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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Essentra Strategic and Q3 Trading Update Conference Call. At this time, I would like to turn the conference over to Paul Forman and Lily Liu. Please go ahead.
Thank you, Tracy. And good morning to you all and thank you for joining this call. It's Paul Forman here and I am with Lily. My intention would be to speak for 5 to 10 minutes and then hand over the floor to -- for questions. So there were 2 elements to the announcement we made today, and I'll take each in turn. The first was to communicate the Board's conclusion that both the growth aspirations of all 3 divisions and also shareholder value would be optimized by becoming a pure play Components business over time. And then secondly, we'll touch upon the trading update and the outlook statement. So the background to the strategic update and the conclusions that the Board have arrived at really has its origins going back to the earlier phases of our development, and our approach is always to have -- to stabilize the business, devise strategies and then grow. Over time, we have built 3 global leadership -- global divisions with leadership positions. I think that operationally, but also strategically, we continue to go from strength to strength, and we have weathered the COVID storm, I think, in very good shape and are highly esteemed by our customers and all 3 divisions, notwithstanding a difficult market context for Packaging through elective surgeries and prescriptions, have all progressed very pleasingly. We have to recognize, however, that there are -- they have 3 different growth journeys and limited synergies or overlaps. And therefore, when the Board stands back, it is a unanimous view that -- to achieve those twin objectives of optimizing growth potential and creating value. The 3 should have independent financing structures, partnerships or whatever else, and the PLC will evolve to become a pure play [ globe ] Components business in due course. The benefit of that is that the residual business will have the opportunity to accelerate its organic and its inorganic growth and will also -- each business will have an appropriate capital and ownership and potential partnership structure. The first step of that is, therefore, a review of the options for the Filters business. This will not be a quick process. We believe that any, if you like, concrete outcome is not expected before the second quarter of 2022 at the earliest. And in the meantime, the Filters division, which is making outstanding progress in its key game changes, it continues to win new outsourcing deals. We're excited about the expansion of the Eco program, and the China JV is also starting very pleasingly, so we will continue to invest in that and ensure that the Filters division really does build upon the outstanding progress made. Happy to take any questions and a few calls on that. If we turn to trading, a like-for-like revenue growth of over 5% which is driven by a very significant growth which is both, I think, self-created and [ use ] the market in Components. You can see there, they're about just shy of 30% compared to Q3 2020, which obviously was the second softest comp, Q2 2020 being the softest comp. [ Lean ] versus Q3 2019, 14% plus on a day adjusted basis. We're not unique in having supply chain challenges, but the business is both meeting those in terms of providing a sustained service level, but also putting pricing through to mitigate that. We -- 2 other highlights, I think, would be that one, we are continuing the rollout of the ERP system, and secondly, that the acquisition in China is going well with demand probably, if anything, somewhat exceeding our expectations. Packaging declined some 6% on a like-for-like basis, again, prescriptions and elective surgery. But actually, if we look particularly in America, the much anticipated recovery is beginning. And so therefore, a bigger challenge at the moment there is finding the labor availability, and also we're seeing early signs of board pressure as well as in cardboard, which is an equally big challenge in the U.S. I think it would be fair to say that we see some signs of a diminution in Europe of a year-on-year decline, but as we suspected, the U.S. is the faster market to recover. And our recent order trends for period 10, 11 would imply that there is some recovery of pent-up demand. And clearly, in the U.K. to be specific, there is speculation about the incremental GBP 6 billion that the [indiscernible] wants to raise to address that backlog, so that's a kind of concrete signal of intent. Filters, through self-help, particularly outsourcing, and now with China kicking in, is growing. And again, looking ahead, I think we feel that there's a very bullish outlook for Filters. It is definitely the strongest it's been performing in terms of top line and opportunities since I've been involved with the business for 5 years. If I then look at the outlook based on our order data, which shows no weakening of the upward trajectory in Components, I talked about the Packaging orders and Filters, we think that demand is holding up pretty well. The only soft part probably is European health care. And the challenges we face are as much about supply side as demand side, but fortunately, due to a heck of a lot of hard work, we are able to mitigate those cost impacts through pricing and sustain our service levels. So I think, ladies and gentlemen, I will pause there, and Tracy will open it up for questions. If you could facilitate that, I'd be very grateful.
[Operator Instructions] We will now take our first question from Andrew Douglas from Jefferies.
