De La Rue : 2020 Annual Report (Indexed PDF)

De La Rue plc

Annual Report 2020

De La Rue

Annual Report 2020

Strategic report 1

Chairman's statement 1

At a glance 4

Our business model 6

CEO review 10

Our strategy 12

Our markets 14

Review of operations 16

Non-Financial Information Statement 18

Financial review 19

Risk and risk management 23

Section 172 31

Responsible business 32

Governance 41

Chairman's introduction Leadership Composition, succession and evaluation

Audit, risk and internal control Remuneration

Directors' report

Financial statements

Independent auditor's report Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Accounting policies

Notes to the accounts Company balance sheet Company statement of changes in equity Accounting policies - Company Notes to the accounts - Company Non-IFRS measures

Five year record Shareholders' information Featured image glossary

CEO review

We have opportunities to grow our polymer and security features within Currency and develop the customer base in our Authentication business, at the same time as reducing our costs.

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At the end of calendar 2019 we enacted a Turnaround Plan to stabilise and grow the business. We outline our progress so far in our plans for the next three years.

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Social responsibility

We are a global business and aim to act for all our stakeholders in the Company. De La Rue is an active participant in our communities across the globe. We outline how we aim to reduce our impact on the environment.

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De La Rue Annual Report 2020

Chairman's statement

A challenging year

We have been working to stabilise the business and put in place our Turnaround Plan."

The Group has had a challenging year, with a wide range of issues which have impacted De La Rue, both financially and operationally. Weak results for the year reflect changes in the marketplace, management disruption and execution problems. The business in overspill demand (Overspill is statehas experienced unprecedented management change, with the Chairman, Chief Executive Officer, Chief Financial Officer, senior independent director and most of the executive team leaving, or resigning, in the past year.

I joined the Board in September 2019 and took on the role of Chairman at the beginning of October. Since that time I have been working with the Board to support our new CEO Clive Vacher and the reconstituted executive team, stabilise the business and put in place the recently announced Turnaround Plan.

Company reorganisation

In November 2019, we launched our new divisional structure, with two divisions, Currency and Authentication. This is discussed in more detail by Clive on page 10. The new organisation is already proving to be a more effective and efficient way for De La Rue to operate.

The Turnaround Plan, led by Clive and developed by an extended executive team, has the aim of generating improved financial performance and a more consistent operating profit and cashflow. This will be delivered by improved efficiency in Currency and growth in Authentication. Clive discusses the changes De La Rue needs to undertake in more detail on pages 10 and 11.

We completed the sale of International Identity Solutions business in October 2019, for which De La Rue received £42m in cash plus an additional amount for working capital, following the UK Government announcement of a phased transition to a new supplier for the UK Passport production contract during calendar 2020.

Following the reorganisation, we report the financial performance during FY 2019/20 for the Authentication, Currency and Identity Solutions divisions and the future strategy for Authentication and Currency divisions only.

Financial performance

De La Rue's performance in FY 2019/20 saw weak revenue, profitability and cashflow compared with the prior year and budget, with significant weakness in banknote volumes in the first half. The banknote market has proven to be cyclical when there is a reduction printwork demand that cannot be satisfied by the country's own internal capacity).

A model that did not adjust quickly enough to this market reality was the major factor behind the weak performance.

The Authentication business saw strong growth in the year. Clive discusses our performance for the year in more detail on pages 10 and 11.

The key elements of the financial performance for the year are - adjusted Group revenue (which excludes "pass-through" Paper and International Identity Solutions revenue on non-novated contracts post-sale) decreased by 17.4% to £426.7m (FY 2018/19: £516.6m). (Please see pages 165 and 166 for full definitions of adjusted and other financial terms). Adjusted operating profit declined to £23.7m (FY 2018/19: £60.1m), while adjusted earnings per share fell to 12.1p (FY 2018/19: 42.9p). Cashflow from operating activities was an inflow of £1.5m (FY 2018/19: outflow of £4.6m) and net debt was £102.8m at financial year end (FY 2018/19: £107.5m). IFRS revenue (which includes "pass-through" revenue on paper and International Identity Solutions non-novated contracts) was £466.8m (FY 2018/19: £564.8m). IFRS operating profit of £42.8m (FY 2018/19: profit £31.5m) was higher than adjusted operating profit due mainly to a gain on the sale of the International Identity Solutions business of £25.3m, a credit of £8.7m relating to the change in revaluation rates for certain UK defined benefit pension deferred scheme members, offset by £9.3m of restructuring charges. IFRS basic EPS from continuing operations was 33.1p (FY 2018/19: 18.8p).

It is important to note that we saw a major contribution to our profits from the UK Passport contract, which will decline rapidly in FY 2020/21 and not contribute the year after, as the contract moves to a new supplier. Further detail of the Group's financial performance is covered on pages 19 to 21.

