Essentra plc (ESNT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Essentra Half Year 2020 Results Presentation. [Operator Instructions] I must also advise you that the conference is being recorded. And I would now like to hand over to your first speaker for today, Paul Forman. Please go ahead.

Good day, everyone, and welcome to what can only be described as an historic interim results presentation for the Essentra plc. It would be a truism beyond belief to say that these are extraordinary circumstances, certainly in my 35 years, I have never seen the like of them nor perhaps would I want to. But I think that as we will hopefully share with you, we have made very much positive progress. So if we go on to Slide 2, the agenda and some key conclusions. The first point I would like to make is that the Essentra family, the 8,000 people across the world has performed, in my opinion, truly magnificently, both in supporting customers and supporting each other. And I say thank you from the bottom of my heart. It is humbling and inspiring to see what you have done. What I'd also like to add there is that we have received fantastic support, unending support from all of our stakeholders, the broader family, whether that be our investors who have shown support, but also interest, whether it be our banks who have been indefatigable in helping us, whether it be pension trustees, equally importantly, whether it be a fantastic customer base we have and the suppliers, all of whom have worked in true partnership. As you will see from the agenda, I think part of the progress that we have made through these testing times has been that we focused on 3 pillars initially: safeguarding our people, supporting our customers and managing our cash flow. And for many weeks or indeed a couple of months until we got into, what I'd call, a slightly weird steady state, we have been focusing on those. So after the summary, the achievements and the priorities within those 3 will be my focus. The second point I'd like to make is that absent something major like a full second wave that April marked the low point in many aspects, medically, financially and we have been improving since then. I'm pleased to report that we have generated operating profit and cash each month. And as a group in period 6th June, we had a low single-digit year-on-year sales decline. So positive progress from a low point in April. The third point I'd like to make ladies and gents is that -- and this relates to our final point on the agenda. Essentra is, in my belief, and that of the Board, inherently stronger, however, counterintuitive that may be. Then at the start of the year, I think we have a more robust business. We have stronger relations with all our key stakeholders. I think we have a focus and an agility which has been tempered in the forge of COVID. And we are really looking forward to and indeed are getting on to the front foot now, whilst, of course, being vigilant and careful. And what we are doing there and how we're thinking about the future will be the focus of the final section, which has really been part of our thinking since probably early May. So if we go on to Slide 3, I will do a quick 2-page overview. Looking back to the first half, we have chosen to describe that the performance has resilience. As I've mentioned, we have had improving revenue and order trends from that mid-year in late March and April. So trading trends have been improved. Components, as you're all aware, is very linked to global or certainly western and Chinese industrial output. So mid-double digits, so mid-20s. Year-on-year sales declined in April, improving through to the most recent time. We've seen that packaging has secured new business by being flexible and available and constantly operational and moved into growth in May and June. And then our Filters division has through self-help through driving these game changes, and I'll give more detail, but particularly, new outsourcing has maintained an improving trend and returned to growth in June. So in June, we saw 2 of our 3 divisions in marginally positive territory. If you would have asked us in the real start of the storm in March, would we have taken that? I think the answer is definitely, yes. If we think about that second level of supporting our customers, the Essentra family, the engagement and resilience they have shown and are demonstrated has shown operational performance that is at least as good as we saw pre-COVID. We have, for most of the period, had all 71 sites fully operational. And I think that's a testament to a huge amount of work by many, many people across the world. And in terms of our cash flow, managing our cash flow, we have a strong liquidity position. At the end of June, it's still north of GBP 0.25 billion, and it's been improving week-on-week, month-on-month. So I think that speaks to the strength of the 3 very different business models we have. And as importantly, I think it is a fantastic foundation from which to expand. So if we go on Slide 4, I look ahead, I think that the resilience of our portfolios have been highlighted by the fact that the like-for-like revenue decline was only in speech marks 8.5% and our operating margins were maintained at 6.5% across the group. As I mentioned, each month has remained profitable and cash generative. And so what we can then do is pivot comfortably to the forward-looking area. We'll continue to focus on these 4 pillars. As I've been saying to my team, one of the risks is that we are become too sanguine or don't focus enough on those 3 in terms of, say, personal safety or whatever. So we will remain as vigilant as ever. But the balance between that business as usual and the building for the future is certainly, if you like, getting more and more equal. If I look ahead with a COVID heavy-asset crystal ball components, we continue to see in the first 2 months of this second half improving like-for-like trends. That will clearly track PMI and industrial output. If one believes expectations, then we think there will be a slow, gradual improvement. The people talk about Vs, Ws, Js, Us. My preference is to say that this is a Nike swoosh with a steep decline and then a gradual recovery. In Packaging, we saw, as I say, positive growth in May and June. Some of our products in the medical sector goes into either elective surgery or prescriptions. We think that in Q3, there is a stock build or chain adjustment, which I think will put a temporary slowdown on like-for-like sales performance. But listening to our customers, they think that as health services open up and as people become more confident either seeing their doctor or comfortable using online, that should recover in Q4. Filters. Having moved into a positive territory of confident, I think, of driving that, and that's partly by outsourcing contract volume, but there are other factors which I'll talk about later. Whilst we have maintained a tight control on capital investment, I'll give some examples of where we are still continuing to invest. So there has been a blend of discretionary activities, salary sacrifices, bonus sacrifices and merit freezes to control some of that discretionary cost and expenditure and cash outflow, but also where we have seen it, we have invested in forward-looking initiatives. We have, as a Board, decided to cancel the interim dividend, but