De La Rue H1 2025 Earnings Call Transcript

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December 12, 2024

There are 5 speakers on the call.

Operator

Good morning, everyone. Welcome to the De La Rue results presentation for the period ended 28 September 2024. Thank you for joining us today, whether in the room with us or via the webcasts. The results were announced this morning and are available on our website, de la Rue.com. I'm Louise Rich, Head of Investor Relations and our CEO, Clive Vacher and Interim CFO, Dean Moore, will present on the results for the first half to you shortly.

Operator

After the presentation, there will be an opportunity to ask questions. For those in the room, please wait until you have a microphone before asking the question. For those on the line, if you wish to ask a question, please submit these through the message system via the website. Importantly, before we start, I would like to draw your attention to the cautionary wording on forward looking statements within the results announcement and on Slide 2 of the presentation. And now I would like to pass over to Clive.

Speaker 1

Great. Thank you, Louise, and welcome to De La Rue's results for the first half of the twenty twenty four-twenty five financial year. I'm Clive Vacher, CEO. Today, I'll be giving an overview of the performance of the company to the period to September 2024. I will also be taking the opportunity to give you an overview of the currency market as well as an update on progress with the separation of authentication prior to disposal.

Speaker 1

I will then hand over to Dean Moore to give you more detail on the financial performance. In the 1st 8 months of the current financial year, we've made substantial progress. Firstly and importantly, we have achieved first half profits ahead of guidance with an adjusted operating profit of £7,300,000 down just £600,000 on the prior period, despite the schedule of deliveries within our currency business leading to a fall in group revenue of over £60,000,000 period on period. At an IFRS level, we moved into operating profit on in our traditionally weaker first half. This financial performance reflects the transformation that we have achieved over the last 5 years to create a streamlined efficient business.

Speaker 1

The recovery in the currency market that we first remarked upon a year ago is continuing. Our order book at the end of November 2024 stood at £338,000,000 the highest level we have seen for at least the last 5 years. This represents a tripling of backlog in the last 14 months and has transformed the prospects for our currency business. I'll talk in more detail in a minute about how we expect this order book to translate into EBITDA over the months to come. I'm delighted with the progress in our currency division, which is the culmination of significant transformation of the business over the past 5 years.

Speaker 1

We have created the strongest player in the currency industry with a market leading win rate, the deepest and widest customer relationships globally, a highly competitive cost base, excellent operational execution and cutting edge technology covering the whole spectrum of paper and polymer banknotes. We have weathered the unprecedented deep downturn of the past 2 to 3 years and stayed true to our strategy during this period. As we have previously messaged, we knew that the market would recover strongly, which it is now doing. We positioned ourselves to come out the strongest from this downturn. And going forward, the results will show in significant earnings growth.

Speaker 1

In our authentication division, in October, as you will have seen, we announced that we had agreed the sale of the division to Crane NXT for cash at a value reflecting an enterprise value of £300,000,000 This transaction will realize significant capital for the benefit of all stakeholders. It crystallized the broad strategic review that followed the appointment of Clive Wiley as Chairman last year. I'll talk about our progress with the sale since our October announcement in a moment. The sale is due to complete in the first half of next calendar year. It will transform our financial position.

Speaker 1

Completion will enable us to pay off our existing revolving credit facility in full ahead of its maturity, leaving us with net cash on the balance sheet and at the same time greatly reduce the remaining deficit on our legacy defined benefit pension scheme. All these achievements would not be possible without the hard work and commitment of all our employees. Getting to where we are now has taken many long hours undertaken by our dedicated teams. I would like to take the opportunity to thank all the De La Rue staff, many of whom I know will be on the call this morning for all their hard work in getting to this point. Turning now to look at the Currency division in more detail.

Speaker 1

The Currency division continued to be profitable during its traditionally weaker first half and despite considerably lower revenue given the difference in delivery schedule profile when comparing the first half of this year with the comparative period last year. During the first half, we continued to win over 2 thirds of the currency tenders in which we bid. In addition, we won banknote contracts from 6 territories where we have not printed notes for many years at least. Nearly all of these will incorporate De La Rue polymer or security features or both increasing our share of the value chain. The strategy that we have pursued is therefore starting to deliver strongly.

Speaker 1

We not only have the best win rate in the industry, but we are increasing our wins in territories formally dominated by our competitors. This is partly due to our competitive cost base, but it is driven further by other value creating factors. For example, since 2020, De La Rue has designed more than half of all new commercially produced banknotes that have been launched into circulation, more than 4 times our nearest competitor. We have positioned ourselves for market leadership in polymer, both in terms of the quality of the substrate itself and the range of features available. And we have introduced to the market a broad range of value enhancing, technologically advanced security features that are capturing market share on both paper and polymer.

