joined in
2018 (eight male/12 female).
In 2019 16 graduates
completed the programme
(eight male/eight female).
During 2019 we welcomed a new HR
Director under whose leadership a refreshed
people strategy has been created. This
strategy is designed around an employee
lifecycle – a model that identifies the ways
in which an individual engages with Essentra
and helps us shape that journey into a
positive experience for everyone.
The next step is about recruiting the
right people to the right job, without
discrimination and based on our
shared values as well as specific skills
and knowledge. Our focus in 2019 has
been on developing a consistent approach
to how we use external suppliers in the
search for talent and our approach to
direct hiring. In 2020 we will be using
new and consistent tools in terms of
assessing candidates.
Attracting great people
The first step in our lifecycle is about
attracting great people through our
reputation for operational excellence and
being a great place to work. The failure
to attract and retain the required talent
necessary to evolve our business has been
identified as a Principal Risk for our business.
In mid-2019 a new role of Talent Acquisition
Director was created to drive this critical
agenda. The initial focus has been on
developing a narrative to enable more
effective conversations with potential
candidates. In 2020 we will look to better
communicate why Essentra is a great place
to work alongside further development of
our employer brand, for example through
the development of an external careers site.
Getting off to a flying start
The next step on the employee lifecycle
is about onboarding our people with the
right support, skills, knowledge and tools.
In 2019 a project team reviewed our current
onboarding practices across Essentra
and looked at best practice in the wider
industry. In 2020 we will be piloting a
digital solution to onboarding that keeps
the employee at the centre of the process
but applies a consistent and manager-led
approach. This work has also addressed
“offboarding” which relates to the final
part of the employee lifecycle which is
about helping people leave Essentra in a
positive way that is consistent, fair and in
which people are treated with dignity and
respect whatever the situation.
HOW WE DO BUSINESS
ESSENTRA PLC ANNUAL REPORT 2019 21
STRATEGIC REPORT
LEAP –
Leadership
Essentials
in Action
Programme
In 2019 we introduced LEAP,
our development programme
aimed at supervisors. The
programme was piloted in
Flippin, USA and Kidlington,
UK in mid-2019 and will be
further rolled out in 2020.
The programme has a
modular design and is
available in multiple
languages so it can be
tailored to the needs of
local sites. The training
focuses on people
leadership and interpersonal
skills, covering issues such
as self-awareness,
managing performance,
communication skills and
behaviours to improve your
personal effectiveness.
How we do business continued
Driving our Diversity and
Inclusion agenda
Next in the employee lifecycle is supporting
our people in work and life, by providing
flexibility where possible so they can
achieve their goals. In 2019 we continued
our focus on diversity and inclusion,
launching a global Diversity and Inclusion
Policy and refreshing membership of the
global Steering Group to include a greater
mix of employees of all levels and
background. The Steering Group’s purpose
is to build an inclusive culture in Essentra
where diversity is embraced by everyone,
ensuring we get the full business benefit
while making Essentra a rewarding and
successful place to work for our colleagues.
In 2019 we expanded the focus of the
work to include explicit work-streams
on disability, mental health and
LGBTQ+ alongside the previous
work-streams looking at gender, age
and multiculturalism.
We continued the partnerships begun
in 2019 with everywoman and Business
in the Community (“BITC”). In 2019 we
have continued to roll-out everywoman’s
e-learning platform delivered online and
via an app, giving access to a variety of
online self-development resources such
as workbooks, online seminars, articles
and podcasts. In 2019 we joined BITCs,
Cross-Organisational Mentoring Circles for
the second year and as part of the scheme
ten Essentra UK-based employees will be
participating from January 2020. The
Circles aim to support the progression
and impact of Black, Asian and Minority
Ethnic (“BAME”) employees and address their
current under-representation at senior levels.
We also remain a proud signatory of the
Race at Work Charter developed by BITC in
partnership with the UK Government in 2018.
In 2019 we extended our partnerships to
include #WorkWithMe, a joint initiative
from Scope and Virgin Media to establish
a growing community of businesses
committed to thinking and acting
differently about disability. The
community is set up to allow members
to share information, advice and insights
in a safe, open and honest environment.
We remain committed to providing all
employees with the opportunity to develop
and advance, which includes giving full
and fair consideration to employment
applications from disabled people. In the
event of employees becoming disabled,
we make every effort to ensure that the
training, career development and
promotion opportunities available are
as far as possible identical to those of
non-disabled employees.
In 2019 we continued to take time to
celebrate and mark several global events
across our sites, including International
Women’s Day in March and International
Men’s Day in November. We launched our
first Group-wide Inclusion Week in
September 2019. The week was an
opportunity to celebrate diversity and
inclusion within Essentra and also further
communicate our Diversity and Inclusion
Charter, which underlines Essentra’s
commitment to building an inclusive
culture and the plans we have in place
to deliver against this commitment.
“In 2019 we continued to build an
inclusive culture where diversity is
embraced by everyone, ensuring
we get the full business benefit
while making Essentra a rewarding
and successful place to work for
our colleagues”
22 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Disability
programme
in Poland
In 2017 our Packaging site in
Lublin, Poland began a
partnership with a local
Foundation called “Heros”
which helps members of the
community who are excluded
or facing discrimination.
As part of the relationship,
Essentra facilitated eight
three-month internships for
disabled members of the
community in 2017 and 2018.
After three of these
internships completed,
local management decided
to offer the individuals
permanent roles; two in
the Prepress Department
and one supporting
administrative processes at
the Raw Material Warehouse.
By partnering with
Heros, our employees
and customers can see
Essentra’s commitment to
diversity and inclusion.
These efforts have also been
recognised by local media as
a great example of inclusive
work practices.
Gender split all employees
Male: 66.5% (5024 employees)
Female: 33.5% (2528 employees)
As at 31 December 2019.
Permanent/contractor split all
employees
Permanent: 95.3% (7202 employees)
Contractors: 4.7% (350 employees)
As at 31 December 2019.
Gender pay gap
In 2019 the focus has been on making
Essentra a more inclusive place to work,
which has included initiatives to improve
the gender balance across the Group.
While we have seen an improvement in our
gender balance versus last year, the data
shows that a gender pay gap does exist
and although it has not improved, it
remains broadly in line with the industry
average. We accept there is still more
work to do and we are working to better
understand the underlying issues relating
to the pay gap and the actions we need
to take to close it.
Our guiding principle is to pay colleagues
according to their role not their gender,
providing everyone with an equal
opportunity to develop and progress.
For example men and women doing the
same jobs at a business unit are paid the
same hourly rate. However, we believe our
gender pay gap is caused by the fact that
we have more men than women across all
levels of the organisation, and specifically
in our most senior roles. Where we have
more men in hourly paid roles versus
females, our male colleagues generally
hold specialist roles that attract premiums,
such as machine setters.
HOW WE DO BUSINESS
ESSENTRA PLC ANNUAL REPORT 2019 23
STRATEGIC REPORT How we do business continued
Overall engagement
Increased by
4%
(78% in 2019
vs 75% in 2018)
“Almost eight in ten employees at
Essentra are engaged; a strong score
which puts us ahead of the global and
manufacturing industry averages”
90%
Employee survey
participation
(91% in 2018)
World-class engagement
In November we received the results of our
2019 employee survey. We saw an increase
in overall engagement from 75% in 2018 to
78% and an almost ten percentage point
increase from 2017 (69%). This means that
almost eight in ten employees at Essentra
are engaged; a strong score which puts us
ahead of the global and manufacturing
industry averages.
We have also maintained our market-
leading participation rate, at 90% this
year, which means we can again be
confident that the results reflect the true
voice of Essentra. Furthermore at a
Group-wide level, we have improved our
result against all questions in the survey;
no areas have decreased.
Questions relating to respect and diversity
saw a huge improvement in our 2019
employee survey which is a reflection of the
work undertaken to embed the diversity
and inclusion agenda throughout 2019:
employees increasingly believe that
Essentra actively supports diversity in the
workplace, that we have created an
environment where different views and
perspectives are valued and that their line
manager treats them with respect.
All site action plans were agreed by the
end of January 2020 and regular meetings
are scheduled throughout the year to
track progress.
Rewarding and recognising
our people
In 2019 we introduced a new approach to
have employees contribute to their UK
pension, which increases the take-home
pay of participating employees and
reduces the employer social security
that Essentra pays.
Our Group-wide “Make It Work” Awards
are now in their second year. The Awards
reflect our Six Principles and celebrate the
people who have gone above and beyond
to deliver what Essentra does best: make
it work. 2019 saw over double the number
of nominations submitted from all
divisions and many functions across
the organisation. Our six winners (five
individuals and one team) were announced
in January 2020 and will accept their
awards at a gala dinner held in the Spring.
Being an ethical employer
Essentra has established a clear
commitment to ensuring that its business
activities are conducted in accordance with
all applicable laws and regulations. The
Group Compliance Strategy is based on
risk-based policy and training protocols
supported by appropriate technology
platforms and expert guidance and advice.
Our Ethics Code is the core foundation of
our Group Compliance Strategy and is
issued to all employees globally and who
must affirm they have received and read
the policy and undertake annual training
on the Code. In addition we have specific
policies relating to Anti-Bribery and
Corruption, Anti-Money Laundering and
Third-Party Due Diligence. These policies
are made available to all employees and
specifically issued for affirmation to senior
leaders and others as appropriate. Further
details on these policies can be found at
essentraplc.com/responsibility
Our Right to Speak Policy and process is
in place to enable any employee to report
circumstances where they believe that
the standards of the Ethics Code, or the
Company’s wider policies and guidance
notes, are not being upheld. We are
committed to ensuring that employees
feel able to raise any such concerns in
good faith, without fear of victimisation
or retaliation and with the support of
the Company. Employees can report
any concerns on a confidential basis
online or by telephone.
Throughout our international operations we
support and endorse human rights – as set
down by the United Nations Declaration
and its applicable International Labour
Organisation conventions – through the
active demonstration of our employment
policies, our supply chain and the
responsible provision of our products and
services. This commitment includes a
mandatory requirement on all our sites to
avoid the employment of children, as well
as a commitment to the prevention of
slavery and human trafficking. Our
operations based in India, Indonesia and
Thailand are additionally accredited to SA
8000 which details fundamental principles
of human rights.
24 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report This role needs to work
closely with manufacturers,
suppliers and internal
departments in finding
ways to improve process
and increase machine
reliability and performance.
This person needs to
demonstrate problem-
solving ability and be a
self-starter with initiative.
A day in the
life of typical
Essentra
employees
Cutting Operator
at a Packaging site
This role is responsible for
operating “guillotine” paper
cutting equipment on site.
This involves measuring,
calculating and setting the
correct programme for the
equipment in order that it
produces volume within a
scheduled time to meet
customer delivery dates.
An operator is responsible for
ensuring that all products
made have conformed to the
following standards: ISO
9001:2008, PS 9000:2011,
GMP and ISO 14001.
This role assists the Print
Supervisor in ensuring that
maximum outputs and
efficiencies are achieved
during a shift and as such a
drive to achieve continuous
improvements is vital. This
role also needs to ensure the
area, equipment and
machinery are kept clean
and tidy and an exceptional
eye for detail is also needed.
Slitting Team Leader
at our Tear Tapes site
This role is responsible for
ensuring the efficient
operation of a number of
secondary slitting machines
throughout a shift. This
involves working with and
communicating to members
of the slitting machine team
to ensure that the correct
work flow is in place and that
machines are operating to
optimum output.
This person also needs to
ensure that all health and
safety practices are adhered
to at all time and that quality
checks are carried out in
accordance with quality
and standard operating
procedures.
This person is expected to
take an active role in the
operation of the whole
factory and shift, by assisting
in day-to-day planning,
promoting further continuous
improvement and offering
advice as and when required.
In this role, a knowledge and
understanding of ISO 9001,
14001 BRC, and OHSAS are
required together with strong
communication skills,
self-motivation and initiative.
Maintenance Engineer
at a Components site
This role is responsible for
the maintenance and
repair of manufacturing
equipment, associated
infrastructure and facilities
equipment. This role operates
under the direction of a
Maintenance Manager,
through the Lead Engineer,
in order to ensure safe,
timely and efficient operation
of all plant machinery and
equipment.
This role ensures that periodic
and preventive maintenance
are scheduled and
undertaken and that
emergency troubleshooting
and maintenance support are
readily provided as needed.
This role is also responsible
for updating records of work
activities, tasks carried out,
parts used through stores
and instruction passed on
between shifts.
Based on workforce analysis for the Chief Executive pay ratio, these are typical UK roles we see in the interquartile range (25th to 75th percentile) of remuneration.
HOW WE DO BUSINESS
ESSENTRA PLC ANNUAL REPORT 2019 25
STRATEGIC REPORT Investment in safety
During the year we continued our
significant investment in safety across
Essentra, both in terms of physical safety
features and skills training to protect
everyone at work.
Year
2017
2018
2019
Number of
Lost Time
Incidents
% change
62
36
33
-8.33
How we do business continued
Health and
safety
Essentra remains committed to achieving
and maintaining the highest standards of
occupational health and safety for our
employees and everyone visiting our
operations. The Board provides direction and
leadership on all health and safety matters.
The Chief Executive has primary responsibility
for safety which is managed every day across
the three divisions by our Operations and
Health, Safety & Environment Managers and
their teams. Their work is guided by the
Group Health, Safety & Environment Director
who, along with the Group Management
Committee, regularly reviews our progress
against our safety objectives and monitors
performance. All incidents resulting in Lost
Time are formally investigated and findings
are shared throughout the business.
We continue to support the adoption of
accredited Occupational Health and Safety
Management Systems including ISO 45001 by
our manufacturing sites. For example, in 2019
the Filters division focused on upgrading sites’
OHSAS 18001 certificates to ISO 45001
standard and this activity is ongoing in 2020.
In Packaging, we continued with a major
machinery guarding project. As part of the
project, all our global Packaging sites have
completed a review process to identify areas
for improvement, conducted consultations
with machine operators and are in the
process of completing works to improve
machine guarding. A key machine at the
Bangor site in Northern Ireland has received
significant guard upgrades to prevent full
and partial body access to the machine
whilst running. This upgrade project has
been identified by the UK Health and Safety
Executive as an industry standard example
of a recommended machine guarding
upgrade project.
A “hand safe” campaign has supported
the machine upgrading project in
Packaging and has been well adopted
by employees with a system of approved
knives and gloves now being used for
appropriate tasks. This has led to a
significant reduction in the number of
cut-related injuries in Packaging Europe
and Asia; 16% from 2018 to 2019.
Our winner in the Openness,
Honesty and Integrity
category was Juan, based
at our Greensboro Packaging
site in the USA. Juan has
a high level of prepress
knowledge which he happily
shares across multiple sites.
He steps up as a leader and
takes time to hear concerns
from fellow employees,
finding solutions.
Make It Work
Awards 2019
At Essentra people are at the
heart of what we do. Every
day, employees go above
and beyond to deliver
what Essentra does best:
make it work.
Our 2019 winner in the
Respect and Diversity
category was Jesline,
based at our Filters division
head office in Singapore.
Jesline took steps beyond
her duties to organise a
variety of charitable events,
encouraging her colleagues
to take part.
Our winner in the Safety
category was Andreas,
based at our Components
site in Nettetal, Germany.
Andreas made great
strides to improve the H&S
environment in Nettal and
increased efficiency with
cost- and waste-saving
projects at the site.
26 ESSENTRA PLC ANNUAL REPORT 2019
NB: numbers restated due to portfolio changes.
Data includes sites owned by Essentra for a full
calendar year on 31 December 2019 to allow year-on-year
comparisons. 2017 and 2018 data restated accordingly.
An additional two LTIs occurred in sites acquired part
way through the year.
Year
2017
2018
2019
Number of
days lost
% change
1,638
987
855
-13.37
Severity rate reduced/improved by 13% from 2018 to 2019
(from 16.78 to 14.55)
NB: numbers restated for 2018 due to lost time incidents
continuing on into 2019 so number of days lost continued
to increase.
Safety engagement and training
In early December, we held our first global
Safety Week with a focus on “slips, trips
and falls”. This was an opportunity to
reinforce every employee’s role in taking
responsibility for driving improvements
and embedding a safety culture
throughout the business. Over 80 sites
took part, with 56 improvement activities
shared. This level of engagement supports
our aim to drive a positive safety culture
throughout the organisation.
The Visible Felt Leadership course develops
employees’ safety leadership skills which
they can use within their everyday roles
and when visiting sites across the Group.
In 2019 over 150 of our managers and over
50 supervisor-level employees were trained
on the course. This training reinforces the
principle that safety is a foundation block
of Essentra’s strategy. It is also crucial
in ensuring a good safety management
culture throughout the organisation.
After attending, managers and supervisors
practise and display the safety leadership
skills they have learned which creates a
visible safety culture on the “shop floor”.
Visible safety leadership also generates
opportunities for engagement between
managers, supervisors and operators to
hold regular safety conversations.
Our aim is to be in the top quartile of
manufacturing companies for Incident
Frequency Rates. We are therefore pleased
to report that the number of incidents
resulting in Lost Time has reduced by 8%
from 36 in 2018 to 33 in 2019 and the total
number of days lost due to incidents has
reduced by 13% over the same period. This
includes the sites owned by Essentra for a
full calendar year on 31 December 2019.
Strategic Report Sustainability
Integration of Environmental, Social
and Governance (ESG) is crucial to our
ability to maintain stability, deliver
our strategies and ensure growth. Good
management of this topic is critical
to meeting the increasing expectations
of all stakeholders including customers,
investors, employees, as well as
prospective employees.
In 2019 we further developed our
sustainability strategy around four pillars:
Responsible Resource Usage, Energy and
Climate Change, People and Communities
and Responsible Supply Chain. During the
year we communicated this strategy
internally under the concept of “small
changes – big impact”, underlining and
encouraging everyone’s role in contributing
to the sustainability agenda.
Essentra’s part in a
low-carbon economy
Essentra recognises that it needs to play
its part within the low carbon economy.
We have a rolling programme of site
energy audits, leading to energy efficiency
improvements, including roll-out of LED
lighting at numerous sites and trials of new
technologies, for example, all-electric presses
in Components. We are also exploring on-site
energy generation – two Filters sites use
waste material to generate heat for sites
and four Packaging sites are exploring solar
photovoltaic projects currently. In addition,
we source certified renewable energy, where
possible and economic to do so.
Our sustainability strategy
Responsible
Resource Usage
Energy
and Climate
Change
People and
Community
Responsible
Supply Chain
Reducing our impact
on the environment
through waste
reduction projects,
driving sites to zero
waste to landfill,
trials of recycled
and biodegradable
materials and trials
of “closed loop”
business models
in partnership
with suppliers
and customers
Reducing scope 1 and
2 GHG emissions via
energy efficiency
(e.g. roll-out of
LED projects across
multiple sites),
on-site energy
generation (e.g.
biomass for
heating in Filters,
four sites at pilot
stage for solar PV
in Packaging)
and procurement
of certified
renewable energy
Ensuring we
support the
communities we
operate in through
our community
engagement
policy – each site
chooses and
actively supports
one or more local
initiatives.
Continued focus
on improving our
health and safety
performance
for employees
and visitors
Ensuring our supply
chain is robust
through ongoing
improvements in
policies and
standards including
new KYS processes
as part of BPR
project, along with
roll-out of a
risk-based supplier
audit programme
Essentra acknowledges the important
role of the Taskforce for Climate Related
Financial Disclosures (“TCFD”) to improve
transparency and drive improvements
across industry. We have disclosed on
the four areas of Governance, Strategy,
Risk Management and Metrics and will
endeavour to increase the level of
disclosure year on year.
Sustainability governance
To further underscore the importance
the Board places on this topic, the
Group Sustainability Committee created
in 2018 was elevated to a Board committee
in 2019 and is now chaired by Ralf
Wunderlich. The Board Sustainability
Committee meets at least quarterly in
order to input to strategy, risk
management and performance.
Board
Sustainability
Committee
Group Management
Committee
Group
Sustainability
Team
Divisional
teams
Essentra’s three divisions
Components
Packaging
Filters
Advises on and reviews sustainability
activities including strategy
development and opportunity and
risk identification
Regularly monitors sustainability
metrics including environmental
KPIs for the Group and divisions
Drives the sustainability agenda
at the corporate level and supports
the divisional teams to achieve
improvements
Improvements made throughout
the business which contribute
to overall progress
HOW WE DO BUSINESS
ESSENTRA PLC ANNUAL REPORT 2019 27
STRATEGIC REPORT How we do business continued
Risk management
In 2019 ESG was recognised as a Principal
Risk. This encompasses the topics of waste
management, Essentra’s carbon footprint
and corporate social responsibility issues.
Additionally, two Emerging Risks have been
identified which are currently managed
under the ESG Principal Risk: Single-use
Plastics and Climate Change. It is
important this topic is managed effectively
due to the potential environmental impact,
changing regulatory context and increasing
public awareness of this issue. Currently,
the risk that climate change poses to
Essentra’s global operations is managed
through business continuity planning for
vulnerable locations.
Defining our material issues
It is important to identify our material
issues in order to focus our efforts on
solutions that make the biggest difference
to our footprint. We are currently finalising
this process using a methodology that
identifies key stakeholders including
customers, industry bodies and
sustainability organisations, and researches
the key sustainability issues that matter to
them. The key issues identified are
weighted on both importance to Essentra
and stakeholders and Essentra’s level of
influence or control over the issue. Finally,
the stakeholders review the ranking to
finalise the priority areas. The areas with a
high business impact and high degree of
control are expected to be GHG emissions,
materials and waste. The material issues
will be re-evaluated annually to ensure
they reflect the areas of highest priority
to our stakeholders.
Voluntary sustainability
disclosures
Essentra is committed to reporting against
voluntary external indices to increase
transparency, motivate stakeholders and
drive change within our business and the
value chain. In 2019, Essentra maintained
a silver Ecovadis rating with an improved
score of 59/100, which is in the 86th
percentile of all companies who completed
the assessment. We are working hard to
improve our CDP Disclosures, improving
our score to C in both the Climate Change
and Water Categories in 2019. Completing
external assessments demonstrates our
commitment to continuous improvement
and helps us to prioritise focus areas for
the next year.
Alongside our Scope 1 and
2 GHG emissions, we also
consider the greenhouse
gas emissions associated
with materials supplied to
us as well as waste created
throughout the product
lifecycle. These emissions are
often significantly greater
than the emissions from our
production facilities; it is
therefore important that
we look for opportunities for
improvement in each stage
of the product lifecycle.
Essentra’s
approach to
Single-use
Plastics
Plastics are lightweight,
versatile and cost-effective
materials, and when used
responsibly, have their place
in achieving a lower carbon
society that benefits people,
planet and profit. However,
once used, plastic waste
must be dealt with
effectively, to limit its
impact on the environment.
We are proactively working
across all divisions to offer
our customers products that
serve their requirements,
whilst minimising the impact
on the environment.
For Filters, a key issue is end
of life waste management.
We are actively trialling new
materials from sustainable
sources, to be able to
provide a biodegradable
solution to the industry.
Within our Tear Tapes
business, we are also
exploring several different
material pathways, including
higher recycled content and
biodegradable materials,
along with materials from
sustainable sources.
In Components we have
conducted initial trials of
materials with a higher
recycled content, that still
meet our customers
demanding technical
requirements. We are also
trialling alternative,
biodegradable materials,
alongside trials of ‘closed
loop’ business models, to be
able to recapture and re-use
those materials.
28 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report
Environmental
reporting – metrics
From 2018 to 2019 our overall, absolute
Scope 1 and 2 GHG emissions decreased
by 6.1%. This has been achieved through
a programme of site efficiency audits
and emissions reduction activities to drive
improvements, such as the implementation
of LED lighting projects at many sites
across the Group. We have also developed
additional opportunity identification
approaches via an energy project run by
one of our graduate teams; the roll-out
of their project will continue to be
implemented across the divisions in 2020
and beyond. Our emissions per £m have
decreased by 1.2%.
Waste reporting has improved significantly
during 2019, with increased oversight of
waste destinations. Recycling, recovery
and incineration have increased as we
build increased awareness of the waste
hierarchy. Waste sent to landfill has
decreased by 39.7%. In addition, eight
sites across the Group have achieved zero
waste to landfill (“ZWTL”) status in 2019;
these sites have at least 12 months’ data
to confirm this.
ERM CVS has verified Essentra’s
environmental data in 2019. The data
verified includes our energy usage and
associated CO2 equivalent emissions,
waste quantities per destination and
number of sites with ZWTL status.
Future Leaders
Energy Project
During 2019 a team of
graduates undertook a
project to create an Energy
Savings Playbook for
Essentra to implement
energy saving activities and
projects. The team visited
Components sites in
Kidlington, UK and Flippin,
USA to investigate potential
energy saving opportunities
in the manufacturing
process and site operations.
The team identified areas for
improvement that would
allow sites to maximise the
benefits of energy saving
projects; these included
suggestions to educate
employees to improve
technical knowledge and
behaviours around energy
management. The team
presented their findings
to the Group Management
Committee in November
2019, highlighting the cost
saving and energy saving
opportunities of rolling
the project out across
the Components division.
Future plans to introduce
energy saving projects
across Essentra’s three
divisions will contribute
towards cost savings for
the business’s and will
reduce the business’ Scope
1 and 2 GHG emissions.
Tonnes CO2e
Scope 1
Scope 2
Total
Total CO2 eq per £m revenue
2018
(restated4)
2017
(restated4)
% change
between 2018
and 2019
11,245
65,852
77,097
75.2
10,738
71,495
82,233
80.0
-8.7
-5.7
-6.1
-1.2
2019
10,264
6,2111
72,375
74.3
Waste (tonnes) solid hazardous
and non-hazardous
Recycling
Recovery including incineration
with energy recovery
Incineration without energy recovery
2019
2018
(restated4)
2017
(restated4)
28,829.8
20,403.9
20,136.7
17,612.9
284.2
2,006.6
1,865.4
Landfill
2,989.2
49,58.3
6,705.1
Percentage of waste diverted from landfill
94.0
81.9
76.6
1
Boundary: waste and
energy data is collected for
all global operations
including manufacturing,
warehouses, and offices.
Sites included in emissions
and waste reporting are
those that constitute 99%
of Essentra’s electricity
consumption within our
operational control. The
sites which make up the
lowest 1% of electricity
consumption are excluded
from reporting and
verification due to their
consumption being
immaterial. Sites sold
during 2019 are not included
in disclosures to allow for
comparison between years.
2
3
As classified by the
Greenhouse Gas Protocol,
Scope 1 includes direct
emissions from the
combustion of fossil fuels
within Essentra’s
operational control,
the scope 1 emissions
associated with refrigerant
gas used in air conditioning
equipment were not
captured during 2019,
however, the data collection
methodology has been
amended to capture this
data in 2020. Scope 2
includes indirect emissions
from purchased electricity
and used by the organisation.
Emission factors: The
Electricity Emissions Factors
by Country published by the
International Energy Agency
4
in 2019 has been used to
calculate Scope 2 emissions;
and the Greenhouse Gas
Protocol 2017 has been
used to calculate
Scope 1 emissions.
Emissions data was
restated because the
methodology to calculate
GHG emissions was
significantly updated
during 2019; previously, only
CO2 was disclosed. Revenue
has not been restated.
Emissions and waste data
have been restated due to
Essentra’s portfolio
simplification, therefore,
sites sold 12 months ago or
more are excluded from all
reporting years.
HOW WE DO BUSINESS
ESSENTRA PLC ANNUAL REPORT 2019 29
STRATEGIC REPORT Financial
review
Trading performance
The FY 2019 result for the Group was
robust, notwithstanding the uncertainty
around the global macroeconomic climate,
and significant portfolio rationalisation
activities that took place during the year.
As disclosed in the HY 2019, in aggregate,
£105m of annualised revenue and £15m
trading profit were disposed during the
year, which had significant impact on
the year-on-year comparisons.
FY 2019 revenue decreased 5.0% (-6.5%
at constant exchange) to £974.1m owing
to disposals during the period: on a LFL
basis, revenue decreased 0.7% (+1.5%
underlying). The underlying result reflected
a resilient performance in Components
(given the macroeconomic conditions) and
a strong performance in Packaging, offset by
a decline in Filters (which was primarily driven
by softer performance in China and also in
markets supplied by the Middle East).
On an adjusted basis, operating profit
was down 3.5% (-5.4% at constant FX)
at £87.5m. The 20bps uplift in the margin
(10bps at constant FX) to 9.0% was driven
by the volume gearing effect from the revenue
growth in Packaging, boosted by the impact
of price increases in both Components and
Packaging, and further operational efficiency
gains in all three divisions.
Including amortisation of acquired
intangible assets of £22.9m and an
exceptional pre-tax credit of £15.4m – mainly
relating to net gains on the divestment of
the aforementioned businesses less costs
associated – operating profit as reported
was £80.0m (2018: £47.2m).
Net financial expense
Net finance expense was above the prior
year at £14.5m (FY 2018: £10.9m), mainly
due to interest on leases from having
adopted IFRS 16 together with a higher
average level of sterling-denominated debt
during the period (which was done as a
Brexit mitigation initiative).
Tax
The effective tax rate on underlying profit
before tax (before exceptional and other
adjusting items) was 19.9% (2018: 19.5%).
Net income
On an adjusted basis, net income of
£58.5m was down 8.9% (10.9% at constant
FX) and adjusted basic earnings per share
decreased by 7.8% (-9.7% at constant FX)
to 21.3p. On a total reported basis, net
income of £41.2m and earnings per share
of 14.7p compared to £28.1m and 9.3p
respectively in FY 2018.
Net working capital
Net working capital is defined as “inventories
plus trade and other receivables less trade
and other payables, adjusted to exclude
deferred consideration receivable/payable
and interest accruals/capital payables”.
The decrease in net working capital, from
£121.8m in 2018 to £113.8m, was largely due
to business divestments, within Specialist
Components, offset by increases in
Components and Packaging. The average
net working capital/revenue ratio was
14.3% (2018: 13.7%, at constant FX). The
increase in the net working capital ratio
was driven by the impact of adopting IFRS
16 (which accounted for 20bps of the
overall 60bps movement), with the
remainder being driven by Brexit related
stock building in the Components division
and an increase in working capital in the
Packaging division being used to fuel
business growth. The movement in trade
and other payables is driven by the release
and utilisation of certain accruals and
deferred income.
“Our continued focus
has led to robust profit
delivery, whilst
maintaining a solid
balance sheet, and
has allowed us to both
increase investment in
the business and
maintain the distribution
to our shareholders”
Lily Liu
Chief Financial Officer
30 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Cash flow
Adjusted operating cash flow was £71.8m
(2018: £77.2m). This includes an outflow of net
working capital for the year of £10.3m (2018:
inflow of £5.9m) and gross capital expenditure
of £58.9m (2018: £61.2m), with net capital
expenditure of £56.6m (2018: £60.2m). Net
capital expenditure equated to 155% (2018:
168%) of the depreciation charge (including
amortisation of non-acquired intangible
assets) for the year of £36.4m (2018: £35.9m).
Net interest paid was £13.3m (2018: £9.5m)
and tax payments remained flat at £16.5m,
after adjusting for exceptional tax payments
on disposals. The outflow in respect of pension
obligations was £1.3m (2018: outflow of £1.0m).
Adjusted free cash flow of £40.7m compared
to £50.2m in FY 2018.
Free cash flow reconciliation
Adjusted operating profit
Non-cash/other items
Net working capital
Net capital expenditure
Adjusted operating cash flow
Tax paid
Net interest paid
Pension obligations
Adjusted free cash flow
£m
87.5
51.2
(10.3)
(56.6)
71.8
(16.5)
(13.3)
(1.3)
40.7
Net debt
Net debt at the end of the period
was £284.4m, a £15.1m reduction from
1 January 2019 (after applying IFRS 16),
primarily due to proceeds from Specialist
Components disposals and free cash flow
generation, partially offset by cost of
strategic acquisitions, dividend payments
and cash exceptional and other adjusting
items. The ratio of net debt to EBITDA as at
31 December 2019 was 2.0x (31 December
2018: 2.1x) after applying IFRS 16 (1.9x before
applying IFRS 16), and interest cover was
6.6x (31 December 2018: 7.9x) after
applying IFRS 16.
Balance sheet
As at the end of 2019, the Company had
shareholders’ funds attributable to Essentra
equity holders of £533.1m (2018: £592.6m).
Total capital invested in the business was
£919.5m (2018: £927.2m).
This finances non-current assets of
£841.8m (2018: £853.3m), of which
£276.0m (2018: £282.2m) is tangible fixed
assets, the remainder being intangible
assets, right-of-use assets, deferred tax
assets, retirement benefit assets and
long-term receivables.
The Company has net working capital of
£113.8m (2018: £121.8m), current provisions
of £3.3m (2018: £5.3m) and long-term
liabilities other than borrowings of
£128.3m (2018: £106.2m).
Pensions
As at 31 December 2019, the Company’s IAS 19
net pension liability was £17.4m (2018: £13.9m).
The Company concluded the triennial
valuation of the two closed defined benefits
sections of the Essentra UK Pension Plan
with the Trustees of the Plan, with a
settlement of £1m to be paid in three equal
payments. The first took place in December
2019, and the remaining two will be paid in
June and December 2020.
Treasury policies and controls
Essentra has a centralised treasury function
to control external borrowing and manage
exchange risk. Treasury policies are approved
by the Board and cover the nature of the
exposure to be hedged, the types of
financial investments that may be
employed and the criteria for investing and
borrowing cash. The Company uses
derivatives only to manage foreign currency
and interest rate risk arising from 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 and suitable
credit rating. Essentra monitors the credit
ratings of its counterparties and credit
exposure to each counterparty.
Foreign exchange risk
The majority of Essentra’s net assets are
in currencies other than sterling. The
Company’s normal policy is to limit the
translation exposure and the resulting
impact on shareholders’ funds by
borrowing in those currencies in which the
Company has significant net assets. As at
31 December 2019, Essentra’s US dollar-
denominated assets were approximately
46% hedged by its US dollar-denominated
borrowings, and its euro-denominated
assets were approximately 32% hedged
by its euro-denominated borrowings.
The majority of Essentra’s transactions are
carried out in the functional currencies of its
operations, and therefore transaction exposure
is limited. However, where such exposure does
occur, Essentra uses forward foreign currency
contracts to hedge its exposure to movements
in exchange rates on its highly probable
forecast foreign currency sales and purchases
over a period of up to 18 months.
Aside from foreign exchange risk, the Group
is also exposed to other types of risks,
including credit risk. Please see note 19 of
the Financial Statements for further details.
Refinancing activities
Essentra is primarily funded by a series of
United States Private Placement (USPP)
loan notes held by various investors, and a
Revolving Credit Facility (RCF) provided by
a group of well rated banks. An $80m USPP
loan note is due to mature in April 2020 and
the remaining $75m USPP loan notes
mature between November 2024 and
November 2029. The RCF is made up of two
tranches, £285m and €100.8m, which both
mature in November 2022. At 31 December
2019 the available bank facilities totalled
£370m (2018: £375m). Furthermore, the
Group also has the following facilities which
become available in 2020:
• a further USPP facility for $25m, which
can be drawn from April 2020, for which
the note purchase agreement has been
signed in December 2019; and
• a bridging loan facility for £50m which
was agreed with banks in February 2020,
with an initial term of 12 months, plus a
further six months at Essentra’s option,
and thereafter another six months at the
lenders’ discretion
Engagement and development
of the Finance team
Having been in the role for more than a
year, I am pleased to report the progress
of our team development. A global Finance
Leadership Team with a mix of internal and
external promotions was assembled, with
a focus on transforming our function to be
more business and people focused. These
efforts have come to fruition with an eight
point increase in the whole Finance team
employee engagement in 2019. Our
Shared Service Centre team in the UK
received a Highly Commended recognition
in the British Credit Awards 2020. During
the year, we also deployed new Robotic
Process Automation technologies in order to
improve process efficiency and engagement,
whilst contributing to the Group-wide
BPR programme.
Lily Liu
Chief Financial Officer
28 February 2020
FINANCIAL REVIEW
ESSENTRA PLC ANNUAL REPORT 2019 31
STRATEGIC REPORT Alternative
Performance
Measures
FY 2019 results at a glance
Revenue
Adjusted operating profit
Adjusted pre-tax profit
Adjusted net income
Adjusted earnings per share
Dividend per share
Reported operating profit
Reported pre-tax profit
Reported net income – total
The financial information in this FY 2019
Annual Report is prepared in accordance
with IFRS as adopted by the European
Union and IFRS as issued by the International
Accounting standards Board, and with the
accounting policies set out on pages
124 to 133.
Basis of preparation
Continuing operations
Unless otherwise stated, the FY 2019 results
and narrative contained in this Annual
Report reflect the revenue and adjusted
operating profit of the Essentra Group on
a continuing basis.
Non-GAAP measures
Throughout this FY 2019 Annual Report,
the following terms are used to describe
Essentra’s financial performance.
Constant exchange rates
Movements in exchange rates relative to
sterling affect actual results as reported.
The constant exchange rate basis adjusts
the comparative to exclude such
movements, to show the underlying
performance of the Company.
For the principal exchange rates for
Essentra for the year ended 31 December
2019 (“FY 2019”), see the table below.
Retranslating at FY 2019 average exchange
rates increases the prior year revenue and
adjusted operating profit by £15.9m and
£1.8m respectively.
32 ESSENTRA PLC ANNUAL REPORT 2019
Principal exchange rates
US$:£
€:£
Average
FY 2019
FY 2018
Closing
FY 2019
FY 2018
1.28
1.33
1.32
1.28
1.14
1.13
1.18
1.12
Like-for-like basis
The term “like-for-like” describes the
performance of the continuing business
on a comparable basis, adjusting for
the impact of acquisitions, disposals and
foreign exchange. The FY 2019 LFL results
are adjusted for the acquisition of Nolato
Hertila (“Hertila”) on 5 July 2018 until 8
February 2019 (further to which it was fully
integrated into the existing Components
activities in Sweden and no longer
separately identifiable), the acquisition
of the Innovative Components business
on 26 June 2019, the acquisition of
Nekicesa Packaging on 6 September 2019,
the divestment of the trade and assets of
the Swiftbrook paper merchant business
on 3 September 2018, the divestment of
the Pipe Protection Technologies business
on 14 January 2019, the divestment of the
Extrusion business on 11 June 2019, the
divestment of the Speciality Tapes
business on 28 June 2019 and finally
the divestment of the Card Solutions
business on 23 July 2019.
Management uses a number of measures
of financial performance, position or cash
flows of Essentra which are not defined
or specified in accordance with relevant
financial reporting. In management’s
view, these Alternative Performance
Measures reflect the underlying
performance of the Company and
provide a more meaningful comparison
of how the business is managed and
measured on a periodic basis.
FY 2019
£m
974
88
73
59
21.3p
20.7p
80
66
41
FY 2018
£m
1,026
91
80
64
23.1p
20.7p
47
36
28
% change
Actual FX
% change
Constant FX
-5
-4
-9
-9
-8
–
69
80
47
-6
-5
-10
-11
-10
n/a
66
76
46
Underlying basis
The term “underlying” describes
performance on a LFL basis, further
adjusting for the closure of the Kilmarnock
and Largo consumer packaging sites and
the cessation of Speciality Tapes in
Nottingham at the end of 2018.
Adjusted basis
The term “adjusted” excludes the impact
of amortisation of acquired intangible assets
and exceptional and other adjusting items,
less any associated tax impact. In
FY 2019, amortisation of acquired intangible
assets was £22.9m (FY 2018: £22.7m),
and there was an exceptional pre-tax
credit of £15.4m (2018: charge of £20.8m).
This exceptional credit mainly relates to net
gains on the divestment of the
aforementioned businesses less costs
associated, together with the release of
provisions with regard to certain site closures;
along with acquisition integration costs.
There was also an exceptional cost incurred in
relation to an investigation involving external
professional advisers, of certain Group
companies’ (in the Filters division) export
activities within the framework of US laws, as
we previously disclosed in our HY 2019 results.
Further details on exceptional and other
adjusting items are shown in note 2 to the
Financial Statements.
Constant exchange, like-for-like and
adjusted measures are provided to reflect
the underlying performance of Essentra.
For further details on the performance
metrics used by Essentra, please refer
to page 16.
Strategic Report Reconciliation of GAAP
to non-GAAP measures
The following tables are presented by
way of reconciling the metrics which
management uses to evaluate the
Essentra Group to GAAP measures.
Cash flow
Adjusted operating cash flow is presented
to exclude the impact of tax, exceptional
items, interest and other items not
impacting operating profit. Net capital
expenditure is included in this measure as
management regards investment in
operational assets as integral to the
underlying cash generation capability
of the Company.
Summary growth in revenue by division
% growth
Components
Packaging
Filters
Specialist Components
Total
Net income
£m
Adjusted net income
Amortisation of acquired intangible assets
Exceptional and other adjusting items
Exceptional tax items
Tax on adjustments
Profit after tax
Cash flow
£m
Operating profit – adjusted
Depreciation and amortisation of non-acquired intangible assets
Share option expense/other movements
Change in working capital
Net capital expenditure (excluding exceptional plant, property and equipment disposal proceeds)
Operating cash flow – adjusted
Tax
Cash outflow in respect of exceptional and other adjusting items
Pension obligations
Add back: net capital expenditure (excluding exceptional plant, property and equipment disposal proceeds)
Net cash inflow from operating activities – continuing operations
Operating cash flow – adjusted
Tax
Net interest paid
Pension obligations
Free cash flow – adjusted – continuing operations
Like-for-like
Acquisitions/
disposals
Foreign
exchange
Total
reported
-1
+1
-1
-1
+1
+1
–
-68
-6
+1
+1
+2
+1
+2
+1
+3
+1
-67
-5
FY 2019
FY 2018
58.5
(22.9)
15.4
–
(9.8)
41.2
64.2
(22.7)
(20.8)
–
7.4
28.1
FY 2019
FY 2018
87.5
47.7
3.5
(10.3)
(56.6)
71.8
(16.5)
(34.2)
(1.3)
56.6
76.4
71.8
(16.5)
(13.3)
(1.3)
40.7
90.7
35.9
4.9
5.9
(60.2)
77.2
(16.5)
(20.8)
(1.0)
60.2
99.1
77.2
(16.5)
(9.5)
(1.0)
50.2
Divisional performance
The revenue and adjusted operating profit for
each division is stated before the elimination
of intersegment revenue and the cost of
central services, as reconciled to the reported
results set out in note 1 on pages 134 to 136.
ALTERNATIVE PERFORMANCE MEASURES
ESSENTRA PLC ANNUAL REPORT 2019 33
STRATEGIC REPORT Risk management
report
Risk management is integral
to protecting and creating
shareholder value.
Risk management approach
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.
We have continued to make good
progress in improving our risk management
processes in 2019 as we move towards our
objective of implementing processes in
line with FTSE 250 upper quartile practice.
This includes a number of initiatives to drive
enhanced risk reporting and further embed
risk activities to improve risk culture across
the Company.
In 2019, the Board also considered Emerging
Risks, with specific attention being given to
those Emerging Risks considered to be of
ongoing importance to the Company and
its stakeholders. Particular focus was
placed on assigning responsibility and
accountability for Principal and Emerging
Risks, particularly those risks that cut
across divisions and Enabling Functions.
The approach was adopted from ISO 31000
Risk Management guidelines and includes
a RACI (responsible, accountable, consult
and inform) matrix to drive clear
responsibility and accountability.
We are committed to managing risks
in a proactive and effective manner to
provide assurance to the Board and
our stakeholders.
Risk management framework
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 risk and to
enable informed decision-making.
Risk can present itself in many forms and
has the potential to impact health and
safety, the environment, our community,
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, employees,
customers, suppliers, and the communities
in which we operate.
The Board reviews its risk appetite annually
by mapping its Principal Risks against a
sliding scale from “risk-averse” to “risk-
neutral” to “risk-tolerant” and this informs
the development of mitigating actions for
each of the Principal Risks.
Roles and responsibilities of the GRC
Identify
• Establish the process for identifying and
understanding key business risks
• Identify risks in each of our businesses and
Enabling Functions
• Risk reviews with senior leadership
• Review Principal, Key and Emerging Risks
Assess
• Prioritise risks through agreed
ranking criteria
• Risk appetite set by the Board for
all Principal Risks
Control
• Ownership defined
• Establish key control processes and practices
• Controls to manage the risk within appetite
• Monitor the operation of the controls
Report
• Agree and implement measurement and
reporting standards
• Communicate with all stakeholders
Manage
• Review all aspects of the Company’s risk profile
• Review and challenge risk management
practices
MANAGE
IDENTIFY
REPORT
ASSESS
CONTROL
The process for identifying, assessing
and controlling material business
risks is designed to manage, rather
than eliminate.
34 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report In 2019, we updated our risk management
framework to include procedures for the
identification, assessment and monitoring
of Emerging Risks, as required by the 2018
UK Corporate Governance Code.
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
Strengthening our framework
To achieve the objective of implementing
FTSE 250 upper quartile risk management
practice, we have made good progress in
implementing our three-year risk
management improvement plan in line with
best practice and ISO 31000 guidelines.
In 2019, we enhanced our risk reporting
and GRC management processes including
implementing a standard risk reporting
template. An annual calendar of GRC
agenda items has also been implemented
and each Principal Risk is subject to an
annual deep dive during each Board and
GRC meeting using a standard reporting
template. This has enabled consistency of
risk reporting across the Company.
The Group Assurance function has
engaged directly with Divisional and
Enabling Functions Leadership teams
on the development of their risk registers
and risk reporting practices. This included
conducting risk knowledge workshops, in
line with ISO 31000, to drive a consistent
understanding and application of risk.
Each workshop included a discussion of the
Board-approved rating criteria for financial
and reputational impact and likelihood, to
ensure that a consistent rating based on
risk to the Company is applied.
Further improvements in risk management
will be continued in 2020.
Risk governance structure
and oversight
The Board has established a risk and internal
control structure designed to manage the
achievement of strategic business
objectives. The Group Assurance function,
separate from line management, enables
and facilitates the risk management
process across the Company and acts
as the custodian of the Company’s
risk architecture and its management.
In addition, all divisions have appointed
Risk Champions to drive risk management
practices into their businesses.
The GRC met seven times in 2019, each
meeting with a full attendance. The
GRC is chaired by the Chief Executive
and its membership comprises the GMC
members, Head of Legal, Group Head
of Assurance and Head of Communications.
Non-member standing attendees are the
Group Health, Safety and Environment
Director, the Director of Group Assurance
and the Group Financial Controller. Other
members of senior management are also
invited to present reports on risk activities.
The Chairman of the Audit and Risk
Committee has a standing invite to attend
all GRC meetings and receives copies of the
minutes of every meeting.
Our risk governance structure
Direct and monitor
Report
Board
Overall responsibility for assessing the Company’s Principal Risks, setting risk appetite and monitoring risk management.
Audit and Risk
Committee
Responsible for
reviewing
the effectiveness
of the Group’s risk
management
systems and
processes.
Facilitators
Group Assurance
Divisional Risk
Champions
Enabling Function
Risk Champions
Group Risk Committee (GRC)
Chaired by the Chief Executive and comprised of the Group Management Committee
members and other key function resources, the GRC is responsible for monitoring
Principal, Key and Emerging Risks and ensuring the effectiveness of divisional and
functional risk management.
Divisional Leadership
Teams
Each leadership team is
responsible for ensuring
their divisional risks are
captured and are being
effectively mitigated
within business as usual
processes. Risk
management is a
standing agenda item
for leadership team
meetings.
Enabling Functions
Leadership Teams
Enabling Functions are
responsible for
identifying and
mitigating risks within
their own functions –
applicable to Finance,
Operations, IT, Human
Resources and Legal,
Risk and Governance.
Group Compliance
Committee (“GCC”)
The GCC directs and
oversees the Group’s
implementation of
compliance programs,
policies and procedures
required to meet legal,
compliance and
regulatory requirements.
Business Units
Specific business units or sites within each division are implementing their own
risk registers, risk and action owners. Management are responsible for
managing local level risk and reporting to the respective leadership teams.
RISK MANAGEMENT REPORT
ESSENTRA PLC ANNUAL REPORT 2019 35
STRATEGIC REPORT Risk categories
The Company has considered the risks it is facing under
the following four risk category headings and has identified
11 Principal Risks
External
Operational
Risks relating to the
macroeconomic climate,
political events, competitive
pressures or regulatory issues
Risks that could impact
day-to-day operations and
prevent business as usual
activities
Strategic
Disruptive
Internal risks that may
impede achievement of
strategic goals
Risks that could impact the
business model or viability of
the Company. Although key
disruptive risks have been
identified and mitigated
by the Company, none
of them are considered to be
Principal Risks currently
Risk Management Report continued
The GRC’s responsibility is 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 GRC reviews
the risk appetite and future risk strategy,
and makes recommendations on risk
appetite to the Board and actions required
to ensure adequate controls and mitigating
actions are in place against identified
Key Risks.
As an important part of fulfilling its
responsibilities the Board receives regular
reporting from the Chief Executive in his
capacity as GRC Chairman to enable the
Board to challenge and review the GRC’s
views on the Principal Risks, Key Risks and
Emerging Risks.
The Audit and Risk Committee (“ARC”)
engages directly with the divisions and the
Enabling Functions, including deep dive
reviews, as part of fulfilling its oversight
responsibilities on the risk management
processes. The ARC, with assistance from
Group Assurance, oversees compliance
with risk management processes and the
adequacy of risk management activities
related to the Company’s operations.
Principal Risks
1.
Failure to Achieve Acceptable Returns
from the Packaging division
2. Tobacco Industry Dynamics
3. Delivery of Strategic Projects
4. Regulatory – Governance
5. Cyber Attack
6.
7.
8.
Macroeconomic and Trade Deal
Uncertainty (including Brexit)
Business Continuity Planning
and Management
Environmental and Social
Governance
9.
Internal Processes and Control
10. Safety (including Regulatory)
11. Talent to Deliver Our Future
Strategic Risks
External Risks
Operational Risks
t
c
a
p
m
I
3
6
5
8
4
10
7
9
1
2
11
Likelihood
KEY:
Increased,
Decreased,
No Change,
New
36 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report The Divisional and Enabling Functions
Leadership teams dedicate time each
year in a facilitated discussion with the
Group Assurance function 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.
Principal Risks
The GRC has responsibility for overseeing
Essentra’s Principal Risks. A top-down and
a bottom-up assessment is undertaken to
identify our Principal Risks. The assessment
is performed against the four risk categories.
As part of the bottom-up process,
the Divisional and Enabling Functions
Leadership teams have also undertaken
a detailed risk assessment, facilitated
by Group Assurance using a consistent
workshop methodology, the outputs
of which were reflected in updated risk
registers. These risk registers were then
analysed to ensure completeness and
appropriateness of the Principal Risks.
As part of our top-down process, an
updated assessment was completed
for each Principal Risk by the GRC. This
top-down assessment required each GRC
risk owner to provide analysis on 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.
These individual responses were
consolidated, the GRC then discussed and
reached a consensus regarding Principal
Risks that can seriously affect the
performance, future prospects or
reputation of Essentra. The outputs from
the GRC assessments were then presented
to the Board for approval along with the
recommendation of Principal Risks to be
included in the viability testing.
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. As a result, the
Principal Risks are a combination of new
and previously disclosed risks.
Key changes in
the year
Following the 2019 review
process, our risk profile
remains stable, with the
following key changes.
Two new Principal Risks have
been identified:
• Talent to Deliver Our
Future captures the risk
that Essentra may fail to
attract and retain the
required management and
leadership skills necessary
to evolve our business,
develop the culture and
meet future customer
needs. This risk has been
introduced given our
strategic growth objective
• Environmental and Social
Governance risk reflects
expectations of increasing
environmental and social
governance obligations,
leading to reputational
risk for the Group.
This includes risk arising
from changing investor
attitudes impacting
ability to secure funding
from investors and social
attitudes towards the
health and environmental
impact of our products
Two 2018 Principal Risks have
been downgraded to Key
Risks for 2019:
• Product Liability –
following improvements
achieved in performance in
quality faults and critical
complaints. These metrics
are regularly reviewed at
Divisional and Group level
• IT Systems – Stability and
Reliability risk due to a
reduction in major
incidents following
significant investments
in our IT infrastructure
In addition to the Principal Risks, Key Risks
and Emerging Risks have been identified
and are being monitored by the Company.
Mitigation actions in response to such risks
are an important part of the Divisional and
Enabling Functions risk reporting to the
GRC and Board.
The Board and GRC evaluate the potential
effects of Principal Risks materialising over
a three-year period to understand how they
could impact the Company’s long-term
viability. The evaluation is based on
plausible worst case scenarios. These
scenarios encompass what could
reasonably go wrong, as a foreseeable
“perfect storm”.
To make this evaluation, the estimated
financial impact of each Principal Risk
crystallising was considered. The Board and
GRC assessed the potential impact on the
Company’s viability, based on selected
severe plausible risk scenarios. These were
developed in conjunction with senior
management. The Principal Risks that were
considered to have a potentially significant
impact on the Company’s viability are
included in the Long-Term Viability
Statement from page 115 to 116.
RISK MANAGEMENT REPORT
ESSENTRA PLC ANNUAL REPORT 2019 37
STRATEGIC REPORT Risk Management Report continued
Emerging Risks
We define Emerging Risk as a changing
risk or a novel combination of risks
for which there is no track record or
previous experience by which the
impact, likelihood or costs can be
understood. Its potential impact is
viewed as being two years or more
in the future.
We strongly believe that identification and
appropriate challenge to the management
and mitigation of Emerging Risks is critical
to our long-term success.
Emerging Risks have the potential to
increase in significance and affect the
performance of the Company and as
such are continually monitored through
our existing risk management
processes described on page 34. Our risk
management process ensures Emerging
Risks are identified and aids the GRC and
the Board’s assessment of whether the
Company is adequately prepared for the
potential opportunities and threats they
present. The process enables new and
changing risks to be identified at an early
stage so we can analyse them thoroughly
and assess any potential exposure.
We undertake a top-down and a bottom-
up assessment to identify Emerging Risks.
Risk management workshops for Divisional
and Enabling Functions Leadership teams
were facilitated by the Group Assurance
function this year, to provide a bottom-up
view of Emerging Risks. These workshops
include discussion of potential Emerging
Risks based on externally sourced Emerging
Risk data. The Company’s potential
exposure is assessed against the Board’s
approved risk measurement criteria. The
process enables new and changing risks
to be identified at an early stage so we
can analyse them thoroughly and assess
potential exposure.
The preliminary view on Emerging Risks
were consolidated and discussed by the
GRC to reach a consensus regarding
Emerging Risks that can seriously affect
the performance, future prospects or
reputation of Essentra. The outputs from
the GRC assessments were presented
to the Board for approval along with the
recommendation to develop appropriate
response strategies.
We have created a list of Emerging Risks to
be reviewed on a regular basis at the GRC
and Board level.
Emerging Risks
Emerging Risk
Climate change
Owner
Risk description
Group Operations Director
Geopolitical change
Group Operations Director
Regulatory change
Company Secretary
and General Counsel
Technology disruptors
Chief Information Officer
The risk that Essentra fails to anticipate the impact of climate
change including the consequential increase in frequency and
severity of natural disasters. This includes consideration to the
impact of climate change on global operations through forward-
looking consideration of business continuity risks in vulnerable
locations. These considerations need to be built into our Mergers
and Acquisitions strategy.
As a global company, Essentra will be exposed to geopolitical
changes that impact on patterns of trade and the movement of
labour and capital. A trend towards protectionism, regionalism and
a rebalancing from West to East creates risks and opportunities
that Essentra will need to manage and exploit.
Essentra is a global company that must comply with regulatory
requirements in many countries. Regulation is increasing worldwide
and may potentially impact our products, operations, workforce
and relationships with suppliers, customers and stakeholders.
The Company continues to be alert to longer-term regulatory
developments including those related to single-use plastics and
tobacco-related and tobacco-alternative products.
The risk that Essentra does not manage its response to evolving
technologies effectively. This may include losing competitive
advantage as rivals deploy advanced manufacturing
technologies, artificial intelligence and robotics to strengthen
product development, marketing, production, distribution and
support functions.
