Good day, and thank you for standing by. Welcome to Essentra full year 2021 results presentation. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Paul Forman. Please go ahead.
Good day, everyone, and a very warm welcome to the full year results for Essentra plc for 2021. My name is Paul Forman, and I'm Group CEO. Today, I will be joined by our Group CFO, Lily Liu, and the Managing Director of our Components division, Scott Fawcett. I think there are three key messages that I would like to start with and leave you with indeed. One of which is that we think 2021 has shown a very strong trading performance across the board. Secondly, that the momentum is continuing or indeed increasing, both in terms of margin profile, but also year-on-year revenue growth, notwithstanding that the comparables are getting more demanding.
Third, that we are very focused on the two strategic reviews whose goal is twofold, one of which is to release shareholder value by becoming a pure-play Components business. Secondly, given the progress they've made strategically, commercially, and operationally, to create three strong standalone global businesses. If we go on to slide 2 in the agenda, I will give a brief summary of highlights. I'll then ask Lily to talk to financial performance. I will ask Scott to talk about the divisional performance of Components. For the final three sections, I will cover the other matters that you can see there, including an outlook for 2022. If we go on to slide 3, it has, as the title suggests, I believe, been a successful year.
We have had a good full-year performance, and Lily will break that down, and I will break it down with Scott into the divisions as well. It would be fair to say the two strategic reviews are progressing in line with the internal expectations. You will recall that we said the outcome of those would be known and communicated in Q2 at the earliest, but we naturally have very clear timetables, and I'm pleased to say that those are being adhered to. In terms of the financial performance, you can see there an 8.5% like-for-like revenue growth and an almost 50% increase in adjusted operating profit. The operating margin gets back to or is slightly ahead of the 2019 levels, and we have accelerated growth in all three divisions, with quarter four representing a 13% like-for-like growth.
Looking in slightly more detail, Components has sustained an increased revenue growth and seen margin expansion. Packaging, notwithstanding challenges both from the market, particularly in H1, but also, labor, and raw material availability challenges, has made real performance progress. It is getting closer to the sector average operating margin that we've always been targeting and is showing an increase in revenue trend. Filters, a small margin increase, but as importantly, strong revenue growth driven by the game changers that we've talked about, and I'll talk more about that as well. The encouraging thing, if we look at quarter one and the likely outcome on a year-on-year basis, is if anything, that we'll see an improvement on the trend that we saw in Q4, with good progress across the board.
Our journey towards being a very responsible, consistent with our purpose, supplier, continues, and I'm pleased to say that both our sustainability, but also the broader ESG, we make good progress. With the material profit growth and good management of net working capital as a % of sales, we retain a strong balance sheet with a ratio of 1.5 net debt/EBITDA. That has given the board the confidence to pursue its stated policy of announcing a progressive dividend. We are proposing to pay a final divvy of 4p, which will give a full-year divvy of 6p. I will then hand over now to Lily Liu to talk about financial performance. Over to you, Lily Liu.
Thank you, Paul. Good morning, everyone. I'm very pleased to be here with Paul and Scott today. Look, I'm very pleased with the progress we made strategically, commercially, and financially in 2021. As always, I'll provide some more color about our financial performance in this section. Let me share with you the key financial metrics on one page. Can we move on to slide 5, please? I would highlight that a significant number of metrics are on or better than 2019 levels. Now, on a constant currency basis, revenue grew 12.6% and 8.4% like-for-like to GBP 960 million. Adjusted OP at GBP 84 million grew 46.5% with OP margin 200 basis points ahead of 2020 and slightly ahead of 2019.
Adjusted EPS grew 55% to 18.2p, with a proposed full year dividend of 6p, as Paul said, clearly demonstrating our progressive dividend policy. Now, I'm particularly pleased with our net debt ratio at 1.5 times, and that our ROIC at 9.1% also brought the return back to the 2019 level. It's fair to say, looking at the full year performance, the three things that I spoke about during H1 result, the growth, margin expansion and strong balance sheet continued into the second half. Now moving on to income statement, slide 6. I'll pick up a couple of numbers here.
Adjusted profit before tax at GBP 67.4 million, 61% up versus 2020, and adjusted net earnings at GBP 54.8 million, which was up 71% with adjusted EPS of 18.2p. You will notice that we labeled 2020 column as restated. This was due to the implementation of IFRIC's agenda decision on software as a service, which resulted in a change of accounting policy. The most significant impact relates to write-off of certain amount from our intangible assets, 2020 and 2021. Now, details of the impact and the restatement can be found in the appendix, where you can also find reported income statement with reported EPS for 2021 of 8.9p. The difference between reported and adjusted EPS was due to the amortization of acquired intangibles and adjusting items, including the charge from SaaS accounting policy change.