we are keeping under review the possibility of resumption of dividends for FY 2020. And clearly, that sustained operating cash flow and profit position will be, if maintained, a significant factor in the Board's thinking early in 2021. And in terms of outlook for FY 2020, I will put the normal caveat that people have, which is the major second wave, then in theory all bets are off, although we have proved quite resilient. But we are expecting adjusted OP, operating profit, to be within the current range of analysts' expectations. So if we go on to Slide 6, which talks about our first and our most important leg about safeguarding our people. This has been from the very first day, the primary focus and we've split it into 3: physical, emotional and financial. We have maintained, I think, a low level of incidences of positive cases notwithstanding the fact that we have in areas like Spain, Northern Italy and parts of America, areas which have been often at the epicenter. We have the highest standards of hygiene and protective safety measures, and I think that has been well received by our people. Equally important, we are very, very careful about return to work in offices. We have the strictest protocols and also the strictest adherence to our own internal standards of what needs to happen to new cases before we allow that. As a result, a number of offices remain closed. As important, increasingly to the physical protection was the emotional well-being. We have been providing for the last 3 months access to support networks, where necessary in looking alternative working arrangements. We have helped families. And in some cases, we have relocated people. We are giving training to a number of our senior people how to recognize. Examples of, say, stress and related activities, and that is something which we're really focusing on. And then thirdly, financial. The senior team, the top 150-odd people, to varying degrees, took a voluntary pay reduction. The idea being that, that sacrifice would enable us in countries where there wasn't a government support network, such as in Nicaragua, where we chose not to take one, such as the U.K. We maintained at furlough equipment levels by guaranteed 80% from effectively 2 quarters, Q2 and Q3, and we are not utilizing any government support through job retention or anything else. So the most important words there, perhaps are those 2 at the bottom, let me just reiterate, my huge gratitude and thanks to the whole family. If we then turn to Slide 7, just to be giving you a feel for some of the things that we've been doing. I've been doing a weekly CEO video message and also a written update that goes to all 8,000 employees. We've also levered that with video messages from many of the PLC Board members. We've had weekly leadership calls with the top 150. And I think as a byproduct one says what we've learned, I think we have a new intensity in cadence and almost informality, but with professionalism, which we will carry forward. As I mentioned earlier, we have employee support networks. And when we were starting like for building for the future, we really involved all of our top senior managers. And so what you see about the thinking on a new way forward is not just 1 or 2 people in a dark rummage, it's an active discussion over 3 months with 150 people. What we also wanted to do was temperature test. And so every week, we would be taking a pulse of how people are feeling. This is anonymous. So there was -- I think it's as objective as you can get. And from a scale of 1 to 4, you can see that people consistently rated well over 3.5. So 90% that Essentra was taking the right actions, but they felt that their people were coping well again 3.5. And in terms of confidence, even in April, it was still 3.3 or so out of 4. So I think our people felt we were doing the right things and felt that kind of confidence of being part of a larger entity and could see a real positive future for the company. So if we then turn on to 8, we have always made the safety and then the engagement our first and second priorities. I'm pleased to say that notwithstanding, obviously, the more difficult environment to operate safely, we've sustained the improvements seen in the number of lost time incidents and really pleased to see that the total hours lost continues its downward trend. So we are improving on that number, but also the severity is showing a welcome turn for the best. And if I were to look at that, including the last 2.5 months data, both of those will continue that steady improvement. On Slide 9, it isn't just the employees. We all live in communities, and we all have, I think, a duty and this desire to help them. And so not only are we proud that we have been serving medical industries and many other critical industries throughout COVID but also the wider community. One example here, our factory in Barcelona, Cutting Manager there basically discovered a way of making visors for the local health tech community have now access to them, we distributed those. We then made them available to our employees and then offered our customers and suppliers as well. So one individual's initiative, a great community involvement and a really nice story, I think you'll agree. If we then turn on to Slide 11. This is leg 2 of our initial 3 legged stool supporting our customers. I have been showing you metrics on service and quality, just to kind of calibrate the rate of improvement over the last few years. We were not anywhere near to world class, say, 2 or 3 years ago. What is really interesting, if you look there at the on-time in full level, is that you can see, without exception, all 3 divisions have recorded an on-time in full. So that delivery, when we said in the quantity, we said and the right product. And one can see there that remarkably, notwithstanding everything else, that the performance across the half year has actually exceeded anything we have achieved in the past, which I think is quite remarkable, really. And we have, as we'll see later, really, I think, got credibility from our customers for doing that. And when I say that we are now inherently stronger, I think that trust and bond where we've stood up and been counted and performed, I think, both reliably and flexibly for our customers has formed an even stronger bond between the 2 of us, the Essentra and our individual customers. Then turn on to 12, the other metric we could use. You can see there, again, delighted to see the -- particularly in Packaging a near 30% improvement in quality incident is the reason that Packaging only goes back to 2019 is that there's a slight difference in definition. But if we've gone back, we're just seeing year-on-year improvement there. Top left, you can see components. And again, Filters and Tear Tapes, which is now part of Filters. So I think really great, notwithstanding the fact we had many people who were sometimes absent. Those people who were in our factories did a fantastic job for the customers. And if we go on to Slide 13, I think this has got both a subjective and an objective benefit. Penlon, the U.K. consortium that was making ventilators for the government. You can see that in the race against time, Essentra Components gave us a seamless hassle-free experience, et cetera, et cetera. We actually turned product around and hand-delivered it within -- a