Earnings Call: H1 2020

Aug 28, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Essentra Half Year 2020 Results Presentation. At this time all participants are I must also advise you that the conference is being recorded. And I would now like to hand over to your first speaker for today, Paul Foreman. Please go ahead. Good day, everyone, and welcome to what can only be described as an historic interim results presentation for Ecentra PLC. It would be true, isn't beyond belief to say that these are extraordinary circumstances. Certainly, my, my 35 years, I have never seen a light of them nor perhaps would I want to, but I think that as we positive progress. So if we go on to Slide 2, the agenda and some key conclusions, The first point I would like to make is that the Accenture family, the 8000 people across the world has performed in my opinion, truly magnificently both in supporting customers and supporting each other. And I say thank you from the bottom of my heart It is humbling and inspiring to see what you have done. What I'd also like to add there is that we have received fantastic support, undenting support from all of our stakeholders, the broader family, whether that be our investors who have shown support, but also interest, whether it be our banks who have been indefatigable in helping us, whether it be pension trustees, equally importantly, whether it be of fantastic customer base we have and the suppliers, all of whom have worked in true partnership. As you'll see from the agenda, I think part of the progress that we've made through these testing times has been that we focused on 3 pillars initially safeguarding our people, supporting our customers, managing our cash flow and for many weeks or indeed a couple of months until we got into what I call the sliding wave steady state. We have been focusing on those. So after the summary, the achievements and the priorities within those 3 will be my focus The second point I'd like to make is that absent something, major like a a full second wave that April marked the low point, in many aspects medically financially. And we have been improving since then. I'm pleased to report that we have generated operating profit and cash each month And as a group in period 6 due, we had a low single digit year on year sales decline. So positive progress, from a low point in April. The third point I'd like to make ladies and gents is that, and this relates to our final point on the agenda. Ecentra is, in my belief in that of the board, inherently stronger however counterintuitive that may be. Then at the start of the year, I think we have a more robust business. We have stronger relations with all our key stakeholders. I think we have a focus and an agility, which has been tempered in the in the forge of COVID. And we are really looking forward to and indeed are getting onto the front foot now. Whilst of course being vigilant and careful. And what we are doing there and how we're thinking about the future will be the focus of the final set which has really been part of our thinking since probably early May. So if we go on to Slide 3, I will do a quick two page overview Looking back to the first half, we have chosen to describe the performance as resilience. As I've mentioned, we have had improving revenue and order trends from that Nadea in late late March April. So trading trends have been improved components, as you're all aware, is very linked to global or certainly Western And Chinese industrial output. So, mid double digit So mid-20s year on year sales decline in April improving through to the most recent time. We've seen that packaging has secured new business by being flexible and available and constantly operational and moved into growth in May June. And then our Filters division has through self help, through driving these game changers and I'll give more detail, but particularly new outsourcing has maintained an improving trend and return to growth in June. So in June, we saw 2 of our 3 divisions in marginally positive territory. If you would have asked us in, the real start of the storm in March, would we have taken. I think the answer is definitely yes. If we think about that second level of supporting our customers, The essential family, the engagement and resilience they have shown and are demonstrated has shown operational performance that is at least as good as we saw pre COVID. We have, for most of the period had all seventy one sites for the operational. And I think that's a testament to a huge amount of work by many, many people across the world. And in terms of our cash flow, managing our cash flow, we have a strong liquidity position at the end of June, it's still north of 1,000,000,000 and it's been improving week on week, month on month. I think that speaks to the strength of, the 3 very different business models we have and as importantly, I think it is a fantastic foundation from which to expand. So if on Slide 4, right, if I look ahead I think that the resilience of our portfolios being highlighted by the fact that the like for like revenue decline was only in speech marks 8.5% and our operating margins were maintained at 6.5% across the group. As I mentioned, each month has remained profitable and cash generative. And so what we can then do is pivot confidently to the forward looking area. We'll continue to focus on these 4 pillars. As I've been saying to IT, one of the risks is that we are, become too sanguine. We don't focus enough on those 3 in terms of, say, personal personal safety or whatever. So we will remain as vigilant as ever, but the balance between, that business as usual and the building for the future is certainly, if you like getting more and more equal. If I look ahead with a COVID caveated crystal ball components, we continue to see in the 1st 2 months of this second half, improving like for like trends. That will clearly track PMI industrial output if one believes expectations, then we think there will be a slow gradual improvement. The people talk about these WJ's use, my preferences to say that this is a Nike swoosh with a steep decline and then a gradual recovery. In packaging, we saw, as I say, positive growth in May June, Some of our product in the medical sector goes into either elective surgery or prescriptions We think that in Q3, there is a, a stock build or chain adjustment which I think will put a temporary slowdown on like for like sales performance, but listening to our customers, they think that spas, health services open up and as people become more confident, either seeing their doctor all comfortable using online that that should recover in Q4. Filters having moved into a positive territory, a confident, I think, of driving that. That's partly by outsourcing contract volume, but there are other factors, which I'll talk about later. Whilst we have maintained a tight control on capital investments, I'll give some examples of where we are still continuing to invest. So there has been a blend of discretionary activities salary sacrifices, bonus sacrifices, merit creams is to control some of that discretionary, costs and expenditure and cash outflow, but also where we have seen it, we have invested in forward looking initiatives. We have, as a board, decided to cancel the interim dividend, but we are keeping under review possibility of resumption of dividends for FY 2020 