6th Sep 2006 07:00
Devro PLC06 September 2006 6 September 2006 DEVRO PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2006 Highlights 30 June 2006 30 June 2005 Revenue £75.2m £74.6mOperating profit (before exceptional items) £9.0m £10.7mOperating margin (before exceptional items) 12.0% 14.3%Exceptional items: Restructuring charge £(1.0)m - Profit on sale of land - £6.1mProfit before tax £7.1m £15.9mEarnings per share 3.1p 7.0pEarnings per share (before exceptional items) 3.6p 4.3pInterim dividend per share 1.425p 1.375pNet debt £29.4m £20.6m Pat Barrett, Chairman of Devro, commented: "Overall, our worldwide sales volume for the first half of 2006 was slightlyahead of the equivalent period in 2005, but some external factors, in particularmuch higher energy prices, have resulted in a lower trading profit for the sixmonths to 30 June 2006 when compared with last year. "We remain committed to improving our market position, products andtechnologies. As previously reported, we have accelerated our investment inCutisin and we are also well advanced in initiatives to improve our otheroperations. We expect our product offering in 2007 to be broader, stronger andbacked by greater manufacturing capacity. Therefore, while the business facesexternal cost and market challenges in the short term, the directors remainconfident about the future prospects for the company." Enquiries: Graeme Alexander Chief Executive 020 7404 5959 on 6.9.06John Neilson Finance Director 01236 879191 thereafterJon Coles / Mark Antelme Brunswick 020 7404 5959 CHAIRMAN'S STATEMENTSix months ended 30 June 2006 Group results Overall, our worldwide sales volume for the first half of 2006 was slightlyahead of the equivalent period in 2005, but some external factors, in particularmuch higher energy prices, have resulted in a lower trading profit for the sixmonths to 30 June 2006 when compared with last year. Global revenue for the period increased to £75.2 million from £74.6 million inthe corresponding period in 2005. Operating profit before a restructuring chargeof £1.0 million was £9.0 million compared with £10.7 million before anexceptional credit of £6.1 million last year. Earnings per share beforeexceptional items was 3.6 pence compared with 4.3 pence in 2005. Trading Trading for the first half of 2006 saw positive results in Europe, with EasternEurope in particular continuing to achieve significant growth. This, however,was broadly offset by weaker sales in the US and some South East Asian markets. Sales volumes finished the period slightly ahead of prior year. This was morethan offset by an adverse price/mix movement of 1.4% resulting principally fromadverse transactional exchange. A favourable translational exchange impact of2.2% then resulted in group revenue being 0.9% ahead of prior year. In Europe, the UK market was subdued, with edible casing volumes finishing theperiod slightly behind the corresponding period in 2005. Competition remainsactive in the UK market, where pricing pressure continues. In Continental European markets, the strong growth in recent years continuedinto 2006. Each of the major market areas - Western, Central and Eastern Europe- achieved higher casing volumes compared with the equivalent period in 2005,resulting in an overall increase of over 10% in these markets. Cutisin increasedits volumes by over 12%, while the Devro and Coria brands also achieved goodgrowth. Sales in all Cutisin's European markets were again ahead of prior year.Eastern European markets were particularly strong, continuing the trend ofrecent years away from gut towards the more productive collagen casing. However, the strengthening of the Czech Koruna compared to the Euro, its majorexport trading currency, had a significant adverse impact on the value ofCutisin's export sales. While underlying prices for Cutisin's products inEuropean markets were stable or slightly higher than 2005, the impact of thetransactional currency movement was a reduction in effective selling prices.With the large majority of Cutisin's output being exported, there was an impactequivalent to £0.8 million within the local Czech operation. In the Americas, volumes in the domestic US market were down when compared tothe first half of 2005, which was a period of unusually strong growth. Thesecond half of 2005 experienced a slow-down, mainly in the snack sausage sector,which continued into the first half of 2006. Trading in the early part of thesecond half of 2006, however, has improved and, as expected, has returned to amore normal pattern of growth. While second half trading should be comfortablyahead of prior year, we do not expect this to completely offset the first halfreduction. Sales into Latin America are also beginning to pick up momentum againafter a quieter first half. In the Asia/Pacific region, revenues were broadly in line with 2005. The salesperformance in Australia and New Zealand was solid, although movements in theNew Zealand exchange rate did have some adverse impact on revenues. In theJapanese market, the growth of recent years continued, with volumes being againcomfortably ahead of prior year. This continued improvement reflects underlyinggrowth in the market combined with commercial initiatives from our Japan-basedteam. Sales into Asia, particularly China, have been lower than expected. Thiswas due in large measure to a shortage of suitable casing for the specificrequirements of the Asian market place. This situation is being addressed andimprovements are expected later in the second half of 2006 and into 2007. Manufacturing continues to face pressure from very significantly increasedenergy prices, which resulted in around £1.7 million of additional costscompared with the first half of 2005. The weaker growth in sales volume in thefirst half, however, restricted our ability to drive through furtherimprovements in manufacturing productivity which otherwise would largely haveoffset these cost pressures. The impact of energy price increases has beengreatest in our Scottish operation. In response to this additional cost burden,and as part of our ongoing efforts to reduce our cost base, we carried out amajor review of the overhead structure. Action taken in January 2006 reduced ouroverhead costs and led to an exceptional restructuring charge of £1.0 million.Annual cost savings are expected to be broadly the same amount. Variability in the quality of some of our collagen raw material led to a periodof reduced production efficiency in our Australian and US operations. Thefinancial impact in the period was of the order of £1 million. Technicalsolutions were developed to control the effects of the variability andconsequently it is expected that this issue will be restricted to the firsthalf. Group profit was affected by a number of exchange rate movements during theperiod, both positive and negative. The overall effect of these movements, bothtranslational and transactional, was an adverse impact of £0.4 million. In the thin-film business, sales continue to be slower than anticipated, andconsiderable time and effort is still required to develop this marketopportunity into a viable commercial proposition. The technology andmanufacturing aspects, however, are progressing well, with several new productsbeing at an advanced stage of development, which will help to support themarketing effort. The progress and future prospects of this business initiativecontinue to be monitored closely. Operating profit before exceptional items was £9.0 million compared with £10.7million in 2005. Basic earnings per share before exceptional items was 3.6 penceagainst 4.3 pence in 2005. Cutisin expansion The major project to expand manufacturing facilities at our Czech subsidiary isnearing completion. The new plant started to produce commercial product in July2006 and will be progressively brought on line during the second half of theyear. Early indications are that productivity from the new manufacturing processis likely to be significantly higher than originally planned. Substantialadditional volume, therefore, should be available in 2007 to meet the strongdemand for Cutisin products, particularly in Eastern European and South EastAsian markets. Net debt Net debt of £29.4 million at 30 June 2006 compares with £20.6 million at 30 June2005. Net cash inflow from operations was below the corresponding period lastyear. This was due to lower operating profits, the cost of the restructuringinitiative in Scotland, pension scheme payments and an increase in workingcapital. Additionally, the cash outflow in respect of capital expenditure in theperiod was £9.6 million, an increase of £4.5 million on the equivalent period in2005. The expansion of our Czech facilities accounted for £5.3 million of thistotal expenditure. Dividend The Board has declared an interim dividend of 1.425 pence per share (2005: 1.375pence). It will be paid on 18 October 2006 to shareholders on the register at 22September 2006. Board changes As previously announced, Mr Stuart Paterson joined the company as anon-executive director on 9 March 2006 and has become Chairman of the AuditCommittee. Stuart has been Chief Financial Officer of Johnston Press plc since2001. Prospects Foreign exchange and energy costs are each expected to continue to have anadverse effect on group profits. Productivity improvement, however, will help tooffset some of this with the expectation of increased sales volumes in thecurrent period and in 2007. We remain committed to improving our market position, products and technologies.As previously reported, we have accelerated our investment in Cutisin and we arealso well advanced in initiatives to improve our other operations. We expect ourproduct offering in 2007 to be broader, stronger and backed by greatermanufacturing capacity. Therefore, while the business faces external cost andmarket challenges in the short term, the directors remain confident about thefuture prospects for the company. CONSOLIDATED INCOME STATEMENTfor the six months ended 30 June 2006 6 months 6 months 12 months ended ended ended 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000Revenue - continuing operations (note 2) 75,206 74,564 152,518 -------- -------- --------- Operating profit - continuing operations 8,007 16,754 27,600--------------------------------------------------------------------------------Analysed as:Operating profit beforeexceptional items (note 2) 9,022 10,653 21,256Exceptional items (note 3) (1,015) 6,101 6,344 -------- -------- --------Operating profit 8,007 16,754 27,600-------------------------------------------------------------------------------- Finance revenue 199 136 351Finance expense (1,105) (1,020) (2,165) -------- -------- --------Profit before tax 7,101 15,870 25,786Taxation (note 4) ( 2,024) (4,510) (7,091) -------- -------- --------Profit for the period 5,077 11,360 18,695 ======== ======== ======== Attributable to:-Equity holders 5,077 11,370 18,651Minority interest - (10) 44 -------- -------- -------- 5,077 11,360 18,695 ======== ======== ========Earnings per share (note 6) - basic 3.1p 7.0p 11.5p - diluted 3.1p 7.0p 11.4p CONSOLIDATED BALANCE SHEETat 30 June 2006 At At At 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000ASSETSNon-current assetsGoodwill 177 168 177Other intangible assets 1,230 847 901Property, plant and equipment 104,327 92,245 101,357Deferred tax assets 10,642 11,503 16,500Other receivables 153 - 171 --------- --------- --------- 116,529 104,763 119,106 --------- --------- ---------Current assetsInventories 21,783 22,441 21,056Current tax assets 638 - 870Trade and other receivables 21,968 24,471 20,218Derivative financial instruments 396 215 541Cash and cash equivalents 8,362 11,971 11,243 --------- --------- --------- 53,147 59,098 53,928 --------- --------- ---------LIABILITIESCurrent liabilitiesFinancial liabilities - Borrowings 1,027 1,263 895 - Derivative financial instruments 58 52 132Trade and other payables 17,842 18,505 21,450Current tax liabilities 2,271 4,265 3,571 --------- --------- --------- 21,198 24,085 26,048 --------- --------- ---------Net current assets 31,949 35,013 27,880 --------- --------- ---------Non-current liabilitiesFinancial liabilities - Borrowings 36,710 31,283 28,068Deferred tax liabilities 15,260 10,302 15,406Retirement benefit obligations 23,555 37,954 41,985Other non-current liabilities 119 180 165 --------- --------- --------- 75,644 79,719 85,624 --------- --------- ---------Net assets 72,834 60,057 61,362 ========= ========= ========= CONSOLIDATED BALANCE SHEETat 30 June 2006 (continued) At At At 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000EQUITYCapital and reserves attributable toequity holdersOrdinary shares 16,211 16,147 16,176Share premium 5,660 5,275 5,471Other reserves 49,089 46,723 49,681Retained earnings/(losses) 1,874 (8,034) (9,966) --------- --------- -------Total shareholders' equity 72,834 60,111 61,362Minority interest - equity - (54) - --------- --------- --------Total equity 72,834 60,057 61,362 ========= ========= ======== The notes on pages 10 to 15 are an integral part of these consolidated interimfinancial statements. CONSOLIDATED CASH FLOW STATEMENTfor the six months ended 30 June 2006 6 months 6 months 12 months ended ended ended 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000Cash flows from operating activitiesCash generated from operations (note 8) 6,495 10,568 28,521Interest received 199 141 357Interest paid (1,105) (1,037) (2,218)Tax paid (3,076) (2,965) (6,434) ------- ------- --------Net cash from operating activities 2,513 6,707 20,226 ------- ------- --------Cash flows from investing activitiesPurchases of property, plant and equipment (9,122) (4,923) (14,962)Proceeds from sale of land - 7,062 7,305Proceeds from sale of other property, plant and equipment 61 37 94Purchases of intangible assets (478) (161) (338)Payments to former minorityshareholders of Cutisin a.s. (5) (9) (13) ------- ------- --------Net cash (used in)/generated from investing activities (9,544) 2,006 (7,914) ------- ------- --------Cash flows from financing activitiesIssue of ordinary share capital 30 95 320Net borrowing/(repayments) under the loan facility 9,221 (4,132) (7,697)Payments under finance leases (13) (33) (41)Dividends paid to shareholders (4,894) (4,423) (6,639) ------- ------- --------Net cash generated from/(used in) financing activities 4,344 (8,493) (14,057) ------- ------- --------Net (decrease)/increase in cash and cash equivalents (2,687) 220 (1,745)Cash and cash equivalents at beginning of period 11,243 11,010 11,010Exchange (losses)/gains on cash and cash equivalents (194) 704 1,978--------------------------------------------------------------------------------Cash and cash equivalents 8,362 11,971 11,243Bank overdraft - (37) ---------------------------------------------------------------------------------Net cash and cash equivalents at end of period 8,362 11,934 11,243 ======= ======= ======== CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the six months ended 30 June 2006 6 months 6 months 12 months ended ended ended 30 June 30 June 31 December 2006 2005 2005 (unaudited) (unaudited) (audited) £'000 £'000 £'000 Profit for the period 5,077 11,360 18,695Net exchange adjustments (658) 564 2,747Cash flow hedges: - net fair value gains, net of tax 178 135 207 - reclassified and reported in operating profit (152) (159) (318)Retirement benefit obligations, net of tax 11,657 (3,888) (7,587)Adoption of IAS 32 and 39 - 200 200 -------- -------- --------Total recognised income for the period 16,102 8,212 13,944 ======== ======== ======== Attributable to:-Equity holders 16,102 8,222 13,900Minority interest - (10) 44 ------- -------- -------- 16,102 8,212 13,944 ======= ======== ======== NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTSfor the six months ended 30 June 2006 (unaudited) 1. Basis of preparation This financial information comprises the consolidated interim balance sheets asat 30 June 2006 and 30 June 2005 and related consolidated interim statements ofincome, cash flows and recognised income and expense for the periods then endedof Devro plc (hereinafter referred to as "financial information"). This financial information has been prepared in accordance with the ListingRules of the Financial Services Authority and on the basis of the accountingpolicies set out in the group's 2005 annual report. The accompanyingconsolidated financial information should be read in conjunction with theconsolidated financial statements and notes thereto included in the group's 2005annual report. The group has chosen not to adopt International Accounting Standard ("IAS") 34,"Interim financial statements", in preparing its 2006 interim statements and,therefore, this interim financial information is not in full compliance withInternational Financial Reporting Standards ("IFRS"). The consolidated interim financial information does not constitute statutoryaccounts within the meaning of Section 240 of the Companies Act 1985. Theseinterim results are unaudited but have been reviewed by our auditors. Thestatutory accounts for the year ended 31 December 2005, which are prepared underIFRS, have been reported on by the group's auditors and delivered to theregistrar of companies. The report of the auditors was unqualified and did notcontain a statement under either section 237 (2) or (3) of the Companies Act1985. 2. Segmental information (a) Primary reporting format - Business segments The business segments shown below are as follows: Collagen casings includes the three edible collagen brands, Devro, Coria andCutisin, and Cutisin non-edible collagen casings. Distributed products compriseTeepak cellulose, Krehalon plastics and other ancillary products. Other productsincludes collagen film, collagen gel, Cutisin plastic casings, collagen formedical and cosmetic use and thin-film products. The unallocated segmentrepresents the activities of the group's head office based at Moodiesburn,Scotland and three subsidiary undertakings which are either solely holdingcompanies or non-trading. There are no sales between business segments. Collagen casings Distributed products Other products 30 June 30 June 30 June 30 June 30 June 30 June 2006 2005 2006 2005 2006 2005 Group £'000 £'000 £'000 £'000 £'000 £'000 Segment results Revenue Sales to external customers 61,093 60,399 8,838 9,532 5,275 4,633 --------- --------- -------- -------- ------- ------- Results Segment results before exceptional items 9,216 11,207 199 158 1,301 973 Exceptional items (860) 6,101 - - - - --------- --------- --------- --------- -------- --------- Segment results 8,356 17,308 199 158 1,301 973 Finance income Finance expense Profit before tax Taxation Profit for the period Segment assets and liabilities Segment assets 140,468 143,815 3,350 3,975 12,362 12,919 Company overdraft Taxation Total assets Segment liabilities 37,019 50,503 1,767 2,532 2,158 2,781 Borrowings Company overdraft Taxation Total liabilities Unallocated Group 30 June 30 June 30 June 30 June 2006 2005 2006 2005 Group £'000 £'000 £'000 £'000 Segment results Revenue Sales to external customers - - 75,206 74,564 --------- --------- --------- --------- Results Segment results before exceptional items (1,694) (1,685) 9,022 10,653 Exceptional items (155) - (1,015) 6,101 --------- --------- --------- --------- Segment results (1,849) (1,685) 8,007 16,754 Finance income 199 136 Finance expense (1,105) (1,020) --------- --------- Profit before tax 7,101 15,870 Taxation (2,024) (4,510) --------- --------- Profit for the period 5,077 11,360 --------- --------- Segment assets and liabilities Segment assets 2,216 706 158,396 161,415 Company overdraft - (9,057) Taxation 11,280 11,503 --------- --------- Total assets 169,676 163,861 --------- --------- Segment liabilities 630 9,932 41,574 65,748 Borrowings 37,737 32,546 Company overdraft - (9,057) Taxation 17,531 14,567 --------- --------- Total liabilities 96,842 103,804 --------- --------- Collagen casings Distributed products Other products 30 June 30 June 30 June 30 June 30 June 30 June 2006 2005 2006 2005 2006 2005 £'000 £'000 £'000 £'000 £'000 £'000 Other segment items Additions to property, plant and equipment 7,681 4,675 2 2 392 196 Additions to other intangible assets 478 158 - 3 - - Depreciation of property, plant and equipment 4,018 3,794 6 7 597 575 Amortisation of intangible assets 122 102 - - 20 18 Unallocated Group 30 June 30 June 30 June 30 June 2006 2005 2006 2005 £'000 £'000 £'000 £'000 Other segment items Additions to property, plant and equipment 37 50 8,112 4,923 ------- ------- Additions to other intangible assets - - 478 161 ------- ------- Depreciation of property, plant and equipment 22 19 4,643 4,395 ------- ------ Amortisation of intangible assets 3 6 145 126 ------- ------ (b) Secondary reporting format - Geographical segments Europe Americas Asia/Pacific 30 June 30 June 30 June 30 June 30 June 30 June 2006 2005 2006 2005 2006 2005 £'000 £'000 £'000 £'000 £'000 £'000 Segment revenue Sales to external customers (by destination) 44,641 43,791 15,563 15,652 15,002 15,121 Inter-segment sales 3,327 3,326 3,724 2,817 219 343 --------- --------- -------- -------- -------- -------- 47,968 47,117 19,287 18,469 15,221 15,464 --------- --------- -------- -------- -------- -------- Segment assets Segment assets 111,203 99,981 25,017 28,567 23,808 37,914 Company overdraft Taxation Inter-segment assets Total assets Other segment items Additions to property, plant and equipment 6,392 2,976 955 983 728 914 Additions to other intangible assets 478 161 - - - - Unallocated Group 30 June 30 June 30 June 30 June 2006 2005 2006 2005 £'000 £'000 £'000 £'000 Segment revenue Sales to external customers (by destination) - - 75,206 74,564 Inter-segment sales - - 7,270 6,486 ------ ------ -------- -------- - - 82,476 81,050 ------ ------ -------- -------- Segment assets Segment assets 15,191 26,506 175,219 192,968 Company overdraft - (9,057) Taxation 11,280 11,503 Inter-segment assets (16,823) (31,553) -------- -------- Total assets 169,676 163,861 -------- -------- Other segment items Additions to property, plant and equipment 37 50 8,112 4,923 -------- -------- Additions to other intangible assets - - 478 161 -------- -------- Sales between geographical segments are made on arms-length terms and conditionswhich are available to unrelated parties. 3. Exceptional items A charge of £1,015,000 in respect of restructuring costs was made in the sixmonths ended 30 June 2006. This charge was deducted in arriving at the operatingprofit of £8,007,000. The exceptional credit of £6,101,000 for the six months ended 30 June 2005relates to the sale of 34.5 acres of surplus land at Moodiesburn. 4. Taxation The charge for taxation for the six months ended 30 June 2006 corresponds to aneffective rate of tax of 28.5% (2005: 28.4%) and reflects the anticipatedeffective rate for the year ending 31 December 2006. The charge for taxationcomprises a UK corporation tax credit of £325,000 (2005: charge of £1,864,000)and a foreign tax charge of £2,349,000 (£2,646,000). 5. Dividends The interim dividend of 1.425 pence per share will be paid on 18 October 2006 toshareholders on the register at 22 September 2006. This compares with theinterim dividend of 1.375 pence and a full year dividend of 4.4 pence in respectof 2005. 6. Earnings per share 6 months 6 months ended ended 30 June 2006 30 June 2005Earnings per share (pence) - Basic 3.1 7.0 - Diluted 3.1 7.0 - Basic before exceptional items 3.6 4.3 Basic earnings per share for the six months ended 30 June 2006 was calculated bydividing the profit for the period of £5,077,000 (2005: £11,370,000) by161,842,779 (2005: 161,393,593) ordinary shares, being the weighted averagenumber of ordinary shares in issue during the period. Share options are only treated as dilutive in the calculation of dilutedearnings per share if their exercise would result in the issue of ordinaryshares at less than the average market price of the shares during the period.Shares arising from share options or the performance share plan are only treatedas dilutive where the effect is to reduce earnings per share. Diluted earningsper share was calculated by dividing the profit for the period of £5,077,000(2005: £11,370,000) by the weighted average number of ordinary shares, includingthe effect of all dilutive potential ordinary shares, of 163,450,256 (2005:163,399,433). The earnings per share before exceptional items of 3.6 pence for the six monthsended 30 June 2006 (2005: 4.3 pence) was calculated in order to eliminate theeffect of the exceptional charge after taxation of £711,000 (2005: credit aftertaxation of £4,375,000) on the results. Basic earnings per share beforeexceptional items was based on the profit attributable to ordinary shareholdersbefore exceptional items, after attributable tax, of £5,788,000 and 161,842,779(2005: £6,995,000 and 161,393,593 ordinary shares), being the weighted averagenumber of shares in issue during the period. 7. Retirement benefit obligations The significant reduction in the group's retirement benefit obligations at 30June 2006 was principally due to: (a) increases in the discount rates applied to the group's major pension schemes; (b) actions taken to amend the early retirement provisions of the UK scheme. 8. Cash flows from operating activities 6 months 6 months 12 months ended ended ended 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000 Net profit for the period 5,077 11,360 18,695Adjustments for:Taxation 2,024 4,510 7,091Finance income (199) (136) (351)Finance expense 1,105 1,020 2,165Gain on disposal of land - (6,101) (6,344)Loss/(gain) on disposal of other property, plant and equipment 38 (18) 161Depreciation of property, plant and equipment 4,643 4,395 8,876Amortisation of intangible assets 145 126 258Performance share plan charge 234 258 397Retirement benefit obligations (1,206) (301) (2,103)Changes in working capital:Increase in inventories (1,046) (2,414) (693)Increase in trade and other receivables (1,804) (1,598) (741)(Decrease)/increase in trade and other payables (2,516) (533) 1,110 -------- -------- --------Cash generated from operations 6,495 10,568 28,521 ======== ======== ======== 9. Analysis of net debt At At At 30 June 30 June 31 December 2006 2005 2005 £'000 £'000 £'000 Cash and cash equivalents 8,362 11,971 11,243Bank overdraft - (37) - -------- -------- --------Net cash and cash equivalents 8,362 11,934 11,243Borrowings less bank overdraft andfinance leases (37,731) (32,482) (28,944) -------- -------- -------- (29,369) (20,548) (17,701)Finance leases (6) (27) (19) -------- -------- --------- (29,375) (20,575) (17,720) ======== ======== ========= This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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