Building for the future Annual Report 2020 – Strategic and Directors’ Reports 01 ESSENTRA PLC ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT Strategic Report Directors’ Report BUILDING FOR 2 Essentra at a glance 82 Chairman’s Corporate 5 Chairman’s Statement Governance Statement 8 Chief Executive’s Review 83 Board of Directors THE FUTURE 15 Delivering on our purpose 85 Corporate Governance 17 Our response to the Report COVID-19 pandemic 100 Group Sustainability Our purpose is to responsibly provide 19 Investment case Committee Report 21 Our business model 102 Nomination Committee the products and services our 23 Stakeholder engagement Report 27 Key Performance 105 Chairman of the Audit Indicators and Risk Committee’s customers need to succeed. 29 Non-Financial Key Letter Performance Indicators 107 Report of the Audit 31 A winning, engaged and and Risk Committee empowered team 113 Chairman of the 36 Class leading Remuneration sustainability Committee’s Letter 42 Growth through 117 Remuneration at a glance innovation 120 Remuneration Report 45 Financial Review Policy summary 48 Alternative Performance 132 Annual Report on A new strategic roadmap for 2020 and beyond Measures Remuneration 50 Risk Management Report 144 Other Statutory 67 Operational Review Information 79 Group Management 149 Statement of Directors’ A winning, engaged and Committee Responsibilities in Respect of the Financial empowered team Statements 150 Independent Assurance Read more on page 31 Statement This is part one of our Annual Class leading Report for the year ended 31 December 2020. Part sustainability “We have refreshed our Annual Report 2020 – Financial Statements Building two consists of our Financial Read more on page 36 purpose, values and goals to Statements and can be better reflect who we want for the found on our corporate future website. When reviewing the to be and where we are performance and activities going as an Essentra family.” Annual Report 2020 – Financial Statements of Essentra plc in 2020, both Growth through parts should be read together. Paul Forman innovation Chief Executive Go to essentraplc.com/ investors Read more on page 42 Read more on page 8 02 ESSENTRA AT A GLANCE ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT ESSENTRA AT A GLANCE Made up of three global divisions, Essentra is a Components Packaging Filters leading provider of essential components and solutions. Every day we produce and distribute millions of small See page 67 for See page 71 for See page 75 for but essential products. Components overview Packaging overview Filters overview Our international network Financial highlights % change % change Actual Constant FY 2020 FY 2019 FX FX Revenue £897m £974m -8 -7 Adjusted1 operating profit £62m £88m -29 -28 50 1 principal 7, 0 6 5 Adjusted pre-tax profit £46m £73m -37 -35 manufacturing employees Adjusted1 net income2 £37m £59m -36 -35 facilities Adjusted1 basic earnings per share 13.1p 21.3p -38 -37 Dividend per share 3.3p 6.3p -48 n/a 34 Net debt £210m £284m -26 n/a Net debt to EBITDA 1.8x 2.0x n/a n/a countries worldwide Net debt to EBITDA (pre IFRS16) 1.5x 1.9x n/a n/a 3 3 research Free cash flow £56.9m £40.7m n/a n/a and development Reported operating 32 centres profit £22m £80m -73 -72 sales and Reported pre-tax profit £6m £66m -91 -91 distribution Reported net income2 £6m £41m -85 -84 operations Reported basic earnings per share 1.7p 14.7p -88 -88 1 Before amortisation of acquired intangible assets and adjusting items 2 Net income is defined as profit after tax, before minority interests 3 A reconciliation of free cash flow is set out in the Financial Review on page 46 03 ESSENTRA AT A GLANCE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT Components 2020 summary • Commenced operations at • Further investment in Business Revenue European Automated Warehouse Process Redesign (BPR) • Continued delivery of “hassle- A leading global in Germany, providing platform programme coupled with launch free” service provision despite manufacturer and for improved service levels and of a new Customer Relationship £255.0m challenging environment, with (2019: £283.3m) distributor of a reduction in cost to serve across Management (CRM) platform further improvement of NPS 1 mainland Europe which will be integrated in 2021 Adjusted operating profit comprehensive range by four points • Actions taken to drive cross selling • Comprehensive programme of components, used • Completed roll-out of new web and enhance market share gains focusing on improving sustainable in diverse industrial platform across Europe and £45.5m such as enhanced e-Commerce product offering applications and introduction of agile monthly (2019: £60.3m) offering and cross selling training