2nd Mar 2005 07:00
Devro PLC02 March 2005 2 March 2005 DEVRO PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2004 Results 2004 2003 % Change Total sales £149.0m £146.1m 2.0% Operating profit £21.4m £21.1m 1.4% Pre-tax profit £18.6m £18.0m 3.2% Earnings per share 8.3p 7.9p 5.1% Dividend per share 4.0p 3.5p 14.3% Net debt £25.4m £26.7m -(at 31 December) Pat Barrett, Chairman of Devro, commented: "Devro has achieved another year of significant growth in the market,capitalising on the fundamental strengths of our business. The breadth of ourproduct range, our geographic reach and our technological expertise have eachcontributed significantly to improved trading worldwide. "We continue to see solid growth opportunities for Devro. We envisage thisgrowth to be largely organic, resulting from further market expansion,particularly in Asia and Eastern Europe, and from additional products whichextend our range. Following the strong end to trading in 2004, 2005 has startedpositively and the Board is looking at the future prospects for the businesswith confidence." Enquiries: Graeme Alexander Chief Executive 020 74045959 on 2 March 2005 John Neilson Finance Director 01236 879191 thereafter Jon Coles / Mark Antelme Brunswick 020 7404 5959 CHAIRMAN'S STATEMENT Devro has achieved another year of significant growth in the market,capitalising on the fundamental strengths of our business. The breadth of ourproduct range, our geographic reach and our technological expertise have eachcontributed significantly to improved trading worldwide. This has resulted inboth unit volumes and sales turnover in local currency being comfortably aheadof prior year. Sales volumes increased in all major product categories, with total volume aheadof prior year by 7.2%. This was partly offset by adverse price/mix of 2.0%resulting from a combination of unfavourable movements in market and productmixes and increased volume discounts at specific key accounts. In localcurrencies, turnover was over 5% ahead of prior year. There was an adversetranslational exchange impact of £4.7 million, however, and reported sales insterling at £149.0 million were, therefore, only 2.0% ahead. There was a strong performance in most markets around the world, with goodvolume growth in both developed and developing markets. Within our moreestablished markets, the UK and US produced a particularly good uplift, while inthe developing regions, substantial growth was achieved in Asia and EasternEurope. These volume gains were delivered through a mix of increased conversionfrom gut casings to collagen, gains in market share and growth in the underlyingsausage market. Our ability to capitalise on these important dynamics isunderpinned by our drive to satisfy the broader needs of our customers throughour ongoing programme of innovation, development and extension of both ourproduct range and our service package. Devro's continuing programme of improvements to both products and manufacturingprocesses also yielded further increases in productivity. This was partlyoffset, however, by disruptions to our manufacturing operations in the UK and UScaused by variations in collagen arising from various regulatory issuessurrounding the supply of casings using US-derived collagen. These issuesresulted from the single case of BSE reported in the US in late 2003 and theconsequent disruptions had an adverse impact on profit of around £0.6 million.The temporary restrictions on collagen supply, coupled with increased demand andadverse foreign exchange effects, led to a rise in collagen raw material pricesfor certain parts of the group's operations, with an adverse profit impact of£1.0 million. Foreign exchange movements, due mainly to the weak US dollar and the relativestrength of sterling, had a negative impact of over £1 million on profits forthe year. Our strong sales growth and productivity improvements, however, enabled Devro toovercome these various adverse effects, and operating profits increased by 1.4%from £21.1 million in 2003 to £21.4 million in 2004. Pre-tax profit was £18.6million compared with £18.0 million in 2003, and earnings attributable toordinary shareholders increased to £13.4 million, resulting in earnings pershare of 8.3 pence, an increase of 5.1% over 2003. Net debt at the end of the year was £25.4 million, £1.3 million less than atDecember 2003. This reduction was achieved despite a marked increase in thelevel of capital investment, dividend payments and business activity. Inaddition, payments totalling £1.7 million were made in respect of the purchaseof the outstanding minority shares in our Czech subsidiary, Cutisin. Theimprovement in net debt reflects our focus on cash management, tight controls onworking capital and the group's strong operational cash flow. During the year, we commenced an investment programme to improve and increasethe group's manufacturing capacity, with the initial focus principally being onthe expansion of our Czech facilities. As a result of this investment programme,capital expenditure for 2004 increased to £11.5 million (2003: £7.4 million) andwe expect it to increase further to around £15 million in both 2005 and 2006before easing back towards previous levels. The sale of the surplus land at Moodiesburn has now been satisfactorilyconcluded and £7.25 million was received