Now moving on to slide seven. This page outlines revenue by division. Components reported revenue of GBP 302 million, a like-for-like growth of 21.7%. On a sales per trading day basis, second half continued with the positive trend we've seen in the first half, with over 14% growth delivered in the second half versus 2019 level. The strong and consistent growth was delivered against the backdrop of supply chain disruptions. Now, Packaging delivered revenue of GBP 362 million, a 3.6% like for like decline from 2020, driven by lower level of elective surgeries and prescriptions versus pre-COVID time for most of the year, also from the impact of labor and raw material availability. We saw an encouraging performance in Q4 with division returning to growth.
Versus 2019, the like-for-like decline was 8.2%, also reflecting that in H1 2019, the business was positively impacted by the introduction of the Falsified Medicines Directive in Europe. 3C! Packaging that we acquired in September 2020 contributed around GBP 34 million to division top line. Now, the order intake on order book in early 2022 remain encouraging. Filters reported a revenue of GBP 296 million, a 12.9% growth and 6.7% higher than 2019. Against the backdrop of a structural decline in the tobacco market, outsourcing contracts won in the last couple of years was main source of growth, together with the volume ramp up in our China JV in the second half of the year.
Now, overall group revenue up 8.4% like for like with accelerated growth in Q4 speaks to our response to the supply chain disruption and our innovation and sustainability-led growth strategy. Now move on to slide 8, summarizing profitability by division. Components posted GBP 57 million profit, an increase of 31.2% against prior year at constant currency, with a very healthy margin just under 19%, an improvement of 100 bips. The division successfully implemented the second round of price increases in Q3, which effectively offset the in-year cost inflation. We saw a very encouraging Q4 margin at 2019 level. Now, Packaging reported a profit of GBP 15.4 million, a growth of 17.6% versus 2020.
Full year margin was 4.2% and Q4 2021 margin at 7.9%, thanks to self-help actions and some timing related one-time cost benefit. The latter accounted for about 200 basis points in Q4. The major plant restructuring activities completed at the end of H1 delivered benefit from H2 onwards. Futures OP was £28.2 million, grew by 20.3% with a margin of 9.5%, 50 basis points improvement on 2020. Versus 2019, the margin reduction was largely driven by lower NPI volume in the mix due to COVID. We started seeing some improved level of NPI activities from some of our customers. Q4 margin was at the 2019 level. Now all our divisions and functions continue to balance between cost management and investment in innovation and other growth initiatives.
The reported GBP 16.6 million central cost was GBP 6 million lower than 2020, driven largely by some one-off credits as well as savings realized from organization changes. Overall group OP at GBP 84 million, 46.5% up versus prior year, and a margin of 8.7%, slightly ahead of 2019. Now moving down the P&L, slide nine, please. Net finance charge of GBP 16.5 million, higher than 2020 due to slightly higher interest charge in the period, Forex movement from leases and higher amortization facility fees. Our effective tax rate reported is 16.6%, which is lower than the underlying ETR, which is 19.7%, due to the impact from UK change of corporate tax, which will have a one-time non-cash benefit of deferred tax asset movement about GBP 2 million.
Our underlying ETR is in the guidance of 19%-20% we provided. Non-controlling interest was GBP 1.4 million from our India and China JVs. As we previously communicated, our China JV commenced production in June as planned, and we saw a small operating loss in 2021 at around GBP 1 million. Now moving on to slide 10. I'll highlight again our net debt ratio was 1.5x, consistent with the 2020 year-end position. Our operating cash flow conversion was 77%, which was lower than the historical average, around 90%. We have invested about GBP 30 million into the working capital in the form of debtors and inventory to support revenue growth, as well as mitigating the widespread supply chain disruptions.
More importantly, I would highlight that our net working capital to revenue ratio was 12.8%, an improvement of 140 basis points versus 2020 and 2019. We continue to invest into our business with CAPEX spend around GBP 41 million. As explained in the beginning on accounting policy change re software as a service, the BPR related spend is now reported in the other adjusting items. Our spend of GBP 41 million is largely in the category of machines and toolings upgrade, China JV investment, and also supporting future outsourcing programs. Now adding the CAPEX and BPR together, the overall spend is in line with our guidance previously provided. After paying interest, tax, and pension contribution, our free cash flow was GBP 36.7 million. Now moving on to slide 11.
Our net debt increased by about GBP 21 million after adjusting for Forex. We maintained the same net debt ratio, as I mentioned a couple of times already, after paying GBP 16 million dividend and spending about GBP 15 million on Components acquisition of Hengzhu. Overall, we maintain a very strong balance sheet that will continue to support organic and inorganic growth. Before I hand it over to Scott, let me summarize again that I'm very pleased with the 2021 result. With three highlights, growth, margin expansion, and strong balance sheet, and with a significant number of key financial metrics on or better than 2019 levels. Now with that, I'll pass it on to Scott to provide an update on Components. Scott, over to you.