The GRC and the Board have undertaken
a rigorous assessment of Emerging Risks
during 2019 and have established
procedures to closely monitor Emerging
Risks on an ongoing basis including:
The Board can confirm that it has
completed a robust assessment of the
Company’s Principal, Key and Emerging
Risks. We continue our focus on
ensuring the adequate mitigation
of risks faced by the Company.
• the GRC’s terms of reference require it
to review the Group’s ability to identify
Emerging Risks
• Emerging Risks is a standing agenda item
at each GRC meeting and each Emerging
Risk will be subject to a deep dive
• external specialist input will be sought
where required
• identified Emerging Risks have been
assigned an owner who is both a GRC
and GMC member. The Emerging Risk
owner is responsible for providing an
update on the development of Emerging
Risks at each meeting
38 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report New
No change
Increased
Decreased
The implementation of these initiatives,
and ongoing performance of the division,
are subject to close monitoring and reporting
at divisional and GMC level each month and
quarter. Leading and lagging KPIs are used to
monitor performance including order lead
times, on time and in full order fulfilment,
complaints, achievement of sales plan,
recovery of inflation cost increases through
pricing, cost savings and overhead as a
percentage of sales.
Strategic Risk
Failure to Achieve Acceptable Returns from the Packaging Division
Change in risk level:
Unchanged
Ownership:
Packaging Division
Managing Director
Relevance
Company specific
Description
The potential for a decline in returns from
the Packaging division, and a failure of the
division to deliver new business wins and
expected cost savings within the timelines
of the turnaround plan, have been reported
as a Principal Risk since 2017.
It was reported in 2018 that the division’s
performance had stabilised and the focus
for 2019 was on ensuring that actions taken
were effective and sustained.
The Packaging division reported revenue
growth and margin improvement for 2019
in line with the strategy and plan.
In addition, the acquisition of Nekicesa
Packaging, a leading converter of folding
cartons that supplies the pharmaceutical
end-market in Spain, provides a revenue-
enhancing addition to the business. The
level of risk to the Company has remained
the same.
This risk includes the potential of the
Packaging business failing to deliver new
business wins, expected cost savings or
acceptable returns.
Mitigation
This Principal Risk is addressed annually with the
development of the business strategy and plan.
Both strategy and plan reflect this risk, and
key initiatives are developed to further improve
business performance, with a target of
achieving industry average margins by 2021.
Key initiatives for 2019 included:
• driving cost savings through operational
continuous improvement projects at each
manufacturing site, efficiency improvements
through investment in new equipment,
procurement initiatives and overhead
cost savings
• achieving profitable revenue growth with
a focus on key and global customer
account management
• delivering on key customer performance
metrics of quality, On-Time-In-Full,
manufacturing lead times, safety and supply
chain efficiency
RISK MANAGEMENT REPORT
ESSENTRA PLC ANNUAL REPORT 2019 39
STRATEGIC REPORT Risk Management Report continued
Strategic Risk
Tobacco Industry Dynamics
Change in risk level:
Unchanged
Ownership:
Filters Division
Managing Director
Relevance
Company specific
Mitigation
Essentra is seeking to mitigate the risk associated
with changes in the tobacco market dynamics by
focusing on activities with longer-term viability
and exploiting potential growth opportunities.
This includes progressing on our “game changers”
and increasing our innovation capabilities.
Key 2019 mitigating actions include:
• completion of China JV agreement for both a
production facility and a development centre
• a significant outsourcing contract has been
secured with a multinational company partner
• four product patent applications have been
filed for NGP products
• operational KPIs continue to improve to ensure
our customers get the best possible service
• implementation of key account management
has provided a deeper insight into customer
needs
• rationalisation of Filters innovations teams
and processes has allowed increased focus
on delivery of strategic initiatives
• succesful integration of Tear Tapes business
allowing tobacco category approach and
diversifying revenue stream
Description
The Filters division supplies filter products
and packaging solutions to manufacturers
in the tobacco industry. Changes in the
traditional tobacco market present both
opportunities and risks for the division.
Whilst the Company has a strong market
position the future growth opportunities
may be affected by dynamics of the
tobacco industry such as the declining
combustible markets, shifting towards
Next Generation Products (“NGP”) as
well as moving towards other tobacco
substitutes such as cannabis.
Essentra’s competitive position can be
sustained if we continue to adapt our
operational capacity and innovation
capabilities in line with key market trends.
Key market trends include global
consumption shift from western to eastern
markets, customers’ self-manufacture and
demand volatility, increasing commercial
pressures, special filters and NGP
developments and evolving legislation.
There is an increasing trend towards more
legislation restricting smoking prevalence
and also related to more sustainable
products and practices (eg EU Single-
use Plastics Directive).
The change in global consumption and
end markets for our products increasingly
requires increased oversight of where
our products are used and a robust
regulatory framework.
2019 saw significant negative publicity
with regard to the use and health effects
of e-cigarettes. Growth in this sector
slowed and further cost pressures were
placed on customers as a result.
Tobacco-related litigation could also affect
Essentra, although there is no history of the
Company being involved in such a claim.
A number of initiatives are targeted to be
completed in 2020 which are anticipated to
minimise the risk over time. The level of risk
to the Company has remained the same.
40 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Strategic Risk
Delivery of Strategic Projects
Change in risk level:
Unchanged
Ownership:
Strategy and
Commercial Director
Relevance
Company specific
Description
The Company’s success is dependent on
its ability to deliver key strategic projects
on time and within budget, to realise their
full potential. The Company invests in, and
delivers, significant strategic, operational
and capital expenditure projects in order
to drive the business forward, for example
our ongoing Business Process Redesign/ERP
implementation. In line with our strategic
plans, this project approach also includes
the acquisition and disposal of businesses.
Failure to deliver such key projects
effectively and efficiently could result in
significantly increased project costs and
impede our ability to execute our strategic
plans. The level of risk to the Company has
remained the same.
Mitigation
The Company uses a range of controls to ensure
successful delivery of strategic projects including:
• day-to-day project management using a
standard project management methodology
• ongoing tracking of key projects by a Group
Project Management (“PMO”) function to
monitor and control major strategic
programmes, investments and capital
expenditure projects
• interventions, as required, by Group PMO,
to initiate, course correct and undertake
remedial actions on programmes and projects
• review and approval of key, strategic projects
by Board and GMC, as appropriate
• robust governance, detailed reporting and
regular reviews by GMC and Board of project
KPIs and key milestones
• use of external advisers to provide expertise,
assistance and rigorous due diligence, as
appropriate
• an annual strategic review is in place with
the Board and the GMC where we proactively
monitor the market, review our strategy and
our strategic programmes. This process is led
by the Strategy and Commercial Director
• acquisition pipeline management to identify
suitable acquisition targets with best
value-creation potential
• post-investment/project reviews to identify
key learnings to embed into future initiatives
• maintain strong focus on the capability of our
employees. This is achieved by mobilising
teams which possess the right skills to deliver
our strategic programmes
RISK MANAGEMENT REPORT
ESSENTRA PLC ANNUAL REPORT 2019 41
STRATEGIC REPORT Strategic Report
Risk Management Report continued
External Risk
Regulatory – Governance
Change in risk level:
Unchanged
Ownership:
Company Secretary
and General Counsel
Relevance
Industry general
Description
The Company operates across many
international jurisdictions and engages
with a wide range of stakeholders,
including a diverse employee, customer and
supplier base. Some locations we operate in
are high risk. We are required to comply
with multiple areas of legislation,
regulation and good practice for areas
such as Anti-Trust, Anti-Bribery, Sanctions
and General Data Protection Regulation
(“GDPR”). Our operations are subject to
an external environment which is seeing
increasing levels of scrutiny and oversight
from regulators and enforcement agencies.
Failure to manage effectively the scrutiny
and oversight and/or comply with new laws
and regulations could result in significant
fines, costs and reputational damage to
the Company.
Whilst the external environment is
generating additional compliance demands
of enforcement, the level of risk to the
Company has remained the same.
Mitigation
The Company deploys a range of controls
to manage regulatory risk including:
• a “tone from the top” from the Board and
GMC on the importance of ethics and
compliance
• strengthening of internal resources
and continued investment to drive
better governance
• the Company’s Legal, Risk and Governance
team continuously monitors changes in
regulations and emerging good practice.
This team is responsible for enacting an
appropriate compliance framework with
effective policies, processes and reporting.
Each division is responsible for embedding
regulatory compliance in their particular sector
• through the Company’s compliance
programme (including employee training),
we aim to conform with all applicable laws
and regulations, and encourage a culture
of transparency, integrity and respect
• a Right to Speak process in which the
Chief Executive, Company Secretary and
General Counsel, and Group Human Resources
Director are key stakeholders
• the establishment of a Group Compliance
Committee that will direct and oversee
the Group’s implementation of compliance
programs, policies and procedures
required to meet legal, compliance
and regulatory requirements
42 ESSENTRA PLC ANNUAL REPORT 2019
External Risk
Cyber Attack
Change in risk level:
Decreased
Ownership:
Chief Information
Officer
Relevance
Industry general
Description
The Company is dependent on the IT
systems for day-to-day operations.
Should the Company be affected by a
cyber security breach, this could result in
suspension of some IT services and loss of
data. Subsequently, the Company could
receive fines, lose customer confidence
and suffer reputational damage.
The risk of cyber attack is ever-present
due to the external threat landscape.
The Company had one significant incident
in February 2019 when one of our sites
experienced an outbreak of malware.
We were able to restore operations over
a 72-hour period and avoid any loss of data.
Cyber attacks are treated as normal course
of business and the Company continues
to invest in cyber security monitoring
and protection capabilities.
The financial impacts of a cyber attack
have been analysed and included in the
Company’s viability modelling.
The potential impact of this risk has
reduced as a result of investments in
our cyber defences.
Mitigation
The Company has an ongoing cyber security
improvement programme. This aims to mitigate
the risks and operational disruption caused by
cyber attacks. This programme includes:
• endpoint protection, encryption of data,
identity-based access control, network
firewalls, web and email content protection
• cyber security awareness training for
all employees
• vulnerability and penetration testing for
all external facing Company services
and websites
• scanning, monitoring and logging tools
to identify intrusions and detect rogue
data traffic
• internal cyber security teams, complemented
by external cyber security services
In 2019 the Company achieved accreditation
with Cyber Essentials Plus and ISO 27001.
It also established a Crisis Communication
Network which will conduct a cyber attack
simulation in 2020.
RISK MANAGEMENT REPORT
ESSENTRA PLC ANNUAL REPORT 2019 43
STRATEGIC REPORT Strategic Report
Risk Management Report continued
External Risk
Macroeconomic and Trade Deal Uncertainty (including Brexit)
Change in risk level:
Unchanged
Ownership:
Group Operations
Director
Relevance
Industry general
Description
As a global business, we operate in many
countries and currencies so changes to
global economic conditions or trading
arrangements have the potential to
impact us.
The UK left the European Union (“EU”) on
31 January 2020 and entered a transition
period until 31 December 2020. During the
transition period the UK will continue to be
bound by EU laws and regulations. Beyond
that date there is no certainty on what the
future relationship between the UK and the
EU will be.
The ongoing Brexit situation could impact
the Company due to raw materials and
finished goods flows across the EU-UK
border. The key risks here are the imposition
of potential duties or customs costs linked
to these flows and the associated potential
supply chain disruptions. The potential
impact of Brexit appears to be reducing,
but has been analysed and estimated as
part of the Company’s viability modelling.
More broadly, as a global business, our
international trade flows expose the Group
to tariffs, duties or quotas imposed through
trade sanctions and also to macroeconomic
effects due to regional or global industrial
output changes.
The level of risk to the Company has
remained the same.
Mitigation
Essentra has an international customer base
which dilutes the effect of downturns in
specific geographies. The economic environment
is constantly monitored as part of our business
planning cycle and budgeting, enabling a
degree of forward planning in the event of a
period of economic instability. This is performed
in close co-ordination with each division to
pinpoint trends likely to impact our individual
business activities.
The annual budgets that result from the planning
process are a control, against which monthly
results are monitored, surfacing any effects of
economic instability and informing commercial
decision-making. Movements in currency can
have positive and negative impacts on the
Company’s reported earnings. This is managed
through proactive hedging of currency measures.
The Board also considers potential impacts of
specific macroeconomic events, including the
UK’s decision to leave the EU. The breadth of the
Company’s portfolio and its diversification across
markets, geographies and products provides
some natural mitigations of potential impacts.
Our divisions consider the wider economic
situation in their strategies as part of the
budgeting and strategic planning process.
Brexit uncertainty
Throughout 2018 and 2019, the Company
conducted a thorough review of Brexit risks
and implemented a series of changes to minimise
raw material and finished product flows across
the EU-UK border, and to mitigate the associated
risks including supply chain disruption. We
continue to monitor the situation post the
recent UK election, and are continuing activity
in this space, including asset/footprint changes,
optimisation of material flows, identification
of alternative raw material supply sources and
putting Authorised Economic Operator status
in place.
44 ESSENTRA PLC ANNUAL REPORT 2019
Operational Risk
Business Continuity Planning and Management
Change in risk level:
Unchanged
Ownership:
Group Operations
Director
Relevance
Industry general
Description
The continuity of our supply chain is a
critical factor in serving our customers, who
expect us to have a resilient supply chain to
minimise the impact of any disruption.
Mitigation
The Group continues to review and refresh its
business continuity management and planning
frameworks and processes, including a current
and ongoing deep-dive review.
Our supply chains can be complex and
global in nature. Our global footprint
exposes us to a broader set of potential
disruption risks including natural
catastrophe, than more focused
companies. However, this global footprint
also provides risk diversification, via
alternative manufacturing routes.
The Group experienced limited employee
impact and operational disruption through
operational-related business continuity
issues, during 2019. Should future events
occur, this could impact production
capability, fixed assets, supply chain
management, customer relationships,
reputation, revenue and profit. Such
events continue to be a risk to the normal
operation of the Company. The level of
risk remains the same.
Other mitigating factors that the Company
has in place are:
• operating within a flexible global
infrastructure
• developing multi-site capabilities and
manufacturing flexibility
• fire and other risk prevention systems
• assessing and managing operational risks
via the enterprise risk management process
• continuing to identify alternative sources
of supply for key raw materials and supply
guarantees where necessary and feasible
• ensuring comprehensive maintenance
plans are in place for key manufacturing
equipment, and/or alternative manufacturing
routes are identified
• maintaining an insurance programme and
working closely with our insurers, FM Global,
to ensure complete and comprehensive cover
to prevent losses
RISK MANAGEMENT REPORT
ESSENTRA PLC ANNUAL REPORT 2019 45
STRATEGIC REPORT Strategic Report
Risk Management Report continued
Operational Risk
Talent to Deliver Our Future
Change in risk level:
New
Ownership:
Group Human
Resources Director
Relevance
Industry general
Description
Failure to attract and retain the required
management and leadership skills
necessary to evolve our business, develop
the culture and meet future customer
needs. The talent market is changing and is
less favourable towards the manufacturing
sector. Our ability to attract candidates is
becoming more challenging, as is the
ability to retain key talent given the wider
range of market opportunities available.
This is a new Principal Risk for 2020.
Mitigation
A more refined people strategy has been
launched and will underpin the approach to
enhance the employee experience and drive
the changes needed.
A newly appointed Talent Acquisition Director
will focus on articulating the employee value
proposition and approach to the external market.
Talent mapping and succession planning will be
implemented with a full organisational wide half
yearly review.
Communication with employees, and
potential employees, is seen as critical
and the communication team will be
strengthened to enhance the Company
profile and communication channels.
People risk mitigation plans are in place
throughout the Group, supported by
the GMC.
Operational Risk
Internal Processes and Control
Change in risk level:
Unchanged
Ownership:
Chief Financial
Officer
Relevance
Company specific
Description
Processes and controls play an important
part in our ability to prevent and detect
inappropriate and unethical behaviour.
This includes fraud, deliberate financial
misstatement and improper accounting
practices. If the design, operation or the
assurance over these controls is ineffective
or ownership is not defined or controls are
overridden, there is a greater risk of
operational loss. The lack of documentation
and embedment of standard operating
procedures across key business areas
including finance increases this risk.
During 2019, we continued the initiatives to
reduce this risk with further work planned
in 2020.
Mitigation
During 2019, Minimum Control Standards
(“MCS”) continued to be rolled out across various
sites in the Company, establishing a consistent
minimum standard of financial controls across
the Group. A total of 50 sites now have had the
MCS roll-out, which account for approximately
80% of Group revenue.
MCS implementation action plans were
continually assessed and tracked through
the course of the year. The primary responsibility
for site roll-outs and embedding of MCS moved
from Group Assurance to divisional management,
and the central co-ordination role is now held by
Group Finance.
Furthermore, Group Assurance audit procedures
were carried out to assess performance of
internal controls and the effectiveness of the
MCS roll-out. Group Finance performed a
separate layer of independent testing to further
evaluate the effectiveness of implementation
thus far.
While the Group recognises that further work is
needed in order to fully embed standard controls
and processes across all sites, benefits of MCS
can already be seen taking effect within the
Group. The project has been conducted in close
collaboration with other wider business
initiatives, such as Business Process Redesign.
Plans for 2020 focus on concluding MCS
roll-out workshops across all remaining sites,
as well as the implementation of self-
assessment testing and certification, which
establishes and enforces accountability for
effectiveness of the controls at the relevant
management level (site and divisional). The
Group will continue to focus on embedment
of the MCS framework to maintain a robust
internal control framework.
46 ESSENTRA PLC ANNUAL REPORT 2019
Operational Risk
Safety (including Regulatory)
Change in risk level:
Unchanged
Ownership:
Group Operations
Director
Relevance
Industry general
Description
Safety is of the highest priority for the
Company. Essentra has many
manufacturing facilities across the world,
along with non-manufacturing sites and
internationally mobile employees. Factory
manufacturing can be inherently risky
given the use of industrial machinery and
high speed manufacturing processes. In
addition, the Company must comply with
national safety regulation in multiple
jurisdictions.
When considering health and safety,
Essentra is aware that should an injury or
fatality occur involving our employees or
visitors; or should there be any breach of
safety regulation resulting in prosecution,
considerable reputational damage is
anticipated as well as potentially
significant financial costs.
Such events will continue to be a risk to the
Company, consequently the level of the risk
remains the same with continued active
management and controls to mitigate
these risks.
Mitigation
Throughout 2019, the “tone from the top” on
safety has continued to reinforce across all of
the businesses. Management teams have been
instructed to give a high priority to establishing
appropriate Safety Management Systems and
reinforcing the desired behaviours by all who
are employed by the Company.
Some of the key mitigations which are in
place include:
• regular reporting to the GMC, GRC and the
Board on Health, Safety and Environment
(“HSE”) related matters
• a Group HSE policy is in place detailing
required standards, governance, roles
and responsibilities at all sites
• performance monitoring and Health and
Safety Audits, incorporating reporting and
escalation arrangements to ensure all
actions are closed
• root cause analysis is conducted for any issues
identified through investigation of serious
incidents, including Near Misses and “Stop,
Think, Examine, Proceed” (“STEP”) programme
Operational Risk
Environmental, Social and Governance
Change in risk level:
New
Ownership:
Group Operations
Director
Relevance
Industry general
Description
Environmental, Social and Governance
(“ESG”) issues are becoming increasingly
important for all companies, including
the Group.
Failure to meet stakeholder expectations
on increasing environmental and/or social
governance obligations could lead to
reputational risk for the Group. This
includes risks arising from changing
investor attitudes, impacting our ability
to secure funding from investors, and
also social attitudes towards the health
and environmental impact of our products
which may impact on our ability to
market them.
ESG is a new Principal Risk for 2020,
having been monitored throughout 2019.
Mitigation
ESG issues are becoming increasingly relevant for
the Group, including exposure to tobacco-related
products, potential changes in regulation related
to single-use plastics, climate change and other
issues.
Recognising this, the Group has recently
instigated a Board Sustainability Committee,
chaired by a Non-Executive Director, and
including membership from Board, GMC and
across the Company. The role of this Committee
is to:
• review and assess the Group’s exposure to
ESG-related issues
• assess the Group’s responses to these issues
• understand whether these responses are
consistent with the risk appetite of the Group
• identify potential gaps in approach and
high-level approaches to closing those gaps
• our Global STEP programme, which is
a hazard identification and process
improvement initiative. This empowers
the entire workforce to recognise and
address opportunities with corrective
actions assigned clear owners for
completion within 48 hours
• focused HSE events throughout the year
to highlight particular risks and help keep
safety at the forefront of our minds.
In 2020, we will continue with the above
work, supplemented by Group-wide
campaigns on high-priority safety areas
(eg Slips, Trips & Falls, Lock Out Tag Out)
The Board Sustainability Committee’s
recommendations will link into and
inform the work of GMC, the divisions and
the Enabling Functions, to reduce risk
exposure, appropriately.
RISK MANAGEMENT REPORT
ESSENTRA PLC ANNUAL REPORT 2019 47
STRATEGIC REPORT Strategic Report
48 ESSENTRA PLC ANNUAL REPORT 2019
Operational
review
Components
Packaging
Filters
50
54
58
ESSENTRA PLC ANNUAL REPORT 2019 49
STRATEGIC REPORT “Essentra
Components’ flexibility
and capability to deliver
the same day means we
are able to support the
ongoing demands from
our customers, hassle-free.”
Mathijs Kox
Director Bax Metaal
Quick thinking
for customers
Based in the Netherlands,
Bax Metaal is at the
forefront in technologies
that enable it to produce
custom solutions in
composite sheet metal
and tubular constructions.
Tasked with creating
frames for a new box spring
bed, it needed to efficiently
procure levelling feet with
a plastic insert and bumper
for an all-round cost-
effective solution.
Bax Metaal turned to
Essentra Components for
support and expertise, and
after extensive discussions
with the technical sales
experts, we provided free
samples to support the
assembly of the prototypes.
With Bax Metaal’s tight
deadline in mind, Essentra
Components identified
standard solutions from the
product range: a threaded
insert, an adjustable foot
and a bumper with required
hardness and specific
dimensions. This solution
provided Bax Metaal with
the perfect solution within
its time frame, without
additional expense.
Operational review: Components
50 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Components:
Delivering
hassle-free
service
A leading global
manufacturer and
distributor of a
comprehensive range
of components, used
in diverse industrial
applications and
end-markets.
Who we are and
what we do
We make and distribute small industrial
components from plastic and metal
that are used in industrial and
consumer equipment.
Our components serve a very
broad and fragmented industrial
manufacturing market. Typically B2B
manufacturers, our core markets range
from data cabinet manufacturers and
telecoms base station producers to
automotive tier suppliers and domestic
appliance manufacturers.
Uniquely we combine the range and
service of a distributor with the expertise
and flexibility of a manufacturer. This
brings the customer a hassle-free
experience when buying components
that are relatively low in cost but have
a high propensity to cause disruption if
there is a problem with either delivery
or quality.
Revenue
£283.3m
(2018: £279.8m)
Adjusted operating profit1
£60.3m
(2018: £61.0m)
Adjusted operating margin1
21.3%
(2018: 21.8%)
1
Excluding amortisation of acquired
intangible assets and exceptional
and other adjusting items.
Scott Fawcett
Managing Director
Components
OPERATIONAL REVIEW | COMPONENTS
ESSENTRA PLC ANNUAL REPORT 2019 51
STRATEGIC REPORT Operational review: Components continued
2019 reflections
In 2019 we made significant steps towards
delivering our strategy. During the year we
launched our new web platform in ten
countries and will continue the roll-out
through 2020. This new platform is built on
the latest flexible technology that enables
us to sustainably compete in an ever-more
demanding and rapidly changing digital
market. This platform has given us the
stage on which to promote our expanding
range of products that have both been
organically introduced and added from
the acquisition of Innovative Components.
Further improving service levels through
our supply chain, we have opened a new
distribution hub in Houston, Texas which
enables us to reach more South/
Southwestern states in our target delivery
time. We have launched two new training
centres in China and the USA to ensure
that our teams build on their expertise in
our full product portfolio.
Financial performance
Revenue increased 1.3% (0.7% at constant
exchange) to £283.3m. Adjusting for
the acquisition of Innovative Components
on 26 June 2019 like-for-like revenue
declined 0.6%.
The challenging macro environment saw
weakening markets throughout the year,
with Global PMI under 50 for six months,
especially affecting Europe.
Access Hardware continues to grow with
all regions seeing double-digit growth.
The emergence of new technologies such
as charging stations and 5G infrastructure
continue to provide good opportunity for
further growth in the market. We are
leveraging our customer base across other
product lines to gain market share by
cross-selling this range.
PCB Hardware sales were down in the
period, linked to the electronics market
declines. Cable management products
which serve a broader range of industries
performed better. Caps and plugs (general
protection) suffered a decline, being driven
by exposure to automotive markets in
particular. Fastener sales were better than
prior year, bolstered by good performance
from the Micro Plastics acquisition.
Adjusted operating profit decreased 1.1%
to £60.3m (at constant FX), equating to a
margin of 21.3%. This 40bps dilution
reflected the aforementioned volume
impact of a softer macro environment
along with the dilutive impact of acquired
and reintegrated businesses, partially being
offset by successful pricing management.
On a like-for-like basis, excluding the Reid
Supply business transfer, OP margin is
broadly flat with prior year.
Our markets
Market trends and dynamics
Revenue by segment
Other Industrial
Manufacturers: 34%
Equipment Manufacturer: 26%
Electronics/Electrical: 20%
Metal Fabrication: 8%
Automotive: 7%
Furniture: 3%
Print/Paper: 1%
Oil and Gas: 1%
Revenue by destination
Europe and Africa: 53%
Americas: 37%
Asia including Middle East: 10%
Trends in the
automotive market
and electronics
markets have had an
adverse impact on our
business during 2019.
Global manufacturing
PMI ended 2019 at 50.1
versus 51.5 at the end
of 2018, with major
drops in the Eurozone
and UK.
good exposure to some
of the faster growing
emerging industries
such as electric vehicle
charging stations,
power storage,
LED lighting and 5G
infrastructure projects.
We continue to focus
our commercial efforts
in these faster growing
segments across all
geographies.
We expect that the
automotive market
is likely to remain
depressed in 2020
and although there
are some signs of
optimism within
the electronics sector,
we remain cautious.
Our business strategy
is focused on driving
sales on a broad
base of mid-sized
manufacturers and
this has the benefit
of developing a
resilient customer base
but also provides us
Automotive
Equipment
Manufacturing
Fabrication
Electronics
Construction
Oil and Gas
Retail POP/
Paper and Board
52 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report • Develop the acquisition
pipeline further with a
view to addressing
product and market
adjacencies as potential
areas for future expansion
• Continue to invest in
our talent through
both recruitment and
development programmes
to support the delivery
of our strategy
2020 priorities
• Continue to deploy our
new web platform across
all our global businesses
to enhance lead and
customer acquisition
• Complete the development
and commence roll-out of
the new Business Process
Redesign (ERP & CRM)
platform
• Enable the commercial
teams to cross-sell
through sales effectiveness
and product application
expertise programmes
• Further improve service
levels with the launch
of new warehouse
in Germany
Acquisition of Innovative
Components
Headquartered in Chicago, USA, Innovative
Components is a leading manufacturer
and distributor of knobs, pins and handles
in North America for a broad range of
end-markets. With production capability
in Chicago and Costa Rica, the company
blends cost-effective production with the
flexibility to produce rapidly in the USA.
The acquisition in June 2019 has built on
Essentra Components’ product offering
in the USA, providing range opportunities
in Europe and Asia and adding
manufacturing capability in Costa Rica.
Their product range combined with our
customer base provides an opportunity
for growth through cross-selling, a key
part of our strategy and fundamental
to us achieving market share gain.
Following on from the acquisition of Micro
Plastics and Hertila, this transaction is
another great example of our Components
strategy in action, and what it means to
have a focus on distinct product categories
in an industry that is very fragmented.
What we measure
81K
(2018: 85K)
41
(2018: 30)
94.3
(2018: 92.4%)
13
(2018: 4)
Active customers
Why we measure it
Reflects marketing
effectiveness and measures
the potential population for
further growth opportunities
Net Promoter Score
Why we measure it
Reflects our customers’
overall satisfaction with our
products and service, as well
as loyalty to our brand
How we have done
Reduction from 85K to 81K,
as we continue to focus on
mid-sized customers
How we have done
Launched a new website in
ten countries and introduced
a number of hassle-free
projects aiming to improve
the customer experience
On Time and In Full
Why we measure it
Demonstrates the ability
to meet delivery demand
How we have done
Continued the roll-out of our
Demand Planning software
platform in Asia and
Americas, improvements in
warehouse processes. New
Hub warehouse launched
in Houston
*
Figures above exclude Reid
Lost Time Incidents
Why we measure it
Indicates our overriding
commitment to health, safety
and welfare in the workplace
How we have done
Unfortunately we had an
increase in LTIs driven by
newly acquired businesses.
We’ve now increased our
focus on health and safety
culture improvements as
part of our post merger
integration plans
OPERATIONAL REVIEW | COMPONENTS
ESSENTRA PLC ANNUAL REPORT 2019 53
STRATEGIC REPORT Whenever a pharma
company gets official
FDA approval on a new
drug, speed of getting
that product to market
is critical, not least for
the patients desperately
waiting for these new
drugs to help
their conditions.
Critical help to
patients faster
Not that many years ago,
the typical time from FDA
approval to getting a drug
into a patient’s hands took
up to eight weeks. Essentra
has developed a reputation
at being the best in class
in supporting drug launches
and through collaborative
efforts customers are
now able to get a product
into the market in under
72 hours.
In 2019 a major global
pharmaceutical customer
was launching a revolutionary
drug therapy that can be
truly life-saving to its
patients around the world.
To support the launch,
after close planning and
coordination with Essentra
prior to FDA approval, our
customer’s supply chain
team stayed at our site in
Puerto Rico so that they
could immediately approve
first production following
FDA approval. That approval
came at 2 AM on a Tuesday
morning and less than seven
hours later, we were shipping
first production to our
customer, allowing them
to hit the market in record
time and most importantly,
providing a new life-saving
therapy option to patients
in need.
In 2019 we supported more
than 500 pharmaceutical
launches globally.
Operational review: Packaging
54 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Packaging:
Collaborative
customer
relationships
Revenue
£352.7m
(2018: £342.3m)
Adjusted operating profit1
£15.1m
(2018: £5.4m)
Adjusted operating margin1
4.3%
(2018: 1.6%)
1
Excluding amortisation of acquired
intangible assets and exceptional
and other adjusting items.
One of very few
multi-continental
suppliers of a
full secondary
packaging range to
the pharmaceutical,
personal care and
beauty sectors.
Who we are and
what we do
We supply both global and mid-sized
customers in our chosen markets,
including 18 out of the largest 20
global pharmaceutical companies.
In response to increasing pressure on
agility, innovation and total cost within
their supply chains, our customers are
looking to focus their spend on fewer
suppliers who can work in partnership
to address their challenges.
Our distinct proposition is underpinned
by our focus on our chosen sectors,
our global scale and our approach to
collaborative customer relationships.
We continue to partner with customers
to innovate new products in a sustainable
way leveraging our agility to meet
shorter launch periods with a wider
range of products.
Iain Percival
Managing Director
Packaging
OPERATIONAL REVIEW | PACKAGING
ESSENTRA PLC ANNUAL REPORT 2019 55
STRATEGIC REPORT Operational review: Packaging continued
2019 reflections
2019 saw the roll-out of our new
key account management process,
better aligning our resources with the
developing organisational structures
within our customers.
Within our operations, multiple initiatives
were targeted at sharing best practice
and leveraging the strength of our
production network, from sales and
operations planning, through global
quality reporting, to standardised
Group-wide colour management.
At the portfolio level, after the divestment of
two non-core sites last year, this year saw the
acquisition of Nekicesa in September 2019.
Financial performance
Reported revenue increased 3.0% (1.7% at
constant exchange). Underlying revenue
increased 5.6% (at constant exchange).
As expected, the first half of the year was
particularly strong reflecting both weaker
comparatives in 2018 and significant
short-term customer demand on the back
of Brexit uncertainties in the UK, and in
anticipation of the introduction of the
Falsified Medicines Directive.
Both Europe and the Americas grew in
the year as both quality improved and
lead time reduced. Growth in the second
half was somewhat hindered by specific
customer supply chain issues reducing
Americas growth rates in Q4. Nekicesa
continues to perform in line with the
rest of the business and above pre-
acquisition expectations.
Adjusted operating profit increased
185.6% to £15.1m (at constant FX),
equating to a margin of 4.3%. This was
largely driven by the volume gearing effect
from the revenue growth, boosted by price
increases to offset higher raw material
costs, a one-time benefit of £1.7m from
the release of previous provisions, the
impact of improved operational efficiencies
crystallising as savings and the benefit of
closing the loss-making Kilmarnock and
Largo facilities. Adjusting for both the
divestment and site closures, the margin
was ahead by 200bps per our expectation.
Our markets
Market trends and dynamics
The Pharmaceutical,
Personal Care and
Beauty markets
remain strong as a
growing, more affluent
and ageing population,
drives both increased
volume and more
segmented products.
Our global and
regional customers are
increasingly focusing
in specific market
areas including
splitting organisations
between pharmaceutical
and over the counter
(OTC) businesses.
With pharmaceuticals
there is an increased
move towards
biologics-based
therapies which
contribute towards
the wider trend in
smaller batch size
requirements and
faster response times.
Our agility and ability
to manage more
frequent changes to
product specifications
and shorter launch
times enables us to
respond well to our
customers’ needs.
Pharmaceutical Personal Care
and Beauty
56 ESSENTRA PLC ANNUAL REPORT 2019
Revenue by segment
Health and Personal Care: 89%
Food and Beverage: 5%
Other: 6%
Revenue by destination
Europe and Africa: 62%
Americas: 36%
Asia including Middle East: 2%
The estimated market
size for Pharmaceutical,
Personal Care and
Beauty secondary
packaging is US$18.5bn
globally and market
growth is between
2% to 3% per annum.
Strategic Report 2020 priorities
• Continue to leverage key
account management
structure and the design
hub capabilities to drive
revenue growth above
underlying market
growth rates
• Further improve
operational efficiency
by focusing on overall
equipment effectiveness,
maximising machine
uptime through
enhancing continuous
improvement activity,
planning optimisation
and preventative
maintenance programs
• Provide added value to
our customers’ businesses
by remaining globally
available, agile and able
to respond to particular
customer demands such
as short-notice new
product launches
• Build on the success of
2019 in further improving
on time in full, lead time
and quality performance
• Finalise the ongoing
integration of
Nekicesa and drive
expected synergies
• Continue to invest in and
enhance the capability
of the Packaging team
Acquisition of Nekicesa
Packaging
Based in Spain, Nekicesa has more than
50 years’ experience developing secondary
packaging solutions for the international
pharmaceutical industry. With two
well-invested facilities in Madrid, it is one
of the leading converters of folding cartons
in the Spanish market.
The acquisition of Nekicesa in September
2019, has added manufacturing capacity
and service capability to Essentra
Packaging’s existing footprint in Barcelona,
giving us a presence in both pharmaceutical
hubs in Spain and helping to establish us as
a leading player in this attractive packaging
market. Nekicesa also brings expertise in
serialisation and digital printing which
can be leveraged through the division.
This is a very exciting opportunity for the
Packaging division and a demonstration
of our strategy in action. The transaction
would not have been possible without the
tremendous efforts of the whole Packaging
team over the last 18 months, stabilising
the business in terms of service, quality
and safety and restoring revenue and
profit growth.
What we measure
96.6%
(2018 95.6%)
14%
Decrease
vs 2018
18
(2018: 23)
On Time and In Full
Why we measure it
Drives performance of quality
systems and service delivery
Customer complaints
Why we measure it
Drives performance of quality
systems and service delivery
How we have done
96.6% compared to 95.6%
in 2018
How we have done
14% decrease in customer
complaints versus 2018
Lost Time Incidents
Why we measure it
Measures the opportunity
cost of incidents in the
workplace
How we have done
Eighteen Lost Time Incidents
compared to 23 in 2018
OPERATIONAL REVIEW | PACKAGING
OPERATIONAL REVIEW | PACKAGING
ESSENTRA PLC ANNUAL REPORT 2019 57
STRATEGIC REPORT In 2019 we continued
to work with a number
of independent customers
in a key Asia territory to
differentiate their brands
using flavour products.
Differentiating
our customers’
brands
Over the course of five years
we have worked with our
customers’ supply chains
to develop bespoke flavour
products.
In a market that has
largely been based on
standard cellulose acetate
filters, customers have
historically used our design,
manufacturing expertise
and flexibility to continually
introduce products into
the market.
This has resulted in us
supporting over 20 SKUs with
14 different flavours in 2019,
thereby distinguishing the
customers’ products and
helping to grow the flavour
segment overall.
Strategic Report
Operational review: Filters
58 ESSENTRA PLC ANNUAL REPORT 2019
Filters:
Focus on innovation
and operational
excellence
The only global
independent
provider of filters
and related
solutions to the
tobacco industry.
Who we are and
what we do
We are the only global independent
provider that designs, develops and
manufactures filters for the tobacco
industry. We provide services such
as laboratory testing, innovation
and components supply for the
tobacco industry.
Our Tear Tape business (which was
absorbed into the division at the
end Q3 2019), is globally recognised as
the leading manufacturer and supplier
of narrow-width pressure sensitive
adhesive tear tapes, which allow the
easy opening of a product’s packaging
and which are largely used in the
tobacco, food and drink, and specialist
packaging sectors.
We supply over 700 filter product
specifications to more than 250
tobacco customers in over 64
manufacturing locations, including
global and regional companies, and
state owned monopolies. Our Tear
Tape business serves key multinational
and regional customers.
Revenue
£303.6m
(2018: £299.4m)
Adjusted operating profit1
£36.2m
(2018: £35.1m)
Adjusted operating margin1
11.9%
(2018: 11.7%)
1
Excluding amortisation of acquired
intangible assets and exceptional
and other adjusting items.
Kamal Taneja
Managing Director
Filters
OPERATIONAL REVIEW | FILTERS
ESSENTRA PLC ANNUAL REPORT 2019 59
STRATEGIC REPORT Operational review: Filters continued
As the first independent filter supplier with
over 70 years of experience our knowledge
is unique, our footprint is global, and we
have built strong relationships with our
customers and suppliers. We are also
unique in the Open, Close, Inform, Protect
Tapes market. Our heritage, technical
reputation, global supply chain and
manufacturing excellence in printing,
coating and converting, set us apart.
2019 reflections
We have made good progress in 2019 on
delivering our strategy, despite a volatile
tobacco industry backdrop. Our overall
operational performance continued to
improve, with some good improvements
in KPI metrics. We have established a
commercial excellence function that
is contributing to a much stronger key
account management process, as well
as delivering a more robust opportunity
pipeline. Our Innovations team has been
restructured, resulting in increased focus on
combustibles and next generation products
(“NGP”) respectively.
In terms of the “game changers”, agreement
was reached with a number of Chinese
partners to establish a Joint Venture, which
will design, manufacture and market
tobacco filters in China. On the NGP front,
four patent applications were made for new
products. Our first significant outsourcing
contract was delivered, worth approximately
£8m per annum for a period of six years.
After the close of 2019 we were awarded
a second outsourcing opportunity with
another multinational company. The Tear
Tapes business was integrated into the wider
division, allowing us to better our offering to
our tobacco customer base.
Financial performance
Revenue for the division was up 1.4%
(down 1.1% at constant exchange). The
modest year-on-year decline was primarily
caused by softer trading in China, which
has been impacted 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. Secondly, the division was faced
with challenging trading conditions in certain
markets supplied out of the Middle East;
in response to sanction compliance failings,
revenue was impacted, with some orders
being delayed and certain relationships being
terminated. Elsewhere, revenue grew in
both the European and Americas regions.
Our markets
Market trends and dynamics
Revenue by segment
Mono: 23%
Specialty: 63%
Tapes: 13%
Other: 1%
Revenue by destination1
Europe and Africa: 31%
Americas: 16%
Asia including Middle East: 53%
1
The inclusion of Tear Tapes revenue
has skewed the split of revenue by
destination, given that the largest
regional market for Tear Tapes is Europe.
The tobacco market is
an extremely dynamic
and complex
environment which
offers both risks and
opportunities.
Volume decline for
combustible products
continues in many
geographies and has
motivated many
customers to drive
cost savings both
internally and in their
supply chains, which
strengthens the case
for outsourcing.
These savings are
reinvested in Next
Generation Products
such as e-cigarettes
and Tobacco Heated
Products. Our
customers also
continue to offer
differentiated
combustible products
that include specialty
filters such as with
capsules and shapes.
Within the market for
tear tapes, the need
for our solutions
continues to rise with
discerning younger,
and wealthier older,
generations looking
for intuitive and
engaging packaging.
Sustainability is a key
trend across all our
market segments
and a focus of our
innovation activities.
All our markets are
susceptible to
counterfeits and
illicit trade. Our
authentication
technology solutions
are deployed across
these markets to keep
consumers, brands and
governments safe.
Tobacco
Food and
Beverage
60 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report The business outperformed the broader
tobacco market and is well positioned
for medium- to long-term growth. During
the period, the division continued to build
upon its proven track record of developing
innovative products which meet the
evolving needs of customers. In the
combustible market, there was further
demand for products which incorporate
one or more capsules and/or are visually
differentiated (such as tube filters),
particularly from the independent segment.
Beyond traditional combustible filters,
there was further progress in NGP.
Although a relatively modest contributor
to divisional revenue and operating profit,
the business continued to work with
various multinationals and independents to
advance their respective potential – or next
phase – Heat Not Burn offers. In addition,
the Scientific Services unit performed well,
further building on its extensive experience
and range of accredited testing methods
for both combustible and NGP products.
Adjusted operating profit decreased
1.3% to £36.2m, with operating margin
unchanged (both at constant FX) at
11.9%, driven by further significant
efficiency improvements and productivity
gains resulting from the division’s world-
class operational metrics.
Establishment of Joint
Venture in China
In November we announced the signing
of an agreement to establish a new Joint
Venture company in China, China Tobacco
Essentra (Xiamen) Filters Co., Ltd. Under
the terms of the agreement, Essentra will
hold a 49% shareholding in the JV with a
number of Chinese industrial companies,
principally Fujian, as well as Hunan,
Shanghai and Guangxi, holding the
remaining 51%.
China is the world’s largest tobacco
market, accounting for 44% of global
cigarette sales by volume in 2018, and this
JV positions us well to take advantage of
the sizeable opportunities there. Indeed,
the creation of a JV in China has been one
of our stated ambitions, or “game
changers”, in the Filters strategy and
closely follows the recent announcement
of a significant outsourcing deal.
The JV will produce specialist and next
generation filters, servicing a rapidly
expanding segment of the Chinese tobacco
industry for which market penetration
remains significantly lower than levels seen
in the rest of the global tobacco industry.
The filters will be manufactured locally
in a new facility in Xiamen which will
incorporate a state-of-the-art
development and testing centre.
2020 priorities
• Continue with the set up of the
China JV with installation and
commissioning of manufacturing
equipment in Q4 this year
• Further development of pipeline
of products for NGP
• Continue to explore further
outsourcing projects
• Drive additional operational
excellence initiatives to help
shorten the supply chain and
further reduce waste
• Harness innovations across
all segments, with focus
on sustainable products
and practices
• Development of commercial
excellence to strengthen the
opportunity pipeline
What we measure
98.5%
(2018: 98.5%)
0%
movement
vs 2018
30%
reduction
vs 2018
0
(2018: 4)
On Time and In Full
Why we measure it
Demonstrates the ability
to meet delivery demands
How we have done
Maintained world-class
service performance and
improved planning and
increased flexibility
underpin performance
Quality complaints
per billion rods
Why we measure it
Demonstrates the ability
to meet quality demands
How we have done
Maintained world-class
service performance,
initiated Six Sigma
training and focused
on product quality
Waste
Why we measure it
Drives productivity and the
efficient use of materials
How we have done
Significant reduction of
over 30% in waste vs 2018
following a reduction of
3.9% in 2018 vs 2017
Lost Time Incidents
Why we measure it
Indicates our overriding
commitment to health,
safety and welfare in
the workplace
How we have done
Decreased from four in
2018 to nil in 2019. Cultural
transformation ongoing
to ensure safety is always
first priority
*
All KPI Figures above exclude
Tear Tapes
OPERATIONAL REVIEW | FILTERS
ESSENTRA PLC ANNUAL REPORT 2019 61
STRATEGIC REPORT Group
Management
Committee
Executive Board Directors
Paul Forman
Chief Executive
Lily Liu
Chief Financial Officer
Further details on Paul’s
skills and experience can
be found on page 66.
Further details on Lily’s skills
and experience can be found
on page 66.
Divisions
Scott Fawcett
Managing Director,
Components
Iain Percival
Managing Director,
Packaging
Kamal Taneja
Managing Director,
Filters
Scott Fawcett joined Essentra in
2010 as Managing Director of the
European Components business,
and was appointed divisional
Managing Director in January
2014. Prior to joining Essentra,
Scott was Head of eCommerce
at Electrocomponents plc, where
he held a variety of increasingly
senior sales, marketing and
eCommerce positions during
his 17-year career there.
Iain Percival joined Essentra as
Managing Director, Essentra
Packaging in 2017, before which
he was divisional CEO, Beverage
Cans Europe for Rexam plc.
Prior to this, Iain held a number
of increasingly senior roles at
Rexam plc, Toyota Motor –
Europe Manufacturing and
Dowty Group, and has extensive
experience in category
management, manufacturing
and supply chain optimisation.
Kamal Taneja joined Essentra
as Managing Director, Essentra
Filters in 2017 from Amcor
Tobacco Packaging, where he
worked as Vice President and
General Manager, based in
Singapore. Prior to this, Kamal
held increasingly senior roles at
Ingersoll Rand and Trane, and
has extensive marketing,
commercial, operational and
supply chain optimisation
experience throughout the
Asia Pacific region.
62 ESSENTRA PLC ANNUAL REPORT 2019
Strategic Report Enabling Functions
See more
on the Board
of Directors
from page 66
Richard Cammish
Chief Information Officer
Richard Cammish joined Essentra
as Chief Information Officer in
June 2017. Prior to this he was
Group Chief Information Officer
for Coats plc. During his career,
Richard has gained extensive
IT, digital and international
experience in organisations
including Heineken, Cadbury,
British American Tobacco
and Mars. He has also worked
for a leading management
consultancy and in a technology
start-up business.
Oshin Cassidy
Group Human
Resources Director
Oshin Cassidy joined Essentra as
Group Human Resources Director
in January 2019. Prior to joining
Essentra, Oshin was Group
Human Resources Director at
Imagination Technologies, and
has extensive human resources
experience having previously
held senior roles at global
organisations including
Securitas, ComfortDelGro,
Centrica and QinetiQ.
Nick Pennell
Group Operations Director
Nick Pennell joined Essentra
as Group Operations Director
in 2017, prior to which he was
Chairman of Lavery/Pennell and a
Partner at Booz Allen Hamilton/
Booz and Co. in the UK and
China. Nick has extensive
experience of performance
improvement, operational and
strategy development projects
gained across the industrial and
energy sectors, and in many
geographies. He has also held
operational and corporate
strategy roles at Bass Brewers
and at Shell.
Jon Green
Company Secretary
and General Counsel
Kathrina FitzGerald
Strategy and
Commercial Director
Jon Green joined Essentra in
2005, and was appointed
Company Secretary and General
Counsel in July 2005. Prior to
joining Essentra, Jon worked as
an in-house lawyer for a number
of large international businesses,
including Hays plc and Unilever
plc. Jon is a qualified solicitor.
Kathrina FitzGerald was
appointed as Strategy and
Commercial Director in January
2018. Prior to joining Essentra,
Kathrina worked with DMGT plc
– a portfolio of information and
media businesses – where she
held a number of increasingly
senior roles during her ten-year
tenure, including Business
Development Director, Managing
Director of DMGT International
and Director of Strategy and
Development. Kathrina started
her career at JP Morgan, where
she spent seven years in
investment banking.
By order of the Board
Paul Forman
Chief Executive
28 February 2020
GROUP MANAGEMENT COMMITTEE
ESSENTRA PLC ANNUAL REPORT 2019 63
STRATEGIC REPORT Directors’ Report
Directors’
Report
64 ESSENTRA PLC ANNUAL REPORT 2019
Chairman’s
Corporate
Governance
Statement
Dear Shareholder
I am pleased to present the Essentra plc Corporate
Governance Report for the year ended 31 December 2019.
This reports on our governance practices that are supporting
the Company as it moves to deliver its three-year strategy
and enters into its final stage of the journey – growth.
Coupled with the achievement of this strategy is the
Company’s journey to reaching FTSE 250 upper quartile
best practice governance.
The Essentra Board is accountable to all of the Company’s
stakeholders for the standards of governance which are maintained
across Essentra’s diverse range of global businesses. During the year,
Essentra was subject to the 2018 UK Corporate Governance Code
(the “2018 Code”) published by the Financial Reporting Council
(“FRC”). The Board has reviewed its operations and governance
framework and confirms that, as at the date of this Report, the
Company has complied with the provisions set out in the 2018 Code.
Essentra applies the 2018 Code’s principles of openness, integrity
and accountability, clear definition of reserved matters and
delegated authorities. There is also a system which exists of checks
and balances in which no individual has unfettered decision-making
power ensuring transparency and integrity in business. This Report
details how Essentra has applied the Principles of the 2018 Code
and by following the more detailed Provisions can demonstrate how
good corporate governance behaviour contributes to the Company’s
long-term sustainable success and achievement of its wider
strategic objectives.
As required by the new Principles of the 2018 Code, the Board,
working with the Remuneration Committee, will align the pension
contribution rates of the current executive directors with the rest of
the UK workforce. Further details can be found in the Remuneration
Report from page 92 to page 93.
As required by the new Principles of the 2018 Code, Mary Reilly
was appointed as the Employee Board Champion, effective
from 1 January 2019, and tasked with bringing the Voice of the
Employee into the boardroom. Mary has embraced this role with
much enthusiasm and travelled to a number of sites around the
world to meet employees and as such has allowed the Board to
hear directly the views of the employees, by providing feedback
at each Board meeting. Given the importance placed on
employee engagement, the success of this role, and indeed our
desire to hear and understand even more, Ralf Wunderlich has
also been appointed as a further Board Employee Champion
which should ensure even more voices are heard in the
boardroom. Further details on this role and Mary’s visits
to a number of locations can be found on page 76.
Mary and Ralf will be supported by the other Non-Executive
Directors who carry out regular, independent site visits to
enable continuous understanding of the business, experience
first-hand the culture within the Company and to engage
directly with employees.
During early 2019 a Board evaluation was undertaken which,
as per the 2018 Code, has become the responsibility of the
Nomination Committee. The evaluation which consisted of a
questionnaire-based approach identified that the performance
of the Board continues to improve. The top priorities for the
Board were identified as: (i) ensuring sufficient time for
discussions, particularly on key topics; (ii) devoting additional
time to strategy and portfolio decisions; (iii) conducting more
site visits; and (iv) having more opportunities for the Board
to meet without the executive management in attendance.
2019 has been a year of consolidating on changes made to
last year’s Board processes and procedures particularly in
relation to the development of Board reporting. This has
enabled the Board to focus on the more important elements
of information presented, with additional attention being
given to the Company’s stakeholders, both internal and external,
within the decision-making process.
During the year the Board responded quickly to support
management in the comprehensive investigation of some
sanctioned market compliance failures in the Filters business.
The Board is committed to ensuring the highest standards of
compliance and has taken steps to ensure the robustness of
the compliance programme and to mitigate the prospect of
any future failures.
Board focus for 2020
We will continue to support the Executive Committees with
their growth plans across all of our businesses through the
continuation of receiving key management presentations and
visits to sites. There are many opportunities for Essentra to grow,
organically and through acquisition, and to build on the success
of the last few years. The Board looks forward to realising and
sharing these successes with our shareholders, employees and
other stakeholders as we effect them through our strategic plan.
Paul Lester, CBE
Chairman
28 February 2020
ESSENTRA PLC ANNUAL REPORT 2019 65
DIRECTORS’ REPORT Directors’ Report
Board of Directors
Experienced, effective
and diverse leadership
Our Business is led by our Board of Directors,
biographical details of the Directors are available
at essentraplc.com/about-us/board-of-directors
Committee membership key
1
2
3
4
5
Audit and Risk Committee
Nomination Committee
Remuneration Committee
Sustainability Committee
Committee Chairman
Paul Lester, CBE
Non-Executive Chairman
Independent on
appointment
Paul Forman
Chief Executive
Executive Director
Lily Liu
Chief Financial Officer
Executive Director
Tommy Breen
Senior Independent Director
2
53
42
321
Appointed to the Board:
December 2015
Appointed to the Board:
January 2017
Appointed to the Board:
November 2018
Appointed to the Board:
April 2015
Skills and experience:
Paul brings a wealth of
experience to Essentra gained in
increasingly senior operational
and strategic executive roles
alongside serving on a number
of Boards in an non-executive
director capacity for more than
20 years. Paul continues to use
his experience to oversee the
development of Essentra’s
strategy and the effectiveness
of its operations.
Other current appointments:
– McCarthy and Stone plc,
Non-Executive Chairman
– Ready Power Service Limited,
Non-Executive Chairman
– First Port Limited,
Non-Executive Chairman
– Appello Limited,
Non-Executive Chairman
Skills and experience:
As Chief Executive Paul combines
strong commercial and operational
leadership with a detailed
understanding of company
rationalisation, as well as growth
through acquisition, development
and delivery of a clear vision and
corporate strategy. Prior to joining
Essentra, Paul was Group Chief
Executive of Coats Group plc – the
world’s leading industrial thread
manufacturer – for seven years.
Previously Paul held a number of
increasingly senior operational
and strategic positions at a variety
of companies, and has a proven
track record of international
manufacturing experience at
the highest level.
Other current appointments:
– Tate and Lyle plc,
Senior Independent Director
Skills and experience:
Lily brings considerable corporate
finance and accounting experience
to the Board gained working
within the manufacturing and
engineering sectors for nearly
20 years. Lily began her career with
a Chinese investment firm before
emigrating to Australia to complete
an MBA. She has worked across
three continents (Asia, Europe
and Australia).
Other current appointments:
– None
Skills and experience:
Previously Tommy was
Chief Executive of DCC plc, an
international sales, marketing,
distribution and business support
services group, headquartered in
Dublin and with operations in 13
countries. Tommy brings significant
experience to Essentra, in particular
of growing diverse businesses both
organically and via acquisition
during his 30-year career with DCC.
Tommy brings a strong commercial
perspective to Board discussions.
Other current appointments:
– Lota View Holdings Limited,
Non-Executive Chairman
– W&R Barnett Limited,
Executive Director
66 ESSENTRA PLC ANNUAL REPORT 2019
See details
of the Group
Management
Committee
from page 62
Nicki Demby
Non-Executive Director
Mary Reilly
Non-Executive Director
Lorraine Trainer
Non-Executive Director
Ralf K. Wunderlich
Non-Executive Director
4321
54321
5321
5432
Appointed to the Board:
June 2019
Appointed to the Board:
July 2017
Appointed to the Board:
July 2013
Appointed to the Board:
July 2017
Skills and experience:
Nicki brings extensive advisory
experience to Essentra, having
provided Board level counsel
to many UK and international
businesses over more than
25 years as an executive
remuneration consultant.
Nicki has been a Partner of
Deloitte LLP and led the
Deloitte “Women on Boards”
programme, as well as teaching
a number of programmes for
Non-Executive Directors. Nicki
combines her Board work with
advice on senior executive career
strategy and development.
Other current appointments:
– Stork & May, Partner
Skills and experience:
Mary brings a wealth of
accounting, finance and
international management
experience to Essentra, having
previously been a Partner of
Deloitte LLP for more than
20 years, as well as serving
on a number of Boards in a
non-executive capacity since
2000. Mary’s focus on finance,
risk and compliance is valuable
to Board discussions. Mary
was appointed as the Board
Employee Champion effective
from 1 January 2019.
Other current appointments:
– Travelzoo, Non-Executive
Director and Chair of the
Audit and Risk Committee
– Mitie Group plc,
Non-Executive Director and
Audit Committee Chairman
Skills and experience:
Lorraine brings a wealth of
experience in many areas and
in particular in relation to
remuneration, with a particular
focus on leadership and talent
bringing valuable insight to
Board discussions. Lorraine
began her executive career at
Citibank, and has some 20 years’
experience in Human Resources
at blue chip companies such as
the London Stock Exchange and
Coutts NatWest Group.