Speaker 1

Of particular note over the last few months is the increase in polymer demand, either for notes which we print ourselves or notes produced for onward processing by others. Production in H125 was substantially higher than the same period last year with a further doubling of production expected in the second half followed by a further significant step up next year. Our investment in doubling polymer capacity is starting to pay off and we will be utilizing both polymer lines strongly in the coming months years. We continue to see customers move from paper to polymer notes whether by way of initial conversions, increasing the number of denominations on polymer or deciding to go for a full conversion of all notes in a series in one go. Expansion of West Horton to create a second polymer line was a wise strategic move to address this long term increase in demand for polymer substrate.

Speaker 1

Our order book rose during the first half to €251,000,000 at the end of September. Since then, following some significant wins in the 3rd quarter, it has risen further to reach €338,000,000 at the end of November, a record level for at least the last 5 years. The lead time to convert orders into finished product within banknote print typically runs around 6 to 12 months. Turnaround times for security features and polymer substrate orders are a little shorter, but it is banknote print that still makes up most of our currency revenue and our order book. Consequently, we expect the build in our order book that we've experienced over the last year to translate into increased sales from the second half of this year onwards.

Speaker 1

We expect currency revenue to accelerate in H2 to bring revenue for the full year in line with that achieved in FY 2024. We should then see a further acceleration in revenue in FY26, where we expect to see strong double digit growth in EBITDA before central costs. I would now like to take a moment to remind you of some of the dynamics of the currency market on which De La Rue will be completely focused post completion of the sale of authentication. Globally, banknotes in circulation grew 5% from 2022 to 2023, the most recent year for which we have comprehensive data. Multiple factors, including inflation and economic uncertainty, can drive the demand for banknotes.

Speaker 1

Three quarters of our sales are to countries where cash offers financial inclusion as the main method of payment or even the only method of payment. About 1 third of the global population don't have access to the Internet and another 1 third don't have access to a good Internet connection. This is a digital inequality that will require substantial time and huge investment to resolve. Cash has an incredibly important role to play here and also where people value it for budgeting reasons or because it protects their fundamental right to privacy. The commercial banknote print market in which we operate represents about 10% of the total volume of around 180,000,000,000 banknotes printed each year.

Speaker 1

In this sector, De La Rue is the long established market leader and continues to retain this position. Our strategy to print high quality banknotes as efficiently as possible has brought success, enabling us to remain profitable throughout the recent post COVID downturn. The other 90% of banknotes issued every year are printed by state print works which are run by governments of the most populous countries. This is an area that offers huge growth potential to De La Rue via supply both of our safeguard polymer substrate and our broad portfolio of security features. This growth strategy has already started to show success with major wins to supply our components into countries like Egypt and Thailand and other opportunities well progressed.

Speaker 1

Our portfolio of security features is broad, offering something to suit every cash cycle. Our polymer is designed to be easy to print on and to have a low environmental impact. We are extremely well set up to meet the market demand and to support central banks with our award winning and industry leading banknote design team. Our manufacturing facilities have been a core part of our transformation of the currency business over the last 5 years. We have invested to give a more flexible, efficient and upgraded manufacturing footprint, rationalizing our banknote print sites at the same time from 5 to 3.

Speaker 1

With our expanded super site in Malta nearing completion and the last notes now removed from storage in Gateshead, our major investments are now all complete or nearly complete. As part of that investment program, we have expanded our West Hawton site to more than double our capacity for producing polymer substrate and to expand our capability for making cutting edge security features at scale. We now have a modern asset base, which can satisfy demand in an efficient and agile way in the growing markets addressed by our strategy. Turning to authentication. While we have announced the potential sale of our authentication division for £300,000,000 Until the sale completes, DeLauro benefits from its performance.

Speaker 1

In the first half, authentication produced solid results with revenue slightly up on the same period last year and operating profits broadly flat. During the period, we announced that we had renewed the final of 4 significant multi year contracts with a combined expected contract value of over £150,000,000 In addition, we won a multi year passport data page program for a different country to run alongside the Australian passport. The separation work to deliver the authentication division to Crane NXT is well underway. We have completed the staff consultation with a good crew heading with authentication to Crane NXT and an equally strong set of employees staying with the remaining business. Detailed discussions with customers are now underway about the novation of contracts.

