DE LA RUE
2017/18 FULL YEAR RESULTS
De La Rue plc (LSE: DLAR) (De La Rue, the “Group” or the “Company”) announces its full year results for 12 months ended 31 March 2018 (the period or full year). The comparative period was 12 months ended 25 March 2017.
FINANCIAL HIGHLIGHTS
· Group revenue +7% at £493.9m; adjusted operating profit*(1) -11% at £62.8m.
· Excluding the exited paper business, revenue +4% and adjusted operating profit*(1) +7%
· Adjusted EPS -9% to 42.9p; reported EPS +99% to 93.7p
· Net debt of £49.9m (25 March 2017: £120.9m), £71.0m lower than the prior year and the lowest in five years, reflecting the £60.3m cash proceeds from the paper transaction as well as better working capital management
· IAS 19 UK pension deficit on a pre-tax basis reduced to £87.6m (25 March 2017: £237.0m)
· Proposed final dividend of 16.7p; full year dividend unchanged at 25.0p
· Group 12 month order book at March 2018 excluding paper orders +6% to £363m (2016/17: £341m)
STRATEGIC AND OPERATIONAL HIGHLIGHTS
· Another year of significant progress against our strategy to become a less capital intensive, more technology led business
· Completed sale of the paper business with a ten year guaranteed supply agreement which reduces the Group's exposure to the volatility of the paper market
· Polymer momentum has gathered pace
– Volumes more than doubled to 810 tonnes
– 24 issuing authorities across 50 denominations, representing more than half of the world's total polymer note issuers
· DLR Analytics™ launched in May 2017 now has 70 or nearly half of the world's central banks signed up, 1/3 of which are new to De La Rue
· Accelerating growth through further investment
– R&D investment increased by 13% year on year – 33 patents filed and 46 patents granted
– Enhanced our product offerings with two strategic partnerships – with Opalux for security features and with Optel for track and trace technology
– Investment in sales and marketing drove growth momentum – international ID and PA&T order intake +117% and 97%, respectively
· De La Rue Authentication Solutions acquired in Jan 2017 ahead of plan
· Programme to become world class manufacturer continues
KEY FINANCIALS
|
|
|
Including Paper |
Excluding Paper |
|||||
|
|
|
2017/18 £m |
2016/17 £m |
Change % |
2017/18 £m |
2016/17 £m |
Change % |
|
|
|
|
|
|
|
£m |
|
|
|
|
Revenue |
493.9 |
461.7 |
+7% |
426.4 |
408.2 |
+4% |
||
|
|
Currency |
371.8 |
349.5 |
+6% |
312.0 |
305.9 |
+2% |
|
|
|
Identity Solutions |
82.0 |
80.6 |
+2% |
76.4 |
73.2 |
+4% |
|
|
|
Product Authentication & Traceability |
40.1 |
31.6 |
+27% |
38.0 |
29.1 |
+31% |
|
|
Adjusted operating profit*(1) |
62.8 |
70.7 |
-11% |
56.9 |
53.3 |
+7% |
||
|
Reported operating profit |
123.0 |
70.2 |
+75% |
117.1 |
52.8 |
+121% |
||
|
|
|
|
|
|
|
|
||
|
EPS basic adjusted*(2) |
42.9p |
47.1p |
-9% |
|
|
|
||
|
EPS basic reported |
93.7p |
47.2p |
+99% |
|
|
|
||
|
Dividend per share |
25.0p |
25.0p |
0% |
|
|
|
||
|
* |
This is a non-IFRS measure. Amortisation of acquired intangible assets is a non-cash item while exceptional items are non-recurring in nature. By excluding these items from the adjusted operating profit and EPS metrics, the Directors are of the opinion that these measures give a better understanding of the underlying performance of the business. “Reported” measures are on an IFRS basis. See note 13 for further explanations and reconciliation to the comparable IFRS measures |
|
(1) |
Excludes exceptional item net gains of £60.9m (2016/17: net charges of £0.4m) and amortisation of acquired intangible assets of £0.7m (2016/17: £0.1m) |
|
(2) |
Excludes exceptional item net gains of £60.9m (2016/17: net charges of £0.4m), amortisation of acquired intangible assets of £0.7m (2016/17: £0.1m) and related tax charges of £9.7m (2016/17: credit of £0.6m) |
|
|
Revenue and adjusted operating profit growth rates for the Identity Solutions and Product Authentication & Traceability reflect a change in allocation of results for these segments made in the year. |
Martin Sutherland, Chief Executive Officer of De La Rue, commented:
“Over the course of this year, De La Rue has achieved some significant milestones in delivering against our five year strategic plan to transform the Group into a less capital intensive, more technology led business. The Invest & Build product lines, namely Polymer, Security Features, Identity Solutions and Product Authentication & Traceability, now contribute more than a third of the Group's revenue and over half of its operating profit.
