Preliminary Results

17th Feb 2009 07:00



For Immediate Release

17 February 2009

PRELIMINARY RESULTS 

FOR THE YEAR ENDED 31 DECEMBER 2008

Devro plc (the "group"), the world's leading manufacturer of collagen products for the food industry, is pleased to announce its preliminary results for the year ended 31 December 2008.

Results  (Continuing operations*)	2008	Restated 2007
Revenue	£183.1m	£156.3m	+17%
Operating profit before exceptional items	£20.6m	£17.7m**	+16%
Profit before tax and exceptional items	£18.8m	£15.6m	+21%
Exceptional items	£(3.5)m	£0.6m
Profit before tax	£15.3m	£16.2m	-5%
Earnings per share	7.6p	7.4p	+3%
Earnings per share before exceptional items	8.2p	6.4p***	+28%
Dividend per share	4.45p	4.45p	-
Net debt	£24.0m	£27.3m

*  On 28 December 2007, BioFilm Limited was sold to Tate & Lyle Ventures LP and Scottish Enterprise's Scottish Venture Fund. See consolidated income statement and note.

**  2007 operating profit has been re-stated to reflect a change in the accounting treatment of net pension finance income.

***  2007 tax credit amounting to £1.3 million re-stated as exceptional

Pat Barrett, Chairman of Devro, commented:

"The progress reported in my statement a year ago has continued throughout 2008. Results have improved across the group, with operating profit before exceptional items increasing by 16% compared to 2007. Operationally, 2008 finished well, which, together with significant movements in certain key currencies, meant that operating results were ahead of our expectations. Despite a full programme of capital expenditure in the year, strong cash flows enabled us to reduce net debt from £27.3 million last year to £24.0 million. The balance sheet is strong and our existing financial resources give us the capacity to continue to grow the business. 

The global economic outlook for 2009 and its impact on Devro is difficult to predict. However, Devro is well positioned to improve operational performance and shareholder value in the future".  

 

Enquiries:

Peter Page	Chief Executive	0207 466 5000 on 17 February
Peter Williams	Finance Director	01236 879191 thereafter
Diane Stewart Charles Ryland Carrie Clement	Buchanan Communications	0207 466 5000

There will be a presentation today at 11.00am for investment analysts. This will be held at the offices of Buchanan Communications, 45 Moorfields, London, EC2Y 9AE. A live audio feed will be available to those unable to attend this meeting in person. To connect to the web cast facility, please go to http://www.citycomments.co.uk/Devro.asp approximately 10 minutes (10.50am) before the start of the briefing. The presentation will also be available on the company's website. 

CHAIRMAN'S STATEMENT

Introduction

The progress reported in my statement a year ago has continued throughout 2008. Results have improved across the group, with operating profit before exceptional items increasing by 16% compared to 2007. Operationally, 2008 finished well, which, together with significant movements in certain key currencies, meant that operating results were ahead of our expectations. Despite a full programme of capital expenditure in the year, strong cash flows enabled us to reduce net debt from £27.3 million last year to £24.0 million. The balance sheet is strong and our existing financial resources give us the capacity to continue to grow the business. 

Financial highlights

Reported revenue for 2008 was £183.1 million (2007: £156.3 million), representing an increase of 17% over 2007. On a constant currency basis, sales revenue would have been up 6% to £165.9 million.

Operating profit before exceptional items was £20.6 million compared with £17.7 million in 2007. 2007 operating profit has been re-stated to reflect a change in the accounting treatment of net pension finance income. This has been moved to financing, resulting in a reduction of £0.6 million in operating profit in both 2007 and 2008. 

Profit before tax and exceptional items rose 21% to £18.8 million (2007: £15.6 million). Pre-tax profit after exceptional items was £15.3 million in 2008 against £16.2 million in 2007. 

Basic earnings per share before exceptional items rose from 6.4p for continuing operations in 2007 to 8.2p in 2008.

In the interim report, we indicated a re-organisation of our manufacturing facilities in the Czech Republic, and reported an exceptional non-cash impairment charge related to that of £3.1 million. We also noted that, during the second half, a further £0.6 million would be provided to cover the cost of redundancy and transfer of assets, bringing the total exceptional cost for the closure of Korenov to £3.7 million. 

These actions will benefit the company and, along with additional investment in replacement lines this year, will generate annual savings of around £2.0 million from 2010.

There was also exceptional income of £0.2 million, being further revenue from the 2005 sale of land at Moodiesburn. Operating profit after exceptional items was £17.1 million (2007: £18.3 million).

The net impact of currency movements was favourable to the group, largely due to the relative weakness of sterling during the second half of 2008. The net benefit to the group's operating profit of these currency movements during the year was £2.4 million.

Net debt reduced to £24.0 million (2007: £27.3 million).

Operational highlights

Sales volumes of collagen casings rose by 2.4% overall, with particularly good growth in edible collagen volumes, offset by some reductions in non-edible collagen volumes.