Thanks, Lily. Good morning, everybody. Lovely to be with you today. If we move on to slide 13, please, let me give you an update from the Components division. If we look at the numbers, Lily and Paul have both talked to the financial numbers here, so I won't go into much detail, but a good, strong financial performance with solid revenue growth and margin expansion. Talking to the commentary behind that, operationally a very challenging year. Significant disruption from supply chain challenges in every way, shape, or form, be that raw materials or labor or freight or inflation costs.
We've done a good job of managing through that, especially in light of the significant increase in demand that we saw as the economies recovered from the initial impact of the pandemic. A big part of our plans and activity last year, which Lily's referred to, is around the pricing action we undertook. There were two rounds of pricing fundamentally in the year. I'm pleased that we've managed to offset the inflationary costs, as we closed out the end of last year as well. Digitalization remains a strong focus of our strategy, looking to improve the customer experience. I'm pleased that we continue to roll out the websites across Asia. The last site actually went live last week in Turkey.
We now have 26 websites live in 16 languages around the world, giving us a great platform to continue to improve the customer experience. We are doing monthly releases and improvements to those websites with our agile processes. We have started the rollout of our ERP program, which went live in Spain at the half year. We continue to work hard to drive on improvements and then focus on the rollout of the ERP program. It is a fundamental platform to enable our future growth and success of the business as well. There's been some work to streamline our operational footprint. We've closed three smaller manufacturing sites, which were part of previous acquisitions, and a number of smaller warehouses through the year, to both improve customer service and manage the footprint efficiencies as well.
We're making good solid progress towards our sustainability goals, which I'll explore in a little more detail on the next slide. If you can move to slide 14, please. Our vision is to become the world's leading responsible hassle-free supplier of essential industrial components. We're on a journey to make the business world class effectively. There are a number of pillars to that. Driving organic revenue growth is part of our ambition clearly. This industrial production plus 4, 5, 6%. The key to driving that forward are really focusing on our category management approach, working in those categories which are going to show high growth potential, such as renewable energies, electrification of vehicles, areas that we're involved and focusing on globally.
The key commercial metric for the organization is more cross-selling. Driving a broader basket of goods into our customers from the very wide range of products that we manufacture and distribute. In the recent customer survey, customers did confirm that wide range is the main reason for them recommending Essentra to their colleagues, so clearly fits with their needs as well. The key for us driving forward this year is to move back into the commercial effectiveness programs, as the supply chains are normalizing, as service is improving, starting to drive our commercial effectiveness programs and backed by the new CRM technology that we put in place over the last year or so, will help us move forward this year. Moving on to our digital customer experience.
We continue to invest in digital to drive that hassle-free customer experience, using data and AI to support better targeting. We are looking to create a new digital talent focus and a new hub this year to support our digital growth. The focus of the program really is moving on now from the rollout of the websites, which is all but complete, and thinking about how we optimize with a particular focus on digitalizing the expertise that we have within the organization, as it's key to meeting some of our customer needs. Digitalizing expertise through knowledge management will be a big focus for us. Finally, from an organic point of view, working on our class-leading sustainability, we are focusing heavily on the use of sustainable materials.
We have driven the recycled content that we're using across the division from 2% to 8% last year, with an exit of circa 10%. Continuing to drive that hard and look at different materials and different source of materials to continue to improve that metric this year to at least 15% as we come through 2022. That's our organic story. Thinking about our inorganic story on slide 15. We continue to work hard on the inorganic pipeline. We operate in this very fragmented market where we have circa 4% share in a GBP 8 billion-GBP 10 billion end market.
There are lots of potential acquisition opportunities for us, looking to help us consolidate, typically looking at new products and solutions, to help us, cross-sell further to our existing customers and leveraging the platform that we have with our digital, the supply chain network that we have in place. We continue to work and to strengthen that M&A pipeline and, have a number of ongoing active conversations, both in terms of developing relationships with private owners, but we'll also continue to look at inbound e-inquiries as well, and have assessed five or six inquiries in recent months, most of which we decided weren't right for us. Again, showing good levels of discipline, focusing on looking for those sweet spot opportunities, that will help us move the business forward.
Since the last published results, we have completed the acquisition of Hengzhu. This is very much a strategic sweet spot for us. Our number one product area in terms of growth, our number one target geography in terms of China. Initial progress has been excellent. Commercial synergies are being delivered. We're successfully cross-selling this product range into the existing China customer base and driving the business forward very well. Priority this year is to continue that post-merger integration plan and deliver the business case that we committed to. Thank you. That's it from me. Let me hand you back over to Paul.
Thank you, Scott. Thank you very much indeed, Lily, as well. If we go on to slide 17, please, a summary of Packaging. As Lily's already mentioned, particularly the earlier part of the year, last year was impacted by the low prescription and elective surgery volumes. In Q4, however, we see a positive trend, and in Q1 of this year, the trend is probably gonna be more back into the range that we've talked about as being typical for this particular sector. That's encouraging. We have, I think, an unprecedentedly high strong order book at the start of this year, and it's good to see that being geographically consistent in its growth.
