1st Mar 2006 07:00
Devro PLC01 March 2006 DEVRO PLC 1 March 2006 PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Results 2005 2004+ % ChangeRevenue £152.5m £148.9m 2.4%Operating profit (before exceptional items) £21.3m £20.7m++ 2.8%Exceptional items: £6.3m - - - profit on sale of landProfit before tax £25.8m £18.0m 43%Earnings per share 11.5p 8.0p 44%Earnings per share (before exceptional items) 8.7p 8.0p 9%Dividend per share 4.4p 4.0p 10%Net debt £17.7m £25.5m - + Prior year numbers have been restated to incorporate adjustments requiredunder IFRS. ++ Including the share of the loss of the joint venture. Pat Barrett, Chairman of Devro, commented: "2005 was another year of achievement and progress. The group continued toincrease its revenue, unit volumes and profits and we again saw growth in eachof our major trading regions. "We believe there is further significant revenue growth potential in thedeveloping markets of South East Asia, Eastern Europe and Latin America and wehave a number of new products under development to support these aims. Withstrong growth continuing in the Cutisin range, we have decided to accelerate ourdevelopment plans for the Czech operations by increasing the level of investmentin the new manufacturing plant being installed in our Jilemnice facility. "With many opportunities to invest in the improvement, development and expansionof our core casing business around the world, the Board is confident about thefuture outlook for the group." Enquiries:Graeme Alexander Chief Executive 020 7404 5959 on 1 March 2006John Neilson Finance Director 01236 879191 thereafterJon Coles / Mark Antelme Brunswick 020 7404 5959 CHAIRMAN'S STATEMENT I am pleased to report that 2005 was a further year of achievement and progress.The group continued to increase its revenue, unit volumes and profits and weagain saw growth in each of our major trading regions. Profit before tax andexceptional items increased to £19.4 million (2004: £18.0 million) while basicearnings per share before exceptional items rose 9% to 8.7 pence (2004: 8.0 pence). Total sales in 2005 were £152.5 million, an increase of 2.4% compared to £148.9million reported for 2004. Sales volumes were ahead of prior year by 1.7%. Thiswas offset by an adverse price/mix of 1.6%, resulting from a combination of asignificant adverse movement in the strength of the Czech Koruna against itsprincipal trading currencies, unfavourable movements in market and product mixesand increased volume discounts at specific key accounts. A positive exchangeimpact on translating overseas sales into sterling then provided a favourable2.3% movement. This sales performance was achieved during a year in which market conditionswere variable and sometimes difficult, particularly during the second half.Volumes in certain of our more established markets were slower in the secondhalf, while substantial growth was generally maintained throughout the year inthe developing regions. In the US market the snack sector slowed markedly duringthe third quarter. While there was some recovery in the fourth quarter, volumesin this category were still below their recent historical trend. In the UK,following two years of above average growth, 2005 experienced quieter tradingconditions. Conversely, in the Asia/Pacific region the pattern of growth seen in2003 and 2004 was maintained throughout 2005, with both South East Asian andJapanese markets experiencing solid increases in sales volumes. A similarsituation existed in Eastern European and Russian markets, where the stronggrowth of recent years continued throughout 2005. These volume gains in thedeveloping markets were delivered through a mix of increased conversion from gutcasings to collagen and growth in the underlying sausage market. We are constantly striving to improve further the performance of both ourproducts and our manufacturing processes to ensure our cost base remains aseffective as possible. In 2005 our programme of improvements yielded furtherincreases in productivity which greatly helped to offset the considerableadverse financial impact of significantly increased energy costs. This rise inenergy costs, the impact of which was greatest on our UK operation and whichmainly occurred during the second half, is expected to remain with us for sometime to come. In response to this additional cost burden, and as part of our ongoing effortsto ensure that our cost base remains as tightly controlled as possible, we havecarried out a major review of the overhead structure in our UK operation. Actionwas taken early in 2006 to reduce our overhead costs. This is costingapproximately £1.0 million to implement but, with the associated benefitsarising from this programme, it will be broadly neutral to profits for the yearas a whole. Pre-tax profit before the