U.S. Markets closed

Edited Transcript of ESNT.L earnings conference call or presentation 2-Aug-19 7:30am GMT

Half Year 2019 Essentra PLC Earnings Call

London Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Essentra PLC earnings conference call or presentation Friday, August 2, 2019 at 7:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Lily Liu

Essentra plc - CFO & Executive Director

* Paul A. Forman

Essentra plc - Chief Executive & Executive Director

* Scott Fawcett

Essentra plc - MD of Components

================================================================================

Conference Call Participants

================================================================================

* Andrew Douglas

Jefferies LLC, Research Division - Equity Analyst

* Charles Hall

Peel Hunt LLP, Research Division - Head of Research

* James Beard

Numis Securities Limited, Research Division - Analyst

* Thomas Richard Sykes

Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [1]

--------------------------------------------------------------------------------

Okay. It's 8:30. Good morning, everyone, both in the room and in cyberspace back there. A very warm welcome to the 2019 interims for Essentra plc.

I will be kicking off. I will give you a summary and a brief update on the highlights. Lily will be taking you through the numbers pre- post IFRS, pre- post disposal, pre- post anything else as well. I will then be giving you an update on what's been happening in the engine room of the business, the stability agenda. We'll then talk because there's awful lot of moving parts about the impact of our portfolio simplification and hopefully, give you some information that will enable you to knit the fog that we have created for you through our active management of the portfolio in the last 6 months.

So if we were to stand back and say the journey since January 1, 2017, is a book, you can choose what type of book, I'll leave that to yourselves, then I think at the moment, what we would be doing is starting the third chapter. Chapter 1 was really about understanding what the fundamental issues were. It was about developing solutions. It was about bringing stability. It was about reinventing ourselves in the eyes of our customers and our people. It was about creating an inflection point where, and we'll put some dimensions on it in a minute, the negative momentum that had been generated in 2015 and '16 was not only stabilized but reversed. It was also about developing strategies for the 3, now only divisions we have that have, in the last 2 years of their implementation, broadly stood unchanged, whilst being tested both by our own internal challenge but also by the forces of external reality.

Chapter 2 then was saying, okay, so we have some stability, we have strategy, but we also have a cluster of businesses with very different profiles, and as we have always said, are not strategically additive. So we've very much taken on the basis of the strategies that Tim shared with you this time last year, a very, if you like, capital allocation-based approach and said, which businesses should naturally remain part of Essentra plc in the third chapter that we're talking about, and which are better added to another entity, and where we can free up capital that we will use for the benefit of Essentra plc and its shareholders.

So as you can see in the title, what I think 2019 really shows is encouraging financial progress, major portfolio rationalization, and now we have 3 focused global divisions. So we have de facto, and this isn't the slide at hand really gone from 9 businesses to 3 businesses in the course of 6-somewhat hectic months. If you actually look down, we'll see a solid result in Components. I'll put some parameters on that in a minute. As I called back in September, we anticipated that the underlying markets would weaken. We cannot mistake the gravity of that, but we can outperform it.

Packaging. If there was an MVP award for the half year, I think Iain Percival in the Packaging team would get that for an accelerated performance and an encouraging trajectory consistent with the guidelines that we have set, which will enable us to get back to the target returns for the industry in 2021.

And then Filters, for the first time in a long time, it has grown both its sales and its margin. And we are increasingly confident that growth can be sustained, not only by getting the fundamentals right, we can talk about that, but also by successful implementation of the game-changers in the second half.

I said that later on I'll take you under the bonnet and what you'll see is on our people and our operating performance, we have again continued to improve in all businesses on all key metrics. And we have announced today that the Specialist Components business will be wound up no later than the end of Q3, enabling us to proceed with a much simpler portfolio. There is a triple-digit or GBP 100-plus million fund that we have generated from these disposals, and that's been used to reduce net debt and to fund 2 value-creating acquisitions. I do not expect that either to be the end of that in H2.

To give you some numbers, on a like-for-like basis, the sales have gone up 3.7%, and profit has gone up 10.8% if you adjust for disposals, closures, et cetera. Our reported operating profit has moved significantly. That's primarily the impact of acquisitions, disposals in the first half of both years. You can see there that EPS up 7.5%, that depending on whether you want to look at it on a pre or post-IFRS 16, I think, in real money, it's GBP 193 million, but Lily says I have to say GBP 242 million, as does Nick Stephens, my auditor, he hates APMs. And with the strength of our balance sheet and the confidence, we're happy and very comfortable maintaining the divi at 6.3p.