Other current appointments:
– TP ICAP plc,
Non-Executive Director, Chair
of the Remuneration
Committee, member of the
Audit Committee, Employee
Board Champion
– Sonae SGS, S.A.,
Senior Independent Director,
Chair of the Remuneration
Committee
Skills and experience:
Ralf brings extensive
international operational
experience in the packaging
industry to Essentra, gained
over many years and through
living and working across three
continents. Currently based in
Germany, Ralf is a senior adviser
to private equity firms and an
independent consultant. Ralf
has a deep understanding of
international capital market
regulations developed from
his previous roles and this
comprehensive knowledge is
valuable to Board discussions.
Ralf was appointed as the joint
Board Employee Champion from
1 November 2019.
Other current appointments:
– AptarGroup, Inc.,
Non-Executive Director
– Huhtamäki Oyj.,
Non-Executive Director
BOARD OF DIRECTORS
ESSENTRA PLC ANNUAL REPORT 2019 67
DIRECTORS’ REPORT Corporate
Governance Report
The Board can confirm that it has complied with the Provisions
as set out in the 2018 UK Corporate Governance Code.
Key topics raised in the 2018 Code
Company
purpose
Page 10
Business
model
Pages
10 and 11
Strategy
Pages
12 to 15
Our people
Pages
20 to 26
Sustainability
Pages
27 to 29
Stakeholder
engagement
Pages
70 to 77
Audit, Risk and
internal control
Pages
86 to 91
The Corporate Governance Report has
been restructured to reflect the pillars of
the new Code. Some of the information
required by the Code is included in the
Strategic Report and is cross-referenced
here to avoid unnecessary duplication.
Fair balanced and
understandable
One of the key corporate governance
requirements is for the Annual Report
to be fair, balanced and understandable.
The coordination and review of the
Group-wide input into the 2019 Annual
Report is a sizeable exercise performed
within exacting time frames which runs
alongside the formal audit process being
performed by the External Auditor.
Following a comprehensive review process,
initially the Audit and Risk Committee, and
then the Board, can confirm that the 2019
Annual Report, taken as a whole, is fair,
balanced and understandable and provides
the information necessary for shareholders
to assess the performance, strategy and
business model of the Company.
68 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Leadership and
accountability
The Board’s role is to provide effective and entrepreneurial
leadership to the Company and to be responsible to the
shareholders for the long-term sustainable success of
the Company.
An effective Board defines the Company’s purpose and then
sets a strategy to deliver it, underpinned by the values and
behaviours that shape its culture and the way it conducts its
business. The Board should consider the main trends and factors
which will affect the long-term success and future viability of the
Company – and how these and the Company’s Principal Risks,
uncertainties and opportunities have been addressed.
Our structure
Essentra plc Board
Audit and Risk
Committee
Remuneration
Committee
Nomination
Committee
Group Management
Committee
Sustainability
Committee
Group Risk Committee
Compliance Committee
Essentra plc Board (the “Board”)
In fulfilling its role, the Board:
• establishes the Company’s
purpose, values and strategy
and has satisfied itself that
these and its culture are aligned
• sets, continually reviews and tests
the Company’s strategic aims
• determines the nature and
extent of acceptable risks in
achieving the Company’s
strategic objectives
• assesses shareholder and
stakeholder interests from
the perspective of the long-
term sustainable success of
the Company
• oversees the establishment
of formal and transparent
arrangements for the application
of corporate reporting, risk
management and internal
control requirements and
principles
• ensures that the necessary
financial and human resources
are in place for the Company
to meet its objectives
• reviews the performance
of the Company’s
executive management
• presents a fair, balanced and
understandable assessment
of the Company’s position and
prospects to its shareholders
essentraplc.com
The terms of reference for each of the Audit and
Risk, Remuneration, Sustainability and Nomination
Committees can be found on the Company’s website.
Group Risk Committee
The Group Risk Committee is
responsible for monitoring Principal,
Key and Emerging Risks, and ensuring
the effectiveness of divisional and
functional risk management.
Further details of the Company’s
risk management framework can
be found on page 81.
Compliance Committee
The Compliance Committee
is established to oversee the
Group’s implementation of
compliance programmes, policies
and procedures required to meet
legal, compliance and regulatory
requirements. The Company
Secretary and General Counsel will
be the Chairman of the Committee
and is accountable for the Company
for compliance activities. The
Committee is responsible for
executive monitoring of the overall
progression of compliance activities.
Audit and Risk Committee
The Audit and Risk Committee
supports the Board and is
responsible for: monitoring the
integrity of the Company’s Financial
Statements; reviewing, challenging
and approving its accounting
policies; and scrutinising the
effectiveness of the internal
and external auditors and the
Company’s internal control and
risk management systems.
Remuneration Committee
The Remuneration Committee
is established by the Board and
is responsible for setting a
remuneration policy for Directors
and senior executives. This policy is
designed to promote the long-term
success of the Company, taking into
consideration the reward, incentives
and conditions available to the
Company’s workforce, shareholders
and other stakeholders. The
Remuneration Committee
determines an appropriate balance
between fixed and performance-
related and immediate and deferred
remuneration. The Remuneration
Committee is also responsible for
setting the fees of the Chairman.
Nomination Committee
The Nomination Committee is
responsible for regularly reviewing
the structure, size and composition
of the Board for any changes that it
considers to be appropriate. The
Nomination Committee will lead the
process for Board appointments and
make recommendations to the
Board taking into account the
Company’s strategic priorities and
the main trends and factors
affecting the long-term success and
future viability of the Company.
Group Management Committee
The Group Management Committee
(“GMC”) provides general executive
management of Essentra within
agreed delegated authority limits
determined by the Board.
Specifically, the GMC supports
the Chief Executive in reinforcing
Essentra’s Six Principles.
Sustainability Committee
The Sustainability Committee
is established by the Board and
is responsible for providing
advice on and co-ordinating,
sustainability-related
activities across the Company.
The Sustainability Committee
shall review the strategies,
policies, management, initiatives,
targets and performance of the
Company within its sustainable
development framework.
CORPORATE GOVERNANCE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 69
DIRECTORS’ REPORT Corporate Governance Report continued
Our stakeholders engagement table
The following disclosure describes how the Directors have had regard to the matters set out in Section 172(1)
(a) to (f) and forms the Directors’ statement required under Section 414CZA of The Companies Act 2006.
Who?
Why?
Stakeholder group.
Why it is important to engage.
How?
How management and/or
directors engaged.
What?
Outcomes and actions
What were the key topics of engagement and what
What was the impact of the engagement
feedback and input did the board/management obtain?
including any actions taken?
Investors
The major interests in our
shares are set out on page 113.
Key metrics:
• Earnings per share
• Total dividends paid
• TSR
• Dividend yield
• Dividend cover
Continued access to capital is of vital importance
to the long-term success of our business.
The key mechanisms of shareholder
engagement included:
Through our engagement activities, we strive to
obtain investor buy-in to our strategic objectives
and our execution of them.
We create value for our shareholders by
generating strong and sustainable results that
translate into dividends.
We are seeking to promote an investor base that is
interested in a long-term holding in the Company.
• AGM
• Full year and half year presentations
• Investor days
• One-on-one investor meetings
with the Chairman, Chief Executive,
Chief Financial Officer, Senior
Independent Director, Chair
of the Remuneration Committee
Other than our routine engagement with investors on topics
Good communication and early notification resulted in
of strategy, governance and performance, below are specific
shareholders vote for the approval of the Remuneration
matters on which we engaged investors and that influenced
Report at the AGM 2019.
outcomes and actions this year:
The Chairman and the Senior Independent Director met key
• Planned change within the Remuneration Policy: early
investors to discuss succession and recruitment plans.
notification and consultation with investors. See the
Remuneration Committee Report from page 92 for
more details.
• Environmental, Sustainability & Governance issues,
particularly in relation to the Single-use Plastics Directive and
its impact on the Filters business.
Escalation of the Group Sustainability Committee to be a
Board Sustainability committee with the Chair being a Non-
Executive Director.
Suppliers
The Company has a large number
of international suppliers and also
partners with a high volume of
small businesses.
Each division presents distinct
key supplier groups. 85% of Filters
and Packaging’s raw materials
come from a small proportion
of suppliers used.
The Components division utilises
a mature network of key suppliers.
Our suppliers are fundamental to the quality of
our products and to ensuring that as a business
we meet the high standards of conduct that we
set ourselves.
We are fundamentally a conversion business and
are dependent on our suppliers to provide our
goods ethically, within our code of conduct, on
time and to the quality required by our customers.
Innovation is key to the success of our business and
engaging with suppliers early is fundamental to the
enabling of new products.
We engage with local suppliers through
working group initiatives that are run
by regional management.
Our supplier code of conduct and
Modern Slavery Statement is shared
with all key and new suppliers.
Procurement runs a supplier
development program with all
key suppliers.
Sustainable procurement has gained an increased focus. With
A key supplier management program has been initiated
procurement working to increase supply chain transparency,
allowing us to drive our environmental and social policies down
environmental and social impact has been a key focus.
the supply chain.
Impact of Brexit on business continuity in our UK and European
We are starting to share our environmental initiatives.
factories: our suppliers shared the plans they are putting in
place, including focus on increased local sourcing.
The Company anticipates that by the end of 2020 more than
20% of our supplier spend will be covered by our supplier code
of conduct certification.
We develop long-term, strategic relationships formed on the
basis of trust and understanding and which are to the mutual
benefit of both parties.
Collaborate on key initiatives and innovation projects.
Management continues to develop contingency plans,
as discussed in our Risk Management Report on page 34.
These will be subject to testing by Internal Audit in the course
of their next cycle of work.
70 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report The following disclosure describes how the Directors have had regard to the matters set out in Section 172(1)
(a) to (f) and forms the Directors’ statement required under Section 414CZA of The Companies Act 2006.
Who?
Why?
Stakeholder group.
Why it is important to engage.
How?
How management and/or
directors engaged.
What?
Outcomes and actions
What were the key topics of engagement and what
feedback and input did the board/management obtain?
What was the impact of the engagement
including any actions taken?
Investors
The major interests in our
shares are set out on page 113.
Key metrics:
• Earnings per share
• Total dividends paid
• TSR
• Dividend yield
• Dividend cover
Continued access to capital is of vital importance
The key mechanisms of shareholder
to the long-term success of our business.
engagement included:
Through our engagement activities, we strive to
• AGM
obtain investor buy-in to our strategic objectives
and our execution of them.
We create value for our shareholders by
generating strong and sustainable results that
translate into dividends.
We are seeking to promote an investor base that is
interested in a long-term holding in the Company.
• Full year and half year presentations
• Investor days
• One-on-one investor meetings
with the Chairman, Chief Executive,
Chief Financial Officer, Senior
Independent Director, Chair
of the Remuneration Committee
Other than our routine engagement with investors on topics
of strategy, governance and performance, below are specific
matters on which we engaged investors and that influenced
outcomes and actions this year:
• Planned change within the Remuneration Policy: early
notification and consultation with investors. See the
Remuneration Committee Report from page 92 for
more details.
• Environmental, Sustainability & Governance issues,
particularly in relation to the Single-use Plastics Directive and
its impact on the Filters business.
Good communication and early notification resulted in
shareholders vote for the approval of the Remuneration
Report at the AGM 2019.
The Chairman and the Senior Independent Director met key
investors to discuss succession and recruitment plans.
Escalation of the Group Sustainability Committee to be a
Board Sustainability committee with the Chair being a Non-
Executive Director.
Suppliers
The Company has a large number
of international suppliers and also
partners with a high volume of
small businesses.
Each division presents distinct
key supplier groups. 85% of Filters
and Packaging’s raw materials
come from a small proportion
of suppliers used.
The Components division utilises
a mature network of key suppliers.
Our suppliers are fundamental to the quality of
We engage with local suppliers through
our products and to ensuring that as a business
working group initiatives that are run
we meet the high standards of conduct that we
by regional management.
set ourselves.
Our supplier code of conduct and
We are fundamentally a conversion business and
Modern Slavery Statement is shared
are dependent on our suppliers to provide our
with all key and new suppliers.
goods ethically, within our code of conduct, on
time and to the quality required by our customers.
Procurement runs a supplier
development program with all
Innovation is key to the success of our business and
key suppliers.
engaging with suppliers early is fundamental to the
enabling of new products.
Sustainable procurement has gained an increased focus. With
procurement working to increase supply chain transparency,
environmental and social impact has been a key focus.
A key supplier management program has been initiated
allowing us to drive our environmental and social policies down
the supply chain.
Impact of Brexit on business continuity in our UK and European
factories: our suppliers shared the plans they are putting in
place, including focus on increased local sourcing.
We are starting to share our environmental initiatives.
The Company anticipates that by the end of 2020 more than
20% of our supplier spend will be covered by our supplier code
of conduct certification.
We develop long-term, strategic relationships formed on the
basis of trust and understanding and which are to the mutual
benefit of both parties.
Collaborate on key initiatives and innovation projects.
Management continues to develop contingency plans,
as discussed in our Risk Management Report on page 34.
These will be subject to testing by Internal Audit in the course
of their next cycle of work.
CORPORATE GOVERNANCE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 71
DIRECTORS’ REPORT Corporate Governance Report continued
Stakeholder table continued
Who?
Why?
Stakeholder group.
Why it is important to engage.
How?
How management and/or
directors engaged.
What?
Outcomes and actions
What were the key topics of engagement and what
What was the impact of the engagement
feedback and input did the board/management obtain?
including any actions taken?
People
We define our workforce as the total
number of employees working for
us for periods in excess of three
months per year.
Key metrics:
• Employee engagement
• Employee turnover rate
• Safety KPIs
• Total benefits and payments
The Company’s long-term success is predicated on
the daily commitment of our workforce to our
purpose and values (Six Principles).
To maintain our competitive advantage and meet
the growing demands of the environment in which
we operate, we need a workforce which is adaptive
and whose skill base constantly evolves. We also
value workers with long-term practical experiences.
We engage with our people regularly and have
developed a people strategy which seeks to create
an environment in which our people are happy at
work and that best supports their well-being.
We invest significantly in our people as we believe
that maintaining low turnover rates across the
entire workforce is the source of our industry-
leading efficiency and productivity rates.
We discuss our workforce engagement
activities from page 76 to page 77.
We distribute an employee survey to
all our employees annually.
To meet the new requirements of the
2018 Code, the Board has appointed
two designated Non-Executive
Directors to be responsible for
workforce engagement.
Employees are provided with
information of concern, including
factors affecting company
performance through
• regular town hall briefings
• intranet updates
The Board reviewed the results of the recent employee survey
Based on survey feedback, the Board is committed to
and encouraged by the high participation rate (90%) and the
supporting management in doing more to make our people
increase from 75% to 78% in engagement overall. The Board
feel proud of and valued by Essentra as well as breaking down
was also pleased to see the significant improvement in respect
silos and encouraging collaboration between departments
and diversity scores as well as confirmation that safety is
and teams.
considered a high priority in our business.
The engagement with Employees through the Board Employee
established in 2019.
Champion roles discussed a number of key topics
In 2020 the Board will support the refreshed HR strategy
The success of the 2019 Board Employee Champion programme
led the Board to appoint a second designated Non-Executive
Director so that the programme can be expanded and more
sites and employees can be visited.
• IT improvements projects
• recognition and reward
• resource and investment allocation
Further details can be found from page 76 to page 77
Our customers are the lifeblood of our business and
we recognise that their feedback and support is
crucial to our future success
We have strategic global relationships
with a number of multinational
companies. We have also invested in key
account management structures across
our businesses to manage relationships
with customers.
This ensures that we provide the
most appropriate service for
individual accounts
We meet customers regularly not only to share information but
Development of long-term strategic relationships formed
to gain feedback on customers KPIs such as OTIF, and also, in
on the basis of trust and understanding and which are to
some cases, to explore areas of potential product information.
the mutual benefit of both parties.
• Key account meetings
• Business reviews
Continued to expand our product offering and build expertise
within our sales team.
A number of hassle free initiatives are continuing, including
within the Components division the introduction of Business
Process Engineering which will build a hassle free service offer
and increase sales effectiveness.
As a global company with many local operations,
Essentra considers governments and regulators as
important stakeholders.
Engagement with regulators and
governments is undertaken in various
ways across our global operations.
At a Group level we have maintained a strong dialogue with
Our dialogue on compliance has an informed chain, we have
various regulatory agencies. During 2019 Essentra co-operated
put in place to ensure risks are reduced and a compliance
fully with the US Government into some sanctioned market
culture can be enlarged.
We are committed to working with governments
at national, regional and local level in establishing
sound and transparent working relationships that
benefit the countries and host communities.
In accordance with our Ethics Code, Essentra does
not provide financial contributions to political
parties and lobby groups.
As a UK listed company the Board
and the GMC manage many of these
relationships while our local teams
regularly engage local governments
in relations community issues.
compliance failures in the Filters business. As a result of the
investigations conducted by the Group in response to US
Government enquiries, the Group has made a voluntary
disclosure to the US Office of Foreign Assets Control.
Customers
Our purpose is to provide the parts,
products and services our customers
need to succeed as a business.
We measure the volume of active
customers by who has received at
least one invoice in the prior year
Government
and Regulators
Wherever we operate we are
committed to conducting business
in line with the appropriate laws
and regulation
72 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report People
The Company’s long-term success is predicated on
We discuss our workforce engagement
the daily commitment of our workforce to our
activities from page 76 to page 77.
We define our workforce as the total
purpose and values (Six Principles).
We distribute an employee survey to
number of employees working for
us for periods in excess of three
months per year.
Key metrics:
• Employee engagement
• Employee turnover rate
• Safety KPIs
• Total benefits and payments
To maintain our competitive advantage and meet
all our employees annually.
the growing demands of the environment in which
we operate, we need a workforce which is adaptive
and whose skill base constantly evolves. We also
value workers with long-term practical experiences.
To meet the new requirements of the
2018 Code, the Board has appointed
two designated Non-Executive
Directors to be responsible for
We engage with our people regularly and have
workforce engagement.
developed a people strategy which seeks to create
an environment in which our people are happy at
work and that best supports their well-being.
Employees are provided with
information of concern, including
factors affecting company
We invest significantly in our people as we believe
performance through
that maintaining low turnover rates across the
entire workforce is the source of our industry-
leading efficiency and productivity rates.
• regular town hall briefings
• intranet updates
Customers
Our purpose is to provide the parts,
products and services our customers
need to succeed as a business.
We measure the volume of active
customers by who has received at
least one invoice in the prior year
companies. We have also invested in key
account management structures across
our businesses to manage relationships
with customers.
This ensures that we provide the
most appropriate service for
individual accounts
Government
and Regulators
Wherever we operate we are
committed to conducting business
in line with the appropriate laws
and regulation
As a global company with many local operations,
Engagement with regulators and
Essentra considers governments and regulators as
governments is undertaken in various
important stakeholders.
ways across our global operations.
We are committed to working with governments
As a UK listed company the Board
at national, regional and local level in establishing
and the GMC manage many of these
sound and transparent working relationships that
relationships while our local teams
benefit the countries and host communities.
regularly engage local governments
in relations community issues.
In accordance with our Ethics Code, Essentra does
not provide financial contributions to political
parties and lobby groups.
Who?
Why?
Stakeholder group.
Why it is important to engage.
How?
How management and/or
directors engaged.
What?
Outcomes and actions
What were the key topics of engagement and what
feedback and input did the board/management obtain?
What was the impact of the engagement
including any actions taken?
The Board reviewed the results of the recent employee survey
and encouraged by the high participation rate (90%) and the
increase from 75% to 78% in engagement overall. The Board
was also pleased to see the significant improvement in respect
and diversity scores as well as confirmation that safety is
considered a high priority in our business.
The engagement with Employees through the Board Employee
Champion roles discussed a number of key topics
• IT improvements projects
• recognition and reward
• resource and investment allocation
Further details can be found from page 76 to page 77
Based on survey feedback, the Board is committed to
supporting management in doing more to make our people
feel proud of and valued by Essentra as well as breaking down
silos and encouraging collaboration between departments
and teams.
In 2020 the Board will support the refreshed HR strategy
established in 2019.
The success of the 2019 Board Employee Champion programme
led the Board to appoint a second designated Non-Executive
Director so that the programme can be expanded and more
sites and employees can be visited.
Our customers are the lifeblood of our business and
We have strategic global relationships
we recognise that their feedback and support is
with a number of multinational
crucial to our future success
We meet customers regularly not only to share information but
to gain feedback on customers KPIs such as OTIF, and also, in
some cases, to explore areas of potential product information.
Development of long-term strategic relationships formed
on the basis of trust and understanding and which are to
the mutual benefit of both parties.
• Key account meetings
• Business reviews
Continued to expand our product offering and build expertise
within our sales team.
A number of hassle free initiatives are continuing, including
within the Components division the introduction of Business
Process Engineering which will build a hassle free service offer
and increase sales effectiveness.
At a Group level we have maintained a strong dialogue with
various regulatory agencies. During 2019 Essentra co-operated
fully with the US Government into some sanctioned market
compliance failures in the Filters business. As a result of the
investigations conducted by the Group in response to US
Government enquiries, the Group has made a voluntary
disclosure to the US Office of Foreign Assets Control.
Our dialogue on compliance has an informed chain, we have
put in place to ensure risks are reduced and a compliance
culture can be enlarged.
CORPORATE GOVERNANCE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 73
DIRECTORS’ REPORT Corporate Governance Report continued
Matters considered by the Board in 2019
In managing the affairs of the Company, the Board’s agenda is set by the Chairman and carefully planned, in conjunction with the
Company Secretary and General Counsel, to ensure focus on the Company’s strategic activities and key monitoring activities as well
as reviewing significant issues. The annual cycle of agenda items deals with an adopted schedule of reserved matters.
Corporate responsibility
• establishment of a Board Sustainability Committee to
assess the Company’s approach to sustainability and
establish a future strategy with objectives
• approval of the Diversity and Inclusion Policy
Strategy
• receiving regular strategy update sessions
• holding an annual “away-day” focused on strategy
• approved change of our divisional structure from four
divisions into three and the incorporation of the Tear Tapes
and Reid Supply into Filters and Components respectively
• agreed outsourcing “game changer” project in the
Filters division
Governance and risk
• review of the Governance Improvement
Programme through regular reports and updates on
governance matters
• appointment of Board Employee Champion role and
received feedback on the employee sessions after
each site visit
• continuous review of the 2018 Code Provisions
• review of its meeting processes particularly in relation
to a consistent approach
• participated in the externally facilitated Board evaluation
• review of risk strategy and risk appetite
• annual review of Principal Risks and Key Risks and Emerging
Risks facing the Group’s businesses
• regular deep dive reviews for the Company’s Principal
Risks continued consideration of the Business Process
Redesign project
• continued consideration of cyber security risk
• continued consideration of Brexit implications and
• annual review of past acquisitions to ensure post acquisition
mitigating strategies
integration is being implemented
• reviewed and approved gender pay reporting
• reviewed and approved the annual Modern
Slavery Statement
• comprehensive investigation into some sanctioned market
compliance failures in the Filters business
Acquisitions and disposals
• approved the purchase of Innovative Components, USA and
• review of the Compliance Transformation program
• review of the Company’s Right to Speak claims and
ensuring arrangements are proportionate and independent
• received updated training on the Market Abuse Regulation
People
• review of Talent Management process within the Group
• review of the annual employee engagement survey results
• monitoring of performance and continued development
of Health and Safety risk
• appointment of new Non-Executive Director
• review of new Human Resources strategy
• at each meeting an assessment of Health and
Safety performance
Costa Rico
• approved the purchase of the minority stake of the
Filters Dubai business
• approved the purchase of Nekicesa Packaging, Spain
• approved the Filters Joint Venture Agreement, China
• approved the sale of Pipe Protection Technologies
• approved the sale of Extrusion, Netherlands
• approved the sale of Speciality Tapes, USA
• approved the sale of Card Solutions, UK
Financial and operational performance
• approval of the Company’s trading statements, full year
and half year results and quarterly trading statements
• received regular reports from the Chief Executive and
the Chief Financial Officer
• approved the Group budget for 2020
• recommended the 2018 final dividend and approval of
the 2019 interim dividend
• received detailed presentations from senior management
across the businesses and considered reports from enabling
functional management about matters of material
importance to the Company
• approval of major capital and operating
expenditure proposals
• review of refinancing proposals
74 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Principal decisions
We define principal decisions as both those that are material to the Company, but also those that are significant to any of our
key stakeholder groups. For detail as to how we established and defined our key stakeholder groups see page 70 to 73. In making
the following principal decisions the Board considered the views of its key stakeholders, as well as the need to maintain a reputation
for high standards of business conduct and the need to act fairly between the members of the Company.
Principal decision 1
Simplification of our divisional
structure
• The Board decided to sell a number
of businesses that were non-core
to the Company and not in line with
the Company’s strategic
plan/objectives
• Details of the disposals are included
on page 14, where we explain our
long-term approach to the
Company’s strategy
• During our engagement with
potential purchasers/investors they
were questioned on their long-term
plans for the businesses particularly
in relation to resource allocation
and employees. The decision to
proceed with each of the disposals
was after due consideration of
the sustainable success of the
Company, after the disposals,
without the disposals and for the
businesses as stand-alone entities
Principal decision 2
Acquisitions
• The Board plays a critical role in
ensuring that a robust and rigorous
process is followed in respect of
acquisitions to ensure that all
elements of the proposals, including
stakeholder considerations are
carefully reviewed and challenged.
Details of the acquisitions are
included in the Operational review
from page 49 to page 61 where
we explain our long-term approach
to the Company’s strategy.
• Presentation to the Board to
consider if the proposal is in line with
the strategy of growth through
acquisition and ensuring long-term
sustainable success
• Considerations include the
financial performance of the target
business, the projected synergies,
the regulatory, political and
competitor landscape and how
best to serve customers.
• The acquisitions of Innovative
Components and Nekicesa
Packaging increased the divisions
footprint into new territories
• Review of the Company’s existing
operations and market presence
in the relevant country, employee
matters, suppliers and potential
risks and managements proposals
for mitigating these businesses as
stand-alone entities
Principal decision 3
Establishment of Board
Sustainability Committee
• The Board decided that the
Group Sustainability Committee
established in 2018 should be
elevated to a new Board
Committee. Chaired by a
Non-Executive Director
• Good management of Environmental
and Social Governance (“ESG”) is
crucial to meeting the increasing
expectations of all stakeholders
including employees, customers
and investors
• Engagement with investors has
highlighted the importance of
ESG to them when considering
investment strategies
• Increasing interest from already
established and new suppliers on
details of the Company’s
objectives and planned actions
in relation to ESG
• ESG is of growing interest to
our employees. The 2018
Employee Survey, highlighted
there was significant room for
improvement for Essentra to
become an environmentally
responsible company
• The Board has identified ESG
as a Principal Risk
CORPORATE GOVERNANCE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 75
DIRECTORS’ REPORT Corporate Governance Report continued
Q&A
Board engagement with employees
In January 2019 Mary Reilly was designated as Board Employee
Champion. In this role Mary has travelled to sites around the
world to meet employees, host town halls, learn about
employee experiences and take back to the Board any
feedback or questions. Given the importance the Board places
on engagement and the desire to hear and understand even
more, in November 2019 Ralf Wunderlich joined Mary in this
role. In 2020 they will visit more Essentra sites – in Asia,
Europe and the Americas – either alone or together.
Mary Reilly
Non-Executive Director
What have you enjoyed most about the role?
A I was initially attracted to the role because I’m naturally curious
– said to be a good characteristic for a Board member – about how
the Company makes money, the role employees play in that and
what their perspectives are on the issues facing Essentra. Also on
a human level I really enjoy meeting different people, so, I’ve
enjoyed getting to the grassroots of the organisation and meeting
the people who make things happen for our customers and each
other every day. The role has given me the opportunity to see the
many different aspects of the organisation – regional differences,
differences between our business divisions – as well as all the
things our employees have in common.
What are the benefits of having this
designated role on the Board?
A When creating this role the Board thought very carefully about
how it should work. We have deliberately ensured that there is no
agenda when I’m out and about meeting employees; it is simply
about creating a genuine dialogue. What this means for employees
is that I can explain what the Board is, how it works and describe
what it is working on. It’s particularly important for employees to
understand that this is not an HR, Workers’ Council or Union role,
it is simply their opportunity to talk. For the Board I am able to
relay perspectives and suggestions and these help build our
understanding of the organisation, enrich our discussions
and inform our broader decision-making.
What are the main themes coming out
of your meetings with employees?
A IT is definitely a theme. While the organisation has invested a lot
in creating more stability in the IT infrastructure there is still some
frustration felt on the front line. As expected HR issues come up
quite frequently in terms of reward and recognition and this aligns
with feedback coming out of the employee survey. Also as you
might expect working environment also comes up a lot, this can be
anything from the availability of toilets to investments in machinery
etc. However, what has really struck me is that the vast majority of
employees do feel invested in the Company’s future and see that
they have a role in making Essentra a great place to work.
Have there been any surprises?
A I have been genuinely surprised to meet so many employees
with long tenures within the organisation and also the huge
amount of pride that exists among the workforce. There’s genuine
care for management by front line staff – the amount of issues
they have to grapple with and also some concern around the
broader economic environment, eg Brexit.
What has been the reaction from
employees to the role?
A The reaction has been really positive everywhere I’ve been.
I have found employees are very happy to take time out of their
shift to meet me. They are universally keen to understand the
difference between the Board and the Group Management
Committee (“GMC”) and how both work in terms of decision-
making at Essentra. Employees have also been really receptive
to the confidential email inbox we have made available so
that employees can contact me outside of the meetings.
76 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report What has been the reaction from the Board?
A The Board has really invested in making this role a success and is
eager to hear the feedback from my visits, which I provide at each
Board meeting.
How has the role influenced decision-making
by the Board?
A In general terms feedback from the role has definitely helped
create more robust dialogue about employees at the Board. It is
interesting for the Board to see how the decisions we make carry
through the organisation and impact on front line staff. I think
we have all been surprised by how long it can take for some
investments to impact the front line, for example in IT upgrade.
As a more specific example of how the role has influenced
decision-making, I was fortunate enough to visit our Packaging site
in Barcelona in April, around the same time that the Board was
considering the potential acquisition of Nekicesa in Spain. Visiting
the site, it was clear that our business has capacity issues which
was leading to employee frustration. They are incredibly passionate
and commercial and really wanted to maximise the opportunities
as they saw them in the Spanish market. While not the deciding
factor in the acquisition, this perspective certainly added to our
decision-making process and the ultimate acquisition which
completed in September.
What have been the challenges of the
role and how do you see it developing?
A Making the time and then managing the trips has required
more organisation than originally envisaged. In making this happen
the Company has been a great support and clearly demonstrates
its commitment in making the role a success.
Indeed because the Board wants to hear and understand
even more from employees, I’m delighted that in November
Ralf Wunderlich was also designated as a Board Employee
Champion. We’ve already seen the benefit of having two Employee
Champions, for example we went through the results of the recent
employee survey together; having two perspectives was very
useful. Ralf and I, together with the whole Board, are committed
to supporting management in doing more to make our employees
feel proud of and are looking forward to visiting a number of our
sites during 2020 either alone or together.
What are you hoping to see evidence
of during your visits of 2020?
A The Company is working hard to improve and change culture
within the businesses, specifically in relation to compliance training
and activities, and I shall be hoping to find evidence of this as
I continue my tour of the Essentra facilities. I shall also be looking
to hear from employees about the impact of the new HR strategy,
particularly the introduction of the employee lifecycle.
Visits by the Non-Executive Directors
and the Board Employee Champion
6
Visit made
to the UK
5
Visits made
to the USA
4
Visits made
to Europe
1
Visit made to
Asia
CORPORATE GOVERNANCE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 77
DIRECTORS’ REPORT Corporate Governance Report continued
Division of responsibilities
The roles of the Chairman and the Chief Executive are
separately held and are so defined as to ensure a clear
separation of responsibilities. The Chairman leads the Board
and ensures its effectiveness, and the Chief Executive is
responsible for the executive management and performance
of Essentra’s operations.
The Board considers that, for the year ended 31 December 2019,
the Non-Executive Directors were each independent. In making
this assessment of independence, the Board considers that the
Chairman and Non-Executive Directors are independent of
management, and free from business and other relationships
which could interfere with the exercise of independent judgement
now and in the future. The Board believes that any shareholdings
of the Chairman and Non-Executive Directors serve to align their
interests with those of shareholders.
The Board considers that the Non-Executive Directors provide
an independent view in Board discussions and in the development
of the Company’s strategy. Non-Executive Directors also ensure
a sound basis for good corporate governance for the Company,
challenging management’s performance and, in conjunction with
the Executive Directors, ensuring that rigorous financial controls
and systems of risk management are maintained as appropriate
to the needs of the businesses within Essentra.
The Senior Independent Director (“SID”), currently Tommy Breen,
can be contacted via the Company’s registered office. In that role,
he is available to shareholders to discuss and develop an
understanding of their issues and any concerns which cannot
be resolved by discussions with the Chairman, the Chief Executive
or Chief Financial Officer, or where such contact is inappropriate.
External commitments
The Board is fully aware of current external commitments for all of
the Non-Executive Directors, and is satisfied these do not distract
from the time committed to Essentra. Non-Executive Directors
are also required to discuss any additional external appointments
with the Chairman prior to their acceptance. In addition, the time
commitments of the Chairman are the subject of review by the SID,
in conjunction with the other Non-Executive Directors. The Conflict
of Interest register is reviewed at each Board meeting.
While there were no material changes to the time commitment of
the Chairman during the year, the Board took note of Paul Lester’s
appointment as Chairman of Ready Power Rail Services Limited
and the separation of Knight Square Holdings Limited into First
Port Limited and Appello Limited. In light of these changes, and
other external positions, it was concluded these are not significant
appointments and that he continues to be able to fully satisfy his
obligations to Essentra. In considering the Chairman’s continued
time commitments to the Company, the Non-Executive Directors
also viewed positively his exemplary attendance record at Essentra,
ensuring that he was able to attend 100% of Board and Committee
meetings and other additional informal meetings with Board
members throughout the year. The Board expects this attendance
record to continue going forward and Paul Lester has given
assurances of his continued commitments to the Company.
The Board also notes that Paul Lester retired from Forterra plc as
Chairman and Director with effect from Forterra’s AGM in May 2019.
78 ESSENTRA PLC ANNUAL REPORT 2019
During the year Tommy Breen has taken on a number of smaller
roles with privately owned companies, all of which were notified
to the Board and Nomination Committee beforehand. The Board
remains confident that he has sufficient time for the SID role.
The Board is content that the Non-Executive Directors devote
sufficient time to the business of Essentra. Executive Directors may
accept outside appointments, provided that such appointments
do not in any way prejudice the ability to perform their duties on
behalf of Essentra.
Paul Forman, Chief Executive, currently holds one external
non-executive position, and the Board is of the view that this is
not detrimental to the performance of his duties given the time
requirements involved and that this appointment is beneficial to
Essentra given Paul’s exposure to another business and their
response to a wide variety of issues. The letters of appointment for
Non-Executive Directors are available for review at the Company’s
registered office and prior to the AGM.
Directors’ elections
The Company’s Articles of Association require that all new Directors
seek election to the Board at the AGM following their appointment.
In compliance with the 2018 Code, all eligible Directors will put
themselves forward for re-election on an annual basis. The Board,
including the Chairman, is satisfied that each of the Directors
being put forward for re-election continues to be independent
and effective and that their ongoing commitment to the role is
undiminished. The Notice of Meeting contains additional information
as to the recommendations of the Directors’ election or re-election.
The conduct of board matters
During the year, there were eight scheduled Board meetings.
In addition to these scheduled formal meetings, the Board met on
a number of other occasions as required. In particular, the Directors
held a specific meeting in June 2019 to review the progress to date,
including the continuing reaction of Essentra’s shareholders, to the
current Group strategy.
There is an enhanced programme of meetings, both formal and
informal, in line with recommendations of the Board evaluation
action plan.
Informal discussions are also held between the Chairman and the
Non-Executive Directors on a regular basis and additionally prior
or post each scheduled Board meeting. Regular contact is also
maintained with the Chief Executive and with members of the
GMC. Led by the SID, the Non-Executive Directors also met
without the Chairman present to appraise his performance.
Board meetings during the year
Paul Lester, Non-Executive Chairman
Paul Forman, Chief Executive
Tommy Breen, Senior Independent Director
Lily Liu, Chief Financial Officer
Mary Reilly, Non-Executive Director
Lorraine Trainer, Non-Executive Director
Nicki Demby, Non-Executive Director1
8 (8)
8 (8)
8 (8)
8 (8)
8 (8)
8 (8)
4 (4)
Nicki Demby was appointed as a Director on 1 June 2019. Figures in brackets
denote the maximum number of meetings that could have been attended.
The Company Secretary and General Counsel acts as Secretary to the Board.
Directors’ Report In 2019 the Board held one of its meetings in Greensboro, USA
which enabled the Board to visit two sites, namely Filters and
Packaging. It is intended that further locations will host meetings
during 2020 so that the Board has the opportunity to engage with
local management and derive a better understanding of the
Company’s operations and business model.
Additionally Non-Executive Directors independently visited
facilities during 2019 in order to gain a better understanding
of the Group’s businesses in a more informal environment and
also to meet employees and support the Voice of the Employee
program; each Director reported back to the Board after their
visits. All of the Non-Executive Directors visited the Packaging
and Components facilities based in Barcelona as part of the
annual Leadership Conference.
Whilst the Board Committees are a valuable part of the
Company’s corporate governance structure, the Board, as a
whole, maintains oversight of such important matters and, after
each Committee meeting, the Chairman of the Audit and Risk
Committee reports on the matters which have been reviewed.
In particular the Board looks to the Audit and Risk Committee
to undertake the majority of the work involved in monitoring
and seeking assurance as to compliance with the internal
controls and risk management practices within this structure.
Other specific responsibilities are delegated to the Remuneration,
Nomination and Sustainability Committees.
The Board believes that it, and its Committees, have the
appropriate composition to discharge their respective duties
effectively with the appropriate level of challenge and
independence, and that the members of the Board in conjunction
with the senior executive teams are well equipped to drive and
deliver, the Company’s strategic objectives.
Roles and responsibilities
Chairman
• Sets the Board agenda
primarily focused on
strategy, performance,
value creation, culture,
stakeholders and
accountability, and
ensuring that issues
relevant to these
areas are reserved for
Board decision
• Shapes the culture in
the boardroom
• Encourages Board
members to engage
in Board and Committee
meetings
• Fosters relationships
based on trust, mutual
respect and open
communication between
Non-Executive Directors
and the
Group Management
Committee
• Develops a working
relationship with the
Chief Executive
• Provides guidance and
mentoring to new
Directors as appropriate
Chief Executive
• Proposes the strategy
to the Board and
implements the
strategy which has
been approved by
the Board
• Communicates to
the workforce the
expectations in respect
of the Company’s
culture and for ensuring
that operational
policies and practices
drive appropriate
behaviour
• Develops manageable
goals and priorities for
the management team
• Leads and motivates
the management
teams
• Ensures that the Board
is aware of the views of
the senior management
team on business issues
• Develops proposals to
present to the Board
on all areas reserved
for its judgement
Senior Independent
Director (“SID”)
• Provides a “sounding
board” for the Chairman
• Serves as an
intermediary for
the other Directors
when necessary
• Acts as an alternative
point of contact for
shareholders where
contact through the
normal channels of
Chairman, or other
Executive Directors
has failed to resolve
any concerns, or for
which such contact
is inappropriate
• Leads the annual
assessment of the
effectiveness of
the Chairman
Non-Executive Directors
• Providing constructive
challenge to executive
management
• Bring experience and
objectivity to the
Board’s discussions
and decision-making
• Monitor the delivery
of the Group’s
strategy against the
governance, risk and
control framework
established by
the Board
• Responsible for
evaluating the
performance of
the Chairman,
led by the SID
Company Secretary
• Maintains a record of attendance at Board meetings and Committee meetings
• Responsible for ensuring good information flows to the Board and its Committees, and between
the GMC and the Non-Executive Directors
• Advises the Board on all regulatory and corporate governance matters
• Assists the Chairman in ensuring that the Directors have suitably tailored and detailed induction
and ongoing training and professional development programmes
CORPORATE GOVERNANCE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 79
DIRECTORS’ REPORT Corporate Governance Report continued
The Board is of the view that it has a highly competent Chairman
who, together with each of the other Non-Executive Directors,
has considerable international experience at a senior level in the
management of activities broadly similar to those carried out
by Essentra and the material issues likely to arise for the Group.
Operational matters and the responsibility for the day-to-day
management of the businesses are delegated to the Chief
Executive, supported by members of senior executive management
as appropriate, within delegated authority limits. The support of
the GMC ensures a strong link between Essentra’s overall corporate
strategy and its implementation within an effective internal control
environment and robust risk management.
Full details of the membership of the GMC can be found on page 62.
As part of the Governance Improvement Programme that Essentra
has established and in order to continue to implement effective
corporate governance within the Group, the GMC is driving working
practices and behaviours through the establishment of clearly defined
annual agendas for reporting, reviewing and decision-making.
Applying Essentra’s corporate
responsibility principles
The Chief Executive is the Director with primary responsibility for the
implementation and integration of Essentra’s corporate responsibility
principles across the Company. During 2019, the Group Operations
Director was responsible for co-ordinating the operation of detailed
policies on health and safety and the environment, and the
Company Secretary and General Counsel was responsible for
co-ordinating policies on ethics, which support Essentra’s
commitment to its corporate responsibility principles. Further
details of these policies can be viewed from page 20 to 29 and
on the Company’s website.
Diversity
The Diversity and Inclusion Steering Group (the “Steering Group”)
has continued to roll-out a programme of work, with some
externally facilitated support, to ensure behaviours fully reflect
the principles of diversity and inclusion across the Company. During
the year the Board approved the Diversity and Inclusion Policy which
detailed its purpose and objectives to create an inclusive culture,
and where diversity is embraced by all employees to ensure Essentra
is a rewarding and successful place to work. The 2019 employee
engagement survey recognised that the activity and commitment
of the Steering Group has created an environment where different
views and perspectives are increasingly valued.
The Board confirms a strong commitment to diversity (including,
but not limited to, gender diversity) at all levels of the Group.
Further information can be found on page 22.
Board Sustainability Committee
It was reported in the 2019 Annual Report that the Company had
established a Group Sustainability Committee. The momentum on
ESG matters, gained though the evaluation of emerging risks at
the Group Risk Committee led to an increased Board level awareness
and commitment to identify and co-ordinate Company-wide
opportunities to improve Essentra’s ESG performance and reduce
the Company’s risk profile through sustainability-related activity.
Consequently it was determined that the importance and relevance
of this topic would be best served by a Board Committee chaired by
a Board member and supported by the Group Operations Director.
Further details can be found on page 27.
Conflict of interests
Directors have a statutory duty to avoid actual or potential
conflicts of interest. The Company’s Articles of Association permit
the Board to consider and, if it sees fit, to authorise situations
where a Director has an interest that conflicts, or may possibly
conflict, with the interests of the Company. The decision to
authorise a conflict of interest can only be made by non-conflicted
Directors. A register of Directors’ interests is maintained so that
any potential concerns are addressed before any material issues
may arise.
The Conflict of Interests register and the schedule of Directors’
Interests is reviewed at each Board meeting. During the course
of the year, there were no material conflicts of interest impacting
on the conduct of the Board’s activities.
Information and professional development
The Chairman, supported by the Company Secretary and General
Counsel, takes responsibility for ensuring that the Directors receive
accurate, timely and clear information.
On appointment, an induction programme tailored to their
individual needs is available to Directors, and is designed to assist
them in their understanding of Essentra and its operations.
Throughout a Director’s tenure, they are encouraged to develop
their knowledge of the Group through meetings with senior
management and site visits. Directors are also provided with
updates, as appropriate, on matters such as fiduciary duties,
Companies Act requirements, share dealing restrictions and
corporate governance matters.
All Directors have access to the advice and services of the
Company Secretary and General Counsel, and for the year under
review, his advice was sought in relation to share dealings only.
In the furtherance of their duties, there are agreed procedures for
the Directors to take independent professional advice, if necessary,
at the Company’s expense. No Director took independent
professional advice during the year.
Shareholder communications
The Board recognises the importance of effective communication,
and seeks to maintain open and transparent relationships with its
shareholders and other stakeholders, including providers of finance,
customers and suppliers. This is achieved by regular updates
through public announcements, the corporate website and other
published material.
Sustainability Committee meetings during the year
Ralf K. Wunderlich Non-Executive Chairman
Paul Forman Chief Executive
Nicki Demby Non-Executive Director
Mary Reilly Non-Executive Director
Jon Green Company Secretary and General Counsel
Nick Pennell Group Operations Director
Other attendees
Strategy and Commercial Director and Group Communications
Director attended by invitation.
Figures in brackets denote the maximum number of meetings
that could have been attended.
1 (1)
1 (1)
1 (1)
1 (1)
1 (1)
1 (1)
80 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report All shareholders can meet any of the Directors of the Company
should they so wish. In particular, the SID is available to
shareholders should they have concerns or wish to share their
views. Feedback from meetings with shareholders is provided to
the Board so they are aware of any issues or concerns, and ensures
that the Board has a balanced view from the major investors.
Additionally, the Board uses the AGM as an occasion to
communicate with all shareholders, including private investors,
who are provided with the opportunity to question the Directors.
At the AGM, the level of proxy votes lodged on each resolution
is made available, both at the meeting and subsequently on the
Company’s website. Each substantially separate issue is presented
as a separate resolution, and the Chairmen of the Audit and Risk,
Nomination, Remuneration and Sustainability Committees are
available to answer questions from shareholders.
The Company also communicates regularly with its major
institutional shareholders and ensures that all the Directors,
including the Non-Executive Directors, understand the views and
concerns of major shareholders in relation specifically to their views
on governance and performance of the Company against strategy.
The Chief Executive, Chief Financial Officer and Investor Relations
Director have primary responsibility for investor relations.
Presentations for analysts and shareholders were held during the
year, and meetings were also undertaken with key institutional
investors to discuss strategy, financial performance and investment
activities. Slide presentations are made immediately available
after the full and half year results, and are also available on the
Company’s website to view and download. The Company ensures
that any price-sensitive information is released to all shareholders
at the same time, in accordance with regulatory requirements.
During the year the Chairman and SID have held independent
meetings with shareholders and additionally the Chairman has
attended meetings with the Chief Executive. At each Board
meeting reports are presented detailing the engagements with
shareholders to ensure that the Board as a whole has a clear
understanding of the views of the shareholders.
Financial reporting
The Directors have acknowledged, in the Statement of Directors’
Responsibilities set out on page 117, their responsibility for preparing
the Financial Statements of the Company and the Group. The
Directors are responsible for preparing the Annual Report and
Accounts, and they consider that the Annual Report and Accounts
taken as a whole are fair, balanced and understandable. The
External Auditor has included a statement about their reporting
responsibilities in the Independent Auditors‘ Report, set out on
pages 180 to 186.
The Directors are also responsible for the publication of half year
results, as required by the Disclosure and Transparency Rules of the
Financial Conduct Authority. This provides a general description of
the financial position and performance of the Company and the
Group during the relevant period.
Internal controls
In accordance with the 2018 Code, the Board acknowledges its
overall responsibility to shareholders to ensure that an adequate
system of risk management and internal control is in place and for
reviewing the effectiveness of this system. Such a system can only
be designed to mitigate, rather than eliminate, the risk of failure
to achieve business objectives, and can therefore only provide
reasonable, and not absolute, assurance against material
misstatement or loss. This is essential for reliable financial
reporting and also for the effective management of the Group.
“The Board recognises
the importance of effective
communication, and seeks
to maintain open and
transparent relationships
with all its stakeholders”
Further details on the Company’s risk management system and
internal controls can be found on page 34.
The following enables the Board to review the effectiveness of the
system of internal control and the financial reporting processes:
• the ARC meets regularly and reports to the Board, no less
frequently than at every Board meeting following an ARC
meeting
• the terms of reference provide a framework for the ARC to
review and oversee the quality, integrity, appropriateness
and effectiveness of the Group’s internal control framework
• the Board has the opportunity to review the internal control
environment at local sites when Board meetings are held away
from the Company’s head office
• every month, each division submits detailed operating and
financial reports covering all aspects of performance. These are
reviewed by the Chief Financial Officer and the Group’s central
Finance function, and summary reports are communicated to
the GMC and the Board
• certificates are required from the businesses to confirm
compliance with the Group’s policies (including financial)
and procedures at both the half year and year end.
Directors’ and Officers’ insurance
In accordance with the Company’s Articles of Association, and
to the extent permitted by the laws of England and Wales, the
Directors are granted an indemnity from the Company in respect
of those liabilities incurred as a result of their office. In respect of
those matters for which the Directors may not be indemnified, the
Company maintained a Directors’ and Officers’ Liability Insurance
Policy throughout the year. It is anticipated this policy will be
renewed. Neither the Company’s indemnity, nor the insurance
policy provide cover, to the extent that a Director is proven to
have acted dishonestly or fraudulently.
CORPORATE GOVERNANCE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 81
DIRECTORS’ REPORT Composition, succession
and evaluation
Nomination
Committee Report
Paul Lester, CBE
Non-Executive Chairman
Chairman of the Nomination Committee
Membership and attendance
Paul Lester, Non-Executive Chairman
Paul Forman, Chief Executive
Tommy Breen, Non-Executive Director
Mary Reilly, Non-Executive Director
Lorraine Trainer, Non-Executive Director
Ralf K Wunderlich, Non-Executive Director
Nicki Demby, Non-Executive Director
Meetings during the year
4 (4)
4 (4)
4 (4)
4 (4)
4 (4)
4 (4)
2 (2)
Other attendees
During 2019, the Group HR Director and the Chairman of the Diversity
and Inclusion Steering Group attended by invitation as appropriate.
Figures in brackets denote the maximum number of meetings that
could have been attended. The Company Secretary and General
Counsel acts as Secretary to the Nomination Committee.
Nicki Demby was appointed to the Nomination Committee with
effect from 1 June 2019, on being appointed as a Non-Executive
Director.
82 ESSENTRA PLC ANNUAL REPORT 2019
The Nomination Committee is responsible for Board
recruitment and in doing so will conduct a continuous
and proactive process of planning and assessment, taking
into account the Company’s strategic objectives and the
main trends and factors affecting the long-term success
of the Company.
2018 UK Corporate Governance Code
Following the publication of the 2018 UK Corporate Governance
Code (the “Code”) the Terms of Reference for the Nomination
Committee were reviewed and revised to ensure Essentra follows
best practice.
The impact of diversity amongst the Board and the senior
management is the responsibility of the Nomination Committee
who believe that diversity can have a positive effect on the quality
of decision-making by reducing the risk of “group-think“.
Securing the right combination of skills, experience and expertise
allows the Board to effectively lead the sustainable growth and
success of the Company for the benefit of all stakeholders.
With regard to the 2018 Code the Nomination Committee noted
that the Board has appointed Mary Reilly as the designated
Non-Executive Director responsible for the engagement of
employees and reporting the Voice of the Employee to the Board
and its Committees effective from 1 January 2019. Ralf Wunderlich
was appointed as the second Voice of the Employee from
1 November 2019.
Talent management and succession planning
The Nomination Committee continues to take an active interest
in the quality and development of talent and capabilities below
Board level, particularly at Group Management Committee
(“GMC”) and senior management.
The Chief Executive presented his annual management succession
plan to the Nomination Committee for consideration. This process
helps to ensure that appropriate opportunities are in place to
develop high performing individuals and to increase diversity in
senior roles across the Group. This continued interest and focus
has seen diversity improve overall.
During the year the Group Human Resources Director attended
a number of the Nomination Committee meetings and reported
on the progress being made with the introduction of a more
structured talent management and succession planning process
within the GMC and senior management. In addition the Group
Human Resources Director shared the development of a Talent
Acquisition strategy to address a key risk identified as the
Company continues to see the skills needed to deliver growth.
The Nomination Committee was notified during the year of
the appointment of a new Talent Acquisition Director role.
Directors’ Report Key activities
2019
• Reviewed and approved
the Nomination
Committee Report for
inclusion within the
2018 Annual Report
• Reviewed the composition,
structure, size and skill set
of the Company’s Board
and the Committees
• Recommended the
appointment of Nicki
Demby to the Board
• Carried out an
external review of
the independence
of Nicki Demby
• Reviewed the
• Recommended to the
• Reviewed and agreed
Company’s evolving
approach to ensuring
a diverse and inclusive
culture and the initiatives
being undertaken by
the Company
• Reviewed the succession
planning for the Board
• Reviewed the nature and
extent of the succession
planning for the GMC and
senior management roles
and the plans to address
any development needs
for senior management
• Reviewed the results of
the Board Evaluation and
implemented an action
plan accordingly
Board the appointment
of Ralf Wunderlich as
the Chairman of the
newly formed Board
Sustainability Committee
• Reviewed the 2018 Code
and noted the new
guidelines in relation to
the role of the
Nomination Committee
• Reviewed and aligned
the Non-Executive
Director Service
Agreements to ensure they
reflected the guidelines
from the 2018 Code
revised Terms of
Reference for the
Nomination Committee
• Approved for
recommendation to the
Board the new Company
Diversity and Inclusion
Policy
• Reviewed the workstreams
and progress currently
being undertaken by the
Diversity and Inclusion
Steering Group
Board changes
When considering succession planning for both the Board and the
senior management roles the Nomination Committee considered
diversity within a range of different aspects, including age, disability,
ethnicity, education and social background, as well as gender.
As reported in last year’s Nomination Committee Report Nicki
Demby was to be appointed as a Non-Executive Director and
Chairman Designate for the Remuneration Committee effective
1 June 2019 and will replace Lorraine Trainer as the Chairman of
the Remuneration Committee after the 2020 AGM.
Inzito Partnership were engaged to assist in the recruitment of
Nicki Demby. There is no related party connection with IInzito
Partnership and the assignment was undertaken on an arms
length basis.
Nicki brings extensive advisory experience, having provided Board
level counsel to many UK and international businesses for more
than 20 years as an executive remuneration consultant. Further
details on Nicki’s skills and experience can be found on page 66.
In recommending Nicki’s appointment to the Board the
Nomination Committee considered potential concerns regarding
her independence and can confirm that:
• post commencement of the succession process Nicki ceased to
provide advice to the Remuneration Committee at Essentra
• the fees paid to Deloitte as remuneration advisers are not
considered to be material both in terms of relationship and fees
from the point of view of Deloitte and the Company
• the succession and selection process included an external
assessment against the required skills and experience required
for the role
• Nicki has considerable experience in providing advice to
remuneration committees
Following the appointment of Nicki as a Non-Executive Director
the Nomination Committee can confirm that:
• Nicki has undertaken a comprehensive induction programme
within the Company
• the Remuneration Committee undertook a process to review
the independent remuneration advisers, Nicki did not participate
in the selection or rationale for the reappointment of Deloitte
• Nicki has made a substantial contribution to the Board and
the Board Committees both in terms of experience, skills and
competency as well as adding gender diversity
Sustainability
Following the creation of the Board Sustainability Committee
during the year the Nomination Committee recommended to
the Board that Ralf Wunderlich be appointed as Chairman of the
Committee effective from 1 November 2019. Ralf’s considerable
experience and interest in ESG matters were taken into
consideration when making this appointment.
Diversity
The Nomination Committee and the Board supports the
recommendations set out in the Lord Davies Report “Women
on Boards”. The fundamental objective must be to ensure that the
best people are appointed to do the best job for Essentra, taking
into consideration other factors, such as market and international
experience, and diversity of thought and background. Appointing
people on merit, without any form of discrimination, is a key
component of Essentra policies across its international operations
at all levels.
During 2019 the Nomination Committee worked with the Group
Human Resources Director and the Diversity and Inclusion Steering
Group in setting and meeting diversity objectives and strategies
for the Group as a whole, and in monitoring the impact of diversity
initiatives including the formalisation of a Group policy which was
distributed to employees for acknowledgement. Further details can
be found on page 22.