and clearly, that sustained operating cash flow and profit position will the, if maintained a significant factor in the board's thinking early in 2021. And in terms of outlook, for FY 2020. I will put the normal caveat that people have, which is if the major second wave then In theory, all bets are off, although we have proved quite, resilient, but we are expecting adjusted OP operating profit. To be within the current range of analysts' expectations. So if we go on to Slide 6 which, talks about our 1st and our most important leg about safeguarding of people. This has been from the very 1st day the primary focus, and we split it into 3 physical, emotional, and financial. We have maintained, I think, a low level of, incidences of positive cases notwithstanding the fact that we have, in areas like Spain, Northern Italy and parts of America, areas which have safety measures, and I think that has, been well received by our people equally important We are very, very careful about return to work in offices. We have the strictest protocols and also restricted adherence to our own internal standards of what needs to happen to new cases before we allow that. As a result, a number of our offices remain closed. As important increasingly to the physical protection with the emotional well-being, We have been providing for the last 3 months access to support networks, where necessary being looking alternative working arrangements. We have helped families and in some cases, we have relocated people We are giving training to a number of our senior people how to recognize examples of say, stress and related activities. And that is something which we're really focusing on. And then thirdly, financial The senior team, the top 150 of people, to varying degrees, took a voluntary pay reduction. The idea being that, that sacrifice would enable us in countries where there wasn't a government support network such as in your paragon, or we chose not to take on, such as the UK, we maintained that furlough equipment levels by guaranteed 80% from effectively 2 quarters Q2 and Q3. And we are not utilizing any government support through job retention or anything else. So, the most important work that I so those 2 at the bottom, let me just reiterate my huge gratitude and thanks to, the whole family. If we then turn to Slide 7, just to be giving you a feel for some of the things that we've been doing. I've been doing a weekly CEO video message and also a written update that goes to all 8000 employees We've also leavened that with video messages from many of the PLC board members. We've had weekly leadership calls with of 150. And I think as a byproduct, 41 says what have you learned? So I think we have a new intensity and cadence and almost informality, but with professionalism, which we all carry forward. As I mentioned earlier, we have employee support networks and when we were starting leg 4 building for the future, we really involved all of our top senior managers. And so what you see about the thinking on our new way forward is not just one or two people in a darkened room, it's It's an active discussion over 3 months with 150 people. What we also want to do, was temperature test. And so every week, we would be taking a pulse of how people are feeling. This is anonymous So there was, I think it's sort of objective as you can get. And from a scale of 1 to 4, You can see that people consistently rated well over 3.5%, so 90% that essentially is taking the right actions. That they felt that that people were coping well, again, 3.5. And in terms of confidence, even in, in April, it was still 3.3 also out of force. So I think our people felt we were doing the right things and felt that kind of confidence of being part of a larger entity and could see a real positive future for the company. So if we then turn on to 8 We have always made, the safety and then the engagement of 1st and second priorities I'm pleased to say that notwithstanding obviously the more difficult environment to operate safely, we've sustained the improvements seen in the number of lost time incidents and really pleased to see that the total hours loss continues, it's downward trend. So we are improving on that number, but also the severity is showing a welcome turn for the best. And if I were to look at that, including the last two and a half months data, both of those would continue that steady improvement. On Slide 9, it isn't just the employees We all live in communities and we all have a I think a duty under desire to help them. And so not only are we proud that we've been serving medical Industries and many other critical industries, throughout COVID, but also the wider community. One example here, our factory, in Barcelona, touted manager that, basically discovered a way of making advisors for the local healthcare community had no access to them. We distributed those. We then made them available to employees and then off our customers and supplies them as well. So one individual's initiative, a great community involvement and a really nice store. I think you'll agree. If we then turn on to Slide 11, this is led to of our initial 3 legged stool supporting our customers. I have been showing you metrics on on service and quality just to kind of calibrate the rate of improvement over the last few years, we were not anywhere near to world class say 2 or 3 years ago. What is really interesting if you look there at the on time in full level is that you can see without exception, all three divisions have recorded an on time in full. So that's delivery, when we said in the quantity, we said, and the right product And one can see there that remarkably notwithstanding everything else that the performance across the half year has actually exceeded anything we have achieved in the past which I think is quite remarkable, really. And we have, as we'll see later, really, I think got credibility from our customers for doing that. And when I say that we are now inherently stronger, I think that trust and bond where we've stood up and been counted and performed, I think, both reliably and flexibly for our customer has formed an even stronger bond between the 2 of us, the Ascentra and our individual customers. So then turn on to 12, the other metric we could use you can see there, again, delighted to see the, particularly in packaging and near 30% improvement in quality instances, the reason that packaging only goes back to 2019 is that there's a slight difference in definition, but If we'd gone back, we'd have seen year on year improvement there, top left, you can see components and again, filters and tear takes, which is now part of filters. So I think really great notwithstanding the fact we had many people who were sometimes absent, those people who were in our factories did a fantastic job for the customers. And if we go on to Slide 13, I think this has got both a subjective and an objective benefit Penlon, the UK consortium that was making ventilators for the government We can see that in the race against time, essential components gave us a seamless hassle free experience, etcetera, etcetera. And would we act actually turned product around and hand delivered it within a new product within 48 hours. A global vision care provider, again, you can see the request was a complex challenge from all angles And it's often, I would say, parenthetically