Right. Let's start. Good morning, everyone. Welcome to the Essentra full year 2018 results. For those of you who don't know me, my name is Paul Forman, I am now joined by a new partner in crime, Lily, who will be talking to you about the interesting bit, the numbers, in a minute. I could probably have given some of these Essentra presentations wearing surgical equipment, such was the surgery that was being required. I think now the patient is, if not fully recovered, we're probably tottering out of the recovery ward and taking our first few steps on a kind of therapeutic treadmill. Such, I think, is the progress that we are making. What I would say about this year is it was a year of inflection and it was a year of progress. As the top headline says there, we have restored growth.
Our recovery is on track, arguably marginally ahead, the strategic initiatives are consistent and being delivered. For the first time since 2015, it's interesting that roughly half the senior team in Essentra have never experienced this, we have had growth both in profit and in like-for-like sales. I will show you the continued progress in our stability program on all our operating metrics. I hope in time it will no longer be necessary to demonstrate that. Packaging has returned to sales and profit growth, we have seen an acceleration in second half. Such is the confidence of the packaging team that their managing director has turned up to this presentation. It's the first time he's ever come, so you can read into that what you wish. Those of you later who are staying for a coffee can pepper him with questions.
Scott normally turns up, I don't think Scott is here because he's in Asia. By their actions should you know them. Components had another very strong performance in the year. The acquisitions that we did, both at the back end of 2017 and way through 2018, are performing in line. Our like-for-like margins are being sustained. Notwithstanding that, of course, we are seeing, as every global industrial, some softness in Q4. Filters is now, I would say, genuinely world-class in much of what it does. What that is doing now is reducing that volatility that we've seen inherent in the churn in our business. We now have the full new executive team in place. We're joined by many of them here today, including the latest, Oshin Cassidy, who's come as Group HRD, so welcome to you. She's been in situ about five weeks.
She told me yesterday it felt about five years, I'm sure that was slight exaggeration. Pipe Protection Technologies, we announced that disposal to NOV. That obviously will have strengthened our balance sheet further, we'll give you some feeling for the impact there. In looking ahead, I think the word is stable. Matt just made the point that these results are quite boring. Where's the fireworks? I'm afraid there are not going to be many fireworks today. The key thing is that the way forward, the vast amount of that is actually value levers that are in our control. If you look at the three largest divisions, we would argue strongly that packaging, because it's basically around pharma, and Filters because of cigarettes, have strong defensive qualities. So far, the last few months are bearing that out.
On behalf of the board, we would say that we are pleased with overall progress, we do think that 2019, when I stand up in 12 months' time, we'll be able to reflect on strategic, operational, and financial progress. If you just give the headline numbers, 1.5% like-for-like sales growth. I'll contextualize that in a second. Adjusted operating profit up 9%. Actually, Lily put some scale around this, if you take into account a one-off increase in things like reward accruals, et cetera, it's underlying much stronger than that. The reported operating profit, GBP 47 versus GBP 5, then EPS up 2.3%. Good cash conversion. Again, we do make that quite a big focus of our culture now. There's about 0.2 x reduction in the net debt/EBITDA following PPT, the dividend has been maintained at GBP 0.207.
I always like to give you some idea of the sequence. You can see there, group like-for-like revenue growth. The situation I inherited when I came in on January 1st, 2017, was -10.6%. You can see that actually now that position is reassuringly above the Y-axis now. If we focus specifically on packaging, people have really been waiting to see when this inflection point occurs. You can see there that 7.7% in H2. Clearly that's against a weak comp, so please don't necessarily just print 7.7% and copy-paste across your spreadsheets ad infinitum. Nonetheless, I do think that that division is well set. The foundations are there. As you'll see in a minute, we have genuinely industry standard, or indeed possibly industry leading performance.
What we are seeing is that, you'll recall, I said no customers actually left us, the share of wallet is increasing with our very robust blue chip customer base. Again, what was the position we inherited on January 1st? 40% decline in operating profit underlyingly. You can see there that there's an increasing trend, 13.5% on H2 2018 on H2 2017, you can see that whilst we are nowhere near the margins that we had back in 2016, potentially, you can see that it's now gone up by about 100 basis points versus the same period in H2 2017. Encouraging progress there. Looking at each of the divisions very briefly, we'll talk more about strategic progress in a minute. Highlights, components like-for-like growth of 6%, tailor two halves, it's lower in H2 versus H1. The operating margin, there have been questions about the sustainability.
If you bear in mind that both Micro Plastics and Hertila had a lower margin coming into the group, broadly the margin has been maintained. What is noteworthy is that their average margin, which on coming in on a kind of blended basis, was about half components. They are now at the kind of typical components level. A near doubling of margin on a run rate basis since we owned them. The encouraging thing is if you look at all of the different product sectors and all of the different geographies, whilst there are different ingredients in the makeup, we do have good progress and in particular areas like access hardware and cable management, our focus on product innovation is yielding very positive benefits. For us, ease of doing business, being hassle-free is a key thing for components.
The fourth bullet point about the commercial and operational initiatives to support that growth market share gain, the primary driver of that is for the first time, we now have a fully integrated website. Our customers use the website not necessary to purchase, but to search. We launched it in Finland earlier this week, so it's a bit too early to say how it's going on, and we'll plan a kind of global rollout across the next 12 months. That's a vital tool in our armory. As I mentioned, Micro Plastics and Hertila, going well, not just in financial results, but in the underlying trends that we have, or KPIs that we set for them. We do have an increasingly strong M&A pipeline. Clearly, we want to do more of these Micro Plastics type acquisitions. I'll talk more strategically in a minute.
