Devro expansion plans remain on track

Sausage casings manufacturer Devro’s plans to establish new plants in the USA and China remain on track to commence production in 2016.

These projects involve a capital investment of £100 million, which has increased slightly as the specifications for the new plants have been refined. However, it believes lower production costs in the USA will yield savings from mid-2016 and the additional capacity for supplying the growing market in China will enhance profits from 2017.

It is hoped the transformation programme will add capacity, align products with market opportunities and reduce unit costs.

It has already completed restructure work in Scotland and Australia, which included the decommissioning of older technology and the outsourcing of the hide preparation operations. Together, these restructuring actions are on track to deliver the expected annual cost reductions of £5m in 2015.

In its half-year results, Devro posted a 5% increase in sales volumes, with volumes reported to be high in China, Japan and south-east Asia. The company saw “steady growth” in North America, offset by lower volumes in Russia and Latin America.

Total revenue for the company increased by 5% on a constant currency basis compared to the same period in 2014. This marks an improvement on its 2014 financial results which saw profits before tax fall from £37.5m to £2.2m.

The company’s net debt rose to £105.6m as at 30 June 2015 compared with £69.2m at 31 December 2014, which it said reflected the cash outlay on fixed assets of £33.7m, largely related to the investments being made to establish the new plants in the USA and China.

Operating profits before exceptional items were £15.6m for the first half, compared with £14.1m for the same period last year. Exchange rate movements reduced profits by -£1.1m in the first half of the year, due to the underlying weakness of the euro.

The restructuring of operations in Scotland and Australia contributed  an additional £2.5m for the period. The increase in sales volumes added £1.9m to profits, with the effects of pricing and sales mix broadly neutral across the regions.

According to Investec, Devro’s half-year results “reflect a better volume performance with demand geographically spread”.

It believes: “The group will grow in H2, but at a lower rate than H1, in line with available capacity.”

Clive Black of Shore Capital on other hand is more cautious about Devro's prospects. 

"From an investment thesis perspective Devro remains work in progress. There could be a pot of gold under the
investment rainbow, albeit that visual extravaganza is way on the horizon at present. The business is investing heavily and investors need to be patient, hoping that each update can give encouragement and build confidence of much better times ahead.

"We take encouragement that change in Australia and Scotland has been completed and management is signalling that China and the USA are 'on-track'. However, those warm moods need to be reflected in a significant stepped upward adjustment in medium-term profits, earnings and dividends with the scope to materially deleverage as well."

Peter Page, chief executive of Devro, said: “Sales volumes have continued to grow in several important markets and prices remain firm. We have made good progress in transforming our manufacturing facilities to support future growth and manage costs, with restructuring completed and the major investment projects on track for completion in 2016. Market demand is strong, input costs are stable and productivity improving, giving confidence for the future.”

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