This is -- you'll now see some charts in the presentation that we have used every time since H1 2017. The left-hand one is the like-for-like revenue growth. You can see there that there is a pleasing and a constant increase in our trend. The -- before we started Chapter 1, there was a minus 11% run rate -- sales decline, and that's moved by 15 percentage points in 5 halves, which is very encouraging. And clearly, also, if you look there in the halves, the Packaging underlying revenue growth, 9.5% compares to minus 9.2% only 3 halves before. So there's an 18.6 percentage point movement in the period of 18 months, which I think is testament: a, to the fantastic work; but b, the fundamental defensive robustness of that market. The margin, which hit its low point in 2017, you can see 8.2, 8.2, continues to progress another 30 bps.

Let me then just delve very briefly into each of the divisions. You can see we have at least 2 of the 3 divisional heads now so clearly, they are feeling better about life because they dare to turn up. So Components, like-for-like, 0.8%. The actual real number is, you can see at the sub-bullet on the first point, 1.7%. This is a business that is multiple transactions, very fast lead-time, low value. It is de facto and has the same kind of characteristics as the distribution business so we always look at sales to working day, which is about 2%. Effectively, I've always said we target industrial production growth, plus 4%. That would imply circa 2% underlying industrial production decline. What I would say is that Q2 was stronger than Q1. If I look ahead with all the news that surrounds us and uncertainty, do I think that's a trend you should extrapolate? No, not necessarily. But I'm confident that between price and market share gain, we can continue to outperform industrial production.

One of our particular highlights is access hardware. This is the -- centered in the Mesan Turkish business. But also, what we've seen encouragingly is the beginnings of cross-selling in things like our fasteners. And that's very important because you've about 6 product categories, but very few of our 10s and 10s and 10s of thousands of customers take multiple product categories. So actually, there is -- our fate is within our own hands in that aspect.

The key essence of how we can improve the ease of our customers to find the right products and to order from us and trade with us in -- as a frictionless of way is actually through our website. This was piloted in Q1 and has now been rolled out in a number of markets. It broadly covers now about 40% or so of our sales base, and by the end of the year, it'll cover 80% of our sales base. So far, it has been very encouraging. Scott, you can ask about it later, is a master of such metrics, but I'll Google our performances and things like that, have gone orders of magnitude better and we're getting very positive feedback from our customers.

What we're also trying to do in terms of hassle-free is to improve the logistics that provides faster, more immediate customer service and also gives us for, fairly obvious reasons, a stronger logistics capability in Europe, in Continental Europe. We have been, from a logistics point of view, probably too heavily weighted in a post-Brexit world or whatever on our Oxford facility. So we will be launching a brand new warehouse in the Dutch-German border in first half of next year. And also, this is a -- the picture there is our Houston warehouse, which is very new, which not only gives us a better ability to serve that southern industrial base but also gives us the capability to absorb innovative components or innovative components and Micro Plastics product and increase our geographic reach.

Hertila, the acquisition we made in Sweden, continues to perform to plan. Micro Plastics as a, if you like, parenthetical footnote, is trading ahead of our integration plan. And we announced recently, and I've been to its Chicago site, Innovative Components, which again you can ask Scott later on about the details. But it complements that very successful access hardware range as combination of plastic and metal, and gives us also, in the form of the Costa Rica base, a low-cost variable manufacturing base.

Packaging. What I should also say is that as the title shows, the operating margin has, despite a relatively slower growth, still being maintained and increased to 40 bps. It's about 23% all in all. Packaging, 9.5% underlying revenue growth. Please do not extrapolate that. We will not sustain 9.5% in perpetuity. The comps will get harder, but I think that, certainly, Iain and the team will achieve somewhere between the 5% medium-term target that we're saying that you should use as a trend and that 9%. So excellent performance. The really encouraging thing is that it's been pretty much consistent in both Americas and Europe and across our product categories. The good thing now that we have stability, is that we're having a totally different dialogue with our customers. Reckitt Benckiser, the AstraZeneca, whomever, it's all about now not only how do we, on a day-to-day basis, can maintain what we're doing but it's how do we help you design products that are tamper proof. How do we help you design products that are cheap and to make in your factories, et cetera, et cetera. And I have seen in the last 18 months, a sea change in that regard.

I've always said that about 2/3 of the benefit, as we go on this journey back within the next 2 years to industry standard margins, is going to be about the benefit of volume through the factories and we're seeing that. But we continue to invest in the equipment. We continue to use the continuous improvement Lean Six Sigma capabilities, and it's encouraging to see that we've also got -- had investment in the last 6 months to address a nice problem of being capacity-constrained in certain product areas.

Filters, 1.3% growth like-for-like. Operating margin is up. I cannot think of a time, I went back where we could have pluses in both of those, but I don't think, Joe, you've ever been able to write 2 plusses. So that's great. What is interesting is, I mentioned it last -- that last year, we -- for the first time in a long, long time, if ever, we moved to having a higher weighting in independence than the MNCs. Clearly, those 5 MNCs are very important, but we are seeing a lot of further encouraging progress. So that's really encouraging because it gives us, if you like, a lower-risk profile. The lumpiness of a certain large player deciding to suddenly go in-house or move or whatever, its impact gets ameliorated.