That is coming on nicely under the leadership of Katrina Fitzgerald. Packaging. I have said that broadly we should be getting back to industry margins by 2021. What does that require? It requires operating margin improvement of about 200, 250 basis points, every 12 months. You can see here that Ian and the team have delivered that. We've just already shown that on an underlying basis, packaging actually had high single digit growth in H2. The business wins we are gaining, regaining share of wallet. We do have that credibility with our customers. We know that through not only voice of the customer research, but actually just the clear track record now of our win rate. That, if you look on an LTM basis, which for me is hugely important, a trailing 12 months, there's a pretty consistent pattern there.
Ian and the team are continuing to develop the product pipeline and the investments that we are making, we are prioritizing, if you recall, both IT and packaging, because packaging had been under-invested in. Those are delivering margin opportunities, but critically, it's also underpinning our capability to have growth. We have find ourselves in the somewhat unusual position in packaging in certain product categories of being capacity constrained. I never thought I'd say those words so quickly about packaging. There are some pinch points in areas like complex literature. We are investing to support growth there as well as to support margin improvement. We did make an announcement about a site in America, in Largo and Kilmarnock. Effectively now, at all but the margin, we are a pure play health and personal care player now. That's our strategic goal.
We don't want to be the biggest, but we want to be the best, and the raft of opportunities in that segment really will pay dividends in terms of our strategic focus. We want to eat, sleep, breathe the HPC sector. As I've demonstrated already, an accelerating pattern of revenue and profit growth in the second half. Filters. Actually, filters, if you looked at it by quarter, would be a U. Isn't that right, Lily? Yes, good. Phew. Got the right letter. That was some moderate revenue decline, but we are seeing a stronger uptrend, particularly in the independent sector. We have five multinational customers, the five, and then we serve about 300 odd independents.
For the first time, I believe, we are now selling more to the independents than to the multinationals, which probably speaks inherently because not all 300 are going to suddenly leave, not least because they don't have any alternative pretty much. I think that points to a greater stability. The key thing, and I'll put some parameters around it in a minute, is that that business genuinely is world-class. For some of our customers now we are at 100% quality and 100% on time in full for, say, six months in a row, which is truly outstanding. That will pay benefits because what, as I'll talk in a minute, we are beginning to finally up our game in terms of innovation.
This market is going through, Matt here looks after BAT, knows better than me, probably more change in the last two years than the last 22. There are great opportunities, both in combustibles, the standard products, and in next generation products. I'll talk about those three game changers in a minute, we have got positive discussions, we have had a win in outsourcing. Next generation China and outsourcing, I'll talk about that in a minute. Specialist components. I don't know whether a portfolio of six can be a game of two halves, tear tapes had a tough 2018, mostly because of its, I think, overexposure to one segment, namely the tear tapes that go around cigarettes. If you look at that portfolio for the other five, they actually achieved 2.2% revenue growth and 200 basis points improvement overall in margin. Its a good progress there.
Effectively, every business either was stable or grew with the exception of tear tapes. Tear tapes and extrusions are two large European businesses. We are basically doing a root and branch assessment of our approach to cost there, I think that we will be fundamentally reappraising how we go about and what the best business model is on those two. Overall, with the exception of the one business in the six, good margin progress and underlying revenue growth. Actually, we've had good margin performance in pretty much the whole portfolio. Lily.
Good morning, all. I'm delighted to be here standing alongside Paul to present a good set of results for 2018 for Essentra. As Paul mentioned, this marks a significant milestone for the company. It's returning to growth of 2018. Overall, looking at our result, our revenue printed at GBP 1.026 billion, a pretty good 1.9% constant ForEx improvement YoY. You look at operating profit, it's GBP 19.7 million, a 9% growth constant currency and 8.8% operating margin, a 50 basis points improvement. Worth pointing out, Paul has already pointed out, that second half of the year, OP grew by more than 13%. Also worth pointing out, if you exclude some share-based payment, sort of build up from nearly zero in 2017 to almost GBP 5 million in 2018, the year-on-year operating profit growth is actually 14%. That's a very strong growth for the underlying business.
Our earning per share is 23.1p, 2.3% growth. Putting revenue by division onto one page, again at constant currency, Components revenue GBP 271 million, a 6% like-for-like growth and reported growth at constant currency under 15%. As Paul highlighted, the two acquisitions we made, Hertila and Micro Plastics, are performing to expectations. Packaging revenue GBP 342 million. If you exclude the disposals we made in the year and also the IP5 carton site closure that was done in December 2017, the revenue actually grew by 3% YoY. You look at the second half, as Paul already mentioned, it's nearly 8% growth on the top line on that basis. Filters revenue GBP 260 million, like-for-like it's just under 3% decline.
It's pretty much the characteristics of the tobacco industry pipeline volatility. We did see good growth from independent customer base in China, India, and Middle East, as Paul mentioned. Specialist component, a modest decline, largely the result of tear tapes volume decline, as Paul mentioned. Overall, GBP 1 billion 26, a 1.9% growth YoY. Turning on to operating profit by division. Components delivered a good, robust operating profit of GBP 60 million, a 13% growth YoY, 22.1% operating margin. It's marginally about 30 basis points decline from 2017, and the two acquisitions we made in the last 18 months, actually 12 and 15 months, there is a little bit of a dilutive effect. Also we made some measured investment into the business to support long-term sustainable growth above market. Turning to Packaging, GBP 5.4 million profit, a 200 basis points improvement on operating margin. That's a good performance.