exceptional gain on the sale of the land atMoodiesburn was£19.4 million compared with £18.0 million in 2004. Basic earnings per sharebefore exceptional items was 8.7 pence against 8.0 pence in 2004, an increase ofalmost 9%. Net debt at the end of the year was reduced to £17.7 million, £7.8 million lessthan at December 2004, and compares with £20.5 million reported at June 2005.This reduction was achieved despite a marked increase in the level of capitalinvestment. During the year, we made good progress on the expansion of our Czech facilities.As a result of this investment programme, capital expenditure for 2005 increasedto £16.7 million(2004: £11.5 million) and we expect it to continue around this level, at leastfor 2006. Dividend The Board is proposing a final dividend of 3.025 pence (2004: 2.75 pence),bringing the total for the year to 4.4 pence (2004: 4.0 pence). This will bepaid on 17 May 2006 to shareholders on the register as of 18 April 2006. Ourdividend policy continues to be one of progressive growth that is bothsustainable over the longer term and consistent with the investment requirementsfor the further development of the business. Board changes As previously announced, Mr Patrick Mocatta retired from the Board at the AnnualGeneral Meeting on 5 May 2005, after nine years as a non-executive Director. Onbehalf of the Board I would like to thank Patrick for his significantcontribution to our company during his time on the Board. Also as previously announced, Mr Paul Neep joined the Board as a non-executiveDirector on 1 February 2005. Paul has been Chief Executive Officer ofGlenmorangie since 2000 and brings to Devro a wide range of internationalmarketing experience. In September we were saddened by the death of Mr John Napier. In his time withthe company as a non-executive Director he made a significant contribution toBoard discussions. His presence is missed and our thoughts are with his family. Employees Our greatest asset is the quality and dedication of our workforce worldwide. Ineed hardly tell shareholders that all who work in the group habitually do workvery hard for them. On behalf of the Board and shareholders, I would like tooffer our employees sincere thanks for their efforts during 2005. Prospects Revenue for the early part of 2006 has been encouraging and our operations areperforming well. The expansion of our manufacturing facilities in the CzechRepublic is progressing according to plan and initial production will commenceduring the second half of this year. With strong growth continuing in theCutisin range, we have now decided to accelerate our development plans for theCzech operations by increasing the level of investment in the new manufacturingplant being installed in our Jilemnice facility. We will continue to experience pressures from higher energy costs. Our ongoingcommitment to improving operational efficiency and manufacturing effectiveness,however, will mitigate much of the adverse effect. While we continue to face strong competition in a number of markets there is,nevertheless, considerable scope for organic growth within the casing sector andwe are continuing to expand our business globally. We believe there is furthersignificant revenue growth potential in the developing markets of South EastAsia, Eastern Europe and Latin America and we have a number of new productsunder development to support these aims. With many opportunities to invest in the improvement, development and expansionof our core casing business around the world, the Board is confident about theoutlook for the group. OPERATING REVIEW Devro had another satisfactory trading year overall, with the majority of ourmajor market areas showing increases in sterling revenue compared with 2004. This was achieved against the backdrop of a softer trading environment duringthe second half of the year, particularly during the third quarter. Trading atthe very end of the year recorded a significant downturn on prior year in almostall markets. Most of this downturn, however, was due to the phasing of the Devrotrading calendar which had fewer effective days for selling in December 2005compared to 2004, reducing group volume growth from 4%, recorded to the end ofNovember, to 2% for the year as a whole. Excluding this effect, trading duringthe fourth quarter generally was comfortably above prior year. Total group revenue for the year, at £152.5 million, was 2.4% ahead of the prioryear figure of £148.9 million. While translational exchange had a positiveinfluence on the revenue in each of our operating regions, the largest singleimpact was the adverse transactional effect of over £1.5 million, arising fromCutisin's export sales in euros and US dollars, which appears as an adverseprice movement. In the UK, the market was slightly subdued, particularly