in February 2005. The cash will be usedto support our business development activities and our capital investmentprogramme. In December, we announced a realignment of the BioFilm joint venture wherebyDevro increased its ownership to 90% of the business. This change will allowgreater flexibility in the marketing of the products and better clarity in thedevelopment of the business. The facility at Hamilton, near Glasgow, which came on-stream towards the end ofthe first half, is now capable of supplying commercial volumes of technicallyadvanced thin-film products to a high quality standard and with a wide range ofpotential attributes. The technology underpinning this process is now welladvanced and a number of product tests have been carried out with commercialpartners which have led to several larger scale market trials being undertaken.However, with the time taken to evaluate these commercial tests being reasonablyextensive, we do not expect substantial sales in the early part of theprogramme. Nevertheless, we are encouraged by the level of interest generated todate. Dividend The Board is proposing a final dividend of 2.75 pence (2003: 2.4 pence),bringing the total for the year to 4.0 pence (2003: 3.5 pence). This will bepaid on 18 May 2005 to shareholders on the register as of 15 April 2005. Ourdividend policy continues to be the provision 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 will retire from the Board at theAnnual General Meeting on 5 May 2005, after nine years as a non-executiveDirector. On behalf of the Board I would like to thank Patrick for hissignificant contribution to our company during his time on the Board. I am delighted that, on 1 February 2005, Mr Paul Neep joined the Board as anon-executive Director. He will succeed Patrick Mocatta as Chairman of theExecutive Directors' Remuneration Committee. Paul has been Chief ExecutiveOfficer of Glenmorangie plc since 2000 and brings to Devro a wide range ofinternational marketing experience. Employees The foundation of our business rests on the quality, dedication and enthusiasmof our people. I would like to acknowledge and thank all Devro's employees fortheir hard, reliable and skilful work in helping to drive the business forwardto further success. Outlook Our results in 2004 display further evidence of the strength of the casingsmarket in general and our position within it in particular. Despite a number ofadverse external factors, Devro was still able to improve earnings and reducenet debt. This was achieved largely due to Devro being at the forefront of collagen casingtechnology, having the stability of strong market positions and a wide globalpresence, and constantly driving more value from operational assets. We intendto continue the strategy of investing in the development of our people, ourprocesses, our products and our markets. With this focused commitment, I amconfident that Devro will maintain and enhance the strong position which it hasalready achieved. We continue to see solid growth opportunities for Devro. We envisage this growthto be largely organic, resulting from further market expansion, particularly inAsia and Eastern Europe, and from additional products which extend our range.Following the strong end to trading in 2004, 2005 has started positively and theBoard is looking at the future prospects for the business with confidence. OPERATING REVIEW Devro was able to strengthen still further its financial performance during2004. Increased sales volumes, productivity gains and tight control of operatingcosts resulted in a rise in profits and a reduction in net debt despite a numberof adverse external factors. Group sales, in local currency terms, increased by over 5%. For the secondconsecutive year we have achieved an increase which is significantly ahead ofthe long-term historical trend. Adverse foreign exchange movements, however,reduced this increase when the sales of our international subsidiaries weretranslated back into sterling. In sterling terms, sales at £149.0 million werethen 2% ahead of the prior year figure of £146.1 million. Sales volumes were 7% ahead of prior year, although this growth was partlyoffset by the combination of market mix, product mix and price being 2% adverse.Global volumes in each of our product lines again showed an increase over prioryear, with volumes of our collagen products ahead in most key markets. In Europe, UK domestic sales showed the strongest growth they have achieved forseveral years. This growth was fairly consistent throughout the year, finishingwith a particularly strong fourth quarter. As a result, UK casing volumesfinished over 6% ahead of prior year. This success was due to a combination ofunderlying growth in the market and some small gains in market share. It was,however, partly offset by average pricing being lower than prior year as aresult of increased sales to customers with higher volume discounts and somecompetitive pricing pressure. Despite the reduction in average price, turnoverin the UK was still some 2.5% ahead of prior year. Elsewhere, in Continental European markets, the success of improvements to theedible collagen product ranges of both Devro and Cutisin formed the basis for anoverall volume increase of over 5%. The Devro range recorded an increase ofalmost 15%, while Cutisin achieved a further 