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De La Rue to slash costs by £35m

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De La Rue plans to substantially grow its polymer banknote business
De La Rue plans to substantially grow its polymer banknote business

De La Rue has quashed fears that it could breach its banking covenants and has announced a new three-year Turnaround Plan that includes an “accelerated cost reduction programme” aimed at saving the group £35m a year – but it’s not yet clear where the axe will fall.

The plan has been announced following three months of “data-driven intensive work” by senior management under the direction of new CEO Clive Vacher, with full details to be rolled out along with the PLC’s year-end results in May.

In a trading update issued today (25 February) De La Rue described H2 trading as “satisfactory” and stated that it was maintaining good liquidity and expected to “operate within its banking covenants” in the current financial year.

De La Rue shares jumped by nearly 20% on the news, rising by 22.8p to 145p (52-week high: 466p, low: 100.9p).

Back in November the group’s share price tanked when it warned it could breach its covenants if trading continued to deteriorate.

In future De La Rue plans to focus on two markets: Currency and Authentication.

It said it would “exceed and accelerate” its previous cost reduction goal of £20m, upping that to £35m on an annualised basis from the second half of its next financial year, although “a significant proportion” of the cost reduction programme is set to be completed by August this year. 

“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,” De La Rue stated.

The group is focusing on the global opportunity for polymer banknotes, with just 3% by volume currently using polymer and demand for currency continuing to grow worldwide – despite the increasing use of technology such as contactless payments. 

“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,” it said.

The firm has printed the new polymer Bank of England £20 released last week and supplied 25% of the polymer volume required for the note.

The group also plans to grow its Authentication division, where the key product is tobacco tax stamps, to £100m sales by March 2022 “with strong operating margins”. That part of the business had sales of £39.3m last year.

Vacher said he was confident the new approach was the right plan for the business.

"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,” he stated.

Further details about where the cost cutting axe would fall were unavailable at the time of writing.

De La Rue has already cut back its Gateshead facility with 170 jobs going there as part of a previous “footprint restructuring programme”, although at the time Unite contended that this was related to the passport contract loss.

The loss of the huge UK passport contract is also affecting De La Rue’s results. Following the government’s decision in March 2018 to award the next contract to continental supplier Gemalto, De La Rue sold its £79m turnover Identity Systems business in November 2019 bringing in £42m in cash.

The new blue passports will begin being issued early next month, with all passports going blue by mid-2020 according to the Home Office. The phased transition from De La Rue to Gemalto will be “a material contributor” to De La Rue’s profitability in the current financial year.

De La Rue said the Turnaround Plan would result in a more flexible manufacturing model “thereby ensuring De La Rue makes money in currency down-cycles and more money in up-cycles.” It said it already had orders in hand to cover around 70% of its manufacturing capacity for the next financial year.

The firm, which is still the world’s largest security printer, had sales of £516.6m last year and employed 2,287 staff.

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