Earnings Call: H2 2018

Mar 1, 2019

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 Foreman, and 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 The patient is, if not fully, fully recovered, we're probably tottering out of the recovery ward and taking our first few steps on a 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, and the strategic initiatives are consistent and being delivered. For the first time since 2015, and it's interesting that roughly half the senior team in a center 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 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 the first time he's ever come, so you can read into that what you wish. Those of you later who are house famed for a coffee can pet for him with questions. Scott normally turns up, but I don't think Scott is here because he's in Asia. So by their actions, should you know them? Components had another very strong performance in the year. The acquisitions that we did both the back end of 2017 and midway through 2018 are performing in line. Our like for like margins are being sustained. But 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. And 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 Osheen Cassidy, who's come as group HRD. So welcome to you. She's been in situ about 5 weeks. She told me it felt about 5 years, but I'm sure that was slight exaggeration. At Pipe Protection Technologies, we announced that disposal to NOV. That obviously will have strengthened our balance sheet further and we'll give you some feeling for the impact there. And 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 I'm, is that the way forward, the vast, vast amount of that is actually value levers that in our control. And if you look at the 3 largest divisions we would argue strongly that packaging because it's basically around pharma and filters because of cigarettes are have strong defensive qualities and so far the last few months are bearing that out. So on behalf of the board, we would say that we are pleased with overall progress and 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. So 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 and Lily put some scale around this if you take into account a one off increase in things like reward accruals, etcetera, it's underlying me much stronger than that, stronger than that. The reported operating profit 47 versus 5, and then EPS up 2.3%. Good cash conversion, again, we do make that quite a big focus of our culture now and there's about 0.2 times reduction in the net debt EBITDA following PPT and the dividend has been maintained at 20.7. 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 Jan 1, 2017 was -10.6 percent. You can see that actually now that position is reassuringly, above the Y axis now. And if you focus specifically on packaging, and people have really been waiting to see when this inflection point occurs, you can see there that 7.7% in H2. Now clearly that's against a weak comp So please don't necessarily just print 7.7 percent and copy paste across your spreadsheets at infinitum, but 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. And what we are seeing is that And you'll recall, I said no customers actually left us, but the share of wallet is increasing with our very robust blue chip customer base. Again, what was the position we inherited on Jan 1, 40% decline in operating profit underlyingly You can see there that there's an increase in trend, 13.5% on H2 'eighteen on H2 'seventeen. And 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 bps versus the same period in H2, 2017. So encouraging progress there. Looking at each of the divisions very briefly, and we'll talk more about strategic progress in a minute highlights, components like for like growth of 6%, Tele2 halves, it's lower in H2 versus H1, the operating margin that being questions about the sustainability, if you bear in mind that both microplastics and flotilla had a lower margin coming into the group, broadly, the margin has been maintained. And what is noteworthy is that their average margin which are on coming in on a kind of blended basis was about half components. They are now at the kind of typical components level. So 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 and that 4th 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. But that's a vital tool in our armory. As I mentioned, microplastics and hottila going well, not just in financial results, but in the underlying trends that we have or KPIs that we set for them. And we do have an increasingly strong M and A pipeline clearly, we want to do more of these microplastic type, acquisitions I'll talk more strategically in a minute. But that is coming on nicely under the leadership of Katrina Fitzgerald. Packaging 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 to 250 bps 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. And 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 were making we were prioritizing, if you recall, both IT and packaging because packaging, had been under invested in Those are delivering margin opportunities, but critically, 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. But there are some pinch points in fit areas like complex literature. And so we are investing to support growth