De La Rue Regulatory News (DLAR)

DE LA RUE PLC

22 November 2016 

Solid performance underpinned by strong order book and good strategic progress

De La Rue plc (LSE: DLAR) (De La Rue, the "Group" or the "Company") announces its half year results for the six months ended 24 September 2016 (the period or half year).

KEY FINANCIALS

The figures below show continuing operations, excluding the Cash Processing Solutions business which was sold on 22 May 2016.

FINANCIAL HIGHLIGHTS

· Half year performance in line with expectations, full year outlook unchanged

· Year on year revenue flat and underlying operating profit up 2% despite the impact of a c£30m contract which concluded in H2 2015/16

· Currency revenue down 2%, underlying operating profit up 3%

· Product Authentication and Traceability revenue up 10% and underlying operating profit up 24%

· Net debt increased by £9.4m to £115.5m

· Group 12 month order book remained strong at £409m, providing good visibility for the rest of the year and beyond

· Concluded pension deficit funding plan with reduced cash contributions in 2017/18 and 2018/19

· Interim dividend maintained at 8.3p

STRATEGIC AND OPERATIONAL HIGHLIGHTS

Optimise & Flex - on track to deliver operational flexibility and planned cost savings

· Banknote Print volumes up 22% to 3.3bn notes, reflecting success in winning both overspill and relationship orders

· Banknote Paper volumes up 8% to 5,300 tonnes

· Successful launch of new Bank of England £5 polymer notes, designed and printed by De La Rue. Printing of £10 polymer notes underway

· Agreement to enter 60/40 joint venture with the Government of Kenya, which will strengthen our position in East Africa

· Restructuring of manufacturing footprint on track

Invest & Build - good momentum building in growth segments

· Good momentum in Polymer

- Second significant volume customer win

- 15 note issuing authorities secured since launch in 2012

· Holographic foil security feature for polymer launched and issued into circulation on the Gibraltar £100 during H1, further enhancing our polymer offering

· Active™ - our latest security thread with lenticular technology - in circulation on first note on Bahamas $10

· Secured two multi-year Identity Solutions contracts with Qatar and Barbados

· DLR Certify™ track and trace system successfully deployed with Cameroon as the first customer

Martin Sutherland, Chief Executive Officer of De La Rue, commented:

"De La Rue's half year results are in line with our expectations. The Currency business has shown strength and resilience despite the impact from the conclusion of a material contract last year. Both Banknote Print and Banknote Paper have performed well with increased volumes.

"De La Rue continues to make good progress against our 2020 strategic plan. We have further strengthened our position in the fast growing East Africa region through the agreement to form a joint venture with the Government of Kenya. I am also pleased with the progress in Polymer where we have secured a second volume customer. We now supply polymer substrate to 15 issuing authorities, representing c40% of total polymer customers. Although the contribution to the Group from Polymer is still small, we are optimistic about its potential growth in the coming years.

"In non Currency businesses, we have secured two multi-year Identity Solutions contracts and gained early traction in the enterprise market for Product Authentication and Traceability.

"While we expect little impact in the current financial year, as a major UK-based exporter with more than 80% of our revenue from outside the UK, we believe that we would benefit from a sustained weakness of Sterling. We are also encouraged by our 12 month closing order book of £409m and the early strategic momentum in the key future growth areas. We remain confident of the business' outlook for the rest of the year and beyond."

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Cautionary note regarding forward-looking statements

These results include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "plans", "goal", "target", "aim", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout these results and the information incorporated by reference into these results and include statements regarding the intentions, beliefs or current expectations of the directors, De La Rue or the Group concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and dividend policy of De La Rue and the industry in which it operates.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond De La Rue's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's actual results of operations, financial condition, liquidity, dividend policy and the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in these results and/or the information incorporated by reference into these results. In addition, even if the results of operations, financial condition, liquidity and dividend policy of the Group and the development of the industry in which it operates, are consistent with the forward-looking statements contained in these results and/or the information incorporated by reference into these results, those results or developments may not be indicative of results or developments in subsequent periods.