NOMINATION COMMITTEE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 83
DIRECTORS’ REPORT Nomination Committee Report continued
Board evaluation
During the early part of 2019, the Company engaged Lintstock
Ltd (“Lintstock”) to externally facilitate an interview-driven review
of the performance of the Board and each of its Committees.
Lintstock engaged with the Chairman of the Nomination
Committee to set the scope of the evaluation and to focus on
any particular areas specific to Essentra. The conclusions were
presented to the Nomination Committee in March 2019 and
an action plan developed.
Board evaluation
Board evaluation
Areas of focus for 2019
• The current composition of the Board, and
any particular considerations relevant to
any potential new Director appointments
• The relationship between the Board and
Chief Executive
• The management of Board and Committee
meetings, and particular considerations to
ensure thoughtful debate and broad input
• Improvements to the quality of the Board and
• The delegation of authority from the
Committee meeting packs
• The Board’s relationships with, and exposure
to, management both inside and outside the
boardroom
• The Board’s understanding of the separate
parts of the business, as well as the Board’s
oversight of strategy, major projects and the
main risks facing the business
Board to senior management, alongside
the Board’s oversight of the performance
of management
• The identification of the priorities for the
Chief Executive, as well as the priorities for
improving the Board’s performance over the
coming year
• The performance of each of the Board
Committees in fulfilling their mandates
What we found
Board dynamics
The Non-Executives’ support and challenge
of management had improved, though
encouraging more discussion at Board meetings
would be beneficial, and particularly with regard
to increased engagement between Board and
GMC members.
Board Committees
Whilst there had been improvement and
enhanced recognition of the Nomination
Committee there needs to be a more structured
approach so the role of the Nomination
Committee reflects equally with the other
Board Committees.
Stakeholder oversight
Understanding the views of customers, suppliers
and communities should be further increased, in
addition to the already good understanding and
requirements of investors, employees and
regulators. Increased focus on the monitoring
of culture and behaviours throughout the
organisation, and the value of site visits in this
context should enhance this.
What has gone well
Board dynamics
The Non-Executives’ support and challenge
of management, both inside and outside the
boardroom. The quality of the relationship
between the Board and Chief Executive.
Board Committees
The Audit and Risk Committee and the
Remuneration Committee fulfil their
responsibilities very effectively.
Opportunities for improvement
Board dynamics
Encouragement of more discussion at Board
meetings, and increased engagement between
Board and GMC members.
Management and focus of meetings
Customers and people matters (including
culture) were identified as areas on which
the Board should spend more time.
Priorities for Change
Management and focus of meetings
The value of site visits undertaken by Board
members was very highly rated.
Board support
The Board packs were rated highly.
Strategic and Operational Oversight
The Board’s review of strategic opportunities
and key operational metrics.
Risk management and
internal control
The Board’s oversight of the main
risks to the business.
Succession planning and
human resources oversight
The strength of Essentra’s management
had improved.
Board support
The timeliness with which Board papers are
circulated was encouraged.
Strategic and operational oversight
Formalising the review and the effectiveness
of past acquisitions and major projects.
Board committees
A number of recommendations were made
for improvement in the management and
administration of the Nomination Committee.
Succession planning and
human resources oversight
Improvements in succession plans for senior
management.
The performance of the Board was seen to have
improved generally since the last Board Review.
The top priorities for the Board over the coming
year were identified as i) ensuring sufficient time
was available for full discussion on key topics, (ii)
devoting additional time to strategy and
portfolio decisions, iii) conducting more site
visits, and iv) having more opportunities for the
Board to meet without executive management
in attendance.
84 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report “I was delighted to join
the Board of Essentra,
my induction has given
me good insight into the
workings of the Company
and the many challenges
and opportunities facing
the Board in the
forthcoming months”
Nicki Demby’s
induction
Prior to and since Nicki
Demby joined the Board
she has participated in
an induction programme
to ensure a smooth
transition, which
has included:
• meeting with the
Company Secretary
covering Board
procedures
• engagement with
the External Auditors
and other advisers
• presentations with
senior executives,
including Corporate
Development and
Strategy, Investor
Relations, Group
Assurance, Human
Resources,
Operations and IT
• receiving briefings
from divisional
management teams
• site tours to both
the UK and overseas
• comprehensive
discussions with the
current Remuneration
Committee Chairman
• receipt of information
relating to the Board,
specifically Market
Abuse Regulation
• planning put in place
for meeting major
shareholders in the
forthcoming months
Key objectives and selecting a
service provider for 2020 evaluation
Lintstock has conducted annual Board and Board Committee
reviews at Essentra for a number of years. The Nomination
Committee proactively considered two alternative providers for
this years evaluation, but after discussions with Lintstock about
formulating a different approach, the Nomination Committee
decided to retain Lintstock given their previous experience of
working with the Board, and the benefit to be derived from
existing knowledge of the Company and its governance
improvement activities.
The Nomination Committee agreed that Lintstock would conduct
a “light touch” approach for the Board and Board Committees,
managed largely through the use of short questionnaires. However,
the proposal is to engage with the GMC with a combination of
questionnaires and interviews to solicit feedback on an anonymous
basis. Good practice reviews are increasingly asking companies
to look at whether the right people are included in the board
evaluation process and extending the respondent or interview
list to include executive management should provide a better
understanding of the Board and its value, and identify
opportunities for doing things differently and better.
The introduction of the GMC into the process will also reflect
the importance of stakeholder engagement and perception
to the Board.
There is no related party connection with Lintstock and the
evaluation was undertaken on an arms length basis.
NOMINATION COMMITTEE REPORT
ESSENTRA PLC ANNUAL REPORT 2019 85
DIRECTORS’ REPORT Audit, risk and
internal control
Chairman of the Audit and
Risk Committee’s Letter
“The ARC fulfils an important
oversight role on behalf of the
Board, monitoring the integrity
of the financial reporting
and the effectiveness of
both the Group’s systems
of internal control and its risk
management framework”
Mary Reilly
Non-Executive Director
Dear Shareholder,
As Chairman of the Essentra plc Audit and Risk
Committee (the “ARC”), I am pleased to present my Report
to shareholders which details the areas and issues covered
by the Committee.
The ARC fulfils an important oversight role on behalf of the
Essentra Board, monitoring the integrity of the Group’s financial
reporting and the effectiveness of both the Group’s systems of
internal control and its risk management framework. During 2019
the ARC continued to apply rigorous scrutiny and challenge to the
Group Assurance function which has responsibility for internal
audit and risk management and I believe that this, together with
the Board’s efforts in promoting a strong risk-focused culture,
play an essential role in safeguarding the interests of stakeholders
and assuring the long-term viability of the Company.
I am particularly pleased that Essentra’s Group Assurance function
won the “outstanding team” category in a nationally recognised
Audit and Risk Awards in 2019 which was a reflection of the
outstanding work and delivery of the Assurance function.
This Report also reflects the requirements placed on committees
by the 2018 Code and applicable guidance, laws and regulations.
In carrying out its duties the Committee also operated in
accordance with recommendations set out in the FRC Guidance
on Audit Committees which was published in April 2016.
In addition to fulfilling its normal programme of work this year the
ARC has spent considerable time and focus on an investigation into
some sanctioned market compliance failures in the Filters business.
The ARC has fully supported management in the initiation of a
compliance transformation programme within the Filters division
which will be rolled out across the Group in 2020. The ARC has
received, and will continue to receive, regular updates on the
programme and additionally will seek assurance that the
effectiveness of this programme is periodically assessed,
by either internal or external resources.
Last year’s Annual Report reported on the implementation of a
Minimum Controls Standards programme (“MCS”) to help drive
improvements within the Company’s financial control framework.
During 2019 the leadership of MCS transitioned from Group
Assurance and was rolled out by divisional management, and
the central co-ordination role became the responsibility of Group
Finance. To date significant progress has been made embedding
MCS within the businesses. A total of 24 workshops were carried
out in 2019, which when combined with the work from 2018
means 50 sites now have had the MCS roll-out completed.
It is encouraging to report these sites account for about 80%
of revenue for the Group.
I am happy to confirm the continuation of the high quality levels
of debate, discussions and presentations made by the Group Risk
Committee particularly when examining and identifying Principal
Risks, Key Risks and Emerging Risks for consideration by the Board
at both the half year and full year reporting cycle. Linked with
the ongoing work in reviewing Emerging Risks the Company
86 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Roles and
responsibilities
Financial Reporting
• Ensuring the interests
of the shareholders are
properly protected
• Monitoring and reviewing
the integrity of the
Financial Statements
and any formal
announcements relating
to financial performance
• Reviewing the relevance
of accounting policies
adopted
• Challenging significant
accounting judgements
Risk Management and
internal control
• Reviewing, assisted by the
Group Risk Committee, the
risk management processes,
procedures and controls
the effectiveness of the
internal financial controls
• The Right to Speak
arrangements and the
follow up of any claims
made through this
mechanism
Internal Audit
• Overseeing the internal
audit activities
• Monitoring and reviewing
the effectiveness of the
internal audit function
• Agreeing the annual
internal audit plan and
reviewing the output
from that
External Audit
• Making recommendations
to the Board in relation
to the appointment,
reappointment and
removal of the
External Auditor
• Reviewing the relationship
with the External Auditor
and monitoring their
independence and
objectivity
“During 2020 the ARC
will continue its focus
on the compliance
transformation programme
and detailed oversight of
the activities of the Group
Assurance Function”
• Reviewing the effectiveness
and quality of the external
audit process
• Agreeing the scope,
terms of engagement
and fees for the
external audit
• Initiating and supervising
a competitive tender
process for the external
audit when required
• Monitoring the
engagement policy of the
External Auditor to supply
non-audit services
• Reviewing and discussing
reports presented by
the external auditor at
each meeting
has consulted with external experts to provide an insight into
the impact, if any, of the EU Single-Use Plastics Directive on
our businesses. The employees who attended this workshop
continue to work together, and alongside the Board Sustainability
Committee, to identify any risks or opportunities.
The detailed report, which follows, aims to provide insight into
the workings and activity of the ARC throughout the year as it
seeks to assist the Board in discharging its responsibilities.
The Report covers, inter alia, the integrity of Financial Reporting;
the relationship with the External Auditor; the effectiveness of
the Group Assurance function and the effectiveness of the risk
management process and internal control processes. I believe
that the ARC has the necessary experience, expertise and financial
understanding to fulfil its responsibilities and meet the increasing
governance demands.
During 2020 the ARC will continue its focus on the compliance
transformation programme and detailed oversight of the activities
of the Group Assurance function.
Mary Reilly
Non-Executive Director
Audit and Risk Committee Chairman
28 February 2020
CHAIRMAN OF THE AUDIT AND RISK COMMITTEE’S LETTER
ESSENTRA PLC ANNUAL REPORT 2019 87
DIRECTORS’ REPORT Report of the Audit
and Risk Committee
Governance
All the ARC members are independent Non-Executive Directors,
and have financial and/or related business experience gained in
senior positions at other large diverse organisations. Mary Reilly has
been the Chairman of the ARC since April 2018, and the Board is
satisfied that Mary has recent and relevant financial experience.
As a whole the Board believes that the members of the ARC are
competent in the business sectors within which the Essentra Group
operates. The ARC supports the Board and reports to it following
each Committee meeting. No member of the ARC has a
connection with the current External Auditor.
In the performance of its duties the ARC has independent access to
the Head of Group Assurance and the External Auditors and may
obtain outside professional advice if required. Both the Head of
Group Assurance and the External Auditor has direct access to the
Chairman of the ARC who held a number of meetings with each
of them during the year outside formal Committee meetings. The
Chairman of the ARC also liaises with the Chief Financial Officer as
well as the Company Secretary and General Counsel as necessary
to ensure robust oversight and challenge in relation to financial
control and risk management.
During early 2019, the Company engaged Lintstock Ltd to facilitate
an interview-driven review of the performance of the ARC, in
conjunction with a full review of the Board and the other Board
Committees. Recommendations concerning the performance of
the meetings were made and an action plan put in place to
address these points. The overall performance of the ARC was very
highly rated. The commitment and engagement of the members
ensure the ARC benefited from open and honest input, encouraged
to a great degree by the Chairman.
There is an annual cycle of items considered by the ARC covering
the requirements of the external audit cycle and any other relevant
matter, as detailed in the Terms of Reference of the ARC. The
agenda cycle is reviewed annually to ensure that the ARC remains
proactive and relevant. The current Terms of Reference for the ARC
are available at essentraplc.com and are also reviewed annually.
The Terms of Reference provide a framework for the ARC’s work
to review and oversee the quality, integrity, appropriateness and
effectiveness of the Group including the following:
• Financial Statements and external financial reporting
• significant financial judgements
• Tax and Treasury function review
• cyber security response
• compliance programme
• system of internal control and internal audit function
• risk management processes and practice
• relationship with, and performance of the External Auditor
Financial Statements and
external financial reporting
Ensuring the integrity of the Financial Statements and associated
announcements is a fundamental responsibility of the ARC.
In recommending to the Board, with regard to the approval
of the 31 December 2018 Annual Report and the 30 June 2019
Half Year Report, the ARC reviewed, examined and challenged
the Chief Financial Officer and External Auditor on their respective
assessments on such items as going concern basis of preparation,
accounting policies and disclosures, any financial reporting issues,
significant financial judgements made and appropriate levels
of disclosures to ensure that the reports are fair, balanced
and understandable.
One point of increased consideration was in relation to the
exposure and liabilities arising from an investigation into some
sanctioned market compliance failures in the Filters business.
The ARC discussed the issue at length, challenged the
management and took external professional advice alongside
consulting the External Auditor, as to the adequacy and
appropriateness of disclosure of the contingent liability for inclusion
in the half year results and latterly the accounting treatment
(recognition, measurement and disclosure) of the associated costs
within exceptional and other adjusting items in the 2019 Annual
Report. The ARC were able to conclude that the various accounting
matters associated with the investigation and potential liabilities
were dealt with appropriately.
Additionally the ARC reviewed the contents and suitability of
the Long-Term Viability Statement and challenged the risk
scenarios, the range of sensitivities applied and the potential
impacts considered.
The ARC was presented with information and advice regarding
the changes due to the implementation of IFRS 16 Leases and
challenged management on the appropriateness of the disclosures.
Membership and attendance
Mary Reilly, Chairman
Tommy Breen, Non-Executive Director
Lorraine Trainer, Non-Executive Director
Nicki Demby, Non-Executive Director
Meetings during the year
4 (4)
4 (4)
4 (4)
2 (2)
Other attendees
The External Auditor, Chairman of the Board, Chief Executive,
Chief Financial Officer, Head of Group Assurance, Group Financial
Controller, Ralf Wunderlich and members of the Group Management
Committee (“GMC”) attended meetings by invitation, as
appropriate. During the year, the ARC met the External Auditor,
PricewaterhouseCoopers LLP (“PwC”), and the Group Head of
Assurance without the Executive Directors being present.
The ARC received presentations from the Chief Executive, the Chief
Financial Officer, divisional Managing Directors, Group Head of Tax,
Group Head of Treasury and the Group Chief Information Officer.
Figures in brackets denote the maximum number of meetings that
could have been attended.
The Company Secretary and General Counsel acts as Secretary
to the ARC.
88 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Significant financial judgements
Goodwill and intangible assets
As required by IAS 36, the Company
undertakes an assessment of the carrying
value of intangible assets on an annual
basis, or more frequently if there is an
indication of impairment. The details of
the work carried out and the results are
in note 8 of the Notes to the Financial
Statements. The assumptions for 2020
and beyond (such as the annual growth
rate and the terminal growth rate) are
based on the 2020 annual plan and
management’s financial projections in
subsequent years. The impairment
reviews performed by management
contain a number of significant
judgements and estimates including
revenue growth, profit margins and
discount rates. A change in these
assumptions can result in a material
change in the valuation of the assets and
the eventual outcome of the impairment
assessment. The ARC evaluated and
challenged the methodology of the
impairment review and the assumptions
on which it was based, including the
financial plans approved by the Board.
The ARC discussed at length with the
Chief Financial Officer, the Chief
Executive and the External Auditor the
review and assumptions presented. After
due consideration the ARC was satisfied
that the impairment assessment is
appropriately carried out.
Exceptional and other adjusting items
The Financial Statements include certain
items which are disclosed as exceptional
and other adjusting items. The nature of
these items is explained within the
Group Accounting Policy, and includes
transaction costs and gains or losses
relating to acquisitions and disposals of
businesses, acquisition related integration
and restructuring costs, and other items
such as impairment losses. Following an
extensive review, the ARC is satisfied that
the Group’s definition of exceptional and
other adjusting items remains clear and
that appropriate level of disclosure is
included. The definition remains
consistent with the prior year, and in the
current year the ARC has been involved in
a rigorous review of the items presented,
and challenged the Chief Financial
Officer about the appropriateness of
items presented including impairment
and restructuring activities to ensure
they are one-off material items rather
than incurred in the ordinary course of
business and are presented separately
to allow a better understanding of the
Group’s ongoing activities. Further details
can be found in note 2 of the Notes to
the Financial Statements.
Tax liabilities
The Group is, on occasion, subject to
tax assessments that may represent
potential future tax exposures, which
arise from tax authorities in a number
of the jurisdictions in which the Group
operates. The Group assesses all such
exposures in the context of specific
country tax laws, where applicable,
makes provisions for any settlements
which it considers appropriate.
The Group operates in a number of tax
jurisdictions, and recognises tax based
on interpretation of local laws and
regulations which are sometimes opaque.
Where the amount of tax payable is
uncertain, the Directors are required
to exercise significant judgement in
determining the appropriate amount
to provide in respect of potential tax
exposures. The ARC challenged the
nature and extent of the tax provisioning
of the Company and sought assurance
that the Company was working diligently
to resolve outstanding liabilities in an
appropriate fashion. The potential tax
exposures over the Group’s transfer
pricing position and the deductibility
of interest on internal financing are
also considered.
The ARC reviewed the assumptions of
the tax liabilities at the start of the year,
those created during the year and the
effective tax rate as indicated in the
Financial Statements from page 119.
The ARC questioned and challenged the
Chief Financial Officer and Group Tax
Director as to the appropriateness of the
Company’s risk attitude and appetite in
this area. The ARC was satisfied that the
tax liabilities are appropriate, and that
the Group’s tax disclosures are adequate
given the nature of the Group’s activities.
Pensions and leases
The accounting of defined benefit
pension schemes requires the exercise of
judgement in relation to the assumptions
used and the range of possible outcomes.
In consultation with Essentra’s actuaries,
management decides the point within
those ranges that most appropriately
reflect Essentra’s circumstances. In terms
of leases, a key judgement in determining
the right-of-use asset and lease liability is
establishing whether it is reasonably
certain an option to extend the lease will
be exercised. 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. Pension accounting
and lease accounting are two of the key
areas of audit focus, and the External
Auditor addressed with the ARC any
potential issues arising from their
external audit process.
Compliance with US Sanctions
Legislations
During the current year, the Group
recognised certain costs in relation to
a review of the compliance of certain
group companies’ export activities
(in the Filters division) with US laws,
for which the Group is co-operating
fully with the US Government. The
Group provided for an estimate of
the expected financial penalties for
sanction compliance failures. In
arriving at this estimate, management
received professional advice from
external consultants which took into
account past experiences from
previous cases. The ARC had direct
communications with the external
consultants and reviewed their
advice and guidance in assessing
the reasonableness of the estimate.
After due consideration, the ARC was
satisfied that the basis for the estimate
is appropriate, and that relevant
disclosures are included within the
Financial Statements.
REPORT OF THE AUDIT AND RISK COMMITTEE
ESSENTRA PLC ANNUAL REPORT 2019 89
DIRECTORS’ REPORT Report of the Audit and Risk Committee continued
Tax and treasury function review
During the year joint presentations were made to the ARC by
the Group Tax Director and the Group Head of Treasury due
to the recognition of the close working relationship of these
two functions, particularly in relation to:
• external and internal debt restructuring
• foreign exchange management
• short- and long-term liquidity
• acquisitions and disposals
Updates were also provided on global regulatory changes and
compliance matters. The ARC considered the matters presented
and were satisfied with the approach being taken.
Additional details on the Group Tax Strategy can be found on
essentraplc.com/responsibility.
Cyber security response
During the year the ARC received regular reports from the Chief
Information Officer on the improvements and controls being
implemented within the Group to help mitigate against the
increasing risk posed to businesses by cyber attack. Cyber security
has been greatly increased across the Group and in addition to
upgrades of web and email protection plus anti-virus software,
ongoing cyber security awareness training campaigns are being
delivered to employees.
Compliance
The Company has established a clear commitment to ensuring
that its business activities are conducted in accordance with all
applicable laws and regulations. The Group Compliance Strategy
is on a risk based policy and training protocols, supported by
appropriate technology platforms and expert guidance and advice.
The ARC continued its regular review of the Group’s compliance
activities and received regular presentations from the Company
Secretary and General Counsel. At each meeting reports are
presented detailing any claims made under the Company’s
independent Right to Speak process.
During the year a number of activities were undertaken to
strengthen the Group’s compliance programme which included:
• appointment of divisional compliance officers in all divisions
• divisional compliance officers to be independent to divisions
• formation of a Group Compliance Committee with a first
meeting January 2020
• roll-out of a Group-wide compliance transformation programme
• initiatives to improve compliance culture and mindset
The compliance transformation programme aims to create a
sustainable business model underpinned by clear controls and
processes. The scope of the compliance transformation programme
includes: (i) Regulatory and Sanctions Compliance; (ii) Third-Party
due diligence; and (iii) Anti Money Laundering and Anti Bribery &
Corruption. The programme has been introduced during 2019 to the
Filters division and is expected to be rolled out to the other two
divisions during 2020. The ARC will receive comprehensive reports
about its progress at each meeting and additionally will seek
assurance that the effectiveness of this programme is periodically
assessed, by either internal or external resources.
90 ESSENTRA PLC ANNUAL REPORT 2019
Compliance
transformation
programme
framework
Why we need to improve
• Creating competitive
advantage
• Ensure consistent
compliance with key
policies and procedures
What we need to improve
• Reinforce positive
compliance culture
• Continuously monitor
changing risks
How we are improving
• Strong tone from the top
to drive business safety
• Promote training and
awareness of policy
framework and controls
• Strengthening
compliance controls and
processes with clearly
defined roles and
responsibilities
Where we want to be
• Sustainable
behavioural change
• Forward-looking
approach to the ever
changing regulatory
governance needs
• Rigorous adherence
of compliance policies
and procedures
Internal control and internal audit
Essentra has a well-established internal audit function, which sits
within the Group Assurance function to monitor and review material
controls such as financial, operational and compliance controls. The
ARC is required to assist the Board in fulfilling its responsibilities for
ensuring the capability of the Group Assurance function and the
adequacy of its resourcing and plans and are committed to a
prioritised and structured programme to drive improvements in
the Company’s internal control systems.
Group Assurance assists the Company in accomplishing its objectives
by bringing a systematic and disciplined approach to the evaluation,
assurance and improvement in the effectiveness of the organisation’s
risk management, internal control and governance processes. In order
to achieve this the ARC reviews:
• the internal audit plan and its achievement of the approved
internal audit plan’s activities
• the adequacy of the budget and resources of the Group
Assurance function
• the operational initiatives for the continuous improvement
of the function’s effectiveness
• follow-up of internal audit activities which focus on
unsatisfactory audit results
• the adequacy of management’s response and the necessary
actions taken to address and rectify any weaknesses identified in
a timely manner
Internal audit results are analysed into root causes to identify
areas, both generic and specific, that require attention. During
the year, Internal Audit focused on Principal Risks in relation to
Regulatory Governance and Internal Processes and Controls.
The ARC’s discussions and considerations on risk to ensure an
oversight of the risk management process continued throughout the
year working closely with the Group Risk Committee and the Group
Assurance function. This enabled the ARC to assess the quality of
its existing practices and to identify Principal Risks, Key Risks and
Emerging Risks. Further details on the risk management initiatives
reviewed by the ARC can be found from page 34 to 48 in the
Risk management report.
Directors’ Report “Essentra has a well-
established internal audit
function which sits within the
Group Assurance function”
External Auditor
During the year the ARC:
• reviewed and agreed the scope and strategic nature of the
audit work to be undertaken
• widened the scope of the external audit in the USA
• agreed the terms of engagement and fees to be paid to the
External Auditor
• reviewed the qualifications, resources and independence of
the External Auditor and assessed its performance with special
regard to the overall quality of the external audit
• reviewed the level of non-audit work being carried out by the
External Auditor and confirmed the level of services ensured
their continued independence
Assessment of the External Auditor
The ARC is provided with reports, reviews, information and advice
throughout the year, as set out in the terms of the External
Auditor’s engagement and performance is formally assessed by
the ARC in conjunction with the GMC. The ARC remains satisfied
that the External Auditor is effective and provided appropriate
independent challenge to the Company’s management.
Independence of the External Auditor
The ARC believes that it is important to maintain the objectivity and
independence of the External Auditor by minimising their involvement
in projects of a non-audit nature. It is, however, also acknowledged
that, due to their detailed understanding of the Company’s business,
it may sometimes be necessary to involve the External Auditor in
non-audit related work, principally comprising further assurance
services relating to due diligence and other duties carried out in respect
of acquisitions, disposals, tax services (outside the EU) and other
services. There is a policy in place which reflects best practice in
relation to the engagement of the External Auditor to supply non-audit
services with defined parameters and approval requirements.
The ARC Chairman, without the approval of the Committee, is
authorised by the Company to engage the External Auditor on
non-audit related work where the fees per project are not considered
to be significant, provided that the annual aggregate of non-audit
related fees shall not exceed 70% of the average of the fees paid in
the last three consecutive financial years. The External Auditor may
not be engaged to provide a non-audit service when the objectives
of the service would be regarded, by a reasonable and informed
third party, as conflicting with the objectives of the external audit.
At each ARC meeting non-audit fee work is reviewed.
Details of the fees paid to PwC up until 31 December 2019, can be
found in note 2 of the Notes to the Financial Statements, which
includes fees paid to the External Auditor and its network firms for
audit services, audit-related services and non-audit services.
PwC provided a letter confirming that it believes it remains
independent within the meaning of the regulations on this matter
and in accordance with their professional standards. The ARC
formally reviewed the letter which describes arrangements in place
to identify, report, and manage any conflicts of interests and
policies and procedures including the extent of non-audit services,
to maintain independence and the subsequent monitoring. From
January 2019 PwC entered into a voluntary commitment to stop
providing non-audit services by the end of 2019, audit related
services will continue.
Effectiveness of the External Auditor
The ARC assessed the effectiveness of the External Auditor
by reviewing:
• the External Auditor’s fulfilment of the agreed audit plan and the
quality of their work including the depth and appropriate challenges
• feedback highlighting the major issues that arose during the
course of the audit
• feedback from the businesses and management evaluating the
performance of each assigned audit team
Engagement of the External Auditor
The External Auditor is engaged to express an audit opinion on the
truth and fairness of the Financial Statements. The external audit
includes the review and testing of the system of internal financial
controls and the data contained in the Financial Statements to the
extent necessary. In order to protect independence and objectivity
and provide fresh challenge to the business, the External Auditor
periodically changes the audit partners at a Group, divisional and
country level, in accordance with professional and regulatory
standards. Such changes are carefully planned to ensure that the
Group benefits from staff continuity without incurring undue risk
of inefficiency. The External Auditor is required to rotate the lead
partner every five years, and such changes will be carefully planned
to ensure business continuity without undue risk or inefficiency.
The current audit partner is Nicholas Stevenson who has been in
this role since PwC was appointed in April 2017.
The ARC has been kept up to date with the development of new
EU-wide regulations concerning audit tenure and the longevity
of audit firm relationships with companies they audit. In 2016 a
comprehensive competitive tender was undertaken for the external
audit and subsequently the appointment of PwC to replace the
Company’s previous auditors was approved by the shareholders
at the 2017 AGM. As detailed above the ARC is satisfied with the
External Auditor’s effectiveness and independence and accordingly
has recommended to the Board that PwC be reappointed as the
Company’s External Auditor at the 2020 AGM. The Company will
continue to consider on a regular basis any potential benefits from
tendering the audit process having regard, in particular, to the
importance of audit quality or the continued independence of the
External Auditor. There are no contractual obligations in place that
restrict the Company’s choice of statutory auditor.
The Company has complied throughout the year with the Statutory
Order 2014 issued by the Competition and Markets Authority.
REPORT OF THE AUDIT AND RISK COMMITTEE
ESSENTRA PLC ANNUAL REPORT 2019 91
DIRECTORS’ REPORT Remuneration
Chairman of the Remuneration
Committee’s Letter
Lorraine Trainer
Non-Executive Director
Dear Shareholder
As Chairman of the Remuneration Committee I am
pleased to present our Remuneration Report for the
financial year ended 31 December 2019.
Linking Reward to Performance
2019 has been a successful year of portfolio rationalisation as
Essentra has divested four businesses in addition to making three
strategic acquisitions. We are now operating more efficiently
as three global divisions. In light of this extensive M&A activity,
the Remuneration Committee has given careful consideration
as to how targets set for our incentive plans should be adjusted.
The basic principles underpinning this process have been to ensure
that the adjusted targets are being measured on a consistent basis
both with the original targets and aligned with the year-end results
as outlined in this year’s Annual Report, and that management
remain incentivised to enhance shareholder value. Details of
the adjusted targets are set out on page 104.
The Committee approved bonus payments of 30% of maximum for
Paul Forman and 28% of maximum for Lily Liu. Paul Forman’s 2017 LTIP
award vested at 13.53% of maximum. Further details can be found on
pages 103 to 104. The Remuneration Committee considered carefully
whether any adjustments should be applied to these formulaic
outcomes, and agreed the outcome is appropriate.
Linking Reward to Strategy
As outlined in the Chief Executive’s Review on pages 4 to 7, our
overarching corporate strategy remains unchanged in 2020 and
accordingly no change is proposed to our Directors’ Remuneration
Policy (the “Policy”).
In 2020 the Committee will make two changes to the annual
bonus. The first is to replace Net Working Capital with Adjusted
Operating Cash Flow. This change is being made because cash
generation is consistent with Essentra’s transition from stability to
the growth stage of our strategy. The second change is to reweigh
the balance between financial and strategic performance
measures from 80%:20% to 70%:30%. The strategic performance
measures are subject to specific targets. They are designed to focus
the executive team on the delivery of key strategic objectives for
the Group in 2020. Payment of any bonus is dependent on
achieving 85% of Plan Adjusted Operating Profit.
It is an important principle of Essentra’s pay philosophy that the
structure of pay should complement and support business
strategy. The table below summarises the KPIs that are being used
in executive incentive plans in 2020.
KPI
2019
2020
2019
2020
Annual bonus
LTIP
50%
30%
40%
30%
Adjusted Operating
Profit
Net Working Capital
Adjusted Operating
Cash Flow
Adjusted EPS
Total Shareholder
Return
Return on Invested
Capital
33%
33%
33%
33%
33%
33%
Personal and Strategic
Objectives
20%
30%
Considering the 2018 UK Corporate
Governance Code (the “2018 Code”)
During the past year the Remuneration Committee has continued
to discuss the 2018 Code and its implications for Essentra. As I
noted last year, our remuneration arrangements are already
compliant with many of the 2018 Code provisions and work is well
under way to incorporate further agreed changes as we prepare to
renew our policy at the 2021 AGM.
Ahead of the policy renewal, the current Executive Directors
have agreed to reduce their annual pension allowances with effect
from 1 April 2020 (based on proposed 2020 salaries) by £11,900
for Paul Forman and £2,100 for Lily Liu.
Further reductions in pension provision for the current Executive
Directors to the level of the wider UK workforce will be completed
by the end of 2022. Details of the precise timetable for this process
will be finalised as part of the 2021 policy.
Although our current policy states that any future Executive Director
appointment will have a maximum pension provision of 20% of salary,
the Committee has determined that pension provision for any future
Executive Director will have a pension in line with the wider UK
workforce. This will formally be incorporated in the next policy renewal
to be approved at the 2021 AGM.
92 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report “In addition to pensions
alignment, the Committee
has also discussed a number
of broader issues relating to
workforce and executive pay.
These include feedback
received by our Board
Employee Champion on
employee share plans, merit
increases, gender pay and
the ratio of Chief Executive’s
pay to employees and
general recognition”
Key principles
Key principles that have
underpinned our approach
to remuneration this year
are as follows:
• Linking reward to strategy.
The delivery of Essentra’s
strategic priorities is
underpinned by a focus on
Key Performance Indicators
(“KPIs”) which measure the
Company’s progress in the
delivery of value.
• Ensuring incentives are
aligned with shareholders’
value. The Committee
ensured that management
were incentivised to
enhance shareholder value
and that management and
shareholder interests
remain aligned.
• Linking reward
to performance.
The Remuneration
Committee sets
performance targets
that are stretching
whilst also providing
sufficient incentive for
management.
• Ensuring remuneration
continues to attract and
develop key talent.
The Remuneration
Committee works with
the Chief Executive to
ensure he has the right
reward tools to be able
to attract talent into the
business.
• Ensuring consistency
of reward principles.
The Remuneration
Committee has taken
an active role in ensuring
that reward principles
are applied consistently
throughout the Essentra
organisation.
The Remuneration Committee is satisfied that the Policy has operated
as intended since its introduction in 2018. However, we intend to fully
assess the Policy’s continued appropriateness ahead of its renewal in
2021 including an assessment of its alignment with strategic priorities
and market practice.
Remuneration for Executive Directors
The Executive Director salaries were reviewed, and the Chief
Executive’s salary will increase for 2020 by 2.4%.
The CFO joined Essentra in 2018 on a salary below the market rate
on the understanding, as highlighted in last year’s Annual Report,
that she may receive an above inflation increase (or increases) as
she gained experience in the role. After a full year in the post, the
Remuneration Committee, with input from the Chief Executive and
other Board members, have assessed her performance. The
consensus view was that her performance had been strong and
that it was therefore appropriate to increase her salary to a level
broadly in-line with the market median using a range of market
data. Accordingly, her salary will increase by 9.9% in April 2020.
Future salary increases are currently anticipated to be in line with
the wider UK workforce.
Remuneration in our wider workforce
The Remuneration Committee continues to consider remuneration
in our wider workforce when making decisions that affect our
senior executives.
In addition to pensions alignment, the Committee has also
discussed a number of broader issues relating to workforce and
executive pay. These include feedback received by our Board
Employee Champion on employee share plans, merit increases,
gender pay and the ratio of Chief Executive pay to employees and
general recognition. These topics are reflected in the management
approach to reward across the workforce.
Conclusion
I hope you will find this report to be clear and helpful in
understanding our remuneration practices and that you will be in
support of the advisory resolution on the Annual Remuneration
Report at the 2020 AGM. As ever, the Remuneration Committee
welcomes any questions or comments from shareholders.
This year, I have also worked closely with Nicki Demby, who joined
the Board in June 2019. I will be stepping down from the Essentra
Board at the 2020 AGM and I am delighted to confirm that Nicki
will take over as the Chairman of the Remuneration Committee.
Nicki has a wealth of experience in this area and is a welcomed
addition to the Board.
I am grateful to the Chairman and my colleagues for their
professional guidance and support in making the right
remunerations decisions in the ever changing external market.
I wish Essentra, its employees and shareholders all the best for
the future.
Lorraine Trainer
Non-Executive Director
Remuneration Committee Chairman
28 February 2020
CHAIRMAN OF THE REMUNERATION COMMITTEE’S LETTER
ESSENTRA PLC ANNUAL REPORT 2019 93
DIRECTORS’ REPORT Remuneration
at a glance
2020 remuneration structure for Executive Directors, showing years of payment
2020
2021
2022
2023
2024
2025
Commentary
Changes for 2020
Base salary
Pension
allowance
Benefits
2020 annual
bonus
50% cash
50% shares
(deferred for
three years)
I
D
O
R
E
P
E
C
N
A
M
R
O
F
R
E
P
Paul Forman £658,560
Lily Liu £362,000
Salary increase of 2.4%
effective 1 April 2020
Salary increase of 9.9%
effective 1 April 2020
Paul Forman’s to reduce by
£11,900, effective 1 April 2020.
Lily Liu’s to reduce by
£2,100, effective 1 April 2020.
Car cash allowance, plus private medical
insurance and life assurance cover
No change
• Maximum opportunity:
No change
– Paul Forman 150% of salary;
– Lily Liu 125% of salary
(DEFERRED
FOR THREE YEARS)
• Performance conditions:
– Adjusted Operating Profit: 40%
– Adjusted Operating Cash Flow: 30%
– Personal and Strategic Objectives: 30%
Adjusted Operating Cash Flow
replaces the Net Working
Capital measure
Reweighting of measures to
align with strategic priorities
2020 LTIP
Three year
performance
period (2020–22)
and two year
deferral (2023–24)
PERFORMANCE
PERIOD
(DEFERRED
FOR TWO
YEARS)
• Conditional award of shares:
– Paul Forman 200% of salary
– Lily Liu 150% of salary
No change
• Performance conditions:
– EPS Growth: 33.33%
– Relative TSR: 33.33%
– Return on Invested Capital: 33.33%
94 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report
The full policy can be
found online at
essentraplc.com/
investors/corporate
governance
Incentive outcomes for 2019
Performance
period
Performance
measures
Annual bonus
2019
LTIP
2017-20191
Adjusted Operating Profit,
Net Working Capital,
Personal Objectives
EPS, TSR,
Adjusted Operating
Cash Flow
Payout
Paul Forman 30.2% of maximum
Details on page 103
Lily Liu 28% of maximum
Paul Forman 13.53% of maximum
Details on page 103
1
Lily Liu did not hold LTIP awards for this performance cycle as she joined the Board in November 2018.
Paul Forman (£000)
2019 actual
2019 maximum
Lily Liu (£000)
2019 actual
2019 maximum
639
37
160
288
244
639
37
160
958
1,875
327
33
65
114
327
33
65
409
Salary
Benefits
Pension
Bonus
LTIP
“The Remuneration
Committee believes that the
overall annual bonus outcomes
for the Executive Directors are
a fair reflection of what has
been achieved in 2019”
REMUNERATION AT A GLANCE
ESSENTRA PLC ANNUAL REPORT 2019 95
DIRECTORS’ REPORT Remuneration
Report
Policy Summary
Our Directors’ Remuneration Policy Report (“the Policy
Report”) sets out the policies under which the Executive
and Non-Executive Directors are remunerated.
The current Policy Report was approved by shareholders at
the AGM on 19 April 2018. A summary of the Policy Report is
set out below and the full version can be found on our website
at essentraplc.com/investors/ corporate-governance/
remuneration-committee.
Summary of 2018 Policy Report
The Remuneration Committee structures Executive Director
remuneration in two distinct parts: (i) fixed remuneration of basic
salary, pension and benefits; and (ii) variable performance-related
remuneration in the form of cash bonuses, deferred share bonuses
and long-term incentive arrangements.
Remuneration for Executive Directors is structured so that the
variable performance-related pay element forms a significant
portion of each package. The majority of total remuneration at
the maximum performance level will derive from the Company’s
long-term incentive arrangements. All incentives are designed
to be aligned to the delivery of Essentra’s strategic priorities.
Basic salary
Purpose and
link to strategy
To reflect the particular skills and
experience of an individual and to
provide a competitive basic salary.
Operation
Generally reviewed annually with any
increase normally taking effect from
1 April although the Committee may
award increases at other times of the
year if it considers it appropriate. The
review takes into consideration a number
of factors, including (but not limited to):
• The individual Director’s role,
experience and performance
• Business performance
• Pay and conditions elsewhere
in the Group
• Market data for comparable roles
in appropriate pay comparators
Opportunity
No absolute maximum has been set
for Executive Director base salaries.
Any annual increase in salaries is at the
discretion of the Committee taking into
account the factors stated in this table
and the following principles:
• Salaries would typically be increased
at a rate consistent with the average
salary increase (in percentage of salary
terms) for permanent UK employees
• Larger increases may also be
considered appropriate if a Director
has been initially appointed to the
Board at a lower than typical salary
• Larger increases may be considered
appropriate in certain circumstances
(including, but not limited to, a change
in an individual’s responsibilities or in
the scale of their role or in the size and
complexity of the Group)
Performance
measures
Not applicable.
96 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Annual bonus
Purpose and
link to strategy
Operation
To ensure the delivery of Company
performance-related objectives,
and to aid retention and to align
Directors’ interests with those of
the Company’s shareholders.
One half of the total annual bonus is paid
in cash shortly after the announcement
of the annual results.
The other half is deferred into shares
in the Deferred Annual Share Bonus
(“DASB”) which will normally vest after
three years subject to continued service.
Performance is assessed against
measures and targets which are
established on an annual basis by
the Remuneration Committee. As
performance increases so does the
percentage payable up to the maximum.
The bonus is subject to malus and
clawback provisions for a period of
three years following the determination
of the bonus. Circumstances in which
these provisions could be applied by
the Remuneration Committee are
material misstatement in the Company’s
Financial Statements, error in assessing
the performance conditions, serious
misconduct by an individual or serious
reputational damage to the Company
or a relevant business unit.
An additional payment (in the form of
cash or shares) may be made in respect
of shares which vest under deferred
awards to reflect the value of dividends
which would have been paid on those
shares during the vesting period (this
payment may assume that dividends
had been reinvested in Company shares
on a cumulative basis).
Opportunity
Chief Executive – 150% of basic salary.
Other Executive Directors – 125%
of basic salary.
Performance
measures
The bonus will be based on
performance assessed over one year
using appropriate financial, strategic
and individual performance measures.
The remainder of the bonus will be
based on financial, strategic or
operational measures appropriate
to the individual Director.
No more than 20% of each
financial measure will vest
at threshold performance.
The majority of the bonus will
normally be determined by
measure(s) of the Company’s
financial performance.
The selected measures for the next
financial year are set out in the
Annual Report on Remuneration
on page 110.
“Remuneration for Executive
Directors is structured so
that the majority of total
remuneration at the
maximum performance
level will derive from the
Company’s long-term
incentive arrangements“
REMUNERATION REPORT
ESSENTRA PLC ANNUAL REPORT 2019 97
DIRECTORS’ REPORT Remuneration Report Policy Summary continued
Long-Term Incentive Plan (“LTIP”)
Purpose and
link to strategy
To drive the long-term delivery of
the Company’s strategic objectives,
aid retention and to align Directors’
interests with those of the
Company’s shareholders.
Operation
An annual award of performance
share awards usually with a three-year
performance and additional two-year
holding period.
Awards are subject to malus and
clawback provisions for a period of three
years following the vesting of the awards.
Circumstances in which these provisions
could be applied by the Remuneration
Committee are material misstatement
Opportunity
An award to any Executive Director would
be limited to a maximum of 300% of salary.
in the Company’s Financial Statements,
error in assessing the performance
conditions, serious misconduct by an
individual or serious reputational damage
to the Company or a relevant business unit.
have been paid on those shares during
the period up to the release of the
shares (this payment may assume
that dividends had been reinvested in
Company shares on a cumulative basis).
An additional payment (in the form of
cash or shares) may be made in respect
of shares which vest under LTIP awards to
reflect the value of dividends which would
Performance
measures
Vesting will be subject to performance
conditions as determined by the
Remuneration Committee on an
annual basis.
The performance conditions will
usually be some combination of
relative TSR, adjusted EPS, adjusted
cumulative operating cash flow and a
capital return measure, although the
Remuneration Committee will retain
discretion to include alternative
performance measures which are
aligned to the corporate strategy.
The Remuneration Committee
may adjust the weightings of
the performance conditions for
each award although usually each
condition would have a weighting in
the range of 20% – 40% of the award.
Performance will usually be measured
over a three-year period.
Up to 25% of each element vests
at threshold performance, usually
rising on a straight-line basis for
performance up to the maximum level
for full payment. Below threshold
performance, that element of the
award will not vest.
All Employee Plans
Purpose and
link to strategy
To create alignment of employees’
interests with those of shareholders
and an awareness of the Company’s
share price performance.
Operation
Under the UK Sharesave, employees
(including Executive Directors) are
invited to enter a savings contract
of three years or five years, whereby
the proceeds can be used towards
the exercise of an option granted at
the time they participate. The option
price can be up to a 20% discount
on the share price at the time
invitations to participate are issued.
An equivalent USA Plan is operated
in a similar manner to the UK plan.
Opportunity
For the UK plan, shares worth up to
the value of the savings an Executive
Director agrees to make over the
saving period at the previously
agreed option price. The savings
amount is subject to the HMRC
limit, currently £500 per month.
The USA Plan is limited to the monthly
dollar equivalent of the UK Sharesave
plan and an option price of up to a
15% discount.
Performance
measures
No performance conditions apply
to All Employee Plans.
98 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Pension
Purpose and
link to strategy
To provide cost-effective long-term
benefits comparable with similar
roles in similar companies.
Operation
A contribution to a defined contribution
plan or paid as a cash supplement.
Opportunity1
Any future Executive Director
appointment will have a maximum
pension provision of 20% of salary.
The current Executive Directors have
pension provision of 25% of salary
(Chief Executive) and 20% of salary
(Chief Financial Officer).2
Performance
measures
Not applicable.
1
2
As stated in the Remuneration Committee Chairman’s letter, subsequent to the approval of this Policy Report, the Remuneration Committee determined that pension provision
for any future Executive Director appointment would be aligned with the level of provision available to the workforce. This will be formally incorporated in the next Policy Report
to be approved at the 2021 AGM.
As stated in the Remuneration Committee Chairman’s Letter, the annual pension allowances for the current Executive Directors will reduce with effect from 1 April 2020.
Further reductions in pension provision to the level of the UK wider workforce will be completed by end of 2022.
Other benefits
Purpose and
link to strategy
To provide cost-effective benefits
comparable with similar roles in
similar companies.
Operation
Other benefits include medical expenses,
life assurance, and a company car or
cash allowance.
The Remuneration Committee may vary
these benefits from time to time to suit
business needs, but they will be provided
on broadly similar terms to those offered
to other Group employees.
Executive Directors are entitled to
reimbursement of reasonable expenses.
Opportunity
There is no overall maximum as the level
of benefits depends on the annual cost of
providing individual items in the relevant
local market and the individual’s
specific role.
Performance
measures
Not applicable.
REMUNERATION REPORT POLICY SUMMARY
ESSENTRA PLC ANNUAL REPORT 2019 99
DIRECTORS’ REPORT Remuneration Report Policy Summary continued
Shareholding requirement
Purpose and
link to strategy
To align the interests of Executive
Directors and shareholders, encourage
a focus on long-term performance
and risk management.
Operation
These shareholding guidelines are to
be built up over six years from the date
of appointment.
The Remuneration Committee will review
progress towards the guidelines on an
annual basis, and has the discretion to
adjust the guidelines in what it feels are
appropriate circumstances.
Opportunity
The guideline minimum level for Executive
Directors is 300%1 of salary for the Chief
Executive and 200% of salary for the
Chief Financial Officer.
Non-Executive Directors are encouraged
to hold a minimum of 7,500 shares.
Performance
measures
Not applicable.
1 The Policy Report contained in the Essentra Annual Report 2017 states a shareholding requirement for the Chief Executive of 200% of salary. As disclosed on our website in advance
of the 2018 AGM, this requirement was increased to 300% of salary.
Non-Executive Directors are entitled to
reimbursement of reasonable expenses.
Non-Executive Directors
Purpose and
link to strategy
To attract high-calibre Non-Executive
Directors with the relevant experience
and skills.
Operation
A basic fee is payable to all Non-
Executive Directors with supplementary
fees for those with additional
responsibilities, such as acting as
Senior Independent Director or chairing
a Board Committee.
Fees are reviewed periodically with
reference to market levels in companies
of a comparable size and complexity,
and taking account of the responsibilities
and time commitment of each role.
No Non-Executive Director participates
in the Group’s incentive arrangements
or pension plan or receives any other
benefits other than where travel to the
Company’s registered office is recognised
as a taxable benefit in which case a
Non-Executive Director may receive the
grossed-up costs of travel as a benefit.
Opportunity
Fees for the current year are stated in
the Annual Report on Remuneration.
Fee increases may differ from those of
the wider workforce in any particular year
as they reflect changes to responsibilities
and time commitments and the periodic
nature of any increases.
A resolution to amend the limit in the
Company’s Articles of Association for
aggregate Non-Executive Directors’
annual fees to £1,000,000 was approved
at the 2018 AGM.
Performance
measures
Not applicable.
100 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Annual Report
on Remuneration
Lorraine Trainer
Non-Executive Director
Remuneration Committee Chairman
Membership and attendance
Meetings during the year
Lorraine Trainer, Non-Executive Director
Tommy Breen, Non-Executive Director
Mary Reilly, Non-Executive Director
Ralf K. Wunderlich, Non-Executive Director
Nicki Demby1, Non-Executive Director
5 (5)
5 (5)
5 (5)
5 (5)
3 (3)
1
Nicki Demby joined the Remuneration Committee in June 2019
Other attendees
During the year, the Chairman, Chief Executive, Chief Financial
Officer, Group Human Resources Director and Director of Reward
were invited by the Remuneration Committee to provide views
and advice. None were present during discussions regarding their
own remuneration.
The Company Secretary and General Counsel acts as Secretary
to the Remuneration Committee.
In addition, services and advice were received from the following
independent and expert consultants:
• Deloitte LLP (“Deloitte”), who are a member of the
Remuneration Consultants Group and have signed up to
its Code of Conduct, provided advice to the Remuneration
Committee on the 2018 Code, the Company’s incentive plans,
and on the remuneration of the Executive Directors and other
senior executives within the Company. Deloitte were appointed
by the Remuneration Committee who review their performance
annually, and are happy with the continued advice and level of
service provided. The Remuneration Committee continues to
be satisfied with the advice provided and level of independence.
Fees charged for the year under review are £86,960. The fees
are charged on a time and expenses basis. Deloitte also
provided other remuneration and tax services to
the Company during 2019.
• New Bridge Street, a part of Aon Hewitt, who are a member of
the Remuneration Consultants Group and have signed up to its
Code of Conduct, provided advice on the Company’s long-term
share incentive plans including the calculation of the TSR LTIP
performance measure. Fees charged for the year under review
are £20,017. The fees are charged on a time and expenses basis.
The Remuneration Committee continues to be satisfied with
the advice provided and level of independence. Aon Hewitt also
provided actuarial advice to the Company for its USA pension
scheme and are appointed as the Group’s insurance broker.
Key activities
Remuneration Committee
2019 key activities
Meetings during 2019
• approved performance
measures and targets
for 2019 annual bonus
of Executive Directors
and other Group
Management Committee
(GMC) members
• approved 2018 annual
bonus outturn for Executive
Directors and other senior
management
• approved 2019 salary
increases for Executive
Directors and other
senior management
• confirmed lapsing of
2016 LTIP award
• approved award levels,
performance measures and
targets for 2019 LTIP award
• reviewed the 2018 Directors’
Remuneration Report for
inclusion in the 2019 Annual
Report
• approved the grant for the
US Stock Purchase Plan
• reviewed the
appropriateness and
independence of the
remuneration advisers
• reviewed remuneration
practices against the
corporate strategy
• considered Executive
Directors’ remuneration
arrangements in the
context of the wider
UK workforce
• discussed proposed
performance measures
for the 2020 annual
bonus for Executive
Directors and other
senior management
• reviewed anticipated
2019 annual bonus
outturn and anticipated
the vesting levels for the
outstanding LTIP awards.
• reviewed the
performance measures
and targets for the 2019
annual bonus and
outstanding LTIP awards
in light of 2019’s
exceptionally high level
of M&A activity
• approved the
introduction of Adjusted
Operating Cash Flow as
a performance measure
for the 2020 annual
bonus to replace Net
Working Capital
• approved the revised
weightings of
performance
measures in the
2020 annual bonus
The Remuneration Committee continuously monitors and reviews
the Company’s relationships with its independent advisers. During
the year the Committee conducted a review of its remuneration
advisers. Following this review the Committee concluded that
Deloitte remained both independent and appropriate and were
therefore reappointed as the main advisor.
REMUNERATION REPORT
ESSENTRA PLC ANNUAL REPORT 2019 101
DIRECTORS’ REPORT Annual Report on Remuneration continued
This section of the Remuneration Report will be subject to an advisory vote at the 2020 AGM.
Total Single Figure of Remuneration Table for 2019 (audited)
The remuneration received by Executive Directors for the year ended 31 December 2019 (and the 31 December 2018 comparative) was as follows:
Executive Directors
Paul Forman9
Lily Liu
Non-Executive Directors
Paul Lester
Tommy Breen
Lorraine Trainer
Mary Reilly
Ralf K. Wunderlich
Nicki Demby5
Totals
Totals
Salary and
fees for the
year or from
the date of
appointment
£000
Taxable
benefits¹
£000
Long-Term
Incentive
Plan²
£000
Bonus
(cash and
deferred
shares)
£000
Cash in
lieu of
pension3
£000
Other
£000
639
625
327
41
250
250
61
57
64
63
77
52
57
52
30
1,505
1,140
37
37
33
224
–
–
–
–
–
–
–
–
–
–
–
70
59
2448
–
–
–
–
–
–
–
–
–
–
–
–
–
–
288
602
114
–
–
–
–
–
–
–
–
–
–
–
–
160
156
65
8
–
–
–
–
–
–
–
–
–
–
–
244
-
402
602
225
164
–
–
510
–
–
–
–
–
–
–
–
–
–
–
5
-
Year
2019
2018
2019
20186
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2019
2018
Total
£000
1,368
1,420
544
71
250
250
61
57
64
63
77
52
57
52
30
2,451
1,965
Taxable benefits comprise a fully expensed car or cash allowance plus private medical insurance and life insurance cover.
1
2 The share price at grant date for the 2017 LTIP was 529p. Accordingly none of the LTIP values above are attributed to share price growth since the grant date. The LTIP value for
3
Paul Forman is based on average of share price from 1st October – 31 December 2019.
Paul Forman received a pension allowance of 25% of basic salary while Lily Liu received a pension allowance of 20% of basic salary. Neither Paul Forman nor Lily Liu are entitled
to any benefit under the Essentra Defined Benefit Pension Scheme.
Nicki Demby was appointed in June 2019.
4 Benefit repayment to her former employer, as disclosed in the 2018 Annual Report.
5
6 Lily Liu’s 2018 remuneration relates to the period from her appointment on 15 November 2018 to 31 December 2018.
7 Total remuneration paid to Directors in 2019 was £2,451,000 (2018 £1,965,000).
8 This LTIP figure includes the dividends paid between the date of grant and 31 December 2019.
9 Paul Forman is the highest paid Executive Director, this table reflects his aggregate remuneration for 2019.
10 SAYE grant on 3 April 2019. This figure is the difference between the exercise price and the share price at the date of grant.
CEO pay ratio (unaudited)
This is the first year that we are publishing our CEO pay ratio. We have elected to follow Option A of the regulations, and to calculate the
ratios using the full-time equivalent pay and benefits for all UK employees in respect of 2019. We have chosen Option A as this provides a
more accurate figure of the Chief Executive’s pay in relation to the wider UK population; salary for the UK workforce is at 31st December 2019.
Salary
Total pay
FY 2019
Method
25th Percentile 50th Percentile 75th Percentile
A
A
A
19,475
20,499
67:1
25,377
27,101
50:1
37,021
38,131
36:1
The salary for the employees at the above percentiles are typical salaries for performing operational roles in our factories. The roles at
these quartiles are a machine operator, maintenance engineer and quality control inspector. The majority of remuneration for these roles
is fixed rather than performance linked. More details of the types of roles can be found on page 25.
The ratios are calculated based on the total remuneration payable to the Chief Executive in respect of 2019, as set out in the single figure
table above.
We operate consistent reward policies across the relevant elements of the UK workforce. For example, the incentive targets for the Chief
Executive have been cascaded down through the management incentives, and the Chief Executive’s salary increase is in line with the
average of the budgeted range for the UK workforce as a whole. Notwithstanding this, the CEO pay ratio will fluctuate year-on-year,
reflecting the higher proportion of variable remuneration that the Chief Executive may receive relative to other employees, the value
102 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report of which is dependant on Essentra’s performance and share price movements. As a result, the Remuneration Committee does not believe
it is appropriate to target a specific CEO pay ratio. However the Committee will annually assess whether the year-on-year movement in
the ratio is consistent with Company performance and employee reward decisions.
