Banknote printer expects drop in volumes

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The world's biggest banknote printer says its volumes are set to drop 20% this year after a production crisis which involved staff allegedly fudging quality-control paperwork.

De La Rue, which prints notes for the Bank of England and more than 150 national currencies, said the production woes, which led to the resignation of chief executive James Hussey, cost the group £35 million but the impact on its full-year results was still unclear.

The group claimed earlier this year some employees falsified paper specification test certificates for some banknote customers after an investigation into production failures at a plant in Overton, Hampshire.

While De La Rue has concluded its own inquiry, an investigation by the Serious Fraud Office is ongoing and the company said it was not in a position to comment further.

De La Rue suspended production and shipment of the affected banknote in July for two months while the matter was investigated, which hit overall volumes, but the firm said it was encouraged by the level of orders in recent weeks.

The group posted a 57% rise in pre-tax profits to £69.4 million in the six months to September 25, after the hit from the production issues was offset by the sale of assets and the closure of a pension scheme.

Shares slumped 12% after today's update.

It is believed De La Rue's production problems related to its largest contract to supply watermarked banknote paper to the Reserve Bank of India.

Indian government officials reportedly flew to the UK earlier this year to quiz the company over the incident and press for compensation.

De La Rue is yet to provide specific details other than to confirm standards were not met, but the security features in the paper were not "compromised".

The group today said it is making "good progress" with its hunt for a new chief executive and will make an announcement soon.

Nicholas Brookes, who was appointed executive chairman in the interim, said: "Issues in paper production at one of our facilities have, as previously advised, had a significant impact on the group's performance during the first half.

"The board took decisive action to eliminate these issues and we are encouraged by the support of our customers and the level of orders and enquiries in recent weeks."

The company not only prints banknotes, but also supplies security documents such as passports, authentication labels and fiscal stamps, and provides cash sorting equipment to central banks.

It launched the new UK passport on schedule in October, which features complex images to help prevent fraud and has moved the holder's identity pages to the front of the book to save time. The group was awarded the £400 million, 10-year contract in 2009.

Guy Hewett, analyst at brokers Investec Securities, said the half-year results made "grim reading".

Mr Hewett said: "While the recent issues are clearly very serious and likely to have further implications in the short term, there are some signs that the worst may now be past."

He added that management's comments on better order levels and enquiries in recent weeks were "encouraging".