When talking about De La Rue, the FTSE-250 printer of banknotes, it helps to
get the puns out of the way early. It obviously has ‘a license to print money’,
it is ‘cash generative’, a company to join ‘to make a lot of money’, and as its
group finance director, Stephen King, says: “Cash is king at De La Rue.”
One of the reasons why the cliches are so easy to come by is because everyone
is interested in, and has an opinion about, money, but at the same time little
is known about where it comes from and how it is made. Money is a constant
source of fascination, and this “mystique” surrounding De La Rue, as King puts
it, is why he joined the company.
“De La Rue is a fantastic brand, and you can guarantee that eight out of 10
people on the street will have heard of us. They might not get what we do
exactly right, but it has tremendous power,” he says.
“I am always attracted to companies that have a product. De La Rue makes the
ultimate product – especially for an accountant. At a dinner party, when people
ask you what you do, you can always bring out some samples. There isn’t another
company like it. One in five banknotes in the world is De La Rue’s.”
But De La Rue has not always been a company that makes money out of making
money. After record profits of £90m announced in 2002, the company was forced to
announce two profit warnings in the 2003 financial year, as declining world
economies and the SARS outbreak in Asia meant that people stopped travelling and
spending money. De La Rue’s orders dried up.
In June 2002, the company’s group FD, Paul Hollingworth, resigned and King
was hired that October to inject some of the financial rigour and discipline
that had been lost as the company had grown through acquisition.
“If a company gets out of step, diversifies away from its core or expands
quickly, you end up increasing risk,” he says. “De La Rue had made a lot of
small acquisitions over the preceding years and had diversified away from its
core business. That’s fine while everything is growing, but inevitably there is
a straw that breaks the camel’s back. We went into recession in Europe,
especially in Germany, which is a massive market for us. It was like the tide
going out. It exposed the rocks.”
King had spent six years at Midlands Electricity as group FD. After its
takeover by a US company in 2002, he started to look for opportunities in a
large, preferably troubled, plc. De La Rue seemed to fit the bill. “You have the
opportunity to change almost anything you want in a company that has had two
profit warnings. It is very difficult to do that in a company that is humming,”
But soon into the job, King was wondering whether he had made the right move.
In the six months between King accepting the job and joining in January 2003,
the finances of the company – which had been run in the interim by De La Rue’s
group financial controller – had gone from bad to worse. King saw immediately
upon joining that the company was not going to meet market expectations for the
financial year ending that March.
“Ten days after I joined I had to issue a third profit warning, and that is a
remarkably short honeymoon,” he says. “Sod’s Law says that if you have one
profit warning, another is going to come along afterwards. But to announce a
third profit warning was a bit tough. I hadn’t even had my first board meeting.
I phoned the directors up and some of them were halfway up a ski slope.
“The size of the gap and the risks we ran meant I was fairly sure we were
going to miss the profits by enough,” he says. “When I asked how we were going
to make this money in the last eight weeks of the year, I was told ‘we will’ and
that was it. There was no detail.”
King says there were a lot of sleepless nights in those first few days. And
as he didn’t know anyone well enough internally to have a heart-to-heart, he
instead turned to a mentor that his headhunters Whitehead Mann had provided for
advice. “I had 10 days of wondering whether I should really call the board
together. Had I made the right judgement?” he says. “Whitehead Mann had assigned
someone to me who had a similar background but who was more experienced and
mature. He asked how it was going and I said it was actually going really badly.
He was someone I was able to talk to.”
King says that De La Rue inevitably suffered from not having a finance
director in place for six months. The group FC, David Finnet, who King describes
as “a solid, safe pair of hands” was stretched too far as the economy and
markets took a further slide in the interim. “A financial controller can stand
in for a month or two if the business and market are stable, but when you have a
rapidly declining market and a number of acquisitions you get stretched too far.
It would be hard for anyone to do that,” King says.
Finnet retired shortly after King joined, leaving a position open that King
was keen to fill with an external candidate. “I wanted to engender change. If
all the candidates had matched up exactly the same I probably would still have
chosen from outside the company. I felt that fresh blood was needed. We needed
emphasis and physical impact that said there was going to be change.”
Change came in the form of a new forecasting system that would make the
company’s banknote salesmen (who King says are almost like diplomats) more
accountable and an FC to run the system who “can’t be bullied” by divisional FDs
in the business who “quite naturally want to defend their own patch”.
“Before I joined, the forecasting system was something the non-execs felt
needed sharpening up. By the time we had had three profit warnings, it was
patently obvious,” he says. “It wasn’t that we didn’t have SAP or some clever
accounting system. It was sheer process problems. We were so diversified in
structure and geography that there wasn’t co-ordination and visibility.