Annual bonus (audited)
Under the terms of the annual bonus arrangements for 2019, Paul Forman was potentially entitled to a maximum bonus of up to 150%
of basic salary and Lily Liu was potentially entitled to a maximum bonus of up to 125% of basic salary. Bonus payments are normally
made one-half in cash and one-half in shares deferred for three years. There are no further performance conditions related to this deferral.
For the year ended 31 December 2019, the performance measures for the Executive Directors were Adjusted Operating Profit (50%),
Net Working Capital (30%) and Personal Objectives (20%). No bonuses are payable unless 85% of the budgeted Adjusted Operating
Profit is achieved. 20% and 50% of the maximum pay-out would be paid for achieving base and target performance respectively.
2019 annual bonus outturn
Performance
measure
Adjusted Operating Profit
Net Working Capital1
Proportion
of bonus
determined
by measure2
50%
30%
Base
performance
Target
performance
Stretch
performance
Actual
performance
£m
% of
maximum
bonus
payable
£83.9m
£93.2m
£97.9m
£84.6m
22.3%
13.6%
13.25%
12.9%
13.9%
0%
1
2
Net Working Capital as % of external sales.
No bonus payable on any measure unless the Company has achieved the 85% of the target Adjusted Operating Profit. This target was met in 2019.
At the start of the year, the Committee set a stretching range for Adjusted Operating Profit and Net Working Capital appropriate for the
portfolio held at that time. 2019 has been a year of portfolio rationalisation as Essentra has divested four businesses in addition to making
three strategic acquisitions. In light of this exceptionally high volume of M&A activity, the Committee adjusted the targets to ensure
measurement is on a consistent basis with the reported figures in this financial year’s Annual Report. The adjustments retained the
level of stretch implicit in the original targets. The Committee considered this approach carefully to ensure that management was not
disincentivised from actions which enhance shareholder value and that management and shareholder interests remain aligned.
The above table shows the adjusted targets.
Achievement
Actual score
Personal Objectives set
Chief Executive – Paul Forman
Employee Engagement – Improve rating in three key underperforming
areas as identified in the 2018 survey results: IT reliability, career
development and personal development, overall engagement of
Grades 6 & 7
Portfolio Optimisation
Business Process Review (BPR) – Achieve year 1 Milestones
The engagement results showed improvement in all areas, with specific
higher levels of improvement in the areas of focus following the 2018
employee survey.
The Specialist Components division was dissolved following the
exceptional delivery of four divestments and transfer of two businesses
into other divisions within the Group. In addition, three further
acquisitions were made in the wider portfolio.
BPR continued to make progress and the project achieved all year one
milestones. All four key workstreams have met objectives within budget
for the year and tracked against the project plan.
Ensure delivery of projects with net savings from Procurement and
Continuous Improvement initiatives
Total savings £19.4m.
Total actual score
Chief Financial Officer – Lily Liu
Improve employee engagement for finance function
Portfolio Management/Optimisation
The engagement results showed improvement in all areas, with the
finance function engagement score moving from 66 to 74 overall with
improvements in all areas.
The Specialist Components division was dissolved following the
exceptional delivery of four divestments and transfer of two businesses
into other divisions within the Group. In addition, three further
acquisitions were made in the wider portfolio.
Review and embed finance organisation supporting business strategy. A new Finance Leadership team has been established with a mix
Review and optimise the Group effective tax rate taking into
consideration any portfolio management/optimisation
Total actual score
Total of bonus
Total of bonus
of external and internal promotions. A well-developed finance
transformation strategy is in place with clearly defined objectives linked
to the business strategy.
Completed a review of the Group tax rate with appropriate provisions
booked. The tax provision position is prudent and will result in an
effective tax rate for 2019 of 19.9%. However, the pace of movement
was hindered by two changes to the tax leadership team.
17/20
Paul Forman 28.50%
Lily Liu 21.25%
5/5
5/5
4/5
5/5
19/20
5/5
5/5
4/5
3/5
ANNUAL REPORT ON REMUNERATION
ESSENTRA PLC ANNUAL REPORT 2019 103
DIRECTORS’ REPORT Annual Report on Remuneration continued
In determining the outcome of the annual bonus for 2019 the Remuneration Committee gave careful consideration to exercising its
discretion including a number of matters not addressed by the mechanics of the plan. We took into account the overall shareholder
experience for the year within which robust performance was delivered. The share price increased by 28.4% from 1 January to 31 December
2019. The executive team delivered significant simplification and strengthening of our portfolio of businesses, completing four disposals
and three acquisitions, resulting in exceptional net gains to our shareholders in the year. Balanced against these positives, during the year
the Group fully cooperated with an investigation into some sanctioned market compliance failures in the Filters business. This has led to
a refresh of the compliance programme, focusing on creating a strong compliance culture. The Remuneration Committee has taken
a thoughtful and balanced view and in the round we have determined that the overall outcome of the Annual Bonus is appropriate.
LTIP awards (audited)
Performance conditions for LTIP awards made in 2017
Threshold
Condition definition
Maximum
Actual outturn
Vesting
Relative TSR (33.33% of the total award)
If median rank is
achieved, 25% of
the TSR element
vests
If upper quartile
rank is achieved
100% of the TSR
element vests
Below median
0%
TSR measured
against the
constituents of the
FTSE 250 (excluding
investment trusts
index over the three
years from the date
of grant)
EPS (33.33% of the total award)
Adjusted EPS
26.1p for 25% of the
EPS element to vest
30.7p for 100% of
the EPS element
to vest
21.3p
0%
Operating Cash Flow
(33.33% of the total award)
Cumulative Adjusted
Operating Cash Flow
2017–2019
£220.4m for 25% of
the Operating Cash
Flow element to vest
£270.4m for 100% of
the Operating Cash
Flow element to vest
£230.8m
41%
During the period from January 2017 to December 2019, there were five divestments and five acquisitions in the Group. In light of this
M&A activity, the Committee adjusted EPS and Operating Cash Flow targets to ensure that they are measured on a consistent basis
with the reported figures in this year’s Annual Report whilst still requiring the level of stretch implicit in the original targets. This approach
ensures that management is not disincentivised from actions which enhance shareholder value and that management and shareholder
interests remain aligned. The above table shows the adjusted targets together with the outcome against these targets.
At the conclusion of the performance period, the Remuneration Committee discussed whether any discretion should be applied to the
formulaic outturn of the LTIP. Whilst the Company’s share price has fallen during the performance period, the Committee considered that
this has been adequately reflected in the zero vesting of the relative TSR element of the award. The Committee also considered the various
issues outlined in the 2019 annual bonus determination above. In conclusion, the Committee was comfortable that the formulaic vesting
outturn of 13.53% of maximum was fair and reasonable.
104 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Equity incentives (audited)
Details of the awards granted and outstanding during the year to the Executive Directors under the LTIP and DASB are as follows:
Paul Forman
LTIP1
LTIP1
LTIP1
DASB
DASB
Lily Liu
LTIP1
Date of
grant
At 1 Jan
2019
Awarded
in year
Exercised/
transferred
in year
Lapsed
in year
At 31 Dec
2019
Share price
at date
of grant
Earliest
vesting date
Expiry date
8 Sept 17
6 Apr 18
13 Aug 19
387,076
292,877
–
–
–
321,241
29 Mar 18
52,059
29 Mar 192
13 Aug 2019
–
–
–
74,342
205,594
–
–
–
–
–
–
–
–
–
–
–
–
387,076
292,877
321,241
52,059
74,342
529.0p
8 Sept 20
7 Sept 23
426.8p
6 Apr 21
6 Apr 24
400.4p
15 Aug 22
13 Aug 25
432.2p
413.0p
1 Mar 21
1 Mar 21
1 Mar 22
1 Mar 22
205,594
400.4p
15 Aug 22
13 Aug 25
1 Subject to a two-year holding period post vesting.
2 Face value of DASB award to the Chief Executive is £307,000.
A total of 1,529,082 (2018: 1,445,715) share incentive awards under the LTIP and the DASB were granted during the year ended 31 December
2019 to Executive Directors and other senior executives on the GMC.
Performance shares awards granted during the year (audited)
The following performance shares awards were granted to Executive Directors on 13 August 2019.
Executive
Paul Forman
Lily Liu1
Type of
award
Number
of awards
granted
Share price
used to
determine
award
Performance
share
Performance
share
321,241
400.4p
205,594
400.4p
Face value
£1,286,249
(200% of salary)
£823,198
(250% of salary)
Percentage
which
vests at
threshold
25%
25%
1 As outlined in the 2018 Annual Report, this award comprises a standard award over shares worth 150% of salary plus a one-off additional award over shares worth 100% of salary.
This latter award was to compensate Lily for the value of share awards granted by her previous employer that lapsed when she joined Essentra. The award is linked to Essentra’s
long-term performance, and is of a lower value than the forfeited awards.
Face value is based on the mid-market closing share price on the day preceding the grant ie 12 August 2019. The performance period for
these awards is three financial years to 31 December 2021 plus an additional two-year holding period following vesting.
Performance conditions for LTIP awards made in 2019 (audited)
Threshold
Condition definition
Maximum
Relative TSR (33.33% of the total award)
TSR measured against the
constituents of the FTSE 250
(excluding investment trusts
index over the three years from
date of grant)
If median rank is achieved,
25% of the TSR element vests
If upper quartile rank is achieved,
100% of the TSR element vests
EPS (33.33% of the total award)
Adjusted EPS
Return on Invested Capital
(33% of the total award)
5% for 25% of the EPS element
to vest
12% for 100% of the EPS element
to vest
9.5% for 25% of the Return On
Invested Capital to vest
14.5% for 100% of the Operating
Cash Flow element to vest
ANNUAL REPORT ON REMUNERATION
ESSENTRA PLC ANNUAL REPORT 2019 105
DIRECTORS’ REPORT Annual Report on Remuneration continued
Save As You Earn scheme (audited)
The Company also operates a Save As You Earn share option scheme (“SAYE”). Details of the awards granted and outstanding under the
SAYE are as follows:
Lily Liu
Three-year SAYE
3 April 19
–
5,503
–
5,503
327.08p
–
1 May 22
31 Oct 22
Date of
grant
At
1 Jan 2019
Granted
Lapsed
At
31 Dec 2019
Exercise
price
Share price
at date of
exercise
Earliest
vesting
date
Expiring
date
The middle market price of an ordinary share in the Company on 31 December 2019 was 434.75p. The middle market price of an ordinary
share in the Company during the year ranged from 341.15p to 434.75p.
Directors’ shareholdings (audited)
The beneficial interests of the current Directors in office during the year, in the issued ordinary share capital of the Company
were as follows:
There have been no changes in the Directors’ interests since 31 December 2019 and the date of this Report
Executive Directors
Paul Forman
Lily Liu
Non-Executive Directors
Paul Lester
Tommy Breen
Lorraine Trainer
Ralf K. Wunderlich
Mary Reilly
Nicki Demby
1 Or date of appointment.
Beneficially owned
LTIP
DASB
SAYE
31 Dec 20181 31 Dec 2019
Vested
Unvested
Unvested
Unvested
240,000
260,000
–
–
7,500
10,000
8,644
7,500
10,000
9,092
136,000
136,000
7,500
–
7,500
750
–
–
–
–
–
–
–
–
1,001,194
126,401
205,594
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,503
–
–
–
–
–
–
Paul Forman and Lily Liu are required to build up a shareholding worth 300% and 200% of salary respectively from the date of
appointment. Beneficially owned shares include the unvested DASB awards and shares held directly. Current holdings as a percentage
of salary are 251% for Paul Forman and 0% for Lily Liu.
Salary used is the prevailing annual salary as at 31 December 2019.
The Executive Directors are regarded as being interested in 1,033,311 (2018: 1,073,932) ordinary shares in Essentra plc currently held by
the Essentra Employee Benefit Trust (“EBT”) as they are, together with other Essentra employees, potential beneficiaries of the EBT.
These shares are held in order to satisfy employee entitlements relating to the Company’s share plans.
As at 31 December 2019, potential and actual share issuance through employee related share plans totalled 2.88%, which is well below
UK institutional shareholder limits of 10% of the Company’s issued share capital.
106 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Performance graph (unaudited)
The graph below represents the comparative Total Shareholder Return (“TSR”) performance of the Company versus the FTSE 250 (excluding
investment trusts) index for the last ten years. This index has been selected as it is considered the most appropriate published general
index in which the Company is a constituent.
This graph shows the value, by 31 December 2019, of £100 invested in Essentra on 31 December 2009, compared with the value of £100
invested in the FTSE 250 (excl. Investment Trusts) Index.
£
800
700
600
500
400
300
200
100
0
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Essentra
FTSE 250 (excluding investment trusts) index
Chief Executive remuneration table (unaudited)
Total remuneration
(£000)
Annual bonus
(% maximum)
LTIP vesting
(% maximum)
Mark Harper
Colin Day
Paul Forman
2010
1 Jan –
14 Apr 11
Apr –
31 Dec 11
2012
2013
2014
2015
2016
2017
2018
2019
2,932
1,715
1,046
1,570
3,824
5,661
2,281
876
1,267
1,420
1,368
100
100
100
100
100
n/a
100
n/a
100
100
60
46.2
100
50
0
0
48
0
64.2
30.2
0
13.53
Mark Harper retired on 14 April 2011 and Colin Day was appointed as a Director on 1 April 2011. Colin Day retired as Chief Executive
on 31 December 2016 and Paul Forman was appointed as Chief Executive on 1 January 2017.
ANNUAL REPORT ON REMUNERATION
ESSENTRA PLC ANNUAL REPORT 2019 107
DIRECTORS’ REPORT Annual Report on Remuneration continued
Percentage increase in the remuneration of the Chief Executive (unaudited)
Salary
Benefits
Bonus
2019
£000
639
37
288
% change
Chief
Executive
% change
UK Group
Management
Committee
2.2%
0%
-52%
4.3%
0%
-43%
2018
£000
625
37
602
The table above shows the percentage movement in the salary, benefits and annual bonus for the Chief Executive and members of the
UK GMC between the current and previous financial year.
UK senior executives have been chosen as the most appropriate comparator group, as they represent those employees eligible to
participate in the same incentive plans as the Chief Executive. Group-wide figures can be distorted by different reward practices
in different geographies and movements in the number of employees.
Relative importance of spend on pay (unaudited)
Staff costs1
Distributions to shareholders
Revenue – total2
Adjusted Operating Profit – total
2019
£m
287.2
54.2
974.1
87.5
2018
£m
293.7
54.2
1,025.6
90.7
% change
-2.2%
0%
-5.0%
-3.5%
1 Staff costs are as per note 5 of the Financial Statements.
2 Revenue and Adjusted Operating Profit had a reduction YOY as a result of the significant portfolio rationalisation, these were chosen as these are KPIs for Essentra.
Payment to past Directors or for loss of office (audited)
There were no payments to past Directors or payments to Directors for loss of office in respect of 2019. As outlined in the 2018 Annual Report
the former CFO’s LTIP award will partially vest during 2020.
Implementation of Remuneration Policy for 2020 (unaudited)
When considering the implementation of the policy for 2020, the Committee was mindful of the 2018 Code and considers that the
executive remuneration framework appropriately addresses the following factors:
Clarity
Simplicity
Predictability
Alignment to culture
Proportionality and risk
We provide open and transparent disclosures both internally and externally in relation to our executive remuneration
arrangements.
Variable remuneration arrangements for our executives and our wider workforce are simple in nature with individuals
eligible for a bonus and, at more senior levels, a single long-term incentive plan. These are well understood by both
participants and shareholders. The introduction of Adjusted Operating Cash Flow into the annual bonus in 2020 will
add a measure that is well understood internally into our incentive program.
Our executive remuneration framework contains maximum opportunity levels for each component of remuneration
with variable incentive outcomes varying depending on the level of performance achieved against specific measures.
The performance measures used for annual bonus and LTIP awards are KPIs (as outlined on page 16) that drive behaviours
that are closely aligned to our strategy and Company values.
The Committee believes that our variable pay structures provide a fair and proportionate link between company
performance and reward. In particular, the use for Executive Directors of annual bonus deferral, LTIP holding periods
and shareholding requirements provide a clear link to the ongoing performance of the Company and therefore long-
term alignment with stakeholders. We are also satisfied that the variable pay structures do not encourage inappropriate
risk-taking.
Notwithstanding this, the Committee retains an overriding discretion that allows it to adjust formulaic outcomes from
incentive plans so as to guard against disproportionate outturns. Malus and clawback provisions also apply to both the
annual bonus and LTIP and can be triggered in circumstances outlined below.
108 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Executive Director Contracts
The Executive Directors have open-ended contracts with their reappointment being confirmed annually at the AGM.
Salary
Basic salary for each Executive Director is determined by the Remuneration Committee, taking into account the role, responsibilities,
performance, experience of the individual and market movement. Salaries are reviewed in April each year.
Paul Forman’s salary will increase by 2.4% in April 2020, in line with the average of the budgeted range for UK employees in 2020.
Lily Liu joined Essentra in 2018 on a salary below the market rate on the understanding, as highlighted in last year’s Annual Report,
that she may receive an above inflationary increase (or increases) as she gained experience in her role. After a full year in post, the
Remuneration Committee, with input from the Chief Executive and other Board members, have assessed Lily’s performance. The
consensus view was that Lily’s performance had been strong and that it was therefore appropriate to increase her salary to a level broadly
in-line with the market median using a range of market data. Accordingly, her salary will increase by 9.9% in April 2020. Future salary
increases are currently anticipated to be in line with the wider UK workforce.
Annual Salary effective from 1 April 2020
Annual salary effective from 1 April 2019
Benefits
Executive Directors are provided with the following benefits:
• car allowance
• private medical insurance with family level cover
• life assurance cover of four times basic salary
Paul Forman
£
Lily Liu
£
658,560
362,000
643,125
329,280
Pension
Paul Forman currently receives a pension allowance equal to 25% of annual salary to permit him to secure pension benefits.
Lily Liu currently receives a pension allowance equal to 20% of her basic salary to permit her to secure pension benefits.
The annual value of pension allowances will be reduced by £11,900 for Paul Forman and £2,100 for Lily Liu with effect from 1 April 2020
and will be aligned with the wider UK workforce by the end of 2022. Details of the precise timetable, process and approach will be
finalised as part of the Remuneration Policy Review to be approved at the 2021 AGM.
Annual bonuses
Each year, the Remuneration Committee reviews the annual bonus, to ensure the performance measures and targets remain
appropriate and aligned with the Company’s short-term strategy, while remaining within the appropriate risk profile.
Under the terms of the annual bonus arrangements for 2020, Paul Forman is potentially entitled to a maximum bonus of up to 150%
of basic salary and Lily Liu is potentially entitled to a maximum bonus of up to 125% of basic salary. Bonus payments are normally made
one-half in cash and one-half in shares in the Company, the entitlement to such shares being deferred for three years, in accordance
with the rules of the DASB.
The approach to the annual bonus for 2020 will be broadly consistent with the approach taken for 2019 other than, as outlined in the
Chairman of the Remuneration Committee’s Letter, the introduction of Adjusted Operating Cash Flow to replace Net Working Capital
and a slight reweighting of performance measures.
ANNUAL REPORT ON REMUNERATION
ESSENTRA PLC ANNUAL REPORT 2019 109
DIRECTORS’ REPORT Annual Report on Remuneration continued
Performance criteria 2020 bonus
In line with the Adjusted Operating Profit gate introduced for 2019, there will again be no bonus payable unless 85% of the Target Adjusted
Operating Profit is achieved. For achieving threshold Adjusted Operating Profit and Adjusted Operating Cash Flow, 20% of the relevant
portion of the bonus will be payable.
The Remuneration Committee believes that Adjusted Operating Profit and Adjusted Operating Cash Flow targets are commercially
sensitive, and will not disclose the targets on a prospective basis. The targets and actual performance against them will be disclosed
on a retrospective basis in the 2020 Remuneration Report.
In addition to the financial measures, the Remuneration Committee has also set targets for Paul Forman and Lily Liu, which are designed
to deliver progress by the Company towards its strategic objectives. The Committee considered the weighting of the bonus in all three
areas and given the strategic drivers in 2020, have rebalanced the bonus weightings to reflect the areas of focus for both Paul and Lily.
This is reflected as follows:
Adjusted Operating Profit
Adjusted Operating Cash Flow
Personal and Strategic Objectives
Weighting (%)
40%
30%
30%
The Remuneration Committee has the discretion, within a three-year period after the determination of the bonus, to withhold or recover
annual cash bonuses or DASB awards through malus and clawback provisions in specified circumstances.
These circumstances take into account where the original bonus was overpaid, due to a material misstatement in the Company’s Financial
Statements or due to an error in assessing the applicable performance conditions or if there has been serious misconduct by an individual
or if there has been serious reputational damage to the Company or a relevant business unit.
Essentra LTIP
An award granted under LTIP consists of a conditional right to receive shares in the Company, subject to satisfaction of performance
conditions. A share award under LTIP will not normally be exercisable before the third anniversary of its award and an additional two-year
holding period applies, and may only be exercised to the extent that the applicable performance conditions have been satisfied.
The following LTIP awards are intended to be granted to Executive Directors during 2020.
The award to be granted in April 2020
Paul Forman
Lily Liu
200%
150%
The LTIP awards to be granted to the Executive Directors in 2020 are structured as per below.
Measures
Relative TSR
Adjusted EPS 2020–2022 CAGR1
ROIC1,2
Weighting
1/3
1/3
1/3
Performance conditions 2020
(25% vests at threshold; 100%
vests at maximum)
Relative to FTSE 250
(excluding investment trusts)
threshold is median;
maximum is upper quartile
Threshold is 5%; maximum is 12%
Threshold is 9.5%; maximum is 14.5%
1 Adjusted EPS and ROIC are subject to adjustment from portfolio management/changes.
2 For EPS and ROIC, based on current practice, we straight line on achievement from threshold to maximum.
Awards granted under the LTIP are subject to malus and clawback provisions for a period of up to three years following the vesting date
of the award. Potential circumstances in which the malus and clawback provisions may be applied are consistent with those applying to
annual bonus awards as described above.
110 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Non-Executive Director fees
The fees for the Chairman are set by the Remuneration Committee, while fees for the Non-Executive Directors are determined by the
Chief Executive and the Chairman.
Following an assessment of time commitments associated with particular roles, the Chairman and Chief Executive have approved an
increase in the fees for the Employee Champion roles and introduced a fee for the new role for chairing the Sustainability Committee.
There were no other increases. No individual was present for the discussion related to their fees.
Annual fee effective
From 1 October 2019
From 1 April 2019
Chairman
250,000
250,000
Non-
Executive
Director
52,000
52,000
Additional
fee for Senior
Independent
Non-
Executive
Director
Additional
fee for
chairing a
Committee1
Additional
Fee for
chairing the
Sustainability
Committee2
10,000
10,000
13,000
13,000
11,000
11,000
Additional
fee for
Employee
Champion3
10,000
10,000
1 Applies to chairing Remuneration, and Audit and Risk Committees.
2 This was effective from 1st October 2019 date when Sustainability Committee was established.
3 The fee for the Employee Champion was increased from £5,000 to £10,000 from 1 October 2019.
Outside appointments (unaudited)
Paul Forman was appointed as a Senior Independent Director of Tate & Lyle during 2019. Paul received and retained fees of £72,656
in respect of this directorship.
Statement of shareholder voting (unaudited)
The results of shareholder voting in relation to the approval of the 2018 Directors’ Remuneration Report at the 2019 AGM and the Directors’
Remuneration Policy Report at the 2018 AGM were as follows:
Annual Report
on Remuneration
(2019 AGM)
Remuneration
Policy Report (2018 AGM)
No. of
votes
%
No. of
votes
225,065,322
99.52
218,535,269
1,077,739
0.48
1,010,719
226,143,061
219,545,988
%
99.54
0.46
6,066
–
540,474
–
Votes cast in favour
Votes cast against
Total votes cast
Abstentions
This Report of the Remuneration Committee has been approved by the Board
By order of
Lorraine Trainer
Remuneration Committee Chairman
28 February 2020
ANNUAL REPORT ON REMUNERATION
ESSENTRA PLC ANNUAL REPORT 2019 111
DIRECTORS’ REPORT Other Statutory
Information
The Directors present their Report prepared in accordance
with the Companies Act 2006, which requires the Company
to provide a fair review of the business of the Group during
the financial year ended 31 December 2019 and audited
Financial Statements of the Company and its subsidiary
undertakings for the year ended 31 December 2019. The
Company’s Registered Office is Avebury House, 201-249
Avebury Boulevard, Milton Keynes MK9 1AU.
In accordance with the UK Financial Conduct Authority’s
Listing Rules (LR 9.8.4C), the information to be included in the
Annual Report and Accounts, where applicable, under LR 9.8.4
is set out in the Directors’ Report.
The Directors’ Report comprises pages 65 to 117, and the sections of
the Annual Report incorporated by reference are as set out below:
Membership of Board during 2019 financial year
page 78
Financial instruments and financial risk management
pages 30 to 31
CO2 emissions
Corporate Governance Report
Future developments of the business of the Group
Employee diversity
page 29
pages 65 to 81
pages 12 to 13
page 22
Results and dividends
The profit on ordinary activities after taxation of the total
Group for the year ended 31 December 2019 was £41.2m
(2018: profit £28.1m).
As at 28 February 2020, the Company has paid the following
dividend in respect of the year ended 31 December 2019:
Interim dividend paid
30 October 2019
Per share
p
Total
£m
6.3
16.5
The Directors recommend that a final dividend of 14.4p (2018: 14.4p)
per share be paid, making a total dividend distribution for the year
of 20.7p (2018: 20.7p).
The final dividend, subject to shareholder approval at the AGM,
will be paid on 1 June 2020 to shareholders on the register on
24 April 2020.
112 ESSENTRA PLC ANNUAL REPORT 2019
Directors
As at 31 December 2019 and the date of the Report, the Board
of Directors comprised:
Paul Lester
Paul Forman
Lily Liu
Tommy Breen
Nicki Demby
Mary Reilly
Lorraine Trainer
Ralf K. Wunderlich
Non-Executive Chairman
Chief Executive
Chief Financial Officer
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
The Company requires all Directors appointed since the last AGM
to be elected at the following AGM and for all other directors to
be re-elected at each AGM.
Nicki Demby was appointed as a Non-Executive Director on
1 June 2019. Having been appointed since the 2019 AGM Nicki
will be putting herself forward for election at the 2020 AGM.
All other directors, except for Lorraine Trainer, will be standing
for re-election.
Lorraine will not be standing for re-election having previously
declared her intention to retire at the 2020 AGM.
None of the Non-Executive Directors have service contracts.
In accordance with the Company’s Conflict of Interests policy,
Directors are required to review their potential conflict of interests
at least on an annual basis and to notify any changes to the
Company Secretary and General Counsel as soon as possible.
During 2019 the current register was approved at each Board
meeting and no material conflicts of interest were identified
during the year.
At no time during the year has any Director had any material
interest in a contract with the Group, being a contract of
significance in relation to the Group’s business. A statement
of Directors’ interests in shares of the Company as at 31 December
2019 and as at the date of this Report is shown on page 106.
Directors’ Report Share capital
The issued share capital of the Company is shown in note 20 of
the Notes to the Financial Statements.
On 31 December 2019, there were 264,129,170 ordinary shares of 25p
each in issue. There were 951,137 ordinary shares of 25p each held in
treasury. The rights and obligations attaching to the Company’s
ordinary shares, and the provisions governing the appointment and
replacement of, as well as the powers of, the Company’s Directors,
are set out in the Company’s Articles of Association, copies of
which can be obtained from Companies House in the UK or by
writing to the Company Secretary.
There are no restrictions on the voting rights attaching to the
Company’s ordinary shares or on the transfer of securities in
the Company, except, in the case of transfers of securities:
• that certain restrictions may from time to time be imposed
by laws and regulations (for example, insider trading laws)
• whereby, pursuant to the Listing Rules of the Financial Conduct
Authority, certain employees of the Company require approval
of the Company to deal in the Company’s ordinary shares
No persons hold securities in the Company carrying special rights
with regard to control of the Company. The Company is not aware
of any agreements between holders of securities that may result in
restrictions on the transfer of securities or on voting rights.
Unless expressly specified to the contrary in the Articles
of Association of the Company, the Company’s Articles of
Association may be amended by special resolution of the
Company’s shareholders.
Substantial shareholders
As at 31 December 2019 the Company was advised of the following
voting rights attaching to the Company’s shares in accordance
with the Disclosure and Transparency Rules:
Prudential plc
Invesco
Heronbridge Investment Management LLP
AXA Investment Managers
% of total
voting rights
5.86
5.10
5.09
4.81
Since 31 December 2019 Royal, London Asset Management Limited
has notified the Company that it has voting rights attached to the
Company’s shares of 5.01%. There have been no other changes.
Employees
As at 31 December 2019, the Company employed 7,552 people
globally and 1,331 people in the UK. Information on the Group’s
policies on employee recruitment, engagement and the
employment of disabled persons can be found in Our people
from page 20 to 26.
Political contributions
In line with Group policy, the Company made no political
contributions (2018: £nil).
Environmental
The disclosures concerning CO2 emissions required by law are
included in Sustainability on page 29.
Directors’ indemnities
During the year, and as at the date of this Report, qualifying third-party
indemnities are in force under which the Company has agreed to
indemnify the Directors and the Company Secretary and General
Counsel, in addition to other senior executives who are Directors of
subsidiaries of the Company, to the extent permitted by law and the
Company’s Articles of Association, in respect of all losses arising out
of or in connection with the execution of their powers, duties and
responsibilities as a Director or Officer of the Company or any of its
subsidiaries, including the pension scheme trustee companies. The
scope of the indemnities extends to include liabilities to third parties.
Significant agreements
The Company has committed bank facilities dated November 2017
consisting of two five-year multi-currency revolving credit facilities
of £285m and €100.8m. Under the terms of these facilities, the
banks can give notice to Essentra to repay outstanding amounts
and cancel the commitments where there is a change of control
of the Company.
Under a note purchase agreement dated 29 April 2010 relating
to US$80m senior notes due 29 April 2020 and a further note
purchase agreement dated 29 November 2017 relating to a total
of US$75.0m senior notes due between 29 November 2024 and
29 November 2029, on a change of control the Company must
make an offer to prepay all the notes at par, without any premium
of any kind, together with accrued and unpaid interest thereon.
All of the Company’s share schemes contain provisions relating
to a change in control. Outstanding options and awards normally
vest and become exercisable on a change of control, subject to
the satisfaction of any performance conditions at that time.
There are a number of other agreements, involving the Company
or its subsidiaries, that take effect, alter or terminate upon a
change of control of the Company following a takeover bid, such
as commercial contracts and Joint Venture agreements. None are
considered to be significant in terms of their potential impact on
the business of the Group as a whole, to any potential bidder for
the Company or Group.
OTHER STATUTORY INFORMATION
ESSENTRA PLC ANNUAL REPORT 2019 113
DIRECTORS’ REPORT
Other Statutory Information continued
Annual General Meeting
The AGM of the Company will be held at Avebury House, 201-249
Avebury Boulevard, Milton Keynes, Buckinghamshire, MK9 1AU on
21 May 2020 at 12 noon.
Purchase of own shares
At the 2019 AGM, shareholders approved a special resolution to
enable the Company to purchase its own shares. That approval
expires at the end of the forthcoming AGM.
In addition to the ordinary business of the AGM, resolutions in
respect of the following matters of special business are included
in the Notice of Annual General Meeting:
Authority to allot unissued shares
At the 2019 AGM, the Directors were granted authority to
allot relevant securities up to a nominal amount of £21,916,842,
which expires at the end of the forthcoming AGM.
At this year’s AGM, shareholders will be asked to grant the
Directors’ authority to allot shares or grant rights to subscribe for
or convert any security into shares: (i) up to an aggregate nominal
amount of £21,931,502 representing approximately one-third of
the Company’s issued share capital, excluding treasury shares, at
28 February 2020 (such an amount to be reduced by the nominal
amount allotted or granted under section (ii) below in excess of
such sum); and (ii) comprising equity securities up to an aggregate
nominal amount of £43,863,005 representing approximately
two-thirds of the issued share capital, excluding treasury shares,
at 28 February 2020 (such an amount to be reduced by any
allotments or grants made under section (i) above) in connection
with an offer by way of a rights issue.
The proposal conforms to the guidelines issued by the institutional
investment protection bodies to ensure that existing shareholders’
interests are safeguarded. The Directors have no present intention
of exercising either of these authorities, which will expire at the end
of next year’s AGM (or, if earlier, the close of business on 21 July
2021) except in relation to share options.
Allotment of shares for cash
At the 2019 AGM, shareholders approved a special resolution to enable
the Directors to allot shares for cash without first offering them to
existing shareholders in proportion to their existing shareholdings.
That approval expires at the end of the forthcoming AGM and
resolutions 13 and 16 in the Notice of AGM seek to renew it.
As per previous years, the Company seeks a resolution which
authorises disapplication of pre-emption rights in respect of
up to an aggregate nominal amount of £3,289,725 (representing
13,158,901 ordinary shares). This aggregate nominal amount
represents approximately 5% of the issued ordinary share capital
of the Company (excluding treasury shares).
In addition to the above Resolution, the Company seeks a
Resolution which authorises disapplication of pre-emption rights
in respect of up to an aggregate nominal amount of £3,289,725
(representing 13,158,901 ordinary shares) in connection with
acquisitions and other capital investments as contemplated by
the Pre-Emption Group’s Statement of Principles. This aggregate
nominal amount represents an additional 5% of the issued ordinary
share capital of the Company (excluding treasury shares).
These authorities will expire at the conclusion of the following AGM
or, if earlier, on 21 July 2021. The proposal conforms to the guidelines
issued by the institutional investment protection bodies to ensure
that existing shareholders’ interests are safeguarded.
At this year’s AGM, the Directors consider it expedient to seek
shareholders’ approval to enable the Company to purchase, in
the market, up to 10% of its issued share capital (excluding any
treasury shares) for cancellation, or to be held in Treasury, such
power to apply until the end of next year’s AGM (or if earlier, 21 July
2021). In accordance with the requirements of the Listing Rules of
the Financial Conduct Authority, the minimum price (exclusive of
expenses) which may be paid for a share is its nominal value and
the maximum price (exclusive of expenses) for shares which may
be paid is the highest of: (i) an amount equal to 105% of the
average market value for a share for the five business days
immediately preceding the date of the purchase; and (ii) the higher
of the price of the last independent trade and the highest current
independent bid on the trading venues where the purchase is
carried out.
The Directors have no present intention of exercising the authority
to make market purchases, however the authority provides the
flexibility to allow them to do so in the future. The Directors will only
utilise this authority if satisfied that to do so would be in the best
interests of the Company and its shareholders generally, and
could be expected to result in an increase in earnings per share
of the Company.
During the financial year ending 31 December 2019, 175,928 ordinary
shares were transferred out of Treasury by the Company to satisfy
share options under the Company’s Sharesave and executive share
incentive plans.
No dividends have been paid on shares while held in Treasury
and no voting rights attach to the treasury shares.
External Auditor
PricewaterhouseCoopers LLP have expressed their willingness to
continue to be appointed as External Auditor of the Company.
Upon the recommendation of the Audit and Risk Committee,
resolutions to appoint them as External Auditor and to authorise
the Directors to determine their remuneration will be proposed
at the AGM.
Recommendation
The Directors believe that the resolutions in the Notice of Annual
General Meeting are in the best interests of the Company and
its shareholders as a whole, and unanimously recommend that
shareholders vote in favour of each resolution.
Derivatives
Information related to derivatives is included in the Accounting
Policies on page 171 and in note 15 and note 19 to the Notes of
the Financial Statements.
Going concern statement
The Directors have assessed whether the Company has adequate
resources to continue in operational existence for the foreseeable
future and accordingly continue to adopt the going concern basis
in preparing the consolidated Financial Statements.
114 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Information regarding the financial position of the Group, its cash
flows, liquidity position, and borrowing facilities are described in
the Financial Review on pages 30 to 31. As described on pages 34
to 48, a number of Principal Risks could potentially affect the
Group’s results and financial position. In addition, note 19 to the
Financial Statements includes the Group’s objectives, policies and
processes for managing its capital, its financial risk management
objectives, details of its financial instruments and hedging
activities and exposures to credit, market and liquidity risk.
Cash balances and borrowings are detailed in note 22 to the
Financial Statements.
Essentra is primarily funded by a series of United States Private
Placement (“USPP”) loan notes held by various investors, and a
Revolving Credit Facility (“RCF”) provided by a group of well rated
banks. An $80m USPP loan note is due to mature in April 2020 and
the remaining $75m USPP loan notes mature between November
2024 and November 2029. The RCF is made up of two tranches,
£285m and €100.8m, which both mature in November 2022.
At 31 December 2019 the available bank facilities totalled £370.4m
(2018: £375m). Furthermore, the Group also has
• a further USPP facility for $25m, which can be drawn from April
2020, for which the note purchase agreement has been signed in
December 2019; and
• a bridging loan facility for £50m which was agreed by banks in
February 2020, with an initial term of 12 months, plus a further
six months at Essentra’s option, and thereafter another six
months at the lenders discretion
The Directors have prepared plans and forecasts for a period of at
least 12 months from the date of signing these Financial
Statements. Based on these, and taking into consideration the risks
detailed in note 19 and the Principal Risks described on pages 34 to
48, the Directors have a reasonable expectation that the Company
has adequate resources to continue in operational existence for the
foreseeable future, and accordingly continue to adopt the going
concern basis in preparing the consolidated Financial Statements.
This disclosure has been prepared in accordance with the Financial
Reporting Council’s UK Corporate Governance Code.
Post Balance Sheet Event
In February 2020, the Company entered into an agreement with
certain banks for a bridging loan facility for £50m, with an initial
term of 12 months, plus a further six months at Essentra’s option,
and thereafter another six months at the lenders discretion.
Long-Term Viability Statement
In accordance with Provision 31 of the 2018 UK Corporate Governance
Code, the Directors have assessed the longer-term viability of the
Company over the three-year period to December 2022.
The assessment has been based on the Company’s strategy and
implementation programme, balance sheet and financing position,
and the potential impact of the key risks and uncertainties
described above. The Company strategy has been translated into a
three-year strategic plan comprising a one-year detailed budget
and a financial forecast for the following two years. The plan will
be subject to annual updates by management and review by the
Board. As a consequence, the Directors have chosen a three-year
time horizon for the Long-Term Viability Statement (“LTVS”) as
being an appropriate time frame for assessing the viability of
the Company. However, the Directors have also given due
consideration to any potential risks beyond this time horizon.
This assessment was informed by our judgements as to the
potential financial impact of the following Principal Risks if
they materialise over the three-year period:
• Failure to Achieve Acceptable Returns from the Packaging
division
• Cyber Attack, including an impact on operational disruption
• Macroeconomic and Trade Deal Uncertainty (including Brexit)
• Delivery of Strategic Projects
In order to support the assessment of the viability, the Directors
have considered the following realistic and plausible scenarios.
The Directors have assumed that the risks in each scenario would
all crystallise simultaneously. In scenario 4, the Directors have
considered the worst case events from each of the selected
Principal Risks.
To perform further stress testing of the Company’s viability, the
Directors have also considered the combined outcome of the
most severe scenario (scenario 4) and a scenario assuming that
the USPP debt repayment (US$80m due in April 2020) would not
be refinanced at all, i.e. the recently agreed new USPP facility of
US$25m in April 2020 (for which the note purchase agreement
has been signed in December 2019) and the new £50m bridging
loan facility (which was agreed in February 2020) were not
available. Furthermore, the Directors assume that the Group’s
financing cost will increase by 20% in 2020–2022 compared to
the base case, as a result of increase in credit premium.
In all the scenarios assessed, including the most severe and
elevated scenarios, there is no indication of potential breaches
of banking covenants and there remains sufficient liquidity
headroom from the Group’s current borrowing facilities.
In making the assessment, the Directors have made a number
of assumptions and considerations:
• Capital markets and bank funding will continue to be available
over the period
• In the event of a major risk crystallising, the Company would
take corrective capital action to preserve the cash resources
of the firm
• Management would be in a position to implement effective
mitigation actions to reduce the impact of a potential risk event.
Mitigating actions considered by management include
availability of alternative sources of funding, cost rationalisation
measures, working capital and capital expenditure management
and potential disposal of non-core assets
Based on the viability assessment undertaken, the Directors have
a reasonable expectation that the Group will be able to continue
in operational existence and meet its liabilities as they fall due
over the period of the assessment.
OTHER STATUTORY INFORMATION
ESSENTRA PLC ANNUAL REPORT 2019 115
DIRECTORS’ REPORT Other Statutory Information continued
Scenario 1
Scenario 3
Level of severity tested
Level of severity tested
Failure to Achieve
Acceptable Returns
from the Packaging
division (middle
scenario)
Cyber event with
Business Continuity
Impact (middle
scenario)
Macroeconomic
and Trade Deal
Uncertainty
(including Brexit)
(severe scenario)
Delivery of
Strategic Projects
(base scenario)
Revenue reduction of 0.7.%, 1.4% and 2.1%
respectively and decline of the operating profit
of 8.5%, 12.1% and 15.4% respectively for the
three-year period
Revenue reduction of £2.2m and decline in
the operating profit of £1m with one-off
exceptional cash cost of £5m in 2020
Revenue reduction of 5.7% in 2020 and 2021
and decline in the operating profit of 24% and
21%, respectively. In 2022, we have resumed
recovery of lost revenue and a 0.8% decline in
the operating profit
Decline in revenue of £0.4m, £1.2m and £2m
in 2020, 2021 and 2022, respectively
Failure to Achieve
Acceptable Returns
from the Packaging
division (severe
scenario)
Cyber event with
Business Continuity
Impact (middle
scenario)
Macroeconomic
and Trade Deal
Uncertainty
(including Brexit)
(severe scenario)
Delivery of
Strategic Projects
(middle scenario)
Revenue reduction of 1.6%, 2.6% and 3.6%,
respectively, and decline of the operating
profit of 17.0%, 16.4% and 21.1%, respectively,
for the three-year period
Revenue reduction of £2.2m and decline in
the operating profit of £1m with one-off
exceptional cash cost of £5m in 2020
Revenue reduction of 5.7% in 2020 and 2021
and decline in the operating profit of 24% and
21%, respectively. In 2022, we have resumed
recovery of lost revenue and a 0.8% decline in
the operating profit
Decline in revenue of £0.7m, £1.9m and £3m
in 2020, 2021 and 2022, respectively
Scenario 2
Scenario 4
Level of severity tested
Level of severity tested
Failure to Achieve
Acceptable Returns
from the Packaging
division (severe
scenario)
Cyber event with
Business Continuity
Impact (severe
scenario)
Macroeconomic
and Trade Deal
Uncertainty
(including Brexit)
(severe scenario)
Delivery of
Strategic Projects
(middle scenario)
Revenue reduction of 1.6%, 2.6% and 3.6%,
respectively, and decline of the operating
profit of 17.0%, 16.4% and 21.1%, respectively,
for the three-year period
Revenue reduction of £4.4m and decline in
the operating profit of £2m with one-off
exceptional cash cost of £10m in 2020
Revenue reduction of 5.7% in 2020 and 2021
and decline in the operating profit of 24% and
21%, respectively. In 2022, we have resumed
recovery of lost revenue and a 0.8% decline in
the operating profit
Decline in revenue of £0.7m, £1.9m and £3m
in 2020, 2021 and 2022, respectively
Failure to Achieve
Acceptable Returns
from the Packaging
division (severe
scenario)
Cyber event with
Business Continuity
Impact (severe
scenario)
Macroeconomic
and Trade Deal
Uncertainty
(including Brexit)
(severe scenario)
Delivery of
Strategic Projects
(severe scenario)
Revenue reduction of 1.6%, 2.6% and 3.6%,
respectively, and decline of the operating
profit of 17.0%, 16.4% and 21.1%, respectively,
for the three-year period
Revenue reduction of £4.4m and decline in
the operating profit of £2m with one-off
exceptional cash cost of £10m in 2020
Revenue reduction of 5.7% in 2020 and 2021
and decline in the operating profit of 24% and
21%, respectively. In 2022, we have resumed
recovery of lost revenue and a 0.8% decline in
the operating profit
Decline in revenue of £2.7m, £22.5m and
£34.2m in 2020, 2021 and 2022, respectively
Directors’ statement as to disclosure of information to the External Auditor
As required by Section 418(2) of the Companies Act 2006, the Directors who were members of the Board at the time of approving this
Report, having made enquiries of fellow Directors and of the External Auditor, confirm that:
• as far as each Director is aware, there is no relevant audit information of which the Company’s External Auditor is unaware
• each Director has taken all reasonable steps that they ought to have taken as a Director to ascertain any relevant audit information,
and to ensure that the Company’s External Auditor is aware of that information
• the Strategic Report and Directors’ Report, including the Report of the Remuneration Committee, were approved by the Board
on 28 February 2020
By order of the Board
Jon Green
Company Secretary
28 February 2020
116 ESSENTRA PLC ANNUAL REPORT 2019
Directors’ Report Statement of Directors’
Responsibilities in Respect
of the Financial Statements
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable
law and regulation.
Company law requires the Directors to prepare Financial
Statements for each financial year. Under that law the Directors
have prepared the Group Financial Statements in accordance with
International Financial Reporting Standards (“IFRSs”) as adopted
by the European Union and parent company Financial Statements
in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards,
comprising FRS 101 Reduced Disclosure Framework, and applicable
law). In preparing the Group Financial Statements, the Directors
have also elected to comply with IFRSs, issued by the International
Accounting Standards Board (“IASB”). Under company law the
Directors must not approve the Financial Statements unless they
are satisfied that they give a true and fair view of the state of
affairs of the Group and parent company and of the profit or loss
of the Group and parent company for that period. In preparing
the Financial Statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently
• state whether applicable IFRSs as adopted by the European
Union and IFRSs issued by IASB have been followed for the
Group Financial Statements and United Kingdom Accounting
Standards, comprising FRS 101, have been followed for the
Company Financial Statements, subject to any material
departures disclosed and explained in the Financial Statements
• make judgements and accounting estimates that are reasonable
and prudent
• prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Group and parent
company will continue in business
The Directors are responsible for the maintenance and integrity of
the parent company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of Financial
Statements may differ from legislation in other jurisdictions.
Directors’ confirmations
Each of the Directors, whose names and functions are listed in
Directors’ Report confirm that, to the best of their knowledge:
• the parent company Financial Statements, which have been
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 Reduced Disclosure Framework,
and applicable law), give a true and fair view of the assets,
liabilities, financial position and profit of the Company
• the Group Financial Statements, which have been prepared in
accordance with IFRSs as adopted by the European Union – Dual
IFRS (European Union and IASB), give a true and fair view of the
assets, liabilities, financial position and profit of the group
• the Directors’ Report includes a fair review of the development
and performance of the business and the position of the Group
and parent company, together with a description of the Principal
Risks and uncertainties that it faces
In the case of each Director in office at the date the Directors’
Report is approved:
• so far as the Director is aware, there is no relevant audit
information of which the Group and parent company’s auditors
are unaware
• they have taken all the steps that they ought to have taken as
a Director in order to make themselves aware of any relevant
audit information and to establish that the Group and parent
company’s auditors are aware of that information
The Directors are also responsible for safeguarding the assets
of the Group and parent company and hence for taking
reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
parent company’s transactions and disclose with reasonable
accuracy at any time the financial position of the Group and
parent company and enable them to ensure that the Financial
Statements and the Directors’ Remuneration Report comply
with the Companies Act 2006 and, as regards the Group
Financial Statements, Article 4 of the IAS Regulation.
Paul Forman
Chief Executive
Lily Liu
Chief Financial Officer
28 February 2020
ESSENTRA PLC ANNUAL REPORT 2019 117
DIRECTORS’ REPORT 118 ESSENTRA PLC ANNUAL REPORT 2019
Financial StatementsFinancial Statements Financial Statements
Consolidated Income Statement
For the year ended 31 December 2019
Revenue
Operating profit before intangible amortisation and exceptional and other adjusting items
Amortisation of acquired intangible assets
Exceptional and other adjusting items
Operating profit
Finance income
Finance expense
Profit before tax
Income tax expense
Profit for the year
Attributable to:
Equity holders of Essentra plc
Non-controlling interests
Profit for the year
Earnings per share attributable to equity holders of Essentra plc:
Basic
Diluted
Earnings per share from continuing operations attributable to equity holders of Essentra plc:
Basic
Diluted
Note
2019
£m
2018
£m
1
974.1
1,025.6
87.5
(22.9)
15.4
80.0
2.1
(16.6)
65.5
(24.3)
41.2
38.4
2.8
41.2
14.7p
14.5p
14.7p
14.5p
90.7
(22.7)
(20.8)
47.2
1.7
(12.6)
36.3
(8.2)
28.1
24.3
3.8
28.1
9.3p
9.2p
9.3p
9.2p
2
3
3
4
6
6
6
6
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
ESSENTRA PLC ANNUAL REPORT 2019 119
119
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Consolidated Statement
of Comprehensive Income
For the year ended 31 December 2019
Profit for the year
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Remeasurement of defined benefit pension schemes
Deferred tax income/(expense) on remeasurement of defined benefit pension schemes
Items that may be reclassified subsequently to profit or loss:
Effective portion of changes in fair value of cash flow hedges:
Net change in fair value of cash flow hedges transferred to the income statement
Effective portion of changes in fair value of cash flow hedges
Foreign exchange translation differences:
Attributable to equity holders of Essentra plc:
Arising on translation of foreign operations
Arising on effective net investment hedges
Income tax income/(expense)
Attributable to non-controlling interests
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Attributable to:
Equity holders of Essentra plc
Non-controlling interests
Total comprehensive income for the year
Note
18
4,16
4
2019
£m
41.2
(4.9)
1.0
(3.9)
0.8
(0.6)
(42.9)
7.5
1.6
(0.6)
(34.2)
2018
£m
28.1
2.7
(0.4)
2.3
0.6
(0.2)
10.1
(5.6)
(0.2)
0.1
4.8
(38.1)
7.1
3.1
35.2
0.9
2.2
3.1
31.3
3.9
35.2
120 ESSENTRA PLC ANNUAL REPORT 2019
120
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
Consolidated Balance Sheet
At 31 December 2019
Assets
Property, plant and equipment
Lease right-of-use asset
Intangible assets
Long-term receivables
Deferred tax assets
Retirement benefit assets
Total non-current assets
Inventories
Income tax receivable
Trade and other receivables
Derivative assets
Other financial assets
Cash and cash equivalents
Total current assets
Assets in disposal group held for sale
Total assets
Equity
Issued share capital
Merger relief reserve
Capital redemption reserve
Other reserve
Cash flow hedging reserve
Translation reserve
Retained earnings
Attributable to equity holders of Essentra plc
Non-controlling interests
Total equity
Liabilities
Interest bearing loans and borrowings
Lease liabilities
Retirement benefit obligations
Provisions
Other financial liabilities
Deferred tax liabilities
Total non-current liabilities
Interest bearing loans and borrowings
Lease liabilities
Derivative liabilities
Income tax payable
Trade and other payables
Provisions
Total current liabilities
Liabilities in disposal group held for sale
Total liabilities
Total equity and liabilities
31 December
2019
£m
31 December
2018
£m
Note
7
9
8
16
18
10
11,19
15,19
12,19,22
24
20
21
21
14,19,22
22
18
17
19
16
14,19,22
22
15,19
13,19
17
24
276.0
43.4
486.3
5.6
13.6
16.9
841.8
113.1
7.0
166.9
0.8
6.2
70.4
364.4
---
1,206.2
66.0
298.1
0.1
(132.8)
0.3
(11.0)
312.4
533.1
7.7
540.8
249.0
39.3
34.3
6.0
3.4
45.3
377.3
60.7
11.4
0.3
37.9
174.5
3.3
288.1
---
665.4
282.2
---
528.2
9.6
14.8
18.5
853.3
119.7
2.9
188.8
0.3
---
65.8
377.5
41.8
1,272.6
66.0
298.1
0.1
(132.8)
0.1
22.8
338.3
592.6
11.6
604.2
311.2
---
32.4
20.7
2.6
50.5
417.4
0.1
---
0.2
41.8
199.5
5.3
246.9
4.1
668.4
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
1,206.2
1,272.6
The consolidated financial statements on pages 119 to 168 were approved by the Board of Directors on 28 February 2020 and were signed on its
behalf by:
Paul Forman
Chief Executive
Company registration no: 05444653
Lily Liu
Chief Financial Officer
ESSENTRA PLC ANNUAL REPORT 2019 121
121
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Consolidated Statement
of Changes in Equity
For the year ended 31 December 2019
Issued
capital
£m
Merger
relief
reserve
£m
Capital
redemption
reserve
£m
Other
reserve
£m
Cash flow
hedging
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
Non-
controlling
interests
£m
At 1 January 2019
66.0
298.1
0.1
(132.8)
0.1
22.8
338.3
66.0
298.1
0.1
(132.8)
0.1
22.8
333.1
(5.2)
---
---
---
---
0.2
(33.8)
0.2
(33.8)
66.0
298.1
0.1
(132.8)
0.3
(11.0)
38.4
(3.9)
34.5
(6.3)
0.4
4.4
0.5
(54.2)
312.4
Issued
capital
£m
Merger
relief
reserve
£m
Capital
redemption
reserve
£m
Other
reserve
£m
Cash flow
hedging
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
Non-
controlling
interests
£m
66.0
298.1
0.1
(132.8)
(0.3)
18.5
362.7
(2.2)
66.0
298.1
0.1
(132.8)
(0.3)
18.5
360.5
---
---
---
---
0.4
0.4
24.3
2.3
4.3
4.3
26.6
66.0
298.1
0.1
(132.8)
0.1
22.8
0.1
5.2
0.1
(54.2)
338.3
(0.3)
11.6
(54.5)
604.2
2019
Total
equity
£m
604.2
(5.2)
599.0
41.2
(38.1)
3.1
(11.6)
0.4
4.4
0.5
(55.0)
540.8
2018
Total
equity
£m
620.4
(2.3)
618.1
28.1
7.1
35.2
0.1
5.2
0.1
11.6
---
11.6
2.8
(0.6)
2.2
(5.3)
---
---
---
(0.8)
7.7
8.1
(0.1)
8.0
3.8
0.1
3.9
---
---
---
Impact on adoption of IFRS 16
Restated total equity at the
beginning of the financial year
Profit for the year
Other comprehensive income
Total comprehensive income for
the year
Acquisition of non-controlling interest
Share options exercised
Share option expense
Tax relating to share-based incentives
Dividends paid
At 31 December 2019
At 1 January 2018
Impact on adoption of IFRS 9
Restated total equity at the
beginning of the financial year
Profit for the year
Other comprehensive income
Total comprehensive income for
the year
Share options exercised
Share option expense
Tax relating to share-based incentives
Dividends paid
At 31 December 2018
122 ESSENTRA PLC ANNUAL REPORT 2019
122
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
Consolidated Statement
of Cash Flows
For the year ended 31 December 2019
Operating activities
Profit for the year
Adjustments for:
Income tax expense
Net finance expense
Intangible amortisation
Exceptional and other adjusting items
Depreciation of property, plant and equipment
Lease right-of-use asset depreciation
Impairment of fixed assets
Share option expense
Hedging activities and other movements
Increase in inventories
Decrease in trade and other receivables
(Decrease)/increase in trade and other payables
Cash outflow in respect of exceptional and other adjusting items
Adjustment for pension contributions
Movement in provisions
Cash inflow from operating activities
Income tax paid
Net cash inflow from operating activities
Investing activities
Interest received
Acquisition of property, plant and equipment
Proceeds from sale of property, plant and equipment
Payments for intangible assets
Acquisition of businesses net of cash acquired
Proceeds from sale of businesses net of cash disposed
Short-term investments
Net cash inflow/(outflow) from investing activities
Financing activities
Interest paid
Dividends paid to equity holders
Dividends paid to non-controlling interests
Acquisition of non-controlling interests
Repayments of short-term loans
Repayments of long-term loans
Proceeds from long-term loans
Lease liability principal repayments
Proceeds from sale of employee trust shares
Net cash outflow from financing activities
Net increase in cash and cash equivalents
Net cash and cash equivalents at the beginning of the year
Net increase in cash and cash equivalents
Net effect of currency translation on cash and cash equivalents
Net cash and cash equivalents at the end of the year
Note
2019
£m
2018
£m
41.2
28.1
4
3
2,8
2
7
9
5,18
24
24
22
12,22
24.3
14.5
23.8
(15.4)
35.5
11.3
0.5
3.9
0.4
(1.1)
7.3
(16.5)
(24.6)
(1.3)
(1.3)
102.5
(26.1)
76.4
1.3
(48.4)
2.6
(10.5)
(26.1)
113.7
(0.6)
32.0
(14.6)
(54.2)
(0.8)
(11.6)
(0.1)
(207.3)
197.3
(12.4)
0.4
(103.3)
5.1
66.2
5.1
(0.9)
70.4
8.2
10.9
23.2
20.8
35.4
---
---
4.8
1.2
(8.0)
5.5
8.4
(20.8)
(1.0)
(1.1)
115.6
(16.5)
99.1
1.2
(58.2)
9.3
(3.0)
(4.9)
0.9
---
(54.7)
(10.7)
(54.2)
(0.3)
---
(0.4)
(101.4)
137.0
---
0.1
(29.9)
14.5
52.0
14.5
(0.3)
66.2
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123
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Accounting Policies
a Basis of preparation
The consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards
as adopted by the European Union (‘‘EU’’) in accordance with EU law (IAS Regulation EC 1606/2002) (‘‘adopted IFRS’’) and International Financial Reporting
Standards as issued by the International Accounting Standards Board, and with those parts of the Companies Act 2006 applicable to companies reporting
under IFRS. The Company has elected to prepare its individual company financial statements in accordance with Financial Reporting Standard 101 Reduced
Disclosure Framework (‘‘FRS 101’’); these are presented on pages 169 to 179.