Very much as Scott faced last year, a lot of our challenge is more about satisfy our supply side challenges and keeping up with the demand. Supply is as much a rate limiting factor as demand currently. I'm very pleased with the self-help actions that the Packaging has taken in 2021.
Some major efficiencies gained from closing two manufacturing sites, and those, notwithstanding the fact that we have a lag between quite material cost increases, both in labor and raw materials, the lag between that and pricing, which is beginning to kick in now, meant that there is a caveat there that Lily mentioned that there was some cost timing benefits, but nonetheless, encouraging to see that in Q4, the margin at the divisional level was at just a tenth under 8%. As well as focusing on cost efficiency and self-help and managing the supply chain challenges, it's really pleasing to see the business moving forward in terms of driving its sustainable offering.
I believe that we lead the way in the industry on that, and it is wonderful to see the team's efforts recognized through winning things like, of course, COVID Supplier of the Year and also winning a gold award for working with a personal care provider using a totally non-adhesive non-plastic product that has been gone down really, really well. In terms of the strategic priorities, it's about firmly getting into that industry average margin on a sustainable basis. Clearly, the growth will help us on the operational gearing, and we have a combination of tailwinds from pricing and headwinds from supply side challenges, but the team are making good progress there. Innovation, which has really accelerated in the last year or so, has been based on two key areas.
Sustainability, as I've already mentioned, but also patient safety, whether that be childproof packaging, whether it be tamper-evident packaging, whether it be individually coded cartons, et cetera, really big steps. I've been really enjoying discussing at a set of top-to-top meetings with some of our largest customers, the kind of portfolio of solutions we can now offer them. That's really these deeper customer partnerships are the way forward for that business. There is still more to do to optimize our supply chain. It is complex. We do have a complex network of factories and warehouses, but continuing to do that will help drive those sustainable margins. That's packaging.
If we turn on to slide 18 and talk a little bit about Filters, you can see the operating margin there, 9.5%. That is, after an impact of the China JV and the investments being made in that. It would probably be closer to double digit if one were to adjust for that. Really good to see sustained growth based on both an acceleration of our outsourcing contract business and the China JV. We really started focusing on this outsourcing about 3 years ago, and you can see that it's now worth an annualized GBP 50 million or more, so very material in the context of a GBP 300 million division. We've seen good volume ramp up and the relationship there is going well.
We are serving an increasing number of the industrial companies there and we've commenced work on a China development center as well, which is a linchpin of that relationship. Whilst it has not yet delivered big dollars, both the ECO, which those of you who talked to me know I'm really excited about, both as a commercial opportunity, but as important as a contribution to the well-being of our planet, and Tobacco Heated Products. Those are increasing in terms of the interest that we have. Indeed, we're now broken the half century for a number of development projects with ECO, and you can see two new ranges there on the right-hand side. Our performance operationally is truly world-class. We always aspire to between 99%-99.5%.
OTIF and our quality rates are still in the very few parts per billion in terms of defects. Team's doing an outstanding job there as well. The tape business, which we shouldn't forget and has contributed really well, as it pivots away from being very reliant on the tobacco to a product we call Rippatape, which is to support the Amazon packages that we all get now, has returned to growth. The strategic priorities I think are self-evident. China and ECO are two linchpins, as is continuing these outsourcing opportunities. I do really believe there's been a sea change in how our key customers regard us, hence the material increase in that.
We truly are partners as opposed to suppliers, not only because we deliver world-class service and product quality, but also because we're bringing lots of new innovations and we offer them, if you like, business continuity of supply, so we give them that reassurance. Our focus continues through a combination of those factors and operational gearing and also the fact that, as Lily mentioned, we're seeing more of the NPI, the new product introduction business, which tends to be slightly higher margin. We're focusing on driving the margins back to those FY 2019 levels. That's all I wanted to say about the divisions. If we then go just onto slide 19 and stand back and really review what we're doing in the ESG space, and so we'll do E, then S, then G, logically enough.
Our normalized figures for GHG reduction, and we've committed to a 25% reduction by 2025 and net carbon neutral by 2040, on a total basis. You can see encouragingly that our baseline 2019 on a normalized figures now adjusting for volume growth, we're now almost 20%, so well on track there. Our climate change score with CDP went from C to B. We've already heard that Scott and the Components division against their target of 20% responsible raw materials by 2025 is exiting the year at 10%. Bearing in mind, that's really one polymer type in our major factory in Kidlington. There's an awful lot of scope to expand. Scott and the team have a roadmap to getting there or beyond.