“Solid growth in all segments has been offset by strategically focused increases in investment in R&D and sales, which will drive long term sustainable growth. While losing the new UK passport tender was disappointing, it does not change our goals, nor does it detract from the underlying performance of the Group which remains strong.
“The sale of the paper business and the associated long term paper supply agreement have reduced our exposure to the volatility of the oversupplied paper market, while securing the surety of supply for our print business.Through this, and good cash generation from the business, we have significantly strengthened our balance sheet with net debt now at its lowest in five years. The stronger balance sheet provides the Group with greater flexibility to allocate capital to deliver long term shareholder value.”
Enquiries:
|
De La Rue plc |
|
+44 (0)1256 605000 |
|
Martin Sutherland |
Chief Executive Officer |
|
|
Helen Willis |
Interim Chief Financial Officer |
|
|
Lili Huang |
Head of Investor Relations |
|
|
|
|
|
|
Brunswick |
|
+44 (0)207 404 5959 |
|
Katharine Spence |
|
|
|
Stuart Donnelly |
|
|
A presentation to analysts will take place at 9:00 am BST on 30 May 2018 at The Lincoln Centre, 18 Lincoln's Inn Fields, WC2A 3ED. The presentation will also be accessible via a conference call and a video webcast. Dial-ins for the conference call are below.
|
Live conference call |
UK Primary: 0844 800 3850 Passcode: 581 268 |
|
|
International: +44 844 800 3850 |
|
|
UK Direct: +44 (0)20 8996 3900 |
|
Archive conference call |
UK free phone: 0800 032 9687 Passcode: 2427 1325 Available from 31 May until 14 June 2018 |
For the live webcast, please register at www.delarue.com where a replay will also be available subsequently.
About De La Rue
De La Rue's purpose is to enable every citizen to participate securely in the global economy. As a trusted partner of governments, central banks and commercial organisations, De La Rue provides products and services that underpin the integrity of trade, personal identity and the movement of goods.
As the world's largest designer and commercial printer of banknotes, De La Rue designs, manufactures and delivers banknotes, banknote substrates and security features to customers in a world where currency will continue to be a key part of the developing payments eco-system.
De La Rue is the world's largest commercial designer and printer of passports, delivering national and international identity tokens and software solutions for governments in a world that is increasingly focused on the importance of a legal and secure identity for every individual.
De La Rue also creates and delivers secure product identifiers and 'track and trace' software for governments and commercial customers alike to help to tackle the challenge of illicit or counterfeit goods and the collection of revenue and excise duties.
De La Rue is listed on the London Stock Exchange (LSE:DLAR). For further information visit www.delarue.com
Cautionary note regarding forward-looking statements
These results include statements that are, or may be deemed to be, “forward-looking statements”. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes”, “estimates”, “anticipates”, “expects”, “intends”, “plans”, “goal”, “target”, “aim”, “may”, “will”, “would”, “could” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout these results and the information incorporated by reference into these results and include statements regarding the intentions, beliefs or current expectations of the directors, De La Rue or the Group concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and dividend policy of De La Rue and the industry in which it operates.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond De La Rue's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's actual results of operations, financial condition, liquidity, dividend policy and the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in these results and/or the information incorporated by reference into these results. In addition, even if the results of operations, financial condition, liquidity and dividend policy of the Group and the development of the industry in which it operates, are consistent with the forward-looking statements contained in these results and/or the information incorporated by reference into these results, those results or developments may not be indicative of results or developments in subsequent periods.