Other than in accordance with its legal or regulatory obligations, De La Rue does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

INTERIM STATEMENT

De La Rue's half year results were in line with expectations, with revenue flat and underlying operating profit up 2%. Implementation of the strategic plan is progressing well with the restructuring of the manufacturing footprint on track and an agreement to form a joint venture with the Government of Kenya. The Group's 12 month closing order book remained strong at £409m (H1 2015/16: £405m) at the end of the period.

In the first half of the year, we successfully mitigated the impact of the conclusion of a security features contract which contributed annual revenue of c£30m with good performance in Banknotes and Banknote Paper. Revenue in Currency was 2% lower than the prior year but underlying operating profit was up 3%.

Identity Solutions performed as expected with revenue up 6% and operating profit down 26%. Margins were in line with those in the FY2015/16. Product Authentication and Traceability performed well with revenue up 10% and operating profit up 24%, driven by higher volumes from existing customers.

FINANCIAL RESULTS

All numbers below are shown for continuing operations only and exclude the Cash Processing Solutions business which was sold on 22 May 2016. The loss from the discontinued operations in the period was £6.2m. See Note 3 in the accounts for details of the discontinued operations.

Group revenue was flat at £189.5m (H1 2015/16: £188.7m) in the first half. Underlying operating profit was up 2% at £24.0m (H1 2015/16: £23.6m). Underlying profit before tax increased by 3% to £18.2m (H1 2015/16: £17.6m) and underlying earnings per share was 4% lower at 14.0p (H1 2015/16: 14.6p). Exceptional net charges in the period were £1.0m (H1 2015/16: exceptional net gains of £7.5m), consisting of £1.6m site relocation and restructuring costs which were offset by £0.5m income relating to release of warranty provisions and a £0.1m gain from a land sale. This resulted in profit before tax of £17.2m (H1 2015/16: £25.1m), down 31% year-on-year.

Underlying operating cash flow, comprising underlying operating profit adjusted for depreciation and the movement in working capital, was £25.0m (H1 2015/16: £61.1m). Net debt at 24 September 2016 was £115.5m up £9.4m since the year end mainly due to an adverse working capital movement. Inventory increased in preparation for sales in the second half of the year.

DIVIDEND

An interim dividend of 8.3p has been declared for the half year ended 24 September 2016 (H1 2015/16: 8.3p), payable on 11 January 2017 to shareholders on the register on 9 December 2016.

STRATEGIC PROGRESS

During the first half, we have made good strategic progress in our three areas of focus: Optimise and Flex, Invest and Build, and the culture change programme.

Optimise and Flex

Optimise and Flex aims to mitigate the risks in the product lines that are challenged by pricing and/or limited growth potential, i.e. Banknote Paper, or that face unpredictable demands, i.e. Banknote Print.

To better align De La Rue's capacity with historic volumes and the unpredictability in the banknote market, in December 2015 we announced our manufacturing footprint restructuring programme to improve efficiency and reduce costs. The programme will see a significant reduction in our banknote production capacity but with an ability to flex with changeable shift patterns and the use of outsourcing partners.

We have agreed changes to working practices in a number of sites, significantly improving labour flexibility. During the period, we have decommissioned two lines in Malta and upgraded a banknote print line in Gateshead, UK. We have also refined the implementation plan to give us a better blend of outsourcing with a more flexible in house production capacity, which involves keeping the remaining banknote print line open in Malta. The plan to deliver c£13m savings per annum from FY2018/19 with £15m incremental capital expenditure remains on track.

In August 2016 we agreed to enter into a joint venture with the Government of Kenya which will acquire a 40% interest in De La Rue's wholly owned subsidiary in Kenya for £5.0m. Leveraging our existing long term strategic relationship with the Government of Kenya, the joint venture will further strengthen our ties with the country and secure our position as a supply hub of currency and security solutions for the East Africa region. The transaction is expected to complete by the end of the financial year.

Our view of the banknote paper market remains unchanged. We continue to pursue strategic partnerships to rationalise capacity and reduce ongoing capital requirements. Discussions with a number of potential partners are ongoing.

Invest and Build

Invest and Build aims to invest in and grow the product lines that are exposed to higher growth and more predictable markets, namely Polymer and Security Features in the Currency segment, Identity Solutions and Product Authentication and Traceability.

Momentum in polymer continues. We gained market share by becoming the joint supplier of polymer substrate in a large market. While we expect limited contribution to the Group's profitability from Polymer in the short term, we believe it has significant growth potential in the coming years.