When we first communicated our targets on zero waste to landfill, we committed to be having zero by 2030. You can see there that we've done almost half, and we'll add another few. I think 2030 will prove ultimately a very conservative target. Then, reduction in waste volumes very significant there at an 11% reduction. Whether it be the products like Reflect in Packaging or Eco or the processes which I've had there, really proud of what the team's done in that space. Socially, we've always placed huge emphasis on the physical and increasing the emotional well-being. I think we've got a pretty strong relationship with our people who seem proud to do the right thing through these terrible last two years.
We recognize that in these times where we are enforcing change upon the organization, very positive change, but nonetheless change that communication and engagement is at the forefront of what we do, and it is absolutely vital. We continue to help sites, particularly in the developing world like India or Indonesia or Thailand, secure vaccinations. We're now into the realm of giving boosters to all of our employees and supporting them through the Essentra Thrives program, which is all about emotional well-being. Equally, while we have no employees or assets in Russia or Ukraine, we do have both Ukrainian and Russian employees in other parts of the Essentra family, and we are providing that support to them.
We felt very strongly and made a corporate donation also to DEC Ukraine. For clarity, since the 24th of February, we have made no sales into Russia, and all sales are suspended until further notice, have taken no orders, and we've communicated that to our customers. Finally, turning to governance, again, I think we're making good progress, not just in terms of the structures, but actually the activity as well. We've established as well as a board sustainability committee, which is chaired by Ralph and of our non-execs. We have an ESG committee to really pull everything together and knit it together and to make sure that we are hitting the milestones we've set.
We continue to emphasize the importance of compliance, and I think very good levels of awareness there. We have Adrian, who came across onto the board and is now the new board employee champion in Americas, which gives us better geographic coverage and obviously a kind of local understanding. We've been working extensively with a third party to inform our response to TCFD recommendations, et cetera. You'll be able to read that and the detail behind it, which I think is very comprehensive in the annual report. Last but not least, the group risk committee, which I chair, is highly proactive. We have an open invitation to Mary as the head chair of audit and risk committee, but indeed any other NED to sit in.
I think we're making good progress there. I think overall on ESG, we've had a year to be satisfied with, if not proud. Finally, if we turn to 2021 and 2022 for an outlook, if we start with 2021 and recap, we've had, as I've indicated, strong start across all 3 divisions. The Q1 growth rate, certainly for the first two and a half months, is ahead of what we saw in Q4 of last year. Our bigger focus, as you'd expect, therefore, is about managing supply chain as opposed to creating demand. To scale our presence in Russia and Ukraine, that's circa 22% of total revenue, 2%, and would be less than that of our profitability. As I mentioned before, all sales are suspended until further notice.
The process of our strategic reviews, which we have said will be crystallized no earlier than Q2, continuing in line with expectations. As Lily has mentioned, there was quite a material difference between constant and the actual FX. The appreciation of the pound against U.S. dollar, euro, and Turkish lira, which Turkish lira is not a big currency for us, but it has moved so much that it doesn't become immaterial, is something that we're aware of. If I look finally in the outlook components, we're seeing strong underlying demand. You know as well as I do the kind of PMI data, which is the best proxy we have for future, and the orders look good.
Packaging, as I say, is back in the kind of revenue growth zone that we've been used to. Filters, through self-help and these game changers, particularly China JV and outsourcing contracts, but with new product introductions and ECO to come, is well set and has enjoyed a really strong start to the year. Finally then on 2022, my three points. One, I think a really good financial performance in all key metrics and critically across the three divisions with good financial performance back to 2019. Secondly, a 2022 that has started well across the piece and is putting most of our focus on supply side as opposed to demand. With that, a strong balance sheet.
Good progress on ESG, and as a sign of confidence, the board is recommending a progressive dividend of 4p. Overall, I think good year well set and on track to crystallize those strategic reviews. Thank you very much for your time and attention, and I believe now that we will move on to Q&A. Thank you very much indeed.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star and one on your telephone keypad. Star and one to ask a question. Your first question today comes from the line of Charles Hall from Peel Hunt. Please go ahead. Your line is open.
Morning, everyone, and well done.
Hey, Charles.
Morning.
Morning.
You talked about like-for-like sales accelerating in Q1 versus Q4. Can you just give a bit of information on the pricing benefit in comparing those two quarters, and so effectively by implication, what the volume performance you're seeing?
There isn't a material difference in pricing impact in Q1 versus Q4 last year, Charles. As you know, we're at 13% in Q4 across the group in aggregate, and we've gone to mid-teens in Q1, or we will do. We're five-sixth of the way through, and we know our order book. No, that's pretty much an increase in volume. There is some increment, but it's at the margin.
Perfect. On the pricing side itself and cost pressures.
Yep.
What you're seeing, where are you in terms of recovery of those costs? Do you need to do more? I know you put through price increases at the start of this year as well as you did back end of last year. Where are we on that trend?
