Interim Statement - Six months to 29 September 2001
News Release : 27 November 2001
HIGHLIGHTS - Operating profits* up 7% at £29.8m and profits before tax* up 13% at £35.6m.
- Cash Systems sales up 23%, operating profits up £10.2m to £14.0m, and margins average 9.5% for first half (excluding acquisitions).
- Currency results depressed in first half through expected wind down of India paper contract but good order book underpins second half results.
- Global Services incurs losses of £2.7m (2000/2001 : profit of £0.9m).
- Headline earnings per share up 7% at 13.4p on comparable period despite 1% increase in effective tax rate.
- Interim dividend increased by 5% to 4.2p (2000/2001 : 4.0p) per share.
- Despite £58m spent on acquisitions (including debt acquired) in the first half closing net debt at £30m represents gearing of just 11%.
- Favourable outlook for second half supported by strong order book in Cash Systems and Currency.
* before exceptional items (including reorganisation costs) and goodwill amortisation charged to operating profits
Brandon Gough, Chairman of De La Rue plc, commented on the results:
"It is particularly pleasing that the first half has seen further progress and continued strong financial performance for De La Rue against a background of overall economic uncertainty. Cash Systems is delivering as promised and is on target to achieve an overall 10% margin for the year (excluding acquisitions). Both Cash Systems and Currency enjoy good order books which helps underpin our confidence for the second half. Global Services has had a disappointing first half but we have taken action to restructure the division into three market focussed businesses."
"The financial strength of the company, our leading market positions, strong order books and calibre of our people allow us to be confident about the outlook for the Group."
For further information please contact:Paul Hollingworth, Finance Director, +44 (0)1256 605307
Mark Fearon, Head of Corporate Affairs, +44 (0)1256 605303
Stephen Breslin,, +44 (0)20 7404 5959
27 November 2001
Group Results A strong trading performance from Cash Systems, where operating profits were up £10.2m to £14.0m (on the back of a 23% rise in revenues - pre-acquisitions), has more than offset a reduction in profits in other parts of the Group resulting in overall operating profits being £2.0m or 7% ahead at £29.8m. Headline earnings per share increased by 7% to 13.4p in the first half despite the effective tax rate increasing from 27% to 28%.
As expected, the absence of India banknote paper orders within our Currency business has impacted first half profits in the Security Paper and Print division. The second half should be stronger given the good banknote order book. For the non-banknote security products business the move to a new manufacturing facility for De La Rue Tapes caused some short term disruption, which adversely impacted profits. Global Services had a disappointing first half and losses of £2.7m were incurred (2000/2001 : profit of £0.9m) as De La Rue Holographics (DLRH) sales and margins came under pressure; and decreased revenues in the Identity Systems (IDS) business caused by timing delays in a number of installations were reported. However, actions taken, as announced in May 2001, should lead to a better performance in the second half with both DLRH and IDS enjoying good order books.
Cash Systems has had an excellent first half as sales were up 23% (pre-acquisitions) and margins improved from 3.2% to 9.5%. We are on target to reach a margin for the year of 10%. The overall contribution from acquisitions was small - £0.4m operating profit on sales of £20.9m but we do expect the acquisitions to be earnings enhancing and make a meaningful contribution for the full year.
Dividend
An increased interim dividend of 4.2p per share, up 5% on last years' interim dividend will be paid on 8 April 2002 to shareholders on the register on 8 March 2002.
Acquisitions
During the first half Group expenditure on acquisitions was £57.6m (including debt acquired). This included several bolt-on acquisitions by Cash Systems including ATS Money Systems Inc., a US based cash handling organisation for the retail market; and Ascom's cash handling service businesses in Belgium and Switzerland. In May 2001, Cash Systems also acquired Currency Systems International Inc. (CSI), the US based manufacturer of large sorting equipment and software for US$55m.