new product within 48 hours. A global vision care provider. Again, you can see the request was a complex challenge from all angles. And it's often, I would say, parenthetically, really, really fast turnaround because we had to be agile as our customers have. Thank you for all your hard work. Pharma outsourcing company. We can learn some lessons on project management and delivery. Multinationals in Filters and bear in mind, these 5 multinationals represent some 15% of our turnover. This is about as good as it gets, can-do attitude in terms of excellent support and communication. So really positive for that. So we have, I think, the intangible benefit, stronger customer relationships. But also we have seen, as a result, for instance, components had a very strong growth in medical device product supply, and we are expanding that. In the U.S. alone, we know that we have won from competition some $5 million of annualized business simply by being there and being for people and being responsive. And an honor to be working with a very high-profile of COVID-19 antiviral medicine, providing all of the labels, literature and cartons. Filters has been really supporting the global majors in terms of providing backup supply if a country of theirs that makes a sole supply of Filters. They said to us, can you please hold this out? And we have still been developing new products as well. And one of the major Indonesian independents wanted something positive. And so within a very short time frame, we worked with them and launched it. So we've had, I think, a tangible benefit as well. If we then go on to a single slide review of each of the 3 divisions. Components clearly the hardest hit by marketplace considerations, but that hasn't stopped them building for the future. So the new website, which is now achieving the highest levels of penetration, it's done. I have actually seen increased traffic constantly throughout. One of our key major goals to hit our industrial production plus 4, which is based on 1% to 2% share gain and 2% to 3% price is cross selling, selling more product categories that we have to existing customers. We are now using, what I call, the Amazon functionality of prompting potential cross-sell ideas. That's been going for a few -- about 3 months now. Our business process redesign project, which we'll talk a bit about later. That is still in the planning and getting ready for the launch phase. We will start in Spain in Q1 2021 and have very increased, if you like, ambitious expectations for the speed of deploying that, having already gained confidence from a very successful go-live within the last couple of months in finance and procurement in our head offices. Our supply chain, we have a very complex supply chain with tens and tens of thousands of customers and products. The German warehouse, which will be lights out and automated, is expected to commence by the end of next month. That will improve our asset churn. It will reduce our cost to serve, but it will also help mitigate a supply chain risk as we rebalance inventory between U.K. and Continental Europe. It was only about 12 months ago that we acquired Innovative Components. That's fitted in extremely well into the family. It is actually now through the share gains into positive year-on-year territory, which given the overall picture is very encouraging and is delivering on its plan. And as I mentioned before, I think everybody in Components has been honored to help produce components that go into hospital trolleys, ventilators, beds, et cetera. And what I would point out is that the operating margin at the top there, 18.4%, which clearly is a very strong Q1 and a weaker Q2 still remains robust. And then turn on to Packaging on Slide 15. We've mentioned the return to growth. Overall, pharma demand, which is about 70% normally of our business, has remained robust. So say we are seeing some softening in specific end markets. The beauty segment that is 20%, clearly, was very challenging in H1. Our customers are telling us that they think by Q4, they will be closer to normal rates. We shall see. I very much hope that is the case. And then the 10% that is tobacco and food has held up. Clearly, I think our ability to respond well and quickly has helped us with those new business wins, and you've seen the levels of service and quality. But also what is critical is our agility in supporting customer needs. We have been having to operate to time scales of product development, which we really -- I don't think anybody in the industry, frankly, has been used to. And then as important, Packaging made its first strategic investment in a number of years in acquisition. Nekicesa in Madrid has performed really well. It has met or exceeded its plan every month in the 11 months, it's been with us, and it has added to our capabilities. And we're really excited by that and encouraged to look for other strategic bullseyes in the focused medical packaging arena. If we then go on to Slide 16 and briefly go into Filters, we have been talking about the game changes, and we gave ourselves a certain time to official cut date. I'm pleased to say that they are now coming through. The first half was affected by very long duration lockdowns in India and Paraguay, plus we, in our Middle Eastern business, saw effectively supply side hiatus. We also took the decision in our Middle Eastern business to cease trading in about May of last year with certain customers where we couldn't feel comfortable about their providence. So that also affected the comparables. Having said that, we have been trying to leverage our global footprint and all 7 sites now are fully operational and indeed a number of actually working 24/7. If I take the game changes, you can see on the left-hand side, there's some of the new equipment to support 1 of our 2 large contract wins. We are getting closer to the expected annualized run rate, having only been going 2 to 3 months. The progress of China JV, we were talking to the other side within the last week, they remained phenomenally committed. If anything, even more excited, we have to recognize that the current constraints imposed by COVID have put some delay into that. Now we're expecting Q2 2021 as opposed to the start of the year or December of this year. And then we continue to work on innovation. We have the biggest capability and biggest knowhow in the industry. We haven't been using it properly and in a structured way. So very much our innovation is focused on 2 key areas, one of which is heat-not-burn or technical heated products, which is a kind of ICOS-type product. And the second is sustainable and biodegradable product categories. There is legislation that is coming in, in 2023, but also with the increased emphasis on sustainability. That is something where we are really coordinating at many players in the industry to help produce standards, but also we are working bilaterally with a number of the large cigarette companies to try and turbocharge that to achieve things way ahead of that time scale. And it's good to report that the Tapes business, which we -- was in specialty last year, has been fully integrated and is now operating very smoothly. So that is the second leg. Our third leg is managing our cash flow and our liquidity. And so I will hand over to Lily on Slide 17 to take you through the financial detail.