In terms of innovation, which is one of the 3 building blocks along with Key Account Management, a world-class service, we are seeing much more innovation. We are now having regular innovation workshops with our customers. And what we're seeing is that we were mostly talking, for instance, to the procurement individuals. We're now talking to marketing, the product development, the R&D people, et cetera.

And in terms of the game changers, we are, I think, making encouraging progress in our discussions in China. We have now got commercial supply in Heat Not Burn. We have got some specific components supply also within the vaping market. And we are having a number of live discussions as we speak about some material outsourcing contracts.

Specialist Components, I suppose I comment n the operating margin increase that clearly, revenue has gone down for fairly obvious reasons. We highlighted last year that Tear Tapes, in particular, had underperformed. We put a strategic recovery plan in place, and that I'm pleased to say has been moving up the margin quite significantly there, and has therefore, gained some good traction. Reid, which is the distribution business anchored in the Midwest, has had a tougher time, which is directly in line and directly correlated with the underlying trends in the industrial production in the Midwest.

So that's a quick tour d'horizon of what's going on clearly. I'll take questions about the detail later, but now I'll hand over to Lily who'll take you through the numbers. Over to you, Lily.

--------------------------------------------------------------------------------

Lily Liu, Essentra plc - CFO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you, Paul. Good morning, everyone. I'm delighted to be here to present our very first Chapter 3 income result alongside with Paul here. As Paul mentioned, we saw encouraging financial progress and significant portfolio rationalization in the first half of the year.

So moving on. In March, I actually ended my presentation on the high of IFRS 16, I thought I changed the sequence, but the message is exactly the same. The net impact to our P&L in balance sheet is minimum. I'm pleased to present a bit more detail on the presentation impact on different lines. If you're interested in this topic, we have more detail in our earnings.

So turning on to our income statement and looking at the year-on-year change. At constant forex, as Paul mentioned, we reported GBP 507 million on half year revenue, a decline on the reported constant forex line of 2.7%. However, if you exclude the divestment, closures and business cessation, the underlying revenue growth for the whole group was 3.7%.

Operating profit, GBP 48.3 million, a 9.6% growth with 9.5% operating margin, 100 bps expansion. It's worth noting that excluding all the divestment, the IFRS 16, the business cessation, the closures, the like-for-like, apple-to-apple and whiter-than-the-white measure is 10.8%, as Paul mentioned. EPS, 12p, a 7.5% increase.

Now turning on to division-by-division. Paul has already mentioned most of the underlying improvement so I would just point out a couple of things here. Number one, component is 0.8%, but actually trading day adjusted, it's 1.7%. As Paul already mentioned, a solid performance, supported by pricing management, pricing initiatives amid a relatively soft global output in manufacturing sector. Packaging, GBP 177 million. Excluding closures, a strong growth of 9.4%. Filters returning to growth, GBP 131 million, 1.3% like-for-like growth. This is against the backdrop of the backhaul industry pipeline volatility that we have always talked about. Independent customers now account for more than 55% of our revenue. Specialist Component, again, on a like-for-like basis, is a decline of just under 1%. Overall group, 3.7% top line growth.

Now turning onto operating profit, which again at constant forex, component delivered OP of GBP 31 million, 3% growth, a margin of 23%, a 40 bps expansion. The pricing management paid dividend, and the business demonstrate a good margin resilience over the cycle. Packaging reported GBP 7.9 million profit, a 360 bps expansion. The improvement was partially helped by a one-off, just under GBP 2 million so the benefit into the first half. Again, Paul mentioned pricing and the improvement on the underlying quality metrics and service level. We have seen pricing initiatives offsetting raw material cost this half. Filters reported profit growth of 5%, a 50 bps improvement, thanks for the operational excellence continued contributing to this. Specialist Component declined on profit as a result of divestment but margin showed 110 bps expansion.

Now let's pause here for central cost, central services, GBP 13.6 million as we expected. I previously stated that we invested into new and upgraded capabilities into the group such as security, cyber security, program management, operations excellence, continuous improvement, procurement. And those capabilities underpin our stability and recovery. Now as a result of our divestment, we expect circa GBP 2.5 million to GBP 3 million unallocated central cost for 2019. Now directionally, the full year central cost would be around GBP 30 million for 2019.

As Paul mentioned, we continue to work on acquisitions, and over time, we want to achieve or we aim to achieve overhead efficiency along with our global BPR program. Paul will provide a bit more color a bit later. Overall, trading performance was strong with margin improvement in all the divisions.