Disposals
In October 2001, we announced the disposal of our Transactions Services (TS) business to alphyra group plc for £6m; £3m of which was in alphyra group new shares. For the half year TS lost £1.2m (2000/2001 : loss of £0.7m) but the sale resulted in an estimated exceptional pre tax gain of £3.0m. As announced in May 2001 we completed the CHF 50m (£20m) disposal of our 50% shareholding in De La Rue Giori SA, the leading supplier of currency printing presses, to Koenig & Bauer AG, the German manufacturer of printing presses. In addition, De La Rue also reached agreement with M. Roberto Giori, Chairman of De La Rue Giori and Dynavest Holding & Cie SCA, the other shareholder, to settle the arbitration claim which was outstanding between the parties, conditional upon completion of the disposal. The net cost of settling the arbitration claim was £5.9m compared to the original claim of £125m.
Global Services Reorganisation
In May 2001, we announced our intention to bring together the broad range of De La Rue's capabilities in Global Services and Security Products, under common leadership and management. Jon Marx, who was appointed to lead the division in May, has made considerable progress in building capabilities around three market focussed businesses of Brand, Identity Systems and Finance. For the purposes of consistency in financial reporting, as announced in May 2001, the Security Products business, which mainly addresses the traditional non-banknote markets, such as travellers cheques, vouchers and stamps will continue to report as part of Security Paper and Print divisional results.
Operations
Cash Systems
|
2001/02
Half Year
£m |
2000/01
Half Year
£m |
2000/01
Full Year
£m |
| |
|
|
|
| Sales |
168.7* |
120.2 |
262.4 |
| Operating profit (before goodwill amortisation) |
14.4* |
3.8 |
17.0 |
* includes acquisitions: sales of £20.9m and operating profit of £0.4m
Cash Systems delivered a strong operating performance in the first half, which was particularly pleasing as the division also had to integrate several bolt-on acquisitions acquired during the first half. First half performance was ahead of our expectations with operating profits (excluding acquisitions) at £14.0m, up £10.2m on the comparable period last year. With the emphasis now away from restructuring towards generating sales growth it was pleasing to report increased revenues of £147.8m (excluding acquisitions), up £27.6m or 23% on the same period last year. The division has also maintained its strong order book (particularly in Branch Cash Solutions), which remains ahead of last year. Whilst we are forecasting strong sales growth in the second half it will not be as high as the first half which benefited in particular from euro related shipments and Twinsafe™ II sales. Operating margins (excluding acquisitions) for the first half were 9.5% and we are still on track to achieve our objective of a 10% margin for the 2001/2002 financial year.
The launch of the euro in January 2002 represents a significant opportunity for this year (with some follow on next year) and we estimate that the benefit for the division this financial year of the euro conversion will be approximately 8% of sales.
Business Stream Performance
Branch Cash Solutions has again performed well under the management of Germain Roesch and the business remains strong in all key regions. Orders and sales for both Teller Cash Dispensers and Teller Cash Recyclers were again encouraging and during the first half orders of 720 units of the Twinsafe Teller Cash Recyclers were taken. The first half benefited from increased sales via the new sales and distribution networks in Switzerland and Belgium, and in particular of Twinsafe units. The businesses were acquired from Ascom Autelca AG in April 2001 and are now bedded in. We have also now launched the Twinsafe machine into the USA market generating significant customer interest. The Original Equipment Manufacture (OEM) business, which makes dispensing mechanisms for ATM machines, performed in line with expectations. As expected, sales were down reflecting the market's move to mini-mechanisms which have a lower selling price.
During the first half much work has centred on the integration of our Cash Processing business stream with the recently acquired CSI business. We have decided to maintain the CSI brand in certain markets and rename the business stream Currency Systems. In May 2001, we appointed Jonathan Ward, previously Managing Director of Cash Processing, to head up the combined business. The CSI integration and savings plans are progressing well and to date we have announced the senior management team; integrated the sales and marketing organisations; finalised the product integration and development plans, and we are in the process of evaluating the impact on our manufacturing strategy. The newly combined business will benefit from being a tightly run organisation, focussed on its key markets but with a lower cost base. More importantly the business will be able to offer a more extensive range of cash processing solutions for our customers. First half sales were disappointing in the combined operation but we remain confident about the outlook for the business.