Our second half was particularly encouraging, with about over 300 basis points improvement like-for-like. Despite the 3% like-for-like revenue decline in the top line for Filters, we've seen good margin expansion of 60 basis points, thanks to a great result from the operations excellence program. Specialist component decline of profit margin was driven by tear tapes from the volume. This has more than offset the good margin expansion from the other five businesses. Second-half margin show a small 30 basis points improvement. Central service cost is pretty much in line with half-year annualized results, slightly up. As I mentioned a moment ago, we had to build up nearly GBP 5 million or GBP 4 million share-based payment. Some costs are booked in the central. I would say central cost, it's likely to go up by about 50 basis points from where it is today on revenue.
We continue to invest, we have invested, we continue investing our people and process to future-proof our business. Over time, this percentage come back down after PBR program kicks in. Paul would introduce PBR program a bit later. You can see the benefit of center provided, supporting a robust and solid business performance. Overall, I want to just reiterate, GBP 90.7 million operating profit printed, a good 9% growth, excluding the share-based payment build-up from nearly zero basis, that's a 14% growth year-over-year. Moving down the income statement, our finance charge was slightly higher than previous year, largely driven by interest on higher net average net debt. Effective tax rate is 19.5%. I mentioned this is 50 basis points lower than 2017. I mentioned a moment ago, we have seen good growth from our independent customers, especially in the Middle East.
You know that 0% corporate tax rate territory. The increase in minority interest this year compared to previous year, again, is driven by the Futurs JV in Dubai and India. As we said, there's good growth from independent customers, and we continue to see that. We reported a GBP 20.8 million exceptional cost and other adjusting items. You can see it's largely made up of some closure costs associated with two packaging sites Paul mentioned, and the cease of production at Nottingham for specialty tapes.
Some transaction costs associated with acquisitions and divestment. As M&A is part of our strategy, especially for our component business, it is reasonable to actually expect some level of M&A transaction costs going forward. Cash flow. Adjusted operating cash flow for 2018 was GBP 77 million, 85% cash conversion. That's a good, strong cash conversion. It is 10 percentage point, we recognize, down from 2017 level.
This is largely driven by the investment we made into the business in CapEx, as Paul mentioned, into packaging, and we did spend a little bit more on IT. Going forward, I would expect our CapEx to be around the GBP 55 million level. It's worth pointing out our working capital, we delivered another set of good results. Our average net working capital to revenue ratio decreased by 120 basis points to 13.7%, as a reflection of our cash discipline in the business. This is going to be a continued focus for the business. After paying interest, tax, and pension contribution, our free cash flow is GBP 50 million. Net debt. On a constant currency basis, it's moved up by about just over GBP 20 million. Really, this is paying dividend, and we spent money on exceptional items as well, offsetting the very strong free cash flow generated by the business.
Our net debt to EBITDA ratio is 1.80, as Paul mentioned, a pro forma reduction of 0.2 from PPT disposal. We maintain our dividend payment at GBP 0.207 for 2018. Just a moment on the PPT. On 14th of January, we announced the divestment of PPT business to NOV at $48 million on a cash debt-free basis. This represent a good value to our shareholders. It's about more than 6 x on EBITDA multiple. As you know, this is a relatively volatile business, where performance is closely linked to the oil price and drilling activities. On a performance basis, as I said, it's 0.2 reduction on our net debt ratio and a mid-single digit reduction on EPS. We estimate a pre-tax gain on disposal somewhere above GBP 4 million, or be above GBP 4 million subject to audit. Brexit.
Look, as a business, we have conducted detailed study in earnest on Brexit planning across multiple areas. The major risk for us as manufacturing and distribution company is clearly the flow of material, both raw material and finished goods across the border on both directions. We have short-term mitigation actions in place. Largely, it's four to six weeks of stock build in our supply chain. Some ours, some our suppliers. Clearly, there's a variation by division as well. In the worst case of us leaving the EU without a deal, we expect a GBP 3 million headwind in the P&L charge on duties and customs. Customs associated cost cannot be passed on immediately. We also expect Essentra to build inventory by about GBP 3 million. So GBP 3 on the P&L and balance sheet.
Once we have more clarity on the nature of the exit deal, there are additional mitigations we can investigate. I'm hoping I'm not alone finishing a finance presentation on an accounting high. IFRS 16, lease consideration came into effect January 1st, 2019. We have done lots of detailed work assessing the impact for our business. It is, in a nutshell, from a P&L perspective, minimum impact on the net income, but it will be a couple of million GBP gross up on EBIT and a couple of million GBP higher interest charge. From a balance sheet perspective, again, if you look at net asset, will be a moderate reduction of GBP 5 million-GBP 10 million, but we have to gross up asset by about GBP 14 million. On that high, I will pass it back to Paul.
Don't worry everyone, we will leave about half an hour in the Q&A for forensic dissection of IFRS 16 and its implications. I will go to the pub, I think. Our journey has always been a consistent one. Stability, which then gives us the right to develop and prosecute strategies and to grow. We have used a pretty consistent, right from February 2017, to say what are the important parts in the first four elements there are the constituent metrics of that journey and our progress. I will take you through each in a minute. We have added a fifth now because our belief is that if we are to sustain that stability, and make it self-reinforcing, we really do need to address, and create the right culture so there isn't just 10 people, but it is 8,010 people who are really driving that.