during the thirdquarter. While sales picked up early in the fourth quarter, UK volumesnevertheless finished 5% behind for the year. However, this should be viewedagainst a picture of unusually strong growth over the two previous years in whatis, essentially, a mature market. In such circumstances, some easing up isperhaps not surprising and, indeed, trading in the early part of 2006 hasreturned to a pattern of reasonably solid growth. While price/mix for the yearwas slightly under 2% adverse, the trend was positive towards year-end with thefourth quarter recording an improvement of around 1%. Competition continues tobe quite active in the UK market, but over the course of the year we held asolid position and the improved price/mix figure for the fourth quarter reflectsactions on price, taken earlier in the year, beginning to work through into themarket. In Continental European markets the excellent growth seen in recent yearscontinued throughout 2005. Each of the major market areas - Western Europe,Central Europe and Eastern Europe - showed an increase in casing sales volumesover prior year, resulting in an overall increase of over 10% in these markets. While the Devro range achieved a solid increase of 4%, Cutisin increased itsvolumes by almost 20%. Sales in all Cutisin's European markets were comfortablyahead of prior year, with Eastern Europe being particularly strong. The goodpotential demonstrated by Eastern European markets during 2004 continuedthroughout 2005, driven by a combination of the underlying conversion from gutto collagen and the continued improvements in the quality, design and range ofthe product offering. These markets continue to hold considerable potential forthe future. However, the strength of the Czech Koruna compared to its major export tradingcurrencies of the euro and US dollar had a significant adverse impact on thevalue of Cutisin's export sales. While underlying prices for Cutisin's productsin European markets were either stable or slightly higher than prior year, theimpact of the transactional currency movement was a reduction in effectiveselling prices. This was equivalent to over £1.5 million within the local Czechoperation, although the impact on group profits is reduced to around £1.0million when Cutisin's results are translated into sterling. In the Americas there was an increase in sterling revenue of almost 3%. Thisresulted from an increase in volumes of slightly under 1% and a positive price/mix of 0.5%, with a positive translational exchange effect contributing thebalance. In local currency terms, total sales in the Americas finished the year ahead ofprior year. Within this, however, second half trading was poorer than theequivalent period of 2004, with volumes slowing markedly after a very good firsthalf. While the phasing of the Devro trading calendar, referred to earlier,played a significant part in this, it was also, in large measure, a reflectionof a small reduction in the snack sausage sector in the US market during thethird quarter. This sector, characterised by products such as beef-sticks andmini-salamis, had been growing strongly for several years and this growthcontinued into the first half of 2005. As the year progressed, the growth slowedand some customers' inventories were re-aligned accordingly. The combination oflower sales and reducing production then resulted in a more significantreduction in the off-take of casing for these products during the second half.This situation, however, is not expected to be of extended duration and weanticipate that a more normal trading pattern will return during 2006. In Latin America, while sales were behind those of 2004, the underlying marketwas actually steady. Availability of Coria product for sale in Latin Americanmarkets was restricted during the first half due to the large demand beingcreated in the growing US market. As 2005 progressed and the snack sector in theUS slowed down, more volume was released into Latin America and sales grewcloser to prior year levels. This continues to be a market with good potentialfor the future, albeit at a lower average price. In the Asia/Pacific region, revenue in local currency increased by 3.5%. Thesales performance in Australia and New Zealand was reasonable, with steadymarket conditions prevailing. In the Japanese market, the solid growth of 2003and 2004 continued into 2005. Volumes were almost 12% ahead of 2004 levels,which were themselves well ahead of the previous year. This continued growth hasbeen assisted by a combination of underlying growth in the market, a strongmarketing drive from our Japan-based team and the availability of porcinecasing. Elsewhere in the region, sales into our other Asian markets have alsogrown strongly with volumes ahead of prior year by almost 20%. This