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Strategic report

Corporate GovernanceFinancial statementsShareholder information

2

De La Rue

Annual Report 2020

Chairman's statement continued

Capital Raising

On 17 June 2020, we announced the terms of a proposed fully underwritten capital raising, which is intended to raise gross proceeds of approximately £100m. The capital raising will be structured by way a firm placing of 45,410,026 new ordinary shares and a placing and open offer of 45,499,065 new ordinary shares, at an issue price of 110 pence per new ordinary share. The proposed capital raising is required to provide the Company and its management with operational and financial flexibility to implement the Turnaround Plan, in particular given the investment needed to achieve the full benefits of the Turnaround Plan, the upcoming refinancing requirement of its existing debt facilities, the loss of the UK Passport production contract during H1 2020/21, and the current unprecedented uncertainty in the financial and commercial markets due to COVID-19. The capital raising is being fully underwritten by Barclays Bank PLC, Numis Securities Limited and Investec Bank plc.

We aim to return to a strong financial position by investing in the business."

In order to facilitate the capital raise, the Directors believe it is necessary that existing Shareholders and new investors have sufficient certainty around the continued availability, and terms, of De La Rue's financing to successfully implement the Turnaround Plan and support the future growth of the business. In order to seek to provide that certainty, we have agreed conditional terms with our lenders in order to secure (among other things) an extension to the maturity date of the Group's existing revolving facility agreement from

1 December 2021 until 1 December 2023 which provides the Group with continued access to bonding facilities and up to £175m of cash loans. As part of the amendments to the revolving facility agreement, the Company is restricted from making dividends for a period of 18 months from the date that the amendments become effective. The amendments are conditional on (among other things) the success of the Capital Raising (such that the gross proceeds of at least £100m are received by the Company by 31 July 2020). In the event that gross proceeds of at least £100m from a capital raise are not received by 31 July 2020, the Company must agree an alternative financing plan with the lenders within 45 days of

On 31 May 2020, the Trustee and the Company agreed the terms for a schedule of contributions and a recovery plan, setting out a programme for clearing the UK Pension Scheme deficit (the "Recovery Plan"). The latest actuarial valuation of the UK Pension Scheme as at 31 December 2019, which was based on intentionally prudent assumptions, revealed a funding shortfall (technical provisions minus the value of the assets) of £142.6m. The Recovery Plan makes an allowance for post-valuation market conditions up to 30 April 2020 (at which point there is an estimated funding shortfall of £190m), including the impact of COVID-19 on financial markets to that date. The £190m funding deficit is addressed by payments of £15m per annum (payable quarterly in arrears) under the Recovery plan payable from 1 April 2020 until 31 March 2023 and then payments of £24.5m per annum (payable quarterly in arrears) from 1 April 2023 until 31 March 2029 (whereas under the recovery plan agreed with the trustee in 2016, the payments would have been £22.2 million between 1 April 2020 and 31 March 2021, £23.1 million between 1 April 2021 and 31 March 2022 and £23 million per annum thereafter until 31 March 2028). In exceptional circumstances additional contingent contributions may also become payable by way of an acceleration of the contributions due in later years. This agreement with the Trustee is conditional on the success of the Capital Raising (such that gross proceeds of £100m are received by the Company by 31 July 2020). Provided that these criteria are achieved, the Group's contributions to the UK Pension Scheme will not change until the next triennial valuation as at 31 December 2022 (to be completed by 31 March 2024).

Capital allocation and dividend

As a result of our H1 2019/20 financial performance and uncertainty around the management outlook at the half year, the Board suspended dividend payments until the new executive team was established, a Turnaround Plan put in place and delivery begins to be demonstrated against that plan. At the half year the Group net debt/EBITDA ratio was 2.72 times, close to our covenant levels of less than, or equal to, 3.0 times. The Board has reviewed a plan for

31 July 2020 or there will be an immediate event of default under the existing revolving facility agreement.

FY 2020/21 that shows the Group will operate within its banking covenants, assuming the successful completion of the fully underwritten equity Capital Raising.

Key facts1

£426.7m

Revenue excluding paper (FY 2018/19: £516.6m)

£466.8m

IFRS revenue

(FY 2018/19: £564.8m)

£23.7m

Adjusted operating profit (FY 2018/19: £60.1m)

£42.8m

IFRS operating profit (FY 2018/19: £31.5m)

1 Please see Financial Review for full definitions of terms.

De La Rue Annual Report 2020

We discuss the viability statement for the business in more detail on page 30 and Going Concern on pages 107 to 109. Due to the actions taken by our CEO and the team in the second half of the year, the Group operated well within its banking covenants (which excludes the pension deficit liability) at 2.24 times debt/EBITDA at year end. In addition, De La Rue met its guidance for the year for adjusted operating profit issued in November 2019.