The financial statements are prepared under the historical cost convention except for derivatives which are stated at fair value and retirement
benefit obligations which are valued in accordance with IAS 19 Employee Benefits.
The preparation of financial statements that conform with adopted IFRS requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting
period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results may ultimately differ
from those estimates.
For the purposes of these financial statements ‘‘Essentra’’ or ‘‘the Group’’ means Essentra plc (‘‘the Company’’) and its subsidiaries.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in
which the estimate is revised and future periods if relevant.
On 14 January 2019, Essentra disposed of its Pipe Protection Technologies business ("PPT") for US$48.0m (£37.5m), free of cash and debt. The
assets and liabilities of PPT had been presented as held for sale on the balance sheet as at 31 December 2018.
The accounting policies used in the preparation of these financial statements are detailed below. These policies have been consistently applied to all
periods presented.
Information regarding the financial position of the Group, its cash flows, liquidity position, and borrowing facilities are described in the Financial
Review on pages 30 and 31. In addition, note 19 to the financial statements includes the Group’s objectives, policies and processes for managing its
capital, its financial risk management objectives, details of its financial instruments and hedging activities and exposures to credit, market and
liquidity risk. Cash balances and borrowings are detailed in note 22.
Essentra is primarily funded by a series of US Private Placement Loan Notes from various financial institutions totalling US$155m and syndicated
multi-currency 5-year revolving credit facilities of £285.0m and €100.8m from its banks. The series of Loan Notes have original maturities ranging
from seven to twelve years and the revolving credit facilities mature in November 2022. At 31 December 2019, the available bank facilities totalled
£370.4m (2018: £375.0m) of which £194.3m (2018: £193.1m) was drawn down. In addition, uncommitted and overdraft facilities are maintained to
provide short-term flexibility. In April 2020 $80m of US Private Placement Loan Notes are due to be repaid and so in February 2020, the Company
entered into an agreement with certain banks for a bridging loan facility for £50m, with an initial term of 12 months, plus a further six months at
Essentra’s option, and thereafter another six months at the lenders’ discretion. Furthermore in December 2019, the Company entered into a note
purchase agreement for a new USPP facility for $25m ($15m due in April 2027 and $10m due in April 2030), which will be available for drawdown
in April 2020.
The Directors have prepared plans and forecasts for a period of at least twelve months from the date of signing these financial statements. Based
on these, and taking into consideration the risks detailed in note 19, the Directors have a reasonable expectation that the Company has adequate
resources to continue in operational existence for the foreseeable future, and accordingly have adopted the going concern basis in preparing the
consolidated financial statements. This disclosure has been prepared in accordance with the Financial Reporting Council’s UK Corporate
Governance Code.
Changes in accounting policies
In the current financial year, Essentra adopted the following pronouncements
IFRS 16 Leases
The Group has adopted IFRS 16 Leases from 1 January 2019. The adoption of this standard has a material effect on the Group’s financial
statements, as disclosed in the Group’s 2018 consolidated financial statements. The quantitative impact of IFRS 16 on the Group’s retained
earnings at 1 January 2019 was a reduction of £5.2m.
IFRS 16 Leases which is effective from 1 January 2019, eliminates the classification of leases as either operating leases or finance leases and
introduces a single lessee accounting model under which a lessee is required to recognise assets and liabilities for all leases with a term of more than
12 months, unless the underlying asset is of low value, and present depreciation of lease right-of-use assets separately from interest as a result of
unwinding of discount on lease liabilities in the income statement.
The Group has performed the impact assessment of adopting this accounting standard, which involved collating information on lease obligations and
contractual arrangements across the Group. This data was then used to compare the impact of the new standard under different transitional options.
The Group has decided to select the modified retrospective approach on transition primarily on grounds of practicality. Under this approach, comparative
information is not restated and the impact of adopting IFRS 16 is presented as an opening retained earnings adjustment as at 1 January 2019.
124 ESSENTRA PLC ANNUAL REPORT 2019
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ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
a. Basis of preparation continued
Under this transition option a methodology for determining the incremental borrowing rate has been developed to calculate the initial lease liability
for each lease. This methodology incorporates three key elements: risk-free rate (reflecting specific country and currency), credit spread (reflecting
the specific risk for each subsidiary within the Group) and an asset class adjustment (reflecting the variation in risk between asset categories).
Approximately 85% of the Group’s future lease obligations under IAS 17 relate to property leases and as a consequence makes up the majority
of the impact of adopting IFRS 16.
The Group has also elected not to reassess whether a contract contains a lease at the end of the date of initial application, but to instead apply
the requirements of IFRS 16 to contracts that were previously identified as leases under IAS 17 and IFRIC 4. Additionally, the Group has elected not
to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4.
The Group has also elected to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months
as of the date of initial application and lease contracts for which the underlying asset is of low value. The Group has leases of certain equipment
(e.g. printing and photocopying machines) that are considered of low value.
(i) The Group’s leasing activities and how these are accounted for
The Group leases various properties, equipment and cars. Rental contracts are typically made for fixed periods of 1 to 20 years, but might have
extension options as described below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and
conditions. The lease agreements do not impose any covenants, but leased assets cannot be used as security for borrowing purposes.
Following the adoption of IFRS 16, effective from 1 January 2019 the Group’s non-current assets include right-of-use assets from asset leasing
arrangements. Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use
by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease
period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is
depreciated over the shorter of the right-of-use asset’s useful life and the lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the
following lease payments:
• fixed payments (including in-substance fixed payments), less any lease incentives receivable;
• variable lease payments that are based on an index or a rate;
• amounts expected to be payable by the lessee under residual value guarantees; and
• payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
Right-of-use assets are measured at cost comprising the following:
• the amount of the initial measurement of lease liability;
• any lease payments made at or before the commencement date less any lease incentives received;
• any initial direct costs; and
• restoration costs.
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Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss.
Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture.
(ii) Variable lease payments
The Group has certain assets which may include variable lease payments based on usage, although this is a small proportion of the Group’s assets.
These include vehicles, with variable lease payments based on mileage or equipment such as printers, of which the lease payments vary based on
their usage. The variable lease payments are not material for the Group.
Any future variable payment increase that requires either speculation or an estimate is not included. Future lease payments should then be applied
only when they are known, with no change to the discount rate.
(iii) Extension and termination options
Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise
operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and
not by the respective lessor.
ACCOUNTING POLICIES
ESSENTRA PLC ANNUAL REPORT 2019 125
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ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Accounting Policies continued
a. Basis of preparation continued
Transition to IFRS 16
The impact on the balance sheet (increase/(decrease)) as at 1 January 2019 is as follows:
Assets
Right-of-use assets
Prepayments and deferred income
Liabilities
Lease liabilities
Onerous lease provision
Accruals and deferred income
Net deferred tax liabilities
Net impact on equity
£m
41.3
(0.4)
(59.4)
9.3
2.8
1.2
(5.2)
The impact on the income statement for 2019 and the estimated impact on the income statement (increase/(decrease) in profit) for 2018 had
IFRS 16 always been in place is as follows:
Depreciation expense
Operating lease expense
Operating profit
Finance costs
Income tax expense
Impact on profit after tax for the year
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
(11.2)
13.5
2.3
(2.1)
---
0.2
(9.7)
11.8
2.1
(2.2)
0.1
---
Under IFRS 16, the Group’s operating profit increased, while its interest expense also increased. This is due to the change in the accounting for
expenses of leases that were previously classified as operating leases under IAS 17.
In the financial year ended 31 December 2019, Essentra adopted the following pronouncements:
Other standards and interpretations
The Group also adopted the following new pronouncements during 2019, which did not have any impact on the Group’s financial statement:
• IFRIC 23 Uncertainty over Income Tax Treatments addresses how to reflect uncertainty in accounting for income taxes, providing guidance on
considering uncertain tax treatments separately or together, examination by tax authorities, the appropriate method to reflect uncertainty and
accounting for changes in facts and circumstances.
• Amendments to IAS 19 Plan Amendment, Curtailment or Settlement specify that in the event of a plan amendment, curtailment or settlement
during a reporting period, an entity is required to use updated information to determine current service cost and net interest for the period
following such an event.
b. Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by Essentra. Control exists when Essentra is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in
the financial statements from the date that control commences until the date that control ceases.
(ii) Transactions eliminated on consolidation
Intragroup balances and any unrealised gains and losses or income and expense arising from intragroup transactions are eliminated in preparing
the consolidated financial statements.
126
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ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
c. Foreign currency
Items included in the financial statements of the Group’s subsidiaries are measured using the currency of the primary economic environment in
which the subsidiary operates (‘functional currency’). The consolidated financial statements are prepared in sterling (functional currency of the
parent company).
(i) Foreign currency transactions
Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated
in foreign currencies at the balance sheet date are translated into sterling at the exchange rate ruling at that date and recognised in the income
statement unless hedge accounting criteria apply (see policy for financial instruments).
(ii) Financial statements of foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into sterling
at the exchange rate ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average
exchange rates.
(iii) Net investment in foreign operations
Exchange differences on retranslation at the closing rate of the opening balances of overseas entities are taken to other comprehensive income, as
are exchange differences arising on related foreign currency borrowings and derivatives designated as net investment hedges, to the extent that
they are effective. Other exchange differences are taken to the income statement. Differences arising prior to 1 January 2004 are included in
retained earnings.
d. Financial instruments
Interest bearing loans and borrowings and other financial liabilities (excluding derivatives) are held at amortised cost, unless they are included in a
hedge accounting relationship. See note 15 for separate disclosure of hedge types.
Derivatives are measured initially at fair value. Subsequent measurement in the financial statements depends on the classification of the derivative
as follows:
(i) Fair value hedges
Where a derivative is used to hedge the foreign exchange exposure of a monetary asset or liability, any gain or loss on the derivative is recognised in
the income statement.
(ii) Cash flow hedges
Where a derivative is designated as a hedging instrument in a cash flow hedge, the change in fair value is recognised in other comprehensive
income to the extent that it is effective and any ineffective portion is recognised in the income statement. Where the underlying transaction results
in a financial asset, accumulated gains and losses are recognised in the income statement in the same period as the hedged item affects profit or
loss. Where the hedged item results in a non-financial asset the accumulated gains and losses previously recognised in other comprehensive
income are included in the initial carrying value of the asset.
(iii) Hedges of net investment in foreign operations
The gain or loss on an instrument used to hedge a net investment in a foreign operation that is deemed effective is recognised in other
comprehensive income. Any ineffective portion is recognised in the income statement.
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(iv) Unhedged derivatives
Unhedged derivatives are charged/credited to the profit and loss.
e. Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Previously revalued properties were
treated as being held at deemed cost upon transition to adopted IFRS.
Where parts of an item of property, plant and equipment or other assets have different useful lives, they are accounted for as separate items.
The carrying values of property, plant and equipment and other assets are periodically reviewed for impairment when events or changes in
circumstances indicate that the carrying values may not be recoverable.
Property, plant and equipment are depreciated over their estimated remaining useful lives on a straight line basis at the following annual rates:
Land and buildings --- Freehold land
Land and buildings --- Buildings
Plant and machinery
Fixtures, fittings and equipment
Not depreciated
2% or life of lease if shorter
7---20%
10---33%
The assets’ useful lives and residual values are reviewed, and adjusted if appropriate, at each balance sheet date.
ACCOUNTING POLICIES
ESSENTRA PLC ANNUAL REPORT 2019 127
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ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Accounting Policies continued
f. Lease liabilities and lease right-of-use assets
Rentals associated with leases that are of low-value or less than 12 months in length are expensed to the income statement on a straight line basis.
The associated lease incentives are amortised in the income statement over the life of the lease.
Leases greater than 12 months in length, and those not of low-value, are recognised as a lease right-of-use asset with the associated future lease
payment terms recognised as a lease liability. The right-of-use assets and the associated lease liabilities are recognised by unwinding the future
lease payments at the rate implicit to the lease or, if the rate implicit to the lease cannot be readily determined, at the relevant incremental
borrowing rate.
The lease right-of-use assets are amortised over their useful economic lives or the lease term, whichever is shorter. The lease liabilities are
derecognised by applying the future lease payments.
g. Intangible assets
(i) Goodwill
Goodwill is stated at cost less any impairment losses.
Acquisitions are accounted for using the purchase method. For acquisitions that have occurred since 1 January 2004, goodwill represents the
difference between the fair value of the assets given in consideration and the fair value of identifiable assets, liabilities and contingent liabilities
of the acquiree. For acquisitions made before 1 January 2004, goodwill is included on the basis of its deemed cost, which represents the amount
previously recorded under UK GAAP.
Since 1 January 2010, the Group has expensed costs attributable to acquisitions in the income statement. Given their one-off nature, these costs
are generally presented within exceptional and other adjusting items.
(ii) Research and development
Research costs are expensed to the income statement in the year in which they are incurred.
Development costs relating to new products are capitalised when the Group is able to demonstrate the technical feasibility of completing
the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset
will generate future economic benefits, the availability of resources to complete the asset and the ability to measure reliably the expenditure
during development.
(iii) Acquired intangible assets
An intangible asset acquired in a business combination is recognised at fair value to the extent it is probable that the expected future economic
benefits attributable to the asset will flow to the Group and that its cost can be measured reliably. Intangible assets principally relate to customer
relationships, which are valued using discounted cash flows based on historical customer attrition rates, and developed technology, which is valued
using an income approach. The cost of intangible assets is amortised through the income statement on a straight line basis over their estimated
useful economic life.
(iv) Other intangible assets
Other intangible assets which are not acquired through a business combination ("non-acquired intangible assets") are recognised at cost to the
extent it is probable that the expected future economic benefits attributable to the asset will flow to the Group and that its cost can be measured
reliably, and amortised on a straight line basis over their estimated useful economic life.
Intangibles are amortised over their estimated remaining useful lives on a straight line basis at the following annual rates:
Goodwill
Customer relationships
Other intangibles --- research and development
Other intangibles --- development of e-commerce
Other intangibles --- software and software development
Not amortised
6-12%
7---20%
10---20%
10---20%
h. Impairment
All assets are reviewed regularly to determine whether there is any indication of impairment. Goodwill is tested for impairment annually.
An impairment loss is recognised whenever the carrying amount of a non-financial asset or the cash generating unit to which it belongs exceeds
its recoverable amount, being the greater of value in use and fair value less costs to sell, and is recognised in the income statement. Value in use
is estimated based on future cash flows discounted using a pre-tax discount rate based upon the Group’s weighted average cost of capital.
Financial assets were assessed for impairment using the expected credit loss model which requires expected credit losses and changes to expected
credit losses at each reporting date to reflect changes in credit risk since initial recognition.
i. Inventories
Inventories are valued at the lower of cost (on a first in, first out basis) and net realisable value. For work-in-progress and finished goods, cost
includes an appropriate proportion of labour cost and overheads.
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ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
j. Cash and cash equivalents
Cash and cash equivalents comprise cash balances and fixed term investments whose maturities are three months or less from the date of
acquisition. Bank overdrafts repayable on demand form an integral part of Essentra’s cash management and are included as part of cash and
cash equivalents in the statement of cash flows.
k. Loans and borrowings
Loans and borrowings are initially measured at cost (which is equal to fair value at inception) and are subsequently measured at amortised cost
using the effective interest method.
l. Trade and other receivables
Trade receivables are initially recognised at fair value and subsequently measured at amortised cost, which is generally equivalent to recognition
at nominal value less impairment loss calculated using the expected loss model.
The Group applies the simplified model to recognise lifetime expected credit losses for its trade receivables and other receivables, including those
due in greater than 12 months, by making an accounting policy election. The expected loss rate estimated for each ageing period is as follows:
Current: 0.5%, Overdue 1-30 days: 1%, Overdue 31-60 days: 5%, Overdue 61-90 days: 10%, Overdue 91-180 days: 25%, Overdue 181-360 days:
50% and Overdue over 360 days: 100%.
m. Trade and other payables
Trade payables are non-interest bearing and are recognised initially at fair value and subsequently at amortised cost.
n. Catalogue costs
The costs associated with the production and printing of catalogues are expensed to the income statement when access is received to those goods.
o. Income tax
Income tax in the income statement comprises current and deferred tax. Income tax is recognised in the income statement except to the extent
that it relates to items recognised in equity or other comprehensive income.
Current tax is the expected tax payable on the taxable income for the year using the applicable tax rates enacted or substantively enacted at
the balance sheet date and any adjustment to tax payable in prior years. Deferred tax is provided, using the balance sheet liability method, on
temporary differences arising between the tax bases and the carrying amounts of assets and liabilities in the financial statements. The following
temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither
accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they will not reverse in the
foreseeable future.
Deferred tax is determined using tax rates that are expected to apply when the related deferred tax asset or liability is settled, using the applicable
tax rates enacted or substantively enacted at the balance sheet dates.
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A deferred tax asset is recognised only to the extent that it is probable that future taxable profit will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefits will be realised.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against liabilities and when they
relate to income taxes levied by the same tax authority and the Group intends to settle its current tax assets and liabilities on a net basis.
p. Revenue
Revenue from the sale of goods is recognised in the income statement net of expected discounts, rebates, refunds, credits, price concessions
or other similar items, when the associated performance obligation has been satisfied, and control of the goods has been transferred to
the customer.
A significant part of the Group’s businesses sell goods on an ex-works basis, where the Group as seller makes its goods ready for collection at its
premises on an agreed upon sales date and the buyer incurs all transportation and handling costs and bears the risks for bringing the goods to
their chosen destination.
Where the Group operates non ex-works terms with customers, revenue is recognised when the control of the goods has been transferred
to the customer. These terms include consignment stock agreements, where revenue is recognised upon the customer removing goods from
consignment stock.
Each customer arrangement/contract is assessed to identify the performance obligations being provided to the customer. Where distinct
performance obligations are deemed to exist, an element of revenue is apportioned to that obligation.
ACCOUNTING POLICIES
ESSENTRA PLC ANNUAL REPORT 2019 129
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FINANCIAL STATEMENTS
Financial Statements
Accounting Policies continued
q. Finance income and expense
Finance income and expense is recognised in the income statement as it accrues.
r. Segment reporting
A segment is identified on the basis of internal reports that are regularly reviewed by the Group Management Committee in order to allocate
resources to the segment and assess its performance.
s. Pensions
(i) Defined contribution schemes
Obligations for contributions to defined contribution pension schemes are expensed to the income statement as incurred.
(ii) Defined benefit schemes
The significant pension schemes in Europe and the USA have been accounted for on a defined benefit basis.
The net obligations in respect of defined benefit pension schemes are calculated separately for each scheme by estimating the amount of future
benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present
value, and the fair value of any scheme assets is deducted. The discount rate is the yield at the balance sheet date on AA credit-rated bonds that
have maturity dates approximating to the terms of Essentra’s obligations. The calculation is performed by a qualified independent actuary using
the projected unit credit method. Net interest on defined benefit assets is presented within finance income, and net interest on defined benefit
liabilities is presented within finance expense.
Actuarial gains and losses that have arisen are recognised in full in the consolidated statement of comprehensive income.
The amounts charged to operating profit are the current service cost, past service cost (including curtailments) and gains and losses on settlement.
The value of a net pension asset is limited to the amount that may be recovered either through reduced contributions or agreed refunds from the scheme.
t. Share-based payments
Essentra operates equity-settled, share-based incentive plans. A charge is made in the income statement based on the fair value of option awards
using the Monte Carlo or binomial valuation models and relevant quoted share price information with a corresponding increase in equity. The fair
value is measured at grant date and spread over the period between grant date and vesting date of the options. The amount recognised as an
expense will be adjusted to reflect the actual number of share options that vest with the exception of options that fail to vest because market
conditions are not met.
u. Exceptional and other adjusting items
The exceptional and other adjusting items are separately presented from other items by virtue of their nature, size and/or incidence (considered
for each operating segment). They are shown as a separate line item within operating profit on the face of the income statement in order for the
reader to obtain a clearer understanding of the underlying results of the ongoing Group’s operations, by excluding the impact of items which, in
management’s view, do not form part of the Group’s underlying operating results, such as gains, losses or costs arising from business acquisition
and disposal activities, significant restructuring and closure costs and other items which are non-recurring or one-off in nature (such as the costs
of fundamental strategic review and reorganisation). Operating profit before exceptional and other adjusting items and acquired intangible
amortisation is called adjusted operating profit, which forms the primary basis of management’s review and assessment of operational
performance of the Group’s businesses.
(i) Gains/losses and transaction costs relating to acquisitions and disposals of businesses
In 2019, Essentra disposed of the Pipe Protection Technologies, Speciality Tapes, Extrusion and Card Solutions businesses, incurring one-off gains
and losses on those transactions. Further one-off costs (such as professional fees) were incurred on the aforementioned disposals and as a result
of acquisitions of Nekicesa and Innovative Components (refer to note 24).
In 2018, Essentra incurred one-off costs (such as professional fees) as a result of acquisitions of Micro Plastics and Nolato Hertila and disposals
of Swiftbrook and Pipe Protection Technologies (refer to note 24).
(ii) Acquisition integration and restructuring costs
Costs relating to the integration of acquired businesses and restructuring associated with acquisitions.
(iii) Other exceptional items
In 2019, this represented credits arising on the release of exceptional provisions previously created as a result of Packaging and Specialist
Components restructuring (releasing closure provisions relating to the following sites: Largo and Kilmarnock in Packaging and Speciality Tapes
Nottingham in Specialist Components), a credit has been recognised relating to the release of a lease liability, originally provided for as part of
the closure of the Newport Cartons business in 2017 partially offset by costs, costs in relation to Group Finance function and Specialist Components
restructuring and costs relating to the review, investigation and expected penalties relating to the compliance of certain group companies’ export
activities within US laws.
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Financial Statements
u. Exceptional and other adjusting items continued
In 2018, this represented costs arising from central management team restructuring, Packaging and Specialist Components restructuring (closure
of the following sites: Largo and Kilmarnock in Packaging and Speciality Tapes Nottingham in Specialist Components), amounts in respect of the
strategic review undertaken during the period and associated reorganisation costs, an exceptional past service cost arising from the UK defined
benefit scheme (see note 18) and an adjustment on contingent deferred considerations on a prior acquisition.
v. Investment in own shares
The shares held in the Essentra Employee Benefit Trust for the purpose of fulfilling obligations in respect of share option plans are treated as
belonging to the Company and are deducted from its retained earnings. The cost of shares held directly (treasury shares) are also deducted from
retained earnings.
w. Provisions
A provision is recognised when there is a probable legal or constructive obligation as a result of a past event and a reliable estimate can be made
of the outflow of resources that will be required to settle the obligation. The outflow is the present value of management’s best estimate of the
expenditure required to settle the present obligation at the balance sheet date.
x. Government grants
Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions will be met,
usually on submission of a valid claim for payment. Government grants in respect of capital expenditure are included within the carrying amount
of the related property, plant and equipment, and are released to profit or loss on a straight line basis over the expected useful lives of the relevant
assets. Grants of a revenue nature are credited to profit or loss so as to match them with the expenditure to which they relate.
y. Net debt
Net debt is defined as cash and cash equivalents and short-term liquid investments, net of lease liabilities, interest bearing loans and borrowings.
z. Dividends
Dividends are recognised as a liability in the period in which they are approved by the shareholders of the Company (final dividend) or paid
(interim dividend).
aa. Assets and disposal groups held-for-sale
Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be
recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their
carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on
remeasurement are recognised in profit or loss.
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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 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. An estimate 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 8.
The useful lives of the Group’s finite-lived intangible assets are reviewed following the tests for impairment 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 (see note 18). 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.
(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 a tax position
is uncertain, a current tax liability is held for anticipated taxes that are considered probable based on the information available.
Key judgement areas for the Group include the pricing of intercompany goods and services as well as the tax consequences arising from
restructuring operations. Included in the tax payable is a liability of £15.3m (2018: £17.7m) for transfer pricing matters and £18.7m (2018: £17.7m)
for other uncertain tax positions. The movement is due to adjustments for current year transactions, foreign exchange movements, expiry of
statute of limitations following the passage of time and agreement reached with tax authorities on previous matters.
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 is currently subject to an information request from HMRC in regard to this matter
and the potential amount payable for this risk as at 31 December 2019, 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.
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 charge/(credit) in the year the matter is concluded.
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Financial Statements
Accounting Estimates continued
(iv) Leases and lease right-of-use assets
A key judgement on adoption of IFRS 16 is determining the incremental borrowing rates to be applied as at 1 January 2019. 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 and that is within
the control of the lessee.
(v) Compliance with US sanctions legislation
During the current year, the Group recognised certain costs in relation to a review of the compliance of certain group companies’ export activities
(in the Filters division) with US laws, for which the Group is co-operating fully with the US Government. As a result of the investigations conducted
by the Group in response to US Government enquiries, the Group has made a voluntary disclosure to the US Office of Foreign Assets Control.
During the year, the Group provided for its current estimate of the expected financial penalties for sanction compliance failures, amounting to
£2.3m. In arriving at this estimate, management received professional advice from external consultants which took into account past experiences
from previous cases. As the Group continues to liaise with the US authorities, this estimate is subject to potential variability. Further details are
included within note 2.
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 2.
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Financial Statements
Notes
1. Segment analysis
In accordance with IFRS 8, Essentra has determined its operating segments based upon the information reported to the Group Management
Committee.
The operating segments are as follows:
Components is a global market leading manufacturer and distributor of plastic injection moulded, vinyl dip moulded and metal items.
Packaging is one of only two multi-continental suppliers of a full secondary packaging range to the health and personal care sectors.
Filters is the only global independent supplier of innovative cigarette filters and related solutions to the tobacco industry.
Specialist Components comprised the following smaller businesses of Essentra:
• The Extrusion business is a leading custom profile extruder located in the Netherlands which offers a complete design and production service.
• The Pipe Protection Technologies business specialises in the manufacture of high performance innovative products from commodity resins to
engineering-grade thermoplastics and polymer alloys for use in the oil & gas industry.
• The Speciality Tapes business has expertise in coating multiple adhesive systems in numerous technologies, and its products range from foam,
magnetic, finger lift and acrylic high bond tapes to hook and loop and non-skid foam.
• The Card Solutions business is a leading European provider of ID card printers, systems and accessories to direct and trade customers.
With effect from 1 January 2019 the Group has altered the organisational structure by transferring the Speciality Tapes Express distribution
locations in the US from the Components division into the Specialist Components division. In addition in the second half of 2019, the Tear Tapes
business has been transferred into the Filters division and the Industrial Supply business has been transferred into the Components division, at which
point there were no more businesses within the Specialist Components division. As a consequence, segmental information for the year ended 31
December 2018 has been restated to reflect these changes.
During the year ended 31 December 2019, the Group disposed of the Extrusion, Pipe Protection Technologies, Card Solutions and Speciality Tapes
businesses. Further details of this can be found in note 24.
The adjusted operating profit/loss presented for each operating segment includes the effect of allocation of certain functional costs such as
finance, human resources, legal and IT, as well as costs relating to management of the divisions on an internal management methodology.
As explained within the accounting policies, the comparative information is not restated for IFRS 16.
134 ESSENTRA PLC ANNUAL REPORT 2019
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134
Financial Statements
1. Segment analysis continued
Components
£m
Packaging
£m
Filters
£m
Specialist
Components
£m
Eliminations
£m
Central
Services1
£m
External revenue
Intersegment revenue
Total revenue
283.1
0.2
283.3
352.7
---
352.7
303.3
0.3
303.6
35.0
0.2
35.2
---
(0.7)
(0.7)
---
---
---
2019
Total
£m
974.1
---
974.1
Operating profit/(loss) before
intangible amortisation and
exceptional and other adjusting items
Amortisation of acquired
intangible assets
Exceptional and other adjusting items
Operating profit/(loss)
Segment assets
Intangible assets
Unallocated items 2
Total assets
Segment liabilities
Unallocated items 2
Total liabilities
Other segment items
Capital expenditure (cash spend)
Depreciation
Average number of employees
60.3
15.1
36.2
4.8
(9.3)
(1.6)
49.4
164.1
171.1
---
335.2
54.1
---
54.1
14.1
7.4
2,409
(12.7)
7.4
9.8
218.9
283.6
---
502.5
89.2
---
89.2
13.5
12.0
3,251
(0.1)
(9.2)
26.9
193.9
22.3
---
216.2
59.0
---
59.0
16.8
10.7
1,730
(0.8)
19.7
23.7
---
---
---
---
---
---
---
0.6
0.1
387
---
---
---
---
---
---
---
---
---
---
---
---
---
---
(28.9)
87.5
---
(0.9)
(29.8)
28.1
9.3
114.9
152.3
35.6
427.5
463.1
13.9
5.3
221
(22.9)
15.4
80.0
605.0
486.3
114.9
1,206.2
237.9
427.5
665.4
58.9
35.5
7,998
1 Central Services includes executive and non-executive management, group finance, tax, treasury, legal, group assurance, human resources, information technology, corporate development, investor
relations and other services provided centrally to support the operating segments.
2 The unallocated assets relate to income and deferred tax assets, retirement benefit assets, derivatives, short-term investments, loan receivables and cash and cash equivalents. The unallocated
liabilities relate to interest bearing loans and borrowings, retirement benefit obligations, derivatives, deferred tax liabilities and income tax payable. Intersegment transactions are carried out on an
arm’s length basis.
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ESSENTRA PLC ANNUAL REPORT 2019 135
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FINANCIAL STATEMENTS
2018
(restated)
Total
£m
1,025.6
---
1,025.6
Financial Statements
Notes continued
1. Segment analysis continued
Components
£m
Packaging
£m
Filters
£m
Specialist
Components
£m
Eliminations
£m
Central
Services1
£m
External revenue
Intersegment revenue
Total revenue
Operating profit/(loss) before
intangible amortisation and
exceptional and other adjusting items
Amortisation of acquired
intangible assets
Exceptional and other adjusting items
Operating profit/(loss)
Segment assets3
Intangible assets3
Unallocated items2
Total assets
Segment liabilities3
Unallocated items2
Total liabilities
Other segment items
Capital expenditure (cash spend)
Depreciation
Average number of employees
279.3
0.5
279.8
61.0
(8.6)
(1.7)
50.7
146.4
167.8
---
314.2
43.7
---
43.7
8.4
7.8
2,390
342.2
0.1
342.3
298.8
0.6
299.4
105.3
1.7
107.0
---
(2.9)
(2.9)
---
---
---
5.4
35.1
10.9
(12.6)
(7.4)
(14.6)
182.6
296.7
---
479.3
86.0
---
86.0
21.0
10.0
3,169
---
(1.3)
33.8
194.8
22.0
---
216.8
62.1
---
62.1
11.9
8.7
1,514
(1.5)
(4.1)
5.3
70.4
51.7
---
122.1
14.0
---
14.0
4.2
6.0
938
---
---
---
---
---
---
---
---
---
---
---
---
---
---
(21.7)
90.7
---
(6.3)
(28.0)
32.5
---
107.7
140.2
26.4
436.2
462.6
15.7
2.9
228
(22.7)
(20.8)
47.2
626.7
538.2
107.7
1,272.6
232.2
436.2
668.4
61.2
35.4
8,239
1 Central Services includes executive and non-executive management, group finance, tax, treasury, legal, group assurance, human resources, information technology, corporate development, investor
relations and other services provided centrally to support the operating segments.
2 The unallocated assets relate to income and deferred tax assets, retirement benefit assets, derivatives, short-term investments, loan receivables and cash and cash equivalents. The unallocated
liabilities relate to interest bearing loans and borrowings, retirement benefit obligations, derivatives, deferred tax liabilities and income tax payable. Intersegment transactions are carried out on an
arm’s length basis.
3 Intangible assets, segment assets and segment liabilities in 2018 include the assets and liabilities of the disposal group held for sale.
Continuing operations’ net finance expense of £14.5m (2018: £10.9m) and income tax expense of £24.3m (2018: £8.2m) cannot be meaningfully
allocated by segment.
No customer accounted for more than 10% of revenue in either 2019 or 2018. Analysed by destination, revenue to Europe & Africa is £481.0m
(2018: £477.4m), revenue to Americas is £296.4m (2018: £340.2m) and revenue to Asia and Middle East is £196.7m (2018: £208.0m). Revenue
to the UK is £97.2m (2018: £105.8m), with other significant countries being the USA with revenue of £221.0m (2018: £264.6m), Ireland £50.9m
(2018: £52.5m) and Germany £52.5m (2018: £51.4m). Non-current assets in the UK total £166.8m (2018: £153.5m), with the other significant
location being the USA with £293.6m (2018: £334.6m).
136
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Financial Statements
2. Net operating expense
Changes in inventories of finished goods and work-in-progress
Raw materials and consumables
Personnel expense1 (note 5)
Depreciation of property, plant and equipment
Profit on sale of property, plant and equipment
Depreciation of lease right-of-use assets
Amortisation of intangible assets
Exceptional and other adjusting items1
Operating lease expense
Exchange differences recognised in profit or loss
Other operating expenses
Net operating expenses
2019
£m
3.9
401.9
287.1
35.5
(0.2)
11.3
23.8
(15.4)
0.7
(0.3)
145.8
894.1
2018
£m
(2.0)
438.2
293.7
35.4
(3.1)
---
23.2
20.8
14.4
(0.4)
158.2
978.4
1 In addition to the above, personnel expense totalling £2.9m (2018: £8.2m) was charged to exceptional and other adjusting items during the year.
No income or expense (2018: £nil) was recognised in operating expense during the year in respect of ineffective cash flow hedges. Essentra’s
hedges of net investments were also entirely effective in 2019 and 2018, and therefore no hedge ineffectiveness has been recognised in net
operating expense in 2019 (2018: £nil). Research and development expenses (including relevant staff costs) charged to profit or loss during
the year amounted to £3.6m (2018: £4.6m). Other operating expenses include manufacturing, selling, general and administrative overheads.
Exceptional and other adjusting items
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(Gains)/losses and transaction costs relating to acquisitions and disposals of businesses1
Acquisition integration and restructuring costs2
Other3
Exceptional and other adjusting items
2019
£m
(15.9)
0.7
(0.2)
(15.4)
2018
£m
4.9
0.2
15.7
20.8
The exceptional and other adjusting items are separately presented from other items by virtue of their nature, size and/or incidence (considered
for each operating segment). They are shown as a separate line item within operating profit on the face of the consolidated income statement
in order for the reader to obtain a clearer understanding of the underlying results of the ongoing Group’s operations, by excluding the impact
of items which, in management’s view, do not form part of the Group’s underlying operating results, such as gains, losses or costs arising from
business acquisition and disposal activities, significant restructuring and closure costs and other items which are non-recurring or one-off in
nature (such as the costs of fundamental strategic review and reorganisation). Operating profit before exceptional and other adjusting items
and acquired intangible amortisation is called adjusted operating profit, which forms the primary basis of management’s review and assessment
of operational performance of the Group’s businesses.
1 Gains/losses and transaction costs relating to acquisitions and disposals of businesses are made up of £8.9m gain on the disposal of Pipe
Protection Technology, £14.9m gain on disposal of Speciality Tapes, offset by a £3.0m loss on disposal of the Extrusion business, £1.3m loss
on disposal of the Card Solutions business, £1.5m costs incurred in establishing the Filters China joint venture, £0.1m costs incurred in acquiring
non-controlling interest of Dubai, £0.9m costs incurred acquiring Innovative Components and £0.8m costs incurred acquiring Nekicesa.
The remaining £0.3m relates to costs incurred to date in pursuit of acquisition targets.
In 2018 there was a net loss of £2.5m relating to the disposal of the Swiftbrook paper merchant business in July 2018, £0.1m of costs in relation to
the acquisition of Nolato Hertila which completed on 5 July 2018, £1.1m relating to the effect of unwinding the fair value adjustment on inventory
in relation to the acquisitions of Micro Plastics and Nolato Hertila and £1.9m of transaction costs relating to ongoing acquisition and disposal
projects and release of £0.7m of deferred consideration relating to a prior acquisition.
2 Acquisition integration and restructuring costs relate to the integration of; Hertila, acquired in 2018, Innovative Components, acquired in 2019,
and Nekicesa, acquired in 2019, into the existing business. Included within the total is £0.1m credit relating to a release of Micro Plastics
integration costs accrued.
3 Other exceptional items in 2019 of £0.2m gain relate to:
• £6.2m credit relating to the release of onerous lease provisions, originally provided for as part of the closure of the Newport Cartons business
in 2017, as a result of lease surrender being agreed with the lessor.
• £2.9m credit relating to the release of excess restructuring and closure provisions relating to the closure of the Largo and Kilmarnock sites within
the Packaging division and Speciality Tapes business at Nottingham within the now dissolved Specialist Components division.
• £0.6m cost in relation to the restructure of the Group Finance function. The programme represents an initiative to streamline and restructure
the Finance function, in line with managements vision of the future of the Finance function.
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 137
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FINANCIAL STATEMENTS
Financial Statements
Notes continued
2. Net operating expense continued
• £7.5m of cost in relation to a review of the compliance of certain group companies’ export activities (in the Filters division) with US laws,
for which the Group is co-operating fully with the US Government. As a result of the investigations conducted by the Group in response to
US Government enquiries, the Group has made a voluntary disclosure to the US Office of Foreign Assets Control. During the year, the Group
provided for its current estimate of the expected financial penalties for sanction compliance failures, amounting to £2.3m. In arriving at this
estimate, management received professional advice from external consultants which took into account past experiences from previous cases.
In addition, £3.2m of external advisory and consultancy costs involved in investigations conducted by the Group and £0.4m of costs of external
resources for direct remediation actions were incurred. As a result of impact on trading transactions with certain customers, impairment
losses of certain related assets (inventories, trade receivable and property, plant and equipment) amounting to £1.6m were also recognised
during the year.
• £0.7m restructuring cost relating to personnel within the now dissolved Specialist Components division not retained within the business.
• £0.1m in relation to Filters restructuring.
The tax effect of the exceptional items is a charge of £14.9m (2018: £2.3m credit).
Auditor’s remuneration
Audit of these financial statements
Amounts receivable by the Company’s auditor and its associates in respect of:
Audit of financial statements of subsidiaries of the Company
Audit-related assurance services1
2019
£m
0.2
1.6
0.2
2.0
2018
£m
0.2
1.2
0.2
1.6
1 These mainly relate to review of the half year financial statements. In addition, non-audit services primarily relate to tax services outside the EU for which fees in the year total less than £0.05m
2019
£m
0.8
0.8
0.5
2.1
(12.2)
(0.8)
(0.3)
(1.2)
(2.1)
(16.6)
(14.5)
2018
£m
0.5
0.7
0.5
1.7
(10.8)
(0.7)
---
(1.1)
---
(12.6)
(10.9)
(2018: less than £0.05m).
3. Net finance expense
Finance income
Bank deposits
Other finance income
Net interest on net pension scheme assets (note 18)
Finance expense
Interest on loans and overdrafts
Amortisation of bank facility fees
Other finance expense
Net interest on net pension scheme liabilities (note 18)
Interest on leases
Net finance expense
138
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Financial Statements
4. Income tax
Amounts recognised in the consolidated income statement
Current tax
Prior years’ tax
Deferred tax (note 16)
Prior years’ deferred tax (note 16)
Income tax expense
Amounts recognised in the consolidated statement of comprehensive income
Deferred tax (credit)/expense on remeasurement of defined benefit pension schemes
Income tax (credit)/expense in respect of foreign exchange
Income tax (credit)/expense
2019
£m
19.9
(0.4)
4.6
0.2
24.3
(1.0)
(1.6)
(2.6)
2018
£m
14.1
0.7
(5.0)
(1.6)
8.2
0.4
0.2
0.6
Factors affecting income tax for the year
Essentra operates in many countries and is subject to income tax in many different jurisdictions (the most significant jurisdictions being the UK,
USA, Singapore, Hungary, Thailand and Indonesia). Essentra calculates its average expected tax rate as a weighted average of the applicable
corporate income tax rates in the tax jurisdictions in which it operates.
Profit before income tax
Tax at weighted average tax rate (2019: 16.9%; 2018: 18.5%)1
Effects of:
Permanent disallowable items (including exceptional costs)2
Disposal of entities3
Overseas state and local tax4
Unrecognised tax attributes (utilised)/arising5
Adjustments in respect of prior years
Withholding tax (including on unremitted earnings)6
Change in tax rates7
Other items8
Income tax expense
2019
£m
65.5
11.1
2.4
8.8
(0.4)
(1.4)
(0.2)
1.0
0.3
2.7
24.3
Income tax expense in the UK is £1.4m (2018: £2.6m credit). The tax effect on exceptional items is included within note 2.
1 The change in the weighted average applicable tax rate is caused by a change in the geographical balance of the Group’s profits and changes in corporate tax rates in these geographies.
2 This primarily includes depreciation on assets not qualifying for capital allowances and costs incurred in connection with acquisition and disposals of businesses. Permanent disallowable items
may vary in future years dependent on the nature of future expenditure.
3 The disposal of the Pipe Protection Technologies, Extrusion and Speciality Tapes businesses in 2019 gave rise to taxable gains, the basis of which is different to the accounting gains.
4 The reduction in the year is largely driven by the gains on disposal which increase the Group’s ability to access tax credits that reduce the impact of the US Global Intangible Low Taxed
Income provisions.
5 See further information regarding deferred tax asset recognition at note 16.
6 Essentra is able to control the timing and amount of remitted earnings so this amount may vary in future years.
7 This reflects the impact of differences in substantively enacted, or enacted corporate tax rates, for future periods to those of the current period.
8 Release/recognition of provisions for uncertain tax positions following challenges raised by local tax authorities and the settlement of open tax audits and expiry of statute of limitations
and sundry items.
2018
£m
36.3
6.7
1.1
---
1.8
1.1
(1.0)
1.3
---
(2.8)
8.2
I
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I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 139
139
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
5. Personnel expense
Wages and salaries
Social security expense
Pension expense (note 18)
Share option expense (note 18)
Total personnel expense
2019
£m
247.5
26.0
9.7
3.9
287.1
2018
£m
254.7
25.4
8.8
4.8
293.7
In addition to the above, personnel expense totalling £2.9m (2018: £8.2m) was charged to exceptional and other adjusting items during the year.
The Annual Report on Remuneration on pages 101 to 111 sets out information on Directors’ remuneration.
Key management remuneration
Short-term employee benefits
Post-employment benefits
Share-based payments
Termination benefits
2019
£m
5.6
0.8
2.3
0.3
9.0
2018
£m
6.0
0.5
3.2
0.8
10.5
Essentra considers key management personnel to be the Directors and the members of the Group Management Committee. The amounts
disclosed are on the same basis as those used to determine the relevant amounts disclosed in the Annual Report on Remuneration.
6. Earnings per share
Earnings
Earnings attributable to equity holders of Essentra plc
Adjustments
Amortisation of acquired intangible assets
Exceptional and other adjusting items
Tax charge/(relief) on adjustments
Adjusted earnings
Weighted average number of shares
Basic weighted average ordinary shares outstanding (million)
Dilutive effect of employee share option plans (million)
Diluted weighted average ordinary shares (million)
Earnings per share (pence)
Basic earnings per share
Adjustment
Basic adjusted earnings per share
Diluted earnings per share
Diluted adjusted earnings per share
2019
£m
2018
£m
38.4
24.3
22.9
(15.4)
7.5
9.8
55.7
262.0
3.6
265.6
14.7p
6.6p
21.3p
14.5p
21.0p
22.7
20.8
43.5
(7.4)
60.4
261.9
2.7
264.6
9.3p
13.8p
23.1p
9.2p
22.8p
Adjusted earnings per share is provided to reflect the underlying earnings performance of Essentra.
The basic weighted average number of ordinary shares in issue excludes shares held in treasury and shares held by an employee benefit trust.
140
140 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
7. Property, plant and equipment
Cost
Beginning of year
Acquisitions (note 24)
Business disposals (note 24)
Additions
Disposals
Transfers
Currency translation
End of year
Accumulated depreciation and impairment
Beginning of year
Business disposals (note 24)
Charge in period
Disposals
Transfers
Impairment
Currency translation
End of year
Land and
buildings
£m
Plant and
machinery
£m
Fixtures,
fittings and
equipment
£m
89.9
10.6
(18.0)
4.5
(1.7)
0.2
(3.6)
81.9
20.9
(7.6)
2.7
(1.2)
---
---
(1.4)
13.4
409.3
3.1
(33.8)
33.2
(13.3)
(1.5)
(12.2)
384.8
232.6
(22.2)
24.5
(11.4)
---
0.2
(8.3)
215.4
77.7
0.3
(2.3)
11.8
(5.6)
(1.7)
(1.3)
78.9
41.2
(2.0)
8.3
(5.6)
(0.5)
0.5
(1.1)
40.8
2019
Total
£m
576.9
14.0
(54.1)
49.5
(20.6)
(3.0)
(17.1)
545.6
294.7
(31.8)
35.5
(18.2)
(0.5)
0.7
(10.8)
269.6
Net book value at end of year
68.5
169.4
38.1
276.0
Cost
Beginning of year
Acquisitions (note 24)
Additions
Disposals
Transfers to assets held for sale
Transfers
Currency translation
End of year
Accumulated depreciation and impairment
Beginning of year
Charge in period
Disposals
Transfers to assets held for sale
Transfers
Impairment
Currency translation
End of year
Land and
buildings
£m
Plant and
machinery
£m
Fixtures,
fittings and
equipment
£m
98.2
---
3.3
(3.3)
(10.4)
(0.1)
2.2
89.9
19.7
3.1
(1.3)
(1.5)
0.1
0.1
0.7
20.9
418.8
0.4
36.4
(24.5)
(31.1)
---
9.3
409.3
238.4
25.4
(20.0)
(17.9)
(0.1)
1.8
5.0
232.6
61.0
0.1
18.7
(1.8)
(1.2)
0.1
0.8
77.7
36.8
6.9
(2.1)
(1.1)
---
---
0.7
41.2
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
2018
Total
£m
578.0
0.5
58.4
(29.6)
(42.7)
---
12.3
576.9
294.9
35.4
(23.4)
(20.5)
---
1.9
6.4
294.7
Net book value at end of year
69.0
176.7
36.5
282.2
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 141
141
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
7. Property, plant and equipment continued
Included within land and buildings, plant and machinery and fixtures, fittings and equipment are assets in the course of construction of £24.0m
(2018: £12.2m) which were not depreciated during the year.
Contractual commitments to purchase property, plant and equipment amounted to £2.0m at 31 December 2019 (2018: £3.1m). Contractual
commitments to lease property, plant and equipment amounted to £5.1m at 31 December 2019 (2018: £nil). The net book value of assets under
finance lease amounted to £nil as at 31 December 2019 (2018: £0.9m).
Impairment charge in 2018 of £1.9m related primarily to the closure of the Kilmarnock site within the Packaging division and the Speciality Tapes
business at Nottingham within the Specialist Components division. The assets were written down to their recoverable amount, which represented
fair value less cost of disposal.
8. Intangible assets
Cost
Beginning of year
Acquisitions (note 24)
Business disposals (note 24)
Additions
Disposals
Transfer
Currency translation
End of year
Amortisation and impairment
Beginning of year
Business disposals (note 24)
Charge for the year
Transfer
Disposal
Currency translation
End of year
Goodwill
£m
Customer
relationships
£m
Other
intangible
assets
£m
370.8
12.6
(34.5)
---
---
---
(9.9)
339.0
31.9
(3.0)
---
---
---
(0.6)
28.3
430.3
13.3
(27.0)
---
---
---
(14.5)
402.1
246.7
(17.6)
21.9
---
---
(7.2)
243.8
17.1
0.7
---
10.5
(7.3)
3.0
(0.2)
23.8
11.4
---
1.9
0.5
(7.3)
---
6.5
2019
Total
£m
818.2
26.6
(61.5)
10.5
(7.3)
3.0
(24.6)
764.9
290.0
(20.6)
23.8
0.5
(7.3)
(7.8)
278.6
Net book value at end of year
310.7
158.3
17.3
486.3
142
142 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
8. Intangible assets continued
Cost
Beginning of year
Acquisitions (note 24)
Additions
Disposals
Transfers to assets held for sale
Currency translation
End of year
Amortisation and impairment
Beginning of year
Disposals
Charge for the year
Transfers to assets held for sale
Impairment
Currency translation
End of year
Goodwill
£m
Customer
relationships
£m
Other
intangible
assets
£m
373.5
2.0
---
(1.3)
(10.2)
6.8
370.8
31.2
---
---
(0.2)
---
0.9
31.9
421.6
3.4
---
(1.5)
---
6.8
430.3
219.7
(0.5)
22.1
---
0.8
4.6
246.7
13.6
---
3.2
---
---
0.3
17.1
10.1
---
1.1
---
---
0.2
11.4
2018
Total
£m
808.7
5.4
3.2
(2.8)
(10.2)
13.9
818.2
261.0
(0.5)
23.2
(0.2)
0.8
5.7
290.0
Net book value at end of year
338.9
183.6
5.7
528.2
Other intangible assets principally comprise trade names acquired with Reid Supply, developed technology acquired with Richco, order backlog,
software development and e-Commerce development costs. Amortisation of intangible assets arising from business combinations (‘‘acquired
intangible assets’’) is presented separately on the face of the consolidated income statement. During the year ended 31 December 2019 software
and development costs previously classified within Plant, Property and Equipment has been transferred into intangibles.
The e-Commerce development and software development costs were not acquired through a business combination, and their amortisation is
included within operating profit before amortisation of acquired intangibles and exceptional and other adjusting items as presented on the face
of the consolidated income statement.
The weighted average remaining useful lives of customer relationships and other intangible assets at the end of the year were 7.9 years and
6.3 years (2018: 8.8 years and 9.4 years) respectively.
Essentra tests intangible assets annually for impairment, or more frequently if there are indications of impairment. A discounted cash flow analysis
is computed to compare the discounted estimated future operating cash flows to the net carrying value of the goodwill and other intangible and
tangible assets for each cash generating unit or group of cash generating units as appropriate.
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 143
143
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
8. Intangible assets continued
Goodwill is allocated to groups of cash generating units, being the operating segments. During the year the Specialist Components division was
dissolved. The remaining businesses within the Specialist Components division, Essentra Industrial Supply (Reid) and Tear Tapes, were transferred
to the Components and Filters divisions respectively along with any associated goodwill. Goodwill is allocated to groups of cash generating units,
being the operating segments, with the allocation as at 31 December 2018 now restated, as follows:
Components
Packaging
Filters
Specialist Components
Intangible assets, apart from goodwill, are allocated to the businesses to which they relate as shown below:
Business
Components --- Businesses of former Moss and Skiffy
Components --- Businesses of former Richco
Components --- Business of former Mesan
Components --- Business of former Abric
Components --- Business of former MicroPlastics
Components --- Industrial Supply
Components --- Innovative Components
Components --- e-Commerce development costs
Components --- Other businesses
Security (Card Solutions)
Speciality Tapes
Packaging --- Americas
Packaging --- Asia
Packaging --- Europe
Packaging --- Nekicesa
Filters
Not allocated to divisions --- software and development costs
Operating segment
Components
Components
Components
Components
Components
Components
Components
Components
Components
Specialist Components
Specialist Components
Packaging
Packaging
Packaging
Packaging
Filters
Central
Goodwill
2018
(restated)
£m
94.4
191.3
21.7
31.5
338.9
2019
£m
98.5
190.5
21.7
---
310.7
Customer relationships and
other intangible assets
2019
£m
10.7
22.6
4.6
8.6
4.5
3.5
8.1
5.2
4.8
---
---
31.9
1.5
55.5
4.2
0.6
9.3
2018
£m
12.3
26.9
6.1
9.9
5.0
4.6
---
2.9
5.7
1.1
9.1
37.0
1.7
66.7
---
0.3
---
175.6
189.3
At 31 December 2019, management has performed an impairment review of the assets in each division. Following the impairment assessment,
no impairment loss was recognised in 2019.
The impairment assessment for intangible assets (excluding goodwill) and property, plant and equipment is performed on the cash generating
units within the divisions. The cash generating units are primarily the manufacturing sites. Goodwill is tested at the divisional level, which is the
level that management monitor goodwill at. The recoverable amount is estimated on the basis of value in use, ie discounted cash flow projection
expected to be generated by the group of cash generating units. For assets in the cash generating units assessed to be impaired, their fair value less
costs to sell is also considered in determining the impairment loss to be recognised, if any. In these cases, the fair value less costs to sell is based on
estimated market prices reflecting the age and condition of the asset.
144
144 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
8. Intangible assets continued
The impairment tests for goodwill and intangible assets are based on the business plan (the "Plan"). Cash flow projections are over five years
using Plan for the first year and subsequent years based on the Group’s Strategic Plan. The Groups impairment test incorporates the following
assumptions and changes in the current year:
• Impairment reviews now take into account the impact of IFRS 16 in both the calculation of discounted cash flows and the asset base.
• Filters was tested for impairment for the first time as it now holds goodwill due to the transfer of Tear Tapes from the Specialist
Components division.
• Specialist Components has now been dissolved and is therefore no longer part of the impairment assessment.
• The key assumptions in the cash flow projections for the Plan are the revenue growth and operating margin for each division. Operating margin
is primarily based on the levels achieved in 2019, which are disclosed in note 1, adjusted by targets set for revenue expansion and cost control
and reduction for each individual division within the Plan period. The key assumptions underlying the estimation of cash flow projections for
value in use are operating profit margin and revenue growth assumptions. The values assigned to these assumptions represent management’s
assessment of market condition and scope for cost and profitability improvement, taking into account realisable synergies resulting from
integration activities. The compound annual revenue growth rate assumption across all three divisions for the next five years ranges from 3.3%
to 6.4%. The average operating profit margin assumption for the next five years included within the Packaging division impairment assessment
ranges from 8.0% to 11.7%. In respect of Components and Filters, the combined average operating profit margin over the five year forecast
period is assumed to improve by 100 bps from 2019.
• In relation to the test for the Components and Filters divisions, cash flows beyond the Plan period are based on Plan cash flows with growth
rates specific to each business during the Plan period of up to 6.5%.
• The estimated cash flows are discounted using a pre-tax discount rate based upon Essentra’s estimated post-tax weighted average cost of
capital of 7.5% (2018: 7.7%). The specific pre-tax discount rates applied for each group of cash generating units to which significant goodwill is
allocated are as follows: 9.0% for Packaging, 9.7% for Components and 9.5% for Filters (2018: 8.8% for Packaging and 9.6% for Components).
• In relation to the test for the Packaging division, management carried out a detailed assessment of the growth and profit margin assumptions
for each of the next four years after the Plan period, and applied a terminal growth rate of 1.5% (2018: 2.0%) subsequently. The growth and
profit margin assumptions are based on management’s assessment of market condition and scope for cost and profitability improvement,
taking into account realisable synergies following the recent integration activities.