really, really fast turnaround because we've had to be agile as our customers have. Thank you for all your hard work. Farmer outsourced companies, we can learn some lessons on project management and delivery. Multinationals, in filters. And bear in mind, these 5 multinationals represent some 15% of our turnover. This is about as good as it gets. Can do attitude in terms of excellent support and communication. So really positive for that. So we have, I think, the intangible benefits, stronger customer relationships, but also we have seen as a result, since the components had a very strong growth in in medical device product supply. And we are expanding that in the U. S. Alone, we know that we have won from competition some $5,000,000 of annualized business simply by being there and being poor people and being responsive and an honor to be working with a very high profile COVID-nineteen anti viral medicine providing all of their labels literature and decontinence. Filters has been really supporting the global majors in terms of providing backup supply if a country that makes it as a sole supply filters, they said to us, can you please help us out? And we have still been developing new products as well. And one of the major Indonesian independence wanted something positive And so within very short time frame, we worked with them and launched it. So we've had, I think, a tangible benefit as well. If we then go on to a single slide review of each of the 3 divisions, components clearly the hardest hit it by marketplace considerations, but that hasn't stopped them building for the future. So the new website which is now achieving the highest levels of penetration it's done, has actually seen increased traffic constantly throughout. One of our key major goals to hit our industrial production plus 4, which is based on 1 2% share gain of 2 percent, 3 percent price is cross selling, selling more product categories that we have to existing customers. We are now using what I call the amazon functionality of prompting potential cross sell ideas that's been going for a few about 3 months now. Our business process redesign project, which we'll talk a bit about later, that is still in the the planning and getting ready for launch phase, we will start in Spain in Q1 2021 and have very increased if you like, ambitious expectations for the speed of deploying that, having already gained confidence from a very successful go live within the last couple of months in finance and procurement in our head offices. Our supply chain, we have a very complex supply chain with tens and tens of thousands of customers and products. The German warehouse, which will be lights out and automated, is expected to commence, by the end of next month. That will improve our asset term. It will reduce our cost to serve, but it will also help mitigate supply chain risk as we rebalanced inventory between the UK and Continental Europe. It was only about 12 months ago that we acquired innovative components, that's fitted in Extreme well into the family. It is actually now through the the share gains into positive year on year territory, which, given the overall picture is very encouraging and is delivering on its plan. And as I mentioned before, I think, everybody in Components has been honored to help produce components that go into, hospital trolleys ventilators, beds, etcetera. And what I would point out is that the operating margin at the top there, 18.4% which clearly is a very strong Q1 and weaker Q2 still remains robust. But then turn on to Packaging. Here on Slide 15. We've mentioned the return to growth. Overall, farmer demand, which is about 70% normally of our business, has remained robust. So say we are seeing some softening in specific end markets, the beauty segment that is 20% clearly was very challenging in H1. Our customers are telling us that they think by Q4 they'll be closer to normal rates we shall see. I very much hope that is the case. And then the 10% that is tobacco and food has held up. Clearly, I think our ability to respond well and quickly has helped us with those new business wins and you've seen the levels of service and quality, but also what is critical is our agility in supporting customer needs, we have been having to operate to timescales of product development, which, we really but I don't think anybody in the industry friendly has been used to. And then as important, packaging made its first strategic investment in a number of years in acquisition, NetIKAYCEA in Madrid has performed really well. It has met or exceeded its plan every month in the 11 months, it's been with us and it has added to our capabilities. And we're really excited by that and encouraged to look for other strategic bull's eyes, in the focused medical packing arena. If we then go on to Slide 16, briefly go into filters. We have been talking about the game changers and we gave ourselves a certain time to official cut date. I'm pleased to say that, they are now coming through. First half was affected by very long, duration lockdowns in India and Paraguay, plus we in our Middle Eastern business, so effectively supply side, hiatus We also took the decision in our Middle Eastern business to cease trading in about May of last year with certain customers where we couldn't feel comfortable about their provenance. So that also affected the comparables. Having said that, we have been trying to leverage our global footprint and all seven sites now are fully operational and indeed a number of actually work in 20 fourseven. If I take the the game changers, you can see on the left hand side there some of the new equipment to support. 1 of our 2 large contracts wind, we are getting closer to the expected annualized run rate having only been going 2 to 3 months. The progress of China JV, we were talking to the other side, within the last week, they remain phenomenally committed and If anything, even more excited, we have to recognize that the constraints imposed by COVID, have put some delay into that. So now we're expecting Q2 2021 as opposed to the start of the year or December of this year. And then we continue to work on innovation. We have the biggest capability and biggest know how in the industry. We haven't been using it properly and in a structured way. So very much our innovation is so on 2 key areas, one of which is heat not burn or technical heated products. Which is a kind of ICOS type product. And the second is sustainable and biodegradable product categories. There is legislation that is coming in in 2023, but also with the increased emphasis on sustainability, that is something where We are really coordinating many players in the industry to help produce standards, but also, we are working bilaterally with a number of the large, cigarette companies to try and turbocharge that to achieve things way ahead of that time scale. And it's good to report that the tapes business, which we wasn't speciality last year, has been fully integrated and is now operating very smoothly. So that is the That is the, 2nd leg. Our 3rd leg is managing our cash flow and our liquidity. And so I will hand over to Lily on Slide 17 to take you through the financial detail. Thank you, Paul. Good morning, ladies and gentlemen. I wish you and your loved ones are safe and healthy. Our essential family members went above and beyond every day to support our customers and I'm really inspired by what our teams achieved during those unprecedented times. Now in this section, I will take you through our 3rd priority, managing our cash flow. Moving on to Slide 18, let me start by highlighting the proactive and responsible actions we have taken to improve our liquidity position. And this leaves us with a healthy balance sheet to move forward. 