Other than in accordance with its legal or regulatory obligations, De La Rue does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.
OVERVIEW
This year the Group has made significant progress in our strategic plan to transform the business to a less capital intensive, more technology-led security product and service provider. The Group has limited its exposure to the volatility of the paper market through the sale of its paper business and gained supply certainty for its print business with a ten year agreement. The £60.3m cash proceeds from the transaction, coupled with the reduction in pension liabilities as a result of the pension indexation change, have significantly strengthened the Group's balance sheet. Net debt of £49.9m at the end of the period was the lowest in five years. The stronger balance sheet creates greater flexibility for the Group to allocate capital to deliver long term shareholder value.
Group revenue increased by 7% to £493.9m, with solid performance across all three segments. Adjusted operating profit was 11% lower at £62.8m. A significant reduction in the profitability of the paper business was the major factor causing the profit decline, with the write off of the UK passport bid costs as well as planned investments in R&D and sales being offset in part by additional margin from increased sales and certain provision and accrual releases, where we now have additional information as to the likelihood and amount of potential liabilities.
Excluding the exited paper business, Group revenue was up 4% to £426.4m and adjusted operating profit was up 7% to £56.9m.
Higher volumes in both Banknote Print and Paper were the main drivers for the good growth in Currency revenue. Momentum in Polymer has gathered pace, with sales volumes more than doubling to 810 tonnes, equating to c11% market share. In addition to the ten year contract to supply polymer substrate to the Bank of England, amounting to 25% of the volume for the new £20 notes in October, Polymer added 11 more customers and 22 denominations to its portfolio in the period. Including the notes on order, our polymer substrate has now been adopted by 24 issuing authorities across 50 denominations, representing nearly half of the world's polymer note issuers.
Identity Solutions (IDS) and Product Authentication & Traceability (PA&T) performed well, with revenue up 2% and 27%, respectively. Adjusted operating profit in IDS was 27% lower due to the write off of the UK passport bid costs. Excluding the write off, operating profit grew by 5%. Adjusted operating profit in PA&T also increased by 4%.
The Group's 12 month order book at the end of the period was up 6% to £363m (2016/17: £341m).
FINANCIAL RESULTS
Group revenue grew by 7% to £493.9m (2016/17: £461.7m) and adjusted operating profit was down 11% at £62.8m (2016/17: £70.7m). Adjusted profit before tax was 9% lower than last year at £53.4m (2016/17: £58.7m). Adjusted basic earnings per share were 9% lower at 42.9p (2016/17: 47.1p).
On a reported basis, operating profit was £123.0m, a 75% increase on the prior year (2016/17: £70.2m). Exceptional net gains were £60.9m (2016/17: net charges of £0.4m) and there was £0.7m amortisation of acquired intangible assets (2016/17: £0.1m). Profit before tax was £113.6m (2016/17: £58.2m). Reported basic earnings per share were 99% higher at 93.7p (2016/17: 47.2p).
Cash generated from operating activities was £73.5m (2016/17: £64.3m), reflecting good working capital management. Working capital cash flow improved by £17.8m due to structural changes and a focus on inventory management. Net debt at 31 March 2018 was reduced to £49.9m, £87.5m lower than the half year and £71.0m lower than the prior year, primarily due to the £60.3m cash proceeds from the sale of the paper business. Capex for the year was £24.7m, including £4.8m capitalised intangibles.