Speaker 1

In Malta, a site that manufactures both for authentication and currency, we have a clear plan to achieve a physical separation within the time frame needed. So we remain on track to complete the sale in the first half of twenty twenty five. The sale of authentication for cash at an enterprise value of £300,000,000 is a truly transformative deal, which realizes significant capital that will benefit all De La Rue Stakeholders. The sale to Crane NXT, a strong buyer with a strategy that provides an excellent fit for both the division and its customers, follows an extensive and broad process conducted by the Board. The application of the sale proceeds to repay our revolving credit facility ahead of its maturity will leave a net cash position on the balance sheet and create a much more resilient group.

Speaker 1

At the same time, we will significantly reduce the remaining deficit on the legacy defined benefit pension scheme by paying £30,000,000 on completion as an accelerated contribution. This will bring us one significant step closer to finding a long term solution to complete the derisking of the remaining GAAP on this scheme. I will now pass you to Dean, who will provide more detail on the financial performance in the first half.

Speaker 2

Thank you, Clive. Good morning, everyone. Firstly, I'll take you through the key highlights from our income statement. Revenue for the period came in at $145,100,000 down $16,400,000 or 10.2 percent on the first half of last year. Gross profit fell in absolute terms, down 3.2 percent or $1,300,000 but gross margin rose substantially, given the move in relative contribution from currency to authentication and improved margins within the currency division.

Speaker 2

Adjusted operating profit of £7,300,000 is down £600,000 or 7.6% versus the comparative period. I'll cover the key drivers for these year on year movements for both revenue and profit in the following slides. As Clive said earlier on, on an IFRS basis, the group moved from an operating loss to a profit of £1,300,000 Pretax exceptional items totaling £5,500,000 before was significantly lower than the £10,800,000 posted in the same period last year. Again, I have a slide that breaks this exceptional charge down further on. Moving on to the revenue walk slide.

Speaker 2

This slide shows the divisional drivers for the period on period movement in revenue. Overall, revenue in the ongoing business fell with a $18,500,000 fall in the currency revenue and authentication showing a marginal rise in revenue of 2,100,000 dollars Currency saw a fall in sales as some deliveries moved into the second half. In contrast, the comparative benefit from banknotes that were manufactured in full financial year 'twenty three, but sold in the first half of last year. Authentification saw strong sales to certain GRS territories through those Sudanese sales were weak given the unrest there. The ID business added an additional multiyear contract to produce passport data pages, which will run alongside the Australian passport.

Speaker 2

The next slide covers adjusting operating profit, showing the $600,000 drop in profits to $7,300,000 In the case of the currency division, profits dropped by just $300,000 despite an $18,500,000 fall in divisional revenue, reflecting better mix of sales with higher margin contracts. In relation to authentication, the division was allocated a larger proportion of central costs, given its higher contribution to overall revenue than in the comparative period last year. Moving on to exceptionals. The $5,500,000 of pretax exceptional costs incurred in the first half of the year principally relate to costs incurred in separating the authentication business prior to sale. We incurred £4,500,000 here.

Speaker 2

Most of the remaining exceptional charge related to costs relating to site restructuring, where we incurred £900,000 of further costs in relation to the closure of Gateshead. In the same period last year, we incurred a substantial $7,900,000 winding down our operations in Kenya and restructuring the UK sites. Moving briefly to the tax line. This period's exceptional tax charge represents the tax impact of the period as well as some beneficial foreign exchange movements on our tax provision. Moving now to the cash flow and looking at the key movements here.

Speaker 2

With an operating cash flow, the most notable move is a £17,900,000 cash outflow from working capital. The main element of this are main elements of this are £7,300,000 of debt investment inventory as the currency business prepare for orders completed in the second half of this year and £8,100,000 increase in trade debtors. This last item reversed soon after the half year as we received 28,000,000 in cash to settle receivables from currency customers in the 1st 3 weeks of October. We also restarted pension payments in the first half following the end of the moratorium we enjoyed last year and paid £3,000,000 in the first half. Our net interest payment for the half was £6,900,000 down on £8,300,000 in the same period last year.

Speaker 2

Within investing activities, CapEx spend net of grant income was kept to £3,800,000 by careful cost control and continuing to match the CapEx to grant income receipts in Malta. CapEx spend is expected to increase in the second half as we incur costs in Malta to physically separate the authentication and currency facilities ahead of the completion of the authentication sale. Now looking at net debt and covenants. The slide says that cash conservation and generation remains a core focus. Actually, it is the core focus for us and has been for quite a while.