That is an increasing part of our management agenda. We have kind of, if you like, earned the right to stabilize. If you were to ask me, I would say, or Paul Lester, the Chairman, we are probably marginally ahead of where I thought we would be on this agenda now. That is quite encouraging. We love our customers. We are trying to earn their love, and we are earning their love, I think now I am getting it back. Service, critical. You can see there our measure is on time in full. Components moving up materially 200 basis points. Filters 98.5%. That I don't think any of the manufacturers themselves would get to a higher figure than that. That genuinely is world-class. Packaging you can see plateaued, but actually, for the first three quarters, it was higher than that.
Ian and the team have got the somewhat perverse problem of having to deal with growth and quite significant growth in certain places. It isn't a flippant comment that we haven't, since we bought Clondalkin in 2015. Is it 2015, Ian? We haven't actually had a top-line volume growth experience. It does put different pressures on the business in terms of efficiency of planning. As I mentioned, there are one or two pinch points in capacity. That trend is now improving again, Ian. That is why we saw in Q4 some kind of pressure. Our key focus in packaging is to sustain the sales growth and volume growth. Because operational gearing is our biggest contributor to profit growth, it is now about making sure that it drops through to the bottom line in full measure. Sales growth was a necessary but not a sufficient condition for profit growth.
Now that is well set, Ian and the team are really looking at operational gearing to drive that next tranche of 200 basis points-250 basis points in progress on margin in 2019. Quality. You can see that over the last two years, a 28% improvement in incident rates and components. Filters, 66, so 2/3 improvement. To put them in context, we now, for every billion products we supply, we have two complaints. That's pretty world-class. A near halving in packaging, and actually, if you were to look at anything that is a major as opposed to a minor, it's something like a 70% reduction over two years. Specialist components, again, good performance there, 17% year-on-year. We cannot have a 16 just because of the difficulty of comparable numbers. IT.
Was it Kelly that was written on Mary, Queen of Scots' heart or something like that? IT is written on my heart somewhere. It still is one of our biggest challenges, we have focused on getting the basics right. We have a long way to go in IT, both in terms of addressing stability, also then harnessing it to improve the operations and efficiency more generally across the group. What you can see here, this is the major incident rate. These are our kind of key problem IT issues, and that's seen a 75% reduction in 12 months. We now have one quarter of the issues that we did. Given we know from exit interviews that IT is the biggest source of stress for our people and our employee engagement surveys also corroborate that.
This is a very major part of our progress in our stability agenda. What is our number one job as a management team is to make sure that our people are safe when they come to work. I am delighted to see that the number of lost time incidents has virtually halved in the space of 12 months. That's good, not only because of the moral duty we have to safeguard our employees, but it also speaks to the process efficiency within our factories. Inherently, if you have unstable processes, you are more likely to have accidents. This speaks both to a cultural and to a process improvement. If our number one job as senior leaders is to keep our people safe, the way that we will sustain it and our number two job as senior leaders is to make them want to come to work in the morning.
That's what I say every factory I go to, I passionately believe it because it does become self-sustaining. What you can see there is in 2018, a good progress on our engagement score. 75 gets us into the pack for global industrials. We are not remotely satisfied about that. We want to be an upper quartile, and we think in a couple of years we will be. The strength that we are now being seen by our people as having a commitment to quality and service, you can obviously see the parameters I showed before, this is really saying that our people notice that they are feeling safe. They understand where we are going. I went to our Indonesian factory about a week ago, and I actually asked the factory workers individually if they could say what the three game changers were.
A relatively high number could actually give me all three. You say, "Well, what's the importance of that?" The importance of actually having an organization from top to bottom understanding where they're going and why can't be understated. Overstated, sorry. What do we need to do better? We need to make sure that our people understand that we want them to have a career, not a job. We need to be better at communicating internally. We also want, and we recognize that a PLC is not just about making money. It's also about contributing to all stakeholders, and involvement in things like communities is not only the right thing for any commercial organization to do, is also fantastic for morale. That's another area where we're looking to progress. The fourth item was financial stability.
I won't try and compete on the brainy number stuff, in terms of qualitatively, those of you who know me, and Lily shares this, we've talked about this net debt to EBITDA ratio one to two times, particularly in the context as I see it. We're going to keep that. Let's just leave it like that. PPT, as Lily's already explained, has put it firmly in that ratio. I do think that in terms of risk management, therefore financial preservation, we have gone from being not very good at all to what external experts would say is probably upper quartile for FTSE 250 now.
We have some really high-quality debates and plans, and therefore, also developing the financial countermeasures. When we do our budgeting now in September, October, we actually have, under different financial and economic scenarios, a range of activities, a range of actions that can be countermeasure to actually protect the underlying financial performance of the business. We do have both in our long-term incentive plans and short-term cash related measures. Lily's already talked about the improvement of 120 basis points on sales to net working capital. Will we keep that measure forever? Probably not. Is it right in cementing the behaviors and mindsets? Absolutely. We did get the RCF in place in 2017, that's good for 2022. We have different USPP tranches, which will be coming for maturity. Qualitatively, as opposed to numerically, I do think that we have that financial stability now as well.
As I mentioned before, all those four, if we want them to be self-sustaining, and if we don't want to do it to people, we want them to do it for themselves, we need the cultural architecture. Unusual for a results presentation, perhaps talk about purpose, values, behaviors, and our internal brand. We do believe that if this organization is to sustain it without massive senior intervention, this is important. What are those four? What's our purpose? We want to make our customers more successful as businesses. That the analogy I would draw is we're now in 1849, somewhere in the West Coast of America. We are choosing to supply the shovels, the picks, the tents rather than prospect gold. We see ourselves as a supporting actor. We are not Hamlet. We are Rosencrantz and Guildenstern or whatever it was. That's dragging up from my English.
