De La Rue Regulatory News (DLAR)

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated by the Market Abuse Regulation (EU) No.596/2014, as it forms part of UK law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"). Upon the publication of this announcement, this inside information is now considered to be in the public domain.

26 July 2022

DE LA RUE PLC ANNOUNCES TERMINATION OF RELATIONSHIP AGREEMENT WITH PORTALS PAPER LIMITED,

AND REITERATES FULL YEAR ADJUSTED OPERATING PROFIT GUIDANCE

· £16.7m exceptional settlement payment relieves De La Rue of £119m fixed payment, profit contribution and volume shortfall payments for remaining life of the Relationship Agreement.

· Full year adjusted operating profit guidance unchanged.

· Settlement is expected to be neutral for adjusted operating profit FY22/23, £4m positive annually thereafter.

· Current financial year expectations of H1:H2 adjusted operating profit split revised to approximately 25%:75% from 33%:67%, due to larger volume shortfall payments than budgeted in H1. This will be offset in H2 by savings from the cancellation of budgeted fixed payments due to the settlement.

· Expected £4m annual cash flow improvement from FY23/24 onwards.

· Net debt expectations unaffected by ongoing trading, but revised proportionately to take the settlement into account: end of year net debt now expected to be in the range of £88-£92m.

Clive Vacher, CEO of De La Rue, commented, "This settlement is another significant step in our plans for De La Rue to become a stronger, cash generative company, and in solving the legacy issues still present in the Company. It allows us to exit an agreement that had over five more years to run which would have cost the company approximately £119m in that period in fixed charges, profit contribution and volume shortfall payments, and which adversely affected our competitiveness. 

"De La Rue now has the freedom to launch competitive tenders for its banknote and security paper requirements and to continue to satisfy the growing worldwide demand for polymer banknotes. There will be a positive result in margin and cash flow from the next financial year onwards, with the exposure of De La Rue's Currency division to market fluctuations further reduced. 

"We are grateful for the long and productive relationship that De La Rue has had with Portals, which has stretched over many decades."

Background

De La Rue plc (LSE: DLAR) ("De La Rue", the "Group" or the "Company") today announces that it has reached a settlement to terminate its long-term supply agreement with Portals Paper Limited ("Portals"), related to the supply of banknote, proofing and security paper (the "Relationship Agreement" or "RA"). 

In March 2018, De La Rue sold the Portals paper-making business to a private equity backed management buyout and entered into the Relationship Agreement for a period of 10 years. Under this agreement, De La Rue has purchased banknote, proofing and security paper from Portals, subject to a minimum annual volume guarantee, and Portals has purchased security features from De La Rue, with no guarantee of volume.

With the continued worldwide transition to polymer banknotes, the guaranteed minimum volumes that the Group was committed to purchase under the RA were significantly in excess of De La Rue's annual requirements and have resulted in substantial volume shortfall payments from De La Rue to Portals. The outlook for the remaining term of the Relationship Agreement was that this situation would worsen, and that the volume shortfall payments would continue to increase.

Settlement arrangements

Without this settlement, in the remaining 5 years, 8 months of the Relationship Agreement (August 2022 to March 2028), De La Rue would be committed to paying Portals a total of approximately £119m in fixed charges, profit contribution and volume shortfall payments. This is in addition to the cost of the paper procured.

The termination of the Relationship Agreement also removes the expected total committed spend of £364.2m (the above fixed charges plus the expected cost of paper manufacture) for the remainder of the RA, as cited on page 143 of De La Rue's 2022 Annual Report. Importantly, it will mean that, going forward, De La Rue will only pay for the actual volumes of paper the Company requires, significantly de-risking it from exposure to paper banknote market volume fluctuations.

Under the settlement terms, which are effective immediately, De La Rue is released from all obligations under the Relationship Agreement and will be free to purchase banknote and security paper from any supplier worldwide. De La Rue will pay Portals the amounts due under the normal RA arrangements in respect of confirmed orders placed up to the end of July 2022, and a total of £16.7m in cash to terminate the Relationship Agreement.