Now moving further down the income statement. Interest charge, slightly higher than prior year, largely impacted by the presentation of IFRS 16 and also slightly higher sterling-related debt to help mitigate some of the Brexit uncertainties. The effective tax rate, 20%, in line with previously stated 19% to 20% range. The unchanged minority interest is a result of circa 3 months less minority interest allocation from Filters JV in Dubai, but offset by stronger growth in our JV in India. So EPS 12p, 7.5% increase.

Now turning onto exceptional and other adjusting items. We reported a gain of just under GBP 23 million. The credit was largely driven by the gain on disposal, as you can see in the details on the slide. One thing I want to just highlight here, the tax payable, if you go to the back half of our earnings, is slightly higher, largely driven by -- the tax base is lower than the accounting base when it comes to net asset. And within the GBP 13 million tax payable, we outlined as gain on disposal -- or tax payable on disposal, and around GBP 5 million is associated with prior relief. That benefited the group historically. We expect tax to be settled in 2019.

We also reported a gain in other categories from provision release to a certain site closures, offset by just under GBP 1 million of external consultancy cost in relation to a review and investigations currently in progress of certain compliance matters in a subsidiary.

Now moving on to cash flow. Our adjusted operating cash flow for the first half was GBP 37 million, 76% cash conversion. As a result of the investment we made in our net working capital associated with 2 matters: number one, as Paul mentioned, Packaging grew by just under 10%, and we invested working capital to support that; and number two, we built some finished goods inventory in our Component business to offset and mitigate the Brexit risks. Overall, the net working capital ratio was 13.9%, a 20 bps improvement comparing to previous year despite the investment we've made, and this is an area we continue to focus on.

Our CapEx is in line with expectation, and we continue to invest in our IT infrastructure, and as Paul mentioned, equipment to support growth in the Packaging area. After applying interest, tax and pension, the free cash flow was just under GBP 23 million.

Turning onto net debt. Our net debt ratio was 1.4 pre-IFRS 16, and post this, 1.6. Whatever metric you look at now is a significant improvement from the year-end at a 0.4, 0.5x reduction. On a constant currency basis and after applying IFRS 16, our net debt reduced by just under GBP 60 million as a result of the fund flow from net acquisitions and disposals and all the free cash flow generated in the business after paying dividend and exceptional items.

Now our return on invested capital for the first half is 10.2%, continue to make steady growth -- steady improvement as you can see on the chart. The low point was 2017 at about 8.6%. Last year, we were 9.6%. Now we're 10.2%, which is a great result in line with our portfolio management and further M&A activities. As Paul mentioned, dividend, the Board reviewed and approved the dividend, unchanged for the interim at 6.3p for half year 2019.

Thank you, Paul. With that, thank you. Hand it back to you.

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [3]

--------------------------------------------------------------------------------

One of the significance of ROIC is, as you probably recall that we've moved to ROIC as a measure for our long-term incentive now. So stability, how we're going to sustain this and then get the organic and inorganic growth building on that engine. We'll go through people, service, IT and our finances.

Two stories here. This is looking at the cumulative lost time incidents. You've seen that there is some improvement, but not enough in terms of the number of LTIs. To a degree the more we acquire, because we have higher safety standards than anyone else, we tend to find that it almost acts as a counterbalance to that positive trend. The encouraging thing, however, is whilst we have a 5% reduction in the number, in terms of lost hours and therefore the severity, we're gotten almost 60% reduction in the lost hours. So we're having fewer incidents, but they're also of a much less serious nature.

Employee engagement, other than the safety of our people, the engagement of our people is my #2 priority. We are really encouraging engagement in our local communities. We are following up on what a key area of desire from our people was, in terms of development; personal development and career development. We have Oshin who has been in place as group HRD now for some 6 months and is really developing, I think, a very coherent and powerful 3-year strategy for our HR capabilities. We have a talent acquisition Director in place. Mary Reilly one of our [NEDs] has, with her customary whim and vigor, taken up the role of Board employee champion and has been visiting a number of sites and has a key input and a very valuable input into how I and the rest of the team think about and perceive how we optimize to further that engagement of our employees. We are now targeting what we call kind of a supervisor level in piloting, some really well-received programs there. And we have also under Nick Pennell developing a sustainability strategy that is focused on 4 areas. Responsible resource usage, we are big users of materials so looking on an end-to-end. So for instance there, a number of our sites now are on 0 waste to landfill. Energy and climate change, clearly, that's something that's relevant to everyone. Whether that be LED lighting, whether it be using solar panels in our factories, these are all programs that we are kicking off.

I believe personally, as do my team, that a business should be a responsible and a valuable member and contributor to the societies and communities in which they operate. We are very much rolling out our community engagement policy. I think 97% of our sites now have an active program there. And with the responsible supply chain, again, we are looking both upwards and downwards across the supply chain to make sure where there'd be know your supplier, know your customer programs, et cetera, that we are making good progress there. We're very cognizant of linking it to some of these UN sustainable development goals, and you can see a cross referral there. It isn't pragmatic to try and address all 17. But you can see that in many, there's an overlap with those.