8% uplift on what had already beena very good performance in 2003. The Devro growth was largely driven by anincrease of over 25% in the volume of products being supplied into WesternEuropean markets, while Cutisin's uplift was based on a 13% increase intoEastern Europe. Our only disappointing result came from Germany, where ediblecollagen casing sales were adversely affected by poor summer weather whichsignificantly reduced the level of sausage consumption. While an importantmarket for the future, however, collagen casing in Germany still only representsa very small percentage of the group's overall turnover. In the Americas, US domestic casing volumes maintained the excellent growthpattern of recent years. A very positive increase of 20% was driven in part bycontinued growth in the market for snack foods and in part by market sharegains. Following a slow start to the year, the second quarter saw a substantialincrease in the rate of sales which was then maintained throughout the year. Theimprovements made to the products and processes have continued to contribute tothe success of Coria in the US market and have supported the very strong andeffective marketing and sales efforts put in by our US subsidiary in thisimportant market area. In Latin America, volumes were again very good, particularly in the first half.During the second half, there was a need to restrict supply in order to maintainadequate cover for the increasing volumes being sold into the buoyant US market.As a consequence, Latin American sales finished the year broadly in line withprior year. Large currency movements had a major impact on the overall American turnoverwhich, at close to £31 million, finished the year 1% behind prior year. Atconstant currency the turnover for the region would have been ahead by over £3million, or 11%. In South East Asia, in the early part of the year, a number of restrictions wereapplied to the use of US-derived collagen following the BSE issue in the US in2003. However, following a major effort to reorganise our collagen sourcing andre-engineer some of our products, and with some redistribution of our supplychain logistics, we overcame these restrictions with little or no impact on oursupply capability. As a result we were able to build on the sales growth whichstarted in the second half of 2003 and achieved a steady improvement through thecourse of 2004, finishing with edible collagen volumes over 13% ahead of prioryear. There was also a need to overcome the same type of regulatory issues inJapan. Again this was successfully accomplished, with porcine collagen, in thisinstance, providing the necessary vehicle for maintaining our market presencewhile alternative collagen sources were established. Japanese sales have beengrowing strongly since 2001 and we achieved a 25% increase in volume followingthe 15% growth achieved in 2003. These gains have been principally driven byunderlying growth in the collagen market as more customers switch from the useof gut, but there have also been gains in market share. While these increasesare clearly very welcome, Asian sales in total account for only slightly over 5%of group turnover and their impact on group profits is correspondingly limited.Nevertheless, the region is a large consumer of sausage products and our solidperformance in these markets places Devro in a good position to take advantageof the considerable potential which this area has for future growth. Elsewhere in the Pacific area, after a slower start, trading in Australiagradually improved as the year progressed and the year as a whole showed amodest gain over 2003. This followed an improvement in market conditions andsome further gains in collagen's share of the market. In our manufacturing operations we continued to make solid improvements to ourtechnology base. Despite the distractions created by the regulatory issues inthe early part of the year, we again placed considerable emphasis on improvingthe quality of the product, plant productivity and the cost of manufacture. Weinstigated a number of improvements during the year which either had a directbenefit in 2004 or will provide the base for further improvements in 2005 andbeyond. These improvements in plant throughput, productivity and cost containment, whichoccurred at each location, helped the group to absorb significant increases ininput costs arising from higher collagen and utility prices. During the firsthalf there was also considerable disturbance to manufacturing operations in theUS and UK as a result of the requirement to re-source collagen supplies andrealign the manufacturing processes to accommodate the changes in raw material.These disturbances cost the group approximately £0.6 million. A major project to expand the manufacturing facilities at our Czech subsidiary,Cutisin, was initiated during 2004 and is progressing according to plan. Thebuilding work is now well underway and the first product is expected to becommercially available during the second half of 2005, with the majority of theadditional capacity coming on-stream during 2006. Devro's commitment to research and development remains strong. We strive for newproduct innovations and product improvements to meet customer requirements whichare becoming more complex and specifications which are becoming increasinglyvaried. Several