18% since the beginning of the pandemic. We have not taken UK government's furlough support. And as Paul shared with you early, The board executive team and senior leaders in the eCentral family took a voluntary pay reduction in Q2. We reported a 76 percent operating cash conversion with dear to our values and paid some smaller suppliers early to upholding integrity of the ecosystem. We also proactively build additional inventory in our Packaging And Futures division for business continuity purpose. We maintained strong cash collections throughout Our net debt ratio for banking covenant purpose was 2.3x and 2.5x after IFRS 16. For reference, our covenant is set at three times for all our facilities. We continue to embed our compliance transformation program internally, And in H1, 2020, we reached agreement with U. S. Government with a deferred prosecution agreement signed. On Page 666,005. With regarding to the self reported historical transactions with OFAC, office for foreign asset controls and the U. S. Treasury, we do not expect significant enforcement actions I will provide some more financial details on this point later. Now turning on to Slide 19. Talking about some P and L measures, we delivered resilient performance with improving trend on revenue and order intake for each of our 3 global divisions in Q2. For the whole group like for like revenue declined by about 8.5% for 1, adjusted operating profit at 1,000,000, like for like down 38% from H1 2019. With adjusted operating profit margin at 6.5 percent. Reported operating profit at CHF 16,000,000 versus 1,000,000 in H1 2019. We reported exceptional gain over 1,000,000 largely driven by the successful disposals of certain businesses in the Specialist Components Division. Which significantly simplified the group and resulted into 3 global divisions. Adjusted EPS at 6.2p. Now starting with liquidity, I will give a bit more color on key financial areas. Now liquidity is 3 charts on Slide 20, demonstrated the performance in operating cash flow generation, the reduction of net debt and improvement in underlying liquidity in Q2. These are the result of our proactive and responsible actions such as senior management voluntary pay reduction, such as cancellations of merit increase, such as discretionary costs and CapEx reduction. And as Paul mentioned, we balance these activities by continuous investment into selective areas to support forward looking initiatives and growth. For example, we invested in new machines for business 1 for full width package supply to a COVID related medicine. We also injected the first transfer capital into our China JV. As a result of our liquidity position, we decided to voluntarily repay CHF26 million of the 50,000,000 bridging facility in July, the cost of which will increase over time. Now moving on to Slide 21, on to our income statement, group revenue JPY 448,000,000 on a like for like and constant currency basis down 8.5%. Operating profit, adjusted operating profit, GBP 29,000,000 operating margin at 6.5 percent, down 300 bps. Adjusted earning at 1,000,000 with adjusted EPS of 6.2p. Okay. Turning on to Slide 22, revenue by division, components reported revenue of BRL130 1,000,000, a decline of 12.8% year on year. The business showed steady improvement since April on revenue and orders on a per trading day basis. Packaging delivered revenue of $185,000,000, a 3% decline year on year. In H1 2019, we saw the benefit from breakfast stock building from certain customers and also from the introduction of E40 foreseified medical directives. The packaging business generated growth in May June. Futures reported a revenue of RMB133 1,000,000 and 11% decline from prior year. We started delivering to the 2 outsourcing contracts that we went in late 2019 early 2020. The declining futures was due to a combination of the early impact of COVID in China, and the extended government enforced lockdown in India and Paraguay. As I said in our 2019 result, We implemented a very strict control and compliance framework in H2 2019 in the Futures division. Delay to certain orders and we withdraw from some customer relationships continue to have negative impact on revenue. From relevant markets for the 1st 4 months in 2020 for comparative purpose. Now let's move on to profitability. Turning on to Slide 23. By division, opponent posted CHF 24,000,000 profit, a decline of 26% against prior year. However, still a very healthy margin of 18.4%. We implemented a 2% price increase earlier this year, which proved to be sticky. The price increase partially offset negative volume impact. Packaging reported a profit of 1,000,000, 2.6% margin. The margin is lower than H1 2019 by 180 bps, partially due to the 1,700,001 off benefit in H1 2019, from release of certain property related provisions. And the rest of the impact was volume driven partially offset by discretionary cost reduction. Nicky Casa, the business we acquired in September 2019 performed to plan every month. Futus' revenue for the first half was CHF 10,800,000 with a margin of 8.1%. The margin decline was driven by volume reduction and negative revenue mix. All our divisions and all functions enacted strict controls on distributional spend. Notwithstanding the incremental costs associated with COVID related PPEs, deep premium and new social distancing working patterns. The reported 10,600,000 central costs reflected both the discretionary cost reduction and also a one off credit from LTIP related accrual release. I'm expecting the second half central cost to be broadly flat or only marginally up against the first half. Overall operating profit, 1,000,000, 6.5 percent margin. Now moving down the P and L, Slide 24, night sentence truck at 7,700,000 a 700,000 increase from H1 2019. As part of the COVID planning, we draw down extra from our RCF facility in April has higher interest expense. Our effective tax rate is 19.2 percent within the guidance of 19% to 20% that we have provided. Minority increased 900,000 from our India JV. Now going forward, MI would also include our China JV, which continues to progress, although at slightly lower slower pace during the COVID disruption. OntoSlide 25, we spent 2,500,000 on exceptional costs for the first half of twenty twenty, chiefly on two items: Firstly, we spent $3,700,000 on legal and advisory fees for certain business development activities. That are still in progress. Secondly, a $1,200,000 credit came from a provision release with regards to the sanction matter that was previously disclosed in 2019 accounts. As we said before, we cooperated fully with the U. S. Government's investigation of a small number of unauthorized transactions to North Korea. We signed the DPA and paid 666 K fines to settle the matter. We also self reported to OFAC on other sanction matters, extending back to 2015. We continue to work with OFAC on the resolution of the review, but we do not currently anticipate further significant enforcement action or financial