Security Features has progressed well strategically. We launched holographic foil on polymer with the issue of the Gibraltar £100 note in September 2016. As the most versatile product category in our portfolio, Security Features can be applied across all other product lines. Our renewed focus on holographic features will help to increase return on assets by utilising the features in banknotes as well as other security products.

Identity Solutions have seen some early success in the first half with the winning of two multi-year ePassport and service contracts - Qatar and Barbados. We have also increased our focus on selling individual components and standalone service contracts to State Print Works (SPWs) and commercial operators.

Product Authentication and Traceability has also made good progress. Just a year after launch, DLR Certify™ was successfully deployed in Cameroon. We also gained traction in the enterprise market, with initial discussions with a number of large commercial organisations about bespoke digital solutions.

We aim to accelerate growth in Invest and Build product lines through partnerships and bolt-on acquisitions, with the main focus on security features. Discussions with a number of potential technology partners are ongoing.

Drive a high performing culture

As part of the culture change programme, we launched the second phase of the Leadership Development Programme, focusing on developing the agility and capability to lead and inspire others to perform at the highest levels while working effectively in a matrix organisation. In June 2016 we hosted our first Above & Beyond Recognition Awards to recognise and celebrate both individual and team achievements in the past year.

We aim to create a leaner, more dynamic and agile organisation. The total headcount as at the end of September 2016 was 3,067, 14% fewer than a year ago.

OPERATING REVIEWS

Currency

The Currency segment comprises Banknote Print, Banknote Paper, Polymer and Security Features.

Performance in the segment has benefited from strong volumes in Banknote Print and Banknote Paper, but offset by the conclusion of an important contract in December 2015. Currency revenue was 2% lower year on year at £136.4m (H1 2015/16: £139.8m), while operating profit was 3% higher, reflecting a better business mix.

The commercial banknote market continues to be buoyant, however orders remain unpredictable due to overspill work from SPWs. Banknote Print volumes increased by 22% during the period to 3.3bn notes (H1 2015/16: 2.7bn), partly by winning overspill orders. Banknote Print revenue was up 8% year on year, with gross profit up 4%.

The new Bank of England £5 polymer notes, designed and printed by De La Rue, were successfully entered into circulation in September. Production of the new £10 polymer notes is now underway.

Banknote Paper volumes increased by 8% to 5,300 tonnes (H1 2015/16: 4,900 tonnes), also benefiting from overspill orders. Banknote Paper revenue was up 6% in the period, offset by lower margins from a different mix of contracts.

There was a 70% increase in Polymer revenue and a doubling of gross profit in the period, although it remains a small part of the Group. We now supply our Safeguard® polymer substrate to 15 issuing authorities across 21 denominations. All three new Scottish £5 notes that were designed and printed on Safeguard® successfully went into circulation in the last two months.

Security Features performance was adversely impacted by the concluded contract. We have made considerable progress on mitigating the impact with several new wins, including the UAE and Dominican Republic. Active™, our latest security thread based on lenticular technology, went into full circulation for the first time with the new Bahamas $10 note in September 2016.

The 12 month order book for Currency remained strong at £322m (H1 2015/16: £318m) at the period end.

Identity Solutions

Revenue grew 6% to £33.5m (H1 2015/16: £31.5m) primarily due to timing of deliveries. Operating profit fell to £3.4m (H1 2015/16: £4.6m), mainly due to the contractual reduction in contribution from a large contract as previously announced. Operating margin in the second half is expected to be in line with the first half.

Our focus on ePassport, digital and service offerings has borne fruit, securing multi-year contracts with Barbados and Qatar to provide ePassport and service solutions.

We have also made considerable progress on our strategy to sell to SPWs and commercial operators with a number of repeat and new orders for individual passport components. The sales pipeline for Identity Solutions remains strong.

Product Authentication & Traceability

Revenue grew by 10% to £21.5m (H1 2015/16: £19.6m), while operating profit increased by 24% to £6.3m (H1 2015/16: £5.1m).

DLR Certify™, our first track and trace software solution, was successfully launched in Cameroon during the period. The end-to-end solution authenticates each pack of cigarettes with uniquely coded tax stamps that also enable the product to be traced through the supply chain with the DLR Certify™ system, thus protecting its citizens and tax revenue from illicit trade.