Thank you, Paul. Good morning, ladies and gentlemen. I wish you and you loved ones are safe and healthy. Our Essentra family members went above and beyond every day to support our customers. And I'm really inspired by what our teams achieved during those unprecedented times. Now in this section, I will take you through our third priority, managing our cash flow. Moving on to Slide 18. Let me start by highlighting the proactive and responsible actions we have taken to improve our liquidity position. And this leaves us with a healthy balance sheet to move forward and also withstand future uncertainties potentially caused by pandemic. Our underlying liquidity improved by 15% since the beginning of the pandemic. We have not taken U.K. government's furlough support. And as Paul shared with you earlier, the Board, executive team and senior leaders in the Essentra family took a voluntary pay reduction in Q2. We reported a 76% operating cash conversion. We adhered to our values and paid some smaller suppliers early to uphold integrity of the ecosystem. We also proactively built additional inventory in our Packaging and Filters division for business continuity purpose. We maintained strong cash collections throughout. Our net debt ratio for banking covenant purpose was 2.3x and 2.5x after IFRS 16. For reference, our covenant is set at 3x for all our facilities. We continue to embed our compliance transformation program internally. And in H1 2020, we reached agreement with U.S. government with a deferred prosecution agreement signed and paid $666,000 of fine. With regarding to the self-reported historical transactions with OFAC, Office of Foreign Asset Controls, and the U.S. treasury, we do not expect significant enforcement actions. I will provide some more financial details on this point later. Now turning on to Slide 19, talking about some P&L measures. We delivered resilient performance with improving trends on revenue and order intake for each of our 3 global divisions in Q2. For the whole group, like-for-like revenue declined by about 8.5% for H1, adjusted operating profit at GBP 29 million, like-for-like down 38% from H1 2019, with adjusted operating profit margin at 6.5%. Reported operating profit at GBP 16 million versus GBP 60 million in H1 2019. We reported exceptional gain over GBP 20 million, largely driven by the successful disposals of certain businesses in the Specialist Components division, which significantly simplified the group and resulted into 3 global divisions. Adjusted EPS at 6.2p. Turning on to the next slide. Now starting with liquidity, I will give a bit more color on key financial areas. Now liquidity, 3 charts on Slide 20 demonstrated the performance in operating cash flow generation, the reduction of net debt and improvement in underlying liquidity in Q2. These are the result of our proactive and responsible actions such as senior management voluntary pay reduction, such as cancellation of merit increase, such as discretionary cost and CapEx reduction. And as Paul mentioned, we balance these activities by continuous investment into selective areas to support forward-looking initiatives and growth. For example, we invested in new machines for business 1 for full suite of packaging supply to a COVID-related medicine. We also injected the first tranche of capital into our China JV. As a result of our liquidity position, we decided to voluntarily repay GBP 26 million of the GBP 50 million bridging facility in July, the cost of which will increase over time. Now moving on to Slide 21 on to our income statement. Book revenue GBP 448 million on a like-for-like and constant currency basis, down 8.5%. Operating profit -- adjusted operating profit GBP 29 million. Operating margin at 6.5%, down 300 bps. Adjusted earnings at GBP 16.3 million with adjusted EPS of 6.2p. Turning on to Slide 22, revenue by division. Components reported revenue of GBP 130 million, a decline of 12.8% year-on-year. The business showed steady improvement since April on revenue and orders on a per trading day basis. Packaging delivered revenue of GBP 185 million, a 3% decline year-on-year. In H1 2019, we saw the benefit from Brexit stock building from certain customers and also from the introduction of EU fortified medical directives. The Packaging business generated growth in May and June. Filters reported a revenue of GBP 133 million, an 11% decline from prior year. We started delivering to the 2 outsourcing contracts that we won in late 2019 and early 2020. The decline in Filters was due to a combination of the early impact of COVID in China and extended government imposed lockdown in India and Paraguay. As I said, in our 2019 results, we implemented a very strict control and compliance framework in H2 2019 in the Filters division. The delay to certain orders and our withdrawal from some customer relationships continue to have a negative impact on revenue from relevant markets for the first 4 months in 2020 for comparative purpose. Now let's move on to profitability. Turning on to Slide 23. By division, Component posted GBP 24 million