Speaker 2

As we pointed out at the time of the AGM, net debt rose in the first half largely due to the movement in working capital that was talked to on the previous slide. However, we met our interest cover and gearing covenant tests at both the end of the Q1 and the end of September and kept within our liquidity headroom test throughout the period. And that debt at the time of the year ending March will depend on the exact timing of the authentication sale. So at the moment, we're not going to give specific guidance on this. However, we are expecting a net investment in working capital over the course of the second half as we prepare for higher production in currency to meet orders towards the back end of this financial year and into next.

Speaker 2

Added to this, the cash cost of separation of authentication will accelerate as we move through the second half. I'll now pass you back to Clive for his summary remarks and guidance on our outlook.

Speaker 1

Thank you, Dean. So in summary, the actions we've taken to improve the efficiency of the business and to remove legacy issues should show tangible financial benefits as we move into the second half of FY twenty twenty five and into FY twenty twenty six. The proposed sale of the authentication business in the first half of next calendar year will transform De La Rue's finances, allowing us to pay off our revolving credit facility and become net cash positive and at the same time will greatly reduce the remaining deficit on our legacy pension fund. Added to this, the currency business is looking at significant top line growth over the next 18 months as it builds out the order book that has been built to record levels over the past year. The division is now organized with the capability and manufacturing footprint to capitalize fully on the strength we are currently experiencing in our markets.

Speaker 1

As a result, we are guiding that the ongoing currency business will see revenue bounce back in the second half to bring divisional revenue for the year back to a similar level that was seen in FY 2024. Therefore, the expectation is that when taken together with authentication, the group will reach adjusted operating profit for the current year in the mid to high €20,000,000 range that we have previously guided. Next year, we expect the translation of the currency order book into sales to continue leading to strong double digit growth in EBITDA before central costs in that division. With the expectation of a significantly enhanced balance sheet and improving top line performance in currency and an efficient and agile operational base, we look forward into 2025 and beyond with confidence. And now I'll pass over to Louise to manage the Q and A.

Speaker 1

Thank you.

Operator

Thank you, Clive. Now if you can move on to questions. We'll start by taking questions from the room and then cover the questions that have been submitted via the website. For those in the room, could I remind you to wait until you've been handed the roving microphone, allowing those listening via the webcast to hear you?

Speaker 3

Thomas Rams from Davy. Thank you for taking my questions. Three questions. First, 2 Hello? Yes, let me go back.

Speaker 3

First 2 are kind of linked, so I'll ask them separately and then come on to the 3rd. Just around currency kind of order book and the pricing dynamics that you're seeing in the market. I'd say the high win rate is very encouraging, but how does that kind of relate to pricing that you're seeing in the market? I appreciate it's commercially sensitive to kind of talk about your pricing, but if we can that's right, industry. And then just about the pipeline.

Speaker 3

How active is the pipeline given the strong win rate in the last 2 months? How does that look for the kind of coming kind of period? Thank you.

Speaker 1

Great. Thanks, Tom. Good morning. So to answer the question on pricing, pricing is very good at the moment. Partly, there's a lot of factors that go into that.

Speaker 1

There is significant market demand, which is a positive factor in pricing. But I think from our perspective, there's a couple of other key things. One is that we have built exceptional relationships with key customers, key high value customers who have high specification of notes. And secondly, that we are capturing now a greater part of the value chain with 2 factors. 1 is the continuing trend from paper to polymer banknotes, which allows us to capture the value of the polymer substrate in addition to any other print activity, for example And secondly, that our feature set on both paper and polymer, which we have been developing the technologies over the last 5 years, is really starting to pay off.

Speaker 1

And so whereas previously we may have been basing a lot of our sales and order book growth on just the print side of the equation, we're now seeing that the substrate and the features are contributing very strongly. So good pricing and an increase in capture of the value chain. And then to your second question, which is on pipeline, it's still very good. There is some really significant business behind what we have already secured. And our outlook takes us very positively throughout FY 'twenty six in terms of good quality work filling our capacity.

Speaker 1

And now we're starting to see a similar trend for FY 'twenty seven. So we're seeing a nice, call it, 2 year 2 to 2.5 year future picture emerging for currency based on where we are today, which is already a record order book.

Speaker 3

Great. That's very encouraging. And the second sorry, third question, just around the polymer kind of capacity. You mentioned that there's going to be a doubling in the second half and then a further step up in the March 26 year. How does that kind of align with your kind of current utilization of West Hawton and the second line investment?

Speaker 3

When will it be full kind of I'm not assuming you're going to add any more capacity to that given the time it takes to add it, but that will certainly help pricing dynamics kind of going forward within the polymer kind of offering.

Speaker 1

Yes. So if I take you back to when we made the decision to double our polymer capacity, that seemed to be the right decision back in 2021. We had about a 2 year lead time to build that capacity. And certainly, we believed at that time that as soon as the capacity was available, it would be utilized. We've had, as you know, a very significant downturn in the currency market.

