De La Rue Plc - Turnaround and Trading Update
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DE LA RUE PLC
TURNAROUND AND TRADING UPDATE
De La Rue plc (LSE: DLAR) ("De La Rue", the "Group" or the "Company") today announces the details of a turnaround plan for the Company (the "Turnaround Plan") following completion of the planned business review, together with a current trading update.
Trading during the second half for both divisions has been satisfactory, and the Board reconfirms the current guidance for adjusted operating profit for FY2019/20 of between £20m and £25m.
The Group expects to operate within its banking covenants for FY 2019/2020, including the net debt/EBITDA covenant of ≤3.0 times and maintains a good level of liquidity headroom under its £275m revolving credit facility which expires in December 2021. The covenant ratio excludes the pension deficit liability.
The Turnaround Plan is based on more than three months' data-driven intensive work by an extended leadership team and covers the three-year period from FY 2020/21 to FY2022/23 inclusive.
De La Rue plans for the Currency division to return to progressive margin growth, beginning in FY 2020/21, driven by cost reductions, and investment in polymer and related features where there are attractive market growth opportunities. Demand for currency continues to grow worldwide and De La Rue aims to maintain its number one position in the commercial currency print marketplace, while taking advantage of shifts in the market.
De La Rue is also targeting continued strong year-on-year growth of its Authentication business during the three-year period of the Turnaround Plan, driven by further, largely project related, investment.
The Company completed the sale of its International Identity Solutions business in October 2019 from which the Company received £42m in cash. The UK Government has announced a phased transition to the new supplier for the UK Passport production contract during calendar 2020, which is a material contributor to FY 2019/20 profitability.
Going forward, the Company will have two strong divisions, which have leading market positions and attractive opportunities for revenue and margin growth.
The Turnaround Plan has the following key elements, which will enable De La Rue to grow with an efficient and appropriate cost structure:
- Cost reduction : The Company is enacting an accelerated cost reduction programme with a significant proportion scheduled to complete by August 2020. Targeted savings on an annualised basis from H2 2020/21 will be approximately £35 million, including actions realised in FY 2019/2020 which already have secured £10 million annualised. This will significantly exceed and accelerate previous cost reduction commitments of £20m by FY 2021/22. The Company's cost structure will be re-based to enable it to compete more strongly across all its market segments, allowing it to tender for currency orders it would previously have declined, and to improve margins on existing work. The restructuring cash costs for this element of the plan will be approximately £17m in FY 2020/21.
- Currency market leadership : The Turnaround Plan is targeting improved profitability in the Currency division. De La Rue has established a leading position in polymer: since 2013, 83 per cent of issuing authorities who have issued banknotes on polymer globally have selected De La Rue Safeguard®. The new Bank of England £20 note released last week, represents the 42nd banknote worldwide that De La Rue has secured on its Safeguard® polymer substrate. De La Rue will also be designing and printing the Bank of England's new £50 banknote for release in 2021. As of today, approximately 3% of the world's banknotes by volume and 12% by denomination have moved to polymer. A cornerstone of the Company's strategy will be investing in, and supporting customers with, the significant trend of transition from paper to polymer notes, including the development of the most secure features on polymer.
With established products and recent innovations, De La Rue has also built a portfolio of industry-leading paper security features that are the choice of a growing range of customers and will continue to be a focus for the business. In the currency printing market, De La Rue is already in the process of increasing its competitiveness and has the world's most extensive experience of printing both on paper and polymer. The Turnaround Plan targets a mid-teen adjusted operating profit margin for this division from FY 2020/2021.
- Continued strong growth in Authentication : De La Rue will deliver significant year-on-year growth in this division in FY 2019/2020 and expects this to continue for several years as more countries adopt tobacco tax stamp schemes to comply with the World Health Organisation (WHO) Framework Convention on Tobacco Control (FCTC). De La Rue is already in discussion with a number of countries regarding the roll-out of tobacco and drinks tax stamp schemes. The Company is targeting agreements with several new countries each year. Each project win may trigger incremental investment requirements, but these planned investments are not needed in advance of contract signature. In parallel, De La Rue will continue to invest in technology, especially in its successful suite of software solutions. The Authentication division will also drive a focused geographical and product segment expansion of the brand protection business, and growth in its identification security features business. Under the Turnaround Plan, De La Rue is targeting Authentication division revenues of £100 million by FY 2021/2022, with strong operating margins.
- Value stream excellence: The Company will continue to improve efficiencies in terms of its manufacturing footprint, asset utilisation and customer programme execution. Further enhancements of capabilities at its sites will help the Company build a more flexible manufacturing model, thereby ensuring De La Rue makes money in currency down-cycles and more money in up-cycles. While in H1 FY 2019/2020, the Currency division's performance was adversely affected by a lack of manufacturing volumes, De La Rue's order book shows strength going into FY 2020/2021. Orders already secured cover approximately 70% of next financial year's manufacturing capacity, with strong prospects for the remainder.
Achieving the full benefits of the Turnaround Plan will be dependent on investment in growth and cost out initiatives. Further details on the Turnaround Plan, including an update on financing options, will be communicated with the Group's full year results on 27 May.
Clive Vacher, CEO of De La Rue, said:
"I am pleased that we have delivered our review of the business on schedule and are on track with the Turnaround Plan, which will deliver significant improvement in the operational and financial performance of the Company. The Plan drives extensive cost reduction and, in parallel, offers a substantial investment opportunity for growth.
"For our valued customers, De La Rue will be an even stronger brand going forward, with exciting market-leading innovations and unparalleled customer focus and support. For our dedicated employees, solidifying both divisions as strong, profitable and growing will ensure long-term stability and a company proud of its number one position globally in the marketplace. For our shareholders, the plan creates value, sustainability and predictability.
"I am confident that this is the right plan for De La Rue. There is a considerable amount of work to be done, and the Company has a single, focused plan, a fully aligned leadership team, and a greatly enhanced structure. We are ready to execute. I look forward to providing further details at our full year results in May."