In terms of the operations, as I said, good progress on every metric pretty much across the board. Call out, say Components there, that's moved up almost a percentage point. Filters maintains its world-class level. The focus there is now not been on OTIF, it's about OTIF but with reducing lead times. And Packaging, notwithstanding the fact that it's growing at 10%, has increased in Q2, was higher than Q1. And Specialist Components moved forward as well.

Quality. You can see there, Components, a halving of quality incidents, a 75% reduction in Filters, a 45% reduction in Packaging and a 17% reduction in 2 years in Specialist Components. So I think it's all trending in a positive encouraging way. It cements that relationship with our customers. It enables us to debate strategic matters, not day-to-day matters. And also, frankly, if we are not having quality issues, it makes our factories that much more efficient. So again, positive consistent improvement across-the-board, which is encouraging. We will, at some stage, get into diminishing returns. So once Filters gets to a bit lower, whether it can ever be perfect, who knows, but it's a really encouraging trend.

The other major issue that we've been focusing on and within our stability agenda, I would say, process rigor and IT capability are 2 things which we still need. If we're at say, 70% to 80% of the way through the stability, where are the big 2 levers? It's probably those 2 allied to making our people top decile in engagement. But what you can see here, this is the major incident rate. You can see that in 2 years, Richard and the team have achieved a 75% reduction there. How is that? It's by having better processes in place, but it's also by spending quite a lot of money, to be honest. So Packaging and IT have been the biggest recipients. So if it hadn't -- we'd be been having some interesting conversations, Richard Cammish and I. So he's doing well.

This is a different time scale. So this is in 1 year. If you look at the hours lost as opposed to the number, i.e., the severity, we've now got an 85% reduction in hours in 1 year, which is very, very significant. So again, it just reduces the frustration in our people and reduces the waste of time. So that's a very, very significant improvement. What it does is it allows Richard and the IT team to focus on defensive things like cyber, and offensive things like supporting Scott and the website rollout and the BPR program, which is a much more constructive use of time.

Which leads us onto the BPR program. Why do we need that? Because we need better financial and business controls and because our 66 -- 46, sorry, ERP systems are just falling over and are not fit for the kind of business we want to be. So it addresses those issues. We have -- I said we would come back and try and scale essentially 2 key points, one of which is within the CapEx guidelines of GBP 55 million or so, this will be absorbed. And secondly, if we look for the next 3 or 4 years, on the impact of the net of the benefits and the increased depreciation, they wash out. So if I were you and I would be doing the model, I'll just ignore it. That's easy, isn't it? All right. Good.

What are the benefits? It enables us to integrate businesses required quickly. It does enable us -- we've already talked about working capital and an end-to-end supply chain. It enables us to manage that in a much more joined up way. It enables us particularly where we have global customers to provide them a purview that's on a much more integrated basis. And in terms of planning -- medium-term planning, it enables this thing called sales and operational planning, S&OP. There are some benefits that we have quantified, which enables me to make that statement about it being awash. Such as SG&A, it will obviously help in terms of, say, the efficiency of Lily's finance function but also in terms of addressing cost of quality. But there are a number of other benefits that will enable in terms of working capital management, machine utilization and just a general reduction on waste.

We are very, very cognizant that having just spent 2.5 years climbing out of the swamp from self-inflicted wounds, if we were to get this wrong, that would have been the waste of an awful lot of time and effort. So we are taking a multi-year approach. We are only looking at Components, finance, purchasing at the moment. The other divisions will follow in time. The other enabling units will follow in time. But it's a phased approach of up to 5 years. So half of our focus is about getting the benefits, half of our focus is about managing the risk.

Our finances, as, hopefully, our actions of the last 6 months have demonstrated, we have applied, ourselves and the Board and the executive team, very rigorous capital allocation. ROIC is a very important determinant of our thinking. We do have and we have maintained strong discipline in terms of the Board-agreed return parameters for M&A. But also, we have introduced a very structured post-investment review process with the Board. And that, for instance, has confirmed the signal progress made with Micro Plastics and the fact we're comfortable with the way they Hertila is. Before IFRS, we've gone from 1.9 to 1.4x net debt-to-EBITDA. If we were to do it plea, it would be 2.1 down to -- sorry, before applying FR -- IFRS 16, can't even say it, let alone standard it. We have gone to 1.4 from 1.9. If we were to do that on a post, it would be 1.6 and 2.1. So -- but anyway, a major reduction.

In terms of the U.K. pension plan, and those of you who know Coats can imagine the joy this is to me, we had a GBP 1 million of deficit, which we are going to close in the next year or so. And you'll have already seen, given the focus on the quality of earnings, the consistent improvement both [ROS] and ROIC.