What are we about? We're providing the parts, products and services, and you'll see that development in packaging in particular, that our customers need to succeed as business. That is the kind of zeitgeist, that is the continuum, that we're very proud to have as our goal and our purpose. We need values. These are the six that we developed, and you've seen examples of them already. These six, if you go to anywhere in Essentra, you will see linked to the stability, strategy, growth. I'm hopeful that most people in the organization could tell you what they are, and they are in about 32 different languages, I think. We have a brand. We have a personality. What is that? Consistent with being the supplier of picks and shovels, et cetera. Bottom line there. We do think teamwork is important.
We do think that we don't want to be a bunch of prima donnas. We do want to be, if you like, every man, I think, if you're into your Jungian archetypes, every man is the one of the 10 that we aspire to be. To cement all of that, this informs all of our internal communications, the internal brand is about we make it work. We make our customer work as a business. We make communities more successful, et cetera. That informs, as I say, the full gamut of internal communications. Those four parts of our cultural architecture are how we believe that our people will be incentivized emotionally and aligned to make sure that those graphs continue in that same trajectory.
If I move on to strategy, forgive me, I'm just going to remind you what we said almost exactly two years ago, that we had a strong strategic hand of cards, a number of self-inflicted wounds. I think this has resonated with some people because they have it played back a lot to me when I go and see investors. We are number one or number two in virtually every business. Some are niche, but they are. Growth is sustainable. We'll see. Often strong entry barriers. Margins. When we are demonstrating this, Lily's already shown it, are sustainable. A great customer base, and we have growth routes, both organically and inorganically as we're demonstrating. What were the challenges I highlighted? Matrix structure. It's gone. It went very quickly. Poor IT. It's now average IT.
There's a lot to do, we can also put it on the front foot. You saw that 77% reduction in major incidents. Lack of strategy. I've spent two years discussing strategy. The strategies that we launched in July 2017. You've seen that the packaging thing is now progressing nicely. Morale. You've seen employee engagement. Of the six, ladies and gents, this is the one, the conspicuous absence of rigorous, consistent process. I'll explain what we're doing about that in a minute. It was always going to be the longest time to fix it, along with poor IT. That remains for us, the biggest single challenge as a team. Don't worry, I'm not going to take you through this. You had to sit through this 18 months ago. Essentially, though, this is a strategy on a page for components. What it says is that there's a very large market.
We have a unique position as a manufacturer and distributor. It's very fragmented, and it can sustain decent returns. What we've done here is just highlight in red those areas where we are making, I think, very tangible progress. Things like one-stop shop. We talked about the launch of our new website. What we haven't focused on at the moment particularly, is the cross-selling and the geographic expansion. I think that probably focusing on Western Europe or Europe generally, North America, including Mexico, and Northeast Asia, in particular China, is the focus at the moment. Packaging merited four columns as opposed to the three columns, such was its challenges. Fundamentally, the pharma packaging market is growing. It can sustain decent margins, and it's quite sticky, and it is globalizing. As you can see, the 2017-2018 is all in red with two exceptions.
One of which is that I was leading discussions. Sorry, this one should be actually in black. I was doing a weekly review, and that is no longer the case because Ian has got it well in hand. Secondly, this operational stability has short-term priority over financial. Such is the operational stability, that now the focus is very much on financial performance. For a year or so, we just said, "Forget that. Just focus on service and quality." Very much we're looking at margin. The rest in the 2018-2019 is making very good progress, and what we are seeing, which is interesting, is a lot of our customers on the top right there are now saying, "Can you follow us into Eastern Europe? Can you follow us into India?
Can you follow us into other parts of Asia?" Indeed, Ian and I are going over to India in the next couple of months to potentially look at partners or more long-term tie-ups. Then Filters. Very good progress. China, we are having very good dialogue with the Chinese state monopoly. We've had our first outsourcing deal, and there are about five or six other live conversations. Heat-not-burn. We are dealing particularly with all of the MNCs who are involved in it, and also about half a dozen companies in China. China seems to be making a bit of a move on the heat-not-burn market, primarily for export. Uniquely for export, because heat-not-burn is banned in China currently.
I think we have given ourselves to the end of the year to prove or disprove the capability of Filters to embrace and build these three game changers, and we are sticking to that. I would say it's encouraging. Talked about process. This was the sixth of the six self-inflicted wounds. Essentially now we are undertaking a focus not on stability, but on efficiency. We are literally about one month into what we think may be a five-year program of business process redesign underpinned by ERP investment. What that will do is it'll, I think, again, make the stability agenda more robust and deliverable, but it will also support the strategic ambition.
For instance, if an AstraZeneca or a Smith Kline wants to be with them seamlessly across the world, having that system in place that mirrors theirs is going to be a critical enabler. Initially, because we are acutely aware of the risk of trying to do everything badly, we're going to focus commercially on components, and then in terms of the kind of central functions, finance and procurement. When we report back to you in July, August, we'll give you some further view on the costs and the benefits at the moment. We're just flagging that that is a program that we are initiating now as we move from stability to productivity, efficiency, etc. There's also, and Lily talked about the slight increase, 50 basis points. One of those elements in our central cost is things like continuous improvement.