there as well as to support margin improvement. We did make an announcement about a site in America and Largo and Kilmarnock effectively now at all, but the margin, we are a pure play health and personal care player now. And 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. And as I've demonstrated already, and 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. Good. Few. Got the right letter. So that was some moderate, revenue decline, but we are seeing a stronger uptrend, particularly in the independent sector. We have 5 Multinational customers, the 5 And then we serve about 300 odd independence. And for the first time, I believe, we are now selling more to the independence than to the multinationals, which probably speaks inherently because not all three 100 are gonna suddenly leave not least because they don't have any alternative pretty much. So I think that points to a greater stability. And 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 1 100% quality and 100% on time in full for say 6 months in a row, which is truly outstanding. And 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 and I've met here looks after VAT, so knows better than me, probably more change in the last 2 years than the last 22. And there are great opportunities both in combustibles the standard products and in next generation products. I'll talk about those 3 game changers in a minute, but we have got positive discussions and we have had a win in outsourcing. So next generation China and outsourcing, I'll talk about that in a minute. Specialist components. I don't know whether portfolio 6 can be a game of 2 halves, but tear tapes had a tough 2018 mostly because of it's I think over exposure to 1 segment, namely the tear totes that go around cigarettes. If you look at that portfolio for the other 5s actually achieved 2.2% revenue growth and 200 bps improvement overall in margin. So good progress there. Effectively, every business either was stable or grew with the exception in tear tapes, tear tapes and extrusions are 2 Large European businesses, we are basically doing a root and branch assessment of our approach to costs there. And I think that we will be fundamentally reappraising, how we go about on what the best business model is on those 2. But overall, with the exception of the one business in the 6 good margin progress and underlying revenue growth. So actually, we've had good margin performance in pretty much the whole portfolio. Lily, Good morning, Hall. And look, I'm delighted to be here standing alongside Paul to present a good set of results for 2018 for Ycentra. As Paul mentioned, This marks a significant milestone for the company is returning to growth of 2018. Overall, looking at our result, our revenue printed at 1,000,000,000 a pretty good 1.9% constant ForEx improvement year over year. And, and you look at operating profit, it's CHF 19,700,000, a 9% growth, a constant currency and 8.8% operating margin of 50 bps improvement, it was pointing out and Paul has already pointing out that second half of the year, OP grew by more than 13% also worth pointing out if you, it's exclude some share based payment sort of build up, from nearly 0 in 2017. To almost CHF5 1,000,000 in 2018, the year on year operating profit growth is actually 14%. That's a very strong growth for the underlying business. And our earning per share is 23.1 k2.3 percent growth. Now putting revenue by division onto one page, Again, at constant currency, our component revenue 1,000,000, a 6% like for like growth and reported growth at constant currency under 15%. As Paul highlighted, the 2 acquisitions we made the Hatila and microplastics are performing to expectations. Packaging revenue, CHF 342,000,000, 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% year over year. You look at the second half, as Paul already mentioned, is nearly 8% growth on the top line on that basis. Futus revenue CHF260 1,000,000, and like for like is just under 3% decline, it's pretty much the characteristics of the tobacco industry pipeline volatility And we did see good growth from independent customer base in China, India and Middle East, as Paul mentioned. A specialist component of modest decline, largely the result of Tier tapes, volume decline, as Paul mentioned, So overall, 1,000,000,000,000, a 1.9% growth year over year. Turning on to operating profit by division, component delivered a good robust operating profit of CHF60 1,000,000, a 13% growth year over year, 22.1% operating margin, It's marginally about 30 bps decline from 2017 and there's a couple of the 2 acquisitions we made in the last 18 months to 18 months, actually 12 months 12 15 months there's a little bit of a dilutive effect and also we made some, measured investment into the business to support long term sustainable growth above market. Turning on to packaging, 5,400,000 profit, a 200 bps improvement on operating margin. That's a good performance. 