I think, yeah, we're actually making pretty good progress, Charles. Clearly we've got the latest challenge is energy, but we're well hedged on that. To put it in context, energy is circa 1% of our sales, so we're not remotely an energy-intensive business. We think probably, well, you tell me what the price of oil is gonna be, but when we did the analysis earlier this week, we saw an increment of circa GBP 4 million, so less than 0.5% of sales, and we'll recoup that in-year. It's not material and we can recoup it.
In terms of the ability to absorb cost, Charles, I would say that, based on what we've seen, through self-help actions, through the impact of operational gearing, and you're looking at the trends in margin in Q4 and then Q1, we see not only strong revenue growth but margin expansion in all three divisions this year still. Now, clearly, I don't know what's gonna happen to the world, so that's the caveat. Yeah, we've started strongly and as I say, Charles, we expect margin expansion in all three.
Perfect. One other thing you mentioned was the still issues about getting supply through to the customers, and obviously that was particularly the case in packaging last year in the States. Where are you in terms of ability to deliver on the demand you've got, and maintain your service levels?
Is that a division by division or a packaging specific question, Charles?
Well, probably division by division, but specifically Packaging.
We have got still some supply side issues which are things like availability of board at a more marginal basis. Also we're seeing more absences due to COVID in the places you'd expect like U.K. and U.S., but that's not particularly material. Yes, we are seeing an improved supply side availability in Packaging such as the growth in orders that actually we're now we're probably at a state where our ability to supply limits our ability to supply. Yes, our supply side capabilities are more of a limit on sales than orders. Effectively Packaging is facing the dilemma that Scott and the team in Components faced about this time last year.
Overall improving, and as a result of that, we've seen Packaging go back into that standard range, you know, the formula we had of 5%-7%, being a kind of par for the course and so we've seen a strong sequential improvement, you know, Q1 to Q3, negative Q4, positive low single-digit Q1 this year, mid-single-digit.
Perfect. That's brilliant. I'll let someone else have a go. Thanks very much, Paul.
Cheers, Charles.
Thank you very much. Your next question comes from the line of Andrew Douglas from Jefferies. Please go ahead. Your line is open.
Yes. Good morning, team. I have the standard three questions as well, although maybe one quick follow-up. Can you talk to us about the next leg of the evolution of Components? You talked about digital, and the progress you're making there and kinda next steps for 2022 seem very logical. What's beyond that? I mean, clearly we had some good progress in AI, you're talking now about what you wanna do in 2022. Is there much to do kinda materially beyond 2022, or is it we now in kinda maintenance and kind of upgrade phase?
Well, I'll paint in the broad strokes and then Scott can fill in the detail. I would say that the digital front end, there is still a lot that we can do. We have started a journey using AI, but are we really embedding smart pricing, et cetera? There's a lot more there and cross-selling, facilitating cross-selling. The other main area, Andy, is the digital backend, which will help our efficiencies. It'll help us assimilate acquisitions, et cetera. The third, I would say, is doing even more on marketing. As you recall, we started setting up category management approaches as an example, and I think embedding that. Those are the three biggest organic levers that I can see. That's probably a totally inaccurate answer though, so Scott will clarify and improve.
Thanks, Paul. And, Hey Andy.
Yeah.
Yeah, I mean, the great need is we have the platform in place. We have one planned launch in Thailand to come, but fundamentally the rollout is complete. It's now about optimizing and continuing to improve the customer experience. I sort of talked in there. The big theme for this year is around digitalizing expertise. We have a lot of expertise around the business from our manufacturing capabilities and getting to share that globally is gonna be a key theme and how we get that knowledge in front of customers to help them find the right product areas is something we're quite excited about. Digital is now optimization of the platform we've built.
As Paul says, the backend, the BPR program is a key enabler for us getting much better data both to help run the business and to communicate with customers to having this global ERP platform in place will be key. Obviously expanding and continuing the rollout of that through this year and next. Beyond that category management, Paul says we've got some interesting activities now looking at some high growth categories. Renewable energy is a good area for us. The EV charging is a great area for us, so starting to really globalize some of those programs, particularly as service starts to normalize. We've been on a recovery road from service point of view since around August where it was at its worst.
We should be recovered by half year, and as the service gets back to normal, we're gonna get more on the front foot from a commercial opportunities point of view.
I think now I've been listening to Scott, Andy. There's one other thing which is we've made big strides, I think, on the sustainability agenda.
Yeah.
Actually, I think we are leading the way in terms of the use of post-consumer recycled and other responsible sources. That we will continue to roll out, but then also we're working with one or two key customers, for instance, one in the commercial vehicle sector, where we are working on a journey to basically total circular recovery of products. I think those are the four key organic levers.
Yeah. Obviously inorganic remains a key area of priority for us, and we're continuing to work on the pipeline.
Yeah. Okay, cool. Then just while you're there, Scott, on the BPR, there's one or two challenges this year. Are we expecting a reasonably straightforward year next year once you've kind of figured what those issues are and then make sure they don't happen again? Or are we in a year of kind of trying to figure out what's going on there?