penalties. This resulted into a credit of 1,200,000 into the exceptional cost. We continue to embed our compliance transformation program into our organization deeply. The group compliance committee was established and met nicely to drive culture changes. Now moving on to cash flow. On Slide 26, I already covered the cash conversion of 76%. The chart shows the key moving parts to the free cash flow for the period. As I said in the beginning, we manage our working capital diligently The net increase here are the net effect of good collection with significant reduction of over dues offset by responsibly paying smaller suppliers early to support the ecosystem and proactive business continuity inventory. To support our customers. Now we are expecting inventory to gradually reduce in the second half where we allow the BCP inventory to move through the system. However, this has to be balanced with potential inventory requirement to mitigate the potential hard Brexit. Net CapEx of CHF 22,000,000 in the first half We continue to invest in selective forward looking and growth like CapEx, such as BPR, such as digital transformation, the Component German warehouse, a new machine for new businesses. I'm expecting the 1st year CapEx to be in the range of CHF 35,000,000 to CHF 40,000,000 allowing the actual growth CapEx after paying interest and tax or free cash flow for the half was GBP 11,500,000. Now moving on to the net debt slide. The net debt ratio for covenant purpose was 2.3 times. The reported net debt after IFRS 16 was flat to Forex adjusted December 2019 balance at 1000000. The positive free cash flow was offset by us taking on new lease, namely the German warehouse, and the renewing of existing basic contracts. Now moving on to Slide 28. We continue to focus on ROIC as a key financial measure. For H1 2019, on a LTM basis, our ROIC was 7.4%. 190 bps reduction from 2019 against the backdrop of global pandemic and the 40% year on year decline over adjusted operating profit in the first half. Let me end my session highlighting again that I met the global pandemic we posted resilient performance from each of our 3 global divisions. We had and continue to have a strong and liquidity position and through our proactive and responsible actions. And we maintain a healthy balance sheet. Thank you. And with that, I will pass it back to put up our 4th priority building for the future. Thank you very much, Lily. So if we all turn on to Slide 30, On the left hand side, we have the route map that we have been using for the last 3 years. The 3 stages, you can see their stability strategy and growth. The 6 principles that we have in the triangle And then the purpose essentially our purpose is to make our customers in the B2B environment more successful. What we have done is, and I mentioned before that we've engaged the views of many of our people from the board through to the top 150 managers. We've really come up with a revised you like one page route map, which reflects not only the changing landscape of the world, but also the changes in and developments of us as a business. June growth, we believe we are stable and we do have clear strategy. So now it's about building for the future. We keep the purpose as in the center of everything we do. But the additional focus we have is on this acting in a responsible way, which is more than sustainability. It's how we interact with all stakeholders. We then have the bottom row of the pyramid as our values. So we've already talked about the importance of safety and engagement, and you can see safety, respect, and diversity allied to an ethical approach, openness, honesty integrity. And then the fact that whilst we are building for the future, we still need and we talk about the importance of agility and energy for change. So those 3 are unchanged. We believe we have walked the talk on that all the way through, and I think no nowhere more so than in the last few months where they have been the post start. If there's been a decision to be made, we've said does this, reflects our values. In terms of then the goals, quite, quite different here. If I start at the bottom, we do want to grow We do need to grow, and we think that innovation, not just in product, but processes is the key to that. Also, because it is the right thing to do, but because all our stakeholders demanded, we want class leading I. E. Relative to any of our competitors, and I'll talk more about their sustainability. And then the winning engaged and empowered team, we show more we can achieve, overall, if we operate together, some of those results, I think, in terms of customer service, cash management and looking after each other have clearly demonstrated that. And we are a family and we've shown that. So the overarching, thing that embraces it is, is how signifying the family that we believe we are. So if we then go on slide 31, class leading sustainability. What does that mean, 4 things responsible resource resource usage. So that means I think not only improving manufacturing operations, but also developing more sustainable materials and products. Energy And Climate Change, for the last 2 years, we've improved our greenhouse gas emissions by 5% to 6% per annum. And we have in a separate RNS announced some stretching new targets today. People and communities, we've already talked about the primary importance of safety, respecting diversity, so health and safety and engagement KPIs are still preeminent, and we wish to get when we showed the example of the face mask rate community involvement And then when it comes to responsible supply chain as processes of raw materials, we're in the middle of conflicts. Global supply chains. And what we need to do is ensure that the whole supply chain has integrity and acts responsibly it to the degree that we can affect that. So as the other second RNS about our sustainability, makes clear, we are launching some ambitious targets on Slide 32. We have, I think, communicated what is a significant step forward in the advancement of our sustainability agenda and we believe will support our goal of being class leading. So in addition to safety and engagement KPIs, We are saying that we will be carbon neutral by 2040 for manufacturing and distribution. That would be Scope 12. We have an interim target of a 25% reduction in normalized our adjusted book for acquisitions 1 and 2 emissions between 2019 to 2025. We want all sites at 0 waste to landfill within the next 10 years by 2030. We are targeting a 20% reduction in overall waste volumes by 20 30 using 2019 as a baseline. 