continuesthe pattern of the past few years and reflects a significant increase in thedeveloping Chinese market as growth in low-temperature or western-styleFrankfurter sausage begins to move forward. In our developing thin-film and biomedical segments we continue to makeprogress, and both the range of products and the technologies required tomanufacture them are now well established. Sales of thin-film products continueto be slower than anticipated, however, and developing this market opportunityinto a viable commercial proposition is an important challenge for 2006. The year saw real productivity gains in manufacturing. Coupled with tight costcontrols, these helped to offset some of the significant rise we experienced inthe cost of energy. This rise had an impact right across the group and amountedto around £2 million of additional costs compared with 2004. The greatest impactwas experienced in the UK operation, particularly in the second half, and was inthe region of £1.3 million. We will continue to experience pressure on ourenergy costs at least in the immediate future. We remain committed to a rigorous and ongoing programme of cost control and, inorder to ensure that any escalation in overall manufacturing costs is kept to anabsolute minimum, action has been taken to tighten further the overheadstructure in the UK operation. This has resulted in some reduction in employeenumbers across each of the overhead cost centres. This action was implemented inJanuary 2006 and will yield annualised cost savings in the order of £1.0million. While it will have some impact on the results for the first half ofthis year, neither profits nor cash should be significantly affected for theyear as a whole. In the Czech Republic, the major project to expand the manufacturing facilitiesis progressing well. The plant installation is well underway and the project isrunning to time, with overall costs expected to finish very close to budget. Thebulk of the new manufacturing process will come on-stream during the second halfof this year and the older Korenov plant will be converted to manufacturing onlynon-edible collagen casing at the end of 2006. Sales of Cutisin products remainbuoyant and the outlook is for continued strong growth. It has, therefore, beendecided to bring forward plans, originally scheduled for 2007, to invest anadditional £3 million this year to extend the new capacity being installed inour Jilemnice facility in the Czech Republic. In our technical and manufacturing operations we continue to place greatemphasis on improving the quality and range of our product offering, togetherwith the consistency and effectiveness of our manufacturing processes. This hasenabled us to extend our range and introduce several enhancements for bothproducts and processes. This continuing programme of improvement is of vitalimportance in helping to retain our position in those markets where we maintainhigh market shares. We also continue to believe that our technologies form thebasis on which the future growth of our business will depend. There is considerable scope for the development of markets in Eastern Europe,South East Asia and Latin America, as well as further opportunities in the moreestablished markets. We remain committed to developing the market through solidinvestment in our marketing programmes, our product development programmes andour manufacturing operations. We will continue to face competitive pressure, butthe group is in a strong position to take advantage of the emergingopportunities as the world food market becomes steadily more automated,generating increasing applications for edible collagen casings. FINANCIAL REVIEW Total sales for 2005 were £152.5 million against a prior year figure of £148.9million. Sales volumes were ahead of prior year by 1.7%. Sales of Cutisin casings weresignificantly higher than prior year throughout 2005, particularly in EasternEurope, while both Devro and Coria experienced a slower second half in the UKand US markets respectively. The volume gain was offset by a price/mix impact of1.6%, due in part to competitive pricing but arising mainly from adversetransactional exchange movements. A favourable translational exchange impact of2.3% then resulted in the overall sterling revenue for the group finishing 2.4%ahead of prior year. The group's operating profit of £21.3 million, excluding an exceptional creditof £6.3 million relating to the sale of surplus land at Moodiesburn, compareswith an operating profit of£20.7 million, including the share of the loss of the joint venture, in 2004. The growth in operating profits was underpinned by increased sales volumes andsignificant improvements in productivity and manufacturing efficiency. The groupalso benefited from a cost reduction programme which has been vigorouslypursued. In