No, I think we figured it out. We've brought some new resources in place. I think we're in a much more confident place. We're about to start testing for our second market. You know, these things will never be perfectly smooth, but I'm expecting a 95% improvement as we hit front. I think we've learned a lot from the first go live. We sort of refocused, and I'm expecting us to move forward well.
not only that, we also last year we have exceptionally high customer demand, right? Where we were rolling out ERP system, and that has to be put into the context.
Okay, cool. Lily, while you're on, question on central costs. There's a few one-offs in the 2021 numbers. Can you quantify kind of what they were and how much, and what should central costs be going forward on the premise that, you know, Filters and Packaging are no longer part of the group? Can you also just give us a rough breakdown of energy split between kind of gas, electricity, oil? I understand it's predominantly electricity, but it's not gas. Can you tell us what were the outsource contract wins in 2021? You talked about GBP 50 million going forward. What does that compare to in 2021, please?
That's, Andy, I thought I got one question, but-
Yeah, I'll give you three while I'm on.
One second to me. Let me come back to the central cost first. Andy, look, about two-thirds of that GBP 6 million is one-off. It's actually relating to some sort of indirect tax that we previously accrued and now got recovery. In terms of, you know, going forward, how I see the central cost, we're still doing the strategic review, Andy. To your point, the group, the shape of the group likely to change. At this stage, I think we still go back to what we talked about before last time.
Perfect. Thank you.
Yeah.
Andy, that's GBP 10 million.
Okay. That's it for another call.
plc cost. Yeah. We still say high single-digit plc.
High single digit. Yeah.
plc cost.
Yeah.
Completely. Yeah.
And, and in-
In terms of energy split, Andy, you're right, we're not a big gas user. What Paul just talked about, the 1.2% revenue, that's largely electricity.
Yeah.
That's pretty much all electricity. To Paul's point, we are quite well hedged, about 40-ish% hedged.
Last but not least, just outsourcing.
We had two outsourcing contracts secured in the year of 2021, and we started delivering those in the second half of the year. I think order of magnitude is based somewhere around the sort of mid-teens to high teens.
Okay. A good opportunity going forward. Perfect. That's really kind. Thank you.
Yeah.
Thank you, team.
Cheers, Andy.
Thank you. Your next question comes from the line of Andres Castano-Mollor from Berenberg. Please go ahead. Your line is open.
Hello, good morning.
Morning.
One question about Filters margins. I wanted to understand how several factors are impacting it. Raw material inflation, China JV, and these outsourcing contracts.
Okay. If I take the first one, as you know, acetate tow is our major raw material, and we haven't really seen any impact there. Filters will have sufficiently increased pricing to mitigate any cost increases in the year. This obviously, Andres, has the normal caveats of, I don't know what's exactly gonna happen to energy, but we are pretty well hedged, and we're not energy intensive in filters at all. The impact, if you were to back out the China impact, you'd be at about 10% margin, as opposed to 9.2. We're expecting, as I said, margin expansion.
The outsourcing deals, when you're in the startup phase, have some kind of dilutive impact as you get up a learning curve, and that's probably the main reason for some of the margin dilution, but that's why we're confident that Filters will see margin expansion above that underlying 10%, and will be on a journey back to getting to the historic levels. Does that answer the question?
That's great. Thank you. Maybe following up with raw materials costs in Packaging, what are you seeing there, and how prices will be passed on in 2022? Thank you.
Packaging?
Yeah, Packaging. Cardboard.
Packaging. Yeah. Cardboard, it's the same story that we've seen in the other divisions, which is that we between packaging costs and now energy costs, with the pricing actions, we believe that we will at least offset. We keep this very live as you'd imagine and, you know, discuss possibility of surcharges as well as price rises. On the basis they can be revoked and are more flexible up and down with, say, energy costs. The bigger challenge, and it's not us, it's an industry-wide thing, is availability, particularly of board. Clearly there is an increasing amount of demand for board, mostly driven by e-commerce, being a new driver, if you like, and you've obviously seen commentary by people like DS Smith.
Net of all of that, I think like the other divisions, you'll see margin expansion. The idea being that things like the annualized impact of the cost actions taken in Packaging and the operational gearing will be a net positive, and that the cost inflation and pricing will roughly cancel each other out. Thank you. Pleasure.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star and one on your telephone keypad. Your next question comes from the line of James Beard from Numis. Please go ahead. Your line is open.
Thanks. Morning, guys. A couple of questions from me. Firstly, just on the strategic review, obviously it's been about sort of 4 or 5 months since that was first announced, and you know, we've seen a sort of M&A downturn derating in wider global equity markets. To what extent is that impacting the conversations that you're having with potential suitors for the two divisions? I guess a sort of slightly related question, you sort of flagged your direct Russia exposure, but presumably that the 2% of sales is slightly greater within Filters than within the other divisions.