2nd half was particularly encouraging with about over 300 bps improvement like for like. Despite the 3% like for like revenue decline in the top line for futures. We've seen good margin expansion of 60 bps, thanks to the, a great result from the operations excellence program. Specialist component decline of profit margin was driven by Tier tapes, and from the volume. And and this has more than offset the good margin expansion from the other 5 businesses. And second half margin show us more 30 bp improvement. Central Service costs is pretty much in line with half year annualized results slightly up. I said mentioned a moment ago, we had to build up a nearly CHF5 1,000,000 or CHF4 1,000,000, a share based payment. Some some cars are booked in the central. And I will say central cars, we we it's likely to go up by about 50 bps from where it is today on revenue. We continue to invest and we have invested and we're continuing to invest in our people and process to future proof our business. Over time, this percentage come back down after VPR program kicks in Paul would introduce PBR program a bit later. But you can see the benefit of center provided supporting us robust and solid business performance. So overall, I want to just reiterate a 1,000,000 operating profit printed a good 9% growth, excluding the share based payment build up, from nearly 0 basis, and 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 a higher average net debt. Effective tax rate is 19.5%. I mentioned this is 50 bps 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's 0% corporate tax rate territory. The increase in minority interest this year compared to, previous year, again, is driven by the fuses JV in Dubai and India. And as we state, there's good growth from independent customers, and we continue to see that. We reported a CHF 20,800,000 exceptional costs and other adjusting items you can see it's largely made up of some closure costs associated with the 2 packaging sites Paul mentioned and CECL production at Nottingham for Specialty Tapes. Some transaction costs associated with acquisitions and divestment As M and A is part of our strategy, it is especially for our component business, it is reasonable to actually expect some level of M and A transaction costs going forward. Cash flow. Adjusted operating cash flow for 2018 was 1,000,000. 85% cash conversion. That's a good strong cash conversion. It is 10 percentage point we'd 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 and we did spend a little bit more on IT. Now going forward, I would expect our CapEx to be around the CHF 55,000,000 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 bps to 13.7 percent 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 of free cash flow is, 50,000,000. Net debt On a constant currency basis, it's moved up by about 1,000,000 just over 1,000,000. And really this is paying dividend and we spent money on exceptional, except items as well and offsetting the very strong free cash flow generated by the business. Our net debt to EBITDA ratio is 1.8 and, as Paul mentioned, a pro form a reduction of 0.2 from PPT disposal. We maintained our dividend payment at 20.7p for 2018. Just a moment on the PPT. On 14th January, we announced the divestment of PPT business to NOV at $48,000,000 on a cash free net debt free basis. This represents a good value to our shareholders. It's about 6 times on the more than 6 times 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 pro form a basis, as I say, this 0.2 reduction on our net debt ratio, and the mid single digit reduction on UPS, we estimate a pretax gain on disposal somewhere about GBP 4,000,000 will be about GBP 4,000,000 subject to audit Braxxet, 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. And we have short term mitigation actions in place, largely it's 4 to 6 weeks of stock build in our supply chain, some hours, some, our suppliers, and clearly there's a variation by division as well. Now in the worst case of of us leaving the EU without the deal, we expect a million headwind in the P and L charge on duties and cost customs associated costs cannot be passed on immediately. And we also expect Essential to build inventory by about GBP 3,000,000 3003 P and L and balance sheet. Once we have more clarity on the nature of the exit deal, there are additional mitigations we can investigate. Now I'm hoping I'm not alone finishing a finance presentation on accounting high, a IFRS 16 lease consideration came into effect 1st January 2019. We have done lots of detailed work assessing the impact for our business. It's in a nutshell from a P and L perspective, minimum impact on the net income but it will be a couple of 1,000,000 gross up on EBIT and a couple of 1,000,000 higher interest charge. From the balance sheet perspective, again, if you look at net asset, will be a moderate reduction of 1,000,000 to 1,000,000, but we have to gross up asset by about 1,000,000. So on that high, I'll pass it back to Paul. Don't worry, everyone. We will leave about half an hour in the Q And A for forensic dissection of IFRS 16 and its implications, I'll go to the pub, I think. Right. So our journey has always been a similar 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, so what are the important parts and the first four elements there? Are the constituent metrics of that journey and our progress. And I'll take you through each in a minute. We've added a 5th 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 ten people, but it's 810 people who are really driving that. And that's an increasing part of our management agenda, we've kind of, if you like, earned the right to stabilize. And if you