Following completion of the Capital Raising the capital allocation of the Company will be:

• • Organic investment: De La Rue will invest in growth-focused R&D and technology, manufacturing efficiency and cost optimisation programmes, and the requirements of new contracts as they are awarded, where such investment is demonstrably accretive to value;

• • Regular returns to shareholders: the Directors recognise the importance of a regular, sustainable dividend to Shareholders. The Directors intend to review regularly the reinstatement of a dividend, with an expectation that a dividend will be paid within the Turnaround Plan period once the Company is generating sustainable positive free cash flow. Once the Turnaround Plan is successfully completed, De La Rue will target a dividend cover of 2 to 3 times underlying earnings, taking into account the sustainable free cash flow generated in the relevant period;

• • Acquisitions in line with strategy: the Directors are focused on the successful execution of the organic Turnaround Plan and therefore acquisitions are not a near term priority. In the medium term, we will explore value enhancing acquisition opportunities, which increase our technology advantage and its ability to accelerate growth in markets where we already have a leading position;

• • Balance sheet strength: De La Rue is committed to maintaining a strong and efficient balance sheet, appropriate for the Company's investment requirements. Accordingly, the Directors will target a long term gearing policy of below 1 times net debt/EBITDA (excluding deficits on retirement benefit schemes), which it expects to achieve by the end of the Turnaround Plan period, taking into account the net proceeds of the Capital Raising.

Governance

The Board considers leadership, culture and good governance as essential factors in the Group's ongoing transformation. We discuss our governance policy in more detail on pages 42 to 53. There is much to do to create a lean, efficient and predictable business, as well as ensuring sound succession planning and talent development. Our people have endured significant change and challenge as well as having to cope with the trials of COVID-19.

We are mindful of our impact on the environment and I am pleased that we have made good progress on our energy use during the year and further details on this area can be found on pages 32 to 40.

The Board

In September 2019, I re-joined De La Rue having been the Managing Director of De La Rue Card Systems Division from 1997 until it was sold to Oberthur at the end of 1999. I succeeded Philip Rogerson as Chairman on his retirement at the start of October 2019.

In October 2019, Andy Stevens, Senior Independent Director, stood down, with Sabri Challah becoming Senior Independent Director and Maria Da Cunha, Non-executive Director, succeeding Sabri as Chair of the Remuneration Committee.

In October 2019, we appointed Clive Vacher as our new Chief Executive Officer and as an Executive Director. Clive has more than 16 years' experience running complex P&Ls for global industrial companies in the commercial and government/defence sectors. He has significant experience of international business transformation and operational performance improvement.

In January 2020, our Chief Financial Officer, Helen Willis stepped down from her role and ceased to be a Director of the Company. Rob Harding joined De La Rue as interim Chief Financial Officer and a member of the Executive Leadership Team, although not as a Director of the Company, in March 2020. As announced on 17 June 2020, Sabri Challah has informed the Board of his intention to step down as a Director due to his other commitments. Sabri will remain on the Board until such time as a successor Independent Non-Executive Director has been appointed, but in any event until no later than the date of the Company's forthcoming annual general meeting.

As we enter the execution phase of the Turnaround Plan, we will look to bring further appropriate skills onto the Board to support the future business direction.

People

The Board would like to thank all those who work for the Company for their hard work and dedication to De La Rue, in what has been a difficult year for many people. As a company, we have had to reduce the workforce in many areas of the business and changes of this kind are regrettable and unsettling.

At the same time as navigating through these changes, we have maintained our commitment to high ethical standards, which are incorporated in our Code of Business Principles. We are conscious of the role we play in many communities around the world and we discuss our role as a responsible business on pages 32 to 40.

Outlook

The Directors believe that the Capital Raising is required to provide the Company and its management with operational and financial flexibility to implement the Turnaround Plan.

We have seen a good start to the year in both our Authentication and Currency divisions. Our Turnaround Plan is well underway and is showing positive results, which gives us confidence in our abilities to grow our revenue and reduce our cost base. At the same time, we are mindful of the challenges we face in the marketplace and with ongoing volatility in global markets. We are confident that we can grow both our revenue and our operating profits in the coming year and aim to move the Company into a cash generating position shortly thereafter.

Considering the financial impact of the planned exit of our Identity Solutions business, we have a target of returning the Company to a strong, financial position and an operating platform which will deliver sustainable growth at high operating margins and strong cash generation in the medium term. Following an initial period of cash outflow to fund the Turnaround Plan, we aim for the Group to be generating positive free cash flow and capable of supporting sustainable cash dividends to shareholders.

Kevin Loosemore Chairman

17 June 2020

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Strategic report

Corporate GovernanceFinancial statementsShareholder information