Letter to shareholders of De La Rue plc
*REACH
5 April 2023
CRYSTAL AMBER FUND LIMITED
("Crystal Amber", the "Company", or the "Fund")
Letter to be sent to De La Rue plc shareholders with Notice of requisitioned General Meeting
On 31 March 2023 the Fund announced that it had sent to the board of De La Rue plc ("De La Rue") a requisition notice requiring De La Rue to convene a general meeting at which a resolution will be proposed to remove Non-Executive Director and Chairman Kevin Loosemore ("the Requisition"). The Requisition also proposed to appoint Pepyn Dinandt as a Non-Executive Director and Chairman. Crystal Amber advises that it has provided De La Rue with the text of a letter which Crystal Amber has requested is included with the notice of general meeting when it is posted to shareholders by De La Rue in due course. The text of the letter to all the shareholders of De La Rue is set out below and can be viewed on the Fund's website at: https://crystalamber.com/news.
" CRYSTAL AMBER FUND LIMITED
("Crystal Amber", the "Company", or "Fund")
Statement regarding De La Rue plc ("DLR")
Failed Turnaround Plan, major governance and stewardship concerns and chronic share price underperformance at DLR requires replacing Chairman.
Dear Fellow Shareholder,
On 30th March 2023, Crystal Amber sent to the board of DLR a requisition notice requiring DLR to convene a general meeting at which a resolution will be proposed to remove Non-Executive Director and Chairman Kevin Loosemore ("the Requisition"). The Requisition also proposes to appoint Pepyn Dinandt as a Non-Executive Director and Chairman.
Why this is essential?
THE TURNAROUND PLAN HAS FAILED BY EVERY MEASURE
In February 2020, DLR announced a three-year Turnaround Plan. In the summer of 2020, it raised £100 million via an equity issue at 110p a share. Crystal Amber was the lead investor, providing £18 million of rescue capital to support the Turnaround Plan. At the time, the directors stated that by the end of Turnaround Plan in March 2023, they were targeting:
1. annual revenue growth of 9% (from £350 million to £453 million).
2. mid-teens and growing operating margins.
3. Authentication revenues of £100 million by FY21/22, with strong operating margins.
4. positive free cash flows capable of supporting sustainable cash dividends.
5. a net debt/EBITDA ratio of below one.
6. balance sheet strength with a long-term gearing policy of below one times net debt/EBITDA
The reality is: (based on current market consensus estimates for the year to March 2023) revenue will be £340.5 million, falling 25% below forecast. Operating margins will be 8.9%. Authentication revenues for FY21/22 were £90 million. H1 operating margins for Authentication of 10.8% compared to 15.8% for FY19/20.Negative free cash flow. No dividends. Net debt/EBITDA margin of 1.7. Net debt/EBITDA of two times. Net debt is forecast at £103.3 million. This is £0.5 million higher than three years ago, before the £100 million equity capital injection.
DLR's stock market value is now £100 million, after the £100 million equity investment, so on a like for like basis, the entire £125 million pre-money stock market valuation has been destroyed.
Since March 2021, DLR's share price is down by 75%.
STEWARDSHIP FAILINGS RESULTING IN MATERIAL UNCERTAINTY GOING CONCERN AUDIT QUALIFICATION
The company's failure to renegotiate its banking covenants when renewing its banking facilities following discussions to pay Portals £20 million to exit its paper commitments, represents in our opinion a gross failing of stewardship. Consequently, DLR is still incurring substantial additional and avoidable costs. This culminated in November 2022 with a material uncertainty going concern audit qualification. The company's Finance Director has since resigned.
GOVERNANCE FAILINGS DEPRIVING SHAREHOLDERS OF UP TO £10 MILLION CASH PROCEEDS FROM SELLING THE HIGH SECURITY PRINT BUSINESS
In the Turnaround Plan, DLR trumpeted being "the only major high-security printer in sub-Saharan Africa within the cheques and cards market." Last December, Crystal Amber wrote to the directors of DLR highlighting the inevitable effect on revenues and profits of its decision to make 300 staff redundant at its Kenyan print facility and cease print operations. Annual revenues were around £30 million and profits approximately £3 million. DLR wrote to Crystal Amber to deny any intention to cease its Kenyan operations. On 20 January 2023, DLR announced the closure of its Kenyan print facilities.
Aside from the detrimental effect on future revenues and profits, DLR's management chose to close a profitable division rather than undertaking a sales process. We understand that a disposal could have realised cash proceeds of up to £10 million, helping to reduce debt. Closure has also adversely impacted commercial opportunities in this long-established region.
EXCESSIVE COSTS PAID TO PROFESSIONAL ADVISERS
Crystal Amber understands that the Chairman is failing to control fees paid to professional advisers including but not limited to Rothschild & Co., Slaughter & May and Brunswick PR. Crystal Amber asks the board to provide shareholders with a breakdown of these material costs.
STATEMENTS TO MARKET PARTICIPANTS
The interim results presentation in November 2022 referred to the company's second polymer line at Westhoughton being "fully operational." The company failed to disclose that this line has been mothballed because there are no orders requiring fulfilment. This follows £20 million of capital investment.
CHAIRMAN'S FAILURE TO TAKE RESPONSIBILITY AND PROTECT SHAREHOLDERS' INTERESTS
Despite as set out above and in our opinion the overwhelming evidence that the board and the Executives have failed to deliver, Chairman Kevin Loosemore continues to fail to take responsibility. Instead, he blames external factors, including "the cycle." The Chairman has failed to hold management to account and protect shareholders' interests. By contrast, Crystal Amber understands that competitors including Oberthur, G&D, Crane NXT and SICPA are trading well.
URGENT CHANGE REQUIRED
An immediate change of leadership is essential. Crystal Amber has concluded that it is necessary to replace Non-Executive Director and Chairman Kevin Loosemore. Crystal Amber believes that Pepyn Dinandt should replace Kevin Loosemore as Non-Executive Director and Chairman.
Pepyn Dinandt has a long and successful track record in building businesses by delivering on value creation programs and securing exits. He is currently Chief Executive of the Climate Control Systems and Automotive Controls division at the Eberspaecher Group, a large family-owned Tier 1 automotive supplier. By the end of 2023, this global division is forecast to have approximately €900 million revenues and 3,500 employees.
Commenting, Pepyn Dinandt said: "The last two years have been a disappointing and costly one for a once proud, great British company. The buck stops with the leadership. I believe that if we act quickly, with focus and operational execution, DLR can recover and thrive. It is now for DLR's long-suffering shareholders to decide if they wish to condone this woeful record or seek to end this spiral of destruction of shareholder value."
CRYSTAL AMBER URGES SHAREHOLDERS TO VOTE IN FAVOUR OF RESOLUTION 1 TO REMOVE KEVIN LOOSEMORE AS A DIRECTOR.
CRYSTAL AMBER URGES SHAREHOLDERS TO VOTE IN FAVOUR OF RESOLUTION 2 TO ELECT PEPYN DINANDT AS A DIRECTOR.
Yours faithfully,
Chris Waldron
Chairman
Crystal Amber Fund Limited"
For further enquiries please contact:
Crystal Amber Fund Limited
Chris Waldron (Chairman)
Tel: 01481 742 742
Allenby Capital Limited - Nominated Adviser
David Worlidge/Freddie Wooding
Tel: 020 3328 5656
Winterflood Investment Trusts - Broker
Joe Winkley/Neil Langford
Tel: 020 3100 0160
Crystal Amber Advisers (UK) LLP - Investment Adviser
Richard Bernstein
Tel: 020 7478 9080
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