were to ask me I would say or the Paul List of the Chairman, we're probably marginally ahead of where I thought we would be on this agenda now. So that's kind of quite encouraging. So we love our customers. We're trying to earn their love and we are earning their love I think now I'm getting it back. Service critical. You can see there our measure is on time in full. Components moving up materially 200 bps, filters 98.5 that I don't think any of the manufacturers themselves would get to a higher figure than that, so that generally is world class. Packaging, you can see plateaued, but actually, for the 1st 3 quarters, it was higher than that, in and the team of 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 Clundalcan in 2015, is it 2015 yet? We haven't actually had a top line volume growth experience. So It does put different pressure pressures on the business in terms of efficiency of planning. As I mentioned, there are 1 or 2 hinge points in capacity. That trend is now improving again in. But that's why we saw in Q4, some kind of pressure. Our key focus in Packaging is to sustain the, sales growth and volume growth, but because operational gearing is our biggest contributor to profit growth It's now about making sure that it drops through to the bottom line in full measure. So sales growth was a necessary, but not a sufficient condition for profit growth. But now that is well set in and the team are really looking at operational gearing to drive that next tranche of 20 to 25 at 200 to 250 bps, in progress on margin in 2019. Quality, you can see that over the last 2 years, a 28% improvement in incident rates and components, filters, 66, so 2 thirds improvement, to put them in context, we now, for every 1,000,000,000, products we supply, 1,000,000,000 we have 2 complaints. So that's pretty, pretty world class. And 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 70% reduction over 2 years and specialist components, again, good performance there, 17% year on year. We can't have a 16 just because of the difficulty of comparable numbers. IT, IT, was it Kelli that was written on Mary Queen of Scott's heart or something like that. IT is written on my heart somewhere. It still is one of our biggest challenges But we have focused on getting the basics right. We have long way to go in IT, both in terms of addressing stability, but also then harnessing it to improve the operations and efficiency, more generally across the group. But what you can see here, this is the major incident rate these are kind of key problem IT issues and that's seen a 75% reduction in 12 months. So we now have 1 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 employment engagement surveys, employment engagement surveys also corroborate that. This is a very, 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? So I'm delighted see that the number of lost time incidents has virtually halved in the space of 12 months. And 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. In inherently, if you have unstable processes, you're more to have accidents. So this speaks both to a cultural and to a process improvement. If our number one job is to as senior leaders is to keep our people safe, the way that we will sustain it and our number 2 job of senior leaders is to make them want to come to work in the morning. That's what I say every factor I go to. And I passionately believe it because it does become self sustaining. And 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 aren't remotely satisfied about that. We want to be an upper quartile and we think in a couple of years, we will be. But the strength that we're now, being seen by our people as having our commitment to quality and service, you can obviously see the parameters I showed before, but this is really saying that our people notice that they are feeling safe. They understand where we're going. I went to our Indonesian factory, about a week ago, and I actually asked the factory workers individually if they say what the 3 game changers were. And a relatively high number could actually give me all the 3 and that we 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 job. We need to be better at communicating internally. And 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. So that's another area where we're looking to progress. The 4th item was financial stability. I won't try and compete on the brainy number stuff, but in terms of qualitatively, Those of you who know me and Lilly shares this, we've talked about this net debt to EBITDA ratio 1 to 2 times particularly in the context as I see it, we're going to keep that. Let's just leave it like that. And PPT, as Lilly's already explained, has put it firmly in that ratio. I do think that in terms of risk management, therefore, preservation, we have gone from being not very good at all to what external experts would say is probably upper quartile for 1,000,000,000 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 has already talked about the improvement of 120 bps on sales to net working capital, will we keep that measure forever? Probably not, but is it right in cementing the behaviors and mindsets? Absolutely. We did get the RCF in place in 2017. So that's good for 2022. And then we have different USPP tranches, which will be coming