Ongoing joint R&D projects with existing enterprise customers have progressed well, which further strengthen our longstanding relationships.

EXCEPTIONAL ITEMS

The net exceptional charge in the period was £1.0m, comprising £1.6m costs relating to site relocation and structure, offset by £0.5m gain from the release of warranty provisions and £0.1m income from land sale. Tax credits relating to exceptional items arising in the period were £0.2m.

INTEREST

The Group's net interest charge was £2.2m (H1 2015/16: £2.3m). The IAS19 related finance cost, which represents the difference between the imputed interest on pension liabilities and assets, was £3.6m (H1 2015/16: £3.7m).

FOREIGN EXCHANGE IMPACT

The currency market has become more volatile following the UK Referendum vote. The majority of our sales are invoiced in Sterling and as the Group hedges all confirmed foreign currency orders and purchases, we expect little impact from the foreign exchange movement in the 2016/17 financial year. However, as a major UK-based exporter with more than 80% of revenue from outside the UK, De La Rue is expected to benefit from competitive advantages presented by the weakness of Sterling.

PENSION DEFICIT AND FUNDING

The Group's formal triennial funding valuation of the UK defined benefit pension scheme was finalised in June 2016. The underlying funding deficit as at 5 April 2015 was valued at £252m. The Group agreed a revised funding plan with the Trustee to eliminate the deficit over a period of 12 years from 31 March 2016. The plan will see the existing funding payment schedule extended from 2022 to 2028.

The cash contributions to the scheme will be £13.0m and £13.5m in 2017 and 2018 respectively, increasing to £20.5m in 2019 and then rising by 4% per annum to 2022. It will be frozen at £23.0m per year between 2023 and 2028. In the year ended 26 March 2016, the Group made funding payments and management fees totalling £19.1m. The Group will continue to pay annual fees of £1.6m for managing the scheme in addition to the cash contributions. The next triennial funding valuation is due in April 2018.

The valuation of the pension scheme under IAS 19 indicates a scheme post tax deficit at 24 September 2016 of £297.7m (26 March 2016: £178.4m), reflecting a decrease in the discount rate used to value the scheme liabilities (2.10% in H1 2016/17 compared with 3.50% in FY 2015/16) and the Group funding contributions. The increase was partly offset by the higher than expected returns on scheme assets.

In common with other final salary schemes, the scheme valuation is very sensitive to any movement in the discount rate, with a 0.25% increase in discount rate resulting in a £49m decrease in liabilities or vice versa and hence the deficit would reduce should interest and discount rates increase in the future.

The charge to operating profit in respect of the UK defined benefit pension scheme for the half year was £0.6m (H1 2015/16: £0.5m). In addition, under IAS 19 there was a finance charge of £3.6m arising from the difference between the interest cost on liabilities and the interest income on scheme assets (H1 2015/16: £3.7m).

BOARD CHANGES

Nick Bray, Chief Financial Officer of Sophos Group plc, joined the Board as a Non-executive Director and Chair of the Audit Committee at the AGM on 21 July 2016. Nick brings extensive and highly relevant experience in the technology and information security industries to the Board. He succeeds Victoria Jarman, who stepped down at the AGM.

OUTLOOK

The Group's 12 month order book at £409m provides good visibility for the rest of the year and the Board is encouraged by the early strategic momentum in the Invest and Build product lines. The outlook for the year remains unchanged.

- ends -

22 November 2016

DIRECTORS REPORT

Principal risks and uncertainties

Throughout its global operations De La Rue faces various risks, both internal and external, which could have a material impact on the Group's performance. The Group manages the risks inherent in its operations in order to mitigate exposure to all forms of risks, where practical, and to transfer risk to insurers, where cost effective.

The Group analyses the risks that it faces under the following broad headings: strategic risks (technological revolution, strategy implementation, changes to the market environment and economic conditions), operational risks, legal/ regulatory, information risks and financial risks (currency risk, credit risk, liquidity risk, interest rate risk and commodity price risk).