Right. A lot of moving parts. Hopefully, this will help you to maybe understand the impact. So disposal is the first column. Gross proceeds, GBP 115 million, loss of GBP 105 million, loss of GBP 50 million in profit and an EPS hit of circa 4p. We then had the purchase for GBP 12 million of 49% Filters JV, which has a, obviously, no revenue or trading profit impact but an EPS uplift of circa 1p. And then the acquisition of Innovative Components brings us GBP 1.5 million of profit and an EPS impact of 0.5p. So those are the moving parts.

The net of that is we had, within Specialist Components, 2 businesses left. Tear Tapes. Tear Tapes, its primary customer base is the tobacco MNCs. It will operate a number of those customers and independents. A number of customers have said it would be better to have the product offering under one coherent customer focus. So we will operate it as a stand-alone center of excellence, but with -- a consistent customer-facing focus. And then Reid is essentially a distributor in the Midwest of third-party branded products to broadly the same customer base and in complementary product areas. The mistake we made a few years ago was to try and smash it in and pretend it was exactly the same. We will not be doing that. It will be a stand-alone, autonomous unit within Scott's division with a separate management team, but looking to leverage the complementary customer bases, et cetera. So I'm sure we will learn from the lessons of the past.

So there's a place -- a clear, coherent, strategic logic for that. We believe that they can, therefore, be more valuable as part of Essentra with such synergies and benefits. And so we are committed to pursuing those 2 within our 3 global division contexts. What does that mean for the numbers? So this is a snapshot of FY 2018. You can see that the Components when we had the St Express sites, there the numbers, Filters, Packaging and then the 6 Specialist Components entity. That is the before. The after looks like that. So you can see when you add in Tear Tapes and Filters, you have the base Components business, you have some of those express sites that moved out with the disposal of Specialist Tapes, and you add in the Reid industrial business you can see there. And then Packaging, that was what it looks like because it's unchanged. So broadly 3 GBP 300 million turnover global divisions although of different margin profiles currently.

So if I look ahead whether be it financially, operationally, commercially, I think the strategy and the progress are on track. I cannot think of how the outcome is different from what I would have expected 12 -- 6 months ago or 12 months. If I were just to have -- you made me sit down and write this presentation, then I'd come out and brought you this. What do we want to do that for? We want to continue to drive above-market organic growth. I think we're doing this in all 3 businesses. We need to sustain that. And Components is doing that, and it's looking at value-enhancing, bolt-on acquisitions. For those of you who hate us for having to change your models, I apologize in advance, but you may well have to do it again.

Packaging, it's continuing this market share gain, leading to organic revenue momentum and, and, and looking at strategic bull's-eye, bolt-on, low-risk acquisitions. I think it's a sign of the confidence on the Board and the senior team that we are now happy to do that where we think that they're low risk and will add value.

And with Filters, we've talked about the importance of innovation, and the step-change Kamal has made on Key Account Management, underpinned by operational excellence and then pursuing those 3 game-changers. As, ladies and gents, I've been saying for the last 11 months, the world was going to go worst place. The good thing is we will outperform the underlying industrial output level, 3%, 4% and Packaging and Filters, effectively remain noncyclical. So as a defensive, it's a defensive plan on a relative basis. Yes, we can't escape the gravity of the world producing less industrially, but actually, that's: a, relevant only to 1; and b, we'll mitigate it because most of the value levers are in our control.

So let me just rephrase. We are now starting Chapter 3. I think H1 is conspicuous for good financial progress. Across-the-board, major, major changes. Positive changes, simplification to our portfolio, and 3 businesses that are now set to move forward organically and inorganically. And therefore, the final bullet point, we do think across each of those metrics, we'll continue to move forward.

That's 42 seconds early, Matt. Right. I will pause there. And I think the way this normally works is we take questions in the room first, and then we go into cyberspace. If you could please wait and have a microphone so the rest of the planet can hear your comments, it'd be helpful. Andy?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [1]

--------------------------------------------------------------------------------

It's Andrew Douglas from Jeffries. Three questions please, if I may. Packaging, clearly doing exceptionally well. And you're making sure that we don't extrapolate 9% forever. Could you just remind us what you think the underlying market is growing at, just kind of, if you can...

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [2]

--------------------------------------------------------------------------------

3% to 4%.

--------------------------------------------------------------------------------

Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [3]

--------------------------------------------------------------------------------

Still 3% to 4%. Right. Okay. And I was slightly surprised by your comment on Components that the second quarter is doing better than the first quarter. We've seen most other industrials saying -- looking the other way and that June was a complete disaster. Can we just kind of flesh that out, just to make sure we understand the kind of the moving parts? Just like...