from maturity. So qualitatively, as opposed to numerically, I do think that we have that financial stability now as well. As I mentioned before, all those 4, if we want them to be self sustaining and if we don't want it to do We don't want to do it to people. We want them to do it for themselves. We need the cultural architecture. Unusual for results presentation, perhaps talk about purpose values behaviors and our internal brand, but we do believe that if this organization is to sustain it without massive senior intervention, this is important. So what are those for? What's our purpose? We want to make our customers more successful as businesses. So 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 a supporting, actor. So we are not Hamlet. We are Rosencrantz and Guildenstern or whatever it was. That's dragging up from my English. And so 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's why that is the kind of zeitgeist. That is the the continuum, and that we're very proud to be, have as our goal and our purpose. We need values. These are the 6 that we developed and you've seen examples of them already. These 6 if you go to anywhere in Ecentra, you will see a link 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, etcetera, bottom line there, we do think teamwork is important We do think that we don't want to be a bunch of free Madonna's. We do want to be, if you like, every man I think is if you're into your union archetypes, every man is the 1 of the 10 that we aspire to be. And then to cement all of that and this informs all of our internal communications, the internal brand is about we make it work So we make our customer work as a business, we make communities more successful, etcetera, etcetera. And that informs, as I say, the full gamut of internal communications. So those 4 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. So if then I move on to strategy, forgive me that I'm just going to just going to remind you what we said almost exactly 2 years ago. That we had a strong strategic handed cards, but a number of self inflicted wounds. I think this has resonated with something I have it played back a lot to me when I go and see investors. We are number 1 or number 2 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 lilies are really shown, a 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. They went very quickly. Poor IT It's now average IT. There's a lot to do, but we can also put it on the front foot, but you saw that, 77% reduction in major incident. Lack of strategy, I've spent 2 years discussing strategy, the strategies that we launched, in July 2017. You've seen that The packaging thing is now progressing nicely. Mural, you've seen employee engagement. Of the 6 ladies and gents, this is the one that 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 is 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, 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, Europe, generally North America including Mexico, and Northeast Asia, in particular, China, is the focus at the moment. Packaging merited 4 columns as opposed to the 3 columns, such was its challenges, fundamentally The farmer packaging market is growing. It can sustain decent margins and it's quite sticky and it is globalizing. As you can see, the 2017 to 2018 is all in red with 2 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 Iain has got it well in hand. And 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. So for a year or so, we just said, forget that just focus on service and quality now very much we're looking at margin. The rest in the 2018 to 2019 is making very good progress. And what we are seeing, which is interesting, is that 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? And indeed Ian and I going over to India in the next couple of months to potentially look at partners or more long term tie ups. And 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 5 or 6 other live conversations. Heat not burn, we are dealing particularly with all of the MNCs involved in it. And also about half a dozen companies in China. China seems to be making a bit of a a move on the heat not burn market primarily for export, well, uniquely for export because heat not burn is banned in China currently. So I think have given ourselves to the end of the year to prove or disprove the capability of filters to, embrace and build these 3 game changers and we are sticking to that, but I would say it's encouraging. Then talked about process. This was the 6th of the 6th self inflicted wounds. Essentially now we are undertaking focus not on stability, but on efficiency. And so we are literally about 1 month into what we think may be a 5 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. So for instance, if an AstraZeneca or a Smith Klein wants us to be with them seamlessly across the world having that 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. So we're just flagging that that is a program that we are initiating now as we move from stability to productivity efficiency, etcetera. There's also, and Lily talked about the slight increase 50 bps, 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 belt 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. So something like a sales and operations planning process which is