Cigarette filters

With a little help from hindsight, most corporate stories can be framed as a morality tale. For Essentra, the obvious theme is hubris. A dull industrial spin-off dares to dream, and wanders from the business that made it rich (cigarette filters) towards more growth-friendly lines (healthcare packaging). Cheered on by the fickle crowd, shares soar, before two profit warnings in six months mark its fall. Cheers turn to boos, the boss departs.

The second warning came on Monday, driving shares down a fifth to the levels of early 2012. With five years of progress seemingly up in smoke, was the journey a waste? Colin Day, the chief executive whose (apparently unrelated) departure was announced in July but is yet to take effect, argues that his strategy has not failed. Rather, its woes stem from events Essentra can barely control: unpredictable clients, slowing oil exploration (hitting sales of pipe protection technologies) and poor integration of a recently acquired packaging business. A manufacturing site had to be kept open to avoid jeopardising a customer relationship. A US tobacco company has shifted operations to Thailand and disrupted Essentra’s sales of filters (still more than a quarter of revenues).

Yet the numbers match the hubris version. Since 2011, Essentra has tripled its assets to £1.5bn, expanded share capital and almost tripled net debt. Its reward: revenues only doubled, and operating income was up just 50 per cent. On S&P Capital IQ’s figures, return on capital has nearly halved.

This is harsh. Consolidating manufacturing sites is scratchy work but often reflects the fragmentation that ultimately justifies the effort. A dozen previous purchases were perfectly well integrated.

In a proper morality tale, crippling debt would be forcing the company into a fire sale of its acquisitions. But while it was hubristic of Mr Day to have called June’s warning a “blip”, Essentra has been taken down a peg, not forced to star in a tragedy.

Email the Lex team at lex@ft.com

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