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [4]

--------------------------------------------------------------------------------

Yes. Okay. This is -- concentrate, Andy.

--------------------------------------------------------------------------------

Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [5]

--------------------------------------------------------------------------------

Okay, understood.

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [6]

--------------------------------------------------------------------------------

Right. We had a really, really strong Q1 2018 -- apologize, because we had a really weak Q1 2017, because in a different world we have pulled forward lots of stuff into Q4 '16. So we had a low-teens Q1 year-on-year in 2018. So it's nothing to do with the world. It's to do with what happened in Q4 2016 to be brutally honest. If -- does that make sense?

--------------------------------------------------------------------------------

Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [7]

--------------------------------------------------------------------------------

Yeah. That does make sense. And then last. Central cost...

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [8]

--------------------------------------------------------------------------------

(inaudible)

--------------------------------------------------------------------------------

Andrew Douglas, Jefferies LLC, Research Division - Equity Analyst [9]

--------------------------------------------------------------------------------

Central cost has clearly been at a reasonably high level. Can we just talk about the -- how do you look at 2, 3, 5 year maybe as to what happens to the shape of the cost goes (inaudible)?

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [10]

--------------------------------------------------------------------------------

Yes. As a percent of sales, we would see it coming down over time. I think we have seen the risks of just doing it either too much or that can feel considered way. And -- so the reason that we've started, for instance, with finance in the BPR is we think there's opportunities there to make that a lot more efficient and value-added. So I think if you look at it as a percentage of sales now, it's what 3%? 3%, I think probably trending down to 2.5% over the medium term. Something like that, Lily?

--------------------------------------------------------------------------------

Lily Liu, Essentra plc - CFO & Executive Director [11]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [12]

--------------------------------------------------------------------------------

James.

--------------------------------------------------------------------------------

James Beard, Numis Securities Limited, Research Division - Analyst [13]

--------------------------------------------------------------------------------

It's James Beard from Numis. I've got 3 questions on Components, if I may. Firstly...

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [14]

--------------------------------------------------------------------------------

You know the answer is x plus 4%, David.

--------------------------------------------------------------------------------

James Beard, Numis Securities Limited, Research Division - Analyst [15]

--------------------------------------------------------------------------------

Possibly. Not actually. (inaudible) On the margin, and so we've got up to 23% in the first half. What are your expectations on that front in H2? Is that a maintained margin over the short term and the medium term given your desire to undertake further acquisitions, which presumably will be in the short term margin-dilutive?

And then second question, thinking slightly more broadly about some of the underlying metrics about that Components business. Are you able to talk about some of the trends that you've seen over the last 18 months to 2 years in terms of customer numbers and average order spend, average order frequency and how those have trended over your tenure?

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [16]

--------------------------------------------------------------------------------

That's not 2 questions. That's 22 questions. That's because it really is 2. Let's start with the first one then. Margins, you're spot on, if we do deals, there is going to be a short-term dilution. Although you've seen that with micro, et cetera, we're able to improve it. In the short term, I see no reason why the margins for the underlying business will go down. I think in the medium term, depending on what happens in the world, I've said low-20s is kind of where we should maintain. At the very worst, which was after GFC, it went down to about [17] or [18], Joe, for a year. So I think the position we have in the value chain and the ease of doing business with better logistics, better website should enable us to maintain our position there, James.

In terms of trends, we are continuing, I believe, to, over the time, to gain small amounts of market share. It is not significant. I think that as we get more integrated with the systems, with the website, with better logistics, I think we can nudge that up. In terms of the overall profile, in terms of number of customers and products, not really. I don't see a big change. We haven't yet licked, for instance, cross-selling, I don't think. We haven't fundamentally changed the nature of our business. So I think with just continuing to do what we do, albeit we are now making it easier for customers to do it.

In terms of value for new customers, we have had a marginal increase, the numbers of new customers we need to work on. There's not hugely, hugely different. We've just got better performance and, we've now launched some aspects of our offering which -- and our people training programs that should enable us to at least sustain that 4% x plus x. Is that fair, Scott? I thought there's something wrong. Charles, you always first ask.

--------------------------------------------------------------------------------

Charles Hall, Peel Hunt LLP, Research Division - Head of Research [17]

--------------------------------------------------------------------------------

Charles Hall from Peel Hunt. I'm just filling in for Christian. Can you just give some color on the pricing benefit in first half in Components? And also give some early thoughts on the website impact on customers, so a bit more detail around that? And obviously, it's not a transactional website in the true sense. But what are you expecting to see? Or what have you started to see in the countries when you speak about...

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [18]

--------------------------------------------------------------------------------

Qualitatively. Yes. Okay. I think you put in your early note, circa 3%, didn't you? I would not choose to, as always, Charles, disagree with you on that. Scott, could you just please come up because I'm happy normally to just try and wing it. But on this particular one. Is this on? Yes, it is. Could you just talk about some qualitative and particularly stuff like this web page stuff which I really don't understand.