a medium term forecasting to optimize the configuration capacity planning, etcetera. These are kind of muscles that we're now learning to develop as an organization. So I think overall, if I were to summarize our journey, I would say the stability were 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 compromise on value and maintain financial discipline to do maybe another couple this year. But also for me, the key focus, we can't do anything about the underlying industrial output globally for what we can do is maintain our focus on pricing excellence and on market share gain. So 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 in a really good got some really great momentum. So it's about translating that sustained sales growth into profit growth, obviously, as the margin improvement, we expect profit growth to materially outperform sales growth. And then filters, it's about innovation. And then it's continuing over the next 10 months to prove or disprove 1, 2 or 3 of these game changers. With specialist components, last August, Tim shared with the value creation strategies, we continue to develop all of those. So 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 and me not to say that particularly for components as opposed to the other 2 major divisions, There is a more uncertain macro environment. I do believe we'll do better than the market. I do believe we'll continue to drive, pricing. But 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 20,089, but who knows? Packaging and filters, relatively noncyclical, to the best of my knowledge, people do not get fewer headaches or smoke less in times of recession. Arguably it's countercyclical, I suppose. So I do think if you look at the defensive qualities of our portfolio, it's actually pretty robust. So we've got good cash flow characteristics, a sensible level of gearing and 2 of the 3 larger larger divisions are, I think, pretty non cyclical and that's being borne out by the last 3 to 6 months. So overall, I would say that our outlook is stable, sorry, matter can't use a more flamboyant adjective, but stable is what it is. Because most of the value levers with the exception of global GDP, are in our control still as hopefully I've demonstrated. So to conclude, 2018, I think was you should think of as a year of inflection. And a year of material progress strategically operationally and financially. So we've now got half an hour for IFRS 16, which I will personally take any questions on that or embedded derivative accounting? What 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? John Hall from Peel Hunt. Can you 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. And 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. We have acquisition conversations going on in all of those three geographic regions we talked about. So North America, Europe and Asia, I would say whilst they vary, Charles, microplastics is a pretty good model. It'll be a little bit smaller, a little bit bigger cap, but broadly, that's a good model. We have 5 live discussions going on at the moment, 4, 5. In that order. Maybe I shouldn't have said that. Oops. So yeah, it's active. You must know, and I can see there's some bankers in this room as well, that the 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, And then you look so the disposal multiple and the acquisition multiples that we've done the others on, I think you should assume broadly 8, 7, 8 times EBITDA or something like that? Is that reasonable? Something like that. And 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. And obviously, you talked a bit about those. Can you just remind us what you see as acceptable margins in packaging? Yes. I think with the business model we have and the geographic focus we currently have, 8% to 10% ROS is a 2021 target, with a Is it 8, 9? 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 kinds of things. You should think of this as a kind of, yes, 200 to 250 bps 2019, 2021 sequentially, something like that. What was the second part of the question? No, that was it. That was the question. Go ahead. I'm not going to ask you any one question, Charles. And so the the improvement in that margin sequentially, nothing 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 ear, 60% of that is operational gearing, but we have invested in productivity. And also in these pinch points where all your capacity constraints can probably get, so there'll be a slight mix benefit as well. Unequally, if you look at the packaging industry, it is in terms of its process, pretty cottage like So I think what you'll see is continuous improvement and process redesign over time in came from Rexam. And I think if you compare and contrast how you make farmer cartons compared to the beast that is Ericsson production lines. It's very, very different. So that's why I'm saying Let's get to base camp of 8% to 10% in 2021, then let's look at what's achievable above and beyond that because I believe there is because and I believe that the HPC segment, we are focusing on mono maniacally can sustain that, but I think we can improve beyond that from 2021. Is that fair, Sorry, Tom Seis from Deutsche Bank. Just on, components first, the pricing power that you have there to offset any potential slight slowdown in volumes. And 