enhancements were introduced throughout the year which extendedor improved our product offering. These were of considerable importance inhelping retain and develop our position in those markets where we aremaintaining high shares or looking for good growth. We believe that ourtechnologies form the base on which the future growth of Devro's business willdepend and we intend to continue our current focus on the group's technologicaldevelopment. In 2004 Devro strengthened its position in the collagen casing business byselling more products to more customers worldwide, and we remain confident ofour ability to grow in the future in the face of increasing competition. We are constantly working to develop new products and improve existing ones tomeet our customers' specific needs. We continue to see many ways of generatingfurther improvements to our processes which will improve the consistency ofproduction, lower the manufacturing cost and enhance the product quality. There will be ongoing competitive pressure, but the group is in a strongposition to take advantage of the opportunities for growth that will arise asthe world food market becomes increasingly automated, generating increasing usesfor collagen casings. FINANCIAL REVIEW Total sales for 2004 were £149.0 million against a prior year figure of £146.1million. Sales volumes were ahead of prior year by 7%, with significant increases beingrecorded in most of our key markets. This volume gain was partly offset by anadverse price/mix impact of 2%, arising from a combination of unfavourablemovements in market and product line mixes, some competitive pricing pressureand an effective reduction in pricing due to increased volume discounts atspecific key accounts. An adverse translational exchange impact of 3% thenresulted in the overall sterling turnover for the group finishing 2% ahead ofprior year. The group's operating profit of £21.4 million compares with £21.1 million in2003. The increase in operating profit was driven by strong sales volume growth andsignificant improvements in productivity and manufacturing efficiency in each ofour manufacturing operations. These factors generated additional profit of £7.0million. Partially offsetting these positive factors, the adverse price/miximpact on average selling prices had a negative effect on profitabilitytotalling £3.0 million. In late December 2003 a single case of BSE was notified in the US. This resultedin issues relating to the sourcing of collagen, subsequently leading to asignificant disruption to our manufacturing operations in both the UK and US asthe processes were modified to accommodate variations in collagen supply. Thishad an adverse impact of around £0.6 million. Additionally, increased demand andsome foreign exchange effects led to rising collagen raw material prices incertain parts of the world, with an adverse impact on profit of around £1.0million. Foreign exchange movements had a negative impact of £1.2 million on profits forthe year. The majority of this impact related to the translation of theoperating profits of our overseas subsidiaries into sterling. The transactionalexchange impact was also adverse, mainly due to the weakness of the US dollar. During the year, bad debts totalling £0.7 million were incurred relating to twoUK customers. Both companies were subsequently sold by the receivers and wecontinue to trade with the new owners. Considerable resources continue to be invested in product and processdevelopment, resulting in research and development expenditure in 2004 totalling£4.0 million, 2.7% of sales (2003: £4.1 million, 2.8% of sales). Net interest expense totalled £2.7 million in 2004 (2003: £3.0 million). Theaverage level of debt was lower than 2003, while the full year impact of the newborrowing facility negotiated in July 2003 offset higher interest rates. Netinterest cover was over 7 times. Net debt at the year end amounted to £25.4 million, comprising gross debt of£36.4 million and cash and liquid resources of £11.0 million. Gearing wasreduced to 34.9% (2003: 41.2%). The group's borrowing facility totals £52.9 million. Two interest rate swapstotalling £15 million are in place to provide protection against potentialincreases in interest rates. These swaps are for nominal amounts of £5 millionand £10 million and expire on 15 July 2005 and 15 July 2006 respectively. At theyear end, 41% (2003: 38%) of the group's borrowings were at fixed rates aftertaking account of the interest rate swaps. 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 2004 of 28.3% is slightly lower than the 2003rate of 28.7%, due mainly to a reduction in the rate of taxation in the CzechRepublic. Net cash flow from operating activities for 2004 was £28.2 million (2003:£28.7million). Despite significantly increased sales, working capital was heldbroadly in line with prior year, except for an increase in prepayments due torequired supplementary contributions of £2.0 million made into the US pensionfund. Capital expenditure totalled £11.5 million. During the year, we commencedan investment programme to expand capacity in the Czech Republic. Expenditure onthis project in 2004 totalled £2.2 million and we expect the final outlay to be£14.0 million by 2006. Dividends of £5.8 million were paid, and there werepayments of £1.7 million in