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 Statements – Financial 2020 Report Annual 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 Liquidity developments, whether as a conservation and building • Resilient platform, result of new information, future events or otherwise, except to for our future driving profitable and the extent legally required. cash generative growth • High customer satisfaction 1.8x £287m levels leading to deepened (2019: 2.0x) (2019: £260m) customer franchises 05 CHAIRMAN’S STATEMENT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
RENEWED FOCUS “Staff have pulled together Awards UK ON OUR PEOPLE to support each other Packaging Company of the Year AND THE PLANET and this has in turn Best Service Improvement Project 2020 supported the stability Payroll Software Supplier As for all businesses, 2020 has been and sustainability of the of the Year a challenging year for us at Essentra. business. My personal No one had expected a global pandemic. thanks go to all of the Essentra family.”
Paul Lester, CBE Chairman
Our people throughout 2020. Virtual health and safety Whilst we are thankful that we ended the year walks, used for both regular health and safety in a stable position, it has not been without checks and for COVID-19 safety purposes, the sad and regrettable loss of some staff have allowed staff to work together across members to COVID-19, and some of their the globe to ensure good safety standards are family members too. Our condolences are in place. For all of our divisions, the ongoing with those families, some with young children, improvement towards safety has been an who we will continue to support over the outstanding achievement in a tough year coming years. For me, this also signifies the and shows the strength of the leadership truly special nature of Essentra and the family teams throughout the organisation and the created here. The last year has shown that the willingness of staff to do better for themselves Essentra family is very real, and has incredible and each other. strength: staff have pulled together to support each other and this has in turn supported the Our performance stability and sustainability of the business. My In 2020, the Group delivered an adjusted personal thanks go to all of the Essentra family. operating profit of £62.0m (2019: £87.5m) with a revenue of £896.5m (2019: £974.1m) As a Board, our priority is the safety of our and adjusted operating cash flow of £76.3m people. Whilst we took all steps necessary (2019: £71.8m). Given that nine months of to navigate our way through COVID-19, the year were spent operating under tight I am also pleased that 2020 saw continued restrictions due to the pandemic, to achieve improvements in our safety performance this is a good result, and shows the resilience indicators with improvements in all divisions of being a global and diversified business. 06 CHAIRMAN’S STATEMENT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Our growth Our sustainability From a strategic point of view, we achieved two We had embarked on a number of significant milestones this year. We welcomed a sustainability initiatives during 2019, and new business into Essentra with 3C!, a business with the newly established Sustainability based in North Carolina in the US, joining the Committee meeting during 2020, we have Packaging division. At the same time, we also been able to take this further. During the year decided to raise equity through a £97m (net we canvassed employees for their priorities. of costs) placement of new shares. This in part There has been a real sense that to carry on funded the acquisition of 3C! and allowed us to as before just won’t do, and that this was the reduce our debt ratio, whilst providing funding opportunity to change gear and to be better. for future growth. Fundamentally, the equity As a result, the integration and embedding placing would not have been possible without of sustainability into our strategy has shifted the ongoing support from shareholders. Our up a gear and we have the momentum and Components division opened their automated support from our people to ensure we will warehouse hub in Germany and completed the meet our environmental targets. roll out of its websites in Europe with further regions due to complete in 2021, both are The Sustainability Committee has been one of strategic initiatives that underpin growth. Those our governance success stories for 2020 and I 20 businesses acquired during 2019 have continued am pleased that its Chairman, Ralf Wunderlich, their integration: Innovative Components in has grasped the opportunity to champion this Zero Waste To Landfill sites the US and Costa Rica continues to do well, as an issue he truly stands behind. (8 sites in 2019) as does Nekicesa in Spain in the Packaging division. As has been reported previously, the Our stakeholders Packaging division continues its turnaround With travel curtailed during the year, it has journey and embarked on a series of measures not been possible for the Board to meet in Q4 2020 which represents a further move staff. We have instead sought other ways to to refining that business. Essentra Packaging engage with staff to ensure we hear directly received the much deserved UK Packaging how staff are managing. Our Voice of the Award in December, which the team are Employee programme has continued and has rightly immensely proud of, and this underpins been adapted to a virtual programme. Mary the potential and growing strength of that Reilly and Ralf Wunderlich have met with business. Despite COVID-19 our Filters division staff remotely, joining either informal team continued to make progress with the Chinese meetings or purpose specific events. We are Joint Venture which is on track to become pleased that the virtual model will be able to operational during 2021. continue once travel restrictions ease, allowing Mary and Ralf to reach out and meet a greater 07 CHAIRMAN’S STATEMENT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
number of employees, whilst keeping travel payment of certain fines, in relation to Company, in particular in his role as Senior and the resultant impact on the environment past sanctions compliance breaches, was Independent Director during a period in which to the essential only. a matter of focus for the Board during the Company experienced significant change. the year. The recent conclusion of the US The Board and I would like to thank Tommy Our usual annual physical events, such as authorities’ review provides a cautionary for his considerable and valued contribution the Make It Work Awards and Leadership reminder of the importance of a robust during his six-year tenure. Conference were regrettably unable to compliance programme. With no additional go ahead. Instead, the Board met weekly enforcement action confirmed, our compliance COVID-19 brought a real-time crisis to the during the first lockdown in the UK, and transformation programme remains a priority Board to manage through. The focus on had the opportunity on those calls to hear to ensure we continue to operate within the Directors’ Duties and Section 172 of the from members of the GMC, and from other requirements of the DPA. Companies Act, emphasises the need for staff, on how the business was responding. that legislation, and throughout our Annual It has not been surprising therefore, that the Our dividend Report you will learn more about practical results of the 2020 Employee Engagement The Board is pleased to confirm that it ways in which the Board took into account Survey show staff are very engaged with the proposes a dividend payment of 3.3p per the interests of all its stakeholders including business, with high levels of engagement share (2019: 6.3p). The 2019 final and 2020 employees, the wider community and maintained at 77% (78% last year). This interim dividend were cancelled last year as environment that the business operates in, Board was despite our decision to de-prioritise a cautionary measure to preserve cash given its suppliers, customers and investors. the actions arising out of the 2019 survey in the unprecedented uncertainty presented by Employee favour of putting employee welfare first. This COVID-19. The Board are pleased to resume We have entered 2021 with many decision paid off, with staff very comforted dividend payments this year. uncertainties, not least the impact of Engagement that management instead chose to focus Brexit, for which we had planned well, but Our Board Champions have on actions that would safeguard them. In Our Directors with ongoing constraints that continue support of this, the Board, the GMC and next to challenge the business. Despite these enjoyed meeting employees to During the year, Lorraine Trainer retired line of senior management took a temporary challenges, I am looking forward to seeing learn about what matters to them as planned as a Non-Executive Director. pay cut which enabled the business to pay the progress made by each of the businesses the most and report back at every Nicki Demby has now taken on the role of for all staff across the Essentra family globally and am confident that with such a strong Board meeting. Chairman of the Remuneration Committee. who were furloughed during that period. An leadership team in place, they will continue My thanks go to Lorraine who was pivotal in initiative to support staff health and wellbeing to develop the business and our people. See Q&A with Ralf ensuring the upward trajectory for employee Wunderlich, Board Employee was launched across the globe so that every engagement and provided wise counsel Champion on page 91 member of the Essentra family has some- Paul Lester, CBE during her seven years as a Board member. where to turn to for help. Chairman 5 March 2021 We have also announced that Tommy Breen Securing a Deferred Prosecution Agreement will retire from the Board and not stand (DPA) with the DOJ and other settlement for re-election at the 2021 AGM. Tommy arrangements with OFAC, including the has made a significant contribution to the 08 CHIEF EXECUTIVE’S REVIEW ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
BUILDING FOR THE FUTURE
A new strategic roadmap for 2020 and beyond 2020 was a uniquely challenging year and 2020 priorities I could not be prouder We have refreshed our • Safeguarding our of the way the Essentra purpose, values and goals people’s physical, global family responded. emotional and physical wellbeing Our people have demonstrated incredible to better reflect who we • Supporting customers resilience, energy and commitment in the demonstrated by face of great personal and professional want to be and where we are the maintenance of pressure. I believe we have ended the year all key quality and a closer team with the invaluable foundations going as an Essentra family. service metrics of deeper customer relationships, stronger financial security and a clearer picture of • Enhancing the the future. strength of our balance Paul Forman sheet to provide Our response to the COVID-19 Chief Executive strategic optionality pandemic section on page 17 • Building for the future with a focus on our BUILDING refreshed purpose, FOR THE FUTURE values and goals 2020 Adjusted earnings per share OUR VALUES OUR GOALS • Further strengthening OUR of a robust compliance A winning, Safety, respect PURPOSE engaged and framework and culture and diversity empowered team 13.1p is to responsibly provide the • Continued investment in (2019: 21.3p) Openness, honesty products and Class-leading High employee and integrity services our sustainability systems, equipment and customers engagement need to succeed innovation, including the Energy Growth through maintained in 2020 for change innovation development of more 77% sustainable products (78% in 2019) 09 CHIEF EXECUTIVE’S REVIEW CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT A winning, engaged and empowered team Our people remain at the heart of our journey and our continued resilience throughout 2020 would not have been possible without their commitment, passion and energy. During the year we made progress delivering the employee lifecycle introduced in 2019, as well as 85% safeguarding our people’s physical, emotional and of employees believe that Essentra took the appropriate financial wellbeing in the wake of the pandemic. steps to ensure employees remained safe and healthy during the pandemic.
Launch of our health Rapidly introduced strict and wellbeing strategy – hygiene and protective Essentra Thrives including safety measures across all the extension of Employee of our global sites, in line A global Essentra family of over 7,000 people. Assistance Programmes with and often exceeding across all our locations local regulations. globally. 10 CHIEF EXECUTIVE’S REVIEW CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
In 2020 we announced new environmental KPIs and targets. These demonstrate a significant step forward Class-leading in our sustainability agenda and the delivery sustainability of our purpose. Environmental, Social and Governance (ESG) issues remain crucial to our ability to effectively build for the future as well as meeting the increasing expectations of all our stakeholders including employees, customers and investors.
We have made a great start to our ambition of 20 zero waste to landfill sites, up from 8 in 2019. being carbon neutral by 2040, having reduced our greenhouse gas emissions by We are working across 13% compared to 2019. all our divisions to offer our customers products that serve their needs while minimising the impact on the environment. 11 CHIEF EXECUTIVE’S REVIEW CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
In 2020 we have been Growth through building the right foundations to enable our goal of driving growth innovation through innovation. In order to truly live our purpose to responsibly help our customers succeed, we need to innovate. Developments in technology, customer needs and the world We are collaborating with around us are continually changing and our customers and creating more sustainable products that pace of change is increasing. to meet the changing needs of customers and broader stakeholders.
Well positioned to innovate and take advantage of commercial opportunities.
These foundations include an innovation mindset, core skills and capabilities to drive innovation and a robust decision gate process to manage a healthy pipeline of innovation activities. 12 CHIEF EXECUTIVE’S REVIEW CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Responding to the pandemic A refreshed strategic roadmap Group Management Committee The COVID-19 pandemic has caused Like so many others, the onset of the It has been an honour to lead and be a At Essentra we are unprecedented levels of upheaval for pandemic forced us to reassess our broader member of this executive team in 2020. managing our response to individuals, families, governments and priorities – checking where we were heading They have worked together brilliantly the COVID-19 pandemic companies alike. In our response we have tried and how we were going to get there. In 2017 under immense pressure and have kept around four priorities: to balance short- to medium-term priorities we established a roadmap with three steps a positive and future-focused outlook. with the long-term view; responding to the for long-term success: stability, strategy and immediate needs while planning for both growth. By the time 2020 began we had Safeguarding recovery and a future beyond the pandemic. entered the final chapter of that journey, with stability and clear strategies restored. our people Early on in the year, we established three clear priorities in managing our response: Therefore in mid-2020 we looked again See our Group safeguarding our people, supporting our at our purpose; the articulation of why Management Committee on customers and managing cash flow and we exist as a company. For Essentra this Supporting page 79 added a fourth priority of building for is about making a powerful difference to our customers the future quickly thereafter. These four our customers, providing the products and priorities have given all our people clarity services they need to succeed as businesses. and comfort as we have worked through During the pandemic we found that far Managing our the issues together. from changing, our purpose took on a new importance and resonance as we maintained cash flow our quality and service levels and supported many customers directly involved in the fight against the virus. However, we have Building for added the word “responsibly” because we know that – now more than ever – we the future have a responsibility to do the right thing for our customers, the environment and the communities in which we operate. 13 CHIEF EXECUTIVE’S REVIEW CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Next, we reviewed our principles and while Building for the Future with During the year we also added to our these have not changed, we have decided confidence and resilience portfolio with the purchase of 3C! in our “Now more than to refer to them as values going forward, During the year we have worked Packaging division, building on the successful ever we have a because they are the human qualities we collaboratively on some key themes for integration of Nekicesa acquired the previous show in everything we say and do, guiding the future, for example: how we can year. The acquisition adds manufacturing responsibility to do our behaviours and framing our decisions. further embed our purpose, values and capacity and service capability to our existing The first – safety, respect and diversity – goals; what “mega trends” are being created Packaging footprint in the Americas as the right thing for addressees how we want everyone in the or accelerated by COVID-19; how we work well as access to proprietary serialisation Essentra family to feel no matter who they together in the future (both culturally and technology. In 2020 we also continued with our customers, the are. The next – openness, honesty and integrity practically); commercial opportunities; and the establishment of a China Joint Venture – is a non-negotiable part of how we do best practices including M&A and operational in the Filters division and the integration environment and business and the culture we want to build. opportunities. There is no doubt that our of Innovative Components, both of which the communities in The third – energy for change – is all about the world will be different after COVID-19 and it are on track. As we look forward to 2021 we future we are building together, because we is important that we are in a position to take continue to ensure we are well placed for which we operate.” know there is still more to do to re-engineer advantage of the opportunities ahead of us. inorganic opportunities, where they can move our systems, realign our processes and our business into complementary product Paul Forman redefine our business. Despite the challenging backdrop of the categories or end-markets, or further our Chief Executive pandemic, in 2020 we also continued to invest geographic distribution capability. Finally, we added three business goals that in our business in order to support future set out what is important to us and what we growth. As well as significant investment will focus on in order to build for the future: in our people agenda, we also continued See our Operational a winning, engaged and empowered team; with the Business Process Redesign (BPR) Review on page 67 class-leading sustainability and growth programme, launching Microsoft Dynamics through innovation. These are expanded 365 into our Group HQ Finance and below and form the structure of this year’s Procurement teams in 2020 and an imminent Strategic Report. All this is represented quite launch planned in our Components division intentionally in what has become known as in 2021. This programme is an important part the Essentra “House”, because every family of how we build the business we want in the has a home where we work not only with, future, because it will liberate our people’s but for, each other. full potential by standardising processes and making it easier for everyone to do their job. 14 CHIEF EXECUTIVE’S REVIEW CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Funds enabled us to strengthen our – already resilient – financial position – further evidence of the proactive actions we took in the face The acquisition of 3C! was enabled by a cash these proposals will have on some of our of COVID-19. box placing launched in September, where colleagues, these actions are both necessary over 38m Essentra shares were offered for and consistent with our strategy to build for sale to institutional investors, senior Directors the future. As we manage through these of Essentra and retail investors. In addition and other challenges in 2021 we will be to the acquisition the funds enabled us to guided by our purpose and values, acting strengthen our – already resilient – financial in a responsible way. position – further evidence of the proactive actions we took in the face of COVID-19. I am incredibly proud of the progress we have made in 2020 despite the very challenging While our business results have inevitably been context and believe that we have established impacted by the pandemic, our performance strong foundations on which to build in 2021. in 2020 recovered well by Q4, with improving I am proud to lead this organisation and revenue and order trends and all three global immensely grateful to all our people for their divisions well-positioned for growth. efforts in a difficult year.
Despite this resilient performance, 2020 Looking forward, by living our purpose, staying was clearly not without its challenges and true to our values and delivering our business 2021 is set to hold more. The finalisation of goals I believe we will build a better, brighter Brexit and an even more uncertain broader future – as one team and one family. macroeconomic environment means we will continue to undertake regular reviews and Paul Forman introduce mitigating actions as necessary. Chief Executive 5 March 2021 In 2020 we also launched a detailed review of our global footprint which resulted in the announced closure of certain sites in 2021 across the Components and Packaging divisions. While we deeply regret the impact
By order of the Board Paul Forman Chief Executive 5 March 2021 15 DELIVERING ON OUR PURPOSE ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
DELIVERING ON Supporting the delivery OUR PURPOSE of ventilators to the NHS With the onset of COVID-19 in the UK, the government found that established international manufacturers of critical care ventilators were struggling to cope Put simply, our purpose We are proud to have played a key role with demand. They reached out to UK “to responsibly provide the in supporting the fight against COVID-19 manufacturers for help and in response, through the supply of products in the a consortium of companies from across the products and services our pharma industry and those used in the aerospace, automotive and medical sectors customers need to succeed” manufacture of goods within medical formed VentilatorChallengeUK. Their mission: is why we exist as a company. devices and PPE categories. produce ventilators for the UK’s National Health Service (NHS). Our purpose continues to be relevant as In 2020 more than ever before, this purpose we build for the future, and we believe VentilatorChallengeUK set about building has guided our decisions, shaped our strategy, that after the pandemic we will be a thousands of emergency ventilators to the inspired our people, and made a powerful more resilient organisation with stronger required specifications. One type, the Penlon difference to our customers. customer relationships. ESO 2 Emergency Ventilator, saves lives by ventilating the sickest patients until they can Despite the sometimes considerable transfer to an ICU ventilator. Problems arose, challenges our own people have faced, when the consortium’s supplier failed to Essentra teams across the world have been deliver the components that were needed at living this purpose every day, ensuring our the last minute due to lack of stock. customers have what they need to deliver during a unique and challenging year. To keep production lines running, VentilatorChallengeUK needed stock immediately. They wanted one port of call – a manufacturer, not just a distributor. Within two hours of the call being made, Essentra Components picked the stock needed and hand delivered it to Penlon. Thereafter a wider range of parts were then ordered, meaning that Essentra Components subsequently supplied Penlon with washers, slotted screws, knurled knobs, retaining washers, cable clips and rectangular inserts. Supporting VentilatorChallengeUK, Penlon was able to deliver the first 30 ventilators to the NHS on the timescale already agreed upon with the UK government. 16 DELIVERING ON OUR PURPOSE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Providing business continuity for a customer impacted by lockdown
One of Essentra’s largest multi-national Filters customers was required to activate business continuity plans in response to a government lockdown and switched production overnight to three of their other plants within the region.
Already having an established relationship with Essentra Filters, the customer asked for help to support this transition. Supplying from two manufacturing operations, Essentra were able to support the delivery of a significant volume of products to maintain supply and avoid stock out situations.
The Essentra team has continued to work A key partner for COVID-19 treatments and vaccines with the customer throughout the pandemic, in particular by ensuring the customer has Since the outbreak of the COVID-19 Europe and the US, by investing in additional been able to maintain their supply chain pandemic, the world has been seeking capacity to deliver on the steep volume ramp in the areas of raw material transfers. This treatments for the symptoms of the virus, up. has only been possible due to the extremely as well as vaccines for the long-term fight close collaboration and trust developed against the virus. By the end of 2020, Essentra had also supplied over time and demonstrates Essentra’s agile the first deliveries of bespoke packaging manufacturing capability. Early on in 2020, Essentra Packaging began items to two of the leading COVID-19 vaccine collaborating with the manufacturer of a manufacturers and demand is expected to leading antiviral drug for the treatment of increase as manufacturing ramps up in Q1 COVID-19. 2021. Essentra is also working on a number of other vaccine projects that are expected to With demand increasing rapidly, the Essentra launch in 2021. team supported the customer and the designated contract manufacturers both in 17 OUR RESPONSE TO THE COVID-19 PANDEMIC ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
OUR RESPONSE TO THE COVID-19 PANDEMIC The COVID-19 pandemic has created unparalleled challenges for the world and shaped 2020 in a way no one could have expected. At Essentra we quickly established a COVID-19 85% Global Response Team which met daily to discuss controls of employees believe that and measures needed to safeguard our employees, Essentra has taken the appropriate steps to ensure contractors and customers. they remained safe and healthy during the pandemic. 2020 Employee Survey
At Essentra we are As well as physical wellbeing, In October we launched our global health and managing our response to Safeguarding we have recognised that the wellbeing strategy – Essentra Thrives – which the COVID-19 pandemic our people pandemic has had a included the extension of Employee Assistance around four priorities: significant impact on our Programmes to all our global locations. At Essentra our number one priority has employees’ emotional well- been to safeguard our people, both as the being. Some of our people who We have also provided financial support to pandemic hit and as we planned for our continued to work in a factory employees when they have been unable to Safeguarding future in its wake. With our employees’ setting have faced challenges work as a consequence of local or national our people physical wellbeing in mind, early on in the around maintaining their Government restrictions arising from the year we restricted business travel, especially journeys to and from home pandemic and to the families of those for those travelling internationally. We also during lockdown. Therefore, employees who have sadly lost their lives. introduced strict hygiene and protective some critical factory and At the peak of the pandemic in 2020 there Supporting safety measures across all of our global warehouse employees in high were around 800 furloughed employees in our customers sites, in line with and often exceeding local risk countries were provided with alternative 12 countries and Company furlough payments regulations. These measures were formalised temporary housing. Employees who have were made to employees unable to work in around the middle of year into a Physical been forced to work from home instead India, South Africa and Paraguay. We did Health Policy which established global of in an office setting have faced different not use UK Government provided furlough Managing our standards on social distancing, hygiene, PPE, challenges – for some isolation, for others the support, nor did we borrow debt from the UK cash flow quarantine periods and return to site. In some difficulties of balancing work life with children Government. Overall we have been able to of our badly affected areas, we extended the or other dependants at home. In response maintain 80% of earnings across the global provision of PPE to family members of direct we set up informal support networks and workforce throughout the year. employees, wanting to ensure the wider alternative working arrangements for Building for wellbeing of the communities we work in. particular groups of employees, so that the future We also established measures around site they could connect with colleagues in a visitors, deliveries and collections. similar situation. Read more about our winning, engaged and empowered team from page 31 18 OUR RESPONSE TO THE COVID-19 PANDEMIC CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
We believe that after the pandemic we will be a more resilient organisation with Supporting Managing our stronger customer relationships. Building for our customers cash flow the future Throughout the pandemic our service We have taken a number of proactive and Throughout the pandemic Throughout the year we and quality levels have remained consistent responsible actions to ensure that our strong we have been conscious have been working with with, or indeed exceeded, pre-pandemic liquidity position has been maintained and of the need to not simply around 120 of our global levels. Furthermore, for the vast majority improved. This has been important in terms fight the current battles, leaders to explore these of the pandemic all of our manufacturing of keeping the Company viable and securing but also plan for recovery issues impacting our and distribution sites have been fully our ability to deliver on other commitments. and the future beyond future in greater operational. Temporary site closures have COVID-19. When the depth. For example, only been instigated in the event of specific During the middle of the year we introduced pandemic is over there will we have explored the local government instruction or where we a temporary 20% reduction in fees for Board be many opportunities for “mega trends” that have deemed it necessary to undertake members, temporary 20% reduction in Essentra and it has been will shape the post a deep clean in order to protect our salary for GMC members, temporary 10% important to plan early COVID-19 world, how employees’ wellbeing. reduction in salary for senior management, so that we are as well flexible working practices, cancelled annual merit pay increases and positioned as we can be to health and wellbeing and Across all divisions we have strived to support did not issue 2020 LTIP awards. Furthermore, take advantage of those. leadership competencies our customers, with numerous examples of we made a reduction in Capex spend and will impact the future Essentra going above and beyond in order to reinforced tight control over all discretionary We believe that after of work, the need for meet or exceed our customers’ expectations. costs and strong day to day cash the pandemic we will be a us to further embed management. more resilient organisation a sustainable business We are proud to have played a key role with stronger customer approach as well as in supporting the fight against COVID-19 In September we launched a placing, relationships, we will have exploring commercial and through the supply of products in the pharma offering over 38m Essentra shares for discovered new ways of operational opportunities industry and those used in the manufacture sale to institutional investors which raised working that we do not and best practices. of goods within medical devices and PPE £97m (net of costs). Half of this funded want to reverse and the categories. Indeed, our excellent levels of the acquisition of 3C! in the Packaging world around us will likely Building for the future customer service and support has given division and the other half allowed us to be more open to certain therefore became the rise to commercial opportunities during further strengthen our, already resilient, innovations or in need of overarching theme of the the pandemic. financial position. new or different products. new strategic approach launched in August and will continue to shape our journey into 2021 and beyond.
Read more about delivering Read more in our Financial on our purpose on page 15 Review on page 45 19 INVESTMENT CASE ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
A RESILIENT PLATFORM, DRIVING Our key PROFITABLE AND strengths... Balanced Organic growth CASH GENERATIVE business model potential in all divisions
The Essentra Group consists of a We have a clear, market-driven GROWTH portfolio of three focused businesses, strategy for each of our divisions. serving multiple end-markets with a They operate in sizeable end-markets broad differentiated range of products in which we are fundamentally and services. well-positioned to drive long-term growth and margin expansion. The variety of end markets served along with the mixture of cyclical and non-cyclical The continued successful launch and industries in which our businesses operate, commercialisation of new products and combine to form a balanced growth services is a key driver of our growth. portfolio with strategic opportunities both for our businesses individually and the Our manufacturing and distribution Essentra Group. expertise adds value in response to customer demands, and our innovative capabilities Our businesses’ dynamic operating models drive collaboration and joint development and hassle-free customer proposition enables of new products and services with key us to work with and add value to customers of strategic partners. all sizes as a trusted partner. The execution capability of our management Our customer-focussed proposition combined team and businesses ensures we are well with high standards of service and supply positioned to deliver on our divisional demanded by such customers, help to strategies capitalising on both organic drive continuous improvement across the and inorganic growth opportunities. We Company. Our market leading positions continue to deliver on the potential of our help us to develop and maintain a close Packaging division in terms of both revenue relationship with a wide portfolio of blue and margin expansion, robust organic and chip customers. inorganic growth in Components and further developing opportunities with Filters’ stated “game changers”. 20 INVESTMENT CASE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Opportunities for Financial Focus on margin expansion resilience sustainability
All our business divisions deliver excellent Investment in research and development Our strategy calls for a significant We have placed a strong emphasis service and quality and enjoy strong functions, supported by the identification focus on cash flow generation, which on purpose, values and sustainability, customer relations leading to operating of additional product sourcing opportunities is evidenced in well-defined capital underpinned by governance and leverage potential. and range development enhance our allocation policies and a strong, robust reward structures. competitive positions. balance sheet. We have a well-invested and flexible Working together with our customers to international sourcing, supply chain and Our people are a highly engaged, talented Following our recent fundraise, we are now innovate, solve problems and drive solutions production infrastructure and remain workforce. With investment already made in back within our targeted gearing range of is core to what we do. Central to this is committed to investing in scalable processes. key systems, ensuring operational stability, our between 1x to 2x (net debt/EBITDA), providing providing solutions through innovation This provides businesses across the Company stable operating environment and committed, a platform from which we can explore and to meet an increasing demand for with the opportunity to use the existing engaged workforce are key enablers in delivery drive further strategic opportunities. environmentally responsible products. infrastructure and management to exploit new of our future growth strategy. opportunities efficiently and cost-effectively. We maintain a strong pipeline of strategic We also maintain robust quality systems to M&A opportunities, a close relationship with internationally accredited standards to assist Our extensive international manufacturing a wide portfolio of blue-chip customers, the fulfilment of customers’ demands. and distribution network ensures the delivery who are successful leaders in their respective of cost-competitive and high-quality products markets and we also serve a wide range in response to customers’ requirements. High of small and medium sized customers. levels of service and broad geographic reach are an important competitive differentiator.
We have placed a strong emphasis on purpose, values and sustainability, underpinned by governance and reward structures. 21 OUR BUSINESS MODEL ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
OUR BUSINESS MODEL
Our purpose What we do Our values Our goals Who we serve
We manufacture A winning, Whether it is a tiny but critical component Safety, engaged and or a bespoke solution to a complex need, we respect and empowered have the skills and capability to manufacture diversity Our a wide range of products. team Automotive Construction Electronics purpose is We partner to responsibly We take a long-term partnership approach provide the with suppliers and customers so we can Openness, Class-leading deliver what our customers need, when honesty and products and sustainability they need it. integrity services our Equipment Fabrication Food and manufacturing Beverage customers We distribute need to Our global scale and market knowledge mean that we are able to anticipate and succeed. meet the needs of our customers, whether Growth Energy for large or small, in a wide variety of end- through change markets and geographies. innovation Personal Care Pharmaceutical Retail POP/ and Beauty Paper and Board
BUILDING FOR THE FUTURE Tobacco OUR VALUES OUR GOALS OUR Safety, respect A winning, and diversity PURPOSE engaged and empowered team is to responsibly provide the Openness, honesty products and Class-leading and integrity services our sustainability customers need to succeed Energy Growth through for change innovation While our business model explains how we compete, our strategy of Building for the Future explains the long-term direction this position allows us to take 22 OUR BUSINESS MODEL CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
OUR COMPETITIVE ADVANTAGE
Market-leading Passion and skills of positions our employees We have market-leading positions Our people are our greatest in the majority of our served asset. They “make it work” for markets providing us with the their colleagues and customers scale and expertise necessary every day. to deliver for our customers.
Strength of customer Diverse and Global footprint relationships market-leading with local execution Deep customer relationships and product and Our comprehensive international expert customer service is at the service ranges production and distribution heart of what we do. Ensuring footprint can be flexed to respond we anticipate and deliver on We invest in product research and to customers’ needs, whether they our customer needs is crucial robust quality systems in order to be product, service, cost or supply to our success as a business. deliver product innovation and chain driven. range development. 23 STAKEHOLDER ENGAGEMENT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
STAKEHOLDER ENGAGEMENT Stakeholder group Investors At Essentra we actively manage a range of key stakeholder relationships, The major interests in our shares are set out on page 145. recognising that our success and Key metrics: sustainability depends on their • Earnings Per Share • Total Shareholder input and involvement. (EPS) Return (TSR) • Total dividends paid • Dividend yield and cover
Why is it important to engage? What were the key topics of engagement Continued access to capital is of vital importance and what feedback and input did the Board/ to the long-term success of our business. management obtain? The Board understands the importance Through our engagement activities, we strive to Other than our routine engagement with of forming and retaining good working obtain investor buy-in to our strategic objectives investors on topics of strategy, governance and performance, below are specific matters relationships with all stakeholder groups. and our execution of them. on which we engaged investors and that We create value for our shareholders by Effective engagement enables the Board to influenced outcomes and actions this year: ensure stakeholder interests are considered generating strong and sustainable results • the impact of the COVID-19 pandemic on when making decisions and is crucial for that translate into dividends. the Company’s financial position and resilience We are seeking to promote an investor base achieving the long-term success of the • cancellation of 2019 final and 2020 interim that is interested in a long-term holding in Company. The following disclosure describes dividend payments the Company. how the Board has had regard to the matters Effective engagement enables • placing of new ordinary shares to fund set out in Section 172(1) (a) to (f) and forms the Board to ensure stakeholder How management and/or Directors the acquisition of 3C! Packaging, Inc. and the Directors’ statement required under interests are considered engaged? strengthen Essentra’s balance sheet Section 414CZA of the Companies Act 2006. when making decisions and is The key mechanisms of shareholder engagement • environmental, social and governance crucial for achieving the included: issues, particularly in relation to the Single- long-term success of • AGM use Plastics Directive and its impact on the the Company. • full year and half year presentations Filters business. • one-on-one investor meetings with the We also actively manage our relationship with Chairman, Chief Executive, Chief Financial debt investors, holding regular business updates Officer, Senior Independent Director, Chair where we discuss Essentra’s future debt strategy of the Remuneration Committee. and how this can be best delivered. What was the impact of the engagement including any actions taken? The successful capital raise enabled Essentra to acquire 3C! Packaging and strengthened Essentra’s balance sheet, positioning the Company well to pursue other strategic opportunities, whilst remaining within the target leverage range of 1x to 2x. 24 STAKEHOLDER ENGAGEMENT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Stakeholder group
Suppliers Employees
The Company has a large number of international suppliers and also partners with a high volume of Our employees are vital in ensuring we provide quality products and services to our customers and small businesses. operate our business activities effectively and efficiently.
Each division presents distinct key supplier groups. 85% of Filters and Packaging’s raw materials come Key metrics: from a small proportion of suppliers used. 80% of our indirect spend eg on IT, is concentrated with a • Employee • Safety KPI: Lost • Gender diversity in small number of key suppliers. The Components division utilises a mature network of key suppliers. engagement Time Incident and management levels Number of Days Lost Why is it important to engage? What were the key topics of engagement Our suppliers are fundamental to the quality of and what feedback and input did the Board/ Why is it important to engage? What were the key topics of engagement our products and to ensuring that as a business management obtain? The Company’s long-term success is based on the and what feedback and input did the Board/ we meet the high standards of conduct that we • the impact of the COVID-19 pandemic daily commitment of our workforce to our purpose, management obtain? set ourselves. on business continuity and the Company’s values and goals. The impact of the COVID-19 pandemic on the We are fundamentally a conversion business financial position To maintain our competitive advantage and meet Company’s financial position and operations, and are dependent on our suppliers to • impact of Brexit on business continuity the growing demands of the environment in which as well as the impact on employees. provide our goods ethically, within our code in our UK and European factories we operate, we need a workforce which is adaptive The results of the 2020 employee survey: of conduct, on time and to the quality • sustainable procurement has continued and whose skill base constantly evolves. We also required by our customers. to gain an increased focus. • 91% participation (90% 2019) and 77% value workers with long-term practical experiences. (78% last year) engagement Innovation is key to the success of our business What was the impact of the engagement How management and/or Directors • the survey told us that our employees feel and engaging with suppliers early is fundamental including any actions taken? engaged? particularly positive about working for to the enabling of new products. We develop long-term, strategic relationships formed on the basis of trust and understanding We engage with our people regularly and have Essentra, how we responded to the pandemic How management and/or Directors and which are to the mutual benefit of both developed a people strategy which seeks to create and our plans to build for the future. engaged? parties. We collaborate with our suppliers on key an environment in which our people are happy at Engagement between employees and the Board We engage with local suppliers through initiatives and innovation projects. work and that best supports their wellbeing. Employee Champions covered a number of key working group initiatives that are run by We invest significantly in our people as we believe topics including recognition, reward and resource regional management. In order to mitigate the impact of COVID-19 and Brexit, the Company developed a broad that maintaining low turnover rates across the and investment allocation. Our supplier code of conduct and Modern set of contingency plans. entire workforce is the source of our industry- What was the impact of the engagement Slavery Statement is shared with all key and leading efficiency and productivity rates. including any actions taken? new suppliers. The key supplier management programme initiated in 2019 has allowed us to drive our We distribute an employee survey to all our In responding to the COVID-19 pandemic we Our Procurement team runs a supplier environmental and social policies down the employees annually. Employees are provided with have made safeguarding employee wellbeing development programme with all key suppliers. supply chain. information of concern, including factors affecting our top priority. company performance through regular Chief As anticipated, by the end of 2020 more than Based on survey feedback, in 2021 we will be Executive updates and town hall briefings. 70% of our supplier spend was covered by our focusing on strengthening engagement around Ethics Code certification. To meet the requirements of the 2018 Code, the careers and talent, new ways of working and Board has appointed two designated Non- recognition. Site action plans were agreed by the Executive Directors to be responsible for the end of January 2021 and regular meetings are employee voice; Board Employee Champions. scheduled throughout the year to track progress. In 2021 the Board will support the continued roll- out of the people strategy and continue to develop and evolve the Board Employee Champion roles. 25 STAKEHOLDER ENGAGEMENT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Stakeholder group
Government and Regulators
Wherever we operate we are committed to conducting business in line with the appropriate laws and regulation.
Why is it important to engage? What were the key topics of engagement What was the impact of the engagement As a global company with many local and what feedback and input did the Board/ including any actions taken? operations, Essentra is committed to working management obtain? We maintain a strong and transparent dialogue with governments at national, regional and The impact of the COVID-19 pandemic on the with various government and regulatory local level in establishing sound and transparent Company, in particular: agencies. working relationships. This is to ensure that the • how we have managed the safety our people In many instances our COVID-19 safety approach way we conduct business with customers and through implementation of COVID-19 safety exceeded local requirements and included suppliers, and how we treat our people and the practices to ensure that we meet all local testing as well as additional support for families community in which we operate meets both requirements and also identify additional through the provision of PPE and hygiene local requirements as well as Essentra’s Code of support or measures that we could take materials. Ethics. to best safeguard our people depending Some sites temporarily closed in line with local In accordance with our Ethics Code, Essentra on their location government regulations and staff were paid does not provide financial contributions to • the position relating to government support in furlough or received pay to a minimum of 80% political parties and lobby groups. each country so as to replicate similar furlough their usual pay, which was often in excess of How management and/or Directors or payment arrangements across the Group in local requirements. all locations engaged? The resolution of historical sanction issues has Engagement with regulators and governments • the need for our manufacturing sites to remain operational despite COVID-19 driven improvements through the compliance is undertaken in various ways across our global transformation programme that continues operations. restrictions, especially those serving critical industries involved in the fight against to be embedded within the Group and sees Essentra is committed As a UK listed company the Board and the GMC COVID-19. increasing awareness and understanding working with governments at manage many of these while our global teams amongst staff at all levels. national, regional and local level In 2020 Essentra FZE Company Limited engage local governments as necessary. The Company has co-operated fully with the in establishing sound and reached a public settlement with the US US authorities and, whilst cautioned by OFAC transparent working Department of Justice and the US Office of on the importance of a robust sanctions relationships. Foreign Assets Control relating to sanctioned market compliance failures in the Filters compliance programme, no further enforcement business. A Deferred Prosecution Agreement action is being taken and the Company was entered into with the US Department continues to operate within the terms of the of Justice and a fine of $666,543.88 paid to Deferred Prosecution Agreement. settle certain sanctions violations by the Filters The Company maintains its focus on continuous business in Dubai. improvement to drive the effectiveness of As previously advised, the Company had made its response to sanction regimes and other a voluntary disclosure to the U.S. Department compliance requirements. of the Treasury’s Office of Foreign Assets Control (OFAC), with regards to certain other historical transactions by the Filters business dating as far back as 2015. 26 STAKEHOLDER ENGAGEMENT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Stakeholder group Read more about how we responded to the COVID-19 Customers pandemic on page 17
Our purpose is to provide the parts, products and services our customers need to succeed as a business.