profit, a decline of 26% against prior year. However, still a very healthy margin of 18.4%. We implemented a 2% price increase earlier this year, which proved to be sticky. The price increase partially offset negative volume impact. Packaging reported a profit of GBP 5 million, 2.6% margin. The margin is lower than H1 2019 by 180 bps, partially due to the GBP 1.7 million one-off benefit in H1 2019 from release of certain property-related provisions. And the rest of the impact was volume driven, partially offset by discretionary cost reduction. Nekicesa, the business we acquired in September 2019, performed to plan every month. Filters' revenue for the first half was GBP 10.8 million, with a margin of 8.1%. The margin decline was driven by volume reduction and negative revenue mix. All our divisions and all functions enacted strict controls on discretional spend, notwithstanding the incremental costs associated with COVID-related PPEs, deep cleaning and new social distancing working patterns. The reported GBP 10.6 million central costs reflect both the discretionary cost reduction and also a one-off credit from LTIP-related accrual relief. I'm expecting the second half central costs to be broadly flat or only marginally up against the first half. Overall operating profit GBP 29 million, 6.5% margin. Now moving down the P&L, Slide 24. Net finance charge at GBP 7.7 million, a GBP 0.7 million increase from H1 2019. As part of the COVID planning, we draw down actual from our RCF facility in April; hence, higher interest expense. Our effective tax rate is 19.2%, within the guidance of 19% to 20% that we have provided. Minority interest GBP 0.9 million from our India JV. Now going forward, MI would also include our China JV, which continues to progress although at slightly slower pace during the COVID disruption. On to Slide 25, we spent GBP 2.5 million on exceptional costs for the first half of 2020, chiefly on 2 items. Firstly, we spent GBP 3.7 million on legal and advisory fees for certain business development activities that are still in progress. Secondly, a GBP 1.2 million credit came from a provision release with regards to the sanctioned matter that was previously disclosed in 2019 accounts. As we said before, we cooperated fully with the U.S. government's investigation of a small number of unauthorized transactions to North Korea. We signed a DPA and paid $666,000 fine to settle the matter. We also self-reported to OFAC on other central matters, extending back to 2015. We continue to work with OFAC on the resolution of their review, but we do not currently anticipate further significant enforcement actions or financial penalties. This resulted into a credit of GBP 1.2 million into the exceptional cost. We continue to embed our compliance transformation program into our organization deeply. A group compliance committee was established and met monthly to drive culture changes. Now moving on to cash flow, on Slide 26. I already covered cash conversion of 76%. The chart shows the key moving parts to the free cash flow for the period. As I said in the beginning, we manage our working capital diligently. The net increase here are the net effect of good collection with significant reduction of overdues, offset by responsibly paying small supplies early to support the ecosystem and proactive business continuity inventory to support our customers. Now we are expecting inventory to gradually reduce in the second half while we allow the BCP inventory to move through the system. However, this has to be balanced with potential inventory requirements to mitigate a potential hard Brexit. Net CapEx of GBP 22 million in the first half. We continue to invest in selective forward-looking and growth like CapEx, such as BPR, such as digital transformation, the component German warehouse and new machine for new businesses. I'm expecting the first year CapEx to be in the range of GBP 35 million to GBP 40 million, allowing the actual growth CapEx. After paying interest and tax, our free cash flow for the half was GBP 11.5 million. Now moving on to the net debt slide. The net debt ratio for covenant purpose was 2.3x. The reported net debt after IFRS 16 was flat to ForEx adjusted December 2019 balance at GBP 297 million. The positive free cash flow was offset by us taking on new lease, namely the German warehouse and renewing of existing leasing contracts. Now moving on to Slide 28. We continue to focus on ROIC as a key financial measure. For H1 2019, on an LTM basis, our ROIC was 7.4%, a 190 bps reduction from 2019, against the backdrop of global pandemic and 40% year-on-year decline of adjusted operating profit in the first half. Let me end my session highlighting again that amid the global pandemic, we posted resilient performance from each of our 3 global divisions. We had and continue to have a strong underlying liquidity position and through our proactive and responsible actions, and we maintain a healthy balance sheet. Thank you. And with that, I will pass it back to Paul to talk about our fourth priority, building for the future.