The Desktop Products business has performed in line with expectations with first half sales driven by euro related products. The business launched a range of euro-ready note and coin counters earlier this year which has been well received by those businesses involved in the changeover to the euro in January 2002. In May 2001, we acquired ATS Money Systems, Inc. (ATS), a leading US provider of cash handling solutions hardware and software, predominantly to the retail sector for US$ 14.0m. Work continues on the integration of ATS as well as further work on formulating the general retail strategy.
The division's Customer Service business, which continues to be a key component of Cash Systems' strategy, performed strongly with good underlying sales growth and now accounts for 30% of total sales. During the period we acquired the Canadian company Haliburton & White and have further expanded our geographic network and invested in our operational capability.
Security Paper & Print
|
2001/02
Half Year
£m |
2000/01
Half Year
£m |
2000/01
Full Year
£m |
|
|
|
|
| Sales |
108.0 |
103.9 |
212.8 |
| Operating profit |
19.3 |
23.8 |
50.4 |
Overall profits in the Currency business have declined. The main reasons for this was the absence of India banknote paper orders (unlikely to resume until 2003) which last year accounted for about 15% of banknote paper volumes and product mix. The banknote business, however, continues to flourish, and given the strong order book the emphasis for the remainder of the year will centre on order fulfilment. During the first half the European Central Bank confirmed a requirement for De La Rue to print an overspill order for euro banknotes. The contract is currently progressing well at our Gateshead, UK factory. During the first half, we also secured a further substantial overspill contract from another customer and there is good order book coverage for the second half on the banknote business. We expect a stronger second half performance from Currency, more in line with the comparable period last year. Cash generation has again been excellent in the first half.
Trading in the non-banknote business was down mainly because activity in De La Rue Tapes, which produces security threads for banknotes, decreased because of a reduction in demand from the Currency division; the business' move to a new, modern facility has also caused some short-term disruption. The UK printing operations (in High Wycombe, Dunstable and Peterborough) have performed in line with our expectations.
Global Services
|
2001/02
Half Year
£m |
2000/01
Half Year
£m |
2000/01
Full Year
£m |
| |
|
|
|
| Sales |
19.3 |
23.5 |
47.9 |
| Operating (loss)/profit |
(2.7) |
0.9 |
1.0 |
Global Services had a very disrupted first half as the division underwent the major reorganisation referred to earlier. The reorganisation is now complete. During the period, divisional revenues declined to £19.3m (2000/2001: £23.5m) and the division made a loss of £2.7m, primarily due to a disappointing performance from De La Rue Holographics and timing of sales contracts in the Identity Systems business.
The wider brand market remains a significant opportunity and the Brand business continues to benefit from its sector focus. As announced last year, part of the Microsoft Windows® labels contract is scheduled to move to a plastic substrate through another supplier later this year but we have been successful in retaining a larger share of this contract than anticipated. The X-box label contract with Microsoft, announced last year, has progressed well with label production now well underway with shipment expected in the second half.
De La Rue Holographics' revenues were down during the first half mainly as a result of production issues related to supply of optical variable devices (OVD's) to the banknote sector, in particular for the euro. We have recently taken several orders for the supply of euro OVD's and efforts centre on ensuring we deliver against these orders in the second half.
The Identity Systems business also reported decreased revenues caused by timing delays in a number of identity systems installations. Trading will pick up in the second half as the business has won a major passport and national identity card contract for a Latin American government (sales value of $20m over 8 years). Under the contract, De La Rue will supply approximately 14 million identity cards and nearly one million digitally in-filled passports, which will be distributed from about 320 sites across the country. There is currently a great deal of interest from our Government customers in upgrading the security of their national identity or passport schemes and the business is well placed to benefit from them.