20% of our packaging raw materials we are committing to have from sustainable sources by 2025. And we believe that these are ahead of the pack We believe passionately that is the right thing to do. We also believe there'll be a commercial and strategic benefit from us achieving it so much so that these targets are embedded in both management assessment criteria and remuneration from this year. Onwards than 2020 onwards. As I mentioned also, if we go to Slide 33, it's not just about our manufacturing processes, but it's also about materials and products. So if I've given a couple of examples in components, we're working with several larger customers to use recycled content and biodegradable additives. In packaging, effectively, we are saying single use plastic out reusable, recyclable paper and board in and our design hub the design capability we have is finding a lot of customer interest in that. In filters, a couple of examples of the bottom, Our Capes business is using, post consumer recycled content, 70% PCR content, which is the first to market for a tape that we use for opening, a variety of products. And perhaps as exciting, filters we believe leading the way in the industry in developing standards, for environmentally responsible cigarette filters and are also working with number of interested parties in an accelerated development of such products. If I then look on Page 34, another aspect in which we continue to invest the business process redesign, where are we, on the right hand side as I mentioned earlier, finance and procurement have gone live with over 100 users in those areas in a number of our headquarter entities. With components, we have completed the pre rollout phases and are getting ready for Europe. We have decided when we talked about speed and decisiveness, we've decided to, do our best to accelerate this rollout. So rather than taking 2 years, we want to do Europe and North America in 2021, which will be 80% of our business. And in parallel to that, in about 12 months' time, we will be starting the preparation work for the packaging division. So I think we're accelerating it. We're seeing that we can actually achieve even more than we thought we could. So we will give our best shot to what is a transformational digitization The most radical change to our Components division, end to end digitization, which I think is an ambitious but a really exciting agenda that will put us apart from anyone else. If I then very briefly at the end, turn to the outlook on 35 or components, say maintaining good operating margins, bearing in mind that industrial production is forecast a slow, but gradual improvement, we think that will, mirror itself in components. Markets And that's really what the PMI data would show. What are our priorities? We just talked about accelerating this digitalization, getting the the German warehouse going and also continuing to look at both organic and acquisition related growth opportunities whilst sustaining, so increasing our sustainable product offer. By then on 36, look at Packaging, we continue to think the 2. Notwithstanding, I think it's going to be some dampening effect for the reasons I mentioned in Q3, certainly listening to our customers. Their term as they think Q4 will be normalized. So we are expecting growth in H2, not our target 5% to 6% but nonetheless some improvement. And we are expecting that margin will expand in 'eighteen, twenty twenty versus 'twenty 19. If we then look at Metikeiza, we think continued good financial strategic and commercial progress there. In terms of the priorities, we continue to look at value enhancing services, but recognize it also that it is still about continuing to get back onto this track for 5% to 6% revenue growth and 200 bps improvement. In H2 because we don't think we will we are short for the reasons and market reasons that we are unlikely to hit that revenue think there will be margin improvement, but it will not be as significant. And also as with components, it's about increasing our sustainable recyclable, biodegradable products. Looking at further supply chain optimization, that's one of the benefits of having much greater stability, we can look therefore in terms of saying, how can we improve our margins beyond the eight 10% target. Part of that is value added services. It's partly about looking at our footprint. And that footprint is partly going to be by the increase in the demands we have, or requests from our customers as we get closer and closer to support them on a broader geographic basis, whilst also looking, given the success of NetIKAYZA, for other opportunities that are strategically, spot on as that wasn't additive to our capabilities. If we then turn finally to filters, we believe that there will be continued revenue growth. We believe that, there will showed progress in margin as well versus both H1 2020 and H2 2019. Underlying demand for cigarettes remains broadly stable. There are on pockets but overarching, certainly the announcements by major tobacco companies have shown that demand is holding up pretty robust. And we can we also expect China JV outsourcing next generation product and sustainable products, which is a 4th game changer and could be if successful dwarf, many of those, we continue to see, expect further progress. There. Tapes also, it's pivoting away from quite a heavy reliance on tobacco, so consumer, things like Amazon type products, but also food products, etcetera. And we will also continue to develop our generation product offering and expect margin expansion in H2. So to summarize on page 38, we believe that we are well positioned. I think that the essential family and its stakeholders have had an H1 to be proud of. The resilience has been highlighted, I think, by a revenue decline of 8.5% and the sustained operating margin, but the 6.5% recognizing that April represented what we expect to have some second major wave to be the at a low point. So really it is about keeping an eagle eye on those 3 first pillars, but then also to build for the future. And I guess what I would say and I'll repeat it finally is that we are inherently stronger than we were at the start of the year. As a business and looking forward to getting onto the front foot and building on these new capabilities and the inherent strength of our portfolio. And so finally on 39th, I will now pass it over to the floor for any questions you have for me and Lily. Thank you very Our first for today comes from Charles Hall from Peel Hunt. Please go ahead. Morning, Paul. Good morning, Lily. Good morning, Charles. A couple of questions. Firstly, on pricing, I think it was mentioned that you saw 2% price improvements in components, which is a pretty good performance into a massive downturn. Can you just comment on how you see that moving forwards and then also comment on the other divisions terms of pricing? And then secondly, on acquisitions, can you just update us on your thoughts? Having got plenty of headroom on your borrowing positions, what your thoughts are on, say, scale, positioning geography, valuation of any potential acquisitions? Sure. Okay. Thanks very much, Charles. In terms of pricing, we believe that components will for the reasons we've discussed before, be able to sustain that level of pricing. Given that we have inherently small complex transactions with tens of thousands of customers and relative pricing opacity plus allied to the fact that our Net Promoter Score continues to go up and up, Charles, I think it's a a benign environment. The in terms of packaging, We have managed to sustain pricing. I think that in the last few months our customers have put an increase in value on the agility and flexibility that we have provided and also the the quality and robustness of supply. So we are not, if you like, being faced with demands for repricing or anything like that at anything, but the most exceptional basis And in terms of filters, we, again, I think mirror the experience of of packaging, we are not having any particular pressure from from MNNCs. We tend when we're doing, say, BCP work for them to just negotiate on a contract specific basis. And with the independent I think it mirrors in some ways the situation with the component customers, whereby we are I think benefiting from a relatively fragmented base and also the fact that if they are going to outsource with a reasonable market share, I think we've proven quite, quite sticky in that regard. So pricing of the things that keeps me awake Charles, and there are 1 or 2, pricing isn't up there particularly amongst the top up. If I then turn on to, M and A, you asked about pricing. And if I can extend that to availability, clearly filters has its China JV, so that's its quasi M and A. So really talking about proponents and packaging. I think that the, the multiple in the multiples we'd be paying in components will be broadly unchanged. There may be some diminution of price expectation, but as you know, that that tends to lag particularly amongst family owned businesses. The the kind of value that they put on, their business is the last thing to go down, but what it might well do. So I think our 8 8 pre synergy 6 post synergy 12, as part of components that, that formula still kind of holds true. I do think it will increasingly throw up greater availability as people either simply get slightly more financially stressed because of COVID or frankly just find that it's all quite a lot of effort and they're prepared to cash in the chips from the years of work. If I turn to packaging, I think that the same thing will hold true on availability, light components that they tend to be smaller, family owned single country operations. I don't think there will be any diminution in multiples, particularly in medical. In fact, I think as you know, it's better than me knowing a lot more about markets than me that actually there may be a marginal premium for health care related assets because of the long term growth potential, which is probably increased over the last few months. So I would say the same kind of multiple expectations, definitely occur as in components. As to our appetite, it's I was going to say undiminished, it actually might be accelerated and heightened because I do think that having gone through what we have done and we've proved to ourselves our ability to add value to acquisitions, Medicaid and innovative components of both, met or outperformed expectations. Innovative Components is actually growing. Notwithstanding the current environment because of revenue synergies. And as I mentioned earlier, our net indicator has hit or exceeded each of its 1st 11 months. It's a very, very synergistic relationship. We're learning certain skills from them, particularly things like serialization, complex serialization, but conversely in areas like safety, engagement and also access to a broader global basis. They are benefiting and I'm delighted to say the to Madrid sites of Nekkaiza, plus the original Barcelona site are working in a very complimentary way. So We are looking at options to get on the front foot inorganically as well as gain organic growth through as you mentioned pricing, but also share gain. And just following up on the packaging side, with that greater focus of your customers on supplier robust this and your high levels of OTIF, are you getting encouragement from your customers to expand product ranges or geography through acquisition? And are they sort of moving you in that direction, or is it not really working like that, if you've got to go and find them? They are not saying please go and buy company X, but they are very receptive to us supporting them either through broader capability, Charles, or through broader geographic coverage and certainly the reaction of the customers to to the Spanish acquisition where quite often we've now developed a European presence with what was exclusively, say, a U. S. Customer base. And we're finding that the dialogues that we have with our pharma customers and our beauty customers is becoming increasingly strategic as well as, I think a very, very complimentary, much of all, partnership based approach. Our question is from the line of Andrew Douglas from Jefferies. Please go ahead. I've got 3 questions, please. 1 for her division. Can we start with filters? Know you've made a lot of progress with game changers in the last kind of 6 12 months. I was intrigued, however, by your commentary on the biodegradable and maybe on the mean, the innovative projects you've got going. Can you just give us an update on kind of timing with regards to those and potentially what is holding back timing. It sounds like you're one of a number of kind of elements to the biodegradable stuff. And maybe just give an outline on that. Packaging, I think you've answered this question, but I just want to make sure, nice market share gains in the first half. Guess, in order to hit your kind of 5% or 6% organic growth per annum, I'm assuming that will continue to be driven by in part market share gains. Just want to make sure that you guys are comfortable with that kind of assertion. And then last on components, You talk about the transformational evolution of the digital side. Can you put that into context for us relative to kind of what your so called peers are doing and kind of where they are on their journey, if anywhere. I'm just kind of understanding, and I know we all understand the opportunity just understanding where you are versus your peers will be really helpful. Sure. So on filters, there is the European legislation which kicks in in 2023 and the, which will affect anything that is single use plastic and there will be certain duties such as cleaning up and things which will be mandated. So that's if you like a backstop date. We are working actively in two areas. We are coordinating the development of standards amongst a number of key players in Europe. And that's quite significant because It isn't often the case that you are able to get people that have been used to competing with each other to for many decades to collaborate. It also speaks volumes that we're actually trusted with that and seeing that as the pivot But from a commercial point of view in parallel with that, we are developing products in house, which are probably, I would say, less than a year away from maturity. And the there's always been the opportunity to have certain filters, which have been more biodegradable than cellulose acetate. The big challenge has been either how to make them cost efficiently or more to how do you not compromise the sensory experience? I must admit I'm not a smoker, so I'm going on what people tell me. But, it just tastes different if you and it has a different impact of the new mouth, etcetera. So that's been a big challenge. Historically, but we have a number of unique propositions and we are talking to certain of the MNCs about whether they wish to work with us on that. Now clearly, if it works, if it works, Andy, would and we own VIP that moves us from being let's say, a critical but a marginal supplier to having a very, very major presence, we wouldn't just operate in the 10% of outsourcing. We'd be operating in the 90% of insourcing, which is why I'm saying that probably along with China, if we get this right, it kind of increases the addressable market, by a multiple as opposed to by a percentage. And I think when we next talk in February, March. I think we'll be able to give you a lot more precision. So it is definitely a potential game