Thank you very much, Lily. So if we all turn on to Slide 30. On the left-hand side, we have the road map that we have been using for the last 3 years. The 3 stages, you can see there: stability, strategy and growth. The 6 principles that we had in the triangle. And then the purpose, essentially, our purpose is to make our customers in the B2B environment more successful. What we have done is, and I mentioned before that we've engaged the views of many of our people from the Board through to the top 150 managers that we've really come up with a revised, if you like, 1 page route map which reflects not only the changing landscape of the world but also the changes and developments of us as a business. So you can see that instead of stability, strategy and growth, we believe we are stable and we do have clear strategy. So now it's about building for the future, the growth. We keep the purpose as in the center of everything we do. But the additional focus we have is on this acting in a responsible way, which is more than sustainability. It's how we interact with all stakeholders. We then have the bottom row of the pyramid as our values. So we've already talked about the importance of safety and engagement, but you can see safety, respect and diversity allied to an ethical approach, openness, honesty, integrity. And then the fact that whilst we are building for the future, we still need and we talk about the importance of agility and energy for change. So those 3 are unchanged. We believe we have walked the talk on that all the way through. And I think nowhere more so than in the last few months where they have been the pole star. If there's been a decision to be made, we've said, does this reflect our values. In terms of then the goals, quite different here. If I start at the bottom, we do want to grow. We do need to grow and we think that innovation, not just in products but process is the key to that. Also, because it is the right thing to do but because all our stakeholders demanded, we want class leading, i.e., relative to any of our competitors, and I'll talk more about that, sustainability. And then the winning engaged and empowered team, we show what we can achieve overall if we operate together. Some of those results, I think, in terms of customer service, cash management and looking after each other have clearly demonstrated that. And we are a family, and we've shown that. So the overarching thing that embraces it is how signifying the family that we believe we are. So if we then go on to Slide 31, class-leading sustainability. What does that mean? 4 themes. Responsible resource usage. So that means, I think, not only improving manufacturing operations but also developing more sustainable materials and products. Energy and climate change. For the last 2 years, we've improved our greenhouse gas emissions by 5% to 6% per annum. And we have, in a separate RNS announced some stretching new targets to date. People and communities, we've already talked about the primary importance of safety, respect and diversity. So health and safety and engagement KPIs are still preeminent, and we wish to get -- and we showed the example of the face mask rate community involvement. And then when it comes to responsible supply chain, as processes of raw materials, we're in the middle of complex global supply chains and what we need to do is ensure that the whole supply chain has integrity and acts responsibly to the degree that we can effect that. So as the other -- second RNS about our sustainability, makes clear, we are launching some ambitious targets, I'm on Slide 32. We have, I think, communicated what is a significant step forward in the advancement of our sustainability agenda, and we believe will support our goal of being class leading. So in addition to safety and engagement KPIs, we are saying that we will be carbon neutral by 2040 for manufacturing and distribution. That would be scope 1 and 2. We have an interim target of a 25% reduction in normalized our adjusted for acquisitions, 1 and 2 emissions between '19 to 2025. We want all sites at 0 waste to landfill within the next 10 years by 2030. We are targeting a 20% reduction in overall waste volumes by 2030 using 2019 as a baseline. 20% of our packaging and raw materials, we are committing to have from sustainable sources by 2025. We believe that these are ahead of the pack. We believe passionately that it is the right thing to do. We also believe there'll be a commercial and strategic benefit from us achieving it, so much so that these targets are embedded in both management assessment criteria and remuneration from this year onwards to 2020 onwards. As I mentioned also, if we go to Slide 33, it's not just about our manufacturing processes but it's also about materials and products. So if I've given a couple of examples in Components. We're working with several larger customers to use recycled content and biodegradable additives. In Packaging, effectively, we are saying single-use plastic out, reusable, recyclable paper and board in. And our design hub, the design capability we have is finding a lot of customer interest in that. In Filters, a couple of examples at the bottom. Our Tapes business is using post-consumer recycled content, 70% PCR content, which is the first to market for tape that we use for opening a variety of products. And perhaps, as exciting, Filters, we are, we believe, leading the way in the industry in developing standards for environmentally responsible cigarette filters and are also working with a number of interested parties in an accelerated development of such products. If I then look on Page 34, another aspect in which we continue to invest. The Business Process Redesign, where are we? On the right-hand side, as I mentioned earlier, finance and procurement have gone live with over 100 users in those areas in a number of our headquarter entities. With Components, we have completed the pre-rollout phases and are getting ready for Europe. We have decided -- and we talked about speed and decisiveness. We've decided to do our best to accelerate this rollout. So rather than taking 2 years, we want to do Europe and North America in 2021, which will be 80% of our business. And in parallel to that, in about 12 months' time, we will be starting the preparation work for the Packaging division. So I think we're accelerating it. We're seeing that we can actually achieve even more than we thought we could so. We will give our best shot to what is a transformational digitization, the most radical change to our Components division, end-to-end digitalization, which I think is an ambitious but a really exciting agenda that will put us apart from anyone else. If I then very briefly at the end turn to the outlook on 35 for Components, say, maintaining good operating margins. Bearing in mind that industrial production is forecast a slow but gradual improvement, we think that will mirror itself in Components markets. And that's really what the PMI data would show. What are our priorities? We just talked about accelerating this digitalization, getting the German warehouse going and also continuing to look at both organic and acquisition-related growth opportunities whilst sustaining -- increasing our sustainable product offer. But then on 36, look at Packaging. We continue to take the H2, notwithstanding, I think it's going to be some dampening effect for the reasons I mentioned in Q3, certainly listening to our customers, they're telling us, they think Q4 will be normalized. So we are expecting growth in H2, not our target 5% to 6%, but nonetheless, some improvement. And we are expecting that margin will expand in H2 2020 versus 2019. If we then look at Nekicesa, I think continued good financial, strategic and commercial progress there. In terms of priorities, we continue to look at value-enhancing services, but recognizing also that it is still about continuing to get back on to this track for 5% to 6% revenue growth and 200 bps improvement in H2 because we don't think we will -- we are sure for the reasons -- market reasons that we are unlikely to hit that revenue. We think there will be margin improvement, but it will not be a significant. And also, as with Components, it's about increasing our sustainable, recyclable, biodegradable products. Looking at further supply chain optimization, that's one of the benefits of having much greater stability. We can look, therefore, in terms of saying, how can we improve our margins beyond the 8% to 10% target. Part of that is value-added services. It's partly about looking at our footprint. And that footprint is partly going to be reflected by the increase in demand we have or requests from our customers, as we get closer and closer to support them on a broader geographic basis, whilst also looking, given the success of Nekicesa for other opportunities that are strategically spot on as that wasn't an additive to our capabilities. If we then turn finally to Filters, we believe that there will be continued revenue growth. We believe that, that will show progress in margin as well versus both H1 2020 and H2 2019. Underlying demand for cigarettes remains broadly stable. There are other pockets that are overarching. Certainly, the announcement by major tobacco companies have shown that demand is holding up pretty robust. And we also expect China JV outsourcing next-generation product and sustainable products, which is a fourth game changer and could be, if successful, dwarf many of those. We're continuing to see -- expect further progress there. Tapes also, it's pivoting away from quite a heavy reliance on tobacco, so consumer, things like Amazon-type products, but also food products, et cetera. And we will also continue to develop our next-generation product offering and expect margin expansion in H2. So to summarize on Page 38, we believe that we are well positioned. I think that the Essentra family and its stakeholders have had an H1 to be proud of. The resilience has been highlighted, I think, by a revenue decline of 8.5% and the sustained operating margin of 6.5%, recognizing that April represented what we expect absent a second major wave to be the low point. So really, it is about keeping an eagle eye on those 3 first pillars but then also to build for the future. And I guess what I would say, and I repeat it finally is that we are inherently stronger than we were at the start of the year as a business and looking forward to getting on to the front foot and building on these new capabilities and the inherent strength of our portfolio. And so finally, on 39, I will now pass it over to the floor for any questions you have for me and Lily. Thank you very much for your attention.