A few questions for me, if I may. Can I just double check the kind of the order of the potential reviews of the 2 businesses which you're looking to not own in the future? I'm assuming that Packaging will be done as and when Filters has been completed. It's going to be quite difficult, I suspect, to run a dual process, and I guess Packaging is not quite ready yet given what's happening with the trading perspective, but any view there would be great. Can I ask also kind of what's the -- I'm assuming that all options would be considered, you're not going to wed it to any specific outcome. And I'm just kind of interested as to what's the fallback option if 2 to 3 options don't get the -- the out of the number or the interest that you would expect? Third question is probably one for Lily. What should we be thinking about with regards to central costs? Is this -- is the central cost line something that you can kind of easily divide up amongst the 3 businesses going forward? And then I'll jump back in the queue for -- giving the people a chance.
All right. I lost my bet, Andy. I was sure Charles was going to be first. The -- in terms of the order, Filters clearly we are focusing on. Having said that, clearly, we cannot predict what this announcement will spawn. If we find ourselves in the situation of having 2 sets of discussions, and we thought they were the right thing for both divisions to optimize their potential, then we would find a way to do so. So all we've done is really signal an end game and a start point, and what happens between A and Z will be not left to the fate to decide, but we will -- we'll see what happens. It may be that this, as I say, does for certain responses in part, if so, I don't know. But we could theoretically have the capability to have twin discussions.
Okay.
And the second was the fallback option. If we look at Filters, we consider the, I think, Andy, a full range of options for monetizing value and for giving it the right environment in which to thrive, because it's actually doing fantastically well. So that could be a simple sale to a third party. It could be some kind of partnership with a policy that would take it forward. Or there could be capital market options as well, which would see it kind of plowing its own furrow. So everything is open for discussion, and we simply -- This is not us being clever. And actually, we've got a rabbit that we're unfurling. This is a clear -- it's a statement of intent rather than a hint of an imminent solution.
Yes.
Right, the last question. Andy, our central costs, look, as part of this reviewing, one work stream will be looking -- will be us reviewing the central cost, and you can see us study it and we're going to optimize the position with the direction of travel. It's slightly too early, Andy, for me to give any guidance at this moment in time.
I mean -- I think, Andy, if we can see Components as a pure play stand-alone business, you could see obviously that it can be skinny compared to the more complex structure that we have at the moment. So one way to look at it is to say, if you take the Components division and what would it take to be a fleet of foot [ skinny ] plc.
Okay. And with regards to kind of back-office shared service centers, we have kind of manufacturing distribution overlap, there's limited overlap, I guess, between the 3 divisions?
Yes. The one area of material commonality is IT, so we'd have to figure a way out of that. But since we don't know the scenario which we're operating at the moment, Andy, it's a bit difficult to speculate. But other than IT, most -- the journey we've been going in the last 12 to 18 months is very much about deploying capability into the divisions now that we don't need a heavier overhead to fix these businesses.
[Operator Instructions] We will now take our next question from Charles Hall from Peel Hunt.
I'm devastated to be beaten by Mr. Douglas, but there we go.
Yes. First time for everything, yes.
I know. I know. It's the sign of the end, the beginning of the end, isn't it? Anyway, speaking of the end, I suppose we're moving to an exciting new pure play business, but you've obviously given a view on timing. Just to be clear on that comment about Q2 at the earliest, is that meaning completion? Or is that meaning decision as to which direction to travel in?
I think we won't have a conclusion to this particular part out to the journey until Q2. Clearly, it doesn't take us 6 months to decide the best [ rate ] forward, and we will remain flexible. So there will be potential avenues we'll be pursuing, but we'll remain open to consider other avenues also.
Then so you'll be sort of having dual track processes as much as it's sensible to do so?
Exactly, Charles. [indiscernible]
We're not going to wake up in 6 months' time and you say, actually, we've reached a conclusion and nothing's happening.
I think it would be slightly foolhardy of me to announce today and then say, yes, we've decided that we think it's the right thing to remain in the shape we currently are, and that might be somewhat about -- still considered.
Yes. And you touched on capital structure. Is there anything to say at this stage of capital structure of the businesses if there was a sort of a market situation to be decided?
No. No. I think, as I say, I outlined 3 broad generic sets of options. A full or partial sale to an appropriate owner that would take it forward at some kind of structured partnership and/or a capital market option, and they all remain open to us at the moment, Charles. So I wouldn't prejudge it, but we're not ruling anything out either.
Perfect. And then just on the trading front. Obviously, very strong performance from Components and a bit of that will be price put through earlier this year, but I guess most of the prices was going in in Q3. So presumably, that's still going to drive top line growth, assuming the volumes stay strong, which it sound that they are. Is that sort of one of the points about why Q4 will be strong?