--------------------------------------------------------------------------------

Scott Fawcett, Essentra plc - MD of Components [19]

--------------------------------------------------------------------------------

So it's still reasonably early days with the sites we've got live. Obviously, I think we've talked in March, we just went up with the first pilot in Finland. We've now got the U.K., Netherlands, U.S. and Canada live. You're right around it's not really focusing online transactions. It's about getting more eyeballs in front of the offer. The very first stage of that is our indexability in Google, and what we've seen there is between a 4 and tenfold increase in the number of pages Google is indexing from our websites. So the old websites were quite poor at this and in a very short period of time the new websites have proven to be much, much better. So the U.K., for example, has gone from, I think, 9,000 pages in Google on the old websites, which were 4, 5 years old, to 40,000 pages inside a month. So much better indexing. Now once you're indexed, you need to get the visibility up, the search indexes. So it's a relevance phase and then we'll see traffic. So traffic has been stable so far. You'd normally expect it to dip. So stable as we're better than we expected. And we're now expecting that to start growing. So more eyeballs to the site, which will be the key, then it's around getting lead generation from the site that we can convert. So early days, but probably better than we expected at this early stage, I think, is where we see ourselves.

--------------------------------------------------------------------------------

Charles Hall, Peel Hunt LLP, Research Division - Head of Research [20]

--------------------------------------------------------------------------------

On the pricing point, you're getting more effective on getting price improvements through presumably that part of that is lower level of discounts to customers and presumably having a more effective website will help in that process?

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [21]

--------------------------------------------------------------------------------

You can be smarter, you can build algorithms and things like that. So yes.

--------------------------------------------------------------------------------

Scott Fawcett, Essentra plc - MD of Components [22]

--------------------------------------------------------------------------------

We've (inaudible) taken best practice that we've had historically in parts of the world and rolled out more consistently. It has been a big part of that and we've focused in the first half. So it's really doing what we did well in some places and making sure we're executing it globally which has led to a better result. We've always been okay, but we're just doing it more consistently globally this half.

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [23]

--------------------------------------------------------------------------------

Thanks, Scotty. Hey, Tom.

--------------------------------------------------------------------------------

Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [24]

--------------------------------------------------------------------------------

Tom Sykes from Deutsche Bank. You mentioned the game-changers and you mentioned in Filters and the progression on potential outsourcing contracts. So wonder, is there any possibility if you quantify both how big and substantial those could be to the division? And maybe just following on from the pricing commentary on Components. Is there -- could you talk about positive pricing in the other divisions as well?

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [25]

--------------------------------------------------------------------------------

Yes. I think if we were to get all 3 firing as they possibly could, it could add 15% to the revenue over the medium term, something like that.

--------------------------------------------------------------------------------

Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [26]

--------------------------------------------------------------------------------

And on the pricing element within Packaging you said...

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [27]

--------------------------------------------------------------------------------

Pricing within Packaging is going well. We are at least recovering our input cost. And Filters, particularly within the independent side, it is not something that has been, I think you know me, I'm fairly straight, it's not natural, endemic in the culture of Filters. But we are beginning to make progress in encouraging and giving the underlying value-add through innovation and through world-class service to actually encourage people to start having discussions there. I think it's been the slowest of out of the blocks of the 3.

--------------------------------------------------------------------------------

Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [28]

--------------------------------------------------------------------------------

Okay. And what, on Packaging, my understanding was that there were price reductions as you had service level drops in Packaging and then you've been recovering.

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [29]

--------------------------------------------------------------------------------

Not really. We didn't. The bigger impact was that we weren't allowed to tender for business. So we are now -- now that we have stability, now we have more value-add on 2 things, one of which is we have been putting price rises; and secondly, we've been tackling the tale of negative or very low gross margin, recognizing that we can't continue like that. And so we have been imposing, in some cases, certain -- certainly quite high double-digit price increases where it is necessary because it makes no sense for us or for the customer to be losing money on the job. Why would we do that? So now I'm encouraged about the progress that Packaging is making. And one of the ways that -- I said 2/3 is through volume, 1/3 is through other things, pricing and removing that negative gross margin tale is another lever. Anybody else?

Do we have anybody in the ether who wishes to ask any questions? I don't know how it happens, but it happens, doesn't it, Matt, yes?

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

No questions over the phone, sir.

--------------------------------------------------------------------------------

Paul A. Forman, Essentra plc - Chief Executive & Executive Director [31]

--------------------------------------------------------------------------------

Okay. All right. Well, thank you very much on this busy results day for coming and joining us. I and my colleagues, and there are quite a few of them, would be free to answer any questions afterwards. Thank you.