[Operator Instructions] Our first for today comes from Charles Hall from Peel Hunt.

A couple of questions. Firstly, on pricing. I think it was mentioned that you saw 2% price improvement in Components, which is a pretty good performance into a massive downturn. Can you just comment on how you see that moving forward? And then also comment on the other divisions in terms of pricing. And then secondly, on acquisitions, can you just update us on your thoughts, having got plenty of headroom on your borrowing positions. What your thoughts are on, say, scale, positioning, geography, valuation of any potential acquisitions?

Sure. Okay. Thanks very much, Charles. In terms of pricing, we believe that Components will, for the reasons we've discussed before, be able to sustain that level of pricing, given that we have inherently small complex transactions with tens of thousands of customers and relative pricing opacity, plus allied to the fact that our Net Promoter Score continues to go up and up, Charles. I think it's a benign environment. The -- in terms of Packaging, we have managed to sustain pricing. I think that in the last few months, our customers have put an increasing value on the agility and flexibility that we have provided and also the quality and robustness of supply. So we are not, if you like, being faced with demands for repricing or anything like that -- anything but the most exceptional basis. And in terms of Filters, we, again, I think, mirror the experience of Packaging. We are not having any particular pressure from MNCs. We tend -- when we're doing, say, BCP work for them to just negotiate on a contract-specific basis and with the independents, I think it mirrors, in some ways, the situation with the component customers, whereby we are, I think, benefiting from a relatively fragmented base. And also, the fact that if they are going to outsource with a reasonable market share, I think we've proven quite sticky in that regard. So pricing of the things that keeps me awake, Charles, and there are 1 or 2. Pricing isn't up there particularly amongst the top of them. If I then turn on to M&A, you asked about pricing, and if I can extend that to availability. Clearly, Filters has its China JV. So that's its quasi M&A. So really talking about Components and Packaging. I think that the multiples we'd be paying in Components will be broadly unchanged. There may be some diminution of price expectation. But as you know, that tends to lag, particularly amongst family-owned businesses. The kind of value that they put on their business is the last thing to go down. But what it might well do, so I think our 8 presynergy, 6 post-synergy, 12 as part of Components that, that formula still kind of holds true. I do think it will increasingly throw up greater availability as people either simply get slightly more financially stressed because of COVID or frankly, just find that it's all quite a lot of effort, and they're prepared to cash in the chips from their years of work. If I turn to Packaging, I think that the same thing will hold true on availability like Components. They tend to be smaller, family-owned single country operations. I don't think there will be any diminution in multiples, particularly in medical. In fact, I think, as you know, infinitely better than knowing a lot more about markets for me that actually, there may be a marginal premium for health care-related assets because of the long-term growth potential which has probably increased over the last few months. So I would say the same kind of multiple expectations definitely occur as in Components. As to our appetite, it's -- I was going to say undiminished. It actually might be accelerated and heightened because I do think that having gone through what we have done and we've proved to ourselves our ability to add value to acquisitions, Nekicesa and innovative components of both met or outperformed expectations, innovative components is actually growing, notwithstanding the current environment because of revenue synergies and as I mentioned earlier on Nekicesa has hit or exceeded each of its first 11 months. It's a very, very synergistic relationship. We're learning certain skills from them, particularly things like serialization, complex serialization. But conversely, in areas like safety, engagement and also access to a broader global basis, they are benefiting. And I'm delighted to say the 2 Madrid sites of Nekicesa plus the original Barcelona site are working very -- in a very complementary way. So we are looking at options to get on the front foot inorganically as well as gain organic growth through, as you mentioned, pricing, but also share gain.

And just following up on the Packaging side. With that greater focus of your customers on supplier robustness and your high levels of OTIF, are you getting encouragement from your customers to expand product ranges or geography through acquisition? And are they sort of moving you in that direction? Or is it not really working like that as you've got to go and find them?

They are not saying, please go and buy company X. But they are very receptive to us supporting them either through broader capability, Charles, or through broader geographic coverage. And certainly, the reaction of the customers to the Spanish acquisition, where quite often we've now developed a European presence with what was exclusively, say, a U.S. customer base. And we're finding that the dialogues that we have with our pharma customers and our beauty customers is becoming increasingly strategic as well as, I think, a very, very complementary, much more partnership-based approach.

Our next question is from the line of Andrew Douglas from Jefferies.

I've got 3 questions, please, one per division. Can we start with Filters? I know you've made a lot of progress with game changers in the last kind of 6, 12 months. I was intrigued, however, by your commentary on the biodegradable and maybe on the, I mean, other innovative projects you've got going. Can you just give us an update on kind of timing with regards to those? And potentially what is holding back timing? It sounds like you're one of a number of kind of elements to biodegradable stuff. So maybe just give an outline on that. Packaging, I think you've answered this question, but I just want to make sure. Nice market share gains in the first half. I guess, in order to hit your kind of 5% or 6% organic growth per annum, I'm assuming that will continue to be driven by in part market share gains. Just want to make sure that you guys are comfortable with that kind of assertion? And then last, on Components, you talked about the transformational evolution of the digital side. Can you put that into context for us relative to kind of what your so-called peers are doing and kind of where they are on their journey, and if anywhere? I'm just kind of understanding -- I know we all understand the opportunity, but just understanding where you are versus your peers would be really helpful.

Sure. So on Filters, there is the European legislation which kicks in, in 2023, Andy, which will affect anything that is single-use plastic, and there will be certain duties such as cleaning up and things which will be mandated. So that's, if you like, a backstop date. We are working actively in 2 areas. We are coordinating the development of standards amongst a number of key players in Europe, and that's quite significant because it isn't often the case that you are able to get people that have been used to competing with each other to -- for many decades to collaborate. It also speaks volumes that we're actually trusted with that and seeing it as the pivot. But from a commercial point of view, in parallel with that, we are developing products in-house, which are probably, I would say, less than a year away from maturity. And there's always been the opportunity to have certain filters which have been more biodegradable than cellulose acetate. The big challenge has been either how to make them cost efficiently, but more how do you not compromise the sensory experience. I must admit, I'm not a smoker, so I'm going on what people tell me, but it just tastes different if you -- and it has a different impact in your mouth, et cetera. So that's been a big challenge historically. But we have a number of unique propositions, and we are talking to certain of the MNCs about whether they wish to work with us on that. Now clearly, if that -- if it works, Andy, would -- and we own the IP, that moves us from being, let's say, a critical but a marginal supplier to having a very, very major presence. We wouldn't just operate in the 10% of outsourcing, we'd be operating in the 90% of insourcing, which is why I'm saying that probably along with China, if we get this right, it kind of increases the addressable market by a multiple as opposed to by percentage. And I think when we next talk in February, March, I think we're able to give you a lot more precision. So it is definitely a potential game changer. We are only focusing our entire innovation efforts on 2 areas, which is Heat Not Burn and biodegradability because we think having learned, we want to make 1 or 2 really big transformational bets. Now that we've got the business growing, and I do believe that we can see Filters growing over the short and medium-term on a consistent basis, which you never been able to say before, that we can make these slightly bigger bets, now that you've got a steadier state growth trajectory built in. Packaging -- I've entirely forgotten your question.