STRATEGIC PROGRESS
In May 2015, we announced a five year plan to transform De La Rue into a less capital intensive, more technology led security product and services provider, with a more balanced business portfolio that will deliver growth and improve quality of earnings, as well as reduce volatility in the business. We identified the main priorities as:
· Divesting non-core business
· Reducing our exposure to the volatility of the paper market
· Improving predictability and competiveness in Banknote Print
· Diversifying revenue by growing Polymer, Security Features, IDS, and PA&T
· Strengthening financial position by improving cash flow and reducing pension deficit
· Fostering a dynamic, high performing culture
We are now three years into our five year plan and despite some headwinds along the way such as the ending of a material security feature contract at the end of 2015, we have made good progress against our strategic objectives as listed below:
· Reorganised the business to a functional structure and streamlined the management team
· Sold the underperforming Cash Processing Solutions business
· Sold Portals De La Rue, reducing our exposure to the volatility of the paper market
· Reduced excess capacity and increased flexibility in our banknote print business
· Established a good position in polymer which is building substantial growth momentum
· Invested in sales and R&D for sustainable growth – we are on track to double our R&D investment which is up 74% since FY14/15
· Acquired DuPont Authentication to build scale, increase differentiation and support growth in the brand protection market
· Reduced net debt by more than 50% despite this acquisition – net debt at the year end is now £49.9m (2014/15: £111.0m)
· Reduced the UK pre-tax pension deficit substantially – £87.6m FY17/18 (2014/15: £236.7m)
· Launched agent transition plan – moving away from agent-led sales model to a more direct approach
Excluding the paper business, Group revenue and operating profit have been growing at CAGR 3% and 4%, respectively over these three years, in spite of the loss of the material security features contract. We have made good progress on diversifying our revenue streams and improving business mix over the last three years. Excluding the aforementioned contract, revenue and profit of the Invest & Build businesses (Polymer, Security Features, IDS and PA&T) have been growing at CAGR 8% and 14% a year, respectively. The four product lines now contribute more than a third of the Group's revenue and half of its operating profit.
Our business is characterised by the lumpiness of large contracts. The risk of being too dependent on few large contracts was identified in 2015. We are derisking by growing the number of key accounts, thus reducing the impact to the Group when a major contract ends. The number of contracts with revenue over £10m has doubled from FY14/15, reducing the customer concentration risk.
Details of the progress we made against our strategic objectives in FY17/18 are shown below.
Deliver operational excellence
Reducing our exposure to the paper market was one of our top strategic priorities. The sale of Portals De La Rue to EPIRIS Fund II and a ten year supply agreement have reduced our exposure to the volatility of the oversupplied paper market, as well as secured paper supply for our print business over the long term. The capital investment related to the paper business can now be released. This, combined with the cash proceeds from the transaction, gives us greater flexibility in allocating capital in order to generate better returns and drive sustainable growth.
During the year, we have reassessed our supply chain management and launched a procurement transformation programme which looks to upskill the team and to change and improve processes, and build strategic partnerships with our key suppliers. We are making progress in driving efficiency in our manufacturing, but recognise that there is more to do in meeting our goal of being a world class manufacturer. We are planning to roll out monitoring and note inspection systems into all sites in the next 18 months in order to improve quality and reduce wastage. In addition, the newly established Advanced Manufacturing Engineering function is looking to reduce time to market for new products. In the meantime, we are exploring opportunities of automating certain processes to improve operational efficiency.
The manufacturing footprint restructuring programme to optimise our banknote print capacity has now completed its second year. While machine upgrades are still ongoing in Kenya and Sri Lanka which has caused some disruption, our manufacturing capability and efficiency will be improved by the end of the restructuring programme with a standardised footprint and common practices. This, combined with reliable outsourcing partners, will give us greater flexibility in dealing with the demand peaks and troughs.
At the corporate level, the finance transformation programme is progressing, but slower than we anticipated. Half of the sites have now migrated to the new SAP system. The programme will continue in the coming year, which will drive efficiency and improve decision making once complete.