The following change to key assumptions will cause the carrying amount to exceed the recoverable amount in the Packaging division:
• An increase in discount rate of 380 basis points
• A reduction of 610 basis points in the operating profit margin in the terminal year
• A reduction of 540 basis points in the terminal growth rate
Management considered the following reasonably possible changes in the key assumptions, and the associated impact on the impairment
assessment, in relation to the Packaging division:
• A 1.2% increase in discount rate would reduce headroom to £164.0m
• A 1.5% reduction in the terminal growth rate (ie to assume no growth) would reduce headroom to £166.0m
• A 1.5% reduction in each year’s growth rate would reduce headroom to £252.9m
• A 2.7% reduction in operating profit margin in the terminal year would reduce headroom to £159.4m
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 145
145
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
9. Lease right-of-use assets
Cost
Beginning of year
Additions
Terminations
Acquisitions (note 24)
Business disposals (note 24)
Currency translation
End of year
Accumulated depreciation
Beginning of year
Charge for the year
Terminations
Business disposals (note 24)
Currency translation
End of year
Land and
buildings
£m
Plant and
machinery
£m
Fixtures,
fittings and
equipment
£m
83.2
10.6
(4.4)
0.3
(2.6)
(2.7)
84.4
48.2
8.2
(2.9)
(1.6)
(1.7)
50.2
11.1
2.6
(2.0)
3.5
(0.2)
(0.4)
14.6
4.8
3.1
(2.0)
(0.2)
(0.2)
5.5
0.2
0.1
(0.1)
---
---
---
0.2
0.2
---
(0.1)
---
---
0.1
2019
Total
£m
94.5
13.3
(6.5)
3.8
(2.8)
(3.1)
99.2
53.2
11.3
(5.0)
(1.8)
(1.9)
55.8
Net book value at end of year
34.2
9.1
0.1
43.4
The income statement shows the following amounts relating to leases:
Interest expense (included in finance cost)
Expense relating to short-term leases (included in cost of goods sold and administrative expenses)
Expense relating to leases of low-value assets that are not shown above as short-term leases
(included in operating expenses)
2019
£m
2.1
0.2
0.2
2.5
2018
£m
---
---
---
---
The lease expenses for short-term leases for the year ending 31 December 2020 is expected to be similar to the expense as disclosed above.
146
146 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
9. Lease right-of-use assets continued
Operating lease (IAS 17) commitments and opening lease liabilities reconciliation:
IAS 17 future operating lease commitments based on gross cash flows as at 31 December 2018
Add: adjustments due to different treatment of extension and termination options
(Less): contracts to which the short-term leases exemption has been applied
(Less): contracts to which the low-value leases exemption has been applied
(Less): service/non-lease components of the lease contracts
Discounted using the Group’s incremental borrowing rate
Lease liability recognised as at 1 January 2019
Of which are:
IFRS 16 lease liability due within one year
IFRS 16 lease liability due after one year
Total
The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 3.9%.
10. Inventories
Raw materials and consumables
Work-in-progress
Finished goods and goods held for resale
£m
62.3
7.8
(0.7)
(0.3)
(1.8)
67.3
(7.9)
59.4
11.7
47.7
59.4
2018
£m
51.3
11.0
57.4
119.7
2019
£m
45.9
9.9
57.3
113.1
Inventories with a total value of £0.9m (2018: £1.5m) were written down as a result of site closures and a review of the compliance of certain group
companies’ export activities (in the Filters division).
On 31 December 2019, inventories of £nil (2018: £3.4m) have been transferred into a disposal group held for sale, see note 24.
11. Trade and other receivables
Trade receivables
Other receivables
Prepayments and accrued income
2019
£m
140.0
16.4
10.5
166.9
2018
£m
150.0
25.9
12.9
188.8
On 31 December 2019, trade and other receivables of £nil (2018: £5.8m) have been transferred into a disposal group held for sale, see note 24.
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F
I
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A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 147
147
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
12. Cash and cash equivalents
Bank balances
Short-term bank deposits and investments
Cash and cash equivalents
Amount in disposal group held for sale
Cash and cash equivalents in the statement of cash flows
13. Trade and other payables
Trade payables
Other tax and social security contributions
Other payables
Accruals and deferred income
2019
£m
62.6
7.8
70.4
---
70.4
2019
£m
108.3
8.0
14.3
43.9
174.5
2018
£m
61.9
3.9
65.8
0.4
66.2
2018
£m
124.3
8.2
18.3
48.7
199.5
On 31 December 2019, trade and other payables of £nil (2018: £4.1m) have been transferred into a disposal group held for sale, see note 24.
14. Interest-bearing loans and borrowings
Non-current liabilities
Unsecured bank loans
US Private Placement Loan Notes
Current liabilities
Other unsecured loans
US Private Placement Loan Notes
Finance lease liabilities
2019
£m
2018
£m
192.5
56.5
249.0
0.1
60.6
---
60.7
190.6
120.6
311.2
---
---
0.1
0.1
At 31 December 2019, the Group had £135.0m (2018: £135.0m), and €70.0m (2018: €65.0m) of unsecured bank loans drawn in sterling and euros
at floating rates of interest set by reference to LIBOR. Essentra’s $155.0m US Private Placement Loan Notes are at a weighted average interest
rate of 5.26% per annum (2018: 5.26%).
In April 2020 $80m of US Private Placement Loan Notes are due to be repaid and so in February 2020, the Company entered into an agreement
with certain banks for a bridging loan facility for £50m, with an initial term of 12 months, plus a further six months at Essentra’s option, and
thereafter another six months at the lenders’ discretion. Furthermore in December 2019, the Company entered into a note purchase agreement
for a new USPP facility for $25m ($15m due in April 2027 and $10m due in April 2030), which will be available for drawdown in April 2020.
The currency profile of the carrying and nominal values of Essentra’s loans and borrowings is as follows:
Sterling
US dollar
Euro
Carrying
value
£m
133.7
117.1
58.9
309.7
2019
Nominal
value
£m
135.0
117.4
59.4
311.8
Carrying
value
£m
133.3
120.6
57.4
311.3
2018
Nominal
value
£m
135.0
121.1
58.1
314.2
The difference between the total nominal and carrying value of loans and borrowings relates to the amortised value of prepaid facility fees of
£2.1m (2018: £2.9m).
148
148 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
15. Derivatives
Essentra uses derivatives to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment
activities. In accordance with its Treasury policy, Essentra does not hold or issue derivatives for trading purposes.
At 31 December 2019
Derivatives held in cash flow hedges
Forward foreign exchange contracts
At 31 December 2018
Derivatives held in net investment hedges
Forward foreign exchange contracts
Derivatives held in cash flow hedges
Forward foreign exchange contracts
Assets
Liabilities
Fair
values
£m
Contractual
or notional
amounts
£m
Fair
values
£m
Contractual
or notional
amounts
£m
0.8
0.8
27.0
27.0
0.3
0.3
16.5
16.5
Assets
Contractual
or notional
amounts
£m
3.4
10.0
13.4
Fair
values
£m
0.1
0.2
0.3
Liabilities
Contractual
or notional
amounts
£m
8.8
19.8
28.6
Fair
values
£m
(0.1)
(0.1)
(0.2)
Cash flow hedges are hedges of the currency risk exposure to variability in cash flows. They relate to trading transactions and interest payments
denominated in foreign currencies.
Hedges of net investments are hedges of the currency risk exposure to changes in the carrying value of net investments in foreign operations.
The net fair value gains or losses on open forward foreign exchange contracts that hedge foreign currency risk of anticipated future sales,
purchases and interest payments are accounted for as cash flow hedges. The fair value will be transferred to the consolidated income statement
when the forecast transactions occur. All of the hedged transactions are expected to occur over the next 15 months and all derivative instruments
mature within the next 15 months.
Essentra had US dollar and euro denominated borrowings which it designated as hedges of its net investments in subsidiary undertakings.
The exchange gains of £3.7m (2018: losses of £6.3m) on the US dollar borrowings and the gains of £3.9m (2018: gains of £0.9m) on the euro
borrowings were recognised in other comprehensive income. In addition, certain foreign exchange contracts were also designated as hedges
of the Group’s net investments in foreign operations.
Finance income and expense arising on financial assets and financial liabilities held at amortised cost are those amounts, excluding interest
on pension scheme assets and interest on pension scheme liabilities, detailed in note 3.
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S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 149
149
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
16. Deferred tax
Deferred tax assets and liabilities (including amounts relating to disposal group held-for-sale) are attributable to the following:
Property, plant and equipment1
Intangible assets2
Employee benefits3
Other4
Tax (assets)/liabilities
Set off of tax
Net tax (assets)/liabilities
Total income statement charge/(credit)
2019
Income
Statement:
Charge/
(Credit)
£m
2.5
(2.8)
0.3
4.8
---
---
---
4.8
Net
£m
4.9
41.1
(7.2)
(7.1)
31.7
---
31.7
---
2018
Income
Statement:
Charge/
(Credit)
£m
(1.6)
(2.8)
(0.1)
(2.1)
---
---
---
(6.6)
Net
£m
8.5
47.6
(5.5)
(14.9)
35.7
---
35.7
---
Assets
£m
(4.9)
---
(8.7)
(21.2)
(34.8)
20.0
(14.8)
---
Liabilities
£m
13.4
47.6
3.2
6.3
70.5
(20.0)
50.5
---
Assets
£m
Liabilities
£m
(8.1)
---
(10.1)
(14.9)
(33.1)
19.5
(13.6)
---
13.0
41.1
2.9
7.8
64.8
(19.5)
45.3
---
1 A deferred tax liability arises on property, plant and equipment as the tax value of assets is lower than the corresponding accounting value. This arises as tax deductions are determined by the
applicable tax laws in each country the Group operates in whereas accounting depreciation is calculated in line with the Group’s accounting policy.
2 A deferred tax liability is provided on temporary differences arising on the Group’s intangible assets as in the majority of cases the local tax authorities do not allow deduction for amortisation of these
intangible assets. The movement during the period is due to the acquisition and disposal activities of the Group offset by reducing intangible asset value from the amortisation charge for the year.
3 This represents deferred tax on the Group’s defined benefit pension schemes and share-based incentives.
4 This includes expenditure that will be deductible in future periods for tax purposes when the amounts are settled in cash, tax losses expected to be utilised in future periods and withholding tax on
overseas earnings from Group companies expected to be remitted in the foreseeable future of £6.2m (2018: £5.7m).
Movements in the year:
Beginning of the year
Charge/(credit) to the income statement in respect of current year
Charge/(credit) to the income statement in respect of prior years
Credit to reserves on foreign exchange movements
(Credit)/charge to other comprehensive income
Credit to reserves on share-based incentives
Reclassification --- IFRS 16 adjustment (Prior year IFRS 9)
Reclassification to current tax
Acquisitions and disposals
Currency translation
End of year
2019
Total Net
£m
2018
Total Net
£m
35.7
4.6
0.2
---
(1.0)
(1.0)
(1.2)
(1.0)
(2.8)
(1.8)
31.7
39.6
(5.0)
(1.6)
(0.1)
0.4
(0.5)
(0.4)
---
2.4
0.9
35.7
No deferred tax liability is provided in respect of unremitted earnings of foreign subsidiaries where Essentra is able to control the remittance of
earnings and it is probable that such earnings will not be remitted in the foreseeable future, or where no liability would arise on the remittance.
At the year ended 31 December 2019 it was expected that earnings from certain overseas Group companies will be remitted and a deferred tax
liability of £6.2m (2018: £5.7m) has been recognised accordingly. This represents withholding taxes payable on the remittance of these earnings
under local tax laws. The amount of temporary differences associated with investments in subsidiaries and branches for which deferred tax
liabilities have not been recognised is £134.0m as at 31 December 2019 (2018: £127.1m), and the associated amount of unrecognised deferred
tax is £15.2m (2018: £14.1m).
Based on available information, Management determined whether it is probable for some or all of the deferred tax assets to be recognised.
In determining this Management considered the cumulative losses in prior years, the history of tax losses, the manner in which assets can be
used (including time limitations under local laws), future earnings potential and expectation of future reversal of taxable temporary differences.
Following Management assessment, gross deferred tax assets of £0.2m (2018: £0.2m) in respect of capital losses and unutilised tax losses of
£27.3m (2018: £27.6m) have not been recognised as their realisation is not probable. The capital losses have an unlimited expiry date. The tax losses
expire as follows: £3.4m within 5 years, £1.9m in 5 --- 10 years, £0.2m in over 10 years and £21.8m with no expiry. If future conditions change the
amount of unrecognised deferred tax assets will be reassessed. This may impact the income tax expense/(credit) in the year of remeasurement.
150
150 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
17. Provisions
Beginning of year
Impact on adoption of IFRS 16
Provisions made during year
Provisions released during year
Utilised during year
Currency translation
End of year
Non-current
Current
End of year
Beginning of year
Provisions made during year
Provisions released during year
Utilised during year
Transfer
Currency translation
End of year
Non-current
Current
End of year
Reorganisation
£m
Other
£m
17.0
(7.6)
---
(8.2)
(1.0)
(0.2)
---
---
---
---
Reorganisation
£m
15.0
6.7
---
(4.7)
---
---
17.0
12.8
4.2
17.0
9.0
(1.7)
3.4
(1.3)
---
(0.1)
9.3
6.0
3.3
9.3
Other
£m
9.8
---
---
(1.0)
(0.1)
0.3
9.0
7.9
1.1
9.0
2019
Total
£m
26.0
(9.3)
3.4
(9.5)
(1.0)
(0.3)
9.3
6.0
3.3
9.3
2018
Total
£m
24.8
6.7
---
(5.7)
(0.1)
0.3
26.0
20.7
5.3
26.0
Reorganisation provisions are generally held against restructuring and redundancy costs, primarily related to the integration of acquired businesses
and restructuring associated with acquisitions. Reorganisation provisions made during 2018 primarily related to the exceptional restructuring costs
arising from the closure of sites in Packaging and Specialist Components.
Other provisions relate primarily to vacant properties, lease dilapidations, employees’ compensation claims, regulatory claims and other claims.
Non-current provisions are generally provisions for vacant properties and lease dilapidations which are expected to be utilised within the next
10 years. The timing of the utilisation of the lease dilapidations assumes the business continues to operate based on the most up to date business
plan. The release of other provisions during the year relates mostly to claims and property-related provisions.
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T
E
M
E
N
T
S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 151
151
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
18. Employee benefits
Post-employment benefits
The Group operates a number of defined benefit and defined contribution pension schemes around the world covering many of its employees.
The Group also has a number of other post-employment obligations in certain countries, some of which are required under local law.
The defined benefit plans are administered by boards of trustees and the assets are held independently from Essentra. The boards of trustees
comprise member nominated trustees, employer nominated trustees and independent advisory trustees. The articles of the plans prohibit
a majority on the boards to be established by either the member or employer nominated trustees.
Pension costs of the defined benefit schemes are assessed in accordance with the advice of independent professionally qualified actuaries.
Full triennial actuarial valuations were carried out on the principal European defined benefit schemes as at 5 April 2018 and annual actuarial
valuations are performed on the principal US defined benefit schemes. The assets and liabilities of the defined benefit schemes have been
updated to the balance sheet date from the most recently completed actuarial valuations taking account of the investment returns achieved
by the schemes and the level of contributions.
The principal European defined benefit schemes entitle remaining members to a pension calculated on 1.25% or 2% of their capped final
pensionable pay multiplied by the number of pensionable years of service. Some members have historical entitlements to accrual rates of
1.67%-1.9% and 3% for certain tranches of their service. The principal US defined benefit schemes entitle certain participating employees
to annuity benefits equal to 50% of final average pensionable salary, reduced for years of service less than 30, and other participating
employees to annuity benefits equal to $49 per month for each year of service.
The amounts included in the consolidated financial statements are as follows:
Amounts expensed against operating profit
Defined contribution schemes
Defined benefit schemes --- current service cost
Defined benefit schemes --- past service cost
Defined benefit schemes --- curtailment gain
Other post-employment obligations
Total operating expense
Amounts included as finance (income)/expense
Net interest on defined benefit scheme assets (note 3)
Net interest on defined benefit scheme liabilities (note 3)
Net finance expense
2019
£m
7.5
1.7
---
---
0.5
9.7
(0.5)
1.2
0.7
2018
£m
7.1
1.5
2.2
(0.2)
0.4
11.0
(0.5)
1.1
0.6
Amounts recognised in the consolidated statement of comprehensive income
Return on defined benefit scheme assets excluding amounts in net finance income
Impact of changes in assumptions and experience to the present value of defined benefit scheme liabilities
Remeasurement of defined benefit schemes
(29.6)
34.5
4.9
14.1
(16.8)
(2.7)
The defined benefit schemes past service cost of £nil (2018: £2.2m) relating to GMP equalisation has been included within exceptional and other
adjusting items (see note 2).
During 2015, the principal defined benefit pension schemes in the UK and the USA were closed to future accrual. Following the closure of the
Group’s principal defined benefit pension schemes to future accruals, the schemes are funded by the Group’s subsidiaries and employees are not
required to make any further contribution. The funding of these schemes is based on separate actuarial valuations for funding purposes for which
the assumptions may differ from those used in the valuation for IAS 19 purposes.
152
152 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
18. Employee benefits continued
The principal assumptions used by the independent qualified actuaries for the purposes of IAS 19 are as follows:
Increase in salaries (pre-2010)1
Increase in salaries (post-2010)1
Increase in pensions1
at RPI capped at 5%
at CPI capped at 5%
at CPI minimum 3%, capped at 5%
at CPI capped at 2.5%
Discount rate
Inflation rate --- RPI
Inflation rate --- CPI
Europe
n/a
n/a
2.90%
2.10%
3.10%
1.90%
2.10%
3.00%
2.10%
2019
USA
n/a
n/a
n/a
n/a
n/a
n/a
3.15%
n/a
n/a
Europe
n/a
n/a
3.10%
2.20%
3.10%
1.90%
2.90%
3.20%
2.20%
1 For service prior to April 2010, pension at retirement is linked to salary at retirement. For service after April 2010, pension is linked to salary at April 2010 with annual increases capped at 3%.
Due to the timescale covered, the assumptions applied may not be borne out in practice.
The life expectancy assumptions (in number of years) used to estimate defined benefit obligations at the year end are as follows:
Male retiring today at age 65
Female retiring today at age 65
Male retiring in 20 years at age 65
Female retiring in 20 years at age 65
Europe
22.3
24.2
23.7
25.6
2019
USA
20.6
22.6
22.2
24.1
Europe
22.4
24.2
23.8
25.8
2018
USA
n/a
n/a
n/a
n/a
n/a
n/a
4.25%
n/a
n/a
2018
USA
20.6
22.7
22.3
24.2
The allocation of assets between different classes of investment is reviewed regularly and is a key factor in the trustees’ investment policies. The
allocation of assets is arrived at taking into consideration current market conditions and trends, the size of potential returns relative to investment
risk and the extent to which asset realisation needs to match liability maturity. There are risks underlying these considerations. If asset returns fall
below the returns required for scheme assets to match the present value of scheme liabilities, a scheme deficit results. Persistent deficits represent
an obligation the Group has to settle through increased cash contributions. If asset maturities are not properly matched with liability maturities,
there is also the risk that the Group could be required to make unplanned short-term cash contributions to resolve resulting liquidity issues. Scheme
assets are invested by the trustees in asset classes and markets that are considered to be reasonably liquid, so through this matching liquidity risk
is considered to be sufficiently mitigated.
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A
N
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S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 153
153
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
18. Employee benefits continued
The fair value of scheme assets, which are not intended to be realised in the short-term and may be subject to significant change before they are
realised, and the present value of the pension scheme liabilities, which are derived from cash flow projections over long periods and are therefore
inherently uncertain, are:
Equities
Bonds/LDI
Other
Fair value of scheme assets
Present value of scheme liabilities
Net retirement benefit assets/(obligations)
Equities
Bonds/LDI
Other
Fair value of scheme assets
Present value of scheme liabilities
Net retirement benefit assets/(obligations)
27%
73%
---
26%
74%
---
Europe
£m
61.6
169.1
1.2
231.9
(218.5)
13.4
Europe
£m
55.3
154.2
0.3
209.8
(194.7)
15.1
57%
43%
---
57%
41%
2%
2019
Total
£m
93.3
193.0
1.5
287.8
(301.2)
(13.4)
2018
Total
£m
85.0
175.2
1.1
261.3
(272.2)
(10.9)
USA
£m
31.7
23.9
0.3
55.9
(82.7)
(26.8)
USA
£m
29.7
21.0
0.8
51.5
(77.5)
(26.0)
The equity, corporate bond and government bond assets are either direct investments or investments made via a managed fund for those asset
classes. All of these assets have a quoted market price in an active market. The other asset class relates primarily to property and hedge funds,
which are valued at their cumulative unit offer price. No direct investment in property is held. No plan assets are invested directly in the shares
of Essentra plc.
The pension surplus in Europe is not restricted as the asset is considered realisable on the basis of the Group’s unconditional right to a refund.
The average expected duration of the Group’s European defined benefit pension liability at 31 December 2019 is 18.0 years (2018: 18.0 years).
The average expected duration of the Group’s US defined benefit pension liability at 31 December 2019 is 12.4 years (2018: 11.7 years).
The Group’s contributions to its defined benefit pension schemes are determined in consultation with trustees, taking into consideration actuarial
advice, investment conditions and other local conditions and practices. The outcome of these consultations can impact the timing of future
cash flows. In 2020, the Group expects to make defined benefit contributions of $6.2m to its US schemes and £0.7m in respect of the Group’s
European schemes.
154
154 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
18. Employee benefits continued
Movement in fair value of post-employment obligations during the year
2019
2018
Defined
benefit
pension
scheme
assets
£m
Defined
benefit
pension
scheme
liabilities
£m
Other
£m
Total
£m
Defined
benefit
pension
scheme
assets
£m
Defined
benefit
pension
scheme
liabilities
£m
Other
£m
Total
£m
Beginning of year
261.3
(272.2)
(3.0)
(13.9)
280.6
(291.3)
(2.7)
(13.4)
Current service cost and administrative
expense
Past service cost
Employer contributions
Return on plan assets excluding amounts
in net finance income
Actuarial losses arising from change
in financial assumptions
Actuarial gains arising from change
in demographic assumptions
Actuarial gains arising from experience
adjustment
Finance income/(expense)
Benefits paid
Curtailments
Currency translation
Business disposals
End of year
(1.7)
---
3.4
29.6
---
---
---
8.1
(11.2)
---
(1.7)
---
---
---
0.1
---
(0.5)
---
---
---
(2.2)
---
3.5
(1.5)
---
2.6
---
(2.2)
0.1
29.6
(14.1)
---
(0.4)
---
---
---
(1.9)
(2.2)
2.7
(14.1)
(38.1)
(0.2)
(38.3)
20.3
0.2
20.5
3.0
0.8
(8.6)
11.2
---
2.6
---
---
---
(0.2)
---
---
(0.1)
---
(4.0)
3.0
0.8
(0.7)
---
---
0.8
---
---
---
---
7.5
(16.7)
---
2.9
---
0.8
(4.5)
(8.0)
16.7
0.1
(4.2)
---
---
---
(0.1)
---
0.1
(0.1)
---
(3.0)
0.8
(4.5)
(0.6)
---
0.2
(1.4)
---
(13.9)
287.8
(301.2)
(17.4)
261.3
(272.2)
Sensitivity
For the significant assumptions used in determining defined benefit costs and liabilities, the following sensitivity analysis gives the estimate of the
impact on the measurement of the scheme liabilities as at 31 December 2019.
0.5% decrease in the discount rate
1.0% increase in the rate of inflation
1.0% increase in rate of salary/pension increases
1 year increase in life expectancy
1 year decrease in life expectancy
0.5% increase in the discount rate
1.0% decrease in rate of salary/pension increases
1.0% decrease in the rate of inflation
(Increase)/decrease in schemes net liabilities
Europe
£m
(21.3)
19.3
n/a
(8.9)
8.9
18.7
n/a
(15.8)
US
£m
(5.3)
n/a
n/a
(2.6)
n/a
4.7
n/a
n/a
Total
£m
(26.6)
19.3
n/a
(11.5)
8.9
23.4
n/a
(15.8)
Share-based incentives
Essentra operates equity-settled share-based incentive plans for its Executive Directors and employees. The total expense in respect of these plans
during the year was £4.4m (2018: £5.2m), of which £0.5m (2018: £0.4m) in relation to senior management restructuring was included within
exceptional operating costs. Details of these plans are set out on the next page:
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M
E
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T
S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 155
155
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
18. Employee benefits continued
Share options outstanding
Weighted
average
exercise
price
Granted
during the
year
Weighted
average
exercise
price
Lapsed
during the
year
Weighted
average
exercise
price
Exercised
during the
year
Weighted
average
exercise
price
Weighted
average
exercise
price
Exercisable
at 31 Dec
2019
Weighted
average
exercise
price
At 31 Dec
2019
At 1 Jan
2019
2019
LTIP Part A
921,994
551.4p
---
LTIP Part B 4,347,600
DASB
223,038
--- 2,531,573
---
236,361
---
---
---
(369,927) 808.9p
(172,870)
214.2p
379,197 453.9p 379,197 453.9p
(768,837)
---
---
---
(4,607)
(36,014)
--- 6,105,729
--- 423,385
---
---
---
1,143
555,730
430.7p
637,870
327.1p
(338,547) 419.4p
(3,058)
407.2p
851,995 357.7p
216,874
449.0p
175,269
327.1p
(205,322) 428.0p
108,332
372.2p
25,389
359.2p
(52,358) 375.6p
---
---
---
---
186,821 357.7p
81,363 365.6p
21,239 442.0p
6,373,568
3,606,462
(1,734,991)
(216,549)
8,028,490
401,579
Weighted
average
exercise
price
Granted
during the
year
Weighted
average
exercise
price
Lapsed
during the
year
Weighted
average
exercise
price
Exercised
during the
year
Weighted
average
exercise
price
At 1 Jan
2018
Weighted
average
exercise
price
Exercisable
at 31 Dec
2018
Weighted
average
exercise
price
At 31 Dec
2018
2018
LTIP Part A
1,203,978
628.4p
---
LTIP Part B 2,923,936
DASB
71,765
--- 2,188,832
---
228,473
---
---
---
(241,598)
997.0p
(40,386)
180.8p
921,994
551.4p 583,847
390.9p
(736,793)
---
---
---
(28,375)
(77,200)
--- 4,347,600
---
223,038
---
---
---
---
---
---
---
---
25,324
---
---
---
---
---
---
---
603,283
462.1p
217,436
407.2p
(263,560)
482.9p
(1,429)
430.0p
555,730
430.7p
198,282
482.6p
151,988
407.2p
(131,351)
451.5p
(2,045)
430.0p
216,874
449.0p
SAYE 3-year
plan
SAYE 5-year
plan
US SAYE
2-year plan
SAYE 3-year
plan
SAYE 5-year
plan
US SAYE 2
year plan
65,785
439.3p
48,706
324.5p
(6,159)
711.5p
---
---
108,332
372.2p
24,468
367.0p
5,067,029
2,835,435
(1,379,461)
(149,435)
6,373,568
633,639
The exercise prices of options outstanding at the end of the year range from nil to 692.0p.
The weighted average share price at the date of exercise for options exercised during the year was 408.5p (2018: 464.5p). The following table
shows the weighted average fair value at the date of grant for options granted during the year:
Year ended 31 December 2019
Year ended 31 December 2018
LTIP
Part A
n/a
n/a
LTIP
Part B
295.5p
284.9p
DASB
346.4p
373.6p
SAYE
3-year
plan
100.1p
85.2p
SAYE
5-year
plan
82.7p
69.9p
156
156 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
18. Employee benefits continued
Fair value model inputs for cumulative share options awarded
Weighted average fair value at grant
Weighted average share price at grant
Weighted average exercise price
Weighted average volatility
Weighted average dividend yield
Weighted risk free rate
Expected employee retention rates
Expected term
Valuation model
Weighted average fair value at grant
Weighted average share price at grant
Weighted average exercise price
Weighted average volatility
Weighted average dividend yield
Weighted risk free rate
Expected employee retention rates
Expected term
Valuation model
LTIP
Part A
103.4p
453.9p
453.9p
33.7%
2.53%
0.88%
88.2%
LTIP
Part B
319.2p
441.9p
---
35.5%
4.77%
0.47%
90.0%
DASB
359.8p
418.3p
---
40.4%
4.96%
0.73%
100.0%
2019
SAYE
5-year
plan
89.9p
443.4p
430.1p
35.5%
4.83%
0.83%
86.7%
SAYE
3-year
plan
106.7p
441.4p
357.7p
40.5%
4.75%
0.65%
88.7%
3.20 years
3.00 years
3.00 years
3.10 years
5.20 years
Binomial Monte Carlo
Binomial
Binomial
Binomial
LTIP
Part A
115.5p
551.4p
551.4p
31.8%
2.77%
0.91%
85.1%
LTIP
Part B
379.1p
521.1p
---
39.3%
4.18%
0.58%
93.3%
DASB
407.4p
465.9p
---
39.7%
4.61%
0.86%
100.0%
2018
SAYE
5-year
plan
102.6p
505.1p
449.0p
34.3%
4.32%
1.04%
79.5%
SAYE
3-year
plan
120.4p
501.6p
430.7p
41.3%
4.22%
0.55%
84.9%
3.20 years
3.00 years
3.00 years
3.00 years
5.00 years
Binomial Monte Carlo
Binomial
Binomial
Binomial
Where relevant, market conditions are taken into account in determining the fair value of the awards at grant date. The three year average historic
volatility at grant date has been used as the volatility input for the LTIP Part A, LTIP Part B, DASB and SAYE 3 year awards, and the five year
average historic volatility at grant date has been used as the volatility input for the SAYE 5 year award.
LTIP
Part A
LTIP
Part B
DASB
2019 and 2018
SAYE
3-year
plan
SAYE
5-year
plan
Contractual life
3 --- 10 years
3 --- 6 years
3 years
3 years
5 years
Details of the vesting conditions of the LTIP Part A, LTIP Part B and DASB share option schemes are set out in the Annual Report on Remuneration
on pages 101 to 111.
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 157
157
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
19. Financial risk management
Essentra’s activities expose the business to a number of key financial risks which have the potential to affect its ability to achieve its
business objectives.
The Board has overall responsibility for Essentra’s system of internal control and financial risk management and for reviewing the effectiveness
of this system. Such a system can only be designed to mitigate, rather than eliminate, the risk of failure to achieve business objectives and
can therefore only provide reasonable, and not absolute, assurance against material misstatement or loss.
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 underlying business activities.
No transactions of a speculative nature are undertaken. The Treasury function is subject to periodic independent reviews by the Group Assurance
function. 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.
The following describes Essentra’s financial risk exposure and management from a quantitative and qualitative perspective.
i) Credit risk
Credit risk is the risk of financial loss if a customer or counterparty to a financial asset or liability fails to meet its contractual obligations, and arises
principally from trade receivables and cash and cash equivalents. Essentra has no significant individual concentrations of credit risk. The following
is an overview of how Essentra manages its credit risk exposures.
Trade and other receivables
Essentra’s exposure to credit risk is driven by the profile of its customers. This is influenced by the demographics of the customer base, including
the industry and country in which customers operate.
Essentra monitors significant customers’ credit limits and recognises an impairment of trade receivables in specific instances where a customer’s
credit standing has deteriorated to the extent that a credit default is considered probable. Following implementation of IFRS 9, Essentra also
recognises an expected credit loss impairment of trade receivables through an accounting policy election, whereby default losses are expected for
each receivables ageing category as follows: Current: 0.5%, Overdue 1-30 days: 1%, Overdue 31-60 days: 5%, Overdue 61-90 days: 10%, Overdue
91-180 days: 25%, Overdue 181-360 days: 50% and Overdue over 360 days: 100%.
Trade receivables were assessed for impairment using the expected credit loss model which requires expected credit losses and changes to expected
credit losses at each reporting date to reflect changes in credit risk since initial recognition.
As at 31 December 2019, gross trade receivables (including amounts relating to disposal group held for sale) were £145.3m (2018: £161.9m) of which
£30.5m (2018: £34.6m) were past due. The ageing analysis of trade receivables is as follows:
1---60 days
61---180 days
181---360 days
360+ days
2019
£m
23.6
3.4
1.8
1.7
30.5
2018
£m
26.8
3.7
1.6
2.5
34.6
As at 31 December 2019, the combined specific and expected credit loss impairment of trade receivables was of £5.3m (2018: £6.6m). The analysis
of the combined impairment based on the underlying receivables is as follows:
Current
1---60 days
61---180 days
181---360 days
360+ days
158
158 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
2019
£m
0.6
0.4
0.8
1.8
1.7
5.3
2018
£m
0.7
0.6
0.9
0.8
3.6
6.6
Financial Statements
19. Financial risk management continued
The movement in the provision for impaired receivables (including amounts relating to disposal group held for sale) is as follows:
Beginning of year
Impaired receivables acquired
Impairment loss recognised
Business disposals
Utilisation
End of year
2019
£m
6.6
(1.2)
1.3
(0.4)
(1.0)
5.3
2018
£m
7.2
---
2.7
---
(3.3)
6.6
Derivative assets
Credit risk with respect to derivatives is controlled by limiting transactions to major banking counterparties where internationally agreed standard
form documentation exists. The credit ratings of these counterparties are monitored regularly.
Cash and cash equivalents
Credit risk relating to cash and cash equivalents is monitored daily, on a counterparty by counterparty basis. The credit limits imposed specify
the maximum amount of cash which can be invested in, or with, any single counterparty. These limits are determined by geographic presence,
expertise and credit rating. Essentra monitors the credit ratings of counterparties.
The following credit risk table provides information regarding the credit risk exposure of Essentra by classifying derivative assets, short-term
investments and cash and cash equivalents (including amounts relating to disposal group held for sale) according to credit ratings of the
counterparties. AAA is the highest possible rating and all of the assets are neither impaired nor past due.
Derivative assets
Short-term investments
Cash and cash equivalents
Derivative assets
Cash and cash equivalents
AAA
£m
---
---
4.4
4.4
AAA
£m
---
2.1
2.1
AA
£m
0.1
---
1.6
1.7
AA
£m
---
1.0
1.0
A
£m
0.7
---
51.5
52.2
A
£m
0.2
47.2
47.4
BBB
£m
---
0.6
9.8
10.4
BBB
£m
0.1
12.7
12.8
BB
£m
---
---
1.5
1.5
BB
£m
---
1.9
1.9
Not rated
£m
---
---
1.6
1.6
Not rated
£m
---
1.3
1.3
2019
Total
£m
0.8
0.6
70.4
71.8
2018
Total
£m
0.3
66.2
66.5
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Essentra’s maximum credit risk exposure is £239.4m (2018: £257.7m) and no collateral is held against this amount (2018: £nil).
ii) Market price risk
Market price risk is the risk that changes in foreign exchange rates and interest rates will affect income or the value of financial assets and liabilities.
Essentra has produced a sensitivity analysis that shows the estimated change to the income statement and equity of a 1%, 5% or 10% weakening
or strengthening in sterling against all other currencies or an increase or decrease of 50 basis points (‘‘bps’’), 100bps and 200bps in market interest
rates. The amounts generated from the sensitivity analysis are estimates and actual results in the future may materially differ.
Essentra is exposed to two types of market price risk: currency risk and interest rate risk.
a) Currency risk
Essentra publishes its consolidated financial statements in sterling but conducts business in several foreign currencies. Therefore it is subject to
currency risk due to exchange rate movements which affect the translation of results and underlying net assets of its operations and their
transaction costs.
Hedge of net investment in foreign operations
The majority of Essentra’s net assets are in currencies other than sterling. The Company’s normal policy is to limit 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.
Essentra’s US dollar denominated assets were approximately 46% (2018: 36%) hedged by the US dollar denominated borrowings. Essentra’s euro
denominated assets were approximately 32% hedged by the euro denominated borrowings (2018: 30%).
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 159
159
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
19. Financial risk management continued
Transaction exposure hedging
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.
Essentra does not formally define the proportion of highly probable forecast sales and purchases to hedge, but agrees an appropriate percentage
on an individual basis with each business by reference to the Group’s risk management policies and prevailing market conditions. The Group
documents currency derivatives used to hedge its forecast transactions as cash flow hedges. To the extent that cash flow hedges are effective,
gains and losses are recognised in other comprehensive income until the forecast transaction occurs, at which point the gains and losses are
transferred either to the income statement or to the non-financial asset acquired.
The following table shows Essentra’s sensitivity to a 1%, 5% and 10% weakening or strengthening in sterling against all currencies. To calculate the
impact on the income statement for the year all currencies’ average rates have been increased or decreased by 1%, 5% or 10%. The translational
effect on equity is limited as a proportion of US dollar and euro exposure is hedged. Accordingly the effect on equity is calculated by increasing or
decreasing the closing rate of all currencies with an adjustment for the movement in currency hedges. It is assumed that all net investment and
cash flow hedges will continue to be 100% effective.
Impact on the income statement --- gain/(loss)
Impact on equity --- gain/(loss)
Impact on the income statement --- gain/(loss)
Impact on equity --- gain/(loss)
Weakening in sterling
Strengthening in sterling
2019
5%
£m
2.8
27.9
1%
£m
0.5
5.4
10%
£m
(4.9)
(48.2)
5%
£m
(2.6)
(25.2)
1%
£m
(0.5)
(5.2)
2018
Weakening in sterling
Strengthening in sterling
5%
£m
2.5
31.3
1%
£m
0.5
6.0
10%
£m
(4.3)
(54.0)
5%
£m
(2.2)
(28.3)
1%
£m
(0.5)
(5.9)
10%
£m
6.0
58.9
10%
£m
5.2
66.0
b) Interest rate risk
Essentra’s strategy is to ensure that at least 30% of the total debt with maturities of more than one year is protected with fixed interest rates or
approved interest rate derivatives.
The following table shows Essentra’s sensitivity to a 50bps, 100bps and 200bps decrease or increase in sterling, US dollar and euro interest rates.
To calculate the impact on the income statement for the year, the interest rates on all external floating rate interest bearing loans and borrowings
have been increased or decreased by 50bps, 100bps or 200bps and the resulting increase or decrease in the net interest charge has been adjusted
for the effect of Essentra’s interest rate derivatives.
Decrease in interest rates
Increase in interest rates
2019
Impact on the income statement --- gain/(loss)
200bps
£m
4.2
100bps
£m
2.1
50bps
£m
1.1
200bps
£m
(4.2)
100bps
£m
(2.1)
50bps
£m
(1.1)
2018
Impact on the income statement --- gain/(loss)
Decrease in interest rates
Increase in interest rates
200bps
£m
3.9
100bps
£m
2.0
50bps
£m
1.0
200bps
£m
(3.9)
100bps
£m
(2.0)
50bps
£m
(1.0)
See note 14 for interest rate disclosure on loans and borrowings.
160
160 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
19. Financial risk management continued
iii) Liquidity risk
Liquidity risk is the risk that Essentra, although solvent, will encounter difficulties in meeting obligations associated with financial liabilities that
are settled by delivering cash or another financial asset.
Essentra’s objective is to maintain a balance between continuity of funding and flexibility. Essentra is primarily funded by a series of US Private
Placement Loan Notes from various financial institutions totalling US$155m and syndicated multi-currency 5-year revolving credit facilities of
£285.0m and €100.8m from its banks. The series of Loan Notes have original maturities ranging from seven to twelve years and the revolving
credit facilities mature in November 2022. At 31 December 2019, the available bank facilities totalled £370.4m (2018: £375.0m) of which
£194.3m (2018: £193.1m) was drawn down. In addition, uncommitted and overdraft facilities are maintained to provide short-term flexibility.
In December 2019, the Company entered into a note purchase agreement for a new USPP facility for $25m ($15m due in April 2027 and $10m
due in April 2030), which will be available for drawdown in April 2020.
In April 2020 $80m of US Private Placement Loan Notes are due to be repaid. In February 2020, the Company entered into an agreement with
certain banks for a bridging loan facility for £50m, with an initial term of 12 months, plus a further six months at Essentra’s option, and thereafter
another six months at the lenders’ discretion.
Amounts drawn by Essentra on its committed facilities are subject to standard banking covenants. The financial covenants require the net debt
to EBITDA ratio to be less than 3.0x and interest cover to be greater than 3.5x. There has been no covenant breach during the period.
Essentra’s available undrawn committed facilities at 31 December were:
Expiring after two years
2019
£m
176.1
2018
£m
181.9
Any loans drawn on these facilities would bear interest at floating rates with reference to LIBOR for the currency and period of the loan.
The maturity of Essentra’s financial liabilities (including amounts relating to disposal group held for sale), including estimated interest payments,
is analysed below.
Unsecured bank loans
US Private Placement Loan Notes
Derivative liabilities
Trade and other payables
Lease liabilities
Other unsecured loans
Deferred consideration
Unsecured bank loans
US Private Placement Loan Notes
Derivative liabilities
Trade and other payables
Finance lease liabilities
Deferred consideration
Fair value
£m
Carrying
amount
£m
Contractual
cash flows
£m
194.3
121.1
0.3
121.7
50.7
0.1
4.3
192.5
117.1
0.3
122.6
50.7
0.1
4.3
204.5
139.7
0.3
122.6
57.2
0.1
4.3
<1 yr
£m
3.5
65.0
0.3
122.6
13.2
0.1
0.9
492.5
487.6
528.7
205.6
Fair value
£m
Carrying
amount
£m
Contractual
cash flows
£m
193.0
120.5
0.2
146.7
0.1
3.9
190.6
120.6
0.2
146.7
0.1
3.9
205.1
150.5
0.2
146.7
0.1
3.9
<1 yr
£m
3.1
6.4
0.2
146.7
0.1
1.3
1---2 yrs
£m
3.5
2.6
---
---
10.9
---
2.2
19.2
1---2 yrs
£m
3.1
67.0
---
---
---
---
464.4
462.1
506.5
157.8
70.1
2019
>5 yrs
£m
---
49.2
---
---
12.3
---
---
I
F
I
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
2---5 yrs
£m
197.5
22.9
---
---
20.8
---
1.2
242.4
61.5
2018
>5 yrs
£m
---
69.1
---
---
---
1.3
70.4
2---5 yrs
£m
198.9
8.0
---
---
---
1.3
208.2
Total trade and other payables (including amounts relating to disposal group held for sale) carried at £174.5m (2018: £203.6m) including accruals
and deferred income of £43.9m (2018: £48.7m) and other taxes and social security contributions of £8.0m (2018: £8.2m) which are not financial
liabilities and are therefore excluded from the above analysis. All trade and other payables are due to be settled in less than six months.
The fair value of the unsecured bank loans is the same as the carrying amount as the loans are at floating rate, except for unamortised facility fees.
The fair value of the US Private Placement Loan Notes is estimated by discounting the future cash flows (interests and principal) at the prevailing
market rates. The fair value of the trade and other payables approximate the carrying amount as they are due to be settled within six months.
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 161
161
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
19. Financial risk management continued
Total financial assets and liabilities
The table below sets out Essentra’s accounting categories and fair value for each class of financial asset and liability (including amounts relating
to disposal group held for sale).
Fair value
£m
Amortised
cost
£m
Fair value
£m
Amortised
cost
£m
Level 1 of fair value hierarchy
Trade and other receivables
Cash and cash equivalents
Other financial assets
Interest bearing loans and borrowings
Lease liabilities
Trade and other payables
Level 2 of fair value hierarchy
Derivative assets
Derivative liabilities
Level 3 of fair value hierarchy
Trade and other payables
Other non-current financial liabilities
---
---
---
---
---
---
0.8
(0.3)
(3.4)
(0.9)
(3.8)
162.0
70.4
6.2
(309.7)
(50.7)
(121.7)
---
---
---
---
---
(243.5)
(247.3)
2019
Total
carrying
value
£m
162.0
70.4
6.2
(309.7)
(50.7)
(121.7)
0.8
(0.3)
(3.4)
(0.9)
2018
Total
carrying
value
£m
191.2
66.2
---
(311.3)
---
191.2
66.2
---
(311.3)
---
(144.4)
(144.4)
---
---
---
---
---
0.3
(0.2)
(1.3)
(2.6)
(198.3)
(202.1)
---
---
---
---
---
---
0.3
(0.2)
(1.3)
(2.6)
(3.8)
Total trade and other receivables (including amounts relating to disposal group held for sale) carried at £172.5m (2018: £204.2m) include
prepayments of £10.5m (2018: £13.0m) which are not financial assets and are therefore excluded from the above analysis. Fair values of forward
foreign exchange contracts and cross currency swaps have been calculated at year end forward exchange rates compared to contracted rates.
These are determined to be level 2 in the fair value hierarchy.
Included within trade and other payables and other non-current financial liabilities, which is classified as level 3 in the fair value hierarchy, is the
deferred consideration of £4.3m relating to the acquisitions of Micro Plastics and Innovative Components (2018: £3.9m). There are no non-recurring
fair value measurements. During the year, a fair value gain of £nil (2018: fair value gain of £nil) in respect of financial instruments at level 3 fair
value hierarchy was recognised within exceptional items (see note 2), and £nil (2018: £nil) was settled in cash. No other fair value gains or losses
were recorded in profit or loss and other comprehensive income.
Included within interest bearing loans and borrowings are $155m (2018: $155m) US Private Placement Loan Notes. The Loan Notes are held at
amortised cost with a carrying value of £117.1m (2018: £120.6m). The Group estimates that the total fair value of the Loan Notes at 31 December
2019 is £121.1m (2018: £120.5m).
All other financial assets are held at amortised cost and mostly have short terms to maturity. For this reason, their carrying amounts at the
reporting date approximate the fair values. Unsecured bank loans, included within interest bearing loans and borrowings, incur interest at floating
rates and as a result their carrying amounts also approximate their fair values at the reporting date.
The table below shows the amount of bank overdrafts offset against the bank balances under enforceable master netting agreements with banks
(including amounts relating to disposal group held for sale):
Gross amount
of recognised
financial
liabilities set
off in the
balance sheet
£m
Net amount of
financial assets
presented in the
balance sheet
£m
Gross amount
of recognised
financial assets
£m
73.6
68.1
(3.2)
(1.9)
70.4
66.2
Cash and cash equivalents:
At 31 December 2019
At 31 December 2018
162
162 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
19. Financial risk management continued
iv) Capital structure
Essentra defines its capital structure as its equity and non-current interest bearing loans and borrowings, and aims to manage this to safeguard
its ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits for other stakeholders.
Essentra sets the amount of capital in proportion to risk. Essentra manages the capital structure and makes adjustments to it in the light of
changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, Essentra
may return capital to shareholders through dividends and share buybacks, issue new shares or sell assets to reduce debt.
Essentra monitors its capital structure on the basis of the medium-term net debt-to-EBITDA ratio. EBITDA is defined as operating profit before
depreciation and other amounts written off property, plant and equipment, share option expense, intangible amortisation and exceptional and
other adjusting items. For 2019 the ratio includes the impact of IFRS 16. In the absence of adjustments for IFRS 16 the net debt to EBITDA ratio
would have been 1.9.
The net debt-to-EBITDA ratios at 31 December were as follows.
Net debt
Operating profit before intangible amortisation and exceptional and other adjusting items
Plus depreciation and other amounts written off property, plant and equipment, and amortisation of
non-acquired intangible assets
Plus share option expense
EBITDA
Net debt-to-EBITDA ratio
20. Issued share capital
Issued, authorised and fully paid ordinary shares of 25p (2018: 25p) each
Number of ordinary shares in issue
Beginning of year
End of year
Note
18
2019
£m
284.4
87.5
48.2
3.9
139.6
2018
£m
240.1
90.7
35.9
4.8
131.4
2.0
1.8
2019
£m
66.0
2018
£m
66.0
264,129,170
264,129,170
264,129,170
264,129,170
At 31 December 2019, the Company held 951,137 (2018: 1,127,065) of its own shares with a nominal value of £0.2m (2018: £0.3m) in treasury.
This represents 0.4% (2018: 0.4%) of the number of ordinary shares in issue.
21. Reserves
Within retained earnings the Company has deducted the value of own shares purchased for an employee trust and treasury shares held by the
Company with a total cost of £10.4m (2018: £11.1m).
Employee trust shares are ordinary shares of the Company held in an employee benefit trust. The purpose of this trust is to hold shares in the Company
for subsequent transfer to Executive Directors and employees relating to deferred share awards and options granted under the Company’s share-based
incentive plans. Full details are set out in the Annual Report on Remuneration on pages from 101 to 111. The assets, liabilities and expenditure of the trust have
been incorporated in these Financial Statements. At 31 December 2019, the trust held 1,033,311 (2018: 1,073,932) shares, upon which dividends have been
waived, with an aggregate nominal value of £0.3m (2018: £0.3m) and market value of £4.5m (2018: £3.7m).
The other reserve relates to the Group reorganisation, which took place as part of the de-merger from Bunzl plc. It represents the difference
between Essentra plc’s share capital and Essentra International Limited’s share capital and share premium on 6 June 2005 and is not distributable.
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ESSENTRA PLC ANNUAL REPORT 2019 163
163
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
22. Analysis of net debt
Cash at bank and in hand
Short-term deposits and investments
Cash and cash equivalents in the
statement of cash flows
Debt due within one year
Debt due after one year
Other financial assets
Lease liabilities due within one year
Lease liabilities due after one year
Net debt
1 Jan
2019
£m
62.3
3.9
66.2
(0.1)
(311.2)
5.0
---
---
(240.1)
Impact on
adoption of
IFRS 16
£m
Cash flow
£m
Business
combinations
£m
Lease
additions
£m
Exchange
movements
£m
Non-cash
movements
£m
---
---
---
---
---
---
(11.7)
(47.7)
(59.4)
0.8
4.3
5.1
0.1
10.0
0.6
14.5
---
30.3
---
---
---
---
(13.8)
---
(0.5)
(1.7)
(16.0)
---
---
---
---
---
---
(1.6)
(11.7)
(13.3)
(0.5)
(0.4)
(0.9)
---
6.1
---
0.3
1.1
6.6
---
---
---
(60.7)
59.9
---
(12.4)
20.7
31 Dec
2019
£m
62.6
7.8
70.4
(60.7)
(249.0)
5.6
(11.4)
(39.3)
7.5
(284.4)
The non-cash movements in debt due after one year represent the amortisation of prepaid facility fees £0.8m offset by £60.7m of debt moving
to debt due within one year. The net non-cash movement in lease liabilities represents early lease terminations £10.4m offset by interest on leases
£2.1m. During the year £20.7m of lease liabilities moved from due after one year to due within one year.
Included within other financial assets is £5.0m of loan receivables arising from the disposal of Porous Technologies and £0.6m of short-term liquid
investments. In the year ended 31 December 2019, the loan receivable arising from the disposal of Porous Technologies moved from non-current
to current assets.
Cash at bank and in hand
Short-term deposits and investments
Cash and cash equivalents in the
statement of cash flows
Debt due within one year
Debt due after one year
Loan receivable (arising from the disposal of
Porous Technologies)
Net debt
1 Jan
2018
£m
48.0
4.0
52.0
(0.5)
(267.1)
5.0
(210.6)
Impact on
adoption of
IFRS 16
£m
Cash flow
£m
Business
combinations
£m
Lease
additions
£m
Exchange
movements
£m
Non-cash
movements
£m
31 Dec
2018
£m
62.3
3.9
66.2
(0.1)
---
---
---
---
---
---
---
---
---
---
---
14.5
---
14.5
0.4
(35.6)
---
(20.7)
---
---
---
---
---
---
---
---
---
---
---
---
---
---
(0.2)
(0.1)
(0.3)
---
(7.7)
(0.8)
(311.2)
---
---
5.0
(8.0)
(0.8)
(240.1)
The non-cash movements in 2018 represent the amortisation in prepaid facility fees.
23. Commitments
Operating leases
At 31 December Essentra had the following future minimum lease payments under non-cancellable operating leases:
Payable within one year
Payable between one and five years
Payable after five years
2019
£m
0.3
0.2
---
0.5
2018
£m
13.6
35.1
13.6
62.3
164
164 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
24. Acquisitions and disposals
Acquisition of minority stake in Essentra (MEA) Pte. Ltd
On 19 March 2019, Essentra acquired the 49% minority interest in its Filters operation based in Dubai, Essentra (MEA) Pte. Ltd, from Aberdeen
International FZE (part of the BBM Bommidala group) for a cash consideration of £11.6m. Essentra (MEA) Pte. Ltd is the holding company of
Essentra FZE, which undertakes the Company’s Filters activities in Dubai.
Establishment of joint venture China Tobacco Essentra (Xiamen) Filters Co., Ltd.
On 27 November 2019, Essentra signed an agreement for the establishment of a new joint venture company in China, China Tobacco Essentra
(Xiamen) Filters Co., Ltd. Essentra holds a 49% interest in this company. As at 31 December 2019 the new joint venture held nil net assets.
Acquisition of Micro Plastics
On 12 December 2017 Essentra acquired 100% of the share capital of Micro Plastics Inc. The transaction was settled with cash consideration of
£19.7m and deferred consideration of £3.7m. During 2019 £1.2m of deferred consideration was paid out to the vendor, with the remainder to be
paid in the future.
Acquisition of Innovative Components
On 26 June 2019, Essentra acquired 100% of the share capital of Innovative Components Inc. and Componentes Innovadores Limitada (together
‘‘Innovative Components’’). Innovative Components is a leading manufacturer and distributor of knobs, pins and handles in North America for
a broad range of end-markets, and is reported under the Company’s Components division.
On acquisition the assets and liabilities of the business acquired were adjusted to reflect their fair value to Essentra. Due to the timing of the
transaction, the purchase price allocations including the split between goodwill and intangible assets and fair value adjustments are provisional
and subject to finalisation for up to one year from the date of acquisition.
A deferred consideration of £2.0m was recognised and will be settled in two equal instalments on the first and second anniversary from the
acquisition date.
Had the acquisition been completed on 1 January 2019, the contribution to the Group’s revenue and operating profit would have been £4.6m and
£1.0m higher respectively.
An estimate of related transaction costs of £0.9m were recognised in the consolidated income statement in exceptional and other adjusting items.
Acquisition of Nekicesa
On 6 September 2019, Essentra acquired 100% of the share capital of Nekicesa Packaging S.L. ("Nekicesa"). Nekicesa is one of the leading
converters of folding cartons supplying the pharmaceutical end-market in Spain and is reported under the Packaging division.
On acquisition the assets and liabilities of the business acquired were adjusted to reflect their fair value to Essentra. Due to the timing of the
transaction, the purchase price allocations including the split between goodwill and intangible assets and fair value adjustments are provisional
and subject to finalisation for up to one year from the date of acquisition.
Had the acquisition been completed on 1 January 2019, the contribution to the Group’s revenue and operating profit would have been £15.0m and
£1.8m higher respectively.
An estimate of related transaction costs of £0.8m were recognised in the consolidated income statement in exceptional and other adjusting items.
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ESSENTRA PLC ANNUAL REPORT 2019 165
165
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
24. Acquisitions and disposals continued
The fair value of assets and liabilities acquired as part of the acquisition of Innovative Components and Nekicesa are detailed below:
Intangible assets
Property, plant and equipment
Lease right-of-use asset
Inventories
Trade and other receivables
Cash and cash equivalents
Deferred tax
Debt
Trade and other payables
Lease liabilities
Goodwill
Consideration
Satisfied by:
Cash consideration
Deferred consideration
Cash consideration
Cash and cash equivalents acquired
Net cash outflow in respect of the acquisition
Nekicesa
£m
Innovative
Components
£m
4.5
13.6
3.5
2.3
3.3
0.8
(2.4)
(13.8)
(3.2)
(3.1)
5.5
4.8
10.3
10.3
---
10.3
(0.8)
9.5
9.5
0.4
0.3
2.0
1.0
0.2
(2.6)
---
(0.7)
(0.3)
9.8
7.8
17.6
15.6
2.0
15.6
(0.2)
15.4
Total
£m
14.0
14.0
3.8
4.3
4.3
1.0
(5.0)
(13.8)
(3.9)
(3.4)
15.3
12.6
27.9
25.9
2.0
25.9
(1.0)
24.9
Goodwill represents the expected operating and financial synergies, and the value of an assembled workforce. Goodwill is not deductible for tax purposes.