Associates
Following the disposal of our stake in De La Rue Giori the main associate is Camelot, the UK lottery operator. Profit from associates before interest and tax rose by £2.1m to £4.5m because of the absence of losses incurred by De La Rue Giori in the first half last year. At Camelot profits were down as a result of lower sales. The second lottery licence commences on 27 January 2002 when De La Rue's effective shareholding decreases from 26.67% to 20%. During October the Company received an interim dividend from Camelot of £15.4m in respect of the first licence period.
Interest
The Group's net interest income of £1.3m is the same as last year as a result of a £0.5m decline in interest received from associates offsetting a £0.5m improvement in the Group's own interest costs (mainly interest receivable on corporation tax refunds). The reduction in interest income from associates follows the disposal of De La Rue Giori and the reduction in Camelot's cash balances as a result of the dividends paid out to shareholders in March of this year.
Taxation
The adoption of FRS 19 has resulted in the restatement of last year's effective tax rate upwards from 23% to 27% (both half year and full year) as well as a credit to shareholders funds (as at 31 March 2001) of £43.9m as a result of bringing on balance sheet a deferred tax asset. The underlying effective tax rate has increased from 27% to 28%. The increase in the effective rate is mainly because of the changing geographical mix of the Group's earnings to higher tax rate jurisdictions. We expect that, in the absence of unforeseen events, the tax rate for the full year will be at a similar level.
Exceptional Items
The net exceptional credit before tax was £7.2m. The most significant item was the disposal of our 50% stake in De La Rue Giori, which resulted in an exceptional gain of £14.5m. Offsetting this gain were the £5.9m costs (including legal fees) of settling the claim brought by our joint venture partner in De La Rue Giori (details of which were provided in the 2001 annual report).
The integration of CSI with our Cash Processing business (now re-named Currency Systems) will result in an estimated pre-tax restructuring charge of £6m to £7m, of which £1.5m was incurred in the first half. The balance is likely to be incurred in the second half.
Cashflow and Borrowings
The build up of working capital in the first half is mainly to satisfy the higher order book, particularly within Cash Systems. Despite this the operating cashflow in the first half was still £18.3m. We expect the working capital position to start unwinding over the second half although given the higher level of sales activity it is probable that overall working capital levels will be higher at the end of the year, than at the beginning.
Closing net debt of £29.8m represents a £65.9m change from the £36.1m net cash position at 31 March 2001. Since the year end we have spent £57.6m on acquisitions (including debt acquired) and £10.2m buying in our own shares to cover share option exposures. During the first half we also paid out both last year's interim and final dividends, amounting to £24.0m.
Outlook
Since the half year overall trading in our operations has been ahead of last year and in line with our expectations.
Whilst no business is immune to the economic cycle our trading performance this year is underpinned by the strength of our order books in both Cash Systems and Currency and helped by the restructuring that has taken place in earlier years. The financial strength of the company, our leading market positions, strong order books and calibre of our people allow us to be confident about the future prospects for the Group.
Notes to Editors 1. An interview with CEO Ian Much can be viewed at the De La Rue http://www.delarue.com/financial/reports and Cantos website http://www.cantos.com/
2. High resolution images can be downloaded from NewsCast at http://www.newscast.co.uk/
3. De La Rue is the world's largest commercial security printer and papermaker,
involved in the production of over 150 national currencies and a wide range of security documents such as travellers cheques and vouchers. Employing almost 7,000 people in 31 countries, the company is also a leading provider of cash handling equipment and software solutions to banks and retailers worldwide, helping them to reduce the cost of handling cash. Applying our core brand values of security, integrity and trust, De La Rue is at the centre of some of the most innovative and exciting developments in the secure products and services market. We are pioneering new technologies from tailored solutions to protect the world's brands through to government identity solutions in secure passports and identity cards.