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 chunk, a large chunk of repeat business and perhaps some that is a little more volatile, but you could characterize the spread of type of volume that you have within there would be helpful as a start, please. Yes, I mean, The important thing is, Tom, if you look at, our profile, We are it's actually quite similar to picker products at random thread, for instance, which is a very small part of the total cost, but it's very important to continuing the production line or whatever 90% of what we do ends up in a finished product. It's not 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. So the average transaction size is tiny. So pricing power is not the word, I think pricing opacity, and also the relevant of service reliable service and ease of lookup compared to the cost. I mean, if you are we do spaces, 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 because these things will go for 0.1 of a pence each. He's not going to spend his time to get from 0.1to0.09 or whatever it may be. That's not the nature of the industry. You're right. We serve when we did our strategic assessment, we did what all good ex Spain and McKinsey consultants do. Look for patterns for margin by end market or customer size, etcetera, that genuinely wasn't a huge differentiation. And Other manufacturing was the largest product category that we serve as opposed to auto or electronics or whatever. So We reflect global manufacturing output. We mirror almost in our spectrum is equivalent to that. So yes, automotive will be a bit more cyclical than say appliances, white goods or whatever. But I think as a proxy, just look at global industrial output because we pretty much mirror it. Okay. Thank you. And then just on Packaging, then you mentioned some supply, 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 the right to have constructive dialogues with our customers, pricing is coming under focus. So, 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 it be loud in the door, let alone open our mouths? So 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. Now clearly the financial progress lags the underlying progress in the foundations and you've seen there that we're much, much more stable. So 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. And sorry, again, well, I've got the mic, but You mentioned poor IT and that you're improving it. And then you mentioned you're putting an ERP system in. And there's a bit of an intake of breath when somebody, if your backbone isn't necessarily as strong as you'd like it, but then 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 it can we is there any free reference? I'm not going to give a commercial break for which particular brand of ERP software it is, it is not an SAP or 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. So 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, but the profile of say components, which has 100 of 1000 of products and 100 of 1000 customers and 100 of 1000 of transactions and filters that had 305 customers and 1000 product lines, it's totally different. So 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. So it's really just a judgment we're making on house able to businesses. But if we are truly, to get an extra 100, 200 points of margin, a frost the group through efficiency, we have to have something like that. And 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 going to go as vanilla as possible and everybody nod sagely. And then vanilla soon becomes neapolitan and then it becomes the amazing ice cream cocktail known to man. And that's when it starts falling down. Here we've got an opportunity pretty much with a blank sheet of paper and a lot of processes. Okay. Thank you. But we are so risk aware, I can't tell you. But we have to do it. James? A couple of questions from me. I'm going to go back to Components again, surprisingly. Looks like your organic growth slowed somewhat in second half from sort of 9% around the sort of 3 3.5% mark. Are you able to give an indication of what the exit rate was and, what trends have been like in the 1st 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 going into 2019 albeit cognizant of macro uncertainty. And then the second question is related to PPT. And just trying to get a feel for the level of margin dial it or the level of margin headwind that causes a group level in 2019 without having come out. Right. I'll take the first, Lily, you take the second. So components in the start of the year I think the formula you have is, Global Industrial Output +4 percent being price and market share gain. So you have to you can So it's X plus 4. The bad news is you have to come up with X. I'll come up with a plus 4. So 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 20seven-eight felt for those of us long enough in the tooth to remember, Charles. But I would say at the moment, if you ask me, Q3, we probably saw we were seeing underlying volume growth 3% to 4% I reckon it's flat now at best. Now I don't know. These things obviously have a whiplash, so whether or not that's people suddenly pulling back. I don't know. You guys talked a lot more industrials than me, but if the likes of people who served the same market specs as us are experiencing, underlying volume