Invest for growth
We continue to invest in Product Management, R&D and Sales, with R&D investment up 13% in FY17/18. We are on track to double our R&D investment which is up 74% since 2015. The investments and improved focus in R&D have increased the number of patents filed and granted to 33 and 46, respectively. In addition to the six new products launched last year, the Group introduced two more in May 2018 – Ignite™ and PureImage™. We launched more products in the last two years than the previous five years.
DLR Analytics™, our cash cycle management software launched in May 2017, has gained significant traction in the market – 70 or nearly half of the world's central banks have now signed up, one third of which are new to De La Rue. New functionality is being added to strengthen the offering and drive further uptake. DLR Analytics™ helps central banks to better understand their cash cycle and forecast demand, which in turn helps us to better understand their needs, building stronger relationships as well as generating new opportunities.
We have enhanced our product offering and extended our market reach through the technology and commercial partnerships with two Canadian technology firms – Opalux and Optel Group. We are working with security features company Opalux to put personalisable security features into identity products. Optel is a market leader in track and trace technology which is used for supply chain management, brand protection, and regulatory compliance in a number of industries, including pharmaceutical and health care. We will closely collaborate on product development and sales.
We continue to invest in sales and marketing in the growth areas, particularly in IDS and PA&T. Since the restructuring of the business in 2016, investment in sales in these two segments was up 79% and 47%, respectively. Given the typical 18-24 months sales cycle of public services contracts, early signs of returns on this investment have just started to emerge. Order intake in IDS (excluding UK passport contract) increased by 117% and in PA&T by 97% in FY17/18, including some long term contracts. Implementation of these contracts is expected to start in FY18/19, which will generate stable revenue and profit from FY19/20 onwards.
We have also upgraded our manufacturing capability by adding a polycarbonate line for identity products and a new security print line for product authentication, both of which are now operational.
Strengthen balance sheet
During the year, we have put more focus on managing working capital and this has had a positive impact. Inventory and trade debtors, excluding the exited paper business, reduced by £13m and £10m, respectively.
The £60.3m cash proceeds from the sale of 90% interest of our paper business completed on 29 March 2018 has further reduced our net debt at the year end to £49.9m (25 March 2017: £120.9m), the lowest in five years.
In November 2017, we announced that the Group's pension trustee had decided to change indexation linked to future pension increases from RPI to CPI for our UK defined benefit pension scheme. This change has significantly reduced the pension liabilities and the corresponding deficit by £80.5m. The UK pre-tax pension deficit at the year end was £87.6m, substantially lower than the £237.0m a year ago.
Drive culture change
Our culture underpins every aspect of our business. It's the strategic priority that enables all the others to be delivered effectively.
Following the completion of the business reorganisation at the end of 2016, we continue to refresh our workforce, adding new skills and capabilities. Today, the senior leadership team and the sales force are unrecognisable from their composition in 2015, with over 40% joining the business in the past two years. This has professionalised the leadership team and added solutions sales skills. Our strong emphasis on performance has seen people's objectives aligned with the Group's strategy.
We are also supporting a drive towards a more diverse workforce – more aligned with the cultural and ethnic diversity of our customers. We launched an inclusion and diversity strategy last year, encouraging inclusivity through changes in recruitment practices and training programmes.
In addition, we are moving away from the agent-led sales model towards a more direct approach, with locally-based sales teams who understand the local markets and cultures, working out of regional hubs. We have already opened hubs in Dubai and Miami and are close to doing the same in Kuala Lumpur.
PENSION DEFICIT AND FUNDING
The valuation of the Group's UK defined benefit pension scheme (the “Scheme”) under IAS 19 indicates a pre-tax deficit at 31 March 2018 of £87.6m (25 March 2017: £237.0m). The decrease reflected the change of indexation linked to future pension increase from RPI to CPI effective from April 2018, as well as revisions in the long term inflation rate and demographic assumptions, which were partly offset by the decrease in discount rate.