Yes, plus we're not seeing a dimming -- if we look at ratio orders to sales, Charles. And if you look at the LTM, which we do on a weekly basis, the slope of the graph hasn't yet lessened. I mean, I think, by definition, as the [ counts ] get harder and the rates of growth mathematically must diminish over time, but it's -- I think if you were to ask Scott or myself, we'd say we're 98% focused on supply side as opposed to demand creation at the moment.
And I think Scott said at the recent call was -- that you were intending to at least recover the input cost inflation. Is that still the thought process a few weeks down the line?
Yes. Yes.
Great. And in terms of the supply chain issues, obviously, every company is having to comment about them and they're real. Do you see yourselves in a stronger position than some of your peers because of the level of in-house manufacturing? Or is that irrelevant on the basis that you still need to get the raw materials?
I think we have certain advantages in Components, Charles, one of which is because of our relative scale compared to these kind of GBP 20 million businesses. We have more clout with purchasing. Secondly, our ability, particularly in Kidlington to use recycled PE, low-density polyethylene, gives us optionality, which other people don't because you have to set up equipment to do that. The third is that we -- because we have manufacturing in Asia, in Europe and in America, we have intracontinental as opposed to intercontinental of supply chains mostly. So that business is less reliant, except for product that we make in China and ship into Europe, into Kidlington is less reliant on freight stresses.
Got it. And so the comments you made previously about getting back to 2019 margins given the volume growth, given the price you're achieving, that seems eminently achievable?
It seems achievable. And the -- I would say we've got unprecedented uncertainty in all aspects of achieving pricing which we're doing. Cost of labor, cost of freight, availability of labor, underlying demand. For the last 2, 3, 4 years, Charles, you could basically take the -- if you got industrial production volume forecasted accurately, you'd have 4%, and you'd assume that there was broad stability in all the elements of the P&L below that. The budgeting discussions this year are going to have variables in every single line, and I can't believe we're unique in that
No, definitely not. And turning to a different issue on the Packaging side, obviously, you're talking about North America starting to improve. Are we now moving to a stage where it's more of an issue on the supply side in terms of actually --
Yes.
Having enough people to produce the product?
Yes. Yes. We have net recruited about 100 to 110 people in the last 2 months, and we're still light. And of course -- The other thing, Charles, is we have our main cluster of packaging manufacturing in North Carolina, which you may know is one of the worst hit, so we've had through active cases enforced, locking -- people locking themselves away, we've also had that as a double whammy.
Yes. And if you've managed to recruit that many in the last 2 months, would you think that over the next 2 months, you'd hope to get to the level you need in order to fulfill the demand?
Yes. Yes.
And presumably you're having to pay people more to both retain and recruit. Is that being passed on to the customers?
Broadly. It's not an exact one for one in terms of timing and level, but yes, we are doing more on pricing and packaging than I can recall.
[Operator Instructions] We will now take a follow-up question from Andrew Douglas from Jefferies.
Can you just give us an update on what you're seeing in China? I appreciate that China is not as big as we'd like it to be in Components, but hopefully will one day. But just what you see on the ground with regards to kind of power and whether that's been problematic for you or will be problematic for you over the next couple of months?
We haven't yet. It varies from province to province and from city to city. We are deemed in our joint venture in Fujian to be a critical industry, and clearly, given the importance of tobacco to the state revenues into government revenues, that's unlikely to change. I think what we're seeing, Andy, broadly is that we sometimes have 2 days of limited power, so we effectively move our weekend around to whenever it suits. Our recent acquisition hasn't experienced, the best of my knowledge, any power-related issue, and Ningbo is more like Fujian where we moved around. So it hasn't compromised our ability yet nor have we yet seen it compromise demand from customers who a bit maybe more affected. It remains a potential, Andy, but not yet. As I said, [indiscernible] has actually from a commercial order book point of view, started very, very strongly.
There appears to be no further questions at this time. I would like to turn the conference back to the host for any additional or closing remarks.
Thank you, Tracy, and thank you all for dialing in. We recognize it's half-term week, so not everybody will be around. But Lily and I realized that there's quite a lot to digest here and it'll probably take 24 hours to process it all, but through Peel Hunt and Jefferies, Lily and I will be available for discussions at investors' convenience over the coming week and a half. So delighted to mull it and kick it around with any of you on the call or your clients, for those of you in the sales force, over the next 1.5 weeks. So I will leave you in peace to enjoy the rest of your day, and just thank you very much indeed for dialing in. Thanks, Tracy.
This concludes today's call. Thank you for your participation. You may now disconnect.