Speaker 1

And it's really important to understand that downturn is not related to the rise of digital. It was purely the post COVID effects where central banks were burning off stocks and then when they hit normal reordering levels, they were not ordering at the time we expected them to due to a lack of public finances and a lack of foreign exchange availability. That is fixing itself now. There is very significant and strong demand from central banks worldwide. And with it, the conversions that we were expecting to happen into Polymer are certainly happening, perhaps offset about 18 months to 2 years from where we believed they would be previously.

Speaker 1

So we are absolutely we kept the faith. We believed it was the right thing to do in any event. But now we are seeing that our capacity is going to be utilized and the capacity that we've built. In terms of utilization, we will be imminently we have recruited significant people for West Hawton, and imminently, we will be running both lines consistently. We expect that to continue throughout FY 'twenty six and into FY 'twenty seven.

Speaker 1

And we will probably still have enough capacity in FY 'twenty seven that we wouldn't need to invest in further, but there will be a decision point, my guess, somewhere in the FY 'twenty seven, FY 'twenty eight time period as to whether further capacity would be needed.

Speaker 4

Okay. We have a couple of questions from the webcast. First, a couple of questions from Edmund Schrull from PSF Capital. Please can you expand please can you break down expected level for authentication, separation and sales cost?

Speaker 1

Sorry, can you just repeat authentication, separation costs was the

Speaker 4

So, please break down expected level of the authentication, separation and sales cost.

Speaker 2

Yes, I think the question is around the €12,000,000 of separation costs that we've specified, what the break of that is between various facets. I think we don't really want to go into considerable detail on that as we sit here, but suffice to say, I imagine something like 70% to 80% of that cost is to do with the physical actual physical separation of the facilities in Malta between currency and authentication. So I think that's probably a fair reflection of how that breaks down. The other cost is basically fees, different fees.

Speaker 4

And following, can you please expand on the working capital cash outflow?

Speaker 2

At what point? At the half year or at the year end? The year end, I think, probably is more specific. We are actually expecting working capital to be an outflow at the year end because we're gearing up for the increase in activity sales activity through the back half of the year and also into the following year. So we will be building up our working capital accordingly for that.

Speaker 2

So I think that's probably and in terms of the half year, major issue on working capital was the increase in receivables, which actually will pay down within 3 weeks. As I said in my presentation, we had £28,000,000 of cash coming in the 1st 3 weeks of the second half, which basically was a timing issue and sorted itself out.

Speaker 4

Okay. And we have another question from Bobby. Two questions, please. Please could you give further details on your normalized earnings expectations for FY 'twenty six for the standalone currency division or after sale of authentication given remaining central costs and new debt free cap structure? When do you expect to be able to conclude the solution to fully derisk the pension liability?

Speaker 2

I think at this stage, I mean, where we sit here now, I think I'd prefer to probably deal with that as we close in on the year end. We'll have far more granularity in terms of where that's going to be. So rather than going to specifics at this stage, I'd prefer to leave that to closer to the time we get to that point when currency is indeed stand alone.

Speaker 1

Yes. So and that's I agree with you, Deane. We're not going to guide specific numbers. What we are saying is that the currency division will be experienced strong double digit earnings growth, FY 'twenty four to FY 'twenty five and FY 'twenty five to FY 'twenty six again. So it's a very positive picture that we will provide more color on at the year end results.

Speaker 1

In relation to the pension scheme, the £30,000,000 payment will leave a fairly manageable amount to pay off. We have committed £30,000,000 immediately on the sale of authentication and then the remaining 40 ish that would need to be paid into the scheme is committed over the next 3 years as deficit repair contributions. So that gives you a feel that within a 3 year period, all other things being equal, that pension deficit will be brought down to 0. However, we are also looking at options to accelerate the full solution for the pension. I cannot guarantee that any of those will come to fruition, but we are exploring a number of options to get that behind us earlier than that time period.

Speaker 4

There are no further questions on the webcast. I'll hand back to the room for closing remarks.

Speaker 1

Just to conclude then, this is a very encouraging position that we find ourselves in. And I really want to stress that, obviously, the last 5 years have been quite a journey at De La Rue. It's been a journey of significant transformation. We and I take my hat off to the teams at De La Rue because we have set out a strategy in 2020. We have remained true to that strategy.

Speaker 1

We have believed in this business throughout all of the challenges that we face, particularly the currency downturn. We knew that it would come good, and we are starting to see that now. So I'm incredibly encouraged by the position we find ourselves in today. Thank you.

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