De La Rue – Some Progress in Tough Market

De La Rue’s results for the first half of the current financial year (FY) – 2022/23 – saw sales and profits fall, along with a reduced overall profit guidance for the full year. However, although the markets were unimpressed and the shares dropped sharply, there was some positive news too on the progress of the company’s Turnaround Plan, and on its future prospects.

Revenue of £164.3 million was 8.3% lower than the same period the previous year. Gross profit from continuing operations at £41.8 million was 13.8% lower, with adjusted operating profit falling by 46.6% to £9.3 million. However, this result was in line with the company’s previous adjusted operating profit guidance given in July.

Using IFRS standards (International Financial Reporting Standards), the company reported an operating loss from continuing operations of £12.6 million compared with an operating profit of £13.6 million in the first half of 2021/22. The major difference was an exceptional items charge of £21.4 million (which included £19.3 million relating to Portals Paper, and £2.5 million of non-cash additional expected credit loss provision on investments). The company noted that the exit from the Portals agreement was going well, with orders placed with five paper mills being at a lower aggregate cost.

Currency division revenues fell by 12.3% to £116.4 million due to significantly lower banknote volumes, a consequence of central banks using up excess stocks built up during COVID (a trend seen across the banknote printing market). The 12-month order book stands at £177.7 million, an increase from the start of the financial year of £14.2 million.

De La Rue’s CEO Clive Vacher noted that, in implementing the Turnaround Plan in the last two and a half years, the company has dealt with significant legacy issues, and is now well positioned to weather the current operating environment.

In the last two years the Authentication division has achieved 22% revenue growth and adjusted operating profit growth of over 50%, and the loss-making Currency business has been transformed into one that is both profitable and increasingly stable. The company’s investment programmes are proceeding well with the second polymer line completed and operational within budget, and the near doubling of the Malta factory proceeding at pace, he said.

The company’s plans for the next three years are aimed at continuing growth in the Authentication business and solid returns on the investments made in the Currency business. Further efficiencies are expected to save an annualised £12 million, and in the next financial year the company will generate free cash flow and see an improved EBITDA.

Business update

Since the implementation of the Turnaround Plan, the capacity to manufacture polymer substrate has doubled. Polymer has increased its share of the banknote substrate market from 3% to 5% and De La Rue’s share has increased to 34%. The number of banknote printing sites has been reduced from five to four, with Malta transitioning into a 29,000 m² state-of-the-art manufacturing site serving both divisions.

By the end of the last financial year, the company had made £36 million of annualised savings, some of the legacy structural issues have been removed, the R&D teams have been consolidated into the Basingstoke site (the company’s HQ), and the company transitioned to a divisional structure comprising Currency and Authentication.

In the last two years, operating profit from both divisions increased from £1.4 million to £35.8 million and adjusted operating margins from 0.3% to 9.6%; in Currency the adjusted operating loss of £9.4 million was transformed into a profit of £19.5 million.

These actions, among others, have put the group on a much firmer financial structure, the company stated, enabling it to refinance the business with facilities running up to January 2025.

Outlook

Given the unpredictability of the external environment, and in particular the timing of customer orders, the company stated that the range of outcomes for adjusted operating profit for the full year are larger than normal, giving a guide in the range £30-33 million. This is below its original guidelines for the full year, which were in the £36 million range.

Further, the company indicated that it has a compelling, value generating vision for the next three years, having positioned the company for positive growth when markets recover, and by 2024 expects to be a free cash generating business on a sustainable basis, with improved EBITDA.