Alongside its interim results, the security printing group announced that the passport contract loss had resulted in a complete rethink over the future for its Identity Solutions offering, and the group would now shift its focus to the production of secure identity components and features, which are also relevant in other high-value markets such as brand protection.
"Over the last six months we have conducted a thorough review of our strategy and market positions. In the light of the UK passport decision, we have concluded that we will refocus our identity business on the supply of higher margin security features and components,” said chief executive Martin Sutherland. “We believe we can continue to drive cost efficiencies across the group and achieve growth in security features, polymer and product authentication and traceability.”
De La Rue cited “strong synergies” between identity components and the rest of the group in terms of technology platforms and the markets they serve. It expects its Product Authentication & Traceability wing to double in size within the next three years.
The revamp of the group’s offering is likely to find favour with activist investor Crystal Amber, which had been pressing for change at the business.
The PLC also said it would “continue to assess all options” for the Identity Solutions prime system integration business (complete products such as passports) to maximise shareholder value, meaning this part of the Identity Solutions operation could be sold off.
Any likely impact on De La Rue’s workforce at its Gateshead security printing facility, which produces passports and other security print products, is currently unknown. The site employs more than 600 workers, with around 200 directly involved with UK passport production.
The group has agreed a preliminary transfer plan with Her Majesty’s Passport Office that will begin in October 2019. The TUPE aspect has not yet been agreed as there is still almost a year left to run, and it is not clear how many De La Rue employees would potentially transfer to continental firm Gemalto, the controversial winner of the new passport tender.
De La Rue said that in its next financial year it expected the remaining UK passport work to bring in two thirds of anticipated annualised profit and sales of around £8m and £40m respectively.
A spokesman said that no-deal Brexit contingency plans were under discussion. “In the event of a no-deal Brexit the Home Office may require the emergency issuance of a new passport at short notice, before it transfers to Gemalto.”
It’s not known whether the emergency passports would be red, or blue.
For the six months to 29 September group sales excluding paper rose by 9% to £242m. Operating profits slumped by 59% to £10.1m due to a mixture of factors, including lower margins at the group’s Currency operation due to the work mix and additional investment in R&D and sales and marketing.
Profits were also hit by an increase in exceptional charges from £1.8m to £6.6m. Site relocation and restructuring costs related to the group’s manufacturing review were £3.3m, and De La Rue booked a £2.9m additional loss on the disposal of the Portals paper making business announced earlier this year.
Order intake rose by 30% and banknote printing volumes increased by 3% to 3.6bn notes. Following the completion of successful trials on its Safeguard banknote polymer, De La Rue has begun printing the new £20 polymer note for the Bank of England, which will be issued in 2020. This will involve 520 tonnes of polymer substrate over two years.
The group has also won contracts for ePassports for Qatar, and diplomatic passports for Libya, a new customer.
The deficit in the group’s defined benefit pension scheme reduced dramatically, from £189.1m the prior year to £77.2m, mainly due to an increase in the discount rate used for the valuation.
De La Rue’s share price was effectively unchanged on the announcement, falling by 1p to 461p (52-week high: 660p, low: 424.5p).