growth then. That's would surprise me. You're looking skeptical. No, James? Yes. On PPT, Look, we, as I just mentioned, I think it's mid single digit EPS dilution, I think, at the OP level, route number about 5. Any other questions in the room before we go to cyberspace? Not in cyberspace, Toby Thornton from Edison. Just CapEx question, please. I think you've indicated another good chunk of CapEx this year, about 55,000,000, which is Still a good margin above annualized depreciation of kind of mid-30s or slightly better than that. Can you give us an indication of where you think, I'm not exactly sure what your, your maintenance growth or your maintenance CapEx number is within that 55 if you could give us an indication of, where the growth CapEx is going and perhaps indicate how much of that 55 is going to Central 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. So that would be a nice problem, Toby. Why did we spend more than perhaps a 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 we'd be at about one point two times for the foreseeable future. We chose particularly since we knew that we could manage, we could see opportunities in networking capital you saw that 1,000,000 positive inflow despite the fact we were growing. So in essence, we kind of banked that and decided to accelerate some of the investment in in IT and in packaging. How much of that 55 could we live without I reckon we probably would have to spend 25 to 30 a year just to keep the machine going. Is that fair? Charles. Just on the filter side, you've got a good improvement in operating margin given the volume reduction and to talk about operational excellence. Can you go into a little bit more detail as to was that a series of small adjustment or there one particular plan in that? No, we are blessed with a particularly strong set of site managers in our 7 factories and led by a very high caliber operations team there. It's about continuous improvement. They're actually getting ahead of the game. So if We talked about the sales and operation planning process. There is, by a country mile, they're the best exponents of it. So it's just doing the basics brilliantly. There hasn't been anything else and it's benefited from being probably the most operationally stable. And does that, improvement in margin sustainable or improveable from here with a let's call it a flat? Well, I don't believe that we will be flat this year. I think we'll see growth. Wangon, let me finish. You can't ask a question and then not wait for the answer. So 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 you if your quality goes from 6 parts per 1,000,000,000 to 2 parts per 1,000,000,000, the benefit is not the cost of those 4 or less it's actually just the enhanced smooth processes. My favorite adjective for a factory, the biggest compliment ever give anything, and it's a bit like the Tonet's presentation map is boring. And you go into our Indonesian factory and there isn't manic running around and mess all of it. It's really quite boring. And I think we're getting into that operating rhythm in And is there a margin improvement because of having growth in the independent as compared to the MCs? Not necessarily, I think it's more just broadly similar gross margin, but the actual conversion cost or whatever it's just coming down through waste reduction in enhanced efficiency. And last question on filters. The growth in the independents obviously means that the NNCs fell by more than the reported numbers, was that just programs coming on coming off and they could return to growth this year? Yes. It's if you if 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. So it's with the churn. Remember, I said there's about 15% or 1,000,000 of churn. It's actually reducing a bit and it will reduce more to more our business weights to say, either independence or pattern protected, heat not burn products or whatever. That's one of our main goals. And others do such a fantastic job that the customer doesn't particularly want to do 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? So I want to make that a more less of a kind of slam dunk decision for them. And presumably in terms of stability, having more outsourcing contracts is going to be a core part of that. Can you just give a a bit of a feel for what it actually means in outsourcing contracts in this context. And is that just a longer term, more certain? Yes, it is because frankly, they don't have the kit anymore to do it. So it's very difficult to make a filter if you don't only filter making equipment. So either we just say forget it, you don't need do any more CapEx, we'll do it or we'll take your machines off you or whatever it may be. And as having any one state probably 3 live discussions about this ranging from 1,000,000 to 1,000,000 or 1,000,000 that kind of order magnitude. Anybody else? Should we open it to the outside world? I'm hoping that somebody's saying or doing something in the back of that booth. Excuse me. I think this somewhat uncomfortable silence in the main auditorium means nobody's got any questions. Go on, Lucy, get on your phone call. You pretend to be someone else. And there are no questions at this point. Please continue. Please continue means tea and coffee is served, I hope. Thank you very much. Thank you.