Salespeople always put the positive side in their forecasts.”
King’s next task was to get the shareholders and analysts back on side to
restore some market confidence in De La Rue and start to communicate future
strategy. In the first two years, King says he spent 50% of his time just on
corporate communications and investor relations – mostly with De La Rue’s five
big institutional shareholders.
“The institutions are very personable and you can go and talk to them. But
they do ask questions like, ‘My shares have declined by this much. What are you
going to do about it?’ You can’t blame them because we have lost them a fortune.
Now, hopefully, we have put it all back again,” King says.
King has driven a programme of cost-cutting with the sale of De La Rue’s
non-core businesses and a restructuring programme that aims to keep the company
“sticking to its knitting”. But process upheaval comes at a price, and King has
had to be proactive communicating the changes to analysts who have started to
get impatient with the turmoil in the company. Merrill Lynch recently wrote a
report in which it said that just for once “it would have been nice to have seen
a clean set of accounts” for De La Rue.
“The Merrill Lynch comment is precisely to the point. De La Rue has spent
£100m in the previous five years in restructuring, writing off goodwill and
acquisitions. We were only valued at £500m, so that’s a hell of a lot of money
that could have gone back to shareholders. They quite rightly said that if we
stopped buying companies and the money fell to the bottom line then it could be
given back to shareholders. That’s not a very sexy strategy, but that is our
De La Rue sold off its loss-making electronic voting business, Sequoia, in
the US in March this year and has refocused on its banknote printing business,
which has been its bread and butter for the past 250 years.
Political unrest (as long as it is “the right sort of upheaval”, says King)
has also been good for business, notably with its order to print dinars (with
Saddam’s head conspicuously absent) for the new Iraqi administration.
Within six months De La Rue had designed, printed and shipped the equivalent
of 26 fully laden Boeing 747s of Iraqi dinars. Something that King says no other
company in the world would have been able to achieve. Of course, being
risk-averse, King ensured that De La Rue was paid up front, in dollars, before
they even turned on the printing machines.
Now that De La Rue is back on track and the currency orders are coming in,
King has had to turn his eye on the company’s compliance issues – especially
international financial reporting standards. “I must be spending 60% of my time
on IFRS. We have been working on it for a year, but it is very difficult to talk
to non-financial people, even on the board, and get them to understand how much
turmoil it causes,” he says. “And as an international company we have to train
people who can’t speak English to change the way their systems operate. IFRS has
meant that for a transaction we used to do one of we now have to do 10 because
of the data we have to collect so we can report.”
King says that while he understands what is driving the standards, their
detail and implementation are disproportionate. Having a March rather than
December year-end has helped as he can watch how the early adopters report their
figures. And, as a non-executive of Weir Group, King has also had experience of
how another large company is handling compliance. “It is remarkably valuable
(being a non-exec). I have Weir’s FD working for me for free, and I’ve got
contact with its PR people to help with communications,” he says. “We have had
access to a lot of people’s presentations, including Weir’s.
“Analysts want to spend 15 minutes on IFRS. They want a nice soundbite and
three lines about why it is not a problem. You have to first tell analysts what
the big hits are and what the risks are. Basically, nothing has changed in the
company – it is just an accounting exercise.”
Having started at De La Rue wondering whether he should have taken the job at
all, King says he has enjoyed getting involved in streamlining the business and
reworking company strategy with the management team – even if compliance is
getting in the way of his day job. A good recovery in the share price during
King’s tenure has probably helped ease his early fears as well.
“De La Rue’s total shareholder return has outperformed the FTSE-100 in the
past three years. Our share price has moved up 40% in the last year. The share
price was 178p when I joined, now it is 400p. When I first joined there were
definitely a lot of sleepless nights. But I sleep really well now,” he says.
Name: Stephen Anthony King
Qualifications: FCA, MBA, AMCT
2002 -: Group finance director, De La Rue
1997-2002: Group finance director, Midlands Electricity
1993-1997: Group financial controller, Seeboard
1990-1993: Group chief accountant, Lucas Industries
1986-1990: Deputy group financial accountant, Lonrho
1982-1986: Coopers & Lybrand
Biggest challenge: The implementation over 12 months of a
multilayered restructuring programme. We have 350 people coming out of the
organisation, factories relocating to various parts of the world and making sure
it’s done on time and we don’t drop anything along the way.
Biggest hassle: It’s regulation. Being able to function
commercially while complying with increasing regulation. It’s not just IFRS,
it’s everything. Fortunately, I don’t have a US listing.
Which company would you like to be FD of?: I’m a Leeds fan,
but who would want to be their FD? It has got to be FD of De La Rue.
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