We have very ambitious targets for the number of yellow and green belts that we want in our company. We are looking now at Kaizen events across our whole portfolio of businesses, of the 50 or so factories, plus the warehouses. We talked about the challenges of sustaining growth and translating it. Something like a sales and operations planning process, which is a medium term forecasting to optimize the configuration, capacity planning, etc. These are kind of muscles that we're now learning to develop as an organization. I think overall, if I were to summarize our journey, I would say the stability we're on or marginally ahead. I believe our strategic progress is at least on track. Components, we're looking to continue to do acquisitions. We have an active set of discussions going on.
I would like to see us ideally, although we will not compromise on value and maintain financial discipline, to do maybe another couple this year. Also, for me, the key focus, we can't do anything about the underlying industrial output globally. What we can do is maintain our focus on pricing excellence and on market share gain. We believe that with the portfolio of products and services we have, we can continue to outperform global industrial production, whatever that may be. Packaging, it's just doing more of the same at the moment. It's got some really great momentum, so it's about translating that sustained sales growth into profit growth. Obviously, as a margin improvement, we expect profit growth to materially outperform sales growth.
Filters, it's about innovation, it's continuing over the next 10 months to prove or disprove one, two, or three of these game changers. With specialist components, last August, Tim shared with you the value creation strategies. We continue to develop all of those. I think internally, we talked about the importance of the value levers we can control. We're making good progress. Clearly, it would be Panglossian of me not to say that, particularly for Components as opposed to other two major divisions, there is a more uncertain macro environment. I do believe we'll do better than the market. I do believe we will continue to drive pricing. We have to recognize that is a context. Now, who knows where it's going to be? I don't think it's going to be as bad as 2008-2009, but who knows? Packaging and Filters, relatively non-cyclical.
To the best of my knowledge, people do not get fewer headaches or smoke less in times of recession. Arguably, it's counter-cyclical, I suppose. I do think if you look at the defensive qualities of our portfolio, it's actually pretty robust. We've got good cash flow characteristics, a sensible level of gearing, and two of the three larger divisions are, I think, pretty non-cyclical. That's been borne out by the last three to six months. Overall, I would say that our outlook is stable. Sorry, Matt, I can't use a more flamboyant adjective, but stable is what it is. Most of the value levers, with the exception of global GDP, are in our control still, as hopefully I've demonstrated. To conclude, 2018, I think you should think of as a year of inflection and a year of material progress strategically, operationally, and financially.
We've now got half an hour for IFRS 16. Which I will personally take any questions on that or embedded derivative accounting. We'll do, I'm aware that we do have people in hyperspace, cyberspace, or whatever it is, but we'll start with questions from the room. Okay, Charles, can I ask you to take the microphone?
Charles Hall from Peel Hunt. Can I just ask on components and your pipeline of acquisitions, can you just sort of run us through how many you've looked at, what the filter is looking like in terms of how many you're progressing scale? Also, with your comments on the macro environment being more uncertain, how does that leave you thinking about price of acquisitions, what rating you'd be prepared to pay, and also what some of the potential vendors are prepared to accept?
Just the egg questions, Charles. Right. We have acquisition conversations going on in all of those three geographic regions we talked about, North America, Europe, and Asia. I would say whilst they vary, Charles, Micro Plastics is a pretty good model. It'll be a little bit smaller, little bit bigger CapEx, but broadly, that's a good model. We have five live discussions going on at the moment. Four? Five?
In that order.
In that order. Maybe I shouldn't have said that. Oops. Yeah, it's active. You must know, and I can see there's some bankers in this room as well, that there is this period where value expectations from sellers take a while to kind of reorientate themselves. But if you look at the EBIT multiple that we did PPT on, so the disposal multiple and the acquisition multiples that we've done the others on, I think you should assume broadly eight, seven, 8x EBITDA, something like that. Is that reasonable? Something like that.
While I've got the mic, I see from your risk mitigations that you've reduced the risk on reaching acceptable margins in packaging and also on the IT side. Obviously, you talked a bit about those. Can you just remind us what you see as acceptable margins in packaging?
Yeah. I think with the business model we have and the geographic focus we currently have, 8%-10% ROS is a 2021 target. Is it eight, nine? I don't know. I know that we printed a different number in, say, 2015, but that was due to business mix and all these kind of things. You should think of this as a kind of, yeah, 200-250 basis points 2019, 2020, 2021 sequentially, something like that. What was the second part of the question? No, that was it.
That was the question.
God, I'm used to you asking only one question, Charles.
Sorry. The improvement in that margin sequentially, I think you talked about moving from stability to focus on margins. Is that taking cost out now, or is that just improving productivity, or is it really going to be driven by volume growth?
I should think, finger in the air, 60% of that is operational gearing. We have invested in productivity, and also in these pinch points where we are capacity constrained, we can probably get, so there'll be a slight mixed benefit as well. Equally, if you look at the packaging industry, it is, in terms of its process, pretty cottage-like. I think what you'll see is continuous improvement and process redesign over time. Ian came from Rexam, and I think if you compare and contrast how you make pharma cartons compared to the beast that is a Rexam production line, it's very different. That's why I'm saying, let's get to base camp of 8%-10% in 2021, then let's look at what's achievable above and beyond that, because I believe there is.
I believe the HPC segment we are focusing on monomaniacally can sustain that, but I think we can improve beyond that from 2021. Is that fair, Ian? Okay, thanks, Charles. James, hello. Oh.
Sorry. Tom Sykes from Deutsche Bank. Just on Components first, the pricing power that you have there to offset any potential slight slowdown in volumes. When you look at the breakdown of the business, presumably you wouldn't see it all having the same degree of cyclicality, that there's a large chunk of repeat business, and perhaps some that is a little bit more volatile.