respect of the purchase of the outstanding minorityshares in Cutisin. Earnings attributable to ordinary shareholders have increased to £13.4 millionfrom £12.7 million in 2003. Unadjusted earnings per share was 8.3 pence, anincrease of 5.1% compared with 7.9 pence in 2003. A final dividend of 2.75 pence per share is proposed. This, together with theinterim dividend of 1.25 pence paid in October, gives a total of 4.0 pence andrepresents an increase of 14.3% over 2003. This level of dividend is more thantwice covered by earnings. Summary financial information for 2004 prepared under International FinancialReporting Standards will be released at the Annual General Meeting on 5 May2005. Consolidated profit and loss accountfor the year ended 31 December 2004 2004 2003 £'000 £'000 ------- ------- Turnover (including share of joint venture) Continuing operations 149,168 146,155Less: share of turnover of joint venture (157) (16) ______ ______Group turnover 149,011 146,139 ______ ______Operating profit Continuing operations 21,634 21,102Share of operating loss of joint venture (269) (37) _____ _____Total operating profit: group and share of joint venture 21,365 21,065Interest (net) (2,735) (3,019) _____ ______Profit on ordinary activities before taxation 18,630 18,046Tax on profit on ordinary activities (5,270) (5,180) _____ _____Profit on ordinary activities after taxation 13,360 12,866Minority interests - (171) _____ ______Profit for the financial year 13,360 12,695Dividends (6,416) (5,593) _____ ______Retained profit for the financial year 6,944 7,102 ===== =====Earnings per share - basic 8.3p 7.9p - diluted 8.3p 7.9p === ==== There is no difference between the profit for the year stated above and itshistorical cost equivalent. Statement of group total recognised gains and losses 2004 2003 £'000 £'000 Profit for the financial year 13,360 12,695Exchange differences 327 961 ----- -----Total gains and losses recognised for the year 13,687 13,656 -------- ------- Consolidated balance sheetat 31 December 2004 2004 2003 £'000 £'000Fixed assets Intangible assets 168 -Tangible assets 92,820 89,230 ______ ______ 92,988 89,230 ______ ______Current assets Stocks 19,688 18,726Debtors: amounts falling due after more than one year 3,678 3,634Debtors: amounts falling due within one year 22,347 22,068Cash at bank and in hand 11,010 12,828 ______ ______ 56,723 57,256Creditors: amounts falling due within one year (27,630) (31,477) ______ ______Net current assets 29,093 25,779 ______ ______Total assets less current liabilities 122,081 115,009 ______ ______ Creditors: amounts falling due after more than one year (35,154) (37,372)Provision for liabilities and charges: Joint venture: Share of gross assets - 83Share of gross liabilities - (120) - (37)Other provisions (14,158) (12,771) _______ _______ (49,312) (50,180) _______ ______ 72,769 64,829 ====== =====Called up share capital 16,133 16,050Share premium account 5,194 4,848Capital redemption reserve 35,587 35,587Special reserve 2,849 109Profit and loss account 13,050 8,235 _______ _______Total shareholders' funds 72,813 64,829Minority interests - equity (44) - _______ _______ 72,769 64,829 ====== ====== Consolidated cash flow statementfor the year ended 31 December 2004 2004 2003 £'000 £'000 Net cash inflow from operating activities 28,150 28,730Returns on investments and servicing of finance (3,168) (3,143)Taxation (4,998) (3,242)Capital expenditure and financial investment (11,358) (7,290)Acquisitions and disposals (1,618) (177)Equity dividends paid (5,831) (4,951) ______ ______Cash inflow before management of liquid resources and financing 1,177 9,927Management of liquid resources 2,499 (1,967)Financing (1,711) (13,032) ______ ______Increase/(decrease) in cash in the year 1,965 (5,072) ===== =====Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash in the year 1,965 (5,072)Cash outflow from decrease in debt 2,140 13,032Cash (inflow)/outflow from (decrease)/increase in liquid resources (2,499) 1,967 ______ ______Change in net debt resulting from cash flows 1,606 9,927Translation difference (360) (1,333) _______ ______Movement in net debt in the year 1,246 8,594Opening net debt (26,654) (35,248) _______ ______Closing net debt (25,408) (26,654) ====== ====== Notes to the preliminary announcement of the final results for the year ended 31December 2004 1 Dividends 2004 2003 £'000 £'000Interim paid of 1.25 pence per share(2003: 1.1 pence) 2,006 1,765 Final proposed of 2.75 pence per share(2003: 2.4 pence) 4,437 3,852 Dividends waived (see below) (27) (24) ------ ------ 6,416 5,593 ==== ==== The employee share ownership plan trust waived the dividends due in respect ofthe shares purchased by it under the Devro 2001 Deferred Bonus Scheme. 2 Statutory Accounts The above financial information does not constitute statutory accounts for theyears ended 31 December 2004 or 31 December 2003. The financial information forthe year ended 31 December 2003 is extracted from the full statutory accountsfor that year which have been delivered to the Registrar of Companies. Thereport of the auditors on these accounts was unqualified and did not contain astatement under either section 237(2) or section 237(3) of the Companies Act1985. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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