The charge to operating profit in respect of the Scheme in the period was £2.3m (2016/17: £1.5m). In addition, under IAS 19 there was a finance charge of £5.6m arising from the difference between the interest cost on liabilities and the interest income on scheme assets (2016/17: £7.4m).
A new triennial review of the Scheme's valuation and the funding plan started in April 2018. The existing funding plan agreed in June 2016 will remain in place until the review is concluded. Cash contribution to the Scheme for the FY18/19 will be £20.5m.
SENIOR MANAGEMENT CHANGES
Following the resignation of Jitesh Sodha on 20 March 2018, the Group has appointed Helen Willis as Interim Chief Financial Officer to help with the year end reporting and to oversee the ongoing change programme in the Finance area. Helen has extensive financial experience, with her latest role as Chief Financial Officer of Premier Farnell PLC. A search for a permanent CFO is underway.
DIVIDEND
The Board is recommending a final dividend of 16.7p per share (2016/17: 16.7p per share). This, together with the 8.3p paid in January 2018, would make a full year dividend of 25.0p per share. Subject to shareholders' approval, the final dividend will be paid on 3 August 2018 to shareholders on the register on 6 July 2018.
OUTLOOK
The strong 12 month order book gives good revenue coverage for the year ahead. Profit for FY18/19 is expected to be in line with last year as we continue to invest in R&D and sales to drive long term sustainable growth.
– ends –
|
Martin Sutherland |
Helen Willis |
|
Chief Executive Officer |
Interim Chief Financial Officer |
30 May 2018
DIRECTORS REPORT
Principal risks and uncertainties
Throughout its global operations De La Rue faces various risks, both internal and external, which could have a material impact on the Group's performance. The Group manages the risks inherent in its operations in order to mitigate exposure to all forms of risks, where practical, and to transfer risk to insurers, where cost effective.
The Group analyses the risks that it faces under the following broad headings: strategic risks (technological revolution, strategy implementation, changes to the market environment and economic conditions), operational risks, legal/ regulatory, information risks and financial risks (currency risk, credit risk, liquidity risk, interest rate risk and commodity price risk).
As described in the 2017 Annual Report, the principal risks include breach of legal and regulatory requirements, failure to win or renew a material contract, pension fund deficit, failure to maintain and exploit competitive and technologically advanced products and services, failure to adopt performance driven culture, failure to secure strategic partnerships to address key issues, information security risk, loss of a key site, health safety or environmental failure, quality management failure, supply chain failure, and unpredictability in the timing and size of substantial contract awards. These risks, along with the risk management systems and processes used to manage them remain unchanged since the Annual Report was published.
Going Concern
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out on pages 2 to 49 of the strategic report in the 2017 Annual Report. In addition, pages 124 to 132 of the 2017 Annual Report include the Group's objectives, policies and processes for financial risk management, details of its financial instruments and hedging activities and its exposure to credit risk, liquidity risk and commodity pricing risk. The financial position of the Group, its liquidity position and borrowing facilities are described on page 39 of the 2017 Annual Report. As described on page 39 of the 2017 Annual Report, the Group meets its funding requirements through cash generated from operations and a revolving credit facility which expires in December 2021.
The Group's updated forecasts and projections, which cover a period of more than twelve months from the date of the 2017/18 full year statement, taking into account reasonably possible changes in normal trading performance, show that the Group should be able to operate within its currently available facilities. The Group has sufficient financial resources together with assets that are expected to generate cash flow in the normal course of business. As a consequence and notwithstanding the net liability position being reported in the consolidated balance sheet, which has primarily arisen due to the value of the deficit in the retirement benefit obligations, the Directors have a reasonable expectation that the Company and the Group are well placed to manage their business risks and to continue in operational existence for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the condensed interim financial statements
A copy of the 2017 Annual Report is available at www.delarue.com or on request from the Company's registered office at De La Rue House, Jays Close, Viables, Basingstoke, Hampshire, RG22 4BS.