If you could characterize the spread of type of volume that you have within there would be helpful as a start, please.
Yeah. The important thing is, Tom, if you look at our profile, it's actually quite similar to pick a product at random, thread, for instance, which is a very small part of the total cost, but is very important to continuing the production line or whatever. 90% of what we do ends up in a finished product. We're not an MRO business in that regard. We have tens and tens of thousands of customers and supply them with 200,000 product lines or whatever. The average transaction size is tiny. Pricing power is not the word. I think pricing opacity, and also the relevance of reliable service, and ease of lookup compared to the cost. We do spacers, little plastic things that keep printed circuit boards separate in computers.
The design engineer puts much more emphasis on knowing that the nylon we use won't melt at extreme temperatures, or that they'll get exactly the quantities they want to their various factories, rather than worrying about. These things will go for GBP 0.10 each. He's not going to spend his time trying to get from GBP 0.10 to GBP 0.09 or whatever it may be. That's not the nature of the industry. You're right. When we did our strategic assessment, we did what all good ex-Bain and McKinsey consultants do, look for patterns for margin by end market or customer size, et cetera. There genuinely wasn't huge differentiation. Other manufacturing was the largest product category that we serve as opposed to auto or electronics or whatever. We reflect global manufacturing output. Our spectrum is equivalent to that.
Yes, automotive will be a bit more cyclical than, say, appliances, white goods or whatever. I think as a proxy, just look at global industrial output because we pretty much mirror it.
Okay. Thank you. Then just on packaging, then you mentioned some capacity constraints that you had. Again, reflecting on price, is that something that is at the industry level, that degree of capacity constraint, and so therefore, there might be some benefit of price for you this year in packaging?
I think generally, now that we're on the front foot and have earned the right to have constructive dialogues with our customers, pricing is coming under focus. We are now looking at low or negative gross margin product lines with individual customers. We're looking at what the scope is. We actually put up pricing for some customers twice last year, mostly to recover cardboard costs. We couldn't have even had that dialogue in 2017. Wouldn't have been allowed in the door, let alone open our mouths. I think pricing is an opportunity, and we're now developing the tools. It's part of this journey, just as improving our operating margins, and our productivity of maturing and being out of, to use the same metaphor, we are no longer being sliced open and having our arteries rearranged and things. We are now a very, very different beast.
Clearly, the financial progress lags the underlying progress in the foundations, and you've seen there that we're much, much more stable. Pricing, yes, is an opportunity for us, and we're being much smarter about it. In terms of these pinch points, yes, it is the case sometimes that there is capacity constraints in the market, and where we can sensibly manage We're having to manage our portfolio in the short term, we're having to add capacity in the medium term.
Okay. Thank you. Sorry again, while I've got the mic, you mentioned poor IT.
Yes.
That you're improving it. You mentioned you're putting an ERP system.
Yes
There's going to be a bit of an intake of breath when somebody, if your backbone isn't necessarily as strong as you'd like it, you're going through this. I know you're going to give more details later in the year.
Correct.
Is this a big SAP implementation or is there any frame of reference?
I'm not going to give a commercial break for which particular brand of ERP software it is. It is not an SAP one. That would be a sledgehammer to crack a nutshell. I caught the back end of the implementation in Coats of that, which was a 12-year journey. I would lose the will to live at that particular prospect. No, it won't. It won't necessarily even be. Clearly, if we're doing it across finance, we have to have a single system. The profile of, say, Components, which has hundreds of thousands of products and hundreds of thousand customers and hundreds of thousands of transactions, and Filters that have 305 customers and a thousand product lines, it's totally different. I would take a lot of convincing that one size fits all here.
There was no point until we had at least a stable business model and a stable performance from a management distraction point of view. If we just had put anything else on top of all of the things we had to do, we'd have made the whole edifice collapse. It's really just a judgment we're making on how stable the business is. If we are truly to get an extra 100, 200 points of margin across the group through efficiency, we have to have something like that. This is where our relative absence of defined process is actually, for once, a blessing in disguise. Because the biggest problem with ERP is you go in, and I've been through this, it's like Groundhog Day.
We say, "Yeah, we're gonna go as vanilla as possible." Everybody nods sagely, vanilla soon becomes Neapolitan, it becomes the most amazing ice cream cocktail known to man, that's when it starts falling down. Here, we've got an opportunity pretty much with a blank sheet of paper in a lot of our processes.
Okay. Thank you.
We are so risk aware, I can't tell you. We have to do it. Hey, James.
Thanks. Hi, it's James Beard from Numis. Couple of questions from me. I'm going to go back to components again, surprisingly. Looks like your organic growth slowed somewhat in the second half from 9% to around the 3.5% mark. Are you able to give an indication of what the exit rate was and what trends have been like in the first couple of months of 2019? Just trying to get a feel for whether that slower rate in H2 is likely to be the sort of growth rate that we see-
Yeah.
going into 2019, albeit cognizant of macro uncertainty.
The second question is related to PPT.
Yep.
Just trying to get a feel for the level of margin headwind that causes at a group level in 2019 with that having come out.
Right. I'll take the first. Lily, you take the second.
Yeah.
Components in the start of the year would be low single digit. I think the formula you have is global industrial output plus 4%, being price and market share gain. It's X plus four. The bad news is you have to come up with X. I'll come up with the plus four. You tell me what average global industrial output will be this year, and I'll tell you. As I said, I don't think It doesn't kind of feel like 2007 and 2008 felt for those of us who are long enough in the tooth to remember, Charles. I would say at the moment, if you ask me Q3, we probably saw we were seeing underlying volume growth 3%-4%. I reckon it's flat now, at best. I don't know.