Key metrics: • On Time and In Full • Quality/complaints • Net Promoter Score (OTIF)
Why is it important to engage? What were the key topics of engagement Our customers are the lifeblood of our business and what feedback and input did the Board/ and we recognise that their feedback and management obtain? support is crucial to our future success. • the impact of the COVID-19 pandemic and How management and/or Directors Brexit on business continuity engaged? • our approach to sustainability across our sites, We have strategic global relationships with including corporate targets a number of multinational companies. • product innovation, including in terms of more sustainable products. We have also invested in key account management structures across our businesses What was the impact of the engagement to manage relationships with customers. This including any actions taken? ensures that we provide the most appropriate Development of long-term strategic relationships service for individual accounts formed on the basis of trust and understanding and which are to the mutual benefit of both parties. We continue to expand our product offering and build expertise within our sales teams. 27 KEY PERFORMANCE INDICATORS ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
KEY PERFORMANCE INDICATORS
The delivery Like-for-like revenue growth (%) Adjusted operating profit1 (£m) Adjusted earnings per share1 (p) of Essentra’s 2020 -6.3 2020 62 2020 13.1 strategic priorities 2019 -0.7 2019 88 2019 21.3 is underpinned by 2018 0.2 2018 91 2018 23.1 a focus on Key Performance How we measure it How we measure it How we measure it Indicators (KPIs) Revenue at constant exchange rates, excluding Operating profit at constant exchange Earnings per share at constant acquisitions and disposals rates, excluding the impact of exchange rates, excluding the impact of which measure Why this is important amortisation of acquired intangible assets amortisation of acquired intangible assets Essentra’s progress Measures the ability of the Company to grow and adjusting items and adjusting items in the delivery sales by operating in selected geographies and Why this is important Why this is important categories, and offering differentiated, cost- Measures the profitability of the Company Measures the benefits generated for of value. competitive products and services shareholders from the Company’s overall performance
Alignment of KPIs to executive remuneration 2 3 Performance measures Net working capital ratio (%) Adjusted operating cash flow (£m) for the executive Annual Bonus Plan 2020 14.2 2020 76 Adjusted operating Performance measures for 2019 14.3 2019 72 cash flow (£m) the executive Long-Term 2018 13.7 2018 77 Incentive Plan 76 How we measure it How we measure it (72 in 2019) Average net working capital2 per month, Adjusted operating profit less non-cash/ as a % of revenue other items, net working capital and net Why this is important capital expenditure Measures the ability of the Company Why this is important 1 Excluding impact of amortisation of acquired to finance its expansion and release Measures the cash generation intangible assets and adjusting items. cash from working capital capability of the Company 2 As defined in the Financial Review on page 46. 3 As defined in the Alternative Performance Measures on page 49 28 KEY PERFORMANCE INDICATORS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Cash conversion (%) Dividend per share (p)
2020 123 2020 3.3 Dividend 2019 82 2019 6.3 per share (p) 2018 85 2018 20.7 3.3 How we measure it How we measure it (6.3 in 2019) Adjusted operating cash flow3 as a Total dividends paid divided by the number percentage of adjusted operating profit2 of relevant shares in issue Why this is important Why this is important Measures how the Company converts Measures the amount of cash per share 1 Excluding impact of amortisation its profit into cash/quality of the which the Company returns to shareholders of acquired intangible assets and Company’s earnings adjusting items. 2 As defined in the Financial Review on page 46. 3 As defined in the Alternative Performance Measures on page 49
Return on Capital Employed (%) Return on Invested Capital (%) Total Shareholder Return (%)
2020 14.7 2020 6.7 2020 -29.7
2019 20.2 2019 9.3 2019 33.5 Cash conversion (%) 2018 22.4 2018 9.6 2018 -32.3 123% How we measure it How we measure it How we measure it (82% in 2019) Adjusted operating profit1 divided Adjusted operating profit1 after tax Total annual increase in value. Based on by (tangible fixed assets and net divided by (capital employed plus the increase in share price and the dividend working capital) intangible assets) paid to shareholders Why this is important Why this is important Why this is important Measures how effectively the Company Measures the Company’s ability to Measures the Company’s ability to generate uses its operational assets effectively deploy capital long-term value 29 NON-FINANCIAL KEY PERFORMANCE INDICATORS ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
NON-FINANCIAL KEY PERFORMANCE INDICATORS
Equally important Customers Environment Safety to the delivery of On Time and In Full (%) CO2 emissions (tonnes) Lost-Time Incidents (LTIs) Essentra’s strategic priorities is a Components Reduced by Increased 12% 2020 37 focus on KPIs 2020 92.1 which measure our 13% 2019 33 2019 94.3 progress against (2020 vs 2019) 2018 36 2018 92.4 stated priorities in terms of Waste to landfill (tonnes) Why this is important Packaging Our overriding commitment in the workplace is the our customers, Reduced by health, safety and welfare of our employees and all communities 2020 97.1 those who visit Essentra’s operations. Our aim is to 2019 96.6 be in the top quartile of manufacturing companies and people. 36.2% for the lowest Incident Frequency Rates. 2018 95.6 (2020 vs 2019) Number of days lost Reduced by 23% Filters Number of sites with zero waste 2020 655 2020 99.1 to landfill Increased by 2019 855 2019 98.5 2018 987 2018 98.5 150% (2019: 8 2020: 20)
Why this is important Why this is important Why this is important Our purpose is to responsibly provide the products We recognise that we have a role, and interest, This is a measure used to quantify the severity and services our customers need to succeed. Our in environmental stewardship. This is not of LTIs. Where incidents do result in Lost Time, we ability to deliver quality products on time and in just a duty we owe to our neighbours, but to work hard to minimise the amount and to support full has been a key focus for 2020. future generations. We know that the way we the injured person in their recovery by offering manage our environmental impacts affects our restricted or light duties, and through a structured reputation and is a measure of the quality of return to work programme. Essentra’s businesses. 30 NON-FINANCIAL KEY PERFORMANCE INDICATORS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
77% High levels of employee engagement maintained, keeping us ahead of the global and manufacturing People industry averages Employee engagement (%) Non-Financial information table 2020 77 Why this is important The happiness and fulfilment of our people is a key This table follows the requirements of Companies Act 2016 2019 78 priority. Having more engaged employees reduces Sections 414C(7), 414CA and 414CB and is intended to help stakeholders understand our position on key non-financial 2018 75 staff turnover, improves productivity and helps us serve and retain our customers. 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 Group Management Management Where to read diversity (%) Committee gender (Levels 6-8) gender Reporting requirement more in this report diversity (%) diversity (%) Environmental matters: Class leading 36 sustainability Employees: A winning, engaged and empowered 31 team Health and safety: A winning, engaged and 31 empowered team Human rights: A winning, engaged and 34 empowered team Social matters: A winning, engaged and 31 empowered team Anti-Bribery and Corruption: A winning, 34 engaged and empowered team Business model: Our business model 21 2020 2020 2020 Principal risks: Risk Management Report 50 Men: 57% (4) Men: 70% (7) Men: 81.6% (71) Women: 43% (3) Women: 30% (3) Women: 18.4% (16) 2019 2019 2019 Men: 50% (4) Men: 70% (7) Men: 83% (80) Women: 50% (4) Women: 30% (3) Women: 17% (16)
2018 2018 Why this is important Men: 57% (4) Men: 73% (8) Women: 43% (3) Women: 27% (3) 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. 31 A WINNING, ENGAGED AND EMPOWERED TEAM ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
A WINNING, ENGAGED Supporting AND EMPOWERED TEAM Essentra employees on Furlough
At the height of the Essentra’s people are at the Communicating through uncertainty pandemic in 2020 heart of our strategic change As the COVID-19 pandemic started to impact there were around 800 included maintaining regular contact with furloughed journey. In responding to our businesses in early March, we quickly colleagues on furlough established the four pillars that would guide in several countries. employees, establishing the COVID-19 pandemic we us through the challenges, the first of these virtual support networks, have made their physical and focused on our people and included the Despite country-specific offering internal opportunities legislative frameworks such as online training, emotional wellbeing our top need to communicate. Establishing a more appropriate Group-wide communications around restrictions during encouraging and facilitating priority and continue to work rhythm facilitated a more timely and a period of furlough, we external activities such as to improve diversity, talent personal cascade of information. Group-wide wanted to create a consistent volunteering and facilitating their return to work post a development and engagement. communications, especially from our Chief global support mechanism Executive, became more frequent with a that allowed us to better period of furlough. maintain our connection Our employees are vital in ensuring we more informal tone, utilising video content with furloughed employees The LFCs were linked so provide quality products and services to with translation meant faster and more and helped them to manage they could ask questions our customers and operate our business effective communication in a timely manner. the impact on their lives and and share great ideas of activities effectively and efficiently. Indeed, We also established more two-way feedback make the best use of their things they were doing to their talent and commitment drives the using digital solutions and smaller group calls. time away from work. support those on furlough. innovation that allows Essentra to provide A global guide for line added value to our customers, enhance While COVID-19 highlighted some of the In each market with managers with furloughed supply chain logistics and reduce the challenges we face in communicating to furloughed employees, we employees was created which environmental impact of operations. frontline factory and warehouse employees across a number of global locations identified a Local Furlough included advice on things and in 20 languages, we recognised the Coordinator (LFC). Their role such as: checking in on well- unique opportunity to support, engage being, offering support, and inspire our people and sought to Our furloughed disseminating information, overcome the challenges and connect colleagues in India came linking them to other with our global workforce. together to use their time furloughed employees, and for COVID-19 related relief work recommending activities to in the local community, such as make best use of their time. the preparation and distribution of 1,000 COVID-19 health and hygiene kits to migrant workers and their families in Bangalore.
Our response to the COVID-19 pandemic on page 17 32 A WINNING, ENGAGED AND EMPOWERED TEAM CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Essentra Thrives confidential and provides a wide range of advice On 10 October, coinciding and support on things like with World Mental Health financial worries, housing Day, we launched our concerns, family challenges, global health and wellbeing relationships, stress and strategy: Essentra Thrives. anxiety. All services can be The strategy formed a key accessed by family members who live in the same house as part of our Diversity and Leading with our values in Safeguarding physical wellbeing an Essentra employee. Inclusion programme in mind. Empathetical and Conscious Throughout the pandemic we have remained 2020; enabling our people supportive approach to In addition, the strategy is leadership committed to achieving and maintaining to bring their whole selves ensure the wider safety supported with Emotional the highest standards of health and safety to work and reach their of all our people for our employees and everyone visiting our full potential within a Support First Aider training and leadership training on operations. As a result we introduced strict supportive, diverse and hygiene and protective safety measures kind culture. understanding mental health. These efforts are helping across all of our global sites, in line with Ensure our people are leaders look after their own Resilience and often exceeding local regulations. The cornerstone of this supported to engage with emotional wellbeing as well and emotional strategy has been the energy for change and support those around them energy Our aim is to be in the top quartile of extension of Employee space to innovate at home and work. manufacturing companies for Incident Assistance Programmes Frequency Rates. We are therefore pleased to across all our locations This programme goes report that the total number of days lost due globally. These programmes to incidents has reduced by 23%, from 855 in include a free advice line beyond the issues identified through COVID-19 as we A healthy individual, 2019 to 655 in 2020. The number of incidents available to employees and Health, see a continued need to will contribute to a resulting in Lost Time has increased slightly close family members in local nutrition and focus on the physical and winning, engaged to 37 in 2020 from 33 in 2019. languages 24 hours a day, vitality 7 days per week, 365 days emotional wellbeing through and empowered team 2021 and beyond. In addition to these KPIs, in 2020 we identified a year. The service is 100% the need and benefit of having a leading indicator measuring health and safety engagement and activities across each site. Respecting we are a This will include time spent on health and diverse family with an “Kindful” safety projects, leadership walks, training, open culture of inclusion culture briefings and “toolbox talks”. In 2021 we will across our global use this to progress further visibility and workforce engagement, which we hope will ensure improvements across a number of areas. 33 A WINNING, ENGAGED AND EMPOWERED TEAM CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Our IT Service Desk Insourcing Project won the “Best Service Improvement Project 2020” at the Service Desk Institute Awards.
In November we held our second annual results reflect the true voice of Essentra. Our and our plans to build for the future. In 2021 global Safety Week with a focus on “slips, trips overall engagement metric continues to score we will be seeking to strengthen engagement and falls”. This was an opportunity to reinforce well at 77% (78% last year), this is based on around talent and careers, new ways of every employee’s role in taking responsibility employees’ views of feeling satisfied, proud working and recognition. All site action plans for driving improvements and embedding our and wanting to remain at Essentra. This score were agreed by the end of January 2021 and safety culture throughout the business. keeps us ahead of the manufacturing and regular meetings are scheduled throughout global benchmark engagement averages the year to track progress. World-class engagement and balanced well across our internal In 2020, despite an incredibly challenging demographics, highlighting that our diversity Recognising our people COVID-19 context, we undertook a slightly and inclusion agenda is proving effective. Our Group-wide “Make It Work” awards are revised global employee engagement survey. now in their third year and celebrate the We were able to maintain a market-leading The survey told us that our employees feel people who have gone above and beyond participation rate of 91% (90% 2019), which particularly positive about working for to deliver what Essentra does best: make it means we can again be confident that the Essentra, how we responded to the pandemic work. The award categories were adapted in 2020 to better reflect our new values and LTI Days lost goals. In 2020 the number of nominations High employee engagement Number of % Number of % was close to double those received in 2019 maintained in 2020 Year lost times change Year lost days change and came from all divisions and functions 2018 36 2018 987 across the organisation. Our winners (five 2019 33 2019 855 individuals and one team) were announced in 77% 2020 37* +12% 2020 655* -23% January 2021 and will be recognised in virtual (78% in 2019) * Excludes 3C! * Excludes 3C! events later in the year. During 2021 we will also be recognising some of our “COVID heroes” acknowledging their response to exceptional circumstances.
In July we took time to say thank you to Essentra was our people and encouraged them to say awarded “Payroll thank you to each other. Thank you cards Software Supplier of the were issued to all employees and a small Year” in conjunction financial gesture added to their July pay. with Ceridian by the It was an opportunity to recognise our Global Payroll Association. amazing Essentra team all over the world for everything they were doing to keep the Essentra family safe, successful and smiling during uncertain times. 34 A WINNING, ENGAGED AND EMPOWERED TEAM CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Creating a diverse environment Being an ethical employer any such concerns in good faith, without Gender split all employees In 2020 we progressed our work to create Essentra has established a clear commitment fear of victimisation or retaliation and with a more diverse and inclusive workplace, to ensuring that its business activities are the support of the Company. Employees can focusing on the launch of our global health conducted in accordance with all applicable report any concerns on a confidential basis and wellbeing strategy, Essentra Thrives laws and regulations. The Group Compliance online or by telephone. which is outlined on page 32. We continued Strategy is based on risk-based policy and Throughout our international operations we to embed the global Diversity and Inclusion training protocols supported by appropriate support and endorse human rights – as set Policy launched in 2019 and partnerships with technology platforms and expert guidance down by the United Nations Declaration organisations such as everywoman, Business and advice. Our Ethics Code is the core and its applicable International Labour in the Community (BITC) and #WorkWithMe. foundation of the Group Compliance Organisation conventions – through the Strategy and is issued to all employees active demonstration of our employment We remain committed to providing all globally, supported by annual training on the policies, our supply chain and the Male: 66.4% (4,691 employees) employees with the opportunity to develop Code and positive affirmation statements responsible provision of our products and Female: 33.6% (2,374 employees) and advance, which includes giving full by the employees. In addition we have services. This commitment includes a As at 31 December 2020. and fair consideration to all employment specific policies relating to Anti-Bribery and mandatory requirement on all our sites to applications from disabled people. In the Corruption, Anti-Money Laundering and Third- avoid the employment of children, as well event of employees becoming disabled, Party Due Diligence. These policies are made Permanent/contractor as a commitment to the prevention of we make every effort to ensure that the available to all employees and specifically split all employees slavery and human trafficking. Our Filters training, career development and promotion issued for affirmation to senior leaders and operations based in India, Indonesia and opportunities available are as far as possible other employees who hold positions where Thailand are additionally accredited to SA identical to those of non-disabled employees. such polices are relevant to ensure best 8000 which details fundamental principles practice. Further details on these policies can of human rights. In 2020 we joined BITC’s Cross-Organisational be found at essentraplc.com/responsibility. Mentoring Circles for the third year and as part of the scheme ten Essentra UK- Our Right to Speak Policy and process is based employees will be participating from well established and enables any employee January 2021. The Circles aim to support to report circumstances where they believe the progression and impact of Black, Asian that the standards of the Ethics Code, or the and Minority Ethnic (BAME) employees and Company’s wider policies and guidance notes, address their current under-representation at are not being upheld. We are committed to Permanent: 99.9% (7,055 employees) Contractors: 0.1% (10 employees) senior levels. ensuring that employees feel able to raise As at 31 December 2020. 35 A WINNING, ENGAGED AND EMPOWERED TEAM CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Bringing our employee Progress we made in 2020 What we will do in 2021 lifecycle to life Attracting great • Developed and launched a new competency • Continue to develop and embed our people through framework aligned to our refreshed values competency framework In 2020 we further embedded and Essentra’s reputation for and goals • Further develop our employer brand, for operational excellence example through the development of an progressed elements of our employee • The framework reflects learnings from the and being a great place pandemic and the competencies needed external careers site lifecycle which was introduced as to work part of a refreshed people strategy in for the future world of work 2019. The employee lifecycle is a model Recruiting the right • Used new and consistent tools to assess • Continued development and training that identifies the ways in which an people to the right job, candidates, and successfully used these on assessment tools individual engages with Essentra and based on shared values remotely using digital solutions • Focus on internal promotions and talent helps us shape that journey into a as well as specific skills mapping positive experience for everyone. and knowledge Onboarding our people • Successfully onboarded new recruits remotely • Global launch of digital onboarding solution with the right support, during 2020 which will also facilitate further remote skills, knowledge and • Piloted digital solution to onboarding that onboarding and early engagement tools to get them off delivers a consistent and manager-led to a flying start approach
Developing our people • Further roll out of LEAP (Leadership Essentials • Extension of LEAP programme to middle in their jobs with in Action) Programme for supervisors – managers opportunities to develop including virtual • Continuation of the Essentra Apprenticeship skills, experience and • Continuation of the Essentra Apprenticeship programme in the UK knowledge programme in the UK • Continuation of the Future Leaders • Continuation of the Future Leaders (Graduate) programme with a new intake expected programme for 2019 intake and graduation of in autumn 2021 2018 intake
Growing our people • Identified supplier for global Learning • Launch of global LMS which will include beyond their job, so they Management System (LMS) a digital platform to communicate directly can thrive and achieve • Upskilled leaders and managers in areas such to employees who do not currently access their full potential as emotional wellbeing, communications and email or the corporate intranet change management • Learning available to all employees through the LMS system
Supporting our people • Major focus in 2020 with support for • Further embed global health and wellbeing in work and life, by employees through the pandemic strategy and EAP provision to all global providing flexibility where • Launch of global wellbeing strategy including locations possible so they can Emotional Support First Aider training • Extend Emotional Support First Aider achieve their goals • Extension of Employee Assistance Programme training globally (EAP) provision to all global locations
Leaving in a positive • Recognised 2020 was a difficult market • Global launch of digital approach to way that is consistent and provided appropriate support for onboarding will include “offboarding” and fair, showing dignity leavers with wider use of outplacement and respect whatever and local connections the situation 36 CLASS-LEADING SUSTAINABILITY ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
CLASS-LEADING SUSTAINABILITY
Our Sustainability Strategy As part of our revised purpose In 2020, we undertook our first comprehensive as a responsible business and materiality assessment, invested in the Responsible Resource Usage Reducing our impact on the environment development of more sustainable products, through waste reduction projects, driving our Building for the Future set ambitious targets for the future and made sites to zero waste to landfill, trials of recycled strategic roadmap, we have good progress towards those targets. and biodegradable materials and trials of “closed loop” business models in partnership set ourselves the goal of During the year we re-confirmed the focus with suppliers and customers “class-leading sustainability”. of our sustainability strategy around four We made significant progress pillars. We have mapped the relevant Energy and Climate Change Reducing Scope 1 and 2 greenhouse gas on our sustainability journey Sustainable Development Goals (SDGs) to these four pillars, with nine goals having a (GHG) emissions via energy efficiency (eg roll-out of LED projects across multiple sites), in 2020, across several fronts. strong and direct link to Essentra’s business. on-site energy generation (eg biomass for We acknowledge that this is a journey and heating in Filters, four sites at pilot stage to achieve these goals by 2030, we will look for solar PV in Packaging) and procurement to further collaborate with stakeholders on of certified renewable energy a local and global basis to ensure that all challenges are overcome effectively. People and Community 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
Environmental, social and governance Responsible Supply Chain Ensuring our supply chain is robust through (ESG) topics are crucial to our ability to ongoing improvements in policies and effectively build for the future as well standards including new KYS processes as as meeting the increasing expectations part of BPR project, along with roll-out of of all our stakeholders, including a risk-based supplier audit programme employees, customers and investors. In 2020 we focussed on communicating our strategy and targets for environmental sustainability. In 2021 we will look to further codify, embed and communicate social and governance aspects. 37 CLASS-LEADING SUSTAINABILITY CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Sustainability governance Employee engagement Risk management We recognise that sustainability is an Since 2019 ESG has been recognised as a Towards the end of 2019 a new Board important topic in employee engagement Principal Risk. In 2020 this was defined as Sustainability Committee was formed, which and retention, as well as attracting new talent encompassing the topics of exposure to elevated the previous Group Sustainability to the organisation. tobacco-related products, potential changes Committee to Board level and underscored the in regulation related to single-use plastics, increasing importance that both the Board and In 2020 we further developed our Group-wide climate change and other issues. Additionally, the Company’s stakeholders are placing on this approach to internal employee engagement an Emerging Risk of Climate Change was issue of Sustainability. around sustainability, in particular in relation previously identified, and has now been to key areas such as greenhouse gases and absorbed within the ESG Principal Risk The Board Sustainability Committee met waste topics. During the year we created four reflecting the increasing relevance of climate regularly in 2020, hearing from external sources Sustainability Specialist Interest Groups for change and the risk it poses to Essentra’s of best practice and inputting to strategy, each pillar of our strategy and in October held global operations. targets, risk management and performance. our first Sustainability Week, with events held across our global footprint. We consider the growing interest from stakeholders in all areas of ESG including The purpose of Sustainability Week was to our sustainability agenda and identify the educate employees on what Essentra was impact this could have on our reputation. It already doing in terms of sustainability and is important that this is managed effectively to get employees involved in activities directly especially with the introduction of additional related to the Energy and Climate Change regulations such as Streamlined Energy and pillar. During the week we encouraged Carbon Reporting (SECR) and the EU Single Advises on and reviews sustainability activities including strategy development employees to identify opportunities of Use Plastic Directive. and opportunity and risk identification Board reducing energy either at work or at home. Sustainability Committee
Regularly monitors sustainability metrics including environmental KPIs for the Group Group Management and divisions Committee
Drives the sustainability agenda at the Group corporate level and supports the divisional Divisional Sustainability teams to achieve improvements teams Team
Improvements made throughout the business which contribute Essentra’s three divisions to overall progress 38 CLASS-LEADING SUSTAINABILITY CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Product innovation across Essentra
Sustainability has been a key driver for innovation across Essentra with each division working with key stakeholders including customers, to improve their product and packaging portfolios. Throughout 2020, many Voluntary Disclosures and Signatories We acknowledge the important role of sustainable product initiatives were explored, including the introduction of recycled plastic the Taskforce for Climate Related Financial Essentra is committed to reporting against voluntary into our Components product ranges, more Disclosures (TCFD) to improve transparency external indices to increase transparency, motivate sustainable secondary packaging for beauty and drive improvements across industry. stakeholders and drive change within our business brands and biodegradable cigarette filters. We have disclosed on the four areas of and the value chain. Governance, Strategy, Risk Management and Metrics and continue to endeavour to Growth through innovation on page 42 Our disclosure scores help to drive ambition within the and Operational Review on page 67 increase the level of disclosure year on year. organisation to reduce greenhouse gas emissions and directly relate to measuring the Energy and Climate We are working and reviewing TCFD Change pillar of our sustainability strategy. requirements as part of our risk management approach to ensure we are managing climate change risks. The Group Risk Committee oversee this process, ensuring we are fulfilling our obligations under TCFD.
See our Risk Management Report on page 50
In 2020, we maintained a During the year we also silver Ecovadis rating with received an improved areas noted for improvement CDP score, moving from including tracking of a C to B in Climate Change additional KPIs, introduction and a C to B- in Water. of a sustainable procurement This improvement, moving policy and more thorough to the “management” supplier assessments that level, demonstrates includes environmental that our business is and social topics. taking co-ordinated action and is continually driving the ambition. 39 CLASS-LEADING SUSTAINABILITY CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Essentra Group Sustainability Materiality Matrix Materiality assessment In 2020 we completed our first sustainability materiality Physical pollution & Employee mental Responsible end-of-life disposal & physical health, Resource Usage assessment, through a structured process that was overseen Brand Reputation safety & wellbeing Energy and by an external consultant. The assessment has helped to Very high Natural Responsible use of Climate Change set priorities for the business through the identification environment, plastics including People and and evaluation of ESG and wider sustainability issues. including marine single-use Community ecosystems Sustainable Responsible As part of the process, we identified key stakeholders such Product Innovation Supply Chain Changes in Manufacturing Climate action as customers, industry bodies and sustainability organisations environmental waste streams including and researched the key sustainability issues that matter legislation/ Preparedness greenhouse gases to them. The key issues identified are weighted on both regulation against natural & (Scope 1, 2 & 3) & use of clean energy importance to Essentra and stakeholders and Essentra’s Traceability human disasters & responsible Transparency Diversity & level of influence or control over the issue. material inclusion including procurement Ethical supply chain gender gap Initially the topics were plotted for each business division and Community Circular economy Employee skill base then combined to form a Group version that demonstrates Engagement principles Employee the overall focus areas for Essentra. engagement
We identified 20 material issues and a number of these relate specifically to the four pillars of our sustainability strategy. For example, we convert materials, often from non-renewable sources, into products which in some cases could impact the Access to sufficient Consumer health & environment – key for us is Responsible Material Usage. Importance stakeholders to and clean water wellbeing
We are present in a large number of countries, employing people from diverse communities and purchasing materials and services in those countries – ensuring we engage appropriately with those people and communities is key, as is ensuring we have a responsible supply chain. Climate change is an issue that will increasingly affect us all, and our customers and their consumers are increasingly demanding an appropriate response from their supply chains – we need to play our part in energy and climate change. All these focus areas are being addressed at either Group, division or site level. Low The material issues will be re-evaluated annually to ensure Low Importance to Essentra Group Very high they reflect the areas of highest priority to our stakeholders. 40 CLASS-LEADING SUSTAINABILITY CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Our Sustainability KPIs and Targets
#1 #2 #3 #4 Per cent Scope 1 & 2 Number of sites Volume of packaging/raw GHG emissions at zero waste waste produced material from (normalised) to landfill (normalised) more sustainable sources Environmental targets and commitments In August 2020 Essentra announced stretching environmental KPIs and targets, Targets GHG carbon neutral by All sites at zero waste to representing a significant step forward in the landfill by 20% 20% advancement of our established sustainability 2040 reduction by 2030 of material 2025 agenda and driven by the outputs of 2030 (or sooner) materiality matrices, regulation, customer (or sooner) feedback and voluntary disclosures.
The measures will see an accelerated reduction in our greenhouse gas (GHG) 25% emissions, providing the roadmap to being reduction by 2025 carbon neutral by 2040 as the Essentra (vs 2019 baseline) family steps up to play its part in achieving a low carbon economy. Our new waste Comments • An interim target of a 25% • 20 sites certified as zero • Initiatives being undertaken to • Targeting 20% of all management initiatives will ensure we do not reduction in normalised Scope waste to landfill in 2020, help drive this goal include site packaging and raw materials send anything to landfill by at the latest 2030, 1 and 2 emissions by 2025 as up from 8 in 2019. level recycling projects and used in the Components building on the 20 sites that have already measured against the 2019 • Initiatives being undertaken to waste reduction programmes. Division’s manufacturing baseline has been set. help drive this goal include site processes to be from more achieved this goal. During this period we also • Will be achieved through level recycling projects and sustainable sources by 2025 – aim to reduce overall waste by a fifth across a programme of energy waste reduction programmes. as a proxy for a Group target. our business, while significantly increasing efficiency improvements and • Consistent with progress rate • All businesses are actively the usage of more sustainable raw materials emission reductions across of larger customers. engaged in material trials, such as fully biodegradable or post-consumer the entire portfolio. customer collaborations and recycled products. • Site level actions include new product development the introduction of energy with the aim of reducing efficient LED lighting, material usage, increasing site insulation and clean post-consumer recycled energy pilots. (PCR) content, using • Various larger customers new materials from more aiming to be carbon neutral sustainable sources or making by 2025–2040. packaging and products biodegradable. • Consistent with European Circular Plastics Alliance targets. 41 CLASS-LEADING SUSTAINABILITY CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Measurement and reporting % change Liquid hazardous and non-hazardous waste by destination between 2019 (cubic metres) 2020 ERM CVS has assured the following Tonnes CO e 2018 2019 2020 and 2020 2 Recycling 243 environmental data for 2020: total Scope 1 Scope 1 11,245 10,264 7,603 -26% and total Scope 2 greenhouse gas emissions, Recovery 519 Scope 2 65,852 62,111 55,327 -11% total waste volumes by destination, total Incineration 89 Total 77,097 72,375 62,930 -13% water usage and the number of sites that Landfill 141 Total CO2 eq per have achieved Zero Waste to Landfill (ZWTL) £m revenue 75.2 74.3 70.2 -5.5 % liquid waste diverted from landfill 86 status. Full details of the scope, activities, limitations and conclusions of ERM CVS’ Tonnes Tonnes Water usage (cubic metres) 2020 assurance engagement are included in Breakdown of of CO2e of CO2e Water usage 166,301 their Assurance Statement on page 150. Energy (MWh) 2019 2020 2019 2020 UK 22,040 19,392 7,685 4,789 1. Boundary: Energy, water, and solid and liquid waste data by destination is collected Electricity Global 140,454 137,457 62,111 55,327 for all global operations including manufacturing, warehouses, and offices across Essentra. The sites included within the emissions, energy use, water and waste Renewable UK 19,652 16,577 0 0 reporting are those that constitute 99% of Essentra’s electricity consumption Electricity within the operational control. The sites which collectively make up the lowest 1% Procured Global 19,652 16,577 0 0 of electricity consumption are excluded from reporting and the scope of external UK 23,852 11,166 4,831 2,241 assurance due to their consumption being immaterial. Natural Gas 2. As defined by the Greenhouse Gas Protocol, Scope 1 includes direct emissions from Global 44,960 30,209 9,107 6,119 the combustion of fossil fuels at operations within Essentra’s operational control. Emissions from the use of refrigerant gases have not been included in our reported UK 8 0 2 0 Scope 1 emissions. Scope 2 includes the indirect emissions from purchased electricity Diesel Global 2,467 3,696 606 908 used by the organisation. 3. Emission factors: The emission factors used to calculate the Scope 2 emissions for UK 33 20 7 5 2020 from purchased electricity are those published by the International Energy LPG Global 376 420 83 96 Agency (IEA 2019) by country. The Greenhouse Gas Protocol 2017 emission factors have been used to calculate Scope 1 emissions. UK 1,156 457 262 228 4. Calculations: We collect all data on a monthly basis in our HSE reporting Fuel oil Global 2,070 2,124 469 481 management system, Enabler and use this as the basis for all calculations. We have followed the Greenhouse Gas Protocol methodology to calculate figures for tonnes
of CO2 equivalent. Diesel, LPG and fuel oil consumption is measured in litres and Solid hazardous and non-hazardous waste 2019 converted to MWh. destinations (tonnes) 2018 (restated)5 2020 5. Restating of data: 2019 solid non-hazardous and hazardous waste data has been Recycling 20,404 28,775 31773 restated for Recycling and Recovery due to corrections of previously reported data. Recovery 2007 3043 3415 Incineration 284 596 Landfill 4958 2989 1907 % solid waste diverted from landfill 82 92 95 42 GROWTH THROUGH INNOVATION ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Leveraging the power of GROWTH THROUGH Artificial Intelligence INNOVATION Essentra Components This has started with the is partnering with Peak, development of a Product a Decision Intelligence Recommendations tool company, to improve business that is initially being performance using data and deployed via the division’s machine learning. Peak’s transactional websites. In order to truly live our As the world begins to recover from the mission is to help companies In 2021 we plan to expand purpose to responsibly help our COVID-19 pandemic in 2021 we believe society put AI at the centre of all will likely continue to be more open to certain commercial decision making, the partnership with Peak into customers succeed, we need innovations or in need of new or different unlocking the value of developing further commercial to innovate. Developments in products and services. There will likely be their data to drive tangible programmes starting with an technology, customer needs many opportunities for Essentra and that, outcomes across teams. AI customer segmentation as a more resilient organisation with stronger tool and then lead scoring. and the world around us are customer relationships, we will be well The Components division has These will both involve looking continually changing and that positioned to take advantage of those. been reviewing how data can at past customers’ profiles pace of change is increasing. be used more effectively to and buying habits, using our In 2020 therefore we have looked to build drive commercial decision internal data augmented with the right foundations to enable our goal making to deliver divisional external data, to help drive of Growth through Innovation. KPIs. The business is data our commercial efforts to rich and utilises this to drive increase return on investment. decision making in a number Peak’s Decision Intelligence of functions, although this has system will generate predictive historically been managed insights about our customers, Growth through innovation across a number of teams supporting the broader utilising a variety of tools. application of our strategy and forming the basis of actions Early in 2020 the business and optimisations. therefore identified an opportunity to rapidly deploy 1 3 AI enabled applications to drive Creating and 2 Establishing a Building the right decision making across a range embedding an robust process with capabilities to drive of functions and activities. innovation appropriate targets innovation Through the second half of the mindset and KPIs year the team worked with Peak to identify and develop a number of use cases. 43 GROWTH THROUGH INNOVATION CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Innovating to meet increased health concerns
Among the alternatives As experts in filter technology, to cigarettes are Tobacco Essentra is well positioned to Heating Products (THPs) serve this growing market. that, because the tobacco is We have carried out extensive heated and not burned, can testing on these products potentially deliver substantially and combining this with our What is innovation? There will be always be commercial and lower levels of toxicants when experience of developing Having new ideas is often easy, but executing operational opportunities for businesses, compared to traditional, filters, now have a range of these ideas effectively is what defines whether that is new products or approaches combustible products. proprietary products available innovation. Innovations can be made in: we can take to our supply chain. We believe to serve our customers. innovation can generate growth by enhancing A number of multi-national • business processes, for example in how a our core business and potentially building Tobacco companies have We are in advanced product or service is produced or delivered new ones. We also know from research that invested in developing in discussions with a number to a customer companies who innovate to keep pace with this technology which has of customers to tailor our these changes are 20 times more successful resulted in strong growth designs to their needs and • products or services, when either a than those who do not. Essentra is working with rates, particularly when deliver bespoke solutions completely new product/service or a new a number of customers, compared to combustible dependent on their individual feature or enhancement in an existing tailoring our designs to cigarettes, and one company product requirements. product/service is created their needs and delivering has received FDA “approval” • business models, reflecting a fundamental bespoke solutions dependent as reduced risk in USA. change in how a company delivers value on their individual product to its customers, whether through the requirements. The filters used are generally development of new revenue streams or a complex construction, distribution channels. longer than cigarette filters and incorporate a number Why innovation is important of different materials. We live in a world of unrelenting change, as changing preferences and new technologies are revolutionising our work and home lives. These developments are changing the way we travel, learn, work, shop and communicate. Some “mega trends” are also being created or accelerated by COVID-19, such as increased sustainability, digital innovation and remote connectivity. 44 GROWTH THROUGH INNOVATION CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Foundations for success 3 At Essentra we have been 1 Creating and 2 Establishing a collaborating with our customers Building the right embedding an robust process with on innovation for some time, capabilities to drive innovation appropriate targets for example by creating more innovation mindset and KPIs sustainable products to meet the changing needs of customers and broader stakeholders. We currently have many approaches to driving In 2020 we introduced “Growth Clearly if our people are expected to help At Essentra we currently have many growth through innovation, from through Innovation” as a strategic build and embed an innovation culture approaches to driving growth through light touch initiatives such as goal for the company. This has set out they need to understand more about the innovation, and in 2020 have established workshops through to a number a clear ambition from the top of the key success factors for innovation and the foundations of a more robust of accelerated projects where we organisation and ensures that innovation develop the skills to sustain it. We also process to manage a healthy pipeline invest more heavily in customer is embedded throughout the purpose need to be more focused on innovation of innovation activities with appropriate research and partner with and vision of our company. capabilities when hiring new recruits targets and KPIs. customers. In 2020 we looked to into Essentra. Our goal is to have diverse formalise some of our work around Our goal is to build a consistent culture teams focused on innovation where In 2019 we developed a clear innovation, consciously building of innovation that incorporates, all employees are supported to drive decision gate process in our Filters the right foundations to ensure encourages and promotes collaboration, innovation activities, not just those with division and this is being expanded for continued success. diversity, flexibility and agility. It should specific innovation deliverables. use in other divisions. This process allows also embrace creativity as well as risk, for a wide “funnel” of ideas at the early so that learning is valued as much as In 2020 our Group Management stage through to prototype development a positive outcome. Role modelling is Committee spent time considering the and assessment of commercial viability also important so that leaders embody role that each of them play in driving much later on. Throughout the process an innovation culture and approach. innovation as well as identifying the metrics are set which help measure In 2020 we created a new Make It Work core skills and capabilities required performance and guide decisions. This Award category reflecting our strategic across Essentra and began to develop process allows us to ensure tight and goal of Growth through Innovation the understanding of innovation within consistent project governance and and in 2021 we will ensuring that our broader global leadership team. We structure resource accordingly. innovation has a greater prevalence in also incorporated innovation within our our communication, recognition and competency framework and in 2021 we reward strategies. will feature innovation more explicitly within training programmes. 45 FINANCIAL REVIEW ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
FINANCIAL REVIEW
Quarterly LFL Revenue Trend Trading performance pandemic related issues, partially being offset Considering the impact of the pandemic, by continued successful pricing management 0 the FY 2020 result for the Group was resilient. and cost control actions. Adjusted operating –2 margin dropped by 210bps (200bps at –4 Overall, FY 2020 revenue decreased by 8.0% constant FX) to 6.9%. –6 (-6.8% at constant exchange) to £896.5m, –8 whilst on a LFL basis, revenue decreased by
%age growth Including amortisation of acquired intangible –10 6.3%. However, in order to fully understand –12 LFL Group performance for the FY, progressive assets of £22.6m and a pre-tax charge from Q1 Q2 Q3 Q4 quarterly trading needs to be considered, adjusting items of £17.7m, operating profit as as this gives more clarity on how, over time, reported was £21.7m (2019: £80.0m); prior the Company became increasingly proficient year included an overall adjusting items credit at dealing with the impacts and challenges of £15.4m (mainly due to gains on business of the pandemic. Q1 trading was largely disposals), whilst 2020 has a total charge unaffected by the pandemic, however with from adjusting items of £17.7m (mainly due the advent of Q2 and the initial shock from to restructuring costs). the major global onset of COVID-19, the Net financial expense Company experienced its low point in trading performance during this second quarterly Net finance expense was above the prior year Lily Liu “2020 was an unprecedented period. From thereon, as the year progressed, at £15.7m (2019: £14.5m), this was mainly Chief Financial Officer year, in which we have delivered Group revenue on a LFL basis showed a steady driven by adverse FX movements on property improvement – going from -9.8% in Q2, to leases in Turkey and Hungary that are a resilient financial performance. -6.7% in Q3 and finally further improving to denominated in non-local currencies. A particular highlight for me has -1.0% in Q4. Tax been our strong cash generation On an adjusted basis, operating profit was The effective tax rate on underlying profit and strengthened balance sheet down 29.1% (-27.9% at constant FX) at before tax (before adjusting items) was 19.2% – which has enabled the Board £62.0m, which was driven in part by the (2019: 19.9%). This reduced tax rate is driven disposal of various businesses in the prior year by a change in the geographical split of to recommend resumption (£5.0m of the £24.0m decline), but mainly by profits across the Company. of dividends.” the volume gearing effect from the revenue Lily Liu decline, which was exacerbated by temporary Chief Financial Officer manufacturing inefficiencies caused by 46 FINANCIAL REVIEW CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Adjusted operating profit Net income Cash flow Net debt On an adjusted basis, net income of £37.4m Adjusted operating cash flow was £76.3m Net debt at the end of the period was £62.0m was down 36.1% (34.7% at constant FX) and (2019: £71.8m). This includes an inflow of £210.4m, a £74.0m decrease from 1 January Adjusted operating cash flow adjusted basic earnings per share decreased net working capital for the year of £6.2m 2020 (including lease liabilities). The overall by 38.5% (37.2% at constant FX) to 13.1p. On (2019: outflow of £10.3m) and net capital decrease was mainly driven by a combination a total reported basis, net income of £6.3m expenditure of £44.7m (2019: £56.6m). of the free cash flow generated during £76.3m and earnings per share of 1.7p compared to Net capital expenditure equated to 111% the year along with cash raised from the £41.2m and 14.7p respectively in 2019. (2019: 155%) of the depreciation charge placement of new share capital in the (including amortisation of non-acquired Company, being netted off against cash Net working capital intangible assets) for the year of £40.2m paid for the acquisition of 3C! Packaging Inc. Net working capital is defined as “inventories (2019: £36.4m). Net interest paid was £12.8m and an increase in lease liability movements plus trade and other receivables less trade (2019: £13.3m) and tax payments were £7.5m (which are driven by a new lease for the Operating cash and other payables, adjusted to exclude (2019: £16.5m), due to the aforementioned aforementioned Components Germany conversion of 123%. deferred consideration receivable/payable lower profitability levels in the year as well warehouse project along with recently Adjusted free cash flow and interest accruals/capital payables”. as a refund of tax in the US. The inflow in extended leases on our Components was £56.9m in 2020, respect of pension obligations was £0.9m Turkey and Filters Hungary facilities). The which was 40% higher The decrease in net working capital to (2019: outflow of £1.3m). ratio of net debt to EBITDA including lease than the previous £108.1m (2019: £113.8m) was largely due to liabilities was 1.8x (31 December 2019: 2.0x), Adjusted free cash flow of £56.9m compared year. lower inventory and receivables levels, which whilst excluding lease liabilities was 1.5x were driven by the reduced trading volumes to £40.7m in FY 2019. (31 December 2019: 1.9x). combined with a concerted effort by the Free cash flow reconciliation £m Company to implement a series of initiatives Balance sheet to adapt and optimise working capital Adjusted operating profit 62.0 As at the end of 2020, the Company had levels, in light of the pandemic. These lower Non-cash/other items 52.8 shareholders’ funds attributable to Essentra Operational Review inventory and receivables were netted off by Net working capital 6.2 equity holders of £617.8m (2019: £533.1m). on page 67 a decrease in trade and other payables. It Net capital expenditure (44.7) Total capital invested in the business was should also be noted that an element of the Adjusted operating cash flow 76.3 £942.6m (2019: £919.5m). year-on-year reduction in overall net working Tax paid (7.5) capital is attributable to FX impact. Net interest paid (12.8) This finances non-current assets of Pension obligations 0.9 £868.6m (2019: £841.8m), of which £263.0m (2019: £276.0m) is tangible fixed assets, the Adjusted free cash flow 56.9 remainder being intangible assets, right-of-use assets, deferred tax assets, retirement benefit assets and long-term receivables. 47 FINANCIAL REVIEW CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
A strengthened balance sheet reflected in a net debt to EBITDA ratio improvement (excluding lease liabilities) from 1.9x in 2019 to 1.5x in 2020.