Fair values of assets and liabilities, including property, plant and equipment, acquired for Nekicesa are provisional and subject to change as the
Group is still permitted to make fair value adjustments up until 12 months after the date of acquisition.
Disposals
On 14 January 2019, Essentra divested of its Pipe Protection Technologies business (‘‘PPT’’) to certain wholly-owned subsidiaries of National Oilwell
Varco, Inc. This disposal resulted in a gain before tax of £11.2m, which has been recognised within exceptional and other adjusting items. Related
transaction costs of £2.3m were also recognised in the consolidated income statement in exceptional and other adjusting items. As at the 2018
year end the assets and liabilities for this business were in a disposal group held for sale.
On 11 June 2019, Essentra divested of its Extrusion business to Inter Primo A/S. This disposal resulted in a loss before tax of £1.8m, which has been
recognised within exceptional and other adjusting items. Related transaction costs of £1.2m were also recognised in the consolidated income
statement in exceptional and other adjusting items.
On 28 June 2019, Essentra divested of its Speciality Tapes business (‘‘ST’’) to OpenGate Capital. This disposal resulted in a gain before tax of
£20.0m, which has been recognised within exceptional and other adjusting items. Related transaction costs of £5.1m were also recognised in
the consolidated income statement in exceptional and other adjusting items.
On 23 July 2019, Essentra divested of its Cards Solution business to Barcodes, Inc. This disposal resulted in a loss before tax of £1.1m, which has
been recognised within exceptional and other adjusting items. Related transaction costs of £0.2m were also recognised in the consolidated
income statement in exceptional and other adjusting items.
166
166 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
24. Acquisitions and disposals continued
The disposal proceeds, nets assets disposed and gains arising from the movement in foreign currency exchange from the divestment of the PPT,
Extrusion, Speciality Tapes and Card Solutions businesses were as follows:
Goodwill
Other intangible assets
Property, plant and equipment
Lease right-of-use asset
Inventories
Trade and other receivables
Cash and cash equivalents
Deferred tax
Trade and other payables
Lease liabilities
Reclassification of gains from movement in foreign currency exchange
Gain/(loss) on disposal before transaction costs
Disposal proceeds
Satisfied by:
Cash consideration
Deferred consideration
Cash consideration
Deferred consideration received
Cash and cash equivalents disposed
Net cash inflow from disposals of businesses
Pipe Protection
Technologies
£m
Extrusion
£m
Speciality
Tapes
£m
Card
Solutions
£m
10.1
---
22.2
0.9
3.4
5.6
0.3
(1.8)
(2.5)
(1.1)
37.1
(9.8)
11.2
38.5
37.5
1.0
37.5
1.0
(0.3)
38.2
3.7
---
11.9
0.1
2.6
4.4
0.8
---
(4.4)
(0.1)
19.0
(2.9)
(1.8)
14.3
14.3
---
14.3
---
(0.8)
13.5
27.4
8.6
10.4
---
3.9
4.3
0.4
(5.8)
(2.5)
---
46.7
(5.9)
20.0
60.8
60.8
---
60.8
---
(0.4)
60.4
0.4
0.8
---
---
1.1
1.5
---
(0.2)
(0.9)
---
2.7
---
(1.1)
1.6
1.6
---
1.6
---
---
1.6
Total
£m
41.6
9.4
44.5
1.0
11.0
15.8
1.5
(7.8)
(10.3)
(1.2)
105.5
(18.6)
28.3
115.2
114.2
1.0
114.2
1.0
(1.5)
113.7
At 31 December 2018, the total assets and total liabilities for PPT were included within assets held for sale. Details can be found in the Essentra
Annual Report 2018.
The total gains of £28.3m before transaction costs represent the pre-tax gain on disposal.
The total gains of £18.6m arising from the movement in foreign currency exchange have been reclassified and reported within the consolidated
income statement as part of the exceptional and other adjusting items arising on the disposal of businesses.
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25. Dividends
2018 interim: paid 31 October 2018
2018 proposed final: paid 3 June 2019
2019 interim: paid 30 October 2019
2019 proposed final: payable 1 June 2020
Per share
2018
p
6.3
14.4
20.7
2019
p
6.3
14.4
20.7
2019
£m
16.5
37.7
54.2
Total
2018
£m
16.5
37.7
54.2
NOTES
ESSENTRA PLC ANNUAL REPORT 2019 167
167
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Notes continued
26. Related parties
Other than the compensation of key management (note 5), the acquisition of minority stake in Essentra (MEA) Pte. Ltd (note 24) and the
establishment of joint venture China Tobacco Essentra (Xiamen) Filters Co., Ltd. (note 24), Essentra has not entered into any material transactions
with related parties since the last Annual Report.
ITC Essentra Limited is 50% owned by the Group. The results were fully consolidated within the Group’s financial statements as it is deemed
Essentra has control by virtue of having control of the Board. As at 31 December 2019 the entity had gross assets of £25.9m (2018: £21.6m),
gross liabilities of £10.4m (2018: £8.1m), operating profit of £6.3m (2018: £4.8m) and movement in cash of £3.8m (2018: £0.1m).
27. Post balance sheet events
In February 2020, the Company entered into an agreement with certain banks for a bridging loan facility for £50m, with an initial term
of 12 months, plus a further six months at Essentra’s option, and thereafter another six months at the lenders’ discretion.
28. Parent company
Essentra plc is a limited company incorporated and domiciled in the United Kingdom. It operates as the ultimate parent company of the Essentra
Group. Its registered office is Avebury House, 201-249 Avebury Boulevard, Milton Keynes, MK9 1AU, United Kingdom. The principal subsidiary
undertakings of Essentra plc are listed in note 10 to the Essentra plc Company Financial Statements.
29. Adjusted measures
Management reviews the adjusted operating profit and operating cash flow as measures of the performance of the business. Adjusted operating
profit is stated before amortisation of acquired intangible assets and exceptional and other adjusting items which are considered not relevant to
measuring the underlying performance of the business. Operating cash flow is defined as adjusted operating profit before depreciation, share
option expense and other non-cash items, less working capital movements and net capital expenditure as shown below:
Operating profit
Amortisation of acquired intangible assets
Exceptional and other adjusting items
Adjusted operating profit
Depreciation
Lease right-of-use asset depreciation
Amortisation of non-acquired intangible assets
Share option expense
Other non-cash items
Working capital movements
Net capital expenditure1
Operating cash inflow --- adjusted
2019
£m
80.0
22.9
(15.4)
87.5
35.5
11.3
0.9
3.9
(0.4)
(10.3)
(56.6)
71.8
2018
£m
47.2
22.7
20.8
90.7
35.4
---
0.5
4.8
0.1
5.9
(60.2)
77.2
1 Net capital expenditure within adjusted operating cash flow excludes £0.3m (2018: £8.3m) of exceptional property, plant and equipment disposal proceeds realised during site closures.
168
168 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
Essentra plc Company
Balance Sheet
At 31 December 2019
Fixed assets
Investment in subsidiary undertaking
Current assets
Debtors
Current liabilities
Creditors: amounts falling due within one year
Net current assets
Non-current liabilities
Note
2019
£m
2018
£m
2,10
464.6
460.2
3
4
273.4
329.5
(61.5)
(1.0)
211.9
328.5
Creditors: amounts falling due after more than one year
5,6
(56.5)
(120.6)
Net assets
Capital and reserves
Issued share capital
Merger relief reserve
Capital redemption reserve
Profit and loss account
Shareholders’ funds: equity interests
620.0
668.1
7
8
66.0
298.1
0.1
255.8
620.0
66.0
298.1
0.1
303.9
668.1
The profit attributable to the equity holders included in the accounts of the Company is £1.3m (2018: profit of £1.0m).
The Company Financial Statements on pages 169 to 179 were approved by the Board of Directors on 28 February 2020 and were signed on its
behalf by:
Paul Forman
Chief Executive Chief Financial Officer
Lily Liu
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ESSENTRA PLC ANNUAL REPORT 2019 169
169
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Profit and loss account
Retained
earnings
£m
315.0
1.3
1.3
(0.7)
0.4
4.4
(54.2)
266.2
Own
shares
£m
(11.1)
---
0.7
(10.4)
Profit and loss account
Retained
earnings
£m
364.0
1.0
1.0
(1.1)
0.1
5.2
(54.2)
315.0
Own
shares
£m
(12.2)
---
1.1
(11.1)
Total
equity
£m
668.1
1.3
1.3
---
0.4
4.4
(54.2)
620.0
Total
equity
£m
716.0
1.0
1.0
---
0.1
5.2
(54.2)
668.1
Financial Statements
Essentra plc Company
Statement of Changes in Equity
For the year ended 31 December 2019
1 January 2019
Profit for year
Issued
share
capital
£m
66.0
Merger
relief
reserve
£m
298.1
Total comprehensive income for the year
---
---
Shares issued to satisfy employee share option exercises
Capital
redemption
reserve
£m
0.1
---
Share options exercised
Share-based payments
Dividends paid
31 December 2019
1 January 2018
Profit for year
66.0
298.1
0.1
Issued
share
capital
£m
66.0
Merger
relief
reserve
£m
298.1
Capital
redemption
reserve
£m
0.1
---
Total comprehensive income for the year
---
---
Shares issued to satisfy employee share option exercises
Share options exercised
Share-based payments
Dividends paid
31 December 2018
66.0
298.1
0.1
170
170 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
Essentra plc Company
Accounting Policies
a Authorisation of financial statements and statement of compliance with FRS 101
The parent company financial statements of Essentra plc (‘‘the Company’’) for the year ended 31 December 2019 were authorised for issue by the
Board of Directors on 28 February 2020 and the balance sheet was signed on the Board’s behalf by Paul Forman and Lily Liu. Essentra plc is a public
limited company that is incorporated, domiciled and has its registered office in England and Wales. The Company’s ordinary shares are publicly
traded on the London Stock Exchange and it is not under the control of any single shareholder. These financial statements were prepared in
accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101).
The profit and loss account of the Company is not presented as permitted by Section 408 of the Companies Act 2006.
b Basis of preparation
The Company transitioned to FRS 101 from the UK Generally Accepted Accounting Practice during the year ended 31 December 2015. No
adjustments were required as part of this transition.
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
• the requirements of paragraph 45(b) and 46-52 of IFRS 2 Share-Based Payment;
• the requirements of paragraphs 62, B64(b), B64(e), B64(g), B64(h), B64(j) to B64(m), b64(n)(ii), B64(o)(ii), B64(p), B64(q)(ii), B66 and B67
of IFRS 3 Business Combinations;
• the requirement of IFRS 7 Financial Instruments: Disclosures;
• the requirement of paragraphs 91-99 of IFRS 13 Fair Value Measurement;
• the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of paragraph
79(a)(iv) of IAS 1, paragraph 73(e) of IAS 16 Property, Plant and Equipment and paragraph 118(e) of IAS 38 Intangible Assets;
• the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D, 111 and 134-136 of IAS 1 Presentation of Financial
Statements;
• the requirements of IAS 7 Statement of Cash Flows;
• the requirements of paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;
• the requirements of paragraph 17 of IAS 24 Related Party Disclosures;
• the requirements in IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members of a
group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member; and
• the requirements of paragraphs 134(d)-134(f) and 135(c)-135(e) of IAS 36 Impairment of Assets.
Where required, equivalent disclosures are given in the consolidated financial statements.
These accounts have been prepared in accordance with The Companies Act 2006 as applicable to companies using FRS 101 and are prepared
on a going concern basis.
These accounts are prepared under the historical cost convention.
The following principal accounting policies have been consistently applied.
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c Investment in subsidiary undertaking
Investment in subsidiary undertaking is held at cost less any provision for impairment. The Company assesses at each balance sheet date whether
the investment in its subsidiary has been impaired.
d Share-based payments
The fair value of share options is measured at grant date. It is recognised as an addition to the cost of investment in the subsidiary in which the
relevant employees work over the expected period between grant and vesting date of the options, with a corresponding adjustment to reserves.
Detailed disclosures for the share-based payment arrangements of the Company are provided in note 18 to the consolidated financial statements.
e Own shares
The shares held in the Essentra Employee Benefit Trust for the purpose of fulfilling obligations in respect of share incentive plans are treated as
belonging to the Company and are deducted from its retained earnings. The cost of shares held directly (treasury shares) is also deducted from
retained earnings.
ESSENTRA PLC ANNUAL REPORT 2019 171
171
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Essentra plc Company
Accounting Policies continued
f Dividends
Dividend distributions to the Company’s shareholders are recognised as a liability in the period in which they are approved by the shareholders
of the Company (final dividend) or paid (interim dividend).
Dividend income is recognised when the right to receive payment is established.
g Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation
are included in the profit and loss account. Exchange differences arising from movements in spot rates are included in the profit and loss account
as exchange gains or losses, while those arising from the interest differential elements of forward currency contracts are included in external
interest income or expense.
h Financial assets
Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are included in current assets, except
for those with maturities greater than 12 months after the end of the reporting period which are classified as non-current assets. The Company’s
financial assets at amortised cost comprise receivables in the balance sheet.
Receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision
for impairment. Interest income is recognised accordingly using the effective interest method.
i Financial liabilities
Interest bearing loans and borrowings and other financial liabilities (excluding derivatives) are initially recognised at fair value net of transaction
costs incurred. They are subsequently held at amortised cost using the effective interest method. Any difference between the proceeds, net of
transaction costs, and the settlement or redemption of borrowings is recognised in profit or loss over the term of the borrowings.
The Company holds financial instruments which hedge the net investments in the foreign operations of its subsidiary undertakings. Gains and
losses on these instruments are recognised in the profit and loss account of the Company.
j Taxation
Income tax in the profit and loss account comprises current and deferred tax. Income tax is recognised in the profit and loss account except to the
extent that it relates to items recognised in equity or other comprehensive income.
Current tax is the expected tax payable on the taxable income for the year using the applicable tax rates enacted or substantively enacted at the
balance sheet date and any adjustment to tax payable in prior years.
Deferred tax is provided, using the balance sheet liability method, on temporary differences arising between the tax bases and the carrying
amounts of assets and liabilities in the financial statements. The following temporary differences are not provided for: goodwill not deductible
for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit or loss, and differences relating to
investments in subsidiaries to the extent that they will not reverse in the foreseeable future. Deferred tax is determined using tax rates that are
expected to apply when the related deferred tax asset or liability is settled, using the applicable tax rates enacted or substantively enacted at
the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profit will be available against which the asset can
be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
172
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ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
Essentra plc Company Notes
1. Net operating charges
The auditor was paid £5,125 (2018: £5,125) for the statutory audit of the Company. Fees paid to the Company’s auditor for services other than
the statutory audit of the Company are disclosed in note 2 to the consolidated financial statements.
The Directors’ remuneration, which was paid by Essentra International Limited, is disclosed in the Annual Report on Remuneration on page 102.
2. Investment in subsidiary undertaking
Beginning of year
Additions
End of year
3. Debtors
Amounts receivable from subsidiary undertakings
4. Creditors: amounts falling due within one year
Accruals and deferred income
Corporate taxes
US Private Placement Loan Notes
5. Creditors: amounts falling due after more than one year
US Private Placement Loan Notes
6. Maturity of financial liabilities
Debt can be analysed as falling due:
Within one year
Between one and five years
More than five years
Investment in subsidiary
undertaking
2019
£m
460.2
4.4
464.6
2019
£m
273.4
273.4
2019
£m
0.7
0.2
60.6
61.5
2019
£m
56.5
56.5
2018
£m
455.0
5.2
460.2
2018
£m
329.5
329.5
2018
£m
0.9
0.1
---
1.0
2018
£m
120.6
120.6
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2019
£m
60.6
14.8
41.7
117.1
2018
£m
---
62.0
58.6
120.6
ESSENTRA PLC ANNUAL REPORT 2019 173
173
ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Essentra plc Company Notes continued
7. Issued share capital
Issued, authorised and fully paid ordinary shares of 25p (2018: 25p) each
Number of ordinary shares in issue
At beginning and end of year
2019
£m
66.0
66.0
2018
£m
66.0
66.0
2019
2018
264,129,170
264,129,170
At 31 December 2019, the Company held 951,137 (2018: 1,127,065) of its own shares in treasury.
8. Reserves
As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Company has not been separately presented in
these Financial Statements. The profit attributable to equity holders included in the accounts of the Company is £1.3m (2018: profit of £1.0m).
Included in the profit and loss account are accumulated share-based payments of £47.9m (2018: £43.5m) which are credited directly to reserves.
Full details of these share-based payments are set out in the Annual Report on Remuneration on pages 101 to 111.
9. Dividends
2018 interim: paid 31 October 2018
2018 proposed final: paid 3 June 2019
2019 interim: paid 30 October 2019
2019 proposed final: payable 1 June 2020
Per share
2018
p
6.3
14.4
20.7
2019
p
6.3
14.4
20.7
2019
£m
16.5
37.7
54.2
Total
2018
£m
16.5
37.7
54.2
174
174 ESSENTRA PLC ANNUAL REPORT 2019
ESSENTRA PLC ANNUAL REPORT 2019
Financial Statements
10. Subsidiary undertakings
The companies named below (including dormant entities) are subsidiary undertakings of Essentra plc and are included in the consolidated Financial
Statements of the Group. The investments in the companies below relate to ordinary shares or common stock. The principal country in which each
company operates is the country of incorporation.
All entities below are wholly owned subsidiaries of the Group except for ITC Essentra Limited (India) (50% owned) and China Tobacco Essentra
(Xiamen) Filters Co., Ltd (49% owned). The ownership held by the Group in these companies are through holding of ordinary shares in these
companies and they are accounted for as subsidiaries of the Group in the consolidated Financial Statements due to a control achieved via
board membership.
Essentra International Limited is the only direct subsidiary of Essentra plc.
Country of
incorporation
Principal activity
Essentra (Bangor) Ltd.
UK
Manufacturing
Essentra Components Limited
UK
Manufacturing
Essentra Filter Products Limited
UK
Manufacturing
Essentra Packaging Limited
UK
Manufacturing
Essentra Packaging & Security Limited
UK
Manufacturing
ESNT Filter Products Limited
UK Holding Company
ESNT Holdings (No.1) Limited
UK Holding Company
ESNT Holdings (No.2) Limited
UK Holding Company
ESNT International Limited
UK Holding Company
ESNT Packaging & Securing Solutions Limited
UK Holding Company
Essentra Filter Products International Limited
UK Holding Company
Essentra International Limited
UK Holding Company
Essentra Overseas Limited
UK Holding Company
Essentra Pension Trustees Limited
UK
Pension Trustee
Essentra Finance Limited
UK Treasury activities
Address of registered office
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
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Essentra (Kilmarnock) Ltd.
Essentra (Northampton) Ltd.
Essentra Services Limited
Filtrona Limited
P. P. Payne Limited
Alliance Plastics Limited
Cigarette Components Limited
ESNT Components Limited
UK
UK
UK
UK
UK
UK
UK
UK
Non-trading
4th Floor, 115 George Street, Edinburgh, Scotland, EH2 4JN
Non-trading
Non-trading
Non-trading
Non-trading
Dormant
Dormant
Dormant
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
ESSENTRA PLC COMPANY NOTES
ESSENTRA PLC ANNUAL REPORT 2019 175
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ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Essentra plc Company Notes continued
10. Subsidiary undertakings continued
ESNT Limited
Filtrona Custom Moulding Limited
North West Plastics Limited
Skiffy Limited
Stera Tape Limited
Essentra (Great Harwood) Ltd.
Essentra (Hull) Ltd.
Essentra (Kimbolton) Ltd.
Country of
incorporation
UK
Principal activity
Dormant
UK
UK
UK
UK
UK
UK
UK
Dormant
Dormant
Dormant
Dormant
Dissolved --- 4th
February 2020
Dissolved --- 4th
February 2020
Dissolved --- 4th
February 2020
Essentra Filter Products Inc
US
Manufacturing
Essentra Packaging Inc
US
Manufacturing
Essentra Plastics LLC
US
Manufacturing
Essentra Packaging Puerto Rico, Inc.
US
Manufacturing
Essentra Packaging US Inc
US
Manufacturing
Innovative Components, Inc.
US
Manufacturing
Micro Plastics, Inc.
US
Manufacturing
Essentra Components Inc
Essentra Components Japan Inc
US
US
Distribution
Distribution
ESNT Holdings Inc
US Holding Company
ESNT (Porous) Holdings Inc.
US Holding Company
ESNT US Holdings Corp
US Holding Company
Essentra Corporation
US Holding Company
Essentra Holdings Corp. (DE)
US Holding Company
US NewCo LLC
US Holding Company
US
US
Non-trading
Non-trading
ESNT Components Co.
US LLC 2, LLC
Essentra Components BV
Essentra Packaging B.V.
Blue NewCo 1 B.V.
176
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ESSENTRA PLC ANNUAL REPORT 2019
Address of registered office
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Avebury House, 201-249 Avebury Boulevard, Milton Keynes,
Buckinghamshire, MK9 1AU
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Two Westbrook Corporate Center, Suite 200, Westchester IL
60154, United States
Netherlands
Netherlands
Distribution
Distribution
Den Belleman 9, 5571 NR Bergeyk, Netherlands
Celsiusweg 37, 8912 AM, Leeuwarden, Netherlands
Netherlands Holding Company
Gustav Mahlerplein 68, 1082 MA, Amsterdam, Netherlands
Financial Statements
10. Subsidiary undertakings continued
Blue NewCo 2 B.V.
Country of
incorporation
Principal activity
Netherlands Holding Company
Blue NewCo 3 B.V.
Netherlands Holding Company
Blue NewCo 4 B.V.
Netherlands Holding Company
Address of registered office
Gustav Mahlerplein 68, ITO Tower 9th floor, MA Amsterdam,
1082, Netherlands
Gustav Mahlerplein 68, Ito Tower, 9th Floor, 1082 MA,
Amsterdam, Netherlands
Gustav Mahlerplein 68, Ito Tower, 9th Floor, 1082 MA,
Amsterdam, Netherlands
ESNT Holdings Cooperatie 1 W.A.
Netherlands Holding Company
Celsiusweg 37, 8912 AM, Leeuwarden, Netherlands
ESNT Holdings (Netherlands) BV
Netherlands Holding Company
Den Belleman 9, 5571 NR, Bergeijk, Netherlands
Essentra BV
Netherlands Holding Company
Celsiusweg 37, 8912 AM, Leeuwarden, Netherlands
Essentra Holdings Cooperative WA
Netherlands Holding Company
Den Belleman 9, 5571 NR, Bergeijk, Netherlands
Essentra Holdings (No.2) Cooperative WA
Netherlands Holding Company
Den Belleman 9, 5571 NR, Bergeijk, Netherlands
Essentra International BV/LLC
Netherlands Holding Company
Den Belleman 9, 5571 NR, Bergeijk, Netherlands
ESNT Holding BV
ESNT Holdings Cooperatie 2 W.A.
Fijnmechanica Surhuisterveen B.V.
Linde Vouwkartonnage B.V.
Richco Benelux BV
Skiffy BV
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Non-trading
Den Belleman 9, 5571 NR, Bergeijk, Netherlands
Celsiusweg 37, 8912 AM, Leeuwarden, Netherlands
Celsiusweg 37, 8912 AM, Leeuwarden, Netherlands
Hanzeweg 14, 7591 BK, Denekamp, Netherlands
Beeldschermweg 5-3, 3821 AH Amersfoot, Netherlands
Den Belleman 9, 5571 NR, Bergeijk, Netherlands
Essentra Packaging Ireland Limited
Ireland
Manufacturing
8 Airways Industrial Estate, Dublin 17, Ireland
ESNT (Cherry Orchard) Holdings Limited
Ireland Holding Company
8 Airways Industrial Estate, Dublin 17, Ireland
C.B. Packaging Limited
ESNT (Cherry Orchard) Limited
ESNT Finance Ireland Limited
Ireland
Ireland
Ireland
Non-trading
Non-trading
Non-trading
Essentra Finance (Euro) Ireland Limited
Ireland
Non-trading
Essentra Pte.Ltd
Singapore
Distribution
Essentra Filter Products Leasing Pte. Ltd
Singapore Leasing Company
Essentra (MEA) Pte. Ltd
Singapore Holding Company
Essentra Filter Products Development Co. Pte.
Ltd
Singapore
Non-trading
8 Airways Industrial Estate, Dublin 17, Ireland
8 Airways Industrial Estate, Dublin 17, Ireland
7 Airways Industrial Estate, Cloghran, Dublin 17, D17 RR88,
Ireland
7 Airways Industrial Estate, Cloghran, Dublin 17, D17 RR88,
Ireland
36 Robinson Road #17-01, City House, Singapore, 068877,
Singapore
238A Thomson Road, #25-04/05 Novena Square, Singapore,
307684, Singapore
36 Robinson Road, #17-01 City House, Singapore, 068877,
Singapore
238A Thomson Road, #25-04/05 Novena Square, Singapore,
307684, Singapore
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Essentra Components GmbH
Essentra Pty Ltd
Austria Holding Company
Australia Treasury activities
Schubertring 6, 1010 Wien, Austria
32 Clyde Street, Rydalmere NSW 2116, Australia
Essentra Industria E Commercio LTDA
Brazil
Manufacturing Room 7, No 1000 Avenida Emilio Marconato, Centro Comercial,
Chacara Primavera, Jaguariuna, Sao Paulo, 13.916-074, Brazil
Essentra Limited
Canada
Manufacturing
2538 Spears Road, Oakville ON L6L 5K9, Canada
China Tobacco Essentra (Xiamen) Filters
Co., Ltd
Essentra Precision Machinery Components
(Ningbo) Co. Ltd.
China
Non-trading
Floor 2 No.289 Binshui Road, Qiaoying Street, Jimei District,
Xiamen City, China
China
Manufacturing 99 Huanghai Road, Beilun District, Ningbo, Zhejiang Province,
China
Essentra Trading (Ningbo) Co. Ltd
China
Distribution
No.99 Huanghai Road, Beilum District, Ningbo, Zhejiang
Province, China
Essentra Components International Trading
(Shanghai) Co Ltd
China Holding Company Room 347, Xinmaolou Building, 2 Taizhong South Road, China
(Shanghai) Pilot Free Trade Zone, Pudong New Area, Shanghai,
200120, China
Essentra Plastic Trading (Ningbo) Co. Ltd
China Holding Company
99 Huanghai Road, Beilun District, Ningbo, Zhejiang, China
Componentes Innovadores Limitada
Costa Rica
Manufacturing
Cartago-Cartago Parque Industrial Y Zona Franca Zeta,
Cartago, Edificios, 48C3 48C4, Costa Rica
Essentra Components sro
Czech
Republic
Holding Company Víde?ská 101/119, Dolní Heršpice, Brno, 619 00, Czech Republic
ESSENTRA PLC COMPANY NOTES
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ESSENTRA PLC
ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Essentra plc Company Notes continued
10. Subsidiary undertakings continued
Essentra Packaging S.a.r.l.
Essentra Components SAS
Essentra International Gmbh
Essentra Components GmbH
Essentra Packaging GmbH
Country of
incorporation
Principal activity
France Holding Company
Address of registered office
F-27200, Sarreguemines, Rue Guillaume, Schoettke, France
France
Non-trading
280 rue de la Belle Étoile, 95700, Roissy, France
Germany Holding Company
Germany
Manufacturing
Filmstr. 5, 06766, Bitterfeld-Wolfen, Germany
Herrenpfad Süd 36, 41334, Nettetal, Germany
Germany
Manufacturing
Filmstrasse. 5, D-06766, Edisonstrasse, Wolfen, Germany
Essentra (Hong Kong) Limited
Hong Kong
Non-trading 36/F, Tower Two, Times Square, 1 Matheson Street, Causeway
Bay, Hong Kong
Essentra Components Kft
Essentra Filter Products Kft
PT Essentra
Essentra (India) Private Limited
ITC Essentra Limited
ESNT Holdings SpA
Hungary Holding Company
Hungary
Manufacturing
Indonesia
Manufacturing
2040 Budaors Gyar u. 2., Hungary
2310 Szigetszentmiklos, Leshegy ut 30, Hungary
Jalan Berbek Industri 1, 18-20 Surabaya Industrial Estate
Rungkut (SIER), Sidoario, 61256, Indonesia
India
India
Manufacturing Survey No. 46, Jala Hobli, Dodajala Village, Bangalore North ---
562 157, Karnataka, India
Manufacturing Doddajala Post, Yarthiganahally, (via) Bettahalasur, Bangalore
North, 562 157, India
Italy Holding Company Podenzano (PC), Loc.I Casoni Fraz. Gargia, Via Copernico no.
54, 29027, Italy
Essentra Packaging Srl
Italy
Distribution
Via Copernico n.54, Loc. 1 Casoni Fraz., Gariga, 29027,
Podenzano, Italy, Italy
Essentra Components srl
Essentra Filter Products Spa
Italy
Italy
Non-trading
Via Massarenti, 1 Loc, 1 Maggio, 40013, Castel Maggiore, Italy
Non-trading Studio De Vivo SCIS, 84123 Salerno, Corso, Garibaldi n. 143, Italy
Essentra Packaging Luxembourg Sarl
Luxembourg
Non-trading
8-10, Avenue de la Gare, L-1610, Luxembourg
Abric Encode Sdn Bhd
Malaysia
Manufacturing
Essentra Malaysia Sdn Bhd
Malaysia
Non-trading
Unit 1110 Block A, Pusat Dagangan Phileo Damansara II, 15
Jalan 16/11 Off Jalan Damansara, 46350 Petaling Jaya,
Selangor Darul Ehsan, Malaysia
Unit 1110 Block A, Pusat Dagangan Phileo Damansara II, 15
Jalan 16/11 Off Jalan Damansara, 46350 Petaling Jaya,
Selangor Darul Ehsan, Malaysia
Essentra Asia Sdn Bhd
Malaysia
Non-trading Unit D --- 3A --- 10, 4th Floor, Greentown Square, Jalan Dato’ Seri
Ahmed Said, 30450 Ipoh, Perak, Malaysia
Essentra Components SEA (M) SDN BHD
Malaysia
Non-trading
D5-5-6, Solaris Dutamas 1, Jalan Dutamas 1, 50480, Kuala
Lumpur, Malaysia
Essentra Components S. de R.L de C.V.
Mexico
Manufacturing
Carretera a Huinala #510, Apodaca, NL 66640, Mexico
ESNT Limited
New Zealand
Services Quigg Partners, Floor 7, 36 Brandon Street, Wellington Central,
Wellington, 6011, New Zealand
Essentra Filter Products S.A.
Essentra Sp. z o.o.
Boxes Prestige Poland Sp. z o.o.
Essentra Packaging Spó?ka z o.o.
Essentra Co., Ltd.
Essentra Components SRL
Paraguay
Poland
Poland
Poland
Republic of
Korea
Romania
Distribution
Non-trading
Manufacturing
Manufacturing
Calle 12, Acacary, Cuidad del Este, Paraguay
11 Lakowa Street, 90-562, Lodz, Poland
Tokarska 25, 20-210, Lublin, Poland
Tokarska 25, 20-210, Lublin, Poland
Distribution 5th Floor, One IFC, 10, Gukjegeumyung-ro, Youngdeungpo-gu,
Seoul, 07326, Korea, Republic of
Distribution Burcuresti Sectorul 1, Strada POLANA, Nr. 68-72, Etaj 2, Biroul
NR.5, Romania
OOO Essentra Filter Products
Russia
Distribution
Essentra Saint-Petersburg Limited Liability
Company
Russia
Non-trading
Moskovskyi pr. 60/129, Business center Senator, 190005, St
Petersburg, Russian Federation
4a Finlyandskiy Prospect, 194044, St. Petersburg, Russian
Federation
Essentra Components sro
Slovakia
Distribution
Gogol’ova 18, 852 02 Bratislava, Slovakia
Essentra Components (Pty) Ltd
South Africa
Distribution Unit 2. Sage Corporate Park, Corner Suni and Tsessebe Streets,
South Midrand, Gauteng, 1683, South Africa
Clondalkin Holdings SA
Spain
Manufacturing
Essentra Packaging S.A.
Spain
Manufacturing
Carrer dels Fusters 18-20, Poligono Industrial Can Cuyas,
Montcada I Reixac, 08110, Barcelona, Spain
Carrer dels Fusters 18-20, Poligono Industrial Can Cuyas,
Montcada I Reixac, 08110, Barcelona, Spain
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Financial Statements
10. Subsidiary undertakings continued
Nekicesa Global Packaging SL
Country of
incorporation
Spain
Principal activity
Non-trading
Nekicesa Packaging SL
Spain
Manufacturing
Address of registered office
Ctra. de Navalcarnero a Chinchon km., 21,2 Grinon, 28971,
Madrid, Spain
Ctra. de Navalcarnero a Chinchon km., 21,2 Grinon, 28971,
Madrid, Spain
Essentra Components S.L.U
Spain
Distribution Calle Roure Gros 1-11, Poligono Industrial Mas d’En Cisa, 08181,
Spain
Essentra Components AB
Sweden
Manufacturing
Essentra Hertila AB
Essentra Components Sarl
Sweden
Manufacturing
Switzerland
Non-trading
Essentra Eastern Limited
Thailand
Non-trading
San Yai Holding Company Limited
Thailand Holding Company
Askims Verkstadsvag 13Sweden, 436 34 Askim, Vastra
Gotalands Ian, Goteborg kommun, Sweden
Persbogatan 1, SE-265 38, Åstorp, Sweden
Rue du Grand-Chene 2, c/o Pierre- Alain Killias, Lexartis
Avocats, 1003 Lausanne, Switzerland
111/5 Moo 2 Tambon Makamku, Amphur Nikom Pattana,
Rayong Province, Thailand
No.776 Charoennakorn Road, Khwaeng Daokhanong, Khet
Dhonburi, Bangkok, Thailand
Pranakorn Holding Company Limited
Thailand Holding Company 776 Charoennakorn Road, Bukkalo, Thonburi, Bangkok 10600,
Thailand
Essentra Limited
Thailand
Manufacturing
Apex Filters Company Limited
Thailand
Non-trading
Chemical Resins (Thailand) Limited
Thailand
Non-trading
Mesan Kilit A.S.
Essentra FZE
Filtrona Venezolana C.A.
Turkey
Distribution
Manufacturing
United Arab
Emirates
Venezuela
116/3 Soi Thiantalay 24, Bangkhunthian-Chaitalay Road,
Thakam, Bangkhunthian, Bangkok, 10150, Thailand
31/2 Rama 3 Road, Chongnonsee, Yannawa,
Bangkok 10120, Thailand
4th Floor, 77/1 Soi Ruamrudee 2, Ploenchit Road, Lumpini,
Pathumwan, Bangkok, 10330, Thailand
Ilitelli Organzie Sanayi, Bolgesi Metal Is San, Sit.7.Blok No24
Basaksehir, Istanbul, Turkey
Plot No. S20403, Jebel Ali Free Zone (JAFZA), PO Box No
261392, Dubai, United Arab Emirates
Property
Company
Urbn. Parque Comercio Industrial Castillito, Lot No. P-8. Street
103 c/c Av. 66, San Diego Municipality, Valencia, Edo
Carabobo, Venezuela
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ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Independent auditors’ report
to the members of Essentra plc
Report on the audit of the financial statements
Opinion
In our opinion:
• Essentra plc’s group financial statements and company financial statements (the "financial statements") give a true and fair view
of the state of the group’s and of the company’s affairs as at 31 December 2019 and of the group’s profit and cash flows for the year
then ended;
• the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted
by the European Union;
• the company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice
(United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law); and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group
financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report, which comprise: the Consolidated and Company Balance Sheets as
at 31 December 2019; the Consolidated Income Statement and Consolidated Statement of Comprehensive Income, the Consolidated Statement of
Cash Flows, and the Consolidated and Company Statements of Changes in Equity for the year then ended; and the notes to the financial
statements, which include a description of the significant accounting policies and critical accounting judgements and estimates.
Our opinion is consistent with our reporting to the Audit & Risk Committee.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in the Accounting Policies to the financial statements, the group, in addition to applying IFRSs as adopted by the European Union,
has also applied IFRSs as issued by the International Accounting Standards Board (IASB).
In our opinion, the group financial statements have been properly prepared in accordance with IFRSs as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (‘‘ISAs (UK)’’) and applicable law. Our responsibilities under
ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements
in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the
group or the company.
Other than those disclosed in note 2 to the financial statements, we have provided no non-audit services to the group or the company in the
period from 1 January 2019 to 31 December 2019.
Our audit approach
Overview
• Overall group materiality: £3.6 million (2018: £4.0 million), based on 5% of profit before tax, intangibles
amortisation and exceptional and other adjusting items.
Materiality
• Overall company materiality: £6.2 million (2018: £6.6 million), based on 1% of net assets.
• There were no significant components within the group.
Audit scope
an additional 35 reporting units.
• We performed full scope audit work on 41 reporting units, and specified procedures over certain balances on
• This provided coverage of 65% revenue, 63% profit before tax, and 73% net assets.
Key audit
matters
• Presentation of exceptional and other adjusting items (group).
• Goodwill impairment (group).
• Compliance with US sanctions legislation (group).
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ESSENTRA PLC COMPANY NOTES
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ANNUAL REPORT 2019
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Financial Statements
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular,
we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the group, we identified that the principal risks of non-compliance with laws and regulations related to the non-
compliance with the Listing Rules, UK and overseas tax legislation not being adhered to, non-compliance with employment regulations in the UK
and other jurisdictions in which the Group operates, breaches of health and safety legislation, non-compliance with import and export restrictions,
and other legislation specific to the industries in which the group operates, and we considered the extent to which non-compliance might have
a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of the
financial statements, such as the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation
of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting of journal
entries to improve revenue performance or to manipulate metrics relating to bank covenants, and management bias in key accounting estimates.
The group engagement team shared this risk assessment with the component auditors so that they could include appropriate audit procedures
in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors included:
• Review of correspondence with the regulators and government authorities;
• Review of correspondence with legal advisors;
• Review of matters reported through the group’s whistleblowing helpline and the results of management’s investigation of such matters;
• Enquiries of management at the group, divisional and local levels;
• Enquiries of the group’s legal team;
• Enquiries with component auditors;
• Review of internal audit reports in so far as they related to the financial statements;
• Identifying and testing journal entries, in particular any journal entries posted with unusual account combinations which result in an impact
to revenue or to metrics relevant to banking covenants;
• Challenging assumptions and judgements made by management in determining significant accounting estimates, in particular in relation
to exceptional and other adjusting items, impairment of goodwill, and compliance with US sanctions legislation. (see related key audit
matters below).
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is
from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting
a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment
by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified
by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the
context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters. This is not a complete list of all risks identified by our audit.
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FINANCIAL STATEMENTS
Financial Statements
Independent auditors’ report
to the members of Essentra plc continued
Key audit matter
How our audit addressed the key audit matter
Presentation of exceptional and other adjusting
items (group)
The financial statements include certain items which are disclosed
as exceptional and adjusting items. The nature of these items is
explained within the group accounting policy and includes transaction
costs relating to acquisition and disposals of businesses, acquisition
integration and restructuring costs, and other items such as site
closure costs and one-off projects.
In the year the most significant exceptional and other adjusting
items relate to the gains on disposal of businesses of £15.9 million,
costs relating to the investigation of certain compliance matters in
respect to the group’s export activities in the Filters division of £7.5
million (see breakdown of costs in a separate key audit matter below),
and releases of a number of provisions relating to previous site closures
of £9.1 million, as well as other restructuring costs of £2.1 million.
We focused on this area as there is limited guidance relating to this
presentational matter within IFRS and judgement is required by the
directors in determining whether items classified as exceptional or
adjusting are consistent with the group’s accounting policy.
Consistency in identifying and disclosing items as exceptional and
adjusting is important to maintain comparability of the results year
on year.
See page 133 for management’s disclosure of this significant
judgement. Also see page 89 in the Audit & Risk Committee report.
Goodwill impairment (group)
All goodwill and indefinite lived intangible assets must be allocated
to cash generating units (CGUs) and tested for impairment annually.
Management must also determine the recoverable amount for other
finite-lived assets where impairment indicators are identified.
The group has goodwill of £310.7 million, of which £190.5m is allocated
to the Packaging division, £98.5 million to Components, and £21.7
million to Filters. Historically, the annual impairment for the Packaging
division has resulted in material impairment charges and low levels of
headroom. However at 31 December 2018 headroom against the asset
carrying value was £165.0 million and in 2019 has further increased to
£284.0 million.
The discount rate calculated by management has decreased compared
to prior year, contributing to the increase in the headroom in the
Packaging model.
The impairment reviews performed by management contain a
number of significant judgements and estimates including revenue
growth rates, profit margins and discount rates. A change in these
assumptions can result in a material change in the valuation of
the assets.
See page 133 for management’s disclosure of this significant
judgement. Also see page 89 in the Audit & Risk Committee report.
We assessed the appropriateness of the group’s accounting policy
for the recognition of exceptional and other adjusting items with
reference to the applicable accounting standards.
We considered whether the items disclosed as exceptional and
adjusting were consistent with the accounting policy and the
approach taken in prior years, to determine that items were
appropriately classified. We did not identify any material items
which we would expect to be reported in earnings before exceptional
and other adjusting items.
Gains/losses and transaction costs related to acquisition and disposal
of businesses (£15.9 million) have been tested through sampling and
items have been traced to supporting invoices, bank statements and
other documentation.
The investigation of compliance matters within the Filters division
(£7.5 million) is considered one-off in nature and does not relate to
underlying trading, and therefore the classification as exceptional
is considered appropriate. Please see separate key audit matter
on the subject of compliance with U.S. sanctions rules below.
Gains arising from the release of provisions relating to site closures
have been agreed to lease surrenders and other supporting
documentation. The classification of these credits as exceptional is
considered appropriate as the release mirrors the treatment of the
charge when the provisions were created in prior periods.
A sample of restructuring costs have been agreed to supporting
evidence such as invoices and redundancy agreements.
We have considered other one-off or notable credits/charges
recognised in earnings before exceptional and other adjusting items
to ensure consistent treatment with adjusting items.
The disclosures included in note 2 were reviewed and deemed reasonable.
We have assessed the methodology applied by management in
performing their impairment reviews and tested the integrity of
management’s cash flow models.
We tested key assumptions made in the impairment review, such as
those around operating margins back to industry and competitor data.
We evaluated the future cash flow forecasts for each CGU, including
short term cash flows, and the process by which they were determined.
In doing so we compared the cash flow forecasts to the latest Board
approved plans and compared prior year budget to 2019 actual
performance in order to assess the quality of management’s
forecasting process. Our procedures confirmed the reasonableness
of the cash flows included in the models.
We also tested key assumptions including exchange rates and
long-term growth rates by comparing them to third party published
economic and industry forecasts and analyst reports. We found
the assumptions to be reasonable.
We validated the discount rate by recalculating the group’s weighted
average cost of capital for each CGU.
We performed sensitivity analyses around the key assumptions to
ascertain the extent of change in those assumptions that, either
individually or collectively, would be required for goodwill to be impaired.
We noted that the required level of change was beyond that which we
would consider likely given the current market conditions and recent
performance of the business.
Disclosures included within note 8 have also been assessed against the
requirements of IFRS and deemed reasonable.
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Financial Statements
Key audit matter
How our audit addressed the key audit matter
Compliance with U.S. sanctions legislation (group)
During the year, the group identified sanctions compliance failures
within its Filters division and conducted an investigation into the failures
identified. The company has made a voluntary disclosure to the U.S.
Office of Foreign Assets Control and continues to cooperate fully with
the U.S. authorities. Costs relating to the investigation and remedial
actions amounting to £3.6 million, a write-off of certain working capital
balances totalling £1.6 million, as well as an estimate of £2.3 million for
the expected financial penalties from the US authorities, have been
recognised as exceptional items in the income statement.
See page 133 for management’s disclosure of the significant judgement
and estimates associated with this matter. Also see page 89 in the
Audit & Risk Committee report.
With the assistance of our forensics experts we assessed the scope,
methodology and overall approach of management’s investigation into
the matter. We obtained the results of management’s investigation,
including the conclusions reached and understood the basis for those
conclusions. We discussed the findings with management, the Audit
& Risk Committee, as well as management’s experts and legal counsel,
and considered the conclusions to be appropriate based on the results
of the investigation and evidence obtained.
Having concluded that certain group companies in the Filters division
had failed to comply with certain U.S. laws:
• we tested management’s assumptions around their best estimate of
the potential exposure to financial penalties that may be imposed on
the group by U.S. authorities by comparing the estimated fine levels
to comparable fines imposed for similar non-compliances published
in U.S. Government sources, as well as discussing them with our
internal sanctions specialists, and we consider the provision to be
reasonable. However, as the financial penalties have yet to be agreed
with the U.S. authorities, the financial penalties that may ultimately
be paid by the group could be higher than that provided;
• a sample of the costs relating to the investigation and remedial
actions have been agreed to supporting evidence such as invoices
without exception; and
• we have scrutinised management’s rationale for writing off certain
working capital balances as a result of the non-compliance matters
identified. We tested the accuracy of the amounts written off back
to underlying accounting records with no issues noted. Given the
nature of the matter, we consider the presentation of the write-off
of working capital balances as exceptional to be appropriate.
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We determined that there were no key audit matters applicable to the company to communicate in our report.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate.
The group is split into three divisions being Components, Packaging and Filters. The Specialist Components division was dissolved in the year
following the disposal of the Pipe Protection Technology, Extrusion, Speciality Tapes, and Card Solutions businesses. Each division consists of a large
number of reporting sites spread globally across 34 territories. There are 255 reporting units within the consolidation, which include the reporting
sites and other consolidation units.
We did not identify any individually significant components within the group, with the largest contribution to revenue being 5% from one reporting
site, and the average being 1%. We determined the most effective approach was to engage PwC local component teams to perform full scope
procedures over 33 reporting units, with the Group audit team performing full scope audit work over a further 8 reporting units. In addition,
specified audit procedures were performed over certain balances, including revenue, at a further 3 reporting units in the Americas. In the largest
sites in the Americas, specified procedures over fixed assets, inventory and trade receivables were also performed. The Group audit team also
performed audit procedures over specific balances within a further 32 reporting units. This approach ensures that appropriate audit coverage
has been obtained over all financial statement line items.
Where work was performed by component auditors, we determined the appropriate level of involvement we needed to have in that audit work to
ensure we could conclude that sufficient appropriate audit evidence had been obtained for the group financial statements as a whole. We issued
written instructions to all component auditors and had regular communications with them throughout the audit cycle. This included a clearance
meeting with each component team and review of all significant matters reported.
In addition members of the group engagement team have visited reporting sites in the U.S., Dubai, Ireland, Germany, Turkey, Hungary and UK,
including meeting with local audit teams and local management as part of these visits.
Based on the detailed audit work performed across the group, we have gained coverage of 65% of total revenue, 63% of profit before tax, and
73% of net assets.
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ANNUAL REPORT 2019
FINANCIAL STATEMENTS
Financial Statements
Independent auditors’ report
to the members of Essentra plc continued
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together
with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on
the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate
on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
How we determined it
Rationale for benchmark
applied
Group financial statements
£3.6 million (2018: £4.0 million).
Company financial statements
£6.2 million (2018: £6.6 million).
5% of profit before tax, intangibles amortisation
and exceptional and other adjusting items.
1% of net assets.
The entity is a holding company of the rest of the
group and is not a trading entity. Therefore an asset
based measure is considered appropriate.
The group is profit-oriented, therefore it is considered
most appropriate to apply a rule of thumb based upon
a profit-based benchmark. The directors, management
and the users of the group financial statements focus
on adjusted numbers, being adjusted operating profit,
adjusted net income or adjusted pre-tax profit. The
group defines ‘adjusted’ as excluding the impact of
intangible amortisation and exceptional and other
adjusting items. Based on this, we consider an adjusted
metric of profit before tax, intangibles amortisation
and exceptional and other adjusting items to be the
most appropriate benchmark.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of
materiality allocated across components was between £0.1 million and £2.4 million. Certain components were audited to a local statutory
audit materiality that was also less than our overall group materiality.
We agreed with the Audit & Risk Committee that we would report to them misstatements identified during our audit above £180,000 (Group
audit) (2018: £198,000) and £180,000 (Company audit) (2018: £198,000) as well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
We are required to report if we have anything material to add or draw attention to in
respect of the directors’ statement in the financial statements about whether the
directors considered it appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the directors’ identification of any material
uncertainties to the group’s and the company’s ability to continue as a going concern
over a period of at least twelve months from the date of approval of the financial
statements.
We are required to report if the directors’ statement relating to Going Concern in
accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge
obtained in the audit.
Outcome
We have nothing material to add or to draw attention to.
However, because not all future events or conditions
can be predicted, this statement is not a guarantee
as to the group’s and company’s ability to continue
as a going concern. For example, the terms of the
United Kingdom’s withdrawal from the European
Union are not clear, and it is difficult to evaluate all
of the potential implications on the group’s trade,
customers, suppliers and the wider economy.
We have nothing to report.
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Financial Statements
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon.
The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to
be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to
conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on
the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006
have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK)
and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below
(required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ Report
for the year ended 31 December 2019 is consistent with the financial statements and has been prepared in accordance with applicable legal
requirements. (CA06)
In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity
of the group
We have nothing material to add or draw attention to regarding:
• The directors’ confirmation on page 34 of the Annual Report that they have carried out a robust assessment of the principal risks facing the
group, including those that would threaten its business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The directors’ explanation on pages 114 to 116 of the Annual Report as to how they have assessed the prospects of the group, over what period
they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation
that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal
risks facing the group and statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit
and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are
in alignment with the relevant provisions of the UK Corporate Governance Code (the ‘‘Code’’); and considering whether the statements are
consistent with the knowledge and understanding of the group and company and their environment obtained in the course of the audit.
(Listing Rules)
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Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the directors, on page 81, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the group’s and company’s position and performance,
business model and strategy is materially inconsistent with our knowledge of the group and company obtained in the course of performing
our audit.
• The section of the Annual Report on page 88 describing the work of the Audit & Risk Committee does not appropriately address matters
communicated by us to the Audit & Risk Committee.
• The directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from a relevant provision
of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006. (CA06)
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF ESSENTRA PLC
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FINANCIAL STATEMENTS
Financial Statements
Independent auditors’ report
to the members of Essentra plc continued
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ Responsibilities in Respect of the Financial Statements set out on page 117, the directors
are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give
a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either
intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16
of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or
to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent
in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not
visited by us; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• the company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting
records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we were appointed by the directors on 20 April 2017 to audit the financial statements for
the year ended 31 December 2017 and subsequent financial periods. The period of total uninterrupted engagement is 3 years, covering the years
ended 31 December 2017 to 31 December 2019.
Nicholas Stevenson (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Milton Keynes
28 February 2020
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Financial Statements
Independent environmental
assurance statement to Essentra plc
ERM Certification and Verification Services (ERM CVS) was engaged by Essentra plc (“Essentra”) to provide limited assurance
in relation to the information set out below and presented in Essentra’s 2019 Annual Report (“the Annual Report”).
Engagement summary
Scope of our
assurance engagement
Reporting
criteria
Assurance
standard
Assurance
level
Respective
responsibilities
Whether the 2019 data and explanatory notes for the following indicators presented on page 29 of the Annual Report are fairly
presented, in all material respects, in accordance with the reporting criteria:
• Total Scope 1 GHG emissions [metric tonnes of CO2eq]
• Total Scope 2 GHG emissions [metric tonnes of CO2eq]
•
Total waste by destination (Landfill, Incineration without energy recovery, Recovery including incineration with energy recovery,
and Recycling‚ [metric tonnes]
• Zero waste to landfill sites [number]
The WBCSD/WRI GHG Protocol (2004, as revised January 2015) for the Scope 1 and Scope 2 GHG emissions, and Essentra’s
internal methodology and reporting criteria for the waste data as described in the footnotes on page 29
ERM CVS’s assurance methodology, based on the International Standard on Assurance Engagements ISAE 3000 (Revised).
Limited assurance.
Essentra is responsible for preparing the data and for its correct presentation in reporting to third parties, including disclosure
of the reporting criteria and boundary.
ERM CVS’s responsibility is to provide conclusions on the agreed scope based on the assurance activities performed and exercising
our professional judgement.
Our conclusions
Based on our activities, nothing has come to our attention to indicate that the 2019 data and explanatory notes for the indicators listed
under Scope above and on page 29 of the Annual Report, are not fairly presented, in all material respects, with the reporting criteria.
Our assurance activities
Our objective was to assess whether the selected data are reported in accordance with the principles of completeness, comparability
(across the organisation) and accuracy (including calculations, use of appropriate conversion factors and consolidation). We planned
and performed our work to obtain all the information and explanations that we believe were necessary to provide a basis for our
assurance conclusions.
A team of assurance professionals undertook the following activities:
• Interviews with relevant Essentra staff to understand and evaluate the data management systems and processes (including IT systems
and internal review processes) used for collecting and reporting the selected data;
• A review of the internal indicator definitions and conversion factors;
• Visits to three Essentra manufacturing sites (UK, Hungary and the United States) to review local reporting processes and the consistency
of reported data with underlying source data and related information for each indicator;
• An analytical review of the data from all sites and a check on the completeness and accuracy of the corporate data consolidation;
• A review of the information relevant to the scope of our work in the Annual Report, to ensure consistency with our findings.
The limitations of our engagement
The reliability of the assured data is subject to inherent uncertainties, given the available methods for determining, calculating
or estimating the underlying information. It is important to understand our assurance conclusions in this context.
Jennifer Iansen-Rogers
Head of Corporate Assurance
27 February 2020
ERM Certification and Verification Services, London
www.ermcvs.com; email: post@ermcvs.com
ERM CVS is a member of the ERM Group. The work that ERM CVS conducts for clients is solely related to independent assurance activities and auditor training. Our processes are
designed and implemented to ensure that the work we undertake with clients is free from bias and conflict of interest. ERM CVS and the ERM staff that have undertaken this
engagement work have provided no consultancy related services to Essentra Plc in any respect.
ESSENTRA PLC ANNUAL REPORT 2019 187
Advisers and Investor
Information
Secretary and Registered Office
Jon Green
Avebury House,
201 – 249 Avebury Boulevard,
Milton Keynes,
Buckinghamshire MK9 1AU
Company Number 05444653
essentraplc.com
Financial adviser and joint
corporate broker
Deutsche Bank
Winchester House,
1 Great Winchester Street,
London EC2 2DB
Joint corporate broker
Peel Hunt LLP
Moor House,
120 London Wall,
London EC2Y 5ET
Financial public relations adviser
Tulchan Communications LLP
85 Fleet Street,
London EC4Y 1AE
Solicitors
Slaughter and May
One Bunhill Row,
London EC1Y 8YY
Independent External Auditor
PricewaterhouseCoopers LLP
Exchange House,
Central Business Exchange,
Milton Keynes,
Buckinghamshire MK9 2DF
Principal bankers
BNP Paribas,
London Branch
10 Harewood Avenue,
London NW1 6AA
Citibank N.A.,
London Branch
Citigroup Centre,
Canada Square,
Canary Wharf,
London E14 5LB
DBS Bank Ltd.,
London Branch
4th Floor, Paternoster House,
65 St Paul’s Churchyard,
London EC4M 8AB
HSBC Bank plc
8 Canada Square,
London E14 5HQ
ING Bank NV, London Branch
8 – 10 Moorgate,
London EC2R 6DA
Lloyds Bank plc
10 Gresham Street,
London EC2V 7AE
National Westminster Bank plc
250 Bishopsgate,
London EC2M 4AA
Santander UK plc
Santander House,
201 Grafton Gate East,
Milton Keynes,
Buckinghamshire MK9 1AN
188 ESSENTRA PLC ANNUAL REPORT 2019
The printer and paper manufacturing
mill are both accredited with ISO 14001
Environmental Management Systems
and are both Forest Stewardship
Council® certified. CPI Colour is also
a certified CarbonNeutral® company.
Designed by
conrandesigngroup.com
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Essentra plc
essentraplc.com
Avebury House
201-249 Avebury Boulevard
Milton Keynes
MK9 1AU
United Kingdom
Telephone: +44 (0)1908 359100
Email: enquiries@essentra.com