In order to get to a 5% to 6% organic growth kind of I'm assuming that you would talk a word, yes I'm assuming that some market share gain, which...

Yes. There's a little pricing, and we can get away with that now. We -- obviously, it would have been a suicidal attempt a few years ago. Part of it is share gain and part of it is underlying market growth. And the good thing is, notwithstanding hydraulic figures, we can point to known share gain wins, and we cited this $5 million worth of stuff that we've got from competitors because we've been able to support. On Components, bearing in mind that as a direct supplier to OE of customers of OE as opposed to aftermarket. So we're not a direct competitor of, say, Electros, who do have an excellent digital capability. We are aiming for not only through the BPR project in 2021, a fully integrated end-to-end capability, but we've got a separate project, which is saying, how do we create the world's best for our segments a front-end experience. Now that could be anything from smart pricing to automating, range updates through to customer interactions that are proactive, saying it's X days since you bought that, would you like some more? Just click yes? And by the way, would you like this? So it really would be transformational and without sounding hubristic, I think it would put a chasm between us and the majority of our competition. It is, in some ways, Filters went through its strategic revolution in 2019. I think 2021 will be the year where the Components business becomes unrecognizable from what it has been and how it is operated. Now it's a market leader and it makes 50% return on capital. So -- but I actually do think that one of the lessons we've learned is let's really just go for it. We were talking about 2 years. We're now going to try and accelerate it. And we've put incremental investment into really time turbocharge this world-class at the front-end for a transformational customer experience.

[Operator Instructions] Our next is from James Beard from Numis Securities.

Two questions from me on Filters. Firstly, on the Middle East part of the business and the sort of sanctions issues you face there. Can you just quantify what proportion of the revenue and profit reduction in the first half of 2020 was as a result of you walking away from business in those segments and just to specifically clarify how profitable was the business that you have walked away from? And then second question was on outsourcing the multinationals. Just wondering what sort of progress you've made over the last sort of 6 months or so in that regard? Has COVID sort of impacted your business development cycles there? And sort of how many contracts do you think you're sort of capable of winning on an annual basis in sort of normalized trading conditions in that particular area?

Okay. James, in terms of the first one, and as always, Lily will correct me when I inevitably get it wrong. But effectively, the amount of business that we walked away from is roughly GBP 1 million a month and it would have been at normal typical margin. So we basically had 5 months of roughly GBP 1 million at March at consistent margins that was in 2019 and wasn't in 2020. I'll pause there. Lily, did I get that right?

Yes, it's about 4 months, Paul, in 2019 that we haven't got in 2020. So you're exactly right. The run rate is about GBP 1 million a month.

So you're bright to me, James, so you can do the math, but it's GBP 4 million of shortfall and proportionate profit. In terms of outsourcing, we obviously had the 2 deals which have an annualized GBP 20 million. I think under it, you've always got the natural churn. But if you say that those kind of things balance out, I would hope that we would get at least a deal a year, maybe more, depending on how things -- the strategic thinking of our customers evolves. Because what we're seeing at the moment is that there are quite a lot of spot contracts with the MNCs from a business continuity planning point of view where they are 100% in-sourced. They have seen that if, say, I don't know, Argentina suddenly gets locked down, they have an issue. And so what we are hoping is that we will be able to, over time, continue to provide the plan B. Very much like in Packaging quite often, a pharma company will give, say, us 10% or 20% and MPS 80% or vice versa. And if we could take advantage strategically as we have done tactically, then that would be the most hopeful circumstance.

Our next question is from Steven Goulden from Deutsche Bank.

Apologies if it's already been asked because my line cut out earlier on, but I just wanted to understand the second half a slight disruption to Packaging. Obviously, you've explained the reasons for a slightly soft Q3, which makes 5%. In line with the margin that the previous announced kind of margin improvement trajectory, what implications would this have do you think for the second half in that regard and potentially even going forward? It sounds like there won't be any real impact in '21, but I just kind of wondered if there's anything else under the hood that we should be aware of?

No, that's a good question, and it hasn't been answered before, Steven. I think that all things being equal, there is no reason why we shouldn't be back on a similar trajectory, assuming a normalization, particularly of the pharma market and the beauty market in 2021. So I think that's tenable. In terms of 2020, it's always a tricky thing to forecast things anyway, but -- particularly in the circumstances. But my best bet is we would be flat in '20 -- in Q3, flat give or take. We would have some growth in '20 -- Q4 2020. And I think we will see a partial resumption of that upward margin trajectory, and I would expect margins in H2 2020 to be higher than both H2 2019 and, of course, H1 2020. Does that make sense?

Yes. That's great.

Lily, is that fair, having you said that all?

Yes, pardon for my time for saying that. So I agree totally.

[Operator Instructions] Okay. There appear to be no further questions. I'll hand back to yourself, Mr. Forman.

Thank you all very much, indeed. I thanked a lot of our stakeholders right at the beginning. And I also thank you, the analyst community, for continuing to take an interest in us. And if you like, at a time when understanding of the business is very important, you've been great facilitators of that. So thank you to all of you on the call, whether you'd be in the analyst community, the investor community or the employee community. So thank you for your attention, and I wish you all a good and a safe day. And for those of you in the U.K., I wish you a very enjoyable and relaxing bank holiday. Thank you.

Thank you very much, sir. Ladies and gentlemen, that does conclude the call. Thank you all for joining. You may now disconnect.