total, these factors generated additional profit of approximately£2.5 million. Offsetting these positive items, the adverse price/mix impact onaverage selling prices had a negative effect on profitability of a similaramount. This adverse price/mix impact relates mainly to a reduction in theeffective selling prices of Cutisin's exports, due to the strength of the CzechKoruna compared with the euro and the US dollar. Energy prices have been rising steeply and this led to an increase of £2.0million in utility costs. Prices continue to rise and, while we have an activeenergy conservation programme in place, we expect broadly similar increases in2006. We continue to make solid progress in developing thin-film products at ourHamilton facility. Although sales show a significant uplift over 2004, groupresults have been adversely affected by £0.8 million (2004: £0.3 million) withdepreciation on the newly-acquired assets accounting for a significant portionof this charge. Pension charges of £2.1 million (2004: £3.4 million) were significantly lowerthan prior year. This was primarily due to a one-off credit of £0.9 millionrelating to a reduction in the future obligations of the US pension fund. Foreign exchange had a net negative impact of £0.6 million on group profits. Thetotal impact of adverse transactional exchange mentioned earlier totalled £1.6million, while group profits benefited by £1.0 million when translating theprofits of the overseas entities into sterling. Considerable resources continue to be invested in product and processdevelopment, resulting in research and development expenditure in 2005 totalling£4.1 million, being 2.7% of sales(2004: £4.0 million, 2.7% of sales). Net interest expense totalled £1.8 million in 2005 (2004: £2.7 million). Theaverage level of debt was significantly lower than 2004, following the land saleearly in 2005. Net interest cover was over 11 times. Net debt at the year-end amounted to £17.7 million, comprising gross debt of£28.9 million and cash of £11.2 million. Gearing was reduced to 29% (2004: 48%). The group's borrowing facility totals £47.8 million. An interest rate swap of£10 million is in place to provide protection against potential increases ininterest rates. This swap expires on 15 July 2006. The financial impact of exchange rate fluctuations is minimised by a policy ofhedging foreign exchange risk. All hedging is undertaken centrally by theCorporate Treasury function, based in Moodiesburn, in accordance withBoard-approved policies and authorities. Specifically, policies permit forwardtransaction hedging to a maximum level of 75% of anticipated currency flows forup to one year ahead. They also permit the hedging of up to 100% of interestrate exposures for a period not exceeding five years. As a matter of policy, thegroup does not undertake any speculative transactions which would increase itsforeign exchange or interest rate risks. The group's effective tax rate for 2005 of 27.5% (2004: 28.3%) has fallen due toan adjustment in respect of the prior year provision for taxation in our USoperation. Cash generated from operations of £28.5 million (2004: £28.3 million) was aheadof prior year, reflecting higher operating profits and lower interest payments. The sale of surplus land led to the receipt of £7.3 million, net of expenses,while tax payments of £6.6 million included £0.9 million in respect of the landsale. Capital expenditure of £16.7 million (2004: £11.5 million) contained £7.4million in respect of the expansion programme in the Czech Republic. Earnings attributable to shareholders have increased to £18.7 million from £12.9million in 2004. Unadjusted earnings per share was 11.5 pence, an increase of44% compared with 8.0 pence in 2004. Excluding the exceptional credit of £6.3million, earnings attributable to shareholders were £14.0 million, givingearnings per share before exceptional items of 8.7 pence, an increase of almost9%. A final dividend of 3.025 pence per share is proposed. This, together with theinterim dividend of 1.375 pence paid in October, gives 4.4 pence and representsan increase of 10% over 2004. Prior year financial information as presented in the comparative figures hasbeen restated to incorporate adjustments required under International FinancialReporting Standards as endorsed by the EU. CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2005 2005 2004 £'000 £'000Revenue - continuing operations 152,518 148,938 ------- ---------Operating profit - continuing operations 27,600 20,948 --------- ----------Analysed as:Operating profit before exceptional items 21,256 20,948Exceptional items 6,344 - -------- --------Operating profit 27,600 20,948 -------- -------- Finance income 351 862Finance expense (2,165) (3,587)Share of post-tax loss of joint venture * - (184) -------- --------Profit before tax 25,786 18,039Taxation (7,091) (5,157) -------- --------Profit for the year 18,695 12,882 ======== ======== Attributable to:-Equity holders 18,651 12,882Minority interest 44 - -------- -------- 18,695 12,882 ======== ========Earnings per share - basic 11.5p 8.0p - diluted 11.4p 7.9p * Included within the share of post-tax loss of joint venture are tax credits of£96,000 for the twelve months ended 31 December 2004. STATEMENT OF GROUP RECOGNISED INCOME AND EXPENSE for the year ended 31 December 2005 2005 2004 £000 £000Profit for the year 18,695 12,882Net exchange adjustments 2,747 1,655Cash flow hedges: - net fair value gains, net of tax 207 - - reclassified and reported in operating profit (318) -Actuarial loss recognised in group pension schemes (11,264) (118)Actuarial gain recognised in US post-retirement benefitobligations 245 321Movement of deferred tax on retirement benefitobligations 3,432 (103)Adoption of IAS 32 and 39 200 - -------- --------Total recognised income for the year 13,944 14,637 ======== ======== CONSOLIDATED BALANCE SHEETat 31 December 2005 2005 2004 £'000 £'000ASSETSNon-current assetsGoodwill 177 177Other intangible assets 901 809Property, plant and equipment 101,357 92,380Deferred tax assets 14,687 12,777Other receivables 171 - --------- --------- 117,293 106,143 --------- ---------Current assetsInventories 21,056 19,766Current tax assets 870 160Trade and other receivables 20,218 19,735Financial assets 541 -Cash and cash equivalents 11,243 11,010 -------- -------- 53,928 50,671 -------- --------LIABILITIESCurrent liabilitiesFinancial liabilities - Borrowings 895 1,661 - Derivative financial instruments 132 -Trade and other payables 21,450 18,697Current tax liabilities 3,571 2,916 -------- -------- 26,048 23,274 -------- --------Net current assets 27,880 27,397 -------- --------Non-current liabilitiesFinancial liabilities - Borrowings 28,068 34,815Deferred tax liabilities 13,593 13,632Retirement benefit obligations 41,985 31,580Other non-current liabilities 165 217 -------- --------- 83,811 80,244 -------- --------Net assets 61,362 53,296 ======== ========EQUITYCapital and reserves attributable to equity holdersOrdinary shares 16,176 16,133Share premium account 5,471 5,194Other reserves 49,681 46,448Retained losses (9,966) (14,435) -------- ---------Total shareholders' equity 61,362 53,340Minority interest - equity - (44) -------- --------Total equity 61,362 53,296 ======== ======== CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2005 2005 2004 £'000 £'000Cash flows from operating activitiesCash generated from operations 28,521 28,281Interest received 357 861Interest paid (2,218) (4,029)Tax paid (6,434) (4,998) --------- ---------Net cash from operating activities 20,226 20,115 --------- ---------Cash flows from investing activitiesPurchase of property, plant and equipment (14,962) (11,325)Proceeds from sale of land 7,305 -Proceeds from sale of other property, plant andequipment 94 97Purchase of intangible assets (338) (151)Payments to former minority shareholders of Cutisina.s. (13) (1,744)Cash balances of joint venture acquired - 126 -------- ---------Net cash used in investing activities (7,914) (12,997) --------- ---------Cash flows from financing activitiesIssue of ordinary share capital 320 429Net repayments under the loan facility (7,697) (2,822)Payments under finance leases (41) (70)Dividends paid to shareholders (6,639) (5,831) --------- ---------Net cash used in financing activities (14,057) (8,294) --------- ---------Net decrease in cash and cash equivalents (1,745) (1,176)Cash and cash equivalents at beginning of year 11,010 12,828Exchange gains/(losses) on cash and cash equivalents 1,978 (642) --------- ---------Cash and cash equivalents at end of year 11,243 11,010 ========= ========== NOTES TO THE PRELIMINARY ANNOUNCEMENT OF THE FINAL RESULTS for the year ended 31 December 2005 1 Analysis of net debt 2005 2004 £'000 £'000 Cash and cash equivalents 11,243 11,010Borrowings less finance leases (28,944) (36,418) --------- --------- (17,701) (25,408)Finance leases (19) (58) --------- --------- (17,720) (25,466) ========= ========= 2 Statutory Accounts The above financial information does not constitute statutory accounts for theyears ended 31 December 2005 and 31 December 2004. The financial information forthe year ended 31 December 2004, as amended to reflect the adoption of IFRS, isextracted from the full statutory accounts for that year which have beendelivered to the Registrar of Companies. The report of the auditors on theseaccounts was unqualified and did not contain a statement under eithersection 237 (2) or section 237 (3) of the Companies Act 1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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