These things obviously have a whiplash, whether or not that's people suddenly pulling back, I don't know. You guys talked a lot more industrials than me, if the likes of people who serve the same market space as us are experiencing underlying volume growth, then that would surprise me. You're looking skeptical. No, James?
No.
No? Okay. Lily, do you want to take the second?
Yes, on PPT. Look, as I just mentioned, I think it's mid-single digit EPS dilution. I think at the OP level, rough number, about five.
Any other questions in the room before we go to cyberspace?
Not in cyberspace. Toby Thorrington from Edison.
Edison.
Just a CapEx question, please. I think you've indicated another good chunk of CapEx, this year, about 55-
Yeah
million, which is still a good margin above annualized depreciation of GBP mid-30s million or slightly better than that.
Four.
Can you give us an indication of where you think I'm not exactly sure what your maintenance growth or your maintenance CapEx number is within that GBP 55 million, if you could give us an indication of where the growth CapEx is going and perhaps indicate how much of that GBP 55 million is going to Essentra as well, please?
Sure. Well, by central you mean IT. It continues to be the largest recipient alongside packaging. The CapEx needed for productivity improvement in packaging is less pronounced. If we do have to spend more than we envisage, it will be because we've got to invest to support growth more. That would be a nice problem, Toby. Why did we spend more than perhaps GBP 55? Some of it is on cyber. Some of it was to accelerate that trend. You saw the 77% reduction in major incidents. It was about shoring up our IT stability. We effectively said that run rate, that the depreciation is in the low 40s and that it'd be about 1.2 x for the foreseeable future.
We chose, particularly since we knew that we could manage, we could see opportunities in net working capital, and you saw that GBP 5 million positive inflow despite the fact we were growing. In essence, we kind of banked that and decided to accelerate some of the investment in IT and in packaging. How much of that GBP 55 could we live without? I reckon we probably would have to spend GBP 25 million-GBP 30 million a year just to keep the machine going. Is that fair?
Fair.
Charles.
Just on the Filters side, you've got a good improvement in operating margin given the volume reduction, and there was talk about operational excellence. Can you go into a little bit more detail as to, was that a series of small adjustments, or was there one particular plan in there?
No, we are blessed with a particularly strong set of site managers in our seven factories and led by a very high caliber operations team there. It's about continuous improvement. They're actually getting ahead of the game. If we talked about the sales and operations planning process, there is, by a country mile, they're the best exponents of it. It's just doing the basics brilliantly. There hasn't been anything else, and it's benefited from being probably the most operationally stable.
Is that improvement in margin sustainable or improvable from here with a, let's call it a flat
I don't believe that we will be flat this year. I think we'll see growth.
And-
Hang on, let me finish. You can't ask a question and then not wait for the answer. I do think we'll see growth. That margin, there is no reason it should be going backwards because it was about structural waste reduction. The benefit of quality. If your quality goes from six parts per billion to two parts per billion, the benefit is not the cost of those four less. It's actually just the enhanced, smooth processes. My favorite adjective for a factory, the biggest compliment I ever give anything, and it's a bit like Toby's presentation, Matt, is boring. You go into our Indonesian factory, and there isn't manic running around and mess all over. It's really quite boring. I think we're getting into that operating rhythm in all seven.
Is there a margin improvement because of having growth in the independents compared to the MNCs?
Not necessarily. I think it's more just, it's broadly similar gross margin, the actual conversion cost or whatever, it's just coming down through waste reduction and enhanced efficiency.
Last question on Filters. The growth in the independents obviously means that the MNCs fell by more than the reported numbers. Was that just programs coming on, coming off-
Yeah.
They could return to-
Yes.
Growth this year?
Yes. Yeah. I think if I took a 12-month period, say from September 2018 to September 2019 and that was our reporting period, you might see a different picture. It's with the churn. You remember I said there's about 15% or GBP 40 million of churn? It's actually reducing a bit, and it will reduce more the more our business waits to, say, either independents or patent protected heat-not-burn products or whatever. That's one of our main goals. Others do such a fantastic job that the customer doesn't particularly want to do it unless there's a hugely compelling reason, because he knows he may save a bit of money, but then will he get the same quality and service levels? I want to make that more, less of a kind of slam dunk decision for them.
Presumably in terms of stability, having more outsourcing contracts is going to be a core part of that. Can you just give a bit of a feel for what it actually means in outsourcing contracts in this context? Is that just a longer term, more certain program?
Yeah. It is because frankly, they don't have the kit anymore to do it. It's very difficult to make a filter if you don't have any filter making equipment. Either we just say, "Forget it. You don't need to do any more CapEx. We'll do it, or we'll take your machines off you," or whatever it may be. As we're having any one stage, probably three live discussions about this, ranging in size from a couple of million to GBP 10 million or GBP 12 million, that kind of order of magnitude. Anybody else? Shall we open it to the outside world? I'm hoping that somebody's saying or doing something in the back of that booth. Cheers, Toby. I think this somewhat uncomfortable silence in the main auditorium means nobody's got any questions.
Ladies and gentlemen on the phone, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced.
Go on, Lucy, get on your phone call. Pretend to be someone else.
There are no question at this point. Please continue.
Please continue means tea and coffee is served, I believe. Thank you very much.
Thank you.