The £16.7m will be classed as an exceptional charge in De La Rue's accounts, and payment is due according to the following schedule:

· £1.7m on or before 31 December 2022

· £7.5m on or before 6 January 2023

· £7.5m on or before 7 April 2023

From the next financial year, FY23/24, De La Rue will not be liable to pay any volume-related shortfall payments. These payments have averaged £3.3m annually for each of the past two financial years.

De La Rue will retain its existing equity and loan note interests in the Portals group of companies and its rights in respect of those interests remain unaffected by this settlement.

The Company has alternative sources of supply for its immediate banknote paper needs and intends to conduct a formal tender process for its future requirements over the coming months. 

Following the termination of the Relationship Agreement, De La Rue will be able to sell all banknote security features freely to customers, through any other paper supplier. This includes the advanced features developed in collaboration with Portals.

Strategically, this settlement supports De La Rue's goals to convert more of its print customers to polymer banknotes, as, in doing so, there will no longer be an offsetting payment for lower paper volumes.

Guidance on impact to financial performance

The effect of this settlement is expected to be neutral to adjusted operating profit in FY22/23 and for this reason, the Board expects full year adjusted operating profit to be in line with market expectations. 

As a result of the settlement, the Board expects there to be a different H1:H2 mix to the previous guidance of 33%:67% for FY22/23. The settlement discussions included an agreement to cut off paper orders after the first four months of FY22/23 at a much lower volume than would be proportionate for the full year. Therefore, the associated volume shortfall costs, and the allocation of fixed costs to lower paper volumes, will mean an adjusted operating profit reduction for H1 of approximately £3m. This amount will be recovered in H2 through the cessation of fixed cost payments to Portals, and no further shortfall payments will be due. The revised proportion in which adjusted operating profit is expected to be split for H1:H2 is, therefore, approximately 25%:75%.

From FY23/24, the Board expects adjusted operating profit and cash flows to be increased by £4m annually as a result of this settlement. This number is provided before the financial implications of De La Rue's re-allocation of paper purchasing are known. Management will be aiming for further savings through this activity.

The termination of the Relationship Agreement will result in a change to the Company's year-end net debt position. Ongoing trading has not affected the previous guidance that net debt would be "approximately flat" at the end of year FY22/23 compared to the end of year FY21/22. However, taking the settlement into account, total net debt at the end of FY22/23 is now expected to be in the £88-92m range. This is driven by the additional cash outlays, consisting of the £16.7m settlement payments, as well as incremental in-year volume shortfall payments of approximately £3m that, under the Relationship Agreement, would normally be payable the following year.

De La Rue plc's LEI code is 213800DH741LZWIJXP78.

Enquiries:

The person responsible for the release of this announcement on behalf of De La Rue for the purposes of MAR is Jane Hyde (General Counsel and Company Secretary).

Cautionary note regarding forward-looking statements

This announcement includes 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", "may", "will", "could", "shall", "risk", "aims", "predicts", "continues", "assumes", "positioned" 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 this announcement 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 and strategies of De La Rue and the industry in which it operates.

By their nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors because they relate to events and depend on circumstances that will occur in the future whether or not outside the control of the Company. Past performance cannot be relied upon as a guide to future performance and should not be taken as a representation or assurance that trends or activities underlying past performance will continue in the future. Accordingly, investors or potential investors should not place undue reliance on these forward-looking statements. The Group's actual results of operations, financial condition, liquidity and the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in this announcement. In addition, even if the results of operations, financial condition and liquidity of the Group and the development of the industry in which it operates, are consistent with the forward-looking statements contained in this announcement, 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 these forward-looking statements, which speak only as at the date of this announcement, and will not publicly release any revisions that may be made to these forward-looking statements, which may result from events or circumstances arising after the date of this announcement.