The Company has net working capital of presence and suitable credit rating. Refinancing activities reviewed the overall dividend payment for this £108.1m (2019: £113.8m), current provisions Essentra monitors the credit ratings of One of the main sources of funding for financial year and taking into consideration: of £5.5m (2019: £3.3m) and long-term its counterparties and credit exposure the Company is a Revolving Credit Facility the resilient financial performance of 2020, the liabilities other than borrowings of to each counterparty. (RCF) provided by a group of eight highly- Company’s stronger balance sheet position, £142.5m (2019: £128.3m). rated banks, which as at the year end was and the encouraging outlook, concluded that Foreign exchange risk set to mature in its entirety in November there should be resumption of a payment for Pensions The majority of Essentra’s net assets 2022. However, for a tranche involving five the FY 2020 final dividend of 3.3p per share As at 31 December 2020, the Company’s are in currencies other than sterling. The of the eight banks (worth £225m), we have (to be paid in June 2021). The dividend payment IAS 19 net pension liability was £23.9m Company’s normal policy is to limit the recently agreed an extension to the facility being proposed is to be funded in full from (2019: £17.4m). This increase in the liability translation exposure and the resulting impact based on new terms, which will now mature cash flows generated from the operations is a result of an actuarial loss (driven by a on shareholders’ funds by borrowing in in November 2023. The Company continues of the Company during 2020. Going forwards, reduction in discount rate) being netted off those currencies in which the Company has to review its financing, including the lenders a progressive dividend policy will be adopted. against a positive return of plan assets. significant net assets. As at 31 December in the original tranche still set to mature in 2020, Essentra’s US dollar-denominated assets November 2022. Finance team update Treasury policies and controls were approximately 27% hedged by its US The Tax and Treasury teams at Group Head Essentra has a centralised treasury function dollar-denominated borrowings, and its euro- Fundraise in 2020 Office have been brought together to form to control external borrowing and manage denominated assets were approximately 32% On 18 September 2020, the Company one combined function. exchange risk. Treasury policies are approved hedged by its euro-denominated borrowings. successfully completed the placing and Lily Liu by the Board and cover the nature of the subscription of new ordinary shares in the Chief Financial Officer exposure to be hedged, the types of financial The majority of Essentra’s transactions are Company. In aggregate, the fundraise 5 March 2021 investments that may be employed and carried out in the functional currencies of comprised of 38,461,538 new ordinary shares, the criteria for investing and borrowing its operations, and therefore transaction raising net proceeds of £96.7m. This fundraise cash. The Company uses derivatives only exposure is limited. However, where such enabled the acquisition of 3C! Packaging, Inc. to manage foreign currency and interest exposure does occur, Essentra uses forward and helped reduce the Company’s leverage rate risk arising from underlying business foreign currency contracts to hedge its ratio to within target range of 1x-2x, providing activities. No transactions of a speculative exposure to movements in exchange rates on the platform for further strategic optionality. nature are undertaken. its highly probable forecast foreign currency sales and purchases over a period of up to Dividends 18 months. Underlying policy assumptions and activities Earlier in the year, in light of the are reviewed by the Treasury Committee. unprecedented uncertainty due to the Controls over exposure changes and Aside from foreign exchange risk, the Group is also exposed to other types of risks, including pandemic, the Company announced that transaction authenticity are in place, and the Board had concluded that all reasonable dealings are restricted to those banks with credit risk. Please see note 19 to the Financial Statements for further details. steps should be taken to conserve cash and, the relevant combination of geographical accordingly, decided to cancel the 2019 final and 2020 interim dividend. The Board has since 48 ALTERNATIVE PERFORMANCE MEASURES ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
ALTERNATIVE PERFORMANCE MEASURES FY 2020 results at a glance
Management uses a number FY 2020 FY 2019 % change % change Like-for-like basis of measures of financial £m £m Actual FX Constant FX The term “like-for-like” describes the Revenue 897 974 -8 -7 performance of the continuing business on a performance, position or Adjusted operating profit 62 88 -29 -28 comparable basis, adjusting for the impact of cash flows of Essentra which Adjusted pre-tax profit 46 73 -37 -35 acquisitions, disposals and foreign exchange. The FY 2020 LFL results are adjusted for the are not defined or specified Adjusted net income 37 59 -36 -35 acquisition of the Innovative Components Adjusted earnings per share 13.1p 21.3p -38 -37 in accordance with relevant business on 26 June 2019, the acquisition of Dividend per share 3.3p 6.3p -48 n/a financial reporting. In Nekicesa Packaging on 6 September 2019, the Reported operating profit 22 80 -73 -72 management’s view, these acquisition of 3C! Packaging on 17 September Reported pre-tax profit 6 66 -91 -91 2020, the divestment of the Pipe Protection Alternative Performance Reported net income – total 6 41 -85 -84 Technologies business on 14 January 2019, Measures reflect the the divestment of the Extrusion business on underlying performance of The financial information in this FY 2020 Constant exchange rates 11 June 2019, the divestment of the Speciality Annual Report is prepared in accordance Movements in exchange rates relative to Tapes business on 28 June 2019 and finally the Company and provide a with International accounting standards sterling affect actual results as reported. the divestment of the Card Solutions more meaningful comparison in conformity with the requirements of the The constant exchange rate basis adjusts business on 23 July 2019. of how the business is Companies Act 2006 and international the comparative to exclude such movements, Adjusted basis managed and measured financial reporting standards adopted to show the underlying performance of persuant to Regulation (EC) No 1606/2002 the Company. The term “adjusted” excludes the impact of on a periodic basis. as it applies in the European Union, and with amortisation of acquired intangible assets the accounting policies set out on pages For the principal exchange rates for and adjusting items, less any associated 156 to 164. Essentra for the year ended 31 December tax impact. In FY 2020, amortisation of 2020 (“FY 2020”), see the table below. acquired intangible assets was £22.6m (2019: Basis of preparation Retranslating at FY 2020 average exchange £22.9m), and there was a pre-tax charge rates reduces the prior year revenue and Continuing operations for adjusting items of £17.7m (2019: credit adjusted operating profit by £12.3m and Unless otherwise stated, the FY 2020 of £15.4m). For the current year charge for £1.5m respectively. results and narrative contained in this adjusting items, £12.7m is driven by the Annual Report reflect the revenue and Principal exchange rates US$:£ €:£ previously announced strategic initiatives that have resulted in the proposed closure of adjusted operating profit of the Essentra Average Group on a continuing basis. certain sites in 2021, across the Components FY 2020 1.29 1.13 and Packaging divisions. The remainder FY 2019 1.28 1.14 Non-GAAP measures is attributable to: £4.6m for external Throughout this FY 2020 Annual Report, Closing professional costs associated with certain the following terms are used to describe FY 2020 1.37 1.12 corporate development activities, £1.6m Essentra’s financial performance. FY 2019 1.32 1.18 for transaction and integration costs of 49 ALTERNATIVE PERFORMANCE MEASURES CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Summary growth in revenue by division
Acquisitions/ Foreign Total % growth Like-for-like disposals exchange reported Components -10 +2 -2 -10 Packaging -4 +7 – +3 Filters -6 – -3 -8 Specialist Components -100 – -100 acquisitions, and £0.2m of external advisory Cash flow Total -6 -1 -1 -8 and consultancy costs in relation to the Adjusted operating cash flow is net cash flow review of the compliance of certain group from operating activities, excluding income Net income companies’ export activities with US laws, tax paid, pensions adjustments, and cash as previously disclosed in the 2019 Annual flows relating to adjusting items, less net £m FY 2020 FY 2019 Accounts. This is offset by a £1.4m release of capital expenditure. It is a measure of the Adjusted net income 37.4 58.5 excess provision held for potential penalties underlying cash generation of the business. Amortisation of acquired intangible assets (22.6) (22.9) in relation to this activity. Further details on Net capital expenditure is included in this Adjusting items (17.7) 15.4 adjusting items are shown in note 2 to the measure as management regard investment Tax on adjustments 9.2 (9.8) Consolidated Financial Statements. in operational assets (tangible and intangible) Profit after tax 6.3 41.2 as integral to the underlying cash generation The Company has changed the layout of its capability of the Company. Cash flow consolidated income statement to present adjusted operating profit measure below Reconciliation of GAAP to £m FY 2020 FY 2019 the income statement. In addition, the non-GAAP measures Operating profit – adjusted 62.0 87.5 description previously used for adjusting The following tables are presented by Depreciation and amortisation of non-acquired intangible assets 52.2 47.7 items has been changed from “exceptional way of reconciling the metrics which Share option expense/other movements 0.6 3.5 and other adjusting items” to “adjusting management uses to evaluate the Change in working capital 6.2 (10.3) Essentra Group to GAAP measures. items”, whilst its scope and definition Net capital expenditure (excluding disposal proceeds relating to adjusting remains unchanged. items) (44.7) (56.6) Operating cash flow – adjusted 76.3 71.8 Constant exchange, like-for-like and Tax* (7.5) (16.5) adjusted measures are provided to reflect Cash outflow in respect of adjusting items (11.1) (34.2) the underlying performance of Essentra. For further details on the performance metrics Pension obligations 0.9 (1.3) used by Essentra, please refer to page 27. Add back: net capital expenditure (excluding disposal proceeds relating to adjusting items) 44.7 56.6 Net cash inflow from operating activities – continuing operations 103.3 76.4 Divisional performance The revenue and adjusted operating Operating cash flow – adjusted 76.3 71.8 profit for each division is stated before the Tax* (7.5) (16.5) elimination of inter-segment revenue and Net interest paid (12.8) (13.3) the cost of central services, as reconciled Pension obligations 0.9 (1.3) to the reported results set out in note 1 on Free cash flow – adjusted – continuing operations 56.9 40.7 pages 165 to 167. * Tax paid excludes the tax paid on business disposals. This is included within the cash outflow in respect of adjusting items 50 RISK MANAGEMENT REPORT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
We continue to closely monitor the impact of the COVID-19 pandemic on our Principal RISK Risks and have been taking steps to actively manage and mitigate those risks, MANAGEMENT for example: • We have introduced stronger REPORT authentication for remote access services to reflect the increased Cyber Security risk posed by remote working. Risk management is integral Responding to COVID-19 Whilst during 2020 we and our employees • We have recognised the importance to protecting and creating disruption in 2020 faced many new and different challenges of wellbeing for our employees and as a result of COVID-19 we believe our risk introduced a global assistance stakeholder value. The preparation of the Essentra risk management report for 2019 was completed management approach and framework programme for all employees together before COVID-19 escalated from an issue enabled us to respond quickly and robustly with the accelerated launch of our Thrive apparently confined to China to a global to the issues which arose across our sites initiative focused on mental health. pandemic leading to disruption to societies and and in international supply chains. • We have been successful in securing economies on a scale that few ever imagined. alternative sources of supply for key raw As a result of COVID-19 we identified a materials and supply guarantees to help number of learnings we are confident we Similar to many we did not have pandemic minimise the challenges of a disrupted can take to drive further improvement in our as a Principal Risk or as an emerging threat supply chain. likely to cause major disruption to our business risk management activities to enhance our at the beginning of 2020 but as we moved capability to identify, assess and respond through the year we continued to challenge effectively to potential threats or future our assessment of our Principal Risks, our risk disruption to our business and to ensure mitigation activities and our overall risk profile a strong foundation to support our future to ensure it appropriately reflected the changes growth objectives. in the risk environment, particularly given the uncertainties which dominated global business Looking ahead to 2021, the COVID-19 prospects and operations due to COVID-19. pandemic, including the potential impact of further variants, remains a global crisis, As the likely extent of the pandemic became and at the date of this report the situation confident that our risk management clearer, so the Company’s crisis management remains volatile and uncertain across many framework responded effectively in protecting response saw the GMC meeting at least three areas of the world. Whilst the Company’s value during the year. As we build for the times a week and the Board at least once, risk landscape has changed to reflect the future there remains a continued focus on enabling swift response and action to changes impacts of COVID-19 we believe that our enhancing our approach to risk management Our risk management in the risk profile with a focus on health and focused risk management efforts across the and building on the lessons learnt in 2020 to framework page 52 safety, supporting our customers and the cash Company have enabled an agile and resilient ensure risk management practices continue to not only protect stakeholder value but to Reviewing our principal risk position. As time progressed, the cadence of response to the unrivalled challenges posed support its creation in line with our strategic profile page 54 such meetings has decreased but the GMC by the pandemic and delivered effective continues to meet at least once a week to mitigating actions. growth objectives. Monitoring emerging risks assess the latest COVID-19 developments and page 55 There are risks emerging that the second or to ensure that we are well positioned for future The impact of COVID-19 has tested and subsequent further waves of COVID-19 will growth in the context of the changes in the challenged the effectiveness of our approach handicap recovery and return-to-work plans business and social environments. to risk and its management. We adapted our ways of working as needed and are with continued disruption across supply chains 51 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Roles and responsibilities of the GRC Our risk governance structure
Identify Facilitators Board • Establish the process for identifying Group Assurance Overall responsibility for assessing the Company’s Principal Risks, setting risk appetite and and understanding key business risks Divisional Risk monitoring risk management performance and the framework. • Identify risks in each of our businesses MANAGE IDENTIFY Champions and enabling functions Enabling Function • Risk reviews with senior leadership Risk Champions • Review Principal, Key and Emerging Group Risk Committee (GRC) Audit and Risk Risks REPORT ASSESS Committee Direct and Chaired by the Chief Executive and comprised of the Group Assess monitor Management Committee members and other key enabling Responsible for Report function resources, the GRC is responsible for monitoring key reviewing the • Prioritise risks through agreed ranking CONTROL criteria risks and ensuring the effectiveness of divisional and functional effectiveness of risk management. the Group’s risk • Risk appetite set by the Board for all management Principal Risks systems and The process for identifying, Control processes. • Ownership defined assessing and controlling material business risks is designed to • Establish key control processes and Divisional Enabling Group manage, rather than eliminate. practices Leadership Teams Functions Compliance Each leadership Leadership Teams Committee • Controls to manage the risk within team is responsible Enabling functions (GCC) appetite for ensuring their are responsible The GCC directs • Monitor the operation of the controls divisional risks are for identifying and oversees • Tracking progress of mitigation captured and are and mitigating the Group’s initiatives being effectively risks within their implementation mitigated within own functions of compliance Report business as usual – applicable programs, policies • Agree and implement measurement processes. Risk to Finance, and procedures and reporting standards management is a Operations, required to meet • Communicate with all stakeholders standing agenda Strategy, IT, legal, compliance Manage item for leadership Human Resources and regulatory • Review all aspects of the Company’s team meetings. and Legal, Risk and requirements. risk profile Governance. • Review and challenge risk management practices
Business Units Specific business units or sites within each division are developing and implementing their own risk registers, risk and action owners. Management are responsible for managing local level risk and reporting to the respective leadership teams. 52 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Risk categories
The Company has considered the risks it is facing under the following four risk category headings and has identified 12 Principal Risks. and societies. The successful adoption of a risk management at the core of the senior Our risk management framework continues External Risks relating to the macroeconomic new working model, based around social management agenda. We are committed to to evolve in line with best practice to ensure climate, political events, competitive distancing requirements, workspace and office managing risks in a proactive and effective that it supports the Company’s growth and pressures or regulatory issues. transformations, augmented work schedules, manner to protect and enhance value, and strategic objectives. A robust, but flexible, reduced travel and continued remote working provide assurance to the Board and our approach to the management of risk is will require careful planning and successful stakeholders. fundamental to the continued success of the Strategic change management to ensure a transition Company. In 2020 the challenges presented Internal risks that may impede which provides opportunity and benefit for We have continued to make good progress by the COVID-19 pandemic included achievement of strategic goals. our business and our people as opposed to in improving our risk management processes relocation of staff, remote working and a threat to our operations and the wellbeing of in 2020 as we continue to ensure our risk temporary inaccessibility of some business Operational our employees. management processes are aligned with FTSE locations. A clear focus was placed on Risks that could impact day-to-day 250 upper quartile practice. This included a accommodating new ways of working and operations and prevent business-as- Whilst COVID-19 has taken the majority number of initiatives to drive enhanced risk ensuring the continued operation of our risk usual activities. of the headlines in 2020, it has also been reporting and further embed risk activities management framework. Through regular important for us to continue to scan the to improve risk culture across the Company. discussions and virtual workshops with all Disruptive horizon for additional new, emerging or Particular focus was placed on assigning divisional and enabling function leadership Risks that could impact the business disruptive risks which could significantly responsibility and accountability for Principal teams, we ensured clear accountability for the model or viability of the Company. impact the Company’s ability to meet its and Emerging Risks, particularly those identification, assessment, and mitigation of Although key disruptive risks have been strategic growth objectives. Despite the focus risks that cut across divisions and enabling risks throughout the Company. identified and mitigated by the Company, on mitigating the impacts of COVID-19, we functions. The approach continues to be none of them are considered to be have paid close attention to the increasing adopted from ISO 31000 Risk Management Risk can present itself in many forms and has Principal Risks currently. momentum associated with the risk agendas guidelines and includes a RACI (responsible, the potential to impact health and safety, the for ESG and climate change (see Class leading accountable, consult and inform) matrix to environment, our community, our reputation, sustainability on page 36), whilst the potential drive clear responsibility and accountability. regulatory compliance, market and financial impacts of international trade deals and the performance and therefore the achievement US election results have also been on our risk Risk management framework of our corporate purpose. By understanding and managing risk, we provide greater radar during the year. There is a risk management framework certainty and confidence to our shareholders, for identifying and managing risk within employees, customers, suppliers, and the Risk management approach defined appetite levels, in relation to both communities in which we operate. Our risk management activities aim to operations and strategy. The framework drive performance aligned to our purpose, has been designed to provide the Group The Board confirms its risk appetite biannually encourage growth through innovation and Risk Committee (GRC) and the Board with a by mapping its Principal Risks against a support the achievement of our strategic clear line of sight over risk and to enable sliding scale from “risk-averse” to “risk- objectives (as set out in the Growth through informed decision-making. neutral” to “risk-tolerant” and this informs the innovation section on page 42). In doing development of mitigating actions for each of this, we take a balanced approach that puts the Principal Risks. 53 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Principal Risks At a strategic level, our risk management roles and responsibilities for those risks that objectives are to: cut across divisions and enabling functions.
Principal Risks were subject to deep dives 12 • identify the Company’s significant risks and during the year at Board and GRC meetings appropriate mitigating actions using a standard reporting template. This • formulate the risk appetite and ensure that enabled consistency of risk reporting across our business profile and plans are consistent the Company.
with it 3 3 6 5 5 • ensure that growth plans are properly In 2021 we will build on lessons learnt from 7
supported by an effective risk infrastructure COVID-19 as we seek to further improve Impact • help management teams to improve the our risk management practices. A key focus 8 8 4 9 9 1 2 7 11 control and co-ordination of risk-taking will be placed on further embedding risk 10 10 across the Company. culture and streamlining processes across the Company, ensuring risk management remains Strengthening our framework an integral part of all business activities. To achieve the objective of implementing Likelihood FTSE 250 upper quartile risk management Risk governance structure and practice, we have made good progress oversight The Board has established a risk and internal 1. Failure to Achieve Acceptable 7. Business Continuity Planning in implementing our risk management Returns from the Packaging and Management control structure designed to manage the improvement plan in line with best practice division and ISO 31000 guidelines. achievement of strategic business objectives. The Group Assurance team, separate from line 2. Tobacco Industry Dynamics 8. Environmental, Social and In 2020 the Group Assurance team engaged management, enables and facilitates the risk Governance directly with divisional and enabling functions management process across the Company 3. Delivery of Strategic Projects 9. Internal Processes and Control leadership teams on the development of their and acts as the custodian of the Company’s 4. Regulatory – Governance 10. Safety, Health and Wellbeing risk registers and risk reporting practices. This risk architecture and its management. In 5. Cyber Attack 11. Talent to Deliver our Future included conducting virtual risk knowledge addition, all divisions and enabling functions workshops, in line with ISO 31000, to drive a have appointed Risk Champions to drive risk 6. Macroeconomic and Trade Deal 12. Exposure to the Cyclical Industrial consistent understanding and application management practices into their businesses. Uncertainty (including Brexit) Market (Components division) of risk. Each workshop included a discussion Strategic Risks Movement of the Board-approved rating criteria for The GRC met eight times in 2020, each External Risks financial and reputational impact and meeting with a full attendance. The GRC Operational Risks likelihood, to ensure that a consistent rating is chaired by the Chief Executive and its based on risk to the Company is applied. membership comprises the GMC members, In 2020 we paid particular attention to Head of Legal, Group Head of Assurance emerging risks and on ensuring clarity across and Head of Communications. Non-member 54 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Key changes in the year
During 2020 we undertook a robust review of our risk profile.
At half year we disclosed the following Since our half year disclosure we standing attendees are the Group Health, compliance with risk management processes key changes: undertook further review of risk profile Safety and Environment Director and the and the adequacy of risk management and do not believe there has been Group Financial Controller. Other members activities related to the Company’s operations. • One new Principal Risk, Exposure any further change the impact or of senior management are also invited to to the Cyclical Industrial Market likelihood assessments of our Principal present reports on risk activities. We also The divisional and enabling functions (Components division), was Risk profiles. A key change since our welcomed external presentations from subject leadership teams undertake regular reviews identified to capture the risk that half year disclosure includes: matter experts on topics including ESG and during the course of the year and engage in changes to the Components sustainability. The Chair of the Audit and Risk facilitated discussions with Group Assurance division cost base and business • Removal of Climate Change risk Committee has a standing invite to attend to consider the risk environment for their model do not happen quickly as an Emerging Risk. We have all GRC meetings and receives copies of the particular functional or geographic area of enough or are not robust enough elevated the profile of this risk and minutes of every meeting. responsibility and how these could impact to minimise the impact on considered it as part of our wider on the achievement of the Company’s operating margins as a result ESG Principal Risk. Please refer to The GRC’s responsibility is to focus and strategic objectives. of cyclical downturns in global the detailed Principal Risk disclosure co-ordinate risk management activities industrial production. which details the initiatives being throughout the Company and to facilitate Principal Risks • Geopolitical Risk was removed undertaken in this area including the appropriate identification, evaluation, The GRC has responsibility for overseeing as an Emerging Risk and fulfilment our obligations under mitigation and management of all key Essentra’s Principal Risks. Our Risk incorporated within the Macro- TCFD requirements. business risks. In addition, the GRC reviews the Management approach in relation to economic and Trade Deal risk appetite and ongoing risk management COVID-19 has been to consider the Uncertainty Principal Risk. approach, and makes recommendations on completeness and appropriateness of our risk appetite to the Board and actions required • An additional Emerging Risk in Principal Risks. Whilst COVID-19 has not to ensure adequate controls and mitigating relation to the changing structure been identified as a standalone Principal actions are in place against identified key risks. of the debt market was identified. Risk, we have considered its impact on each of our Principal Risks and our risk appetite. • The likelihood assessment of six As an important part of fulfilling its Where necessary we have identified suitable Principal Risks was increased: responsibilities the Board receives regular mitigating actions. A top-down and a PR3 Delivery of Strategic reporting from the Chief Executive in his capacity bottom-up assessment is undertaken to Projects, PR5 Cyber Attack, PR7 as GRC Chairman to enable the Board to identify our Principal Risks. The assessment Business Continuity Planning and challenge and review the GRC’s views on key risks. is performed against the four risk categories. Management, PR8 Environmental, Social and Governance, PR9 The Audit and Risk Committee (ARC) engages As part of the bottom-up process, the Internal Processes and Control and directly with the divisions and the enabling divisional and enabling functions leadership PR10 Safety, Health and Wellbeing. functions, including deep dive reviews, as part teams have also undertaken a detailed risk The impact assessment of PR7 of fulfilling its oversight responsibilities on the assessment, facilitated by Group Assurance Business Continuity Planning and risk management processes. The ARC, with using a consistent workshop methodology, Management was also increased. assistance from Group Assurance, oversees the outputs of which were reflected in 55 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Emerging Risks updated risk registers. These risk registers were then analysed to ensure completeness and Emerging Risk Owner Risk description Controls appropriateness of the Principal Risks. Regulatory Company Essentra is a global company that must comply We remain alert to longer-term regulatory change Secretary and with regulatory requirements in many countries. developments including those related to single As part of our top-down process, an updated General Counsel Regulation is increasing worldwide and may use plastics and tobacco-related and tobacco- assessment was completed for each Principal potentially impact our products, operations, alternative products. Risk by the GRC. This top-down assessment workforce and relationships with suppliers, The Company’s Legal, Risk and Governance required each GRC risk owner to provide analysis customers and stakeholders. team continuously monitors changes in on material changes in the risk they manage COVID-19 has significantly impacted supply chains regulations and emerging good practice seeking and whether they consider it to have more or and the working environment, potentially leading to external support or guidance as necessary. less impact during the course of the year on new or additional areas of regulatory scrutiny and Strengthening of internal divisional resources to subsequent regulatory change. achievement of our strategic objectives. identify market and product changes and any potential associated regulatory requirements. These individual responses were consolidated, Technology Chief Information The risk that Essentra does not manage its response We continue to monitor and review the GRC then discussed and reached a disruptors Officer to evolving technologies effectively. This may include developments in the external market through consensus regarding Principal Risks that losing competitive advantage as rivals deploy our networks. This includes innovation and can seriously affect the performance, future advanced manufacturing technologies, artificial futures sessions with existing suppliers. We are prospects or reputation of Essentra. The outputs intelligence and robotics to strengthen product also involved in a range of external technical development, marketing, production, distribution focus groups. from the GRC assessments were then presented and support functions. to the Board for approval along with the Evolving Chief Financial The debt market is evolving, and the lending We remain alert to the change in investors’ recommendation of Principal Risks to be included conditions Officer condition and appetite can be impacted by key appetite and we continue to respond to this in the longer term viability (LTVS) testing. of the Debt events, we have recently observed the effect from and maintain our profile in the debt market. Market the COVID pandemic. Essentra continues to have The treasury team monitors changes in the The Board believes the Principal Risks are strong liquidity and we will stay alert to the change specific to Essentra and reflect the risk debt markets and is in regular contact with of investors’ appetite and respond optimally to it banks inside of the Essentra bank group and profile of the Company at the current time. and maintain our profile in the debt market. other financial institutions to ensure that we All Principal Risks are managed within their have the widest variety of market options individual risk appetite. As a result, the 12 that are available. Principal Risks are a combination of one new, as disclosed at half year, and 11 previously disclosed risks.
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. 56 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
The evaluation is based on plausible worst Emerging Risks have the potential to increase future prospects or reputation of Essentra. case scenarios. in significance and affect the performance The outputs from the GRC assessments were of the Company and as such are continually presented to the Board for approval along with To make this evaluation, the estimated monitored through our existing risk the recommendation to develop appropriate Emerging Risks and wider financial impact of each Principal Risk management processes described on page response strategies. key risks have been identified crystallising was considered. The Board and and are being monitored by 110. Our risk management process ensures We have created a list of Emerging Risks to be the Company. Mitigation GRC assessed the potential impact on the Emerging Risks are identified and aids the actions in response to such Company’s viability, based on selected severe GRC and the Board’s assessment of whether reviewed on a regular basis at the GRC and risks are an important part plausible risk scenarios. These were developed the Company is adequately prepared for Board level as set out page 55. of the divisional and enabling in conjunction with senior management. The the potential opportunities and threats The GRC and the Board have undertaken a functions risk reporting to the Principal Risks that were considered to have a they present. GRC and Board. potentially significant impact on the Company’s rigorous assessment of Emerging Risks during viability are included in the Long-Term Viability The process enables new and changing risks 2020 and have established procedures to Statement on page 148. to be identified at an early stage so we can closely monitor Emerging Risks on an ongoing analyse them thoroughly and assess any basis including: In addition to the Principal Risks, Emerging potential exposure. • the GRC’s terms of reference require it Risks and wider key risks have been identified We undertake a top-down and a bottom- to review the Group’s ability to identify and are being monitored by the Company. up assessment to identify Emerging Risks. Emerging Risks Mitigation actions in response to such risks are Risk management workshops for divisional • Emerging Risks is a standing agenda item at an important part of the divisional and enabling and enabling functions leadership teams each GRC meeting and each Emerging Risk functions risk reporting to the GRC and Board. were facilitated by the Group Assurance will be subject to a deep dive Emerging Risks function this year, to provide a bottom-up • external specialist input will be sought where view of Emerging Risks. These workshops required We define Emerging Risk as a changing risk or include discussion of potential Emerging Risks • identified Emerging Risks have been a novel combination of risks for which there based on externally sourced Emerging Risk assigned an owner who is both a GRC and is no track record or previous experience by data. The Company’s potential exposure is GMC member. The Emerging Risk owner which the impact, likelihood or costs can be assessed against the Board’s approved risk is responsible for providing an update on understood. Its potential impact is viewed as measurement criteria. The process enables new the development of Emerging Risks and being two years or more in the future. and changing risks to be identified at an early activities in response at each meeting. stage so we can analyse them thoroughly and We strongly believe that identification and The Board can confirm that it has completed a assess potential exposure. appropriate challenge to the management robust assessment of the Company’s Principal, and mitigation of Emerging Risks is critical to The preliminary view on Emerging Risks were Key and Emerging Risks. We continue our focus our long-term success. consolidated and discussed by the GRC to on ensuring the adequate mitigation of risks reach a consensus regarding Emerging Risks faced by the Company to ensure alignment that can seriously affect the performance, with the Board-approved risk appetite. 57 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Strategic Risk
Failure to Achieve Acceptable Returns from the Packaging Division
Change in risk level Ownership Relevance Unchanged Packaging Division Managing Director Company specific
Description Mitigation The delivery of these actions, and ongoing The potential for a failure to deliver improving This Principal Risk is addressed annually with the performance of the division, are subject to returns each year and demonstrating delivery of development of the business strategy and plan. close monitoring and reporting at divisional industry average returns by end of 2021 has been Both strategy and plan reflect this risk, and and GMC level each month and quarter. The identified as a Principal Risk since 2017. key initiatives are developed to further improve Board also continues to maintain close oversight across progress of these actions. Leading and This risk includes the potential of the Packaging business performance (see Operational Review lagging KPIs are used to monitor performance business failing to deliver new business wins, page 71 for more information). Key mitigation including order lead times, on time and in full expected cost savings or acceptable returns. actions include: order fulfilment, complaints, achievement of • strengthening the existing value proposition for COVID-19 sales plan, recovery of inflation cost increases customers using the knowledge and expertise There has been no change in the risk profile; through pricing, cost savings and overhead as from our recent acquisition of 3C! and COVID-19 has impacted our ability to a percentage of sales. deliver growth in 2020 with the underlying Nekicesa to support the continuing top line pharmaceutical market in particular disrupted by growth and margin improvement the lack of patient visits to GPs and significantly • continuing to drive cost savings through fewer elective surgeries resulting in lower demand operational continuous improvement projects for branded and generic drugs. at each manufacturing site, efficiency improvements through investment in new equipment, procurement initiatives New • continuing to optimise the manufacturing No change supply chain and overhead costs Increased • maintaining our focus on key account Decreased management and enhancing this with capabilities to support local customer site problem solving • continued delivery against key customer performance metrics of quality, On-Time-In- Full, manufacturing lead times, safety and supply chain efficiency. 58 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Strategic Risk
Tobacco Industry Dynamics
Change in risk level Ownership Relevance Unchanged Filters Division Managing Director Company specific Implementation of the two outsourcing contracts Description COVID-19 Mitigation agreed in 2019, now both in The Filters division supplies filter products and 2020 saw a notable impact of COVID-19 Essentra is mitigating the risk associated with full supply. One additional packaging solutions to manufacturers in the accelerating volume declines in the combustible changes in the tobacco market dynamics by contract has been agreed with tobacco industry. Changes in the traditional market, postponement of new product focusing on activities with longer-term viability an independent customer in tobacco market present both opportunities and introductions and disruption of the duty free and exploiting potential growth opportunities. 2020. risks for the division. market due to global travel restrictions. These This includes progressing on our “game changers” Whilst the Company has a strong market position factors have, in turn, placed further cost and increasing our innovation capabilities the future growth opportunities may be affected pressures on both our customers and suppliers. especially around NGP and sustainability. by dynamics of the tobacco industry such as the There was considerable disruption in the first half Key mitigating actions include: of the year caused by the global pandemic but a declining combustible markets, shifting towards • establishing the manufacturing facility of our strong second half of the year demonstrated that Next Generation Products (NGP) as well as China JV to allow first product shipments in H1 underlying demand remains in place. moving towards other tobacco substitutes. The 2021 within the world’s largest tobacco market focus of stakeholders on ESG objectives provides Greater stability should also be achieved • implementation of the two outsourcing an additional area of challenge for the business. through full year impact of the two significant contracts agreed in 2019, now both in full There is continued legislation to reduce outsourcing contracts in 2021 and first supply. One additional contract has been smoking prevalence and promote the use of commercial production from our Joint Venture agreed with an independent customer in 2020 more sustainable products and practices, for Company in China, the world’s largest tobacco • enhanced innovation capabilities resulting in example the EU Single Use Plastics Directive. This market. In addition, our focus on innovation is multiple product patent applications in the key presents an opportunity for growth through our delivering a pipeline of new products that we segments of NGP and sustainability sustainable product portfolio. believe can deliver a competitive advantage • operational KPIs continue to improve with an in 2021 and beyond. Essentra is well placed to additional focus on lead time reduction in 2020 The change in global consumption and end compete and succeed as we continue to drive to ensure our customers continue to get the markets for our products requires increased our operational and innovation capabilities in line best possible service oversight of where our products are used and a with key market trends. • implementation of key account management robust regulatory framework. Tobacco-related has provided a more robust pipeline, as litigation could also affect Essentra, although A number of initiatives are targeted to be demonstrated by continued outsourcing wins there is no history of the Company being involved completed in 2021 which are anticipated to • the integration of the Tapes business provides in such a claim. minimise the risk over time. new growth opportunities in Food and Beverage and e-Commerce segments • building on lessons learnt to further enhance our compliance programme to further develop a robust regulatory framework. 59 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Strategic Risk
Delivery of Strategic Projects
A portfolio of key strategic Change in risk level Ownership Relevance projects has been developed Increased Strategy and Company specific Commercial Director and is maintained to ensure appropriate focus of key Description Mitigation M&A projects by a Group Project The Company’s success is dependent on its Strategy and Governance • acquisition pipeline management to identify Management team to monitor ability to deliver key strategic projects on time • an annual strategic review with the Board and suitable acquisition targets with best value- and control major strategic and within budget, to realise their full potential. the GMC where we proactively monitor the creation potential programmes, investments and The Company invests in, and delivers, significant market, review our strategy and our strategic • an annual post-investment review and project capital expenditure projects. strategic, operational and capital expenditure programmes, particularly in light of the impact lessons learnt to identify key learnings to projects in order to drive the business forward, for of COVID-19. This process is led by the Strategy embed into future initiatives example our ongoing Business Process Redesign and Commercial Director • use of external advisers to provide expertise, implementation. In line with our strategic • review and approval of key, strategic projects assistance and rigorous due diligence, as plans, this project approach also includes the by Board and GMC, as appropriate with robust appropriate. acquisition and disposal of businesses. Failure to governance and detailed reporting of project Employee deliver such key projects effectively and efficiently KPIs and key milestones. • maintain strong focus on the capability of could result in significantly increased project Project Management our employees. This is achieved by mobilising costs and impede our ability to execute our • a portfolio of key strategic projects has teams which possess the right skills to deliver strategic plans. been developed and is maintained to ensure our strategic programmes COVID-19 appropriate focus of key projects by a Group • support project managers’ development During 2020 as a result of COVID-19 impacts Project Management (PMO) team to monitor through a variety of training programmes and and restrictions; we encountered some delays and control major strategic programmes, professional qualifications in project delivery. This added complexity in investments and capital expenditure projects • increased use of technology and video project co-ordination due to remote working • day-to-day project management using a conferencing to support teams and project and travel restrictions. Additionally, there has standard project management methodology activities been a need to review our project pipeline from based on PMI PMBOK (“Project Management • In order to ensure a continued focus on the both a strategic and budgetary perspective as Body of Knowledge”) established a standard people element in projects, relevant change we continue to build for the future. Our ability Project Management tool based on Microsoft management principles are being embedded to successfully deliver strategic projects given Project to further enhance visibility and in all key strategic projects and more broadly, the prolonged period of COVID-19 requires us to governance change management training introduced also manage our employee wellbeing through • interventions, as required, by Group PMO, to across the Company. effective change management. initiate, course correct and undertake remedial actions on programmes and projects. 60 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
External Risk External Risk
Regulatory – Governance Cyber Attack
Change in risk level Ownership Relevance Change in risk level Ownership Relevance Unchanged Company Secretary Industry general Increased Chief Information Industry general and General Counsel Officer
Description Mitigation Description Mitigation The Company operates across many The Company deploys a range of controls to The Company is dependent on the IT systems for The Company has an ongoing cyber security international jurisdictions and engages with a manage regulatory risk including: day-to-day operations. Should the Company be improvement programme. This aims to mitigate wide range of stakeholders, including a diverse • a “tone from the top” from the Board and affected by a cyber security breach, this could the risks and operational disruption caused by employee, customer and supplier base. Some GMC on the importance of ethics and result in suspension of some IT services and cyber attacks. This programme includes: locations we operate in are high risk. We are compliance loss of data. Subsequently, the Company could • endpoint protection, encryption of data, required to comply with multiple areas of • through the Company’s compliance receive fines, lose customer confidence and network firewalls, web and email content legislation, regulation and good practice for programme (including employee training), suffer reputational damage. protection areas such as Anti-Trust, Anti-Bribery, Sanctions we aim to conform with all applicable laws COVID-19 • deployment of strong authentication for and Data Protection and Privacy. Our operations and regulations, and encourage a culture of The risk has been heightened, primarily due to remote access and cloud based services are subject to an external environment which is openness, honesty and integrity a significant increase in remote working as part • continued cyber security awareness training seeing increasing levels of scrutiny and oversight • improved compliance communication with of COVID-19 crisis management. The Company for all employees from regulators and enforcement agencies. “Be smart, be sure” campaign is mitigating these additional risks through • vulnerability and penetration testing for all Failure to manage effectively the scrutiny and • continuous improvement of the Group consistent deployment of our security controls external facing Company services and websites oversight and/or comply with new laws and compliance framework to ensure effective to devices away from the office, maintaining • pending implementation of cloud-to-cloud regulations could result in significant fines, costs compliance programme with appropriate software updates and the introduction of data service monitoring (CASB) and reputational damage to the Company. policies, processes, reporting and monitoring stronger authentication for remote access • improvements to security operations capability COVID-19 • a Group Compliance Committee that directs services. across monitoring and alerting (people, Changes in supply chains and the adoption of and oversees the Company’s implementation Cyber attacks are a serious threat to the smooth processes and tools) remote working environments as a result of of compliance programmes, policies and running of our business. We continue to invest • Enhanced IT security team capabilities COVID-19 potentially increase compliance and procedures required to meet legal, compliance in our cyber security programme which includes complemented by third party advisory services control risks. COVID-19 has potentially increased and regulatory requirements mitigation and risk reduction activities across • ISO 27001 certification (renewed in Dec 2020). the risk in relation to data privacy given the • strengthening of internal divisional resources people, process and technology. additional collection of personal data. We have not to support embedding of regulatory seen a significant change in other regulatory risks. compliance within the respective businesses and continued investment to drive better Whilst the external environment is generating governance additional compliance demands and • extensive focus on third party due diligence, undertaking increased levels of enforcement, sanctioned market activity to take account of the Company continues to drive continuous lessons learnt from the past improvements in its compliance activities and • the Company’s Legal, Risk and Governance overall the level of risk to the Company has team continuously monitors changes in remained the same. regulations and emerging good practice seeking external support or guidance as necessary. 61 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
External Risk
Macroeconomic and Trade Deal Uncertainty (including Brexit)
Change in risk level Ownership Relevance Over the past few years, Unchanged Group Programme Director Industry general the Company conducted a thorough review of Brexit risks Description Mitigation Brexit and implemented a series As a global business, changes to global economic Essentra has an international customer base Over the past few years, the Company of changes to minimise raw conditions or trading arrangements have the which dilutes the effect of downturns in specific conducted a thorough review of Brexit risks and material and finished product potential to impact us. Our international trade geographies. The economic environment is implemented a series of changes to minimise raw flows across the EU-UK border, flows expose the Company to tariffs, duties or constantly monitored as part of our business material and finished product flows across the and to mitigate the associated quotas imposed through trade sanctions and planning cycle and budgeting, enabling a degree EU-UK border, and to mitigate the associated risks including supply chain also to macroeconomic effects due to regional or of forward planning in the event of a period of risks including supply chain disruption and to disruption. global industrial output changes. economic instability. This is performed in close co- ensure the appropriate customs processes and procedures are in place to allow for effective and Essentra will need to adapt to geopolitical ordination with each division to pinpoint trends efficient flow of goods and materials between changes that impact on patterns of trade and likely to impact our individual business activities. the UK and the EU. We continue to work with our the movement of labour and capital. A trend The annual budgets that result from the planning supply chain partners to minimise disruption and towards protectionism, regionalism and a process are a control, against which monthly ensure flow of goods across the EU-UK border. rebalancing from West to East creates risks and results are monitored, surfacing any effects of opportunities that Essentra will need to manage economic instability and informing commercial and exploit. decision-making. Movements in currency can In light of the Trade and Co-operation Agreement have positive and negative impacts on the being agreed between the UK and the EU, our Company’s reported earnings. This is managed Brexit focus has moved to continuing to ensure through proactive hedging of currency exposures. we are following robust customs and shipment The Board also considers potential impacts of processes and proactive management of goods specific macroeconomic events, including the across the UK-EU border, to minimise delays to UK’s decision to leave the EU. The breadth of the our customers, and our working capital. 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. 62 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Operational Risk Strategic Risk
Business Continuity Planning and Management Exposure to the Cyclical Industrial Market (Components Division)
Change in risk level Ownership Relevance Change in risk level Ownership Relevance Increased Group Programme Industry general Year on year Components Division Company Specific Director New risk in 2020 as Managing Director disclosed at half year Description Mitigation We operate a global manufacturing footprint The Company continues to review and refresh its Description Mitigation and supply chain. Making this supply chain business continuity management and planning The Components division serves industrial OEM Key mitigating actions being undertaken to resilient is a critical factor in serving our frameworks and processes. customers and hence, is exposed to overall protect the division from future industrial Industrial Production trends. Global Industrial declines include the following: customers, to minimise the impact of potential Mitigating factors that the Company has in Production has tended to be cyclical in nature disruptions. place for single location issues include: • Optimising our fixed cost base such that it is a with major economic downturns leading to a Business continuity management issues can lower proportion of operating costs • leveraging our global manufacturing footprint downturn in Industrial Production. From the be focused on particular locations, driven by to provide alternative manufacturing locations Global Financial Crisis in 2008-2009 to the The Components division undertakes continuous single point supply chain failures. Here, our • fire and other risk prevention systems current COVID-19 crisis, economic cycles have review of its operating footprint to optimise global footprint provides risk diversification, via • assessing and managing operational risks via impacted demand in the broad industrial manufacturing and distribution cost to serve. alternative manufacturing routes. the enterprise risk management process market. Our new distribution facility in Nettetal, Germany Equally, business continuity issues can be • ensuring comprehensive maintenance plans provides an opportunity for this as we leverage The Components division sells to a broad base broader in nature and impact a number of sites are in place for key manufacturing equipment, delivery network capabilities to reduce our of key end markets including Automotive, simultaneously as has been the potential with and/or alternative manufacturing routes are distribution footprint while delivering enhanced Capital Goods and Electronics. This broad base COVID-19. Our global footprint may expose us to identified service level to our customers. of customers provides some risk diversification, a broader set of potential multi-site disruption • maintaining an insurance programme and however, future downturns in Industrial Our increased investment in the automation of risks, than more focused companies. working closely with our insurers, FM Global, to Production are almost certain to happen, albeit production and distribution activities enabled by ensure complete and comprehensive cover to Robust business continuity planning and with an uncertain timeframe. robotics will further help to reduce fixed costs. management practices are required to minimise prevent losses. The Components division can make changes to • Increased variability of our cost base the impact on production capability, supply Additional measures to mitigate against multi- its cost base and business model to maintain We also undertake reviews of how better to chain management, customer relationships, site issues include: operating margins against fluctuations in manage labour, striking the right balance between reputation, revenue and profit. • enhancing our multi-site capabilities and demand. The risk is that such changes do not permanent and temporary employees, so that we The Company experienced some minor disruption manufacturing flexibility happen quickly enough, or are not robust enough are able to effectively manage our cost base. through COVID-19 related issues, during 2020. The • identifying alternative sources of supply for key to minimise the impact on operating margins. • Diversification across the market sectors we vast majority of sites remained operational, with raw materials and supply guarantees where sell to; both within the industrial sector and a small number of sites temporarily shut due to necessary and feasible also beyond it government imposed lockdowns. • global, standard site/network assessment approaches for pandemic and other issues. We have introduced a category management approach focusing on faster growing and resilient During 2021 the company will work with our markets. We continue to explore entry opportunities insurers to model the potential impact of in new markets to further mitigate this risk. climate change • Innovation We continue to exploit our innovation capabilities to secure new opportunities and diversify with the use of new materials in the event of future restrictions on the use of plastics. 63 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Strategic Risk
Environmental, Social and Governance Governance-related issues are managed through the Change in risk level Ownership Relevance Company’s comprehensive risk Increased Company Secretary and General Counsel Industry general management processes. In addition environmental and Description Mitigation Specifically, the GRC is also reviewing our social topics are managed Environmental, Social and Governance (ESG) Governance-related issues are managed through approach to managing climate change risk, via the Board Sustainability issues are becoming increasingly fundamental the Company’s comprehensive risk management including fulfilling our obligations under TCFD Committee, chaired by a for all companies. For Essentra, this includes processes. requirements. Non-Executive Director, and exposure to tobacco-related products (see In addition environmental and social topics The Components division is exposed to potential including membership from Developing more sustainable cigarette filters on are managed via the Board Sustainability impacts of ESG initiatives and climate change Board and GMC. page 76), potential changes in regulation related Committee, chaired by a Non-Executive Director, risks including reduction in single use plastics. to single-use plastics (see Increasing recycled and and including membership from Board and GMC. The division is actively working to incorporate renewable content on page 68), climate change The role of this Committee is to: more sustainable materials and believes it has and other topics (see Supporting ethical beauty the innovation capabilities to enable future • review and assess the Company’s exposure to brands on page 72). growth opportunities with the use of these sustainability-related issues materials. Similarly, Filters is exposed to single Failure to meet stakeholder expectations • assess the Company’s responses to these issues use plastic legislation and is actively developing on increasing environmental and/or social • understand whether these responses are new innovative products including the recently governance obligations could lead to reputational consistent with the risk appetite of the launched ECO range of biodegradable filters. or commercial risk for the Company. This includes Company risks arising from changing investor attitudes, • identify potential gaps in approach and high- increasing customer expectations, social level approaches to closing those gaps. attitudes towards the health and environmental impact of our products which may impact on The Board Sustainability Committee’s our ability to market them, along with ability recommendations link into and inform the work to attract and retain talent, given increasing of the GMC, the divisions and the enabling employee focus on sustainability-related topics functions, to reduce risk exposure appropriately (see page 37). The Company is also establishing a Sustainability Working Group comprising representatives from the divisions, Group HSE, Group HR, Group LRG, Group Communications and Group Investor Relations to monitor and respond to ESG and sustainability related-topics on a day-to-day basis. 64 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Operational Risk
Internal Processes and Control Minimum Control Standards Change in risk level Ownership Relevance continued to be rolled Increased Chief Financial Officer Company specific out across various sites in the Group, establishing a Description Mitigation Group Assurance audit procedures were carried consistent minimum standard Processes and controls play an important part in During the year, Minimum Control Standards out to assess performance of internal controls. of financial controls across the our ability to prevent and detect inappropriate (MCS) continued to be rolled out across various These reviews were temporarily disrupted in Company. A total of 70 out and unethical behaviour. This includes fraud, sites in the Group, establishing a consistent the first half of the year due to COVID-19, of 79 sites now have had the deliberate financial misstatement and improper minimum standard of financial controls across but resumed in the second half of the year. MCS roll-out, which account accounting practices. If the design, operation or the Company. The MCS steering group continued Additionally, Group Finance performed a separate for approximately 94% of the assurance over these controls is ineffective in its role as the governing body overseeing layer of independent testing to further evaluate Group revenue. or ownership is not defined or controls are activities. A total of 70 out of 79 sites now the effectiveness of implementation thus far. overridden, there is a greater risk of operational have had the MCS roll-out, which account for The Company has also started reviewing the loss. approximately 94% of Group revenue. potential additional requirements in the UK with regards to internal controls, and this will continue COVID-19 MCS implementation action plans were into 2021. In response to COVID-19 there has been greater continually assessed and tracked through the adoption of flexible and remote working course of the year. The primary responsibility Monitoring controls and processes continue to be arrangements. There is an ongoing need to adapt for site roll-outs and embedding of MCS rests performed to prevent and detect inappropriate our controls and processes to these changing with divisional management, with central co- and unethical behaviour. This includes fraud, ways of working. ordination by Group Finance. deliberate financial misstatement and improper accounting practices. With the MCS framework now rolled out to a large majority of the sites, the Company is shifting its focus onto the implementation of internal testing methodology to ensure continuing compliance with the framework. Furthermore, the MCS project has been conducted in close collaboration with other wider business initiatives, such as Business Process Redesign, which saw the first implementation of the new system at the head office during the year. The new system entails establishment of standard operating procedures, and improves the landscape around enforcement of internal controls. In the face of the challenges posed by COVID-19, the Company has ensured continued communications to the sites regarding the importance of continuing robustness in internal controls. 65 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Operational Risk
Safety, Health and Wellbeing
Change in risk level Ownership Relevance Our health and wellbeing Increased Group Human Resources Director Industry general strategy, Essentra Thrives, launched with the Description Mitigation With the increased focus on mental and introduction of the global The safety, health and wellbeing of our employees The “tone from the top” has continued to emotional health and wellbeing, we have assistance programme for all is of the highest priority for the Company. reinforce safety, health and wellbeing across all introduced awareness training for leaders and employees. We are continually mangers. We have developed training materials looking at areas where we Essentra has many manufacturing facilities of the businesses. Management teams have been for employees and are now moving towards can enhance the health, across the world, along with non-manufacturing instructed to give a high priority to establishing introducing proactive steps for employees to safety and wellbeing of our sites and internationally mobile employees. appropriate Safety Management Systems and manage their own wellbeing. Our health and employees. Factory manufacturing can be inherently risky reinforcing the desired behaviours by all who are wellbeing strategy, Essentra Thrives, launched given the use of industrial machinery and high employed by the Company. with the introduction of the global assistance speed manufacturing processes. In addition, Some of the key mitigations which are in place programme for all employees. We are continually the Company must comply with national safety include: looking at areas where we can enhance the regulation in multiple jurisdictions. • regular reporting to the GMC, GRC and the health, safety and wellbeing of our employees. Should an injury or fatality occur involving Board on Health, Safety and Environment our employees or visitors; or should there be (HSE) related matters any breach of safety regulation resulting in • a Group HSE policy detailing required prosecution, considerable reputational damage standards, governance, roles and is anticipated as well as potentially significant responsibilities at all sites financial costs. • launch of our health and wellbeing strategy Increasingly, especially given recent COVID-19 with a specific workstream that considers our related events, the mental and emotional leaders, managers and employees wellbeing of our leaders, managers and workforce • performance monitoring and Health and is becoming a focus. The organisation is working Safety Audits, incorporating reporting and in a different way, which is impacting individuals escalation arrangements to ensure all actions physically as well as emotionally. The prolonged are closed period of COVID-19 and the potential impact of • root cause analysis is conducted for any issues further variants increases risks in this area. identified through investigation of serious incidents, including Near Misses • our Global “Stop, Think, Examine, Proceed” (“STEP”) programme 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. 66 RISK MANAGEMENT REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Strategic Risk
Talent to Deliver Our Future
Change in risk level Ownership Relevance Unchanged Group Human Resources Director Industry general The change agenda coupled Description • ensuring the resilience of our leadership Mitigation with the impact of COVID-19 Failure to acquire, retain, develop and motivate and management teams as the pandemic Key mitigations include reviewing the people creates a need to focus on the required management and leadership continues; the prolonged period is having a toll strategy to ensure it underpins the approach to retention of key talent, necessary to evolve our business, develop our on the emotional wellbeing of our people enhance the employee experience, drive changes avoiding burn-out and culture and meet future customer needs. The • recognising the impact of COVID-19 on needed and have skilled leaders for the future. presenteeism. change agenda coupled with the impact of employees and the real issues of presenteeism This strategy considers: and fatigue. COVID-19 creates a need to focus on retention of • ensuring the variable pay schemes are key talent, avoiding burn-out and presenteeism. COVID-19 will reshape business needs, the adequate to retain key talent and reward high Additionally, we must continue to grow the agile talent market as well as the expectations of performance skills required to build for the future. our managers and leaders. We must continue • building management capability across the COVID-19 to be proactive and forward looking in order to wider team to ensure we manage through the The impact of COVID-19 changes the talent balance the needs of our business today and its change journey in an engaged and considered landscape in the short-term, with a focus on requirements tomorrow. way retention of the key leaders to transition and • talent mapping and succession planning change to a post pandemic working model. that considers current and future business As we move forward, retention will need to be requirements balanced with attraction to boost the talent • develop the health and wellbeing strategy with needed to deliver our strategy in key areas such a specific consideration of the actions needed as digital. The market conditions are predicted to aid retention of our wider workforce to change with great speed post COVID, with • communication with employees is a critical key talent in areas such as agility and change step to ensure engagement, drive a sense of leadership predicted to be in high demand and purpose and belonging across the workforce therefore we need to consider: • assessing what training and support we can • our ability to retain talented leaders and provide to future leaders, middle managers on managers who have the agility and skills we resilience and developing their personal career will need going forward path in a considered way. • ensure we have the right retention tools to motivate and drive performance 67 OPERATIONAL REVIEW | COMPONENTS ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT COMPONENTS: CONTINUATION OF OUR DIGITAL JOURNEY
Our markets
Revenue
A leading global Automotive Equipment Fabrication Electronics Construction Retail POP/ £255.0m Manufacturing Paper and Board (2019: £283.3m) manufacturer and distributor of a What we measure Adjusted operating profit1 comprehensive range 82k 45 92.1% 14 £45.5m of components, used (2019: 93k) (2019: 41) (2019: 94.3%) (2019: 13) (2019: £60.3m) in diverse industrial 1 Adjusted operating margin applications and Active customers Net Promoter Score On Time and In Full Lost Time Incidents Why we measure it Why we measure it Why we measure it Why we measure it end-markets. Reflects marketing Reflects our customers’ Demonstrates the Indicates our overriding 17.8% effectiveness and overall satisfaction ability to meet delivery commitment to health, (2019: 21.3%) measures the potential with our products demand safety and welfare in 1 Excluding amortisation of acquired population for further and service, as well as the workplace intangible assets and adjusting items. How we have done growth opportunities loyalty to our brand Though our sites How we have done How we have done How we have done remained operational Number of incidents Reduction impacted The increase of 4 points throughout the remained high, however Scott Fawcett by macroeconomics in is reflective of the year, OTIF fell due to we did see a significant Managing Director addition to continued continued roll-out of reductions in stock reduction in severity as Components focus on mid-sized the new websites and of levels being exposed we continue to focus customers remaining operational as demand improved on improving the safety throughout a very faster than expected culture across the challenging year through H2, coupled division with labour shortages in the US and operational onboarding challenges with the new German Hub warehouse 68 OPERATIONAL REVIEW | COMPONENTS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Revenue by segment Who we are and what we do The business is introducing recycled plastic into standard We make and distribute small product ranges to create a industrial components from plastic and “new normal” of using recycled metal, that are used in industrial and material across our global consumer equipment. manufacturing operations.
Our components serve a very broad and fragmented industrial manufacturing market. Typically catering to B2B manufacturers, our core markets range from data cabinet manufacturers and telecoms base station producers to Other Industrial Equipment: 31% automotive tier suppliers and domestic Metal Fabrication: 18% Increasing recycled and renewable content Industrial Vehicles: 10% appliance manufacturers. Industrial Electronics: 8% In 2020 the Components Essentra Components is a In 2020 the division also Consumer Electronics: 8% Uniquely we combine the range and Automotive: 7% division embarked on a signatory of the European conducted successful trials Production Machinery: 7% service of a distributor with the expertise comprehensive programme Circular Plastics Alliance on a low-density polyethylene Furniture and Fixings: 6% and flexibility of a manufacturer. This focusing on improving the which aims to boost the (LDPE) recycled content Medical: 2% Oil & Gas: 1% brings the customer a hassle-free sustainability of the product European plastics recycling product, which we will look Energy Generation experience when buying components that range for the benefit of our industry by stimulating to launch in 2021. (incl. renewables): 1% are relatively low in cost but have a high Food, Beverage and Chemicals: 1% customers, as well as the demand and supply. propensity to cause disruption if there is a wider community and planet. Revenue by destination problem with either delivery or quality. The business is introducing Many of the division’s recycled plastic into standard products are plastic which product ranges to create has the benefit of being a “new normal” of using lightweight and durable. In recycled material across exploring recycled materials our global manufacturing and the potential recyclability operations. Our target is of products, we want to to use 20% recycled or ensure these important renewable polymer raw characteristics are retained. materials by 2025.
Europe and Africa: 53% Americas: 37% Asia including Middle East: 10% 69 OPERATIONAL REVIEW | COMPONENTS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
2020 Review Financial performance Revenue for the year decreased by 8.5% Market trends and Progress made in 2020 to £255.0m on constant currency basis. In 2020 we continued to make progress towards Adjusting for the acquisition of Innovative dynamics Components, LFL revenue was -10.1%. Within the delivery of our vision and strategy despite The pandemic clearly had a significant the Group, Components is the division which the impacts of the pandemic. We completed impact on our business through the year, the roll-out of our new web platform across is most exposed to industrial cyclicality. Global PMI finished the year at 53.8 with Europe and introduced an agile monthly However, it has seen the greatest level of six months of positive sentiment following improvement process. We plan to continue the quarterly trading performance recovery the initial shock from the first wave, when agile improvement process in 2021, to further during the course of the year. PMI dropped to a record low 39.8 in April. enhance the customer experience, as well as Latest forecasts from Oxford Economics launching the site into a number of our Asian On a LFL basis, revenue was 5.3% down in Q1, indicate that overall Industrial Production markets. We also launched our new European which was reflective of the pandemic causing in 2021 will return to 2019 levels, although automated warehouse in Germany, which gives disruption in China earlier than in the rest of some of the sectors such as automotive us the platform to improve service levels and the world and a soft end-market backdrop may not recover fully within the year. reduce cost to serve across mainland Europe. in the US. As we moved into Q2 and as the Following the introduction of new customs arrangements between the UK and the We continued to invest in our BPR programme, pandemic took a firm grip across the globe, EU, we have focused on ensuring continuity which we have been developing in 2020 ahead we saw an accelerated slowdown in customer demand, with LFL revenue falling to -20.0% in of service for customers, but the additional of roll-out across Europe in 2021. We have also administrative burden has resulted in the quarter. However, from then on, we have launched our new CRM platform in 2020 (which some supply chain disruption. This remains will be integrated with the new ERP platform). seen a steady recovery in the division’s trading a risk we will continue to monitor, as we performance – Q3 improved to a level of move forward. Completed roll-out of In 2020 we decided to consolidate warehouse -13.9%, whilst Q4 improved further to -0.3%. a new web platform operations from three European warehouse across Europe with sites into the aforementioned German Caps and plugs full year sales were down 2021 plans for launch 14%, however with this sector largely in Asian markets. warehouse. Furthermore, the closure of three manufacturing sites (one in Sweden and two indexing to the automotive market, we saw in the US), as well as the exit of three smaller the sharpest decline in Q2 with recovery warehousing and distribution (express) sites in thereafter; Q4 sales were flat on 2019. Access the US, have been announced. These actions Hardware was more resilient with full year will all take effect in 2021 and allow us to sales down 5% but exiting the year with Q4 improve service for our customers, maximise in growth at 2%. Despite depressed market the opportunities for automation and support volumes, we saw some excellent wins in the anticipated growth for the division. telecommunications equipment market. 70 OPERATIONAL REVIEW | COMPONENTS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Commenced operations at European Automated Warehouse in Germany, providing platform for improved service levels and reduction in cost to serve across mainland Europe.
As the pandemic developed, we saw rapid Adjusted operating profit decreased by 2021 priorities for changes in mix across many product areas 23.4% to £45.5m, equating to a margin of but probably most significantly in the 17.8% (2019: 21.3%). This 350bps dilution Components fasteners category where we saw demand for reflected the aforementioned volume impact high volumes of plastic fastening to supply of a softer macro environment,which was • Continue to improve our digital in to face shields, office partitions and retail exacerbated by temporary manufacturing customer experience in 2021, checkout screens markets. inefficiencies caused by pandemic related launching the website into a issues, partially being offset by continued number of our Asian markets Despite this, the fasteners range was down successful pricing management and cost 6% for the year. Fibre, wire and cable Development and roll-out • Complete the development control actions. of the new Business Process management products performed better and commence roll-out of the Redesign. than the divisional average, -5% for full year new Business Process Redesign but +7% in Q4. Notably we saw increased (ERP and CRM) platform demand in the domestic appliance sector as people invested in home improvement • Improve service levels enabled by rather than travel. A strong medical device optimising performance in the focus throughout the year saw us supply new German Hub warehouse significant orders to the ventilator market, including supporting VentilatorChallengeUK • Continue to strengthen the as outlined on page 15. acquisition pipeline further with a focus on product and market adjacencies as potential areas for future expansion
• Expansion of our sustainable product offering including introducing recycled plastic into standard product ranges 71 OPERATIONAL REVIEW | PACKAGING ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT PACKAGING: DEEPENED CUSTOMER RELATIONSHIPS
Our markets
Revenue
One of very few Pharmaceutical Personal Care £363.2m multicontinental and Beauty (2019: £352.7m) 1 suppliers of a What we measure Adjusted operating profit1 full secondary 97.3% 30% 15 £13.8m packaging range to (2019: 96.6%) (decrease (2019: 18) (2019: £15.1m) the pharmaceutical, vs 2019) 1 Adjusted operating margin personal care and On Time and In Full Customer Lost Time Incidents Why we measure it complaints Why we measure it beauty sectors. Drives performance Why we measure it Measures the 3.8% of quality systems Drives performance of opportunity cost (2019: 4.3%) and service delivery quality systems and of incidents in the 1 Excluding amortisation of acquired service delivery workplace intangible assets and adjusting items. How we have done Improved OTIF through How we have done How we have done enhanced planning and Improved quality Improved safety scheduling coupled with through enhanced through broader Iain Percival using our network of defect root cause engagement from our Managing Director plants more efficiently analysis and corrective teams in identifying Packaging actions and fixing hazards 1 All measures are presented before they become a on a LFL basis risk to an employee’s safety 72 OPERATIONAL REVIEW | PACKAGING CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Revenue by segment Who we are and what we do We design, develop and manufacture We are collaborating with folding cartons, leaflets and labels to customers to reduce packaging waste as well as improve the the world’s leading pharmaceutical recyclability of packaging. and beauty companies.
We are focused on Healthcare and Beauty markets, both of which have strong long term growth dynamics and this focus enables us to better understand our customers’ needs.
Health and Personal Care: 89% We use our knowledge and understanding Food and Beverage: 5% Supporting ethical beauty brands Other: 6% of the markets and supply chains we operate in to help our customers solve The Packaging division is In particular the division’s labels, carton navigation and problems locally and globally through proactively working with Design Hub is working communication. The solution designing, developing and delivering several global customers to with customers to create included two cartons which Revenue by destination innovative products and services. increase the sustainability of appropriate packaging do not require glue, thereby This ability to support our customers’ pharmaceutical and beauty solutions for ethical and ensuring their vegan and manufacturing locations locally whilst packaging. This includes sustainable beauty brands. sustainability credentials. having the global scale and position to collaborating with customers Made from FSC board, support them in a geographically diverse to reduce packaging waste During 2020, a customer the cartons are also fully way is a distinct advantage for Essentra as well as working to improve approached Essentra to recyclable. Packaging, making us a valued and the recyclability of packaging, provide a range of branded trusted partner. for example by substituting packaging solutions that met foil and laminates with the sustainable and ethical paper based design and the brand values while remaining provision of removable labels optimised for manufacture. that encourage effective The team developed the Europe and Africa: 63% complete packaging solution Americas: 36% consumer recycling. Asia including Middle East: 1% including product 73 OPERATIONAL REVIEW | PACKAGING CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
2020 Review Market trends and dynamics Progress made in 2020 In 2020 total prescription volumes have We expect the market to return to 2020 saw a further year of operational contracted by an estimated 3% in the moderate growth in the second half of progress with quality and service both USA and 2.8% across the EU5 which 2021, with the healthcare systems having improving on 2019 on a LFL basis with 30% is unprecedented in a market that to catch up on the significant backlog of fewer quality complaints and OTIF at 97.3%, delivered constant growth over a decade. elective surgeries, chronic diseases and all achieved whilst coping with the immense Prescription drugs demand went down cancer diagnostic and treatments. The operational and logistical challenges of the significantly driven by the reduction of pandemic has shown our customers the pandemic. Organisational strength has patient visits to General Practitioners, and importance of working with suppliers been significantly improved by targeted with the hospitals focusing their activity that can offer a robust supply network, recruitment and use of existing talent on COVID-19 treatments, stopping elective business continuity plans, and the ability surgeries and other non-critical activities. to maintain high levels of service and development processes. We have also built The demand for vaccines experienced a quality despite the challenging environment capabilities in supply chain management, – an area where Essentra Packaging has continuous improvement and procurement significant slow-down in Q2 2020 with vaccination campaigns being put on hold, delivered excellent metrics in 2020. This which have supported improved service, and has started to rebound at the end of resulted in a number of supply contracts efficiency and cost optimisation. 2020, with an increase expected in 2021 being signed before the end of 2020. with the supply of COVID-19 vaccines. The beauty market, which is more reactive Despite the pandemic impacting our markets Some market segments like Over The than healthcare, was severely impacted at through reduced prescriptions and fewer Counter (OTC) drugs experienced significant the beginning of the pandemic (some of our elective surgeries, the division continued to growth during the pandemic, spiking in key customers reduced demand by 30% over support customers through 2020, indeed Q2 2020, but this did not offset the overall a few months) but rebounded in Q3 and is Awarded “Packaging many directly involved in the fight against lower demand for healthcare products. returning progressively to pre-COVID-19 run News” 2020 UK COVID-19. This support is evidenced in the rates for Q1 2021. This market is undergoing Packaging Company results of our Customer Survey in which we a significant transformation driven by of the Year. scored 8.1 out of 10 against last year’s 7.9 consumers expecting more sustainable products, this will generate opportunities and a Packaging industry average of 7.6. to win share positioning, with the right offering and approach. A major highlight of the year was the value enhancing acquisition of 3C! Packaging, in September. Integration activities are progressing well with delivery of early procurement synergies and growth pipeline opportunities being progressed. 74 OPERATIONAL REVIEW | PACKAGING CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Support to fight against COVID-19 through supply of products to the pharma industry, including packaging for leading anti-viral drug and two of the leading vaccines.
Another highlight was that in November we impact from the reduction in the levels of 2021 priorities for received external recognition from a leading prescriptions and elective surgeries through industry publication “Packaging News” with lockdown periods. Packaging the award of “UK Packaging Company of the Year”. Over the course of H2, there was a steady • Continuing to roll-out and improvement, as the pharmaceutical and embed our supply chain agility In 2020 we proposed the closure of our beauty markets started to slowly recover; programmes, technical support manufacturing sites in Portsmouth, UK and Q3 was -8.5%, this improved to -1.3% in and innovation capabilities Moorestown, US in 2021. These actions reflect Q4 (both on a LFL basis). Continuing progress on (including sustainable solutions the significant reduction in demand in some zero waste to landfill through our Design Hub network key areas and withdrawal of key customer Adjusted operating profit decreased 9.6% sites, reducing in the US and Europe) will allow us production due to the pandemic, whilst also to £13.8m, equating to a margin of 3.8% CO2 emissions. to deliver our value proposition of supporting supply chain optimisation. (50 bps decline). This was largely driven supporting our customers in solving by the volume gearing effect from the their local and global problems Financial performance revenue decline, which was exacerbated Revenue for the year increased 2.8% to by temporary manufacturing • Continuing progress on zero £363.2m at constant currency. On a LFL basis, inefficiencies caused by pandemic waste to landfill sites, reducing related issues. Netted off the revenue decline was -4.0% for the year. CO2 emissions, ensuring we In H1, despite the onset of the pandemic, against these was the impact have responsible sourcing of our underlying demand remained relatively of continued successful materials and supporting our robust. LFL performance in H1 was -3.0%. pricing management customers in their sustainable and and cost control actions. responsible product development This performance was reflective of a tough prior year comparison as H1 2019 was bolstered by short-term customer demand on the back of the new regulatory requirements as prescribed by the Falsified Medicines Directive.
During the year the division was impacted by pandemic-induced supply chain performance issues and temporary facility closures. These closures were rectified from May and the division delivered positive monthly revenue growth towards the end of H1. However, with the advent of H2, underlying demand saw softness in certain end markets owing to an 75 OPERATIONAL REVIEW | FILTERS ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
FILTERS: LEVERAGING INNOVATION FOR SUSTAINABILITY
Our markets
Revenue
The only global Tobacco Food and £278.3m Beverage (2019: £303.6m) independent provider of filters What we measure Adjusted operating profit1 and related solutions 99.1% 9% 11% 2 £25.2m to the tobacco (2019: 98.5%) (reduction (reduction (2019: 2) (2019: £36.2m) industry. vs 2019) vs 2019) 1 Adjusted operating margin On Time and In Full1 Quality complaints Waste1 Lost Time Incidents2 Why we measure it per billion rods1 Why we measure it Why we measure it Demonstrates the Why we measure it Drives productivity and Indicates our overriding 9.1% ability to meet delivery Demonstrates the the efficient use of commitment to health, (2019: 11.9%) demands ability to meet quality materials safety and welfare in 1 Excluding amortisation of acquired demands the workplace intangible assets and adjusting items. How we have done How we have done Maintained world-class How we have done Significant reduction How we have done service performance; Maintained world-class of 11% in waste vs 2019 Health and safety improved planning and service performance following a reduction of is always our first Kamal Taneja increased flexibility 30% in 2019 vs 2018 priority, we are proud Managing Director underpin performance to maintain our high Filters standards of safety despite the challenges 1 Measures presented for presented by the Core Filters business only excluding Tear Tapes pandemic 2 Presented for total division Including Tear Tapes 76 OPERATIONAL REVIEW | FILTERS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Focused innovation Revenue by segment Who we are and what we do investment culminated in development of proprietary We provide outsourced filter sustainable filters in 2020. manufacturing services for the tobacco industry and solutions to enhance the open/close functionality of packaging whilst also informing and protecting the contents.
Our customers are primarily for tobacco companies for whom we provide filters to meet both legislative requirements and also to differentiate our customers’ Mono: 24% brands – be that visually, through flavour Specialty: 62% Developing more sustainable cigarette filters Tapes: 12% transmission etc. Our Tapes are used in a Other: 2% number of markets (eg e-Commerce Paper It is widely reported that In 2020 Essentra Filters The division has also been & Board, Food & Beverage) where safe and cigarette filters are one of the developed a new range of evolving current Tapes easy opening of a package is critical to the most littered items globally plastic free filters, aiming to products to further minimise Revenue by destination customer experience. and, once littered, they can meet all requirements of the their environmental impact, persist in the environment EU Single Use Plastic (SUP) ultimately launching a new We supply over 1,200 filter product for an extremely long time. Directive. These are also 100% “Supastrip PCR” product in specifications to more than 185 customers Therefore the industry, biodegradable and degrade 2020. This product includes in over 65 different countries, including Essentra Filters included, more rapidly than filters 70% post-consumer recycled all the multinational tobacco companies, has focused R&D efforts constructed with cellulose (PCR) content in the film Independents and State Monopolies. on developing alternative acetate. All these new filters and still provides the same materials which are less were covered by patent easy opening performance impactful to the environment applications and, although as SupaStrip®. while still offering the same early, have been well received level of performance and by the market demonstrating filtration as traditional the strength of the Filters Europe and Africa: 28% Americas: 19% cigarette filters. Decision Gate process. Asia including Middle East: 53% 77 OPERATIONAL REVIEW | FILTERS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
2020 Review Market trends and dynamics Progress made in 2020 Historically market decline (excluding The EU SUPD has catalysed the In 2020 our overall operational performance China) has been 3-5%, however, various requirement for more sustainable continued to improve, with some good trading updates from tobacco companies alternatives to the standard, cellulose improvements in KPI metrics, thanks to a in 2020 have shown volume declines in acetate filter and the majority of resources focus on a reduction in lead time and the excess of this. In the short term customers are now focused in either this area or establishment of a Commercial Excellence also paused any significant new product alternative products (eg THP). team that is contributing to a much stronger introductions (NPIs) and have increased For our Tapes business the pandemic has key account management process. focus on costs. driven an increase in online purchases, According to Euromonitor the growth hence significantly increasing opportunities In relation to the division’s game changers, rate for cigarettes globally is -3.7%, within the paper and board segment. the two previously announced outsourcing although strong growth is forecast in next Conversely, within the food and beverage contracts are now operational, with full generation products (16.8% for THP and segment, cost focus has led to tapes being production capacity being achieved on 3.1% for E-cigarettes). de-specified on a number of accounts. both of these. Additionally during the year, China remains a significant growth the division also won another outsourcing opportunity, accounting for c.45% of contract with an independent customer. cigarette volumes in 2019 and an increasing demand for special filters. Our China The China JV remains on track to commence joint venture provides a great platform to capture the many opportunities available production towards the end of Q2 2021, in the world’s largest tobacco market. providing a great platform to capture the Plans on track many opportunities available in the world’s to establish a largest tobacco market. manufacturing facility for China Joint We continue to build our pipeline of next Venture towards the generation products (NGP) opportunities end of Q2 2021. – with one further patent application made, one proprietary product launch and joint developments ongoing with several partners. The division also has a number of ongoing projects collaborating with customers and suppliers on biodegradable filters. As previously reported, in December 78 OPERATIONAL REVIEW | FILTERS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Launch of Tobacco Heating Product (THP)Vortex Filter in 2020, expanding the division’s NGP offering.
2020 the division launched three proprietary better had it not been for certain logistical 2021 priorities biodegradable filter products (Eco Sensation, challenges towards the end of the period, ECO Cavitec and ECO Cavitec Sensation), in shipping product in Asia, derived from for Filters aiming to meet all requirements of the EU regional container shortages. Single Use Plastic (SUP) Directive on plastic • Manufacturing facility in our China and biodegradability. Even though it is Adjusted operating profit decreased 29.2% JV to be operational with first early days for this launch, we are receiving to £25.2m, equating to an operating margin customer shipments towards the very positive feedback and interest from of 9.1% (decline of 300 bps). This was largely end of Q2 our customers. driven by the volume gearing effect from Drive additional operational the revenue decline and a mix effect from excellence initiatives to help • Continued development and launch shorten the supply Financial performance proportionally less NPI projects. Additionally, of sustainable products building on chain and further recent momentum On a constant currency basis, total Filters temporary manufacturing inefficiencies reduce waste. divisional revenue was 5.6% down on the caused by pandemic related issues also prior year period, of which the core Filters adversely impacted profits during the year. • Expand our Key Account business (division excluding Tear Tapes) Management approach into Tapes was down by 4.9%. and adopt a category approach allowing us to better serve our H1 was 11.2% down for the overall division target markets affected by two short-term factors: the impact from government enforced facility • Drive additional operational closures in India and Paraguay and the excellence initiatives to help continued effect on prior period comparatives shorten the supply chain and due to business disruption in the Middle East further reduce waste following the sanction compliance issues • Identify and secure new announced in our year end 2019 results. outsourcing opportunities As we moved into H2, the division returned to delivering marginal half-yearly growth, bolstered by the optimisation of production volumes for the previously announced outsourcing contract wins. In H2, the overall division recorded growth of 0.2%, whilst the core Filters business delivered growth of 0.7%. Growth in H2 would have been even 79 GROUP MANAGEMENT COMMITTEE ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
GROUP MANAGEMENT COMMITTEE
Executive Board Directors Divisions
Paul Forman Lily Liu Scott Fawcett Iain Percival Kamal Taneja Chief Executive Chief Financial Officer Managing Director, Managing Director, Managing Director, Further details on Paul’s skills and Further details on Lily’s skills Components Packaging Filters experience can be found on page 83. and experience can be found Scott Fawcett joined Essentra in Iain Percival joined Essentra as Kamal Taneja joined Essentra on page 83. 2010 as Managing Director of the Managing Director, Essentra as Managing Director, Essentra European Components business, and Packaging in 2017, before which he Filters in 2017 from Amcor Tobacco was appointed divisional Managing was divisional CEO, Beverage Cans Packaging, where he worked as Vice Director in January 2014. Prior to Europe for Rexam plc. Prior to this, President and General Manager, joining Essentra, Scott was Head of Iain held a number of increasingly based in Singapore. Prior to this, eCommerce at Electrocomponents senior roles at Rexam plc, Toyota Kamal held increasingly senior plc, where he held a variety of Motor – Europe Manufacturing roles at Ingersoll Rand and Trane, increasingly senior sales, marketing and Dowty Group, and has and has extensive marketing, and eCommerce positions during extensive experience in category commercial, operational and supply his 17-year career there. management, manufacturing and chain optimisation experience supply chain optimisation. throughout the Asia Pacific region. 80 GROUP MANAGEMENT COMMITTEE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Enabling Functions
Richard Cammish Oshin Cassidy Kathrina FitzGerald Jon Green Nick Pennell Chief Information Officer Group Human Resources Director Strategy and Company Secretary Group Programme Director Richard Cammish joined Essentra Oshin Cassidy joined Essentra as Commercial Director and General Counsel Nick Pennell joined Essentra as Chief Information Officer in June Group Human Resources Director Kathrina FitzGerald was appointed Jon Green joined Essentra and was as Group Operations Director 2017. Prior to this he was Group Chief in January 2019. Prior to joining as Strategy and Commercial Director appointed Company Secretary and in 2017 and became Group Information Officer for Coats plc. Essentra, Oshin was Group Human in January 2018. Prior to joining General Counsel in July 2005. Prior Programme Director in January During his career, Richard has gained Resources Director at Imagination Essentra, Kathrina worked with to joining Essentra, Jon worked as an 2021, reflecting the importance of extensive IT, digital and international Technologies, and has extensive DMGT plc – a portfolio of information in-house lawyer for a number of large programme delivery to achieving experience in organisations including human resources experience and media businesses – where she international businesses, including Essentra’s strategic objectives. Heineken, Cadbury, British American having previously held senior roles held a number of increasingly senior Hays plc and Unilever plc. Jon is a Prior to joining Essentra Nick was Tobacco and Mars. He has also at global organisations including roles during her ten-year tenure, qualified solicitor. Chairman of Lavery/Pennell and a worked for a leading management Securitas, ComfortDelGro, Centrica including Business Development Partner at Booz Allen Hamilton/ consultancy and in a technology and QinetiQ. Director, Managing Director of Booz and Co. in the UK and China. start-up business. DMGT International and Director of Nick has extensive experience Strategy and Development. Kathrina of performance improvement, started her career at JP Morgan, operational and strategy where she spent seven years in development projects gained across investment banking. the industrial and energy sectors, and in many geographies. 81 CHAIRMAN’S CORPORATE GOVERNANCE STATEMENT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT Directors’ report 82 CHAIRMAN’S CORPORATE GOVERNANCE STATEMENT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT CHAIRMAN’S CORPORATE GOVERNANCE STATEMENT
The Board holds corporate governance This is our second year reporting on Section 172 Another key area of focus is the progress and its principles in the highest regard and (1) Companies Act 2006, and with feedback made in the compliance transformation Dear Shareholder believes that good governance should be at on the first year of S172 reporting available, we programme which has had particular regard the heart of all its decisions and discussions. have increased our disclosures in this area to to the impact of the Deferred Prosecution On behalf of the Board, The 2018 UK Corporate Governance Code explain how we have engaged our stakeholders Agreement requirements. The programme is I am pleased to present (2018 Code) and its principles has continued and to describe the outcomes. Our statement headed up by our Company Secretary and the Corporate Governance to apply throughout the year and supported on Section 172 and stakeholder engagement General Counsel, Jon Green. He has been our discussions and decision making with can be found on pages 23 to 26. determined that COVID-19 should have Report for the year ended openness, integrity and accountability at limited impact on this important programme 31 December 2020. the forefront of our minds. The Board has It has been a challenging and busy year: the and has made good progress in raising reviewed its operations and governance Board met weekly for much of 2020 and awareness across the Group. framework and confirms that, as at the date received regular updates between meetings of this Report, the Company has complied on the four priorities of employee physical and Finally, you will read that our AGM will be live with the provisions set out in the 2018 Code, emotional wellbeing, continued high levels streamed which will allow more shareholders other than the two points reported in more of customer support, cash conservation and to join us. We propose adopting new Articles detail on page 85. building for our future. This was initiated and of Association that will allow us to hold hybrid replicated at GMC which ensured we were AGMs in future years. We believe this will The Corporate Governance Report that well placed to respond to both UK and other increase our opportunity to engage with you follows sets out and explains the processes government announcing new COVID-19 rules. and we hope you will join us virtually at our in place which are essential for delivery AGM this year. More details can be found in of long-term success. We have provided Throughout the year the Board ensured it the Notice of Annual General Meeting. additional information wherever possible so remained focused on its other key areas of that our shareholders and other stakeholders responsibilities too and the report that follows Paul Lester, CBE who may read this report are able to gain a outlines the activities of the Board. As a Board Chairman deeper understanding of how we approach we found working remotely stretched our 5 March 2021 governance. Information required to be dynamics and we agreed to bring forward our reported under the Directors’ Report is Board evaluation so that we could examine reported both here and within the Strategic and understand the impact of remote Report and cross-references have been meetings on the Board dynamic. We made provided throughout to signpost this. initial enhancements to our governance arrangements in early 2020 including the appointment of a Head of Governance who has ensured we have run efficiently. 83 BOARD OF DIRECTORS ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Committee membership key 1 Audit and Risk Committee 4 Sustainability Committee BOARD OF DIRECTORS 2 Nomination Committee 5 Committee Chairman Experienced, effective and diverse leadership – Our Business is led by our Board of Directors, 3 Remuneration Committee biographical details of the Directors are available at essentraplc.com/about-us/board-of-directors
Paul Lester, CBE Paul Forman Lily Liu Tommy Breen Non-Executive Chairman Chief Executive Chief Financial Officer Senior Independent Director Independent on appointment Independent on appointment Executive Director 2 5 2 4 4 1 2 3 Appointed to the Board: Appointed to the Board: Appointed to the Board: Appointed to the Board: December 2015 January 2017 November 2018 April 2015 Skills and experience: Skills and experience: Skills and experience: Skills and experience: Following his appointment to the Board in As Chief Executive Paul combines strong Lily joined Essentra as Chief Financial Officer in Previously Tommy was Chief Executive of DCC December 2015, Paul was made Non-Executive commercial and operational leadership 2018, before which she was CFO of Xaar Plc Group, Plc, an international sales, marketing, distribution Chairman in May 2016. Paul brings a wealth of with a detailed understanding of company a FTSE listed inkjet technology developer and and support services group, headquartered in experience to Essentra, gained in increasingly rationalisation, as well as growth through manufacturer of industrial inkjet printheads. Prior Dublin and with operations in 13 countries. Tommy senior operational and strategic executive roles, acquisition, development and delivery of a clear to this, Lily was CFO, Smiths Detection at Smiths has significant experience relevant to Essentra, and has also served on a number of Boards in a vision and corporate strategy. Prior to joining Group Plc, and has 20 years of experience in the in particular of growing diverse businesses both Non-Executive capacity for more than 20 years. Essentra, Paul was Group Chief Executive of Coats manufacturing and engineering sectors. organically and via acquisition during his 30 year Group plc – the world’s leading industrial thread career with DCC. Other current appointments: Lily began her career with a Chinese investment manufacturer – for seven years. Previously Paul • Non-Executive Chairman, McCarthy & Stone plc firm before emigrating to Australia to complete an Other current appointments: held a number of increasingly senior operational • Non-Executive Chairman, Ready Power Rail MBA, and she has worked across three continents • Non-Executive Director and Chairman and strategic positions at a variety of companies, Services Group Limited, First Port Limited, (Asia, Europe and Australia). Designate, Homeserve plc and has a proven track record of international Appello Limited and Marley Limited. • Non-Executive Chairman, Lota View manufacturing experience at the highest level. Other current appointments: Holdings Limited Past appointments: None • Chief Executive, VT Group plc and Graseby plc, Other current appointments: • Executive Director, W&R Barnett Limited • Chairman of John Laing Infrastructure • Non-Executive Director and Senior Independent Fund, Greenergy, Forterra plc and Knight Director, Tate & Lyle plc Square Holdings • Group Managing Director, Balfour Beatty plc President of the Society of Maritime Industries the BSA and the Engineering Employers Federation 84 BOARD OF DIRECTORS CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Committee membership key 1 Audit and Risk Committee 4 Sustainability Committee 2 Nomination Committee 5 Committee Chairman 3 Remuneration Committee
Nicki Demby Mary Reilly Ralf Wunderlich Jon Green Non-Executive Director Non-Executive Director Non-Executive Director Company Secretary
1 2 3 4 5 1 2 3 4 5 2 3 4 5 4 Appointed to the Board: Appointed to the Board: Appointed to the Board: Appointed to the Board: June 2019 July 2017 June 2017 Secretary to the Board in July 2005 Skills and experience: Skills and experience: Skills and experience: Skills and experience: Nicki brings extensive advisory experience to Mary is currently Non-Executive Director and Based in Germany, Ralf is currently an independent Jon Green joined Essentra in March 2005, and was Essentra, having provided Board level counsel to Chair of the Audit Committee of global media consultant and a senior adviser to private appointed Company Secretary & General Counsel in many UK and international businesses over more internet company Travelzoo – a US-listed publisher equity firms. He is an advisor to the Board of Elif July 2005. Jon is a qualified solicitor and heads the than 25 years. Nicki has been a Partner of Deloitte of travel, entertainment and local offers and Packaging, and a Non-Executive Director for the Legal, Risk & Governance team. His responsibilities LLP and led the Deloitte “Women on Boards” of Mitie Group plc, a facilities management Shepherd Building Group Board. He is a Non- extend to include legal, compliance and risk programme, as well as teaching a number of company. She is a Non-Executive Director of Executive Director of Huhtamaki Oyj (a Nasdaq management together with the delivery of the programmes for Non-Executive Directors. Nicki is Gemfields Group Limited, a world-leading supplier Helsinki-listed global food packaging company). internal audit programme. Prior to joining Essentra, a Fellow of the Institute of Chartered Accountants of responsibly sourced gemstones. Mary brings a He is a former member of Amcor Limited’s Jon worked as an in-house lawyer for a number of and a Fellow of the Chartered Institute of wealth of accounting, finance and international Global Executive Team and former President of large international businesses, including Hays plc Personnel Development. Nicki combines her management experience to Essentra, having the business group Amcor Flexibles Asia Pacific and Unilever plc Board work with advice on senior executive career previously been a Partner of Deloitte LLP for more (Packaging Solutions). strategy and development. than 20 years, as well as serving on a number of Ralf brings much experience to Essentra from his Boards in a Non-Executive capacity since 2000. Other current appointments: time spent in senior executive positions at leading • Partner, Stork & May. Other current appointments: global packaging companies across Europe, the • Non-Executive Director and Chair of the Americas and Asia. Audit Committee, Travelzoo Other current appointments: • Non-Executive Director and Chair of the • Non-Executive Director, AptarGroup, Inc., Audit Committee, Mitie Group plc • Non- Executive Director, Huhtamäki Oyj • Non-Executive Director, Gemfields • Non-Executive Director, Shepherd Building Group Limited Group Limited; • Adviser to the Board, Elif Packaging 85 CORPORATE GOVERNANCE REPORT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT CORPORATE Key topics raised in the 2018 Code GOVERNANCE REPORT Company purpose Sustainability Pages 15, 16 and 87 Pages 36 to 41 and 100 to 101
Business model Stakeholder engagement Pages 21 and 22 Pages 23 to 26
The Board can confirm that it has complied adopted by the organisation in drafting the Our people Audit, Risk and with the Provisions as set out in the 2018 UK Annual Report, which requires Group-wide Pages 31 to 35 internal control Corporate Governance Code (the “Code”), co-ordination and review. That process runs Pages 105 to 112 other than: alongside the formal audit of the Financial Statements conducted by the External Auditor. • Provision 36 of the Code on post- employment shareholding but which The Board further takes into account is included in the proposed Directors’ representations made by management Reward Policy which is subject to a vote and the views of the internal and external by shareholders at the AGM in May 2021 auditors as to the integrity of the narrative • Provision 38 of the Code on pension and financial statements. The comprehensive contribution rates, which the Company review process carried out initially by the ARC is working towards and will be fully and then Board, is used by the Board who effective for Executive Directors from has determined that the 2020 Annual Report, 1 Jan 2023 onwards. taken as a whole presents a fair, balanced and understandable position and provides Board meetings during the year The Corporate Governance Report reflects the shareholders with the information necessary pillars of the Code. Some of the information to assess the performance, strategy and Meetings during the year business model of the Company. required by the Code is included in the Paul Lester, Non-Executive Chairman 8 (8) Strategic Report and is cross-referenced here Paul Forman, Chief Executive 8 (8) to avoid unnecessary duplication. Leadership and accountability Tommy Breen, Senior Independent Director 8 (8) The Board of Directors is appointed by Lily Liu, Chief Financial Officer 8 (8) Fair, balanced and understandable shareholders, who are the owners of the Mary Reilly, Non-Executive Director 8 (8) One of the key requirements is for the Company. It is the Board’s principal collective 1 Annual Report to be fair, balanced and responsibility to provide effective and Lorraine Trainer, Non-Executive Director 3 (3) understandable. In coming to a conclusion entrepreneurial leadership to the Company Ralf Wunderlich, Non-Executive Director 8 (8) that the Annual Report is fair, balanced and and to be responsible to shareholders for Nicki Demby, Non-Executive Director 8 (8) understandable the Board has the support the long-term sustainable success of the 1 Lorraine Trainer retired from the Board on 21 May 2020. Figures in brackets denote the maximum number of of the ARC, which makes recommendations Company taking into account the interests meetings that could have been attended. The Company Secretary and General Counsel acts as Secretary to the Board and is supported by the Head of Governance who attends all the meetings. to it on this and also considers the process of all stakeholders. 86 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Our structure
Essentra plc Board
Audit and Risk Remuneration Nomination Group Management Sustainability Committee Committee Committee Committee Committee
Group Risk Committee Investment Committee The Board delegates authority to manage the business to the Chief Executive Officer and essentraplc.com delegates other matters to Board Committees Group Compliance Treasury The terms of reference for each of the Audit and Risk, Remuneration, Sustainability and Nomination Committees and management as appropriate. The Board Committee Committee can be found on the Company’s website. The terms of reference are reviewed annually and updated as necessary. has formally adopted a schedule of matters reserved to it for its decision. Essentra plc Board (the “Board”) Remuneration Committee Group Risk Committee In providing leadership to the Company, In fulfilling its role, the Board: The Remuneration Committee is established by the The Group Risk Committee is responsible for the Board should establish the Company’s • establishes the Company’s purpose, values and Board and is responsible for setting a remuneration monitoring Principal, Key and Emerging Risks, and policy for Directors and senior executives. This policy ensuring the effectiveness of divisional and functional purpose and values and set a strategy strategy and has satisfied itself that these and its culture are aligned is designed to promote the long-term success of risk management. Further details of the Company’s risk to deliver them, whilst ensuring that the • sets, continually reviews and tests the Company’s the Company, taking into consideration the reward, management framework can be found on page 51. behaviours that shape its culture are aligned strategic aims incentives and conditions available to the Company’s Group Compliance Committee • determines the nature and extent of acceptable workforce, shareholders and other stakeholders. The to the strategy. The Board should consider Remuneration Committee determines an appropriate The Group Compliance Committee (GCC) is risks in achieving the Company’s strategic objectives established to oversee the Group’s implementation shareholder and other stakeholder views and • assesses shareholder and stakeholder interests from balance between fixed and performance-related and immediate and deferred remuneration. The of compliance programmes, policies and procedures the main trends and factors which will affect the perspective of the long-term sustainable success required to meet legal, compliance and regulatory of the Company Remuneration Committee is also responsible for setting the long-term success and future viability the fees of the Chairman. requirements. The Company Secretary and General • oversees the establishment of formal and Counsel is be the Chairman of the GCC and is of the Company – and how these and the transparent arrangements for the application of Nomination Committee accountable for the Company for compliance Company’s Principal Risks, uncertainties and corporate reporting, risk management and internal The Nomination Committee is responsible for regularly activities. The GCC is responsible for executive control requirements and principles opportunities have been addressed. More reviewing the structure, size and composition of monitoring of the overall progression of compliance • ensures that the necessary financial and human the Board for any changes that it considers to be activities. information on this can be found in the Risk resources are in place for the Company to meet its appropriate. The Nomination Committee will lead Investment Committee Management Report on pages 50 to 66. objectives the process for Board appointments and make • reviews the performance of the Company’s recommendations to the Board taking into account The Investment Committee was introduced at the executive management the Company’s strategic priorities and the main trends start of 2020 and operates as a sub-committee of • presents a fair, balanced and understandable and factors affecting the long-term success and future the GMC. The Chief Financial Officer is the Chairman assessment of the Company’s position and viability of the Company. of the Investment Committee and its membership prospects to its shareholders includes all of the GMC. The Investment Committee Group Management Committee provides control and challenge around major capital Audit and Risk Committee The Group Management Committee (GMC) provides expenditure over £250k. The Audit and Risk Committee supports the Board general executive management of Essentra within Treasury Committee and is responsible for: monitoring the integrity of agreed delegated authority limits determined by The Treasury Committee operates as a sub- the Company’s Financial Statements; reviewing, the Board. Specifically, the GMC supports the Chief committee of the GRC. It sets the Treasury Policy for challenging and approving its accounting policies; Executive in achieving Essentra’s values and goals. approval by the Board, and reports to the GRC for and scrutinising the effectiveness of the internal and Sustainability Committee management of treasury related risks and to the ARC external auditors and the Company’s internal control The Sustainability Committee focuses on all for the effectiveness of the process for managing and risk management systems. environmental aspects and is responsible for providing those risks. advice on and co-ordinating, sustainability-related activities across the Company. The Sustainability Committee reviews the strategies, policies, management, initiatives, targets and performance of the Company within its sustainability framework. 87 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
ESSENTRA PURPOSE, VALUES AND CULTURE Safety, respect and diversity During 2020, the Board, GMC and senior Essentra Values During 2020, the Board, GMC leaders took the opportunity to reconsider the Company’s purpose, values and goals to and senior leaders took the Openness, The values are used both in behaviours and ensure they remained relevant and aligned opportunity to reconsider honesty and to guide decision making and setting policies with the strategy. Following discussion across the Company’s purpose, integrity and provide a means of periodically assessing values and goals to ensure the organisation, the Board agreed that the and evaluating culture. The Essentra family purpose was still relevant but needed to reflect they remained relevant and culture has come to the fore during the the importance the business and the Essentra aligned with the strategy. pandemic and the commitment shown by family placed on doing business responsibly, leaders who upheld the values to keep people whether this involved considering business Energy for safe which in turn reassured our people, and ethics in who we do business with, ensuring change served to ensure the purpose of responsibly customers had the best product possible, providing products and services to continue to striving to do more to meet sustainability to be met. targets. The Board were pleased that the inclusion of ‘responsible’ came with the support and commitment of the Essentra family.
In meetings its purpose, Essentra’s values are used on a daily basis. Formally known as the Six Principles, the values enable our people to understand what matters the most and to drive those values forward in their roles BUILDING and everyday work. Whether recruiting new FOR THE FUTURE people, providing Health & Safety training or OUR VALUES OUR GOALS assessing risks, the values can be applied to OUR all spheres of Essentra. Safety, respect A winning, and diversity PURPOSE engaged and empowered team is to responsibly provide the More detail on our purpose can be found Openness, honesty products and Class-leading and integrity services our sustainability customers in the Chief Executive’s Review on pages need to succeed Energy Growth through 8 to 14 and Delivering on our purpose on for change innovation pages 15 and 16. 88 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Matters considered by the Board in 2020
The Board’s agenda is set by Strategy Financial Operational and Risk Governance and Ethics Leadership and People the Chairman and carefully • Approved changes to the • Approved the Company’s • Received regular reports from • Received updates from the • Received weekly updates planned, in conjunction with Company’s strategic roadmap trading statements, full year the Chief Executive and the Board Employee Champions during the peak of COVID-19 the Company Secretary and that sets out the Company’s and half year results and Chief Financial Officer and agreed a framework for on the safety and wellbeing of General Counsel, and with purpose, values and goals quarterly trading statements • Received detailed virtual visits our people the support of the Head of • Approved the equity raise • Received weekly financial presentations from senior • Undertook the annual • Monitored performance and Governance, to ensure that • Approved the acquisition of reports on cash management management across the acquisition integration review continued development of appropriate time is given to 3C! and performance in response businesses and considered • Participated in two externally Health and Safety risk and at managing the affairs of the • Held a virtual strategy session to the potential impact of reports from enabling facilitated Board evaluation, each meeting assessed Health Company. This ensures focus with GMC members, approved COVID-19 functional management review of the conclusions and and Safety performance on the Company’s strategic the business plan supported • Approved the Group budget about matters of material agreement on subsequent • Reviewed of the annual activities and key monitoring by an in depth-review of each for 2021 importance to the Company action plans employee engagement activities as well as reviewing divisional strategy • Cancelled the 2019 final • Undertook a considered • Received feedback from survey results. significant issues so that • Received regular strategy dividend in order to preserve review of each Principal an external review on the matters are considered in update sessions cash in light of uncertainties Risk and Emerging Risk and quality and balance of Board line with the schedule of • Received regular updates faced by the global pandemic approved the introduction agendas and papers reserved matters. An annual on progress of the Business • Approval of major capital of a new Principal Risk and • Reviewed and approved cycle of agenda items is in Process Redesign project. and operating expenditure Emerging Risk gender pay reporting place to support the work proposals • Received regular updates • Reviewed and approved of the Board. • Review of refinancing on progress of the Business the annual Modern Slavery In addition to scheduled Board proposals. Process Review project Statement meetings, the Board met on a • Review of risk strategy and • Received updates on the weekly basis for part of 2020 risk appetite outcome of sanctioned to receive updates on the four • Continued consideration market compliance failures in priorities set following the of Brexit implications and the Filters business outbreak of the pandemic. mitigating strategies • Review of the Company’s These four priorities are • Continued consideration of Right to Speak claims and reported on in more detail cyber security risk. ensuring arrangements at pages 17 and 18. are proportionate and independent • Received updated training on the Market Abuse Regulation. 89 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Principal decisions
Principal decisions are defined as both those Principal decision 1 Principal decision 2 Principal decision 3 that are material to the Company, but also Equity Raise Acquisition of 3C! Cash Preservation those that are significant to any of our key stakeholder groups. For more detail on our key • The Board agreed to place new ordinary shares • The Board approved the acquisition of 3C! as • The Board decided that due to the uncertainty stakeholder groups see page 23. In making up to a value of £97m (net of costs) to raise the acquisition met the Company’s strategic that COVID-19 had presented to consider the following principal decisions the Board additional equity and financial criteria, by creating significant measures available to preserve cash to maintain considered the views of its key stakeholders, as • Each of the Directors chose to subscribe for new value, strengthening the Company’s customer the best position possible well as the need to maintain a reputation for shares, and in total, directors subscribed for proposition and offering significant synergies • The Board discussed and agreed that high standards of business conduct and the £230k of new shares • The Board considered its stakeholders in cancellation of the 2019 full year dividend would need to act fairly between the members of the • An accelerated bookbuild process was used by reaching this decision and concluded that the support its approach to cash preservation Company. the brokers, however the Board were conscious acquisition would be a positive opportunity during the COVID-19 period and also agreed to that other retail investors, including staff may • The Board also considered the implications for not declare a HY2020 interim dividend want the opportunity to participate in the the Packaging division and agreed that it would • The Board recognised the importance of equity fundraise and agreed an offer should be strengthen the Packaging division’s position dividends to all shareholders but believed this made on the PrimaryBid platform to enable as with its key customers in the US pharmaceutical was a responsible action to take to conserve many investors to participate as possible sector cash during a period of uncertainty • The Board agreed that £50m of the net • The Board considered additionally that the • The Board also recognised that the need to proceeds of the equity raise would be used to acquisition would create a North Carolina hub preserve cash was important for the long- acquire 3C! whilst the additional amount raised providing the Packaging division with greater term success of the business and all of its would be used to strengthen the Company’s strength for future growth which would benefit stakeholders balance sheet and to give the Company staff, customers and suppliers. • The Board keeps dividend payments under flexibility to pursue other compelling strategic review. opportunities as and when they arise • The Board agreed that the reasons for their decision ensured the Company retained financial strength which would in the long term benefit of a variety of stakeholders including shareholders, staff, customers and suppliers. 90 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
BOARD EMPLOYEE ENGAGEMENT
During 2020, the Board Champions, Mary Positive feedback has been received by Reilly and Ralf Wunderlich continued to both our people and the Board. Whilst the engage with staff throughout the Essentra sessions are confidential, Mary and Ralf, family. The Board both enjoy hearing from with the support of the Future Leaders, Mary and Ralf and are committed to the have started to track whether there are Voice of the Employee initiative. any themes in order that they can be addressed as they think appropriate. The Board have made a commitment to: In addition to Voice of the Employee • receive updates at every meeting sessions, Mary joined a number of team • review themes and to engage management meetings across the businesses so that she as appropriate where the Board have any could speak with people directly to hear concerns for herself how they were managing to • review formal employee feedback for work remotely and to provide colleagues themes that may be raised directly with with an opportunity to raise any concerns people in the sessions to ascertain their with her. Unfortunately, it was not possible view on those matters to replicate this with staff working on the shop floor due to our own COVID-19 safety A schedule of visits had been agreed for 2020 measures and therefore during 2021 the but as it became apparent that Mary and Voice of the Employee sessions will focus Ralf would not be able to visit in person, an on reaching out to a wider group of staff to alternative framework was created to ensure ensure they have the same opportunity to that the Board still heard from people directly. provide their feedback. The framework uses virtual meetings and sessions are facilitated by the Future Leaders The Board look forward to further feedback who have worked with Mary, Ralf and the over the course of 2021. Head of Governance, to deliver Voice of the Employee sessions. 91 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT Q&A WITH RALF WUNDERLICH
The Role of the Board Champion What are your reflections on your “It is great for the first full year as a Board Champion? • The role was introduced • The Board attaches high Board to hear I was so pleased to become a Board following the introduction of importance to employee Champion and join Mary in this very the requirement for employee engagement and want to directly about what important role. Mary and I had worked on engagement in the 2018 UK engage with staff to deepen great plan to engage with many of our people Corporate Governance Code their understanding of matters the most – and intended to visit sites and had a planned Essentra’s working culture and schedule of visits but it was evident that by • The Board has appointed two approach to key issues including safety, sustainability, the end of Q1 these would not go ahead. We designated Non-Executive Directors as health & safety, inclusion, would need to adapt those plans if we were to to the role referred to as the Board diversity and sustainability community, meet our people and at that point we agreed Employee Champion, in order company culture.” to move to virtual meetings. As we considered to ensure that enough sites and • The Board want to understand what we could do virtually, it was hugely people have an opportunity for what our people consider to be Ralf K. Wunderlich disappointing to have to accept we would not direct contact with the Champions the greatest risks as well hear Non-Executive Director reach as many staff as would have done if we about the positive side of work for had visited a site. However, we have now got • The Board is keen to hear and Essentra a good structure around our virtual meetings understand the views of employees and we are sure that as lockdown continues, and the impact that Board • The Board Employee Champion we will be better prepared and able to meet decisions have on the workforce is not an HR position – it is to staff in 2021 and hopefully by the second half listen to our family members and of 2021 some in-person meetings are possible. • The Champions represent the make sure they have a voice that employee views and consider how is heard directly by the Board What have you enjoyed most the decisions taken by the Board so they can calibrate messages about the role? will impact the workforce. It is not that management and the I enjoy meeting our people and hearing a spokesperson for the Company engagement survey tell us about what matters to our people. Safety is in front of employees, more an our number one priority and a paramount employee spokesperson in front • Details of discussions remain concern for the Board, and by talking with of the Board anonymous but the Champions staff it is obvious that it is indeed everybody’s report back to the Board at number one priority. I really enjoy people every meeting talking to me about what Essentra means to them, and how they feel about working for Q&A 92 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Q&A “As this is still relatively Essentra. That is one of the questions in the Have there been any surprises? indicates the importance the Board places on new to UK boards, we are still learning to ensure that Employee Engagement Survey and being Our people are always very straightforward employee engagement and representation. the most value can be taken able to hear it direct from people makes a and open with us and I really value their As this is still relatively new to UK boards, we from the feedback we get.” real difference. honesty. We found the same when we were are still learning to ensure that the most value able to visit sites in 2019. This gives Mary can be taken from the feedback we get. Ralf Wunderlich What are the benefits of having this and I insights into what is important and Non-Executive Director designated role on the Board? we can then take that back to the Board. What have been the challenges The role gives the Board the opportunity to If we hear of something that’s not right, it of the role and how do you see it hear from people at different levels across means we can tackle that with the Board and developing? the organisation, especially staff on the shop management’s support. There have been two challenges. The first floor. It is great for the Board to be able to is the COVID-19 pandemic: we had to flip hear directly about what matters the most What has been the reaction from from in-person visits to virtual and put a – safety, sustainability, community, company employees to the role? framework in place to make that happen. culture amongst others – how they feel about I am always genuinely pleased to see that The other longer-term challenge is language helps the Board in performing their duties. our people take the sessions seriously and – with so many sites in so many locations, are straightforward with their feedback and we have had to think about how to ensure The role is there for the good and bad days questions. They want to talk to us and seem we can hear what people are saying. To help too. Mary and I are ready to listen to staff to enjoy the opportunity. We explain our roles with this, our graduates suggested using who have had to live through the impact of at the start of the session so that people are a mobile app so that people could submit difficult decisions taken by management and clear on what to expect. questions in their language in advance and are ready to answer and discuss any issue. we can address those. We have also involved our Future Leaders in What are the main themes our sessions. They have helped organise the What are you hoping to see evidence coming out of your meetings sessions and gain the opportunity to work of during your visits, both virtual and with employees? directly with senior managers as well as the in person, in 2021? This year, staff have been concerned about Board, and of course, they get to listen to With vaccinations now available, I am hopeful the pandemic: their safety, their emotional what their colleagues across the globe have this will bring us all back to a more normal, wellbeing. The Board were pleased that the to say too. or new normal business life. I am hopeful Essentra Thrives initiative expanded the that I will be able to get to meet our people Employee Assistance Programme to all staff What has been the reaction in person and those on the shop floor. Our across the globe. from the Board? business has made some difficult decisions The Board always hear back from Mary or I in 2020 in connection with restructuring the at every meeting. The Chairman, Paul Lester, business, and I am looking forward to meeting makes it a point to have feedback on each the people who have had to live through and every Board meeting agenda. Clearly this those changes. 93 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
DIVISION OF RESPONSIBILITIES
The roles of the Chairman and the Chief ensuring that rigorous financial controls and Executive are separately held and are so systems of risk management are maintained defined as to ensure a clear separation of as appropriate to the needs of the businesses responsibilities. The Chairman leads the within Essentra. Board and ensures its effectiveness, and the Chief Executive is responsible for the The Senior Independent Director (SID) can Non-Executive Directors provide executive management and performance be contacted via the Company’s registered an independent view in Board of Essentra’s operations. office. During the year, this role was held by discussions and in the development Tommy Breen, and upon his retirement, the of the Company’s strategy. The Board considers that, for the year ended role will pass to Mary Reilly in 2021 subject to 31 December 2020, the Non-Executive her re-election as a Non-Executive Director. Directors were each independent. In making The SID is available to shareholders to discuss this assessment of independence, the and develop an understanding of their issues Board considers that the Chairman and and any concerns which cannot be resolved Non-Executive Directors are independent of by discussions with the Chairman, the Chief management, and free from business and Executive or Chief Financial Officer, or where other relationships which could interfere such contact is inappropriate. with the exercise of independent judgement now and in the future. The Board believes External commitments that any shareholdings of the Chairman and The Board is fully aware of current external Non-Executive Directors serve to align their commitments for all of the Non-Executive interests with those of shareholders. Directors and is satisfied these do not distract from the time committed to Essentra. The Board considers that the Non-Executive Non-Executive Directors are also required to Directors provide an independent view in discuss any additional external appointments Board discussions and in the development with the Chairman prior to their acceptance. of the Company’s strategy. Non-Executive In addition, the time commitments of the Directors ensure a sound basis for good Chairman are the subject of review by the SID, corporate governance for the Company, in conjunction with the other Non-Executive challenging management’s performance and, Directors. The Conflict of Interest register is in conjunction with the Executive Directors, reviewed at each Board meeting. 94 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
While there were no material changes to the also remains available to meet outside of the forward for re-election on an annual time commitment of the Chairman during formal meeting schedule. basis. As Tommy Breen has announced the year, the Board took note of Paul Lester’s his retirement from the Board, he will not appointment as Chairman of Marley Limited. All of the Board have attended all Board and stand for re-election. The Board, including The Board concluded that he continues to be Committee meetings this year and with their the Chairman, is satisfied that each of the commitment to their roles clear, the Board In considering the Chairman’s able to fully satisfy his obligations to Essentra. Directors being put forward for re-election is content that the Non-Executive Directors continued time commitments to In considering the Chairman’s continued time continues to be independent and effective devote sufficient time to the business of the Company, the Non-Executive commitments to the Company, the Non- and that their ongoing commitment to the Essentra. Executive Directors may accept Directors also viewed positively Executive Directors also viewed positively his role is undiminished. The Notice of Meeting outside appointments, provided that such his exemplary attendance record exemplary attendance record at Essentra, contains additional information as to the appointments do not in any way prejudice at Essentra, ensuring that he was ensuring that he was able to attend 100% of recommendations of the Directors’ re- the ability to perform their duties on behalf of able to attend 100% of Board and Board and Committee meetings and other election. Essentra. Committee meetings. additional informal meetings with Board members throughout the year. The Board The conduct of Board matters expects this attendance record to continue Paul Forman, Chief Executive, currently During the year, there were eight scheduled going forward and Paul Lester has given holds one external non-executive position, Board meetings. In addition to these assurances of his continued commitments to and the Board is of the view that this is scheduled formal meetings, the Board met the Company. not detrimental to the performance of his weekly for a number of months during the duties given the time requirements involved first lockdown in the UK and on a number of During the year Mary Reilly took a role as and that this appointment is beneficial to other occasions as required. a Non-Executive Director at Gemfields Essentra given Paul’s exposure to another Limited. This was notified to the Board and business and their response to a wide variety Informal discussions are also held between Nomination Committee beforehand who of issues. The letters of appointment for the Chairman and the Non-Executive believe Mary has sufficient time to still fulfil Non-Executive Directors are available for Directors on a regular basis and additionally her role as Chairman of the ARC and Board review at the Company’s registered office and prior to or post each scheduled Board Champion. Mary continues to be available to prior to the AGM. With fluctuating COVID-19 meeting. Regular contact is also maintained meet outside of formal meetings. arrangements in place, please contact with the Chief Executive and with members [email protected] if you wish of the GMC. The SID has also held meetings Ralf Wunderlich was appointed to Shepherd to view these documents prior to travelling. with Non-Executive Directors without the Building Group Limited towards the end Chairman present. of the year and having notified the Board Directors’ elections and Nomination Committee of this The Company’s Articles of Association appointment, the Board concluded he still require that all new Directors seek election had sufficient time for his roles of Chairman to the Board at the AGM following their of the Sustainability Committee and Board appointment. In compliance with the 2018 Champion. As with Paul Lester and Mary, Ralf Code, all eligible Directors will put themselves 95 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
The Board is supported in its role by Board Operational matters and the responsibility Board paper review Committees and whilst they are a valuable for the day-to-day management of the In addition to the Board Effectiveness reviews, part of the Company’s corporate governance businesses are delegated to the Chief as detailed on page 104 of the Nomination structure, the Board, as a whole, maintains Executive, supported by members of senior Committee report, an externally facilitated oversight of such important matters executive management as appropriate, review of Board papers was undertaken. The and, after each Committee meeting, the within delegated authority limits. The support review identified areas of good practice in the The GMC met virtually several Chairman of the Audit and Risk Committee of the GMC ensures a strong link between quality and content of some Board papers. times a week during 2020 as it reports on the matters which have been Essentra’s overall corporate strategy and For instance, reports to the Board on cyber steered the business safely through reviewed. In particular the Board looks to the its implementation within an effective risk were highly commended, and this meant Covid-19 and intends to meet on a Audit and Risk Committee to undertake the internal control environment and robust the Board were very well cited on the risk and weekly basis in 2021 until such time majority of the work involved in monitoring risk management. mitigating actions being taken. Other Board as it is appropriate to reconsider and seeking assurance as to compliance with papers had scope for improvement to reduce Full details of the membership of the GMC its meeting cadence. the internal controls and risk management the dependency on appendices and ensure can be found on pages 79 and 80. practices within this structure. reports were succinct and clearly set out the input required from the Board. Other specific responsibilities are delegated The GMC met virtually several times a week to the Remuneration, Nomination and during 2020 as it steered the business safely Applying Essentra’s corporate Sustainability Committees. The Board through COVID-19 and intends to meet on responsibility principles believes that it, and its Committees, have a weekly basis in 2021 until such time as The Chief Executive is the Director with the appropriate composition to discharge it is appropriate to reconsider its meeting primary responsibility for the implementation their respective duties effectively with cadence. The GMC has adopted a clear and integration of Essentra’s corporate the appropriate level of challenge and governance framework: agendas are set responsibility principles across the Company. independence, and that the members of the according to the framework and all matters During 2020, the Group Operations Director Board in conjunction with the senior executive arising are addressed. Papers are circulated in was responsible for co-ordinating the teams are well equipped to drive and deliver, advance of the meetings and the CEO makes operation of detailed policies on health the Company’s strategic objectives. good practice of ensuring views of all GMC are heard. As these behaviours are modelled and safety and the environment, and the The Board is of the view that it has a highly across the business, it has encouraged Company Secretary and General Counsel competent Chairman who, together with these practices to be shared across other was responsible for co-ordinating policies on each of the other Non-Executive Directors, management committees, all of which have ethics, which support Essentra’s commitment has considerable international experience contributed to continual improvements in to its corporate responsibility principles. at a senior level in the management of effective corporate governance and timely Further details of these policies can be viewed activities broadly similar to those carried upward reporting within the Group. on the Company’s website. out by Essentra and the material issues likely to arise for the Group. 96 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Diversity Sustainability Committee Information and professional During 2020, the Diversity and Inclusion The Sustainability Committee has now met development Steering Group that had been established in for its first full year. Under the leadership of The Chairman, supported by the Company 2019, met early in the year and considered Ralf Wunderlich, a Sustainability strategy Secretary and General Counsel, takes plans for diversity initiatives during 2020. The has been developed and targets agreed so responsibility for ensuring that the Directors onset of the pandemic made it challenging that sustainability can be reflected in the receive accurate, timely and clear information. for the Group to continue their work as people wider strategy. Given the important work needed to focus on safety measures, however, undertaken by the Sustainability Committee, On appointment, an induction programme The Board continues to confirm a this did not diminish the importance attached a separate report has been prepared on tailored to their individual needs is available strong commitment to diversity to Diversity & Inclusion. With a global its activities and can be found on pages to Directors, and is designed to assist including, but not limited to, gender workforce facing challenges brought about 100 and 101 whilst a more information on them in their understanding of Essentra at all levels of the Group. by COVID-19 it was agreed that all employees Class-Leading Sustainability can be found and its operations. should be included in the Essentra Thrives on pages 36 to 41. initiative, and they now have access to the Throughout a Director’s tenure, they are Employee Assistance Programme regardless Conflict of interests encouraged to develop their knowledge of their location or grade. The emotional Directors have a statutory duty to avoid of the Group through meetings with senior wellbeing of all our people is a priority and actual or potential conflicts of interest. The management and site visits. Directors are also location or grade should not be a barrier to Company’s Articles of Association permit provided with updates, as appropriate, on receiving support. the Board to consider and, if it sees fit, to matters such as fiduciary duties, Companies authorise situations where a Director has Act requirements, share dealing restrictions The Board continues to confirm a strong an interest that conflicts, or may possibly and corporate governance matters. commitment to diversity including, but not conflict, with the interests of the Company. All Directors have access to the advice and limited to, gender diversity at all levels of the The decision to authorise a conflict of interest services of the Company Secretary and Group, and considers its own composition can only be made by non-conflicted Directors. General Counsel, and for the year under provides a reasonable indication of its A register of Directors’ Interests is maintained review, his advice was sought in relation to approach to this commitment. Further so that any potential concerns are addressed share dealings only. In the furtherance of their information can be found on page 103. before any material issues may arise. duties, there are agreed procedures for the The Conflict of Interests register and the Directors to take independent professional schedule of Directors’ Interests is reviewed advice, if necessary, at the Company’s at each Board meeting. During the course expense. No Director took independent of the year, there were no material conflicts professional advice during the year. of interest impacting on the conduct of the Board’s activities. 97 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Shareholder communications be held in future years which will allow votes investment activities. Slide presentations are The Board recognises the importance of cast electronically to be counted on the day. made immediately available after the full effective communication, and seeks to The Board support the proposal to amend and half year results, and are also available maintain open and transparent relationships the Articles and believe this will provide on the Company’s website to view and with its shareholders and other stakeholders, an increased opportunity for shareholder download. The Company ensures that any Directors, understand including providers of finance, customers and engagement. The Articles also set out some price-sensitive information is released to all the views and concerns of suppliers. This is achieved by regular updates minor amendments and the AGM Notice shareholders at the same time, in accordance major shareholders in relation through public announcements, the corporate explanatory notice sets out the details of with regulatory requirements. During the specifically to their views on website and other published material. these changes in more detail. year the Chairman, SID, Chairman of the governance and performance of Remuneration Committee and Chairman the Company against strategy. All shareholders can meet any of the At the AGM, the level of proxy votes lodged of the Sustainability Committee have held The Chief Executive, Directors of the Company should they so on each resolution is made available, both independent meetings with shareholders Chief Financial Officer and wish. In particular, the SID is available to at the meeting and subsequently on the and additionally the Chairman has attended Investor Relations Director have shareholders should they have concerns or Company’s website. Each substantially meetings with the Chief Executive. At each primary responsibility for wish to share their views. Feedback from separate issue is presented as a separate Board meeting reports are presented detailing investor relations. meetings with shareholders is provided resolution, and the Chairmen of the Audit the engagements with shareholders to regularly to the Board so they are aware of and Risk, Nomination, Remuneration and ensure that the Board as a whole has a clear any issues or concerns, and ensures that Sustainability Committees are available to understanding of the views of the shareholders. the Board has a balanced view from major answer questions from shareholders. investors. Following advice from the UK Financial reporting The Company also communicates and government, the AGM in 2020 was held as The Directors have acknowledged, in the engages regularly with its major institutional a closed event in order to observe COVID-19 Statement of Directors’ Responsibilities shareholders and ensures that all the safety measures and shareholders were set out on page 149, their responsibility for Directors, including the Non-Executive encouraged to submit questions in advance preparing the Financial Statements of the Directors, understand the views and concerns of the meeting. For 2021, the Board will host Company and the Group. The Directors are of major shareholders in relation specifically to both an in-person and virtual AGM so that responsible for preparing the Annual Report their views on governance and performance the Board can continue to communicate with and Accounts, and they consider that the of the Company against strategy. The Chief all shareholders, including private investors, Annual Report and Accounts taken as a whole Executive, Chief Financial Officer and Investor who are provided with the opportunity to put are fair, balanced and understandable. The Relations Director have primary responsibility questions to the Directors. Shareholders are External Auditor has included a statement for investor relations. Virtual presentations for encouraged to attend virtually but will need about their reporting responsibilities in the analysts and shareholders were held during to lodge votes by proxy. The Notice of AGM Independent Auditors‘ Report, set out on the year, and virtual meetings were also includes a proposal to amend the Articles of pages 210 to 218. undertaken with key institutional investors to Association in order that hybrid meetings can discuss strategy, financial performance and 98 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
The Directors are also responsible for the processes that cover, amongst other matters, • every month, each division submits detailed publication of half year results, as required by segregation of duties, reporting responsibilities operating and financial reports covering the Disclosure and Transparency Rules of the and review and approval requirements. The all aspects of performance. These are Financial Conduct Authority. This provides a Manual prohibits management overrides reviewed by the Chief Financial Officer and general description of the financial position and the processes set out within the Manual the Group’s central Finance function, and and performance of the Company and the are also reflected within financial reporting summary reports are communicated to the In accordance with the 2018 Group during the relevant period. systems and the framework for financial GMC and the Board Code, the Board acknowledges controls within the Group. A Delegation of • certificates are required from the businesses its overall responsibility to Internal controls Authority is in place, that is also reviewed and to confirm compliance with the Group’s shareholders to ensure that an In accordance with the 2018 Code, the Board updated on a regular basis, that identifies policies (including financial) and procedures adequate system of acknowledges its overall responsibility to approval processes for different matters. The at both the half year and year end. risk management and internal shareholders to ensure that an adequate Manual is applied across the entire Group and control is in place. system of risk management and internal supported by a twice yearly confirmations Directors’ and Officers’ insurance control is in place and for reviewing the from divisional management in relation to In accordance with the Company’s Articles of effectiveness of this system. Such a system adherence to the Group accounting policies. Association, and to the extent permitted by can only be designed to mitigate, rather the laws of England and Wales, the Directors Further details on the Company’s risk than eliminate, the risk of failure to achieve are granted an indemnity from the Company management system and internal controls business objectives, and can therefore in respect of those liabilities incurred as a result can be found on pages 109 and 110. only provide reasonable, and not absolute, of their office. In respect of those matters for assurance against material misstatement The following enables the Board to review the which the Directors may not be indemnified, or loss. This is essential for reliable financial the Company maintained a Directors’ and reporting and also for the effective effectiveness of the system of internal control and the financial reporting processes: Officers’ Liability Insurance Policy throughout management of the Group. the year. It is anticipated this policy will be • the ARC meets regularly and reports to renewed. Neither the Company’s indemnity, The internal control and risk management nor the insurance policy provide cover, to the process for financial reporting processes is the Board, no less frequently than at every Board meeting following an ARC meeting extent that a Director is proven to have acted documented within the Essentra Accounting dishonestly or fraudulently. Manual (the “Manual”) that is updated • the terms of reference provide a framework on a regular basis. The Manual sets out for the ARC to review and oversee the quality, the procedures and process established for integrity, appropriateness and effectiveness of internal and external financial reporting the Group’s internal control framework and incorporates accounting policies that • the Board has met with divisional Managing are adopted by the Company, as well as Directors as has the ARC, who have processes and controls relating to tax and discussed with them the internal control treasury matters. The Manual sets out clear environment at local sites 99 CORPORATE GOVERNANCE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Roles and responsibilities
Chairman Senior Independent Director (SID) Non-Executive Directors
• Sets the Board agenda primarily focused • Provides a “sounding board” for the Chairman • Providing constructive challenge to executive on strategy, performance, value creation, • Serves as an intermediary for the other Directors management culture, stakeholders and accountability, and when necessary • Bring experience and objectivity to the ensuring that issues relevant to these areas • Acts as an alternative point of contact for Board’s discussions and decision-making are reserved for Board decision shareholders where contact through the normal • Monitor the delivery of the Group’s strategy • Shapes the culture in the Boardroom channels of Chairman, or other Executive against the governance, risk and control • Encourages Board members to engage in Directors has failed to resolve any concerns, or framework established by the Board Board and Committee meetings for which such contact is inappropriate • Responsible for evaluating the performance • Fosters relationships based on trust, mutual • Leads the annual assessment of the of the Chairman, led by the SID respect and open communication between effectiveness of the Chairman 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 Chief Financial Officer Company Secretary
• Proposes the strategy to the Board and • Lead, direct and oversee all aspects of • Maintains a record of attendance at Board implements the strategy which has been the finance and accounting functions meetings and Committee meetings approved by the Board of the Group • Responsible for ensuring good information • Communicates to the workforce the • Contributes to the development of strategy flows to the Board and its Committees, and expectations in respect of the Company’s culture and management of the Group’s business between the GMC and the Non-Executive and for ensuring that operational policies and • Manage relationships with the external auditor Directors practices drive appropriate behaviour and key financial institutions and advisors • Advises the Board on all regulatory and • Develops manageable goals and priorities for • Ensure effective internal controls are in corporate governance matters the management team place and compliance with appropriate • Assists the Chairman in ensuring that • Leads and motivates the management teams accounting regulations for financial, the Directors have suitably tailored and • Ensures that the Board is aware of the regulatory and tax reporting detailed induction and ongoing training and views of the senior management team professional development programmes on business issues • Develops proposals to present to the Board on all areas reserved for its judgement 100 GROUP SUSTAINABILITY COMMITTEE REPORT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT GROUP SUSTAINABILITY COMMITTEE REPORT
The Sustainability Committee is Roles and responsibilities responsible for driving forward the Group wide approach to sustainability with a The role and responsibility of the Sustainability • Understand whether these responses Committee is to: are consistent with the risk appetite focus on reducing and ideally eliminating • Review and assess the Company’s of the Company any environmental impact. The exposure to sustainability-related issues • Identify potential gaps in approach and Sustainability Committee agreed within • Assess the Company’s responses to high-level approaches to closing those gaps its Terms of Reference that it would these issues report to shareholders on its activities so that shareholders can better understand the role of the Sustainability Committee.
Membership and attendance
Meetings during the year
Ralf Wunderlich, Chairman 4 (4) Nicki Demby, Non-Executive Director 4 (4) Mary Reilly, Non-Executive Director 4 (4) Paul Forman, Chief Executive Officer 4 (4) Jon Green, Company Secretary and General Counsel 4 (4) Nick Pennell, Group Programme Director 4 (4)
Other attendees During 2020, the Chairman, the SID, the Chief Financial Officer, the Strategy and Commercial Director, the Group Communications Director and the Group HSE Director were invited to attend every meeting. Figures in brackets denote the maximum number of meetings that could have been attended. The Committee Secretary was initially the Group Sustainability Coordinator, and the role has now been passed on to the Head of Governance. Lily Liu was appointed as a member of the Sustainability Committee with effect from 1 January 2021.
Ralf Wunderlich Non-Executive Director 101 GROUP SUSTAINABILITY COMMITTEE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Key activities 2020 Embedding sustainability and The Sustainability Committee has contributed • Approved four sustainability targets for reducing risk to setting targets used by the Remuneration i) zero waste to landfill sites, ii) total waste Following the first full year of the Sustainability Committee to align remuneration with production, iii) the percentage of packaging Committee, the increasing focus on sustainability. This has further underpinned and raw materials from sustainable sources sustainability has ensured the Sustainability the importance and commitment placed and iv) Scope 1 and 2 greenhouse gas Committee has been very active in supporting on sustainability. (GHG) emissions the Group as it has increased its focus in this “As sustainability continues The Sustainability Committee has also area. During the year, we asked our people to gather momentum, • Agreed KPIs to support reporting progress considered how sustainability initiatives and what mattered to them and their response it is embedded within the on the sustainability targets and monitored the development of the Group’s sustainability reporting against those KPIs highlighted how important sustainability organisation that will provide was to them. This was incorporated into the strategy can reduce and mitigate the • Reviewed disclosures and the results of the the greatest impact for the wider strategy and having engaged with staff, Principal Risk on Environmental, Social and Carbon Disclosure Project which has moved environment.” there was a momentum to continue to seek Governance (ESG) risks. Recommendations from a ‘C’ to a ‘B’ out ideas and initiatives that could be shared made by the Committee has helped to • Reviewed disclosures made under the across the organisation. inform the work of the GMC, divisions and voluntary Ecovadis index and the progress enabling functions thereby reducing the made towards improving the existing Those ideas and the energy created has Group’s exposure to the Principal Risk on silver score been shared with the wider organisation ESG. For example, disclosures made as part • The Sustainability Committee invited two by establishing a Sustainability Working of CDP reporting have identified further guest speakers – a major bank and Helsinki Group comprising representatives from improvements that can be made across Nasdaq listed manufacturing company the divisions, Group HSE, Legal function, the Group, that when implemented will both – to share their journeys to support the Group Communications and Group Investor decrease the risk exposure and increase the Sustainability Committee as it develops Relations. The Sustainability Working Group CDP rating. its understanding of best practices and has also been able to monitor and respond learnings from other companies and on ESG and sustainability related topics on Task Force on Climate Disclosure (TFCD) various stakeholders a day-to day-basis. The Sustainability Committee will spend time • Received updates on key sustainability during 2021 considering the impact of TCFD initiatives including the reduction of single Building on the response from employees, disclosures in order to meet TFCD reporting use plastics across the Group. the Sustainability Committee agreed four requirements. The Sustainability Committee sustainability targets. These continue to will focus on the four TFCD disclosure areas be embedded within the organisation and of governance, strategy, risk management monitoring the progress against the agreed and metrics and targets and review existing KPIs will be the focus for the Sustainability activity and reporting metrics as well as Committee during 2021. identify where there may be gaps in order to reach an agreed approach. 102 NOMINATION COMMITTEE REPORT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
NOMINATION COMMITTEE REPORT COMPOSITION,
SUCCESSION AND Roles and responsibilities EVALUATION • Reviewing the size, structure and • Undertaking succession planning for the composition of the Board to ensure they Board and senior executive positions and remain appropriate to the Company’s keeping under review the leadership needs strategic objectives of the business • Support the development and keep under • Determining the independence of Directors review diversity and inclusion • Assessing whether Directors commit enough • Recommending membership of the Board time to discharge their responsibilities and its Committees and leading the process • Reviewing the induction and training needs “The Nomination for new Board appointments of Directors Committee actively considers whether succession plans build diversity and Membership and attendance
inclusion into the Meetings during the year talent pipeline.” Paul Lester 3 (3) Paul Forman, Chief Executive 3 (3) Tommy Breen, Non-Executive Director 3 (3) Mary Reilly, Non-Executive Director 3 (3) Lorraine Trainer, Non-Executive Director 1 (1) Ralf Wunderlich, Non-Executive Director 3 (3) Nicki Demby, Non-Executive Director 3 (3)
Other attendees During 2020, 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, with the support of the Head of Governance who also attends all meetings.
Paul Lester, CBE Lorraine Trainer retired from the Board on 20 May 2020 and therefore was only scheduled to attend 1 of the meetings. Non-Executive Chairman 103 NOMINATION COMMITTEE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
The Nomination Committee Key activities 2020 • Encouraging further action to embed The Chief Executive presented his annual agreed to trial a Board • Reviewed the composition, structure, and develop diversity and inclusion management succession plan to the Apprentice scheme with size and skill set of the Company’s Board across the organisation Nomination Committee which was a view to increasing the and the Committees and recommended • Assess whether directors are able to considered in detail with ongoing updates pool of talent available the appointment of Lily Liu to the commit enough time to discharge provided at following meetings. This process to all plc boards. Sustainability Committee their responsibilities helps to ensure that the development of senior management and other high • Reviewed the Company’s approach to performing individuals is actively managed a diversity and inclusion Board apprentice so that the business has the leadership it • Reviewed succession planning for the During the year, the Nomination Committee agreed to pilot the introduction of a Board requires. The Nomination Committee also Board, key roles on the GMC and senior considers whether the succession plan builds management roles and the plans to Apprentice in 2021. Both the Board and the Nomination Committee recognise there diversity in senior roles and where necessary a regular invitee, and her enthusiasm and address any development needs for this allows the Nomination Committee, the interest in sustainability was evident in her senior management is a general lack of available talent from within ethnic minority communities with the Chief Executive and the Group HR Director contribution as was her commitment to • Reviewed the leadership needs of the attributes required for UK plc board positions. to agree actions to better ensure the talent integrate sustainability within the strategy business as it developed its strategy The Nomination Committee therefore agreed pipeline is more diverse. The development planning cycle for 2021. The Nomination including the impact of COVID-19 on to trial a Board Apprentice scheme with a of a diverse range of talent will continue Committee are very pleased to approve the nature of leadership required by view to increasing the pool of talent available to be a focus in 2021. The Nomination Lily’s appointment. the organisation to all plc boards. The individual selected will Committee noted the importance of the Diversity and inclusion • Reviewed the results of the Board have the appropriate attributes to go on Future Leaders Programme, which successfully Evaluation and implemented an action to become a future Non-Executive Director recruited a diverse and broad selection of The Nomination Committee and the Board plan accordingly but be in need of an opportunity to gain plc graduates. Continued engagement with the continue to review diversity and inclusion Future Leaders was critical to not just the • Reviewed and approved the Nomination board experience which this role will provide. and noted that whilst some initiatives had programme’s success and to maintaining Committee Report for inclusion within This will run as a 12-month programme and out of necessity received a lower profile whilst momentum by those selected throughout the 2019 Annual Report will provide both the individual and the Board the organisation managed its way through their careers. the global pandemic, the importance of • Reviewed and agreed revised Terms of with benefits. We look forward to reporting on diversity and inclusion remained. The launch Reference for the Nomination Committee this initiative in our next annual report. Sustainability of Essentra Thrives, which supports health and Key Activities for 2021 Talent management and succession During the year, as the Sustainability wellbeing across the organisation, emphasised planning Committee continued to embed itself the importance of including all of Essentra’s • Ongoing review of succession planning for The Nomination Committee continues to into the governance framework and people and providing them with the same the Board, its Committees, the GMC and in the organisation, the Nomination level of support regardless of role or location. senior management roles take an active interest in the quality and development of talent and capabilities below Committee agreed to appoint Lily Liu to the The Committee agreed that as the • Monitoring the introduction and Board level, particularly at GMC level and Sustainability Committee. Lily had initially organisation emerged from the pandemic, effectiveness of a Board Apprentice senior management. attended the Sustainability Committee as a relaunch of diversity and inclusion would 104 NOMINATION COMMITTEE REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
benefit everyone by continuing to build Terms of Reference. The process takes into • a review of the strategy for each one • there is a good process for stakeholder awareness and understanding amongst staff. account the independence of the candidate, of the divisions management with regular meetings with This would also reflect agreed activity that an assessment of the candidate’s skills • development of ESG throughout the shareholders along with virtual employee formed the wider organisational strategy. against the required skills and experience for organisation engagement sessions. the role and how the appointment supports • initiating a processes for stronger talent • Board support had improved considerably During 2020, Diversity and Inclusion Steering the Board’s commitment to diversity. management and succession planning over the year Group that had been established in 2019, • the Audit and Risk and Remuneration met early in the year and considered plans The Nomination Committee agreed that the • recruitment of a Head of Governance to Committees were very well run and for diversity initiatives during 2020. The Group fundamental objective for all appointments enhance board support and strengthen highly effective considered the challenges it faced across remained the that the best person needed to governance throughout the organisation the globe with differing attitudes towards be appointed to do the best job for Essentra, Priorities for change diversity and inclusion. Whilst the Diversity taking into consideration other factors, such A second board evaluation and Inclusion Steering Group agreed it was as market and international experience, and The Board agreed in October 2020 to carry out The Board agreed that following the second appropriate to focus on people’s safety as diversity of thought and background. a further review, as the Board was conscious review, the following priorities would be a priority during the global pandemic, there that not having been able to meet in person addressed during 2021: was agreement that this did not decrease the Appointing people on merit, without any form had made the dynamics of the Board more • a refreshed focus on Board dynamics importance or need of diversity. The Diversity of discrimination, remains the key component challenging. The informal time that the Board to ensure that the Board operated as and Inclusion Steering Group look forward of Essentra policies across its international would usually spend together had been lost, efficiently as possible with creative to renewing their focus and continuing their operations at all levels. Further details on and the Board believed that it needed to approaches to be adopted to ensure the work in 2021. the Company’s approach to diversity and consider its performance again through a Board worked well together inclusion can be found on page 34. fresh pair of eyes. Sam Allen Associates (SAA) The Nomination Committee also considered was appointed to externally facilitate an • more time would be spent on divisional the Board’s diversity and looked at its Board evaluation interview-driven review of the effectiveness strategies supported by regular reporting on the agreed performance metrics for composition. The Board agreed that its As required the 2018 Corporate Governance and performance of the Board, its committees each of the divisional strategies composition was reasonably diverse both Code, the Board undertakes an annual review and directors. SAA engaged with the Chairman from gender and ethnicity but that a Board of its effectiveness. The Board engaged of the Nomination Committee to set the • increased focus on succession planning Apprentice could further encourage greater Lintstock to carry out this review and with the scope and areas of focus. The conclusions were from senior management upwards to ethnic diversity and provide views and insights Chairman of the Nomination Committee, the presented to the Board in early 2021: further develop a diverse talent pipeline that could benefit the performance of both scope of evaluation and areas for focus were in line with strategic expectations. the Board and the organisation as a whole. agreed. The conclusions were provided to the • the Board is very experienced and fully involved in decision making and competent Key objectives and selecting a service Board in February 2020 with an action plan provider for 2020 evaluation Board nomination process developed and further discussions held by the on all regulatory matters Whilst there were no appointments made Board in May 2020 following a re-scheduling • the Board has adapted well to a rapidly Neither Lintstock nor SAA have any during the year, the Nomination Committee of the presentation due to COVID-19. These changing situation with robust debate other connection with the Company follows a process to ensure that an open and actions were implemented in early 2020 and throughout 2020 or individual Directors. transparent process is used in line with its included: 105 CHAIRMAN OF THE AUDIT AND RISK COMMITTEE’S LETTER ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
AUDIT, RISK AND INTERNAL CONTROL
Roles and responsibilities Financial Reporting Internal Audit • Ensuring the interests of the shareholders • Overseeing the internal audit activities “The Committee has are properly protected • Monitoring and reviewing the effectiveness continued to play a key • Monitoring and reviewing the integrity of of the Internal Audit function the Financial Statements and any formal • Agreeing the annual internal audit plan and role within the Company’s announcements relating to financial reviewing the output from that performance External Audit governance framework • Reviewing the relevance of our current accounting policies • Making recommendations to the Board in relation to the appointment, reappointment to support the Board • Challenging significant accounting and removal of the External Auditor judgements in matters relating to • Reviewing the relationship with the External Risk Management, Internal Control Auditor and monitoring their independence financial reporting, internal and Compliance and objectivity controls, compliance • Reviewing regular reports from the • Continuous challenge of the effectiveness Group Risk Committee and reviewing risk and quality of the external audit process and risk management.” management processes • Agreeing the scope, terms of engagement • Reviewing the effectiveness of the internal and fees for the external audit financial controls • Initiating and supervising a competitive • Right to Speak arrangements and the tender process for the external audit when follow up of any claims made through this required mechanism • Monitoring the engagement policy of the • Reviewing regular updates from the Group External Auditor to supply non-audit services Compliance Committee and assessing • Reviewing and discussing reports presented progress on the compliance transformation by the external auditor at each meeting Mary Reilly programme Non-Executive Director 106 CHAIRMAN OF THE AUDIT AND RISK COMMITTEE’S LETTER CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Membership and attendance
Dear Shareholder, Audits during 2020 were conducted on Meetings during the year As Chairman of the Essentra plc Audit and balance sheet reviews, financial controls, Mary Reilly, Chairman 4 (4) Risk Committee (the “ARC”), I am pleased supply chain integrity, safeguarding people, Tommy Breen, Non-Executive Director 4 (4) to present my Report for the year ended business resilience and security. Our Group Lorraine Trainer, Non-Executive Director 2 (2) Assurance team were able to both support 31 December 2020 to shareholders. Nicki Demby, Non-Executive Director 4 (4) the businesses whilst providing an additional Other attendees The Report provides an insight into the ARC’s level of assurance that the ARC needed. Lorraine Trainer resigned as a Non-Executive Director on 20 May 2020 and therefore only attended 2 meetings. Audits were undertaken remotely using deliberations and activities throughout The External Auditor, Chairman of the Board, Chief Executive, Chief Financial Officer, Head of Group Assurance, Group Financial the year and explains how it has fulfilled a combination of in-depth reviews and Controller, Ralf Wunderlich and members of the Group Management Committee (GMC) attended meetings by invitation, as its oversight role on behalf of the Essentra self-assessment checklists with follow up 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. Board, by monitoring and robustly challenging discussions held with relevant colleagues. We continue to develop our internal audit The ARC received presentations from the Chief Executive, the Chief Financial Officer, Group Financial Controller, Divisional the integrity of the Group’s financial Managing Directors, Group Head of Tax, Group Head of Treasury, UK Shared Services Finance Director, the Chief Information reporting the systems of internal control practices to take account of the challenges Officer and the Chief Information Security Officer. presented by the pandemic. and its risk management framework. The Figures in brackets denote the maximum number of meetings that could have been attended. Report explains how the ARC has met the The ARC also spent time reviewing the The Company Secretary and General Counsel acts as Secretary to the ARC with the support of the Head of Governance requirements placed on audit committees who attends all meetings. by the 2018 Code and applicable guidance, processes associated with the Company’s risk laws and regulations. In carrying out its management and supported the Board in duties the ARC also operated in accordance its assessment of the Principal and Emerging business. Despite the challenges presented As we emerge from the disruption caused with recommendations set out in the FRC Risks and the effectiveness of the mitigation by COVID-19 and the focus on safety, the by the pandemic, the ARC will be focused Guidance on Audit Committees which was plans. Following an extensive review of Company continued with training and other on overseeing the extended Group published in April 2016 and remain cognisant how COVID-19 may have changed the risk compliance activities. The plan agreed for Assurance programme and ensuring that of updated FRC guidance, letters and reports profile and appetite, the ARC recommended 2021 continues to drive improvements and the risk management, internal control and that are relevant to the work of the ARC. redefining some of our Principal Risks and the takes account of changes in risk profile and compliance activities remain robust and introduction of a new Principal Risk: Exposure lessons learnt, and has provided assurance effective. The ARC will also be working with The Committee has continued to play a to the Cyclical Industrial Market – Components to the ARC that the terms of the DPA agreed the External Auditor on the transition of the key role within the Company’s governance division. Emerging Risks were also refined and with the DoJ can be met on an ongoing basis. partner. Finally, as Chairman of the ARC, I framework to support the Board in matters a new risk identified: Evolving Conditions of am pleased to engage with shareholders and relating to financial reporting, internal control the Debt Market. The detailed report which follows, aims continue to be available to meet if asked. and risk management. COVID-19 brought a to provide insight into the workings and focus to the system of internal controls and In light of the matters highlighted in activity of the ARC throughout the year as Mary Reilly financial reporting and we sought assurance last year’s Annual Report regarding the it seeks to assist the Board in discharging Non-Executive Director Audit and Risk Committee Chairman over these with the support of our Group investigations into historical non-compliance its responsibilities. The Report covers, inter 5 March 2021 Assurance team. with US trade sanction laws in the Filters alia, the integrity of Financial Reporting; division and the settlements reached with the relationship with the External Auditor; As the pandemic impacted the original 2020 the DoJ and OFAC in 2020, the ARC have the progress made with the compliance internal audit plan, a revised plan of internal paid particular attention to the accounting transformation programme and the audits was put in place for H2 that focussed and reporting implications of the agreed effectiveness of the risk management process on key areas of risk to the business at that settlements and the ongoing programmes and internal control processes. I believe time so that the audit would also support the to enhance compliance procedures across that the ARC has the necessary experience, business’ approach to those areas. The ARC the Group. During the year, the ARC expertise and financial understanding to fulfil has since agreed an extended internal audit received regular reports on the compliance its responsibilities and meet the increasing plan for 2021. transformation programme to ensure that governance demands. it was being implemented across all of the 107 REPORT OF THE AUDIT AND RISK COMMITTEE ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
REPORT OF THE AUDIT AND RISK COMMITTEE
Governance In the performance of its duties the ARC evaluation reconfirmed that the ARC worked All the ARC members are independent has independent access to Group Assurance well and to be “a very diligent and effective Non-Executive Directors, and have financial and the External Auditors and may obtain Committee” that made time for “good and/or related business experience gained outside professional advice if required. Group debate on important matters”. in senior positions at other large diverse Assurance and the External Auditor has direct There is an annual cycle of items considered organisations. Mary Reilly has been the access to the Chairman of the ARC who by the ARC covering the requirement of the Chairman of the ARC since April 2018, and held a number of meetings with the Group external audit cycle and any other relevant the Board is satisfied that Mary has recent Assurance team and the External Auditor matter, as detailed in the Terms of Reference “The ARC operates very well and and relevant financial experience. Mary spent during the year outside formal Committee of the ARC. The agenda cycle is reviewed the majority of her career at Deloitte and is meetings. The Chairman of the ARC also was said to be a very diligent and annually to ensure that the ARC remains an experienced audit chair. Each of the other liaises with the Chief Financial Officer as effective Committee.” proactive and relevant. The current Terms ARC members also has relevant experience: well as the Company Secretary and General of Reference for the ARC are available at Nicki Demby is a fellow of the Institute of Counsel as necessary to ensure there is robust essentraplc.com and are also reviewed Chartered Accountants and formerly a oversight and challenge in relation to financial annually. The Terms of Reference provide a partner of Deloitte LLP and Tommy Breen control, risk management and compliance. framework for the ARC’s work to review and is a former CEO of an international sales, Two evaluations were carried out of the oversee the quality, integrity, appropriateness marketing and services group. Biographies for Committee during the year. and effectiveness including the following: the ARC members can be found on page 83 and 84. As a whole the Board believes that The first review was carried out by Lintstock • Financial Statements and external the members of the ARC are competent in who made recommendations relating to the financial reporting the business sectors within which the Essentra performance of the meetings. An action plan Group operates. The ARC supports the Board • significant financial judgements was agreed and implemented early in 2020. and reports to it following each Committee • Tax and Treasury function review The overall performance of the ARC was very meeting. No member of the ARC has a highly rated. • cyber security response connection with the current External Auditor. • the compliance programme A second evaluation was undertaken by • the efficacy of the Internal Audit function Sam Allen Associates at the end of 2020 to • the risk management processes and consider whether the dynamics of the ARC practice had been impacted through a prolonged period of virtual meetings. The second • the relationship with, and performance of the External Auditor. 108 REPORT OF THE AUDIT AND RISK COMMITTEE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Financial Statements and external Tax and treasury review Additional details on the Group Tax financial reporting During the year joint presentations were made Strategy can be found on essentraplc.com/ Ensuring the integrity of the Financial to the ARC by the Group Head of Tax and the responsibility. Statements and associated announcements Group Head of Treasury due to the recognition is a fundamental responsibility of the ARC. of the close working relationship of these two Cyber security response In recommending to the Board, with regard functions, particularly in relation to: The Chief Information Officer attended ARC to the approval of the 31 December 2019 meetings on a regular basis and provided ARC Annual Report and the 30 June 2020 Half The tax strategy, attitude to tax risk and with regular reports on the improvements During the year, the pandemic Year Report, the ARC reviewed, examined governance and monitoring: and controls being implemented within the resulted in an increased focus and challenged the Chief Financial Officer Group to help mitigate against the increasing on viability. and External Auditor on their respective • tax actions taken during the year and the risk posed to businesses by cyber attack. assessments on such items as going concern impact of COVID-19 on cash management Cyber security had been greatly increased basis of preparation, accounting policies and • short and long-term liquidity across the Group in response to the increasing risk profile, particularly given the impact of disclosures, any financial reporting issues, • a review of transfer pricing global COVID-19 and changes in working practices, significant financial judgements made and documentation processes appropriate levels of disclosures to ensure and with the move to our people working at • a review of the Senior Accounting that the reports are fair, balanced and home, there were further enhancements put Officer process. understandable. The ARC also challenged in place to ensure the security of our systems which was supported additionally by cyber the External Auditor on the appropriateness Updates were also provided on global security awareness training. of their audit coverage and their measure regulatory changes, including the EU of materiality. mandatory disclosures rules and Corporate The Chairman of the ARC also held additional Criminal Offence Act 2020, and compliance During the year, the pandemic resulted in sessions with the Chief Information Officer matters including activity to be undertaken an increased focus on viability and the ARC and the Chief Information Security Officer during the year. The ARC considered the reviewed the contents and suitability of the and reported back to the Committee on the matters presented and were satisfied with Long-Term Viability Statement and going work undertaken by the relevant teams to the approach being taken. concern, and challenged the risk scenarios, ensure appropriate cyber resilience activities were in place. the range of sensitivities applied and the Following the resignation of the Group Head potential impacts considered in line with of Treasury, the Tax and Treasury functions FRC guidance. have been combined and is led by the Group Head of Tax who has taken on the role of joint role of Group Head of Treasury and Tax. 109 REPORT OF THE AUDIT AND RISK COMMITTEE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
The GCC has seen significant cultural change and lessons learnt to be shared.
Compliance Right to speak and whistleblowing Assurance function and the adequacy of The Company’s commitment to conducting The ARC received updates at each of its its resourcing and plans. The ARC, and the its business activities in accordance with all meetings on any right to speak issues raised Board, are committed to a prioritised and applicable laws and regulations was further and sought assurance from management structured internal audit programme to drive enhanced in 2020 through the introduction on the issues raised and the Company’s improvements in the Company’s internal of an executive Group Compliance response. At the outbreak of COVID-19, our control systems. Committee (GCC). people were understandably concerned about safety measures being taken and we Group Assurance assists the Company in The GCC is chaired by the Company Secretary encouraged our people to use the right to accomplishing its objectives by bringing a and General Counsel and has met monthly Key activities 2020 speak process to ensure any inconsistencies in systematic and disciplined approach to the throughout 2020 with representation from • Compliance training, both online, approach and safety measures were reported evaluation, assurance and improvement across the divisions and Group. The GCC and remote sessions in place of in to senior management directly. This approach in the effectiveness of the organisation’s reports to each ARC on the response to key person sessions allowed remedial action to be taken quickly risk management, internal control and compliance risks and the programme of thereby ensuring the ongoing safety of our governance processes. In order to achieve this • Regular review of training completion the ARC reviews: activities designed to mitigate exposure. rates across the Group Essentra family. • Risk assessments Notwithstanding the impact of COVID-19, During the year, particular concerns were • the internal audit plan and its achievement which meant the GCC had to re-prioritise its • Policy reviews, development of short expressed regarding potential conflicts of of the approved internal audit plan’s plans, good progress was still made. The GCC form summaries and a tool box interest impacting one site and the ARC activities has remained focused on driving effectiveness approach to training materials oversaw a thorough investigation of the • the adequacy of the budget and resources and continuous improvements in compliance. • Re-brand of compliance materials allegations, including the use of external of the Group Assurance function The Compliance Plan has seen significant • Development of a Compliance Charter resource, and continues to monitor the • the operational initiatives for the cultural change and the sharing of information and Framework impact of the Company’s response including continuous improvement of the function’s across divisions has allowed synergies to local management transition to mitigate • Development of a refreshed Ethics Code effectiveness be harnessed to best use, for instance in future risk. • Development of a Compliance Plan • follow-up of internal audit activities which monitoring the effectiveness of training. focus on unsatisfactory audit results for 2021 Internal control and internal audit The compliance transformation programme • Testing of the effectiveness of the • the adequacy of management’s response Essentra has a well-established Internal and the necessary actions taken to address has had particular regard to the impact training programme within one Audit function, which sits within Group of the Deferred Prosecution Agreement division and to be replicated across and rectify any weaknesses identified in a Assurance to monitor and review material timely manner. requirements around regulatory and sanctions all divisions during 2021 controls such as financial, operational and compliance, third-party due diligence and compliance controls. The ARC is required to anti-money laundering and undertook activity assist the Board in fulfilling its responsibilities that supported these key areas. for ensuring the capability of the Group 110 REPORT OF THE AUDIT AND RISK COMMITTEE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
As the year unfolded it became evident the response, its actions and the process used to • reviewed the level of non-audit work being original internal audit plan would not be consider the effectiveness of the mitigations. carried out by the External Auditor and “The Group Assurance team able to be carried out due to the impact confirmed the level of services ensured their continues to adapt its approach of COVID-19. A revised schedule was put in The ARC concluded that the process had continued independence to take account of new best place for H2 that focused on key risk areas to been very thorough and was assured further • the Chairman of the ARC met with the practices and the key challenges the business and the ARC ensured the plan that the Chairman of the ARC had also External Audit partner frequently outside impacting the business.” remained robust and relevant as well as being been present at the Group Risk Committee of the meeting schedule. achievable despite the necessary change meetings in which the risks had been to remote audit practices and different reviewed. The ARC’s work in turn supported Assessment of the External Auditor the Board by providing it with assurance it ways of working. The ARC has approved an The ARC is provided with reports, reviews, needed as to the robust nature of the process internal audit plan for 2021 which provides a information and advice throughout the used by the Company to identify risk. significant increase in activity, with additional year, as set out in the terms of the External investment in internal resource and co-source More information on Principal and Emerging Auditor’s engagement and performance is arrangements to ensure the delivery of an formally assessed by the ARC in conjunction extensive programme of assurance despite Risks can be found on pages 50 to 66, the Long Term Viability Statement on page 147 with the GMC. The ARC assesses the External the potential ongoing impacts of COVID-19. Auditor’s independence annually and remains The Group Assurance team continues to and 148 and the Risk Management Process on 110. satisfied that the External Auditor is effective adapt its audit approach and methodologies and provided appropriate independent to take account of the new best practice challenge to the Company’s management. which are emerging. External Auditor During the year the ARC: Independence of the External Auditor Risks Management Process • reviewed and agreed the scope and The ARC believes that it is important to The ARC Chairman, without the approval The ARC’s discussions and considerations and maintain the objectivity and independence of the Committee, is authorised by the oversight of the risk management process strategic nature of the audit work to be undertaken of the External Auditor by minimising their Company to engage the External Auditor on continued throughout the year working closely involvement in projects of a non-audit nature. non-audit related work where the service is • agreed the terms of engagement and fees with the Group Risk Committee and the The Revised Ethical Standard 2019 provides a in compliance with the whitelist of services to be paid to the External Auditor Group Assurance function. This enabled the whitelist of services which may be provided to under the Revised Ethical Standard 2019, ARC to assess the quality of existing practices • reviewed the qualifications, resources and public interest entities – if the service is not on and the fees per project are not considered and processes used to identify, assess and independence of the External Auditor and the list, it must not be provided to the Group. to be significant, provided that the annual mitigate responses to risks to the Company assessed its performance with particular There is a policy in place which reflects best aggregate of non-audit related fees shall achieving its long term strategic objectives. regard to the overall quality of the external practice in relation to the engagement of the not exceed 70% of the average of the audit The ARC undertook deep dives into risk areas audit and especially challenged the External Auditor to supply non-audit services fees paid in the last three consecutive which provided the opportunity for the ARC to External Auditor’s ability to carry out a in compliance with the whitelist, with defined financial years. challenge the effectiveness of the Company’s robust audit remotely parameters and approval requirements. 111 REPORT OF THE AUDIT AND RISK COMMITTEE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Details of the fees paid to PwC up until Engagement of the External Auditor The ARC has been kept up to date with the 31 December 2020 can be found in note 2 The External Auditor was originally engaged development of regulations concerning of the Notes to the Consolidated Financial by the Company in 2017 following a audit tenure and the longevity of audit firm Statements, which includes fees paid to the competitive tendering process. The External relationships with companies they audit. In External Auditor and its network firms for Auditor is engaged to express an audit opinion 2016 a comprehensive competitive tender audit services, audit-related services and on the truth and fairness of the Financial was undertaken for the external audit and non-audit services. Statements. The external audit includes the subsequently the appointment of PwC to review and testing of the system of internal replace the Company’s previous auditors was PwC provided a letter confirming that it financial controls and the data contained approved by the shareholders at the 2017 believes it remains independent within the in the Financial Statements to the extent AGM. As detailed above the ARC is satisfied meaning of the regulations on this matter necessary. In order to protect independence with the External Auditor’s effectiveness and in accordance with their professional and objectivity and provide fresh challenge to and independence and accordingly has standards. The ARC formally reviewed the the business, the External Auditor periodically recommended to the Board that PwC be letter which describes arrangements in place changes the audit partners at a Group, reappointed as the Company’s External to identify, report, and manage any conflicts of divisional and country level, in accordance Auditor at the 2021 AGM. The Company will interests and policies and procedures including with professional and regulatory standards. continue to consider on a regular basis any the extent of non-audit services, to maintain Such changes are carefully planned to ensure potential benefits from tendering the audit independence and the subsequent monitoring. that the Group benefits from staff continuity process having regard, in particular, to the without incurring undue risk of inefficiency. importance of audit quality or the continued Effectiveness of the External Auditor The External Auditor is required to rotate independence of the External Auditor. There are The ARC assessed the effectiveness of the the lead partner every five years, and such no contractual obligations in place that restrict External Auditor by reviewing: changes will be carefully planned to ensure the Company’s choice of statutory auditor. business continuity without undue risk or The Company has complied throughout the • the External Auditor’s fulfilment of the inefficiency. The current audit partner is year with the Statutory Order 2014 issued by agreed audit plan and the quality of their Nicholas Stevenson who has been in this role the Competition and Markets Authority. work including the depth and appropriate since PwC was appointed in April 2017. The challenges year end 2021 will be Nicholas’s last year and • feedback highlighting the major issues that the External Audit partner and the ARC has arose during the course of the audit already started working with PwC to ensure a • feedback from the businesses and smooth and effective transition. management evaluating the performance of each assigned audit team. 112 REPORT OF THE AUDIT AND RISK COMMITTEE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Significant financial judgements
Goodwill and intangible assets of businesses, acquisition related integration and sought assurance that the Company As appropriate during a period of uncertainty, As required by IAS 36, the Company and restructuring costs, and other items such was working diligently to resolve outstanding the External Auditor provided significant undertakes an assessment of the carrying as impairment losses. Following an extensive liabilities in an appropriate fashion. The potential challenge to the ARC on the process used to value of intangible assets on an annual basis, review, the ARC is satisfied that the Company’s tax exposures over the Company’s transfer undertake the assessment and the outcome or more frequently if there is an indication of definition of adjusting items remains clear and pricing position and the deductibility of interest of the scenarios. The ARC, on behalf of the impairment. The details of the work carried out that appropriate level of disclosure is included. on internal financing are also considered. Board, challenged the assumptions and and the results are in note 8 of the Notes to The definition remains consistent with the sensitivities around the scenarios presented by The ARC reviewed the assumptions of the the Financial Statements. The assumptions for prior year, and in the current year the ARC has management and where judgement had been tax liabilities at the start of the year, those 2021 and beyond (such as the annual growth been involved in a rigorous review of the items applied, the ARC sought and was provided with created during the year and the effective tax rate and the terminal growth rate) are based presented and following a robust discussion explanation that the ARC were satisfied with. rate as indicated in the Financial Statements on the 2021 annual plan and management’s the ARC agreed to adopt a de minimus In turn, management dedicated an extensive from page 151 and note 4 of the Notes to financial projections in subsequent years. approach. The ARC challenged the Chief period of time and resource to stress testing the Consolidated Financial Statements. The The impairment reviews performed by Financial Officer about the appropriateness a range of scenarios that provided a range ARC questioned and challenged the Chief management contain a number of significant of items presented including impairment and of outcomes. Financial Officer and Head of Group Tax as judgements and estimates including revenue restructuring activities to ensure they are one- to the appropriateness of the Company’s More information on the Group’s going growth, profit margins and discount rates. off material items rather than incurred in the risk attitude and appetite in this area. The concern can be found on pages 146 and 147. A change in these assumptions can result ordinary course of business and are presented separately to allow a better understanding of ARC was satisfied that the tax liabilities in a material change in the valuation of the The ARC also reviewed the Group’s long- the Group’s ongoing activities. Further details are appropriate, and that the Group’s tax assets and the eventual outcome of the term viability assessment for the period can be found in note 2 of the Notes to the disclosures are adequate given the nature of impairment assessment. The ARC evaluated to 31 December 2023 which considered a Financial Statements. the Company’s activities. and challenged the methodology of the range of scenarios based on the potential impairment review and the assumptions on Tax liabilities Going concern and long-term financial impact of the Group’s Principal Risks which it was based, including the financial viability assessment crystallising as well as the risks associated The Company is, on occasion, subject to tax plans approved by the Board. with COVID-19 also impacting the risks. assessments that may represent potential The ARC reviewed the assumptions applied Similar to the challenges the ARC presented The ARC discussed the current year assessment future tax exposures, which arise from tax for going concern and long-term viability management in assessing the going concern at length with the Chief Financial Officer, the authorities in a number of the jurisdictions assessment. At half-year 2020 and at year-end position, the ARC challenged the relevance Chief Executive and the External Auditor the in which the Group operates. The Group 2020, an extensive process was applied to the and assumptions of the Principal Risks to review and assumptions presented, including assesses all such exposures in the context of going concern that assessed the outcome of the Company’s long term viability. The consideration of the impact of COVID-19 on specific country tax laws, where applicable, a range of scenarios. This included a downside External Auditor again challenged the ARC such assessments. After due consideration makes provisions for any settlements which scenario that reflects the current uncertainty on the process adopted and was satisfied the ARC was satisfied that the impairment it considers appropriate. in the global economy but which was thought that a robust and through process was in assessment is appropriately carried out. The to be severe but plausible. The results of this place so that the ARC was able to make a relevant disclosure is set out in note 8 of the The Company operates in a number of tax scenario show that there is sufficient liquidity recommendation to the Board on the Group’s Notes to the Financial Statements. jurisdictions, and recognises tax based on in the business for a period of at least 12 interpretation of local laws and regulations months from the date of approval of these long-term viability. Adjusting items which are sometimes opaque. Where the financial statements, and do not indicate any The more detailed assessment of the Group’s amount of tax payable is uncertain, the covenant breach during the test period. The The Financial Statements include certain long-term viability is set out in the Long-Term Directors are required to exercise significant scenario includes assumption for similar extent items which are disclosed as adjusting Viability Statement on pages 148. items. The nature of these items is explained judgement in determining the appropriate of disruptions as seen in 2020. Set against within the Group Accounting Policy, and amount to provide in respect of potential tax this were mitigating actions including tight includes transaction costs and gains or exposures. The ARC challenged the nature and management of capital expenditure, sales and losses relating to acquisitions and disposals extent of the tax provisioning of the Company general overhead, and working capital. 113 CHAIRMAN OF THE REMUNERATION COMMITTEE’S LETTER ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
CHAIRMAN OF THE REMUNERATION COMMITTEE’S LETTER
2020 was a year of Dear Shareholder to the future of the environment in which we This report includes: do business. The products we manufacture responsible remuneration. As Chair of the Remuneration Committee and distribute are integral to the supply chain • The proposed Directors’ Remuneration The Executive Directors I am pleased to present to you the Directors’ of many of our customers. Our customers Policy to be approved at the 2021 AGM; Remuneration Report for the year ended want to work with a manufacturer who takes and received reduced 31 December 2020. a responsible approach to environmental issues. It is important to our current and • The Annual Directors’ Remuneration salaries, reduced pension Consultation with our shareholders future employees they work for a business Report, describing how the current Policy that is reducing its environmental impact. I had the opportunity to consult with some has been put into practice during 2020, allowances, no annual Increasingly, our shareholders want to invest of our shareholders during the year as and how we plan to implement the new in a company that is making progress on the bonuses and no LTIP we considered our proposals for the new Policy in 2021. environmental sustainability issues that are Directors’ Remuneration Policy. We heard a awards were made relevant to our business. range of views and these perspectives were This is my first Directors’ Remuneration in 2020 invaluable in shaping our final proposals. Report since my appointment as Chair Our proposal is to take a balanced approach of the Remuneration Committee at the given the feedback we received. I want to The discussions were particularly helpful AGM in May 2020. I would like to thank thank our shareholders for their time and in terms of the way we intend to link part my predecessor, Lorraine Trainer, for her input, which was helpful and constructive. of incentive outcomes in the future to the contribution as Chair of the Remuneration progress of the business on environmental Committee prior to the AGM in 2020. Responding to the pandemic in 2020 – sustainability. Our shareholders emphasised a year of responsible remuneration that the performance measures we use should be relevant to the business and to At the beginning of 2020, the COVID-19 value creation. In future we have decided to outbreak was in its very early stages and link part of the outcomes of our variable pay the severity and scale of its impact was not plans to progress against our longer-term yet apparent. The first of our businesses environmental sustainability targets. We to be impacted was in mainland China in believe these are important to some of our key January 2020. As with many international stakeholders; our customers, our employees, groups, Essentra’s ability to do business our suppliers and our shareholders, as well as was immediately and significantly affected.
Nicki Demby Non-Executive Director 114 CHAIRMAN OF THE REMUNERATION COMMITTEE’S LETTER CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
We have provided All of the 34 countries in which we do business Through the year we have focused on Essentra has adapted to the new economic financial support to all have been impacted by the pandemic and safeguarding our employees, supporting our environment. We suspended the payment our global employees when we have responded to successive Government customers, managing our cash flow and of our dividend in order to protect our they were unable to work imposed restrictions in each of those building for the future. In a year of responsible cash position. Towards the end of 2020 we as a consequence of local countries. We recognise that it has caused remuneration, and as part of managing launched a detailed review of our global or national Government considerable uncertainty and hardship for our our cash flow, the fixed pay of our Board footprint which resulted in the proposed employees, customers and suppliers. and Senior Leaders across the business was closure of certain sites in 2021 across the restrictions arising from reduced by 20% for three months during the Components and Packaging divisions. While the pandemic In line with our values, Essentra’s first response most uncertain period of the year, and any we deeply regret the impact these proposals was focused on protecting the safety, health inflationary salary increase was removed. will have on some of our colleagues, these and wellbeing of our employees. Our 2020 Other leaders in the business also reduced actions were both necessary and consistent Employee Survey indicated that 85% of their fixed pay and any annual salary increase with our strategy to build for the future. our employees felt that we had taken the was made on an exceptional basis only. appropriate steps to ensure they remained safe Acquisition of 3C! and healthy. We did not use UK Government Furthermore we made no LTIP awards in 2020. Looking ahead, Essentra is committed to provided furlough support, nor did we borrow This was an unusual decision in the market emerging from the pandemic with a resilient debt from the UK Government. We have place. It reflected that our Senior Leaders business. In September 2020, we raised equity provided financial support to all our global were prepared to personally contribute to to buy 3C!, a packaging business in the US, employees when they were unable to work as a making cost savings in the business. Stock and to strengthen our balance sheet. The consequence of local or national Government market volatility in late March and April when acquisition adds manufacturing capacity and restrictions arising from the pandemic and the LTIP grant is usually made was also a service capability to our existing Packaging to the families of those employees who have concern. footprint in the Americas as well as access to sadly lost their lives. There have been some proprietary serialisation technology. notable and inspiring examples where Essentra All these measures funded company furlough employees responded quickly to ensure that payments to employees unable to work in The need for a flexible approach to our products reached local customers in the India, South Africa and Paraguay and also remuneration health sector when they had an urgent need. contributed to payments for those needing to Long term value creation for shareholders Our Board Employee Champions, Mary Reilly isolate. This considered approach has meant and pay for performance continue to be at and Ralf Wunderlich, continued to engage with that we have maintained 80% of earnings the heart of our remuneration policy and groups of employees throughout 2020 using across the global workforce throughout the practices. As we do business in 34 countries, “virtual coffee mornings”, as we were no longer year, providing the financial support needed. attracting and nurturing a mix of talent with able to hold physical meetings. a range of backgrounds, skills and capabilities enables Essentra to thrive. This is the case in good times, but has perhaps become more important in more difficult times. 115 CHAIRMAN OF THE REMUNERATION COMMITTEE’S LETTER CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Remuneration remains a key part of attracting We intend to keep our approach to Directors’ We are widening the 2021 annual bonus and retaining the people who we need to Remuneration under review and may seek performance target ranges and reducing lead our business. We need to ensure that shareholder approval sooner than required by the proportion of bonus paid for achieving our reward packages are appropriate and fair UK legislation if this becomes necessary. threshold performance (from 20% to 10%) in the context of the business and the wider to reflect the difficulty of setting financial BUILDING employee profile. We aim to deliver market Linking reward to performance targets in the current economic environment. FOR THE FUTURE competitive pay in return for performance For 2020 no annual bonus is payable to OUR VALUES OUR GOALS against the Company’s strategic objectives. the Executive Directors. The targets were The awards under the Long-Term Incentive OUR set in February 2020 before the economic Plan will include a measure linked to our Safety, respect A winning, and diversity PURPOSE engaged and It is important that we maintain flexibility in progress against our published target for empowered team impact of COVID-19 pandemic could be is to responsibly provide the our approach to remuneration so that we can the reduction of greenhouse gas (GHG) Openness, honesty products and Class-leading fully understood. Although the business and integrity services our sustainability customers remain adaptable in a rapidly changing world. performance remained resilient, the targets emissions. Reducing our carbon footprint need to succeed Energy Growth through This has never been clearer than over the last is beneficial to the environment and for change innovation proved unattainable in the economic year. We have very carefully considered some environment that followed. drives reductions in the cost of energy to alternative approaches. We have concluded the business. The emissions targets set that a Directors’ Remuneration Policy which The performance targets set for the 2018- are consistent with the stated goal to is fundamentally similar to our previous 20 LTIP were also not achieved. This was reduce GHG emissions by 25% from 2019 approach will provide the necessary flexibility partly attributable to the impact of the to 2025. Performance will be reviewed for the future. Detailed aspects have been COVID-19 pandemic in the final year of by the Sustainability Committee and updated to meet new external governance the performance period. externally audited. requirements that have emerged since the The awards under the last time we sought shareholder approval and Linking reward to strategy The table below summarises the KPIs that we are planning to use in the LTIP compared to Long Term Incentive Plan to provide some limited areas of additional The table below summarises the KPIs that we our last grant in 2019. No LTIP awards were will include a measure linked flexibility. The proposed changes are described are planning to use in the annual bonus in 2021. to our progress against our in detail later in this Report. made in 2020. published target for the KPI LTIP reduction of greenhouse gas The approach to setting executive remuneration Adjusted Operating Profit 40% continues to be guided by the following principles: KPI 2019 2021 emissions. Adjusted Operating Cash Flow 30% Adjusted EPS 33% 40% • delivery of the business strategy Strategic Objectives – including 10% on progress against Zero Waste to Landfill 30% Return on Invested Capital 33% 30% • creating sustainable, long-term performance Total Shareholder Return 33% 20% • consideration of stakeholder interests. The Strategic Objectives will include our progress Progress in reducing GHG emissions 10% as a business against our objective of Zero Waste to Landfill by 2030. Performance will be reviewed by the Sustainability Committee. 116 CHAIRMAN OF THE REMUNERATION COMMITTEE’S LETTER CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
The Remuneration Committee carefully for Paul Forman (to 20% of salary) and 3% Conclusion considered the appropriate size of the 2021 of salary for Lily Liu (to 15% of salary). This Essentra is committed to emerging stronger LTIP awards, taking into account a range of follows reductions of £11,900 p.a. and £2,100 from the pandemic. It is important that factors including share price performance, the p.a. respectively in 2020. Further reductions we maintain flexibility in our approach decision not to make any LTIP awards in in pension provision to the level of the relevant to remuneration so that we can remain 2020 and the need to avoid windfall gains. workforce will be completed by the end of agile in a rapidly changing world. I hope The Committee concluded that appropriate 2022. Our proposed new Policy indicates that you will find this report to be clear Essentra is committed to award levels for 2021 will be unchanged that the pension provision for any future and helpful in understanding of our emerging stronger from the from the award levels in 2019 at 200% Executive Director will be in line with the remuneration practices and that you will be pandemic. It is important that we and 150% of salary for the CEO and CFO relevant workforce. in support of the resolution on the Directors’ maintain flexibility in our respectively. We have carefully reviewed Remuneration Policy and the advisory approach to remuneration so that The Remuneration Committee is satisfied the performance ranges to be used for resolution on the Annual Remuneration we can remain agile in a rapidly that the current Policy was operated as each element of the award. We have taken Report at the 2021 AGM. As ever, the changing world. intended since its introduction in 2018. a balanced approach to setting the LTIP Remuneration Committee welcomes any performance ranges given the uncertain questions or comments from shareholders. economic environment in which the awards Remuneration for Executive Directors are being made. The Committee retains the The Executive Director salaries were reviewed I am grateful to the Chairman and my discretion to adjust the outcomes of the LTIP and will increase in April 2021 by 1.9%, in line colleagues for their professional guidance awards to reflect the overall performance of with the wider UK workforce. and support in making responsible the business over the performance period. decisions on remuneration. Remuneration in our wider workforce Considering the 2018 UK Corporate The Remuneration Committee continues to Nicki Demby Governance Code (the ‘2018 code’) consider remuneration in our wider workforce Non-Executive Director During the past year the Remuneration when making decisions that affect our Remuneration Committee Chairman 5 March 2021 Committee has continued to discuss the senior executives. The Committee has also 2018 Code and its implications for Essentra. discussed a number of broader issues relating As noted last year our remuneration to workforce and executive pay. These include arrangements are already compliant with feedback received by our Board Employee many of the 2018 Code provisions. The current Champions on employee share plans, merit Executive Directors have agreed to further increases, and the ratio of Chief Executive pay reduce their annual pension allowances with to that of our other employees. These topics effect from 1 April 2021 by 3.1% of salary are reflected in the approach to reward across the workforce. 117 REMUNERATION AT A GLANCE ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
REMUNERATION 2021 remuneration structure for Executive Directors 2021 2022 2023 2024 2025 Commentary Changes for 2021 AT A GLANCE Base salary Paul Forman: salary increase from £643,1251 to £655,345 (1.9%) effective 1 April 2021.
Lily Liu: salary increase from £353,9762 to £360,700 (1.9%) effective 1 April 2021.
Pension Paul Forman’s pension allowance allowance to be reduced by 3.1% of salary effective 1 April 2021 Lily Liu’s pension allowance to be reduced by 3.0% of salary effective 1 April 2021 Benefits Car allowance, private medical insurance No change and life assurance cover
2021 annual • Maximum opportunity: No change bonus – Paul Forman 150% of salary 50% cash – Lily Liu 125% of salary • Performance conditions: – Adjusted Operating Profit: 40% Within Strategic Objectives 10% – Adjusted Operating Cash Flow: 30% is based on progress towards 50% shares – Strategic Objectives: 30% Zero Waste to Landfill (deferred for three years) (50% DEFERRED FOR THREE YEARS) PERFORMANCE PERIOD PERFORMANCE
2021 LTIP • Conditional award of shares: No change Three year – Paul Forman 200% of salary performance – Lily Liu 150% of salary period (2021-23) and two year deferral (2024-25) PERFORMANCE (DEFERRED PERIOD FOR TWO YEARS) • Performance conditions: Reweighting of existing – EPS Growth: 40% measures and introduction – Return on Invested Capital: 30% of greenhouse gas emissions 1 Salaries effective from 1 April 2020 were originally intended to be £658,560 and – Relative TSR: 20% reduction target £362,000 for Paul Forman and Lily Liu respectively. As outlined in our Stock Exchange – Reducing greenhouse gas emissions: announcement of 14 April 2020, the CEO waived his proposed 2.4% annual increase in his salary which would have applied from 1 April 2020 and the CFO’s salary increase 10% was also reduced by 2.4%. 118 REMUNERATION AT A GLANCE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Incentive outcomes for 2020
Performance Performance period measures Pay-out Annual bonus 2020 Adjusted Operating Profit, Adjusted Operating Paul Forman 0% of maximum Details on page 135 Cash Flow, Personal and Strategic Objectives Lily Liu 0% of maximum “ 2020 was a year of LTIP 2018-20201 Adjusted EPS, Adjusted Cumulative Operating Paul Forman 0% of maximum Details on page 135 responsible remuneration. Cash Flow, Relative TSR The Executive Directors 1 Lily Liu did not hold LTIP awards for this performance cycle as she joined the Board in November 2018. received reduced salaries, reduced pension allowances, no annual bonuses and no LTIP awards were made in 2020.” Paul Forman (£000) Nicki Demby 611 37 152 Non-Executive Director 2020 actual 288 244 2020 maximum 611 37 152 917 1,222
Lily Liu (£000) 330 14 64 2020 actual 2020 maximum 330 14 64 413 495
Salary Bonus Benefits LTIP Pension 119 REMUNERATION AT A GLANCE CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Summary of Committee decisions related to COVID-19
Element of Remuneration Committee Decision Rationale
2020 Salary/Fee • In light of the continuing need to manage our • Our response to the COVID-19 situation has been to “Our peoples’ health increases cash position and liquidity, the Committee safeguard our people, support our customers, and to and wellbeing has been our approved the Executive Directors’ decision to manage our cash. Our people’s health and wellbeing top priority. By temporarily voluntarily waive the 2.4% annual increase in has been our top priority. By temporarily reducing the reducing the Executive and their salaries that would have applied from 1 April Executive and Non-Executive Directors’ pay this has Non-Executive Directors’ pay 2020, and the CFO’s salary increase was also helped fund furlough arrangements in countries that reduced by 2.4%. have required us to temporarily close a factory or office. this has helped fund furlough arrangements in countries that • In addition, Executive Directors agreed to a 20% • The Company has not taken advantage of the Job have required us to temporarily reduction in base salaries from 1 April to 30 June Retention Scheme or any other UK Government 2020. The Chairman and Non-Executive Directors assistance resulting from COVID-19. close a factory or office.” also agreed to a 20% reduction in their fees for Nicki Demby this period. Non-Executive Director
2020 Bonus • The Executive Directors’ 2020 bonus was based • The Committee felt this was a responsible decision on financial targets set before COVID-19 in light of the impact of the pandemic on wider impacted our financial performance and no stakeholders in the business. adjustments were made. • No bonus was payable due to the impact of the COVID-19 pandemic.
2020 LTIP Award • The Committee agreed to not make a 2020 • Not granting LTIP awards helped to support the LTIP award. profitability of the Company in an exceptionally difficult year. 120 THE DIRECTORS’ REMUNERATION POLICY REPORT ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
THE DIRECTORS’ REMUNERATION POLICY REPORT
The Directors’ Remuneration Policy The Remuneration Committee discussed Policy change Rationale for change and implementation in 2021 (“the Policy Report”) sets out the this Policy Report over a series of meetings policies under which the Executive and which considered the strategic priorities of Introduction of post- In line with the UK Corporate Governance Code, the updated Policy employment shareholding will incorporate a guideline for a Director to remain compliant with Non-Executive Directors are remunerated. the business, governance requirements and guideline and change to their in-employment shareholding guideline for two years after leaving The Policy Report is designed to be in evolving market practice. Input was sought design of in-employment employment. full compliance with the requirements of from the CEO, CFO and members of the HR shareholding guideline The shareholding guideline that applies whilst a Director is in-employment the Large and Medium-sized Companies team, while ensuring that conflicts of interests will remain at 300% of salary for the CEO and 200% of salary for other Executive Directors. In order to better align the guideline with incentive and Groups (Accounts and Reports) were suitably mitigated. Consideration was vesting outturns, the existing requirement to meet the guideline within six (Amendment) Regulations 2013, the UK given to the wider workforce when evaluating years of appointment will be replaced by a requirement to retain at least Corporate Governance Code as issued by the approach to Directors’ remuneration. We 50% of post-tax vested shares until the guideline is satisfied. the Financial Reporting Council and the have consulted with our major shareholders Extend malus and clawback In line with the FRC’s Guidance on Board Effectiveness, potential malus and Listing Rules. and taken advice from our independent provisions in the bonus and clawback triggers will be widened to include business failure. advisers, Deloitte. LTIP The current Directors’ Remuneration Policy Alignment of pension In line with the UK Corporate Governance Code, we will continue with our was approved by our shareholders at the AGM Summary of key changes: The key provision phased approach to reducing the Executive Director pension allowances in 2018. We are required by law to put a new proposed changes in our updated Policy are to align with the relevant workforce by the end of 2022. Any new Executive Directors will have pension provision from appointment in line with the Policy to our shareholders for approval three summarised below. These changes bring our relevant workforce. years later. This will be presented at the 2021 Policy in line with current mainstream UK AGM. The current Policy Report can be found Addition of Environmental, As a manufacturing company our environmental impact forms an market practice and are consistent with the Social and Governance (ESG) important element of how we do business. Accordingly, scope to include in full in the Essentra Annual Report 2017, a Essentra corporate strategy. measures as an alternative ESG measures in future bonus or LTIP awards forms part of the new Policy. copy of which can be downloaded from type of measure in the bonus In 2021, we will introduce a greenhouse gas (GHG) emissions target into or LTIP www.essentraplc.com. our LTIP. The targets set will be consistent with the goal of reducing GHG emissions by 25% by 2025 relative to a 2019 baseline.
The Remuneration Committee has reviewed Equalise the maximum In order to give the Remuneration Committee flexibility during the three- the continued appropriateness of the current permitted bonus year Policy period, it is proposed to align the maximum bonus opportunity opportunity for all Executive that can be offered under the Policy to all Executive Directors at 150% Policy Report in the context of the Company’s Directors at 150% of salary of salary (currently the CFO has a lower maximum opportunity of 125% corporate strategy. Shareholder approval of salary). As a Committee, we are mindful of the importance of using will be sought at the AGM on 20 May 2021 this flexibility in a responsible manner and can confirm that the bonus opportunity will be unchanged in 2021 (CEO: 150% of salary; CFO: 125% of for the updated Policy Report set out below. salary). Subject to shareholder approval, the updated Policy Report will take effect immediately Change to Non-Executive In recognition of future increases in the level of time commitment Directors’ (NEDs) fee required from a NED in our highly international business, the new Policy after the AGM and will apply to the 2021 structure will provide flexibility to make additional payments to NEDs in the financial year. event that an individual is required to make a significant additional time commitment and/or to reflect travel time. The new Policy also specifically makes reference to the additional fee payable to the Board Employee Champion role, introduced in 2019 to ensure the Board actively seek feedback direct from the global workforce. 121 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Remuneration Policy 1. Overview on an annual basis and has determined that • Select, appoint and determine the terms The Remuneration Committee considers all The Remuneration Committee determines there are currently no significant concerns of reference for independent consultants elements of the remuneration package as a and recommends to the Board the framework with the structure or operation of the to advise the Remuneration Committee on whole. It looks to ensure that an appropriate for the remuneration of the Executive remuneration policy. remuneration matters balance is maintained between them so that Directors and the Chairman of the Board. The In determining the policy for the Executive the need for both short-term success and remuneration of the Non-Executive Directors The Remuneration Committee’s main Directors, the Remuneration Committee’s key long-term sustainable growth is recognised. is the responsibility of the Board as a whole. responsibilities are to: objectives are to: The Remuneration Committee also ensures No Director is involved in determining or that non-financial business measures and • Develop the Company’s Remuneration voting on their own remuneration. • Ensure that senior executives’ remuneration individual objectives reflect adequately Policy for the Executive Directors, the is designed so as to attract, retain and the Company’s Environmental, Social and The Chief Executive’s remuneration proposals members of the GMC and other senior motivate high quality executives in a Governance (ESG) responsibilities. for the other members of the Group executives, covering basic salary, bonus, manner that aligns their remuneration Management Committee, including the long-term incentives, retirement provisions with the interests of shareholders and other 2. Summary of components of Company Secretary (GMC) are reviewed and other benefits stakeholders, particularly in the design Executive Directors’ remuneration by the Remuneration Committee, and the • Strike an appropriate balance between: of the performance-related elements of The Remuneration Committee structures Committee’s recommendations with regards – the fixed and variable; and their remuneration packages and their Executive Directors’ remuneration in two shareholding guidelines to those proposals are made to the Board. – the cash and equity-related components distinct parts: • Promote the achievement of both the of total remuneration packages – fixed remuneration of basic salary, The Remuneration Committee also takes note Company’s annual and longer-term pension provision and benefits; and of the remuneration policy as detailed by the • Review and determine the terms of strategic objectives. The Remuneration – variable performance-related Chief Executive in respect of other levels of employment and remuneration of Committee considers the alignment remuneration in the form of cash management in the Company and makes the individual Executive Directors and of Company performance and the bonuses, deferred share bonuses and such recommendations to the Chief Executive nominated senior management, including remuneration of its senior executives, long-term incentive arrangements. as the Remuneration Committee deems any specific retirement or severance terms including the Executive Directors, to be an appropriate. The Remuneration Committee important element of driving shareholder • Determine the remuneration of the has regard to the proposed remuneration value. It believes that senior executives Remuneration for Executive Directors is Chairman of the Board policy for other management and employees should be highly rewarded (on a market- structured so that the variable performance- across the Group, when determining • Establish and review the operation of competitive basis) for the delivery of related pay element forms a significant recommendations on remuneration for the any employee share plans, including the stretching goals but should also receive portion of each package. The majority of total Executive Directors and other senior executives. granting of awards, the setting and testing reduced rewards when the business does remuneration at the maximum performance of performance conditions and exercising of not perform to expectations level will derive from the Company’s long- The Remuneration Committee places any awards under long-term incentive plans • Encourage Executive Directors to act term incentive arrangements. All incentives significant focus on, and spends considerable • Review the workforce remuneration and in a fair and responsible manner without are designed to be aligned to delivery of time reviewing the risks surrounding the related policies and the alignment of unnecessary risk-taking having regard Essentra’s strategic priorities. Company’s existing remuneration policies incentives and reward with culture to the long-term performance of the Company 122 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
3. Policy Table
Basic salary
Purpose and Operation Opportunity Performance link to strategy measures
To reflect the particular skills and experience Generally reviewed annually with any increase No absolute maximum has been set for Executive Not applicable. of an individual and to provide a competitive normally taking effect from 1 April, although the Director base salaries. basic salary Remuneration Committee may award increases at Any annual increase in salaries is at the discretion other times of the year if it considers it appropriate. of the Committee taking into account the factors The review takes into consideration a number of stated in this table and the following principles: factors, including (but not limited to): • Salaries would typically be increased at a rate • The individual Director’s role, experience and consistent with the average salary increase (in performance percentage of salary terms) for the relevant • Business performance workforce. • Pay and conditions elsewhere in the Group • Larger increases may be considered appropriate • Market data for comparable roles in appropriate in certain circumstances (including, but pay comparators 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). • Larger increases may also be considered appropriate if a Director has been initially appointed to the Board at a lower than typical salary. 123 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
3. Policy Table continued
Bonus
Purpose and link to strategy Operation Opportunity Performance measures
To ensure the delivery of Company performance- One half of the total bonus is paid in cash shortly 150% of basic salary. The bonus will be based on performance using related objectives, aid retention and to after the announcement of the annual results. appropriate financial, strategic and individual align Directors’ interests with those of the The other half is deferred into shares in the performance measures. Company’s shareholders. Deferred Annual Share Bonus (“the DASB”) which The majority of the bonus will normally be will normally vest after three years subject to determined by measure(s) of the Company’s continued service. financial performance. The remainder of the Performance is assessed against measures and bonus will be based on financial, strategic, ESG, targets which are established by the Remuneration operational or other suitable business measures Committee. As performance increases so does the appropriate to the individual Director. percentage payable up to the maximum. No more than 20% of each financial measure will The bonus is subject to malus and clawback vest at threshold performance. 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, business failure 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). 124 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
3. Policy Table continued
Long-Term Incentive Plan (LTIP)
Purpose and link to strategy Operation Opportunity Performance measures
To drive the long-term delivery of the Company’s An annual grant of performance share awards An award to any Executive Director would be Vesting will be subject to performance conditions strategic objectives, aid retention and to usually with a three-year performance and limited to a maximum of 300% of salary. as determined by the Remuneration Committee align Directors’ interests with those of the additional two-year holding period. on an annual basis. Company’s shareholders. Awards are subject to the LTIP plan rules, including The performance conditions will usually be some malus and clawback provisions for a period of combination of relative TSR, adjusted EPS, adjusted three years following the vesting of the awards. cumulative operating cash flow, ESG and a capital Circumstances in which these provisions could return measure although the Remuneration be applied by the Remuneration Committee are Committee will retain discretion to include material misstatement in the Company’s Financial alternative performance measures which are Statements, error in assessing the performance aligned to the corporate strategy. conditions, serious misconduct by an individual, The Remuneration Committee may adjust the business failure or serious reputational damage to weightings of the performance conditions for the Company or a relevant business unit. each award although usually each condition An additional payment (in the form of cash or would have a weighting in the range of 10% to shares) may be made in respect of shares which 40% of the award. vest under LTIP awards to reflect the value of Performance will usually be measured over a three- dividends which would have been paid on those year period. shares during the period up to the release of the shares (this payment may assume that dividends Up to 25% of each element vests at threshold had been reinvested in Company shares on a performance, usually rising on a straight-line basis cumulative basis). for performance up to the maximum level for full payment. If below threshold performance, that element of the award will not vest. 125 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
3. Policy Table continued
Employment and Post-Employment Shareholding guideline
Purpose and link to strategy Operation Opportunity Performance measures
To align the interests of Executive Directors and Whilst in-employment, Executives Directors are Not applicable. Not applicable. shareholders, encourage a focus on long-term expected to build up a shareholding worth 300% performance and risk management. of salary for the Chief Executive and 200% for the Chief Finance Officer. The shareholding guidelines are to be built up by retaining 50% of post-tax vested shares from the date of approval of this Policy. 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. Executive Directors will also be expected to remain compliant with the above guideline for a period of two years post-employment. This guideline will apply to shares from incentive awards due to be released from the date of adoption of the Policy at the 2021 AGM. The Committee would retain discretion to waive this guideline if it is not considered appropriate in the specific circumstances. Non-Executive Directors are encouraged to hold a minimum of 7,500 shares. 126 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
3. Policy Table continued
All Employee Plans – Sharesave
Purpose and link to strategy Operation Opportunity Performance measures
To create alignment of employees’ interests with Under the UK Sharesave, employees (including For the UK plan, shares worth up to the value of the The Remuneration Committee agree the annual those of shareholders. Executive Directors) are invited to enter a savings savings an Executive Director agrees to make over discount to be applied to the Sharesave schemes. contract of three years or five years, whereby the saving period at the previously agreed option No performance conditions apply to All Employee the proceeds can be used towards the exercise price. The savings amount is subject to the HMRC Plans. of an option granted at the time they choose to limit, currently £500 per month. participate. The Remuneration Committee has The US Plan is limited to the monthly dollar the discretion to set the option price up to a 20% equivalent of the UK Sharesave plan and an option discount on the share price at the time employees price of up to a 15% discount. are invited to participate. An equivalent US plan is operated aligned to the UK plan where possible.
Pension
Purpose and link to strategy Operation Opportunity Performance measures
To provide cost-effective long-term benefits A contribution to a defined contribution plan or Any future Executive Director appointment will Not applicable. comparable with similar roles in similar paid as a cash supplement. have a pension provision in line with the relevant companies. workforce. The pension provision for the current Executive Directors will continue to be phased down to align with the relevant workforce by the end of 2022. The next stage in this process, effective 1 April 2021, will see pension allowances reduced to 20% and 15% of salary respectively for the CEO and CFO. 127 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
3. Policy Table continued
Other benefits
Purpose and link to strategy Operation Opportunity Performance measures
To provide cost-effective benefits comparable Other benefits include family medical expenses, life There is no overall maximum as the level of benefits Not applicable. with similar roles in similar companies. insurance, and car allowance. depends on the annual cost of providing individual The Remuneration Committee may vary these benefits in the relevant local market and the benefits from time to time to suit business needs, individual’s specific role. 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.
Chairman and Non-Executive Directors – Fees
Purpose and link to strategy Operation Opportunity Performance measures
To attract a high-calibre Chairman and Non- A basic fee is payable to the Chairman and Non- Fees for the current year are stated in the Annual Not applicable. Executive Directors with the relevant experience Executive Directors (NED’s) with supplementary Report on Remuneration. and skills. fees for those NED’s with additional responsibilities, Fee increases may be greater than those of such as acting as Senior Independent Director, the wider workforce in any particular year as chairing a Board Committee, an additional defined they reflect changes to responsibilities and role such as a Board Employee Champion or for a time commitments and the periodic nature of significantly increased time commitment. any increases. Additional payments may be made to Non- Executive Directors for time spent travelling on Company business. Fees are reviewed periodically with reference to market levels in companies of a comparable size, complexity and taking account of the responsibilities and time commitment of each role. The Chairman and the Non-Executive Directors do not participate in the Group’s incentive arrangements or pension plan or receive any other benefits other than where travel to the Company’s registered office is recognised as a taxable benefit in which case the Chairman or a Non-Executive Director may receive the grossed-up costs of travel as a benefit. The Chairman and non-Executive Directors are entitled to reimbursement of reasonable expenses. 128 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
4. Remuneration The Remuneration Committee also retains 5. Existing awards 6. Choice of performance measures Committee discretion the ability within the Remuneration Policy The Remuneration Committee reserves the and approach to target setting The Remuneration Committee will operate to adjust the targets and / or set different right to make any remuneration payments The Remuneration Committee sets the bonus plan and long-term incentive plans measures and alter weightings and the and / or payments for loss of office (including performance metrics under both the bonus according to their respective rules and will be formulaic outcomes for the bonus plan and exercising any discretions available to plan and LTIP which are clearly aligned to consistent with normal market practice, the LTIP, and to adjust targets for the LTIP if it in connection with such payments) the Group’s strategy and are usually part Listing Rules and relevant income tax and events occur which cause it to determine that notwithstanding that they are not in line with of its Key Performance Indicators (KPIs). social security rules, including flexibility in a the conditions are unable to fulfil their original the Remuneration Policy 2021 (set out above) Personal objective performance measures number of regards. These include: intended purpose. where the terms of the payment were agreed: within the bonus are also directly linked to key strategic objectives. • When to make awards and payments The Remuneration Committee may make – (i) before the Remuneration Policy set minor amendments to the Remuneration Policy • How to determine the size of an award or out above came into effect, provided Targets are set at the start of each as set for regulatory, exchange control, tax or a payment, or when and how much of an that the terms of the payment were performance period by the Remuneration administrative purposes or to take account award should vest consistent with the shareholder-approved Committee taking into account relevant of a change in legislation, without obtaining Directors’ Remuneration Policy in force at internal and external reference points and • Who receives an award or payment shareholder approval for that amendment. the time they were agreed; or are designed to be appropriately stretching. • How to deal with a change of control or – (ii) at a time when the relevant individual restructuring of the Group was not a Director of the Company • Whether a participant is a good / bad leaver and, in the opinion of the Remuneration for incentive plan purposes, and whether Committee, the payment was not in and what proportion of awards vest and consideration for the individual becoming timing of delivery a Director of the Company. For these • How and whether an award (or an award purposes “payments” includes the of shares outlined in this Policy that is yet Remuneration Committee satisfying to be granted) may be adjusted in certain awards of variable remuneration and, circumstances (eg rights issues, corporate in relation to an award over shares, the restructuring, events and special dividends) terms of the payment are “agreed” at • What the weighting, measures and targets the time the award is granted. should be for the bonus plan and LTIP from year to year 129 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
7. Remuneration mix 8. New appointments Share incentives The graphs below demonstrate the potential remuneration mix for both of the Executive Basic salary New appointees will be granted awards Directors in 2021 in four theoretical scenarios: minimum, meeting expectations, maximum Will be set based on relevant market data, under the LTIP up to the limit described in (assumed no share price growth) and maximum (assumed 50% share price growth over the experience and skills of the individual, the Policy Table. An award may be made LTIP performance period). internal relativities across the Company shortly following a new appointment. In and the individual’s current basic salary. the first year, the Remuneration Committee 1 Minimum Any annual increase in salary for a new may set different performance measures 2 Meeting Expectations and targets for the LTIP to those of the other 3 Maximum, no share price growth appointment would be at the discretion of the Paul Forman 4 Maximum, assuming 50% share Remuneration Committee and would typically Executive Directors, depending on the timing price growth be broadly consistent with the average and scope of any appointment. 1 100% Fixed Pay salary increase for the relevant workforce. Annual Bonus Pension 2 LTIP However, larger increases may be considered 50% 30% 20% A contribution to a defined contribution appropriate in certain circumstances. For plan or a cash supplement in line with the 3 26% 32% 42% example, where new appointees have initial relevant workforce. basic salaries set below market rates, any Theoretical ScenariosTheoretical 4 20% 31% 49% shortfall will be managed with phased Other benefits 0 1,000 2,000 3,000 4,000 increases (which may be greater than those As provided to current Executive Directors. (£000’s) offered to the relevant workforce) over a Where necessary the Remuneration period of two to three years, subject to their Lily Liu Committee may approve the payment of development in the role. relocation expenses to facilitate recruitment, 1 100% and flexibility is retained for the Company to Bonus pay for legal fees and other costs incurred by 2 54% 29% 17% New appointees will be able to participate the individual in relation to their appointment. 3 30% 32% 38% in the bonus plan up to the limit described in the Policy Table; and, in the first year, Buy-out awards
Theoretical ScenariosTheoretical 4 24% 31% 45% being pro-rated to reflect the proportion To potentially facilitate the recruitment of employment during the year. In the first 0 500 1,000 1,500 2,000 through the buy-out of existing awards year, the Remuneration Committee may set (£000’s) and compensation arrangements from different performance measures and targets Assumptions: their current employer, the Remuneration 1 Salary: to be paid during 2021. for the bonus to those of the other Executive Committee will retain the ability to make 2 Benefits: 2020 reported taxable benefits. Directors, depending on the timing and scope 3 Bonus maximum of 150% of salary for Paul Forman and 125% of salary for Lily Liu. a one-off buy-out award. In doing so, of any appointment. In order to facilitate 4 LTIP award of 200% of salary for Paul Forman and 150% of salary for Lily Liu. the Remuneration Committee will take 5 Pension allowance assumed to be 20% for Paul Forman and 15% of salary for Lily Liu. recruitment, the Remuneration Committee account of all relevant factors, including 6 Meeting expectations scenario assumptions – 50% of bonus maximum paid and 25% of LTIP award vests. may compensate for any bonus forgone when 7 Maximum scenarios assumptions – 100% of bonus maximum paid and 100% of LTIP award vests. any performance conditions attached to the individual leaves their previous employer. 8 No dividend accrual considered. incentive awards, the likelihood of those 9 Sharesave awards have been ignored. 130 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
conditions being met, the proportion of the 9. Service contracts and exit be reduced to take into account any sums • The payment of any bonus will be at the vesting /performance period remaining and payments earned during the payment period by way Remuneration Committee’s discretion, the form of the award (eg, cash or shares). Service contracts normally continue until the of employment elsewhere. based on the individual circumstances The overriding principle will be that any Director’s agreed retirement date or such • There are no enhanced provisions on a and would usually be pro-rated for buy-out award should be of comparable other date as the parties agree. change of control. the period of service and may be paid commercial value to the compensation which entirely in cash. In determining the level • In certain circumstances, such as gross has been forfeited. Buy-out awards will be of bonus to be paid, the Remuneration • The policy for executive service contracts misconduct, the Company may terminate made using existing incentive arrangements Committee may, at its discretion, take is that notice periods will normally not employment immediately without notice where possible, but it may be necessary to into account performance up to the exceed 12 months. Paul Forman has a or payment. use the exemption under Listing Rule 9.4.2. service contract dated 2 January 2017 and date of cessation or over the financial • The Remuneration Committee reserves Shareholders will be informed of any such Lily Liu has a service contract dated 15 year as a whole based on appropriate the right to make any other payments in payments at the time of appointment. November 2018, both with a notice period performance measures as determined connection with a Director’s cessation of of 12 months from either party. The service by the Remuneration Committee. office or employment where the payments In the case of internal appointments or contracts for the Executive Directors are • Under the rules of the LTIP, outstanding are made in good faith in discharge of appointments following the Company’s available for inspection by shareholders awards may vest if a participant leaves an existing legal obligation (or by way of acquisition of or merger with another at each AGM and during normal business for specified reasons, including injury, damages for breach of such an obligation) company or business, any variable pay hours at the Company’s registered office. disability, ill health, death, retirement with element or legacy arrangements in respect or by way of a compromise or settlement • The Remuneration Committee’s policy the Company’s agreement, redundancy, of the prior role would normally be allowed of any claim arising in connection with in relation to termination of service or the business or company in which the to pay-out according to its terms, adjusted the cessation of a Director’s office or contracts is to apply an appropriate level participant is employed ceasing to be part as relevant, to take into account the employment. of mitigation, having regard to all of of the Group or on a change of control. appointment. • Any such payments may include, but the circumstances of the individual, the In these circumstances a participant’s are not limited to, paying any fees for award vests on an appropriate time pro Non-Executive Directors termination of employment, and to any outplacement assistance and / or the rata basis (unless the Remuneration In the event of the appointment of a new legal advice received. The Company has the Director’s legal and / or professional advice Committee decides it is inappropriate to Non-Executive Director, remuneration right to make a payment in lieu of notice fees in connection with their cessation of do so) subject to the satisfaction of the arrangements will normally be in line with (such payment being made based on salary office or employment. relevant performance criteria at the normal the structure set out in the Policy Table for and at the Remuneration Committee’s • The service contract for any new vesting date with the balance of the award Non-Executive Directors. In the event that discretion as to the value of benefits), appointment would be on a similar basis to lapsing. The Remuneration Committee a Non-Executive Director is required to and any such payment may be made in that described above. has discretion to determine that the temporarily take on the role of an Executive monthly instalments at the Company’s performance period should end on the date Director, their remuneration may include any discretion, with a requirement for the of cessation of employment if it feels this is of the elements listed in the Policy Table for individual to make reasonable endeavours appropriate. If, however, the termination of Executive Directors. to find alternative employment and may employment is not for one of the specified 131 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
reasons, and the Remuneration Committee 11. Relationship between Essentra currently manages a number of 13. External appointments does not exercise its discretion to allow remuneration of Executive Directors employee forums including sessions with the Essentra recognises its senior executives can an award to vest, a participant’s award and other employees two Employee Champions, and with specific benefit from serving in a personal capacity lapses in full on the date of cessation. The The Remuneration Committee is kept groups covering diversity and inclusion, as Non-Executive Directors of non-Essentra Committee retains discretion to allow the informed of pay and employment conditions employee engagement focus groups, Group companies. It is, at the same time, holding period for vested awards to expire in the wider Group and this is factored into leadership team sessions and other focus conscious of the corporate governance at the end of the normal two year period or, deliberations when setting the Remuneration groups. Executive pay is a regular item for recommendations that Executive Directors if appropriate, at an earlier date. Policy for Executive Directors. The Group-wide these forums. should take account of the time commitment • The DASB awards may vest if a participant salary increase budget and the proposed required by a non-executive position. leaves for specified reasons including increase for permanent employees in the 12. How the views of shareholders are Executive Directors are permitted to accept death, the business or company in which relevant markets, or employees of such taken into account non-executive directorships offered by listed the participant is employed ceasing to other jurisdiction within which the Executive The Remuneration Committee has consulted companies and other organisations, which be part of the Group, retirement with Directors operate or reside, is considered with major shareholders and investor bodies provide industry experience or public service. the agreement of the Company or at the by the Remuneration Committee when in the past when material changes to the Such outside appointments are subject to discretion of the Board. DASB awards will determining any basic salary increase for Policy have been proposed, and this approach prior Board approval, taking into account either vest on the normal vesting date or at Executive Directors. will continue in the future with the overall existing duties, potential conflicts of interest the point of the participant leaving date if aim to maintain an open and transparent and time commitments outside of Essentra’s deemed a good leaver by the Remuneration As stated previously, the overall remuneration dialogue. A thorough consultation process responsibilities. Any fees earned from these Committee. package for Executive Directors is structured was undertaken with our major shareholders roles may be retained by the Executive Director. so that the variable performance-related pay and representative bodies before this updated 10. Non-Executive Directors element forms a more significant portion Policy Report was submitted for the approval The Chairman and Non-Executive Directors compared to pay for other employees. of all shareholders. do not have service contracts and do not This policy is to ensure there is a clear link participate in any Company pension, share between the individual and corporate or incentive schemes. In accordance with performance achieved, the value this creates best practice, letters of appointment have for shareholders and the overall reward to been issued for all Non-Executive Directors Executive Directors. The weighting of variable for an initial period of three years but may pay will vary throughout the Group based be terminated by either party with three on the seniority of the individual, the role months’ notice. No compensation is payable and specific responsibilities. The Essentra on termination, except for fees and expenses Management Bonus Plan also provides accrued to date. These letters are available a consistent approach for the Executive for inspection by shareholders at each AGM Directors and Managers within Essentra by and during normal business hours at the aligning the same performance conditions Company’s registered office. for their bonus plans. 132 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Annual Report on Remuneration
Key activities Membership and attendance Remuneration Committee 2020 key activities Meetings during the year Meetings during 2020
Nicki Demby, Non-Executive Director 6 (6) Q1 2020 Tommy Breen, Non-Executive Director 6 (6) • Approved 2019 annual bonus out turn for Executive Directors and Mary Reilly, Non-Executive Director 6 (6) GMC members. Ralf Wunderlich, Non-Executive Director 6 (6) • Approved performance measures and targets for the 2020 annual Lorraine Trainer1, Non-Executive Director 1 (2) bonus of Executive Directors and GMC members. 1 Lorraine Trainer left the Remuneration Committee in May 2020. She missed the February 2020 Committee meeting due to illness. • Approved the 2017 LTIP out turn for Executive Directors and other Other attendees senior management. 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 participated in discussions regarding • Reviewed 2019 Directors’ Remuneration Report for inclusion in the their own remuneration. 2020 Annual Report. The Company Secretary and General Counsel acts as Secretary to the Remuneration Committee. Q2 2020 In addition, services and advice were received from the following independent and expert • Considered remuneration issues in relation to COVID-19: 20% reduction in consultants: base salaries and fees for Directors and GMC for 3 months, withdrawal of inflationary salary increase for Executive Directors and no 2020 LTIP award. • Deloitte LLP (Deloitte), who are a member of the Remuneration Consultants Group and have • Discussed the Directors’ Remuneration Policy and possible changes. signed up to its Code of Conduct, provided advice to the Remuneration Committee on the draft Directors’ Remuneration Policy, the 2018 Code, the Company’s incentive plans, and on Q3 2020 the remuneration of the Executive Directors and other senior executives within the Company. • Discussed draft changes to the Directors’ Remuneration Policy and Deloitte were appointed by the Remuneration Committee who review their performance shareholder consultation process. annually, and are content with the continued advice and level of service provided. The • Considered the impact of the share placing on share plans. Remuneration Committee continues to be satisfied with the level of independence. Fees charged for the year under review are £77,650. The fees are charged on a time and expenses Q4 2020 basis. Deloitte also provided other remuneration, consulting and tax services to the Company • Considered adjusting the 2018 LTIP outturn for M&A activity during during 2020. the performance period. • New Bridge Street, a part of Aon Hewitt, who are a member of the Remuneration • Considered the design of the 2021 annual bonus for Executive Directors Consultants Group and have signed up to its Code of Conduct, provided advice on the and GMC. Company’s long-term share incentive plans including the calculation of the TSR LTIP • Considered the design of the 2021 LTIP for Executive Directors and other performance measure. Fees charged for the year under review are £13,404. The fees are senior management. charged on a time and expenses basis. The Remuneration Committee continues to be • Discussed shareholder feedback from consultations on the Directors’ satisfied with the advice provided and level of independence. Aon Hewitt also provided Remuneration Policy. actuarial advice to the Company for its USA pension scheme and are appointed as the Group’s insurance broker. • Reviewed the draft 2020 Directors’ Remuneration Report. • The Remuneration Committee continuously monitors and reviews the Company’s • Reviewed Executive Directors and GMC share ownership. relationships with its independent advisers. 133 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
This section of the Remuneration Report will be subject to an advisory vote at the 2021 AGM.
Total Single Figure of Remuneration Table for 2020 (audited) The remuneration received by Executive Directors for the year ended 31 December 2020 (and the 31 December 2019 comparative) was as follows:
Salary and fees for the Bonus year or from Cash in (cash and Long-Term the date of Taxable lieu of Total fixed deferred Incentive Total variable appointment benefits¹ pension2 remuneration shares) Plan3 remuneration Other Total Year £0008 £000 £000 £000 £000 £000 £000 £000 £000 Executive Directors Paul Forman 2020 611 37 1529 800 – – – 800 2019 639 37 160 836 288 172 460 1,296 Lily Liu 2020 330 14 649 408 – – – 408 2019 327 33 65 425 114 – 114 57 544 Non-Executive Directors Paul Lester 2020 238 – – 238 – – – 238 2019 250 – – 250 – – – 250 Tommy Breen 2020 59 – – 59 – – – 59 2019 61 – – 61 – – – 61 Lorraine Trainer4 2020 24 – – 24 – – – 24 2019 64 – – 64 – – – 64 Mary Reilly 2020 71 – – 71 – – – 71 2019 77 – – 77 – – – 77 Ralf Wunderlich5 2020 69 – – 69 – – – 69 2019 57 – – 57 – – – 57 Nicki Demby6 2020 57 – – 57 – – – 57 2019 30 – – 30 – – – 30 Totals 2020 1,459 51 216 1,726 – – – – 1,726 Totals 2019 1,505 70 225 1,800 402 172 574 5 2,379
1 Taxable benefits comprise a car allowance, private medical insurance and life insurance cover. 2 Neither Paul Forman nor Lily Liu are entitled to any benefit under the Essentra Defined Benefit Pension Scheme. 3 The 2018 LTIP lapsed as the minimum performance conditions were not met. The 2017 LTIP value for Paul Forman has been restated based on the share price on the date of vesting (8 September 2020) of 293.2p. 4 Lorraine Trainer stepped down from the Board in May 2020 at the AGM. 5 Ralf Wunderlich was appointed as a Board Employee Champion in November 2019. 6 Nicki Demby was appointed Chair of the Remuneration Committee in May 2020 at the AGM. 7 Sharesave grant on 3 April 2019. This figure is the difference between the exercise price and the share price at the date of grant. 8 Due to COVID-19 all Directors had a 20% reduction in salary and fees for three months. 9 Paul Forman’s pension allowance was reduced to 23.1% of salary at 1 April 2020. Lily Liu’s pension allowance was reduced to 18% of salary as at 1 April 2020. 134 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
CEO pay ratio (unaudited) This is the second year that we are publishing our CEO pay ratio. We have elected to continue 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 2020. 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 31 December 2020.
Method 25th Percentile 50th Percentile 75th Percentile Salary A £ 19,494 £26,951 £38,413 Total pay A £21,074 £26,951 £41,402 FY 2020 A 38:1 30:1 19:1 FY 2019 A 67:1 50:1 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 Customer Service Representative, Digital Team Leader and Lead Maintenance Engineer. The majority of remuneration for these roles is fixed rather than performance linked. The ratios are calculated based on the total remuneration payable to the Chief Executive in respect of 2020, as set out in the single figure table above.
The CEO pay ratio for 2020 has reduced to 30:1 at the median. This reflects the three month salary reduction that the CEO voluntarily agreed in order to help fund the furlough payments for our employees globally, that no annual bonus was paid for 2020 and that none of the 2018 LTIP awards vested.
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 of which is dependent 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 2020, Paul Forman was entitled to a potential maximum bonus of up to 150% of basic salary and Lily Liu 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 2020, the performance measures for the Executive Directors were Adjusted Operating Profit (40%), Operating Cash Flow (30%) and Strategic Objectives (30%). No bonuses are payable unless 85% of the Target Adjusted Operating Profit is achieved. 135 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
2020 Annual Bonus Outturn % of Performance Actual maximum Base Target Stretch performance bonus Measure Weighting performance performance performance £m payable Adjusted Operating Profit 40% £82.8m £92.0m £96.6m £62m 0% Adjusted Operating Cash Flow 30% £81.8m £90.9m £95.5m £76.3m 0%1
1 No bonus is payable under any performance measure as a result of missing 85% of the target Adjusted Operating Profit.
At the start of the year, the Committee set a stretching range for Adjusted Operating Profit and Adjusted Operating Cash Flow based on the original financial forecast for 2020. The Adjusted Operating Profit and Adjusted Operating Cash Flow targets were not changed for the economic impact of COVID-19.
In the Committee’s view, the Executive Directors delivered a resilient financial performance despite the significant economic downturn. Many of the key strategic objectives set for the year were also successfully achieved. However, due to missing the underpin Adjusted Operating Profit Target, there was no payment due to the Executive Directors under either the 30% strategic element or the 70% financial element of the bonus.
In determining the outcome of the annual bonus for 2020 the Remuneration Committee gave careful consideration to exercising its discretion including a number of matters not addressed by the mechanics of the plan. 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 2018 Threshold Actual Condition (25% Vesting) Maximum outturn Vesting 3 year Relative TSR v FTSE250 (exc investment trusts) (33.33%) Median Upper quartile Below median 0% 3 year Compound Annual Growth in Adjusted EPS (33.33%) 6% 15% -16.9% 0% 3 year Cumulative Adjusted Operating Cash Flow (33.33%) £252m £292m £225.3m 0%
At the conclusion of the performance period, the Remuneration Committee discussed whether any discretion should be applied to the formulaic outturn of the LTIP. In conclusion, the Committee was comfortable that the formulaic vesting outturn of 0% of maximum was fair and reasonable, and was satisfied that adjusting for M&A activity during the three year performance period would make no difference to the formulaic outturn. 136 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | 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:
Exercised/ Share price Date of At 1 Jan Awarded transferred Lapsed At 31 Dec at date Earliest grant 2020 in year in year in year 2020 of grant vesting date Expiry date Paul Forman LTIP1 8 Sept 17 387,076 – 58,496 328,580 – 529.0p 8 Sept 20 7 Sept 23 LTIP1 6 Apr 18 292,877 – – – 292,877 426.8p 6 Apr 21 6 Apr 24 LTIP1 13 Aug 19 321,241 – – – 321,241 400.4p 15 Aug 22 13 Aug 25 DASB 29 Mar 18 52,059 – – – 52,059 432.2p 1 Mar 21 1 Mar 21 DASB 29 Mar 19 74,342 – – – 74,342 413.0p 1 Mar 22 1 Mar 22 DASB 30 Mar 202 56,840 – – 56,840 253.4p 1 Mar 23 1 Mar 23 Lily Liu LTIP1 13 Aug 19 205,594 – – 205,594 400.4p 15 Aug 22 13 Aug 25 DASB 30 Mar 203 – 22,642 – – 22,642 253.4p 1 Mar 23 1 Mar 23
1 Subject to a two-year holding period post vesting. 2 Face value of DASB award to the Chief Executive is £143,805. 3 Face value of DASB award to the Chief Financial Officer is £57,284.
A total of 174,389 (2019: 1,529,082) share incentive awards were granted during the year ended 31 December 2020 to Executive Directors and other senior executives on the GMC, all relating to the DASB awards on annual bonuses earned in 2019.
Performance shares awards granted during the year (audited) No awards were granted in 2020 as the Committee felt it would be inappropriate to grant an LTIP award when the salaries of many employees that were furloughed around the world were reduced by 20%. This helped fund the cost of paying 80% of salaries for all furloughed workers globally. 137 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
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 2020 and the date of this Report.
Beneficially owned LTIP DASB SAYE
31 Dec 2019 31 Dec 2020 Vested Unvested Unvested Unvested Executive Directors Paul Forman 260,000 308,461 58,496 614,118 183,241 – Lily Liu – 19,230 – 205,594 22,642 5,503 Non-Executive Directors Paul Lester 7,500 11,346 – – – – Tommy Breen 10,000 13,846 – – – – Lorraine Trainer 9,092 9,092 – – – – Ralf Wunderlich 136,000 170,230 – – – – Mary Reilly 7,500 9,423 – – – – Nicki Demby 750 2,673 – – – –
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 262% for Paul Forman and 36% for Lily Liu.
Salary used is the prevailing annual salary as at 31 December 2020.
The Executive Directors are regarded as being interested in 1,084,091 (2019: 1,033,311) 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.
As at 31 December 2020, potential and actual share issuance through employee related share plans totalled 1.65%, which is well below UK institutional shareholder limits of 10% of the Company’s issued share capital. 138 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | 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 2020, of £100 invested in Essentra on 31 December 2010, compared with the value of £100 invested in the FTSE 250 (excl. Investment Trusts) Index. The other points plotted are the values at intervening financial year-ends.
£ 500
400
300
200
100
0 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019 Dec 2020 Essentra FTSE 250 (excluding investment trusts) index 139 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Chief Executive remuneration table (unaudited) Mark Harper Colin Day Paul Forman
1 Jan – 14 Apr 11 1 Apr –31 Dec 11 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total remuneration (£000) 1,715 1,046 1,570 3,824 5,661 2,281 876 1,267 1,420 1,296 800 Annual bonus (% maximum) 100 100 100 100 60 46.2 0 48 64.2 30.2 0 LTIP vesting (% maximum) 100 n/a n/a 100 100 50 0 0 0 13.53 0
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.
Year-on-year change in pay for Directors compared to the average of employees (unaudited) In line with the requirements in The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, which implement Articles 9a and 9b of the European Directive 2017/828/EC1 (commonly known as the Revised Shareholder Rights Directive), the table below shows the percentage change in Directors’ remuneration and average remuneration of employees from the year ended 31 December 2019 to the year ended 31 December 2020. Given the small number of people employed by the Essentra Plc entity, data for all employees of the Essentra Group has been included.
There were no salary increases in 2020 except for statutory and negotiated increases and a few market rate adjustments on an exceptional basis. As a result, the average salary increase is 1.7% from 2019 to 2020. Average bonuses have fallen due to the economic impact of the COVID-19 on the Group’s financial performance.
The increase in fees for Nicki Demby and Ralf Wunderlich reflect their respective appointments to the Board in 2019, and as Chair of the Remuneration Committee in 2020 and appointment as Board Employee Champion in November 2019.
Average Paul Lily Paul Tommy Lorraine Ralf Mary Nicki employee1 Forman Liu Lester Breen Trainer Wunderlich Reilly Demby Salary / Fees +1.7% -4.3% +0.9% -4.8% -3.3% -62.5% +21% -7.8% +90% Benefits +4.7% 0% -57.6% n/a n/a n/a n/a n/a n/a Bonus -73.3% -100% -100% n/a n/a n/a n/a n/a n/a
1 The average employee salary is based on all global employees. The average employee benefits and bonus are based on employees located in the UK and USA. The differing approach reflects the information held in global systems. 140 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Relative importance of spend on pay (unaudited) 2020 2019 % £m £m change Staff costs1 271.8 287.1 -5.3% Distributions to shareholders – 54.2 -100% Revenue – total2 896.5 974.1 -8.0% Adjusted Operating Profit – total2 62.0 87.5 -29.1%
1 Staff costs are as per note 5 of the Financial Statements. 2 Revenue and Adjusted Operating Profit have fallen as a result of the impact of COVID-19 on our markets.
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 2020.
Implementation of Remuneration Policy for 2021 (unaudited) When considering the implementation of the policy for 2021, the Committee was mindful of the 2018 Code and considers that the executive remuneration framework appropriately addresses the following factors:
Clarity We provide open and transparent disclosures both internally and externally in relation to our executive remuneration arrangements. Simplicity 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. Predictability 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. Alignment to culture The performance measures used for annual bonus and LTIP awards are KPIs that drive behaviours that are closely aligned to our strategy and Company values. In 2021 the LTIP will include a greenhouse gas (GHG) emissions measure and the strategic objectives will include a reduction of waste to landfill target. Proportionality and risk 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. For example, under the proposed Directors’ Remuneration Policy, the shareholding guideline for Executive Directors continues two years after leaving Essentra. 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.
Executive Director Contracts The Executive Directors have open-ended contracts with their reappointment being confirmed annually at the AGM. 141 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
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. Any salary change is normally effective in April each year.
Paul Lily Forman Liu £ £ Annual salary effective from 1 April 2021 655,345 360,700 Annual salary effective from 1 April 2020, excluding 20% reduction from 1 April – 30 June 2020 643,125 353,976
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
Pension Paul Forman’s pension allowance was reduced by £11,900 from 1 April 2020. He currently receives a pension allowance equal to 23.1% of base salary. Lily Liu’s cash allowance in lieu of pension was reduced by £2,100 from 1 April 2020. She currently receives a pension allowance equal to 18% of base salary.
From 1 April 2021, pension allowances will be further reduced to 20% and 15% of salary respectively for Paul Forman and Lily Liu. This continues the phased approach to align with the wider workforce by the end of 2022.
2021 Annual bonus Under the terms of the annual bonus arrangements for 2021, 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 deferred for three years, in accordance with the rules of the DASB.
The measures and weightings for the annual bonus for 2021 will be consistent with those in 2020:
Weighting Measures (%) Adjusted Operating Profit 40% Adjusted Operating Cash Flow 30% Strategic Objectives – including 10% on progress against Zero Waste to Landfill 30%
In 2021, there will be no bonus payable unless the Remuneration Committee determines that the Company’s 2021 financial performance is satisfactory. For achieving threshold Adjusted Operating Profit and Adjusted Operating Cash Flow, 10% of the relevant portion of the bonus will be payable. Progress against Zero Waste to Landfill will be reviewed by the Sustainability Committee. 142 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
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 2021 Remuneration Report.
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, if there has been serious reputational damage to the Company or a relevant business unit, or in the event of corporate failure.
2021 LTIP An award granted under the LTIP consists of a conditional right to receive shares in the Company, subject to satisfaction of performance conditions over a three-year period. An additional two-year holding period applies. Malus and clawback provisions also apply to LTIP awards for three years from vesting.
The following LTIP awards are intended to be granted to Executive Directors during 2021.
Paul Lily Condition Forman Liu LTIP awards as a percentage of salary 200% 150%
Threshold Condition (25% Vesting) Maximum Compound Annual Growth in Adjusted EPS2 (40%) 5% 13% ROIC2 (30%) 8.5% 14.5% Relative TSR v FTSE2501 (20%) Median Upper quartile Reduction in GHG Emissions3 (10%) 10% 15%
1 FTSE 250 excluding companies in the following industries: basic materials, energy, financial services, real estate, utilities and travel and leisure. 2 Adjusted EPS and ROIC are subject to adjustment from portfolio management/changes. 3 Externally audited Scope 1 and 2 GHG emissions consistent with our publicly stated commitment to be carbon neutral by 2040, and an interim reduction of 25% by 2025 relative to a 2019 baseline. 143 THE DIRECTORS’ REMUNERATION POLICY REPORT CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | 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.
All Non-Executive Directors had a 20% fee reduction for 3 months from 1 April to 30 June 2020. There will be no change to Non-Executive Directors’ fees in 2021. No individual was present for the discussion related to their fees.
Additional Additional fee for Additional Additional Non- fee for Senior Audit and fee for fee for Executive Independent Remuneration Sustainability Employee Annual fee effective Chairman Director Director Committee chairs Committee chair Champions From 1 October 2019 £250,000 £52,000 £10,000 £13,000 £11,000 £10,000
Outside appointments (unaudited) Paul Forman is the Senior Independent Director of Tate & Lyle. Paul received and retained fees of £78,000 in respect of this directorship during 2020.
Statement of shareholder voting (unaudited) The results of shareholder voting in relation to the approval of the 2019 Directors’ Remuneration Report at the 2020 AGM and the Directors’ Remuneration Policy Report at the 2018 AGM were as follows:
Annual Report Remuneration on Remuneration Policy Report (2020 AGM) (2018 AGM)
No. of No. of votes % votes % Votes cast in favour 207,406,775 99.70 225,065,322 99.52 Votes cast against 620,224 0.30 1,077,739 0.48 Total votes cast 208,026,999 226,143,061 Abstentions 16,212,347 6,066 –
This Report of the Remuneration Committee has been approved by the Board
By order of
Nicki Demby Non-Executive Director Remuneration Committee Chairman 5 March 2021 144 OTHER STATUTORY INFORMATION ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Directors Share capital OTHER STATUTORY As at 31 December 2020 and the date of the The issued share capital of the Company Report, the Board of Directors comprised: is shown in note 20 of the Notes to the Financial Statements. INFORMATION Paul Lester Non-Executive Chairman Paul Forman Chief Executive On 31 December 2020, there were Lily Liu Chief Financial Officer 302,590,708 ordinary shares of 25p each in Tommy Breen Non-Executive Director issue. There were 908,650 ordinary shares Nicki Demby Non-Executive Director of 25p each held in treasury. The rights and obligations attaching to the Company’s Mary Reilly Non-Executive Director The Directors present their Report prepared Results and dividends ordinary shares, and the provisions governing Ralf Wunderlich Non-Executive Director in accordance with the Companies Act 2006, The profit on ordinary activities after taxation of the appointment and replacement of, as well which requires the Company to provide a fair the total Group for the year ended 31 December as the powers of, the Company’s Directors, review of the business of the Group during the 2020 was £6.3m (2019: profit £41.2m). The Company requires all Directors appointed are set out in the Company’s Articles of financial year ended 31 December 2020 and since the last AGM to be elected at the Association, copies of which can be obtained audited Financial Statements of the Company The Company did not pay a dividend in 2020 following AGM and for all other directors to from Companies House in the UK or by and its subsidiary undertakings for the year following a decision by the Board to preserve be re-elected at each AGM. Tommy Breen has writing to the Company Secretary. ended 31 December 2020. The Company’s cash in view of the global pandemic and the confirmed that he will retire from the Board Registered Office is Avebury House, 201-249 uncertainties that created. from the close of the 2021 AGM and will not There are no restrictions on the voting Avebury Boulevard, Milton Keynes MK9 1AU. stand for re-election. rights attaching to the Company’s ordinary Per share Total shares or on the transfer of securities in the p £m In accordance with the UK Financial Conduct None of the Non-Executive Directors have Company, except, in the case of transfers Authority’s Listing Rules (LR 9.8.4C), the Interim dividend – – service contracts. In accordance with the paid 30 October of securities: information to be included in the Annual 2020 Company’s Conflict of Interests policy, Report and Accounts, where applicable, under Directors are required to review their potential • that certain restrictions may from time to LR 9.8.4 is set out in the Directors’ Report. conflict of interests at least on an annual time be imposed by laws and regulations The Directors recommend that a final basis and to notify any changes to the (for example, insider trading laws) The Directors’ Report comprises pages 81 to dividend of 3.3p (2019: 6.3p) per share be Company Secretary and General Counsel • whereby, pursuant to the Listing Rules of 148, and where information has been included paid. No interim year dividend was paid for as soon as possible. During 2020 the current the Financial Conduct Authority, certain in the Strategic Report sections of the 2020 therefore the total dividend distribution register was approved at each Board meeting employees of the Company require Annual Report this has been incorporated by for the year is 3.3p (2019: 6.3p). and no material conflicts of interest were approval of the Company to deal in the reference are as set out below: identified during the year. The final dividend, subject to shareholders Company’s ordinary shares approval at the AGM, will be paid on Membership of Board during 2020 page 85 At no time during the year has any Director financial year 1 June 2021 to shareholders on the register No persons hold securities in the Company had any material interest in a contract with on 23 April 2021. carrying special rights with regard to control Financial instruments and financial pages 45 to 47 the Group, being a contract of significance in risk management of the Company. The Company is not aware relation to the Group’s business. A statement CO emissions page 41 of any agreements between holders of 2 of Directors’ interests in shares of the Corporate Governance Report pages 85 to 99 securities that may result in restrictions on the Company as at 31 December 2020 and as at transfer of securities or on voting rights. Future developments of the business the date of this Report is shown on page 137. of the Group pages 42 to 44 Employee diversity page 34 Unless expressly specified to the contrary in the Articles of Association of the Company, Stakeholder Engagement pages 23 to 26 the Company’s Articles of Association may be amended by special resolution of the Company’s shareholders. 145 OTHER STATUTORY INFORMATION CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
Substantial shareholders Directors’ indemnities All of the Company’s share schemes contain At this year’s AGM, shareholders will be As at 31 December 2020 the Company During the year, and as at the date of this provisions relating to a change in control. asked to grant the Directors’ authority to was advised of the following voting rights Report, qualifying third-party indemnities are Outstanding options and awards normally allot shares or grant rights to subscribe attaching to the Company’s shares in in force under which the Company has agreed vest and become exercisable on a change for or convert any security into shares: (i) accordance with the Disclosure and to indemnify the Directors and the Company of control, subject to the satisfaction of any up to an aggregate nominal amount of Transparency Rules: Secretary and General Counsel, in addition performance conditions at that time. £25,140,172 representing approximately to other senior executives who are Directors one-third of the Company’s issued share % holding of subsidiaries of the Company, to the extent There are a number of other agreements, capital, excluding treasury shares, at 5 March Invesco 6.64% permitted by law and the Company’s Articles involving the Company or its subsidiaries, 2021 (such an amount to be reduced by the that take effect, alter or terminate upon a RLAM 5.99% of Association, in respect of all losses arising nominal amount allotted or granted under change of control of the Company following section (ii) below in excess of such sum); Majedie 5.18% out of or in connection with the execution a takeover bid, such as commercial contracts and (ii) comprising equity securities up to an Ninety One UK Limited 5.02% of their powers, duties and responsibilities as a Director or Officer of the Company or and Joint Venture agreements. None are aggregate nominal amount of £50,280,343 Ameriprise Financial, Inc. and its group 4.98% any of its subsidiaries, including the pension considered to be significant in terms of their representing approximately two-thirds of Standard Life 4.82% scheme trustee companies. The scope of the potential impact on the business of the Group the issued share capital, excluding treasury Heronbridge 4.81% indemnities extends to include liabilities to as a whole, to any potential bidder for the shares, at 5 March 2021 (such an amount to Company or Group. AXA 4.81% third parties. be reduced by any allotments or grants made under section (i) above) in connection with Norge Bank 3.02% Annual General Meeting an offer by way of a rights issue. Kames Capital 2.99% Significant agreements The Company has committed bank facilities The AGM of the Company will be held at The proposal conforms to the guidelines provided by a group of eight banks, dated Essentra Components site at Langford Locks, Employees issued by the institutional investment November 2017, consisting of two five-year Kidlington, Oxford, OX5 1HX on 20 May 2021 protection bodies to ensure that existing As at 31 December 2020, the Company multi-currency revolving credit facilities of at 12 noon. The meeting will be held as a shareholders’ interests are safeguarded. employed 7,065 people globally and 1,280 £285m and €100.8m, set to mature in its virtual meeting and physical attendance will The Directors have no present intention of people in the UK. Information on the entirety in November 2022. For a tranche only be possible if UK government regulations exercising either of these authorities, which Group’s policies on employee recruitment, involving five of the eight banks worth £225m, in place at the time permit this. Any updates will expire at the end of next year’s AGM (or, engagement and the employment of disabled an extension has been agreed to the facility will be posted on the Company‘s website and if earlier, the close of business on 21 July 2021) persons can be found in “A winning, engaged based on new terms, which will now mature shareholders are asked to check the website except in relation to share options. and empowered team” from page 31 to 35. in November 2023. The Company continues in the approach to the AGM. Details of how to review its financing, including the lenders to join the AGM can be found in the Notice of Political contributions Allotment of shares for cash in the original tranche still set to mature in Annual General Meeting. In line with Group policy, the Company made November 2022. At the 2020 AGM, shareholders approved a no political contributions (2019: £nil). In addition to the ordinary business of the special resolution to enable the Directors to Under the terms of these facilities, the AGM, resolutions in respect of the following allot shares for cash without first offering Environmental banks can give notice to Essentra to repay matters of special business are included in the them to existing shareholders in proportion Notice of Annual General Meeting: to their existing shareholdings. That approval The disclosures concerning CO2 emissions outstanding amounts and cancel the commitments where there is a change of expires at the end of the forthcoming AGM required by law are included in Class-leading Authority to allot unissued shares sustainability on page 41. control of the Company. and resolutions 13 and 14 in the Notice of At the 2020 AGM, the Directors were granted AGM seek to renew it. authority to allot relevant securities up to a nominal amount of £21,931,502, which expires at the end of the forthcoming AGM. 146 OTHER STATUTORY INFORMATION CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
As per previous years, the Company seeks At this year’s AGM, the Directors consider Proposed amendment to the Articles Going concern statement a resolution which authorises disapplication of pre- it expedient to seek shareholders’ approval of Association At 31 December 2020, the Group’s financing emption rights in respect of up to an aggregate to enable the Company to purchase, in In order that the Company can best engage arrangements amounted to £448.0m, nominal amount of £3,771,026 (representing the market, up to 10% of its issued share with shareholders at its AGM, the Notice comprising United States Private Placement 15,084,103 ordinary shares). This aggregate capital (excluding any treasury shares) for of AGM includes a resolution to amend (USPP) of US$100.0m (with a range of nominal amount represents approximately 5% of cancellation, or to be held in Treasury, such the Articles of Association so that hybrid expiry dates from November 2024 to April the issued ordinary share capital of the Company power to apply until the end of next year’s meetings can be held. Approval of this will 2030) and a multi-currency revolving credit (excluding treasury shares). AGM (or if earlier, 21 July 2022). In accordance allow the Company to hold both a physical facility (RCF) of £375.0m (of which £225.0m with the requirements of the Listing Rules of and virtual meeting simultaneously and for expires in November 2023 following extension In addition to the above Resolution, the the Financial Conduct Authority, the minimum electronic votes to be counted. Further details agreed with lenders in January 2023, and the Company seeks a Resolution which authorises price (exclusive of expenses) which may be of the proposed amendments can be found remaining amount in November 2022). disapplication of pre-emption rights in respect paid for a share is its nominal value and the in the Notice of AGM. The Board support the of up to an aggregate nominal amount of maximum price (exclusive of expenses) for adoption of this amendment to the Articles. At 31 December 2020, £161.2m of the RCF £3,771,026 (representing 15,084,103 ordinary shares which may be paid is the highest of: facility was undrawn. The facility is subject to shares) in connection with acquisitions and (i) an amount equal to 105% of the average External Auditor two covenants, which are tested semi-annually: other capital investments as contemplated market value for a share for the five business PricewaterhouseCoopers LLP have expressed net debt to EBITDA (leverage) and EBITA to net by the Pre-Emption Group’s Statement of days immediately preceding the date of the their willingness to continue to be appointed finance charges. Despite the macroeconomic Principles. This aggregate nominal amount purchase; and (ii) the higher of the price of the as External Auditor of the Company. Upon uncertainty, the Group has not sought to represents an additional 5% of the issued last independent trade and the highest current the recommendation of the Audit and Risk change either of the two covenants. The ordinary share capital of the Company independent bid on the trading venues where Committee, resolutions to appoint them Directors believe that the Group is well placed (excluding treasury shares). the purchase is carried out. as External Auditor and to authorise the to manage its business risks notwithstanding Directors to determine their remuneration the impact of current events such as Brexit These authorities will expire at the conclusion The Directors have no present intention of will be proposed at the AGM. and, after making enquiries including a review of the following AGM or, if earlier, on 21 July exercising the authority to make market of forecasts and predictions, taking account 2022. The proposal conforms to the guidelines purchases, however the authority provides Recommendation of reasonably possible changes in trading issued by the institutional investment the flexibility to allow them to do so in the performances and considering the existing The Directors believe that the resolutions in protection bodies to ensure that existing future. The Directors will only utilise this banking facilities, including the available the Notice of Annual General Meeting are shareholders’ interests are safeguarded. authority if satisfied that to do so would be liquidity, have a reasonable expectation that in the best interests of the Company and its in the best interests of the Company and the Group has adequate resources to continue Purchase of own shares shareholders as a whole, and unanimously its shareholders generally, and could be in operational existence for at least the next recommend that shareholders vote in favour At the 2020 AGM, shareholders approved a expected to result in an increase in earnings 12 months following the date of approval of of each resolution. special resolution to enable the Company to per share of the Company. the financial statements, and no breaches of purchase its own shares. That approval expires Derivatives covenants are expected. at the end of the forthcoming AGM. During the financial year ending 31 December 2020, 42,487 ordinary shares were transferred Information related to derivatives is included The uncertainty as to the future impact on the out of Treasury by the Company to satisfy in the Accounting Policies on page 157 and Group of the COVID-19 pandemic has been share options under the Company’s Sharesave in note 15 and note 19 to the Notes of the considered as part of the Group’s adoption of and executive share incentive plans. Financial Statements. the going concern basis, taking into account the experience during 2020 and the most recent No dividends have been paid on shares while held in Treasury and no voting rights attach to the treasury shares. 147 OTHER STATUTORY INFORMATION CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
circumstances. As at 31 December 2020 and The severe but plausible scenario does not In late February 2021, OFAC confirmed that The assessment has been based on the as at the date of approval of these financial indicate a material uncertainty which may no further enforcement action would be taken Company’s strategy and implementation statements, all of the Group’s manufacturing cast significant doubt over the Company’s and against the Company or its subsidiaries in programme, balance sheet and financing and distribution facilities are operational and Group’s ability to continue as a going concern. respect of supplementary matters raised with position, and the potential impact of the key have broadly resumed to pre-pandemic levels Therefore, the Directors continue to adopt the OFAC in 2020. risks and uncertainties described above. The of service. Across the Group, public health going concern basis of accounting in preparing Company strategy has been translated into measures advised by governments are being the financial statements. In accordance with Provision 31 of the 2018 a three-year strategic plan comprising a one- followed in support of their efforts to contain UK Corporate Governance Code, the Directors year detailed budget and a financial forecast the spread of the virus, and the supply chain is Further information on the Group’s borrowing have assessed the longer-term viability of for the following two years. The plan will be being proactively managed as are operating facilities, cash resources and other financial the Company over the three-year period subject to annual updates by management costs and the timing of capital expenditure. instruments are described in the Financial to December 2023. and review by the Board. As a consequence, As part of the going concern assessment, Review on pages 45 to 49. the Directors have chosen a three-year the Board has also considered a downside The assessment has been based on the time horizon for the Longer-Term Viability scenario that reflects the current uncertainty The Directors have prepared plans and forecasts Company’s strategy and implementation Statement (LTVS) as being an appropriate in the global economy and which we consider for a period of at least twelve months from programme, balance sheet and financing time frame for assessing the viability of the to be severe but plausible. The results of this the date of signing these financial statements. position, and the potential impact of the key Company, as this is the period reviewed by scenario show that there is sufficient liquidity Based on these, and taking into consideration risks and uncertainties described above. The the Group Board in its strategic planning in the business for a period of at least 12 the risks detailed in note 19, the Directors have a Company strategy has been translated into a process. The Directors believe that this months from the date of approval of these reasonable expectation that the Company has three-year strategic plan comprising a one-year presents a reasonable degree of confidence financial statements, and do not indicate any adequate resources to continue in operational detailed budget and a financial forecast for the over this longer-term outlook, However, the covenant breach during the test period. The existence for the foreseeable future, and following two years. The plan will be subject to Directors have also given due consideration to scenario includes assumption for similar extent accordingly have adopted the going concern annual updates by management and review any potential risks beyond this time horizon. of disruptions as seen in 2020. Set against basis in preparing the consolidated financial by the Board. As a consequence, the Directors this were mitigating actions including tight statements. This disclosure has been prepared have chosen a three-year time horizon for the This assessment was informed by our management of capital expenditure, sales and in accordance with the Financial Reporting Long-Term Viability Statement (LTVS) as being judgements as to the potential financial general overhead, and working capital. Since Council’s UK Corporate Governance Code. an appropriate time frame for assessing the impact of the following Principal Risks if they the first COVID-19 external announcement viability of the Company. However, the Directors materialise over the three-year period: issued by the Company, the Group has been Post balance sheet event have also given due consideration to any cash generative and hence the liquidity position In January 2021, the Company entered into potential risks beyond this time horizon. • Failure to Achieve Acceptable Returns from has further improved. Overall liquidity (defined a restated and amended Revolving Credit the Packaging Division as available undrawn borrowing facility plus Facility with certain banks which extended Long term viability statement • Cyber Attack, including an impact on cash and cash equivalent excluding the amount the arrangements of the existing facility. In accordance with provision 31 of the 2018 UK operational disruption attributable to non-controlling interests) at the Corporate Governance Code, the Directors • Macro-economic and Trade Deal end of December was approximately £285m, In February 2021, HMRC confirmed that the have assessed the longer-term viability of Uncertainty (including Brexit) Company and its subsidiary, Essentra Filter the Company over the three year period to which improved from approximately £260m • Delivery of Strategic Projects. at half-year, achieved by diligent cash flow Products International Limited, were not December 2023. beneficiaries of EU State Aid and therefore management in the Company. In order to support the assessment of the there were no funds due to HMRC for recovery viability, the Directors have considered the of State Aid. 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 Risk. 148 OTHER STATUTORY INFORMATION CONTINUED ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
In all of the scenarios assessed, there is no Directors’ statement as Scenario 1 indication of potential breaches of banking to disclosure of information Level of severity tested covenants, and that there remains sufficient to the External Auditor Failure to Achieve Acceptable Returns Revenue reduction of £9.1m, £11.5m and £20.8m, respectively, and decline of the operating liquidity headroom from the Group’s current As required by Section 418(2) of the from the Packaging Division (middle) profit of £5.5m, £7.8m and £10.7m, respectively, for the three year period borrowing facilities. Companies Act 2006, the Directors who Cyber event with Business Revenue reduction of £2.6m and decline in the operating profit of £1.6m with one-off Continuity Impact (middle) exceptional cash cost of £5m in 2021 were members of the Board at the time of In making the assessment, the Directors Macro-economic and Trade deal Revenue reduction of £44.8m, £69.8m and £85.5m, respectively, and decline of the operating approving this Report, having made enquiries uncertainty (including Brexit) profit of £15.7m, £23.5m and £28.6m, respectively, for the three year period have assumed that capital markets and of fellow Directors and of the External Auditor, (severe) bank funding will continue to be available confirm that: Delivery of Strategic Projects (base) In line with base case assumptions over the period. Furthermore, management would be in a position to implement • as far as each Director is aware, there is further effective mitigation actions to Scenario 2 no relevant audit information of which the reduce the impact a potential risk event Company’s External Auditor is unaware and to preserve cash resources. Mitigating Level of severity tested • each Director has taken all reasonable steps actions considered by management include Failure to Achieve Acceptable Returns Revenue reduction of £15.8m, £26.2m and £34.6m, respectively, and decline of the operating that they ought to have taken as a Director from the Packaging Division (severe) profit of £7.9m, £14.2m and £18.0m, respectively, for the three year period availability of alternative sources of funding, to ascertain any relevant audit information, Cyber event with Business Revenue reduction of £3.3m and decline in the operating profit of £2.2m with one-off cost rationalisation measures, working capital Continuity Impact (severe) exceptional cash cost of £10m in 2021 and to ensure that the Company’s External and capital expenditure management and Macro-economic and Trade deal Revenue reduction of £44.8m, £69.8m and £85.5m, respectively, and decline of the operating Auditor is aware of that information uncertainty (including Brexit) (severe) profit of £15.7m, £23.5m and £28.6m, respectively, for the three year period potential disposal of non-core assets. • the Strategic Report and Directors’ Report, Delivery of Strategic Projects Decline in revenue of £0m, £15.0m and £11.3m in 2021, 2022 and 2023, respectively, and decline of (middle) the operating profit of £1.4m, £7.0m and £7.3m, respectively, for the three year period Based on the viability assessment undertaken, including the Report of the Remuneration the Directors have a reasonable expectation Committee, were approved by the Board that the Group will be able to continue in on 5 March 2021. Scenario 3 operational existence and meet its liabilities as By order of the Board Level of severity tested they fall due over the period of the assessment. Failure to Achieve Acceptable Returns Revenue reduction of £15.8m, £26.2m and £34.6m, respectively, and decline of the operating Jon Green from the Packaging Division (severe) profit of £7.9m, £14.2m and £18.0m, respectively, for the three year period Company Secretary Cyber event with Business Revenue reduction of £2.6m and decline in the operating profit of £1.6m with one-off Continuity Impact (middle) exceptional cash cost of £5m in 2021 5 March 2021 Macro-economic and Trade deal Revenue reduction of £44.8m, £69.8m and £85.5m, respectively, and decline of the operating uncertainty (including Brexit) profit of £15.7m, £23.5m and £28.6m, respectively, for the three year period (severe) Delivery of Strategic Projects Decline in revenue of £0m, £15.0m and £11.3m in 2021, 2022 and 2023, respectively, and decline of (middle) the operating profit of £1.0m, £5.0m and £4.6m, respectively, for the three year period
Scenario 4
Level of severity tested Failure to Achieve Acceptable Returns Revenue reduction of £15.8m, £26.2m and £34.6m, respectively, and decline of the operating from the Packaging Division (severe) profit of £7.9m, £14.2m and £18.0m, respectively, for the three year period Cyber event with Business Revenue reduction of £3.3m and decline in the operating profit of £2.2m with one-off Continuity Impact (severe) exceptional cash cost of £10m in 2021 Macro-economic and Trade deal Revenue reduction of £44.8m, £69.8m and £85.5m, respectively, and decline of the operating uncertainty (including Brexit) (severe) profit of £15.7m, £23.5m and £28.6m, respectively, for the three year period Delivery of Strategic Projects Decline in revenue of £0m, £15.0m and £22.5m in 2021, 2022 and 2023, respectively, and decline of (severe) the operating profit of £1.4m, £7.0m and £7.3m, respectively, for the three year period 149 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS
The directors are responsible for preparing • select suitable accounting policies and financial position of the group and company • the Directors’ Report includes a fair review the Annual Report and the financial then apply them consistently; and enable them to ensure that the financial of the development and performance of the statements in accordance with applicable • state whether applicable International statements and the Directors’ Remuneration business and the position of the group and law and regulation. accounting standards in conformity with Report comply with the Companies Act 2006. company, together with a description of the the requirements of the Companies Act principal risks and uncertainties that it faces. Company law requires the directors to 2006 and international financial reporting The directors are responsible for the prepare financial statements for each standards adopted pursuant to Regulation maintenance and integrity of the company’s In the case of each director in office at the financial year. Under that law the directors (EC) No 1606/2002 as it applies in the website. Legislation in the United Kingdom date the directors’ report is approved: have prepared the group financial European Union have been followed governing the preparation and dissemination • so far as the director is aware, there is statements in accordance with international for the group financial statements and of financial statements may differ from no relevant audit information of which accounting standards in conformity with United Kingdom Accounting Standards, legislation in other jurisdictions. the group’s and company’s auditors are the requirements of the Companies Act comprising FRS 101 have been followed for unaware; and 2006 and company financial statements in the company financial statements, subject Directors’ confirmations accordance with United Kingdom Generally to any material departures disclosed and Each of the directors, whose names and • they have taken all the steps that they Accepted Accounting Practice (United explained in the financial statements; functions are listed in Directors’ Report ought to have taken as a director in order Kingdom Accounting Standards, comprising to make themselves aware of any relevant • make judgements and accounting confirm that, to the best of their knowledge: FRS 101 “Reduced Disclosure Framework”, and audit information and to establish that the estimates that are reasonable and applicable law). Additionally, the Financial • the group financial statements, which group’s and company’s auditors are aware prudent; and Conduct Authority’s Disclosure Guidance have been prepared in accordance with of that information. and Transparency Rules require the directors • prepare the financial statements on International accounting standards in to prepare the group financial statements the going concern basis unless it is conformity with the requirements of the in accordance with international financial inappropriate to presume that the group Companies Act 2006 and international reporting standards adopted pursuant to and company will continue in business. financial reporting standards adopted Paul Forman Regulation (EC) No 1606/2002 as it applies pursuant to Regulation (EC) No 1606/2002 Chief Executive in the European Union. The directors are also responsible for as it applies in the European Union, give a safeguarding the assets of the group and true and fair view of the assets, liabilities, Under company law, directors must not company and hence for taking reasonable financial position and profit of the group; approve the financial statements unless they steps for the prevention and detection of • the company financial statements, which Lily Liu are satisfied that they give a true and fair fraud and other irregularities. have been prepared in accordance with Chief Financial Officer view of the state of affairs of the group and 5 March 2021 United Kingdom Accounting Standards, company and of the profit or loss of the group The directors are responsible for keeping comprising FRS 101, give a true and fair view for that period. In preparing the financial adequate accounting records that are of the assets, liabilities, financial position statements, the directors are required to: sufficient to show and explain the group’s and company’s transactions and disclose and profit of the company; and with reasonable accuracy at any time the 150 INDEPENDENT ASSURANCE STATEMENT TO ESSENTRA PLC ESSENTRA PLC ANNUAL REPORT 2020 STRATEGIC REPORT | DIRECTORS’ REPORT
INDEPENDENT ASSURANCE STATEMENT TO ESSENTRA PLC
ERM Certification and Verification Services (ERM CVS) was engaged by Essentra plc (‘Essentra’) A team of assurance professionals undertook Essentra collects refrigerant gas usage data to provide limited assurance in relation to the information set out below and presented in the following activities: from its sites, however due to the lack of Essentra’s 2020 Annual Report (‘the Annual Report’). detailed information regarding the specific • Interviews with relevant Essentra staff gases used emissions from this source have Engagement summary to understand and evaluate the data not been included in Essentra’s Scope 1 GHG Scope of our Whether the 2020 data and explanatory notes for the following indicators presented on pages management systems and processes emissions for 2020. assurance 40 and 41 of the Annual Report are fairly presented, in all material respects, in accordance engagement with the reporting criteria: (including IT systems and internal review processes) used for collecting and reporting The limitations of our engagement • Total Scope 1 GHG emissions [metric tonnes of CO eq] 2 the selected data; The reliability of the assured data is subject • Total Scope 2 GHG emissions [metric tonnes of CO2eq] • Total hazardous and total non-hazardous waste by destination (Landfill, • A review of the internal indicator definitions to inherent uncertainties, given the available Incineration without energy recovery, Recovery including incineration with energy and conversion factors; methods for determining, calculating or recovery, and Recycling) [metric tonnes] • Virtual visits to four Essentra sites (UK (2), estimating the underlying information. It • Zero waste to landfill sites [number] Turkey and the United States) to review is important to understand our assurance • Total water usage [cubic meters] local data management and reporting conclusions in this context. Due to travel Reporting The WBCSD/WRI GHG Protocol (2004, as revised January 2015) for the Scope 1 and Scope 2 processes, and the consistency of reported restrictions as a result of COVID-19 our criteria GHG emissions, and Essentra’s internal methodology and reporting criteria for the waste and water data as described in the footnotes on page 41 of the Annual Report. data with underlying source data and assurance work for the 2020 reporting period was either desk-based or used virtual Assurance ERM CVS’s assurance methodology, based on the International Standard on Assurance related information for each indicator; interviews and meetings with the Essentra standard Engagements ISAE 3000 (Revised). • An analytical review of the data from all corporate reporting team and the sites Assurance level Limited assurance. sites and a check on the completeness selected for virtual visits. We did not undertake Respective Essentra is responsible for preparing the data and for its correct presentation in reporting to and accuracy of the corporate data any in-person visits to Essentra operations. responsibilities third parties, including disclosure of the reporting criteria and boundary. consolidation; ERM CVS’s responsibility is to provide conclusions on the agreed scope based on the assurance activities performed and exercising our professional judgement. • A review of the information relevant to the scope of our work in the Annual Report, to ensure consistency with our findings. Our conclusions Beth Wyke Partner, Head of Corporate Assurance Based on our activities, nothing has come to our attention to indicate that the 2020 data and Observations 24 February 2021 explanatory notes for the indicators listed under ‘Scope’ above and shown on pages 40 and 41 Essentra’s location-based Scope 2 GHG of the Annual Report, are not fairly presented, in all material respects, with the reporting criteria. emissions for 2020 have been calculated by ERM Certification and applying IEA (2019) emission factors to the Verification Services, Our assurance activities underlying activity data. The Scope 2 GHG London Our objective was to assess whether the selected data are reported in accordance with the emissions for 2020 calculated using these www.ermcvs.com; principles of completeness, comparability (across the organisation) and accuracy (including emissions factors are higher than would be email: [email protected] calculations, use of appropriate conversion factors and consolidation). We planned and the case if IEA (2020) emission factors had performed our work to obtain all the information and explanations that we believe were been applied. necessary to provide a basis for our assurance conclusions.
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 in any respect. Essentra plc essentraplc.com
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