end-markets. improvement process, with 2021 plans for launch in Asian markets Packaging 2020 summary • Continued delivery of new business • Awarded “Packaging News” Revenue wins 2020 UK Packaging Company • Resilient trading performance One of very few multi- of the Year against backdrop of fewer • Increased customer satisfaction to £363.2m continental suppliers of 81% (2019: 79%) ahead of industry prescriptions and elective (2019: £352.7m) a full range of secondary surgeries, and improving trends average score of 76% Adjusted operating profit1 packaging to the as the year progressed • Operational KPIs improved, for pharmaceutical, personal • Support to fight against COVID-19 example improvement in quality by care and beauty sectors. through supply of products to 30% versus 2019 £13.8m the pharma industry, including • Acquisition of 3C! Packaging, (2019: £15.1m) packaging for leading anti-viral strengthening position in drug and two of the leading important pharmaceutical market COVID-19 vaccines Filters 2020 summary • Support to customers to ensure • Significant focus on the Revenue business continuity in their supply development of sustainable • Resilient performance despite chain products including launch of The only global challenging backdrop of volume £278.3m independent provider of • One further outsourcing contract proprietary biodegradable filters declines ™ (2019: £303.6m) agreed with an independent and SupaStrip PCR tape made filters and related solutions • Operational KPIs continued to Adjusted operating profit1 customer during the year from 70% recycled content to the tobacco industry. improve with focus on reduction in lead time to further enhance • Plans on track to establish customer service manufacturing facility for China £25.2m Joint Venture towards the end of (2019: £36.2m) • Continued focus on key account Q2 2021 management delivering deeper 1 Before amortisation of acquired understanding of customer needs • Launch of Tobacco Heating intangible assets and adjusting items and a more robust pipeline Product (THP) Vortex Filter, 2 Net income is defined as profit after expanding the division’s tax, before minority interests 3 A reconciliation of free cash flow is set NGP offering out in the Financial Review on page 46 04 ESSENTRA AT A GLANCE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT HOW WE How we have performed this year Revenue Adjusted operating profit Adjusted measures Adjusted results exclude certain PERFORMED items because, if included, these items could distort the understanding of Essentra’s THIS YEAR performance for the year and £896.5m £62m the comparability between (2019: £974.1m) (2019: £87.5m) periods. In management’s view, such adjusted performance measures (APMs) reflect the underlying performance of the Adjusted operating margin Reported operating profit business and provide a more meaningful comparison of how Operational highlights the business is managed and measured on a periodic basis. Our APMs and KPIs are aligned to • Uniquely challenging year • Value enhancing acquisition 6.9% £21.7m our strategy and business segments, and are used to with the global COVID-19 of 3C! Packaging completed (2019: 9.0%) (2019: £80.0m) measure the performance of the Company and form the basis of pandemic inevitably and integration on plan the performance measures for impacting business results remuneration. See page 27 for • Progress on sustainability, Adjusted earnings per share Reported earnings per share KPIs and page 48 for APMs. • Strength of three distinct with environmental Cautionary forward-looking business models demonstrated targets announced statement This Annual Report contains in resilient performance across 13.1p 1.7p forward-looking statements the Group • Efficiencies from strategic based on current expectations (2019: 21.3p) (2019: 14.7p) and assumptions. Various known initiatives supporting and unknown risks, uncertainties • Improving trends across short- and medium-term and other factors may cause actual results to differ from any all markets and all three profit growth Dividend per share Cash conversion future≈results or developments global divisions well placed expressed or implied by the • Review of our global footprint forward-looking statement. to capitalise on growth Each forward-looking statement opportunities resulting in the announced speaks only as of the date of closure of certain sites in 2021 3.3p 123% this Annual Report. The (2019: 6.3p) (2019: 82%) Company accepts no obligations • Consistent focus throughout across the Components and to revise or update publicly these the year on employee Packaging divisions forward-looking statements or adjust them to future events or wellbeing, customers, cash Net Debt ratio