As described in the 2016 Annual Report, the principal risks include failure to innovate, timing of contract awards and political factors, loss of a key customer or contract, product security, product integrity, reputational damage, supplier failure, health and safety failure, environmental breach, loss of a key site, contract issues, breach of competition regulations, loss of core IT systems, information security and actions of its employees and third parties. These risks, along with the risk management systems and processes used to manage them remain unchanged since the Annual Report was published.

The main risks and uncertainties faced by the Group for the remaining six months of the year and the risk management systems and processes used to manage them are unchanged from those described further in the 2016 Annual Report, a copy of which is available on request from the Company's registered office at De La Rue House, Jays Close, Viables, Basingstoke, Hampshire, RG22 4BS.

Going Concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out on pages 6 to 24 of the strategic report in the 2016 Annual Report. In addition, pages 86 to 89 of the 2016 Annual Report include the Group's objectives, policies and processes for financial risk management, details of its financial instruments and hedging activities and its exposure to credit risk, liquidity risk and commodity pricing risk. The financial position of the Group, its liquidity position and borrowing facilities are described on page 26 of the 2016 Annual Report. As described on page 26 of the 2016 Annual Report, the Group meets its funding requirements through cash generated from operations and a revolving credit facility which expires in December 2019.

The Group's updated forecasts and projections, which cover a period of more than twelve months from the date of the interim statement, taking into account reasonably possible changes in normal trading performance, show that the Group should be able to operate within its currently available facilities. The Group has sufficient financial resources together with assets that are expected to generate cash flow in the normal course of business. As a consequence and notwithstanding the net liability position being reported in the consolidated balance sheet, which has primarily arisen due to the value of the deficit in the retirement benefit obligations, the Directors have a reasonable expectation that the Company and the Group are well placed to manage their business risks and to continue in operational existence for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the condensed interim financial statements.

A copy of the 2016 Annual Report is available at www.delarue.com or on request from the Company's registered office at De La Rue House, Jays Close, Viables, Basingstoke, Hampshire, RG22 4BS.

Responsibility Statement of the Directors in respect of the Interim Statement

We confirm that to the best of our knowledge:

The Board

The Board of Directors of De La Rue plc at 26 March 2016 and their respective responsibilities can be found on pages 38 and 43 of the De La Rue plc Annual Report 2016. Since that date the following changes have taken place:

· Victoria Jarman stepped down as Non-executive Director and Chair of the Audit Committee at the conclusion of the AGM on 21 July 2016

· Nick Bray was appointed as Non-executive Director and Chair of the Audit Committee on 21 July 2016

For and on behalf of the Board

Philip Rogerson

Chairman

22 November 2016

INDEPENDENT REVIEW REPORT TO DE LA RUE PLC

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 24 September 2016 which comprises the Group condensed consolidated interim income statement, the Group condensed consolidated interim statement of comprehensive income, the Group condensed consolidated interim balance sheet, the Group condensed consolidated interim statement of cash flows, the Group condensed consolidated interim statement of changes in equity and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. 

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 24 September 2016 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.

Ian Bone

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

Canary Wharf,

London, E14 5GL

22 November 2016

*Profit before tax includes continuing and discontinued operations. The cash flows relating to discontinued operations are included within Note 3

Inter-segmental transactions are eliminated upon consolidation.

Discontinued operations - The Group completed the sale of the Cash Processing Solutions business on 22 May 2016 (see note 3).

3 Discontinued operations

The Group completed the sale of the entire issued share capital of Cash Processing Solutions Limited and related subsidiaries (together "CPS") to CPS Topco Limited, a company owned by Privet Capital on 22 May 2016.

Under the terms of the agreement, De La Rue received £2.1m upon completion of the transaction. In addition, deferred consideration totalling £1.5m will be payable in two equal instalments on the first and second anniversaries of the transaction. The Group is also entitled to further contingent consideration and liable for certain contingent liabilities following the sale. In the event that certain performance related and event driven milestones are achieved by CPS c£3m would be receivable. In the event that significant reductions in working capital are achieved by CPS, amounts would be receivable in relation to this. If certain cash balances can be repatriated to the UK c£2m would be receivable, net of contingent tax liabilities on these transactions. As the amounts involved, timing and likelihood of these transactions cannot be determined at the period end, these have not been included in the figures below.

No pension liability transferred as part of the disposal.

Results of the discontinued operation: