24th Jan 2008 07:01
Devro PLC24 January 2008 24th January, 2008 DEVRO PLC Operational Review At Devro's interim results, announced in September 2007, the group's CEO, PeterPage, indicated that he would be conducting an operational review of thebusiness, having become CEO in June 2007. Highlights Management actions to date resulting from operational review include: • Manufacturing at Scottish operations stabilised• US business enhanced by decisive action to establish a leading position in collagen gel• BioFilm Limited sale completed without significant cost or write down Future operational improvements identified: • Focus on pricing• Growth opportunities in most markets• Investment in sales and distribution infrastructure in Russia and China• New products to capture significant opportunity in conversion from gut casings• Product development to be supported by dedicated Technical Marketing team• Improvements to stock management and distribution Commenting on today's announcement, Devro's CEO, Peter Page, said: "This has been a thorough review, to identify how we will increase groupearnings in the future. During the review, a number of operational issues havebeen resolved and, looking ahead, several opportunities have been identified forthe short and medium term, which will generate earnings growth and increasedvalue for shareholders. "Of key strategic importance will be management's resolute focus on reversingthe recent decline in pricing and subsequent margin pressure that had adverselyaffected the business. Price increases on the majority of lines are now beingintroduced, although given the nature of some client contracts, this will be anongoing process. "The review has also identified a number of significant opportunities inexisting markets, as well as further potential in emerging markets, especiallyRussia and China. Furthermore, the continuing conversion from gut to collagencasings continues to present a significant opportunity. There is now a series ofinitiatives in place, including continuing product development, increasedmarketing, and strengthening sales teams that will make the most of theseopportunities." There will be a presentation today at 9am for investment analysts summarisingthe operational review. This will be held at 16 Lincoln's Inn Fields, London,WC2A 3ED. A live audio feed will be available to those unable to attend this meeting inperson. To access this facility, please call +44 (0)1452 541 076. As previously indicated, Devro will announce results for the year ended31 December, 2007 on 5 March, 2008. Enquiries: Peter Page Chief Executive 020 7404 5959 on 24 January, 2008,John Neilson Finance Director 01236 879191 thereafterAnita Scott, Mark Antelme Brunswick 020 7404 5959 Notes to editors: Devro (www.devro.plc.uk) is the world's leading manufacturer of collagenproducts for the food industry. In addition, the company manufactures a range ofplastic casings, supplies customers in the food industry with a range ofdistributed products and also supplies pure collagen raw materials for use inthe healthcare industry. With manufacturing facilities in three continents and2006 revenue in excess of £150m, Devro products are sold worldwide. Operational Review Introduction------------In September 2007, Devro's recently appointed CEO, Peter Page, updated themarket with his view of the longer-term prospects for the business. In summary, he reported that Devro has a strong share of the global collagencasings market (estimated at 50%), with a balanced range of products and goodpositions in each sector of the market, when segmented by product application.Geographical diversity is also well-balanced, with four manufacturing centresaround the world. Whilst Devro is exposed to common issues of raw material andutility cost increases, customer consolidation and active competitors, there isnothing to suggest that there is likely to be substantial disruption to thecurrent market situation. For these reasons, Peter Page indicated that he wouldbe conducting an Operational Review across the business, with the purpose ofincreasing earnings over the period 2008-2010, rather than seeking a fundamentalchange of strategic direction. Operational Review------------------ 1. 2007 update ----------- - Trading to 31 December 2007 has been in-line with market expectations - H2 Sales improved over H1, with significant growth in China and Russia - Management action stabilised Scottish manufacturing operations in H2 following the £1M adverse costs reported for H1. Senior Management changes have resolved challenging issues in manufacturing processes. - A very difficult USA market situation has been successfully managed in H2, whereas earlier projections gave rise to expectations of significantly reduced profitability arising from the change of one key account from collagen casing to the process of co-extrusion. Coria, Devro's US company, has invested in plant and technology in the preceding three years to establish a competitive advantage in supplying gel to the USA's leading food corporations, and this has been reflected in volume and prices for Coria's gel during 2007. Meanwhile, the capacity previously used for collagen casing has all been allocated to emerging market sales. - BioFilm Limited, the specialist thin-films division, was sold in a transaction completed on 28 December, to a new company jointly-owned by Tate & Lyle Ventures and Scottish Enterprise. Whilst the technology is novel and clearly has potential, BioFilm had not made a positive contribution to EBIT, and it still required substantial further investment. Devro has done well to complete the exit from thin films without any significant costs to the Group, still retaining an interest to benefit from any possible future sale of the business. Devro continues to develop new products in collagen: casings, gel and biomedical collagen. - These recent developments have helped to lay the foundations for 2008. 2. 2008 Prospects -------------- - Around the world, Devro has introduced price increases on most product lines, which will take effect from Q1. Pricing and margin are the key priorities for 2008, in order to reverse the recent trend of declining prices, attributable to customer consolidation, erosion by currency movements, and volume growth in lower-priced markets. Further progress on pricing in 2009 and 2010 will be necessary before the benefits reach EBIT, as a number of key accounts are in long-term contracts, and recently there have been significant raw material cost increases in glycerol and cattle hides which will have to be passed on to customers. - Despite the step change to gel in the USA in 2007, collagen casing sales volumes are expected to increase in 2008, driven by higher demand from existing customers, and initiatives to displace gut from targeted new opportunities. The additional volume will come from existing manufacturing capacity, with no extra capital expenditure planned to accommodate volume growth. - There will be capital expenditure at Cutisin in the Czech Republic, to complete the process of upgrading facilities to achieve compliance with future EU Food Hygiene and Waste Water Treatment Regulations, in what is probably the most modern and efficient collagen casings plant in operation worldwide. - At the Scottish operations, capital expenditure will increase the volume of enhanced products designed to retain UK market share and support prices. - We have also announced this week the appointment of Peter Williams as Group Finance Director, with effect from 1 May 2008. Peter brings considerable experience in Group Finance, and he will make a significant contribution to Devro in the future. - Capability in manufacturing and supplying biomedical collagen will be enhanced during 2008 with the completion of an ISO 13485 (medical grade) clean room in Scotland. In tandem with the Group's unique facility in New South Wales, which sources collagen from Australia's BSE-free herd, this will enable the Group to use its unique knowledge of collagen science to develop a stronger presence in the specialist biomedical sector. Devro's competence in this area was recently highlighted with the announcement of a UK Government grant of approximately £750,000 for research into artificial ligaments using nanotechnology, involving the University of Cambridge, Addenbrooke's Hospital, Orthomimetics and Devro plc. The fact that Devro was named in the funding announcement highlights the recognition it has achieved for its expertise in this specialist sector. - China and Russia are growing in importance, and Devro will be taking steps to establish a stronger local presence in both markets. 3. 2009-2010 Prospects ------------------- - Through investment in enhanced products, and professional sales and marketing activities, Devro expects at least to keep pace with market volume growth. Collagen Casing Trade Association statistics indicate a worldwide volume growth of 4.58% in the 2006-2007 period. - Through innovative product development, Devro will also continue to seek new business as gut-based markets increase in sophistication and convert to longer run, more efficient automated processes better adapted to collagen casings. The gut casings market is estimated to be twice as large as the collagen casings market, indicating the scale of opportunity. A dedicated Technical Marketing team has been established, from existing resources, to focus on this sector and other new opportunities. - The management team in Scotland will be preparing proposals, in 2008, for a significant improvement in the long-term profitability of UK operations. Whilst the immediate manufacturing issues have been addressed, there is still a need to improve earnings substantially. Financial and Shareholder Issues-------------------------------- - The main focus for the period 2008-2010 will be to increase Group earnings substantially and to manage debt levels firmly. - Management understands the importance of dividend to shareholders: the current goal is to maintain dividend levels, and increase the cover with earnings growth. - The Board considers that the current level of net debt gives a reasonable balance between leveraging shareholders' equity and leaving sufficient flexibility to manage the business for medium-term improvements. A recent analysis of the Group's Weighted Average Cost of Capital, combined with existing banking facilities, means there is scope to support appropriate earnings-enhancing strategic developments in due course. Opportunities for appropriate acquisitions will be considered. - Whilst Pension Schemes have been well funded historically, in 2008 the Group will seek further ways to manage the inherent, long term liabilities. - The strength of the Czech Koruna has been, and continues to be, a real challenge to the business. In the long-term, it is expected to become a member of the Euro, which will bring stability. Until then, Cutisin, the Group's Czech operation, will continue to seek ways to increase the proportions of Euro and Dollar denominated purchases to balance its significant income exposure to those currencies. Cutisin's real advantage lies in the efficiency of its modern production lines, installed in 2006, and in the impressive commitment and technical competence of its staff. Thus, whilst currency movements may erode some cost advantages, there is a fundamental, long-term advantage to having the Czech base which will outlast medium term currency changes. Conclusion---------- A number of legacy issues have been closed off, the Group is placing anincreased emphasis on pricing opportunities whilst also seeking to limit costs,with the objective of improving the return on capital and deliveringsubstantially improved earnings for shareholders. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
DVO.L