changer. We are only focusing our entire innovation efforts on two areas, which is heat not burn and biodegradability. Because we think having learned, we want to make 1 or 2 really big transformational bets. Now that we've got the business growing. And I do believe that we can see filters growing over the short and medium term on a consistent basis which you haven't been able to say before, that we can make these slightly bigger bets now that we've got a steady estate growth trajectory built in. Yeah. Packaging, I've entirely forgotten all your questions. In order to get, in order to get to 5% to 6% organic growth, kind of, I guess, I'm assuming there's some market share gains, which are there's a little pricing and we can get away with that now. We obviously have been a suicidal attempt a few years ago. Part of it is share gain and part of it is underlying market growth. And the good thing is notwithstanding headline figures, we can point to known share gains and we cited this $5,000,000 worth of stuff that we've got from competitors because we've been able to support. On components, bearing in mind that as a direct supplier to OE of of customers of OE as opposed to aftermarket. So we're not a direct competitor of saying electrodes who do have an excellent digital capability. We are aiming for not only through the BPR project in 2021, a fully integrated end to end capability, but we've got a separate project, which is saying, how do we create the world's best for our segments, front end experience. Now that could be anything from smart pricing to automated range updates through to customer interruptions that are proactive saying it's X days since you bought that. Would you like some more? Just click yes or And by the way, would you like this? So it really would be transformational and without sounding heuristic, I think it would put a chasm, a chasm between us and the majority of our competition. It is, in some ways, filters went through its strategic revolution, in 2019. I think 2021 will be the year where the components business becomes unrecognizable from what it has been and how it has operated. Now it's a market leader and it makes 50% return on capital. So but I actually do think that one of the lessons we've learned is let's really just go for it. We were talking about 2 years. We're now going to try and accelerate it. And we've put incremental investment into really time turbocharged, this world class front entrance for a transformational customer experience. Our next is from James Beard from Numis Securities. Please go ahead. Thanks. Good morning. And two questions from me on filters. Firstly, on the Middle East part of the business and the sort of sharp sanctions issues you face there. Can you just quantify what proportion of the revenue and profit reduction in the first half of twenty twenty was as a result of, you walking away from business in those segments and just just to specifically clarify how profitable was the business that you have walked away from? And then second question was on outsourcing with multinationals. Just wondering what sort of progress you've made over the last sort of 6 months or so, in that regard has COVID sort of impacted your business development cycles there? And sort of how many contracts do you think you're sort of capable of winning on an annual basis in sort of normalized trading conditions, in that particular area? In terms of the first one, and as always, Lily will correct me when I inevitably get it wrong, but, effectively, the the amount of business that we walked away from is roughly GBP 1,000,000 a month and it would have been at normal typical margin. So, we basically had 5 months of roughly 1,000,000 at march@consistentmargins that was in 2019 and wasn't in 2020. I'll pause there, Lily. Did I get that right? Yes, it's about 4 months for, in 2019 that we haven't got in 2020. So you're exactly right. The run rate is about 1,000,000 a month. So you're right to me, JC, you can do math, but it's 1,000,000 of shortfall and proportionate profit. In terms of outsourcing, we obviously had the 2 deals which have an annualized 1,000,000 sterling. I think under it, you've always got the natural churn, but if you say that those kinds of things balance out, I would hope that we would get at least a deal, a year, maybe more depending on how things the strategic thinking of our customers, evolves because what we're seeing at the moment is that there are quite a lot of spot contracts with the MNCs from a business continuity planning point of view. Where they are 100% insourced, they have seen that, if say, I don't know, Argentina suddenly gets locked down. They have an issue. And so what we are hoping is that we will be able to, over time, continue to provide the plan B very much like in packaging quite often, a farmer company will give, say, us 10% or 20% and MPS, 80% or vice versa. And if we could take advantage strategically as we have done tactically, then that would be the most hopeful circumstance. Okay. Thank you. Our next question is from Steven Golden from Deutsche Bank. Please go ahead. If this has already been asked because my line cut out earlier on, but I just wanted to understand the sort of the second half slight disruption to packaging Obviously, you've explained the reasons for a slightly soft Q3, which makes perfect sense. In line with the margin that the previous announced kind of margin improvement trajectory, what implications would this have you think for the 2nd half in that regard and potentially even going forward? It sounds like there won't be any real impact in 'twenty one, but I just kind of wonder if there's anything else under the hood that we should be aware of. That's a good question. And it hasn't been asked before, Steve. I think that all things being equal, there is no reason why we shouldn't be back on a similar trajectory, assuming a normalization, particularly of the pharma market and the beauty market in 2021. So, I think that's tenable. In terms of 2020, it's always a tricky thing to forecast things anyway, but particularly in the circumstances. But my best bet is we would be flat in 20 in Q3, flat give or take. We would have some growth in 20 q44 2020. And I think we will see a partial resumption of that upward margin trajectory, and I would expect margins in H2 2020 to be higher than both H2 2019 and of course, H1 2020. Does that make sense? Yes. That's great. Very helpful. Thanks. Thank you. Lily, that's fair? And having said that all? Yes, but my thanks for saying that. So I agree totally. Okay, thanks a lot Okay. There appear to be no further questions. I'll hand back to yourself, Mr. Foreman. Thank you all very much indeed. I thanked a lot of our stakeholders right at the beginning. And I also thank you, the analyst community, for continuing to take an interest in us and if you like at a time when understanding that the business is very important you've been great facilitators of that. So thank you to all of you on the call whether you'd be in the analyst community community or the employee community. So, thank you for your attention and I wish you all a good and a safe Day. And for those of you in the UK, wish you a very enjoyable and relaxing bank holiday. Thank you. Thank you very much, sir. Ladies and gentlemen, that does conclude the call. Thank you all for joining. You may now disconnect.