As sort of second or third question, as it were, just on Components, any commentary on sort of the site footprint, and any potential changes or rationalization that you might be making across 2022?
First question, James. Strategic review. Is it different because of context? I don't think so because the two businesses concerned, unlike Components, are pretty much have structural rather than cyclical trends. If the view is, and I know coming off a pandemic is not 100% guaranteed, but essentially the demand for medical products and medical packaging is pretty much independent of things to a sensible degree. Those people who are interested in partnering with that division kind of tend to look through what's going on. I think ditto with tobacco. If you're interested, I think you kind of look through any short-term perturbation. Second question, James, was?
Just a quick one on Russia exposure in Filters.
Right. Yeah, you're right. That in ascending order, it's Packaging, Components, and then Filters. Having said that, it's important to recognize that product we were sending into Russia, quite a bit of that was actually for export markets out of Russia. What you're seeing is, the MNCs, the customers we have there are reconfiguring their supply chains. Whilst we don't and won't sell into Russia, some customers have actually asked us to supply other parts of the region as they try and service non-Russian markets in that part of the world.
There's a gross number which we've stated for the group, and then there's effectively a net number, which is very difficult to disentangle because we can't see into the bowels of what the likes of BAT or PMI are doing exactly. We have actually had conversations at relatively short notice about trying to help customers with their specific challenges of servicing the other markets in that region. On the third, I think I'll probably defer to Mr. Fawcett opposite the table.
Hi, James. Quick on footprint. No further plans at this stage. Our focus really is on capacity at this point in time. We've got strong demand, so we've got a couple of site expansions in the plan for later this year, but no footprint consolidation plans at this stage for this year. We did do quite a few pieces of work last year, which were all sort of post-merger integration activities on some small manufacturing sites. We're now focusing on serving the capacity effectively.
I think in the medium term, we will continue to look at our logistics footprint, particularly as we get BPR done. Scott's exactly right. We've got the four organic challenges and keeping up with demand at the moment. Now is not the time to be modifying our footprint. Clearly, James, is M&A dependent. That's the current thinking. They're in the top ten priorities for the Components division. Footprint isn't in it.
Okay, cool. A very quick follow-up there. You mentioned, obviously, M&A is an active priority component. Is that something that you would still contemplate executing even with the sort of ongoing strategic review of the other two divisions?
Yes, absolutely. We're bound by at least three NDAs at the moment.
Yeah. Okay. Thanks.
Thank you. Your next question comes from the line of Charles Hall, Peel Hunt. Please go ahead. Your line is open.
Haven't we already spoken, Charles? You only get one go. You know that.
Yeah, I know, but you're nice enough to take one more. Anyway, it's for Scott, so much more important.
Oh, what?
Scott, the Net Promoter Score obviously dropped last year, unsurprisingly, with all the global challenges. Can you just give an update as to where it's moving and whether you're sort of getting back on track in terms of customer satisfaction and what remains to be done?
Yeah, certainly. We peaked or dipped to our low point really in August in terms of the size of the backlog we created and then the OTIF measure that goes with that. From August, we've been seeing recovery. We're expecting to have the backlog totally cleared and OTIF normalizing, well, backlog cleared by half year or OTIF normalizing in Q3 effectively. That's on track. The backlog is more than 50% down from where it started, which is encouraging. At the moment we're definitely seeing some signs of encouragement. The monthly NPS scores are gradually getting a little bit better as well, which is helpful.
We do expect it to see a recovery in NPS by the year-end when we do the annual customer survey. We're not there yet, but we're on track and meeting our expectations in terms of getting increased outputs. Supply chains are still unstable, though. While our manufacturing output and capacity is improving and doing exactly what we can, you know, U.S. ports still causing issues. Freight is still very inconsistent on intercontinental shipping. It's still a whack-a-mole almost. Every time we fix one thing, something else will emerge. We're doing a good job of regaining the service back generally.
I think, Charles, the sales growth data trends would indicate we are not materially alienating our customer base at the moment.
Yeah, that makes sense. Very good. Thanks.
Cheers, Charles.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star and one on your telephone keypad. Star and one to ask a question. There are currently no further questions. I will hand the call back to you, sir.
Thanks very much, Sharon. Well, thank you all for attending. Just maybe finish with the three key messages, one of which is that I think it was a very strong performance across the board. Secondly, that certainly Q1 would indicate that the goal we've articulated of margin expansion and sales growth, which we achieved in all three divisions last year, I think we're well placed to replicate that in 2022. The milestones that we set ourselves for the strategic reviews internally are all still on plan, and we are still consistent with the timescales that we indicated. I thank you very much indeed for joining us.
Clearly, we will be doing the rounds and should the analyst community wish it, then Lily on my left-hand side will be delighted to address any particular question you have. Thank you very much indeed and stay safe. Have a great weekend everyone, and enjoy the sun. Thanks.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.