Distributed product revenues grew by 19% to £21.5 million, much of this as a result of the relative strength of the euro, the currency in which most distributed products are sold. Revenue from the sale of other products, including collagen film, collagen gel, biomedical collagen and plastics, increased by 29% in 2008, with growth in each of these product groups.

In our operational review in January 2008, we stressed that pricing was to be given precedence over volume and market share, and we are now able to report that we achieved average prices increases of 3.2% overall during the year on a constant currency basis, whilst also increasing sales volumes.

Europe and Africa

Sales volume growth in edible collagen casing was most evident in the developing markets of Eastern Europe, where volumes rose by 15%, but was also significant in South Africa and Kenya. UK sales continued to recover well, ending the year more than 2% ahead of 2007 levels, due in part to new and improved products developed in our Scottish operation. There were reduced sales volumes into the more mature markets of Western Europe and Scandinavia. 

We are currently investing approximately £5.0 million in new lines in Jilemnice in the Czech Republic, which will become operational in the third quarter of 2009. As reported in our interim statement, the Board took the decision to reorganise Cutisin manufacturing facilities, by adding new lines and closing the old manufacturing facility at Kořenov with effect from the summer of 2009. This plant has been kept running for several years to provide additional capacity for the business, but has become increasingly expensive in terms of manufacturing costs, energy efficiency and maintenance. These changes will generate full-year savings of £2.0 million from 2010 for the same output, with enhanced product quality and significantly reduced carbon dioxide emissions and water usage.

There was a write-down of £0.6 million of a test facility in Jilemnice (purchased in 1999) which is no longer operational, saving an on-going depreciation cost of £0.1 million per year. This was not treated as an exceptional item. 

The manufacturing performance at our Scottish operation improved as 2008 progressed, with higher profitability relative to 2007 despite substantially increased energy costs. Overall, however, there is still much work to do in Scotland, particularly as regards sales pricing, before adequate levels of profitability are achieved. 

Americas

Excluding the impact of the switch of a major customer from our casings to our collagen gel in late 2007, sales volumes in the US were 7% ahead of 2007, while sales to the emerging Latin American markets showed excellent growth, up by 24% year-on-year. The impact of conversion from gut to collagen casings has had a particularly favourable impact on Latin American sales. Devro continued to consolidate its position as the leading supplier of collagen gel for co-extrusion, with increased sales year-on-year. The rate of growth of gel sales slowed during the second half of 2008 and demand is expected to be flat in 2009. 

In US dollar terms, sales revenues in the Americas as a whole were almost 6% ahead of 2007 (17% in sterling terms).

Asia/Pacific

Sales growth in Asia/Pacific remained strong in 2008. While this was most evident in China, we also achieved growth in the established Japanese market, the Philippines and other South East Asian countries. The growth in the Chinese market is attributable to the increasing popularity of Western-style sausage. Selling prices in China remain below average, but these are being increased at a faster rate than elsewhere. More modest gains in sales volumes were also achieved in the mature markets of Australia and New Zealand.

Sales revenues in the Asia/Pacific region as a whole rose by 21% as compared to 2007.

The additional manufacturing capacity in Australia, installed in late 2007, is performing at higher levels of efficiency than we had anticipated in our original plans, giving better manufacturing costs. 

Input prices

The overall cost of raw materials in 2008 was broadly similar to that of 2007, although there is an expectation that hide prices will increase in 2009. The current downturn in the automobile, furniture and aerospace industries is having a significant impact on the availability of cattle hides, our prime source of raw collagen. Management is actively involved in identifying new sources of hides, to ensure a sustainable supply of this vital raw material. 

Energy costs increased significantly in 2008, having an adverse effect on operating profit of £1.5 million as compared to 2007. Although global energy costs have fallen in recent months, utility costs in 2009 will remain at higher levels for approximately the first half of the year, because of the timing of some fixed-price supply contracts. 

Dividend

The Board is proposing a final dividend of 3.025 pence (2007: 3.025 pence) bringing the total for the year to 4.45 pence (2007: 4.45 pence). The final dividend will be paid on 15 May 2009 to shareholders on the register as of 17 April 2009.

We previously indicated our intention to increase the level of dividend cover by growing earnings while maintaining dividend levels.

Board changes

As previously announced, John Neilson, our Finance Director since 1993, retired on 1 May 2008, and was succeeded on the same date by Peter Williams. The company therefore enters 2009 with a substantially reconstituted Board, with the two executive directors having been appointed in the past two years, and two non-executives having joined the Board since the start of 2005.

 

Last year, I announced my intention to step down as Chairman at the forthcoming Annual General Meeting, once a successor had been identified. I am pleased to say that the recruitment process is well advanced. 

Outlook 

These are interesting times. The broader economic environment is setting unprecedented challenges for all businesses.

However, with over 80% of revenues coming from overseas, Devro's global base and market-leading position give it a solid platform for further progress. There is also scope to continue the improvement recently seen in the Scottish business. Our ongoing commitment to increased capital investment underlines management confidence in the prospects for the business in 2009 and beyond.

The thanks of the entire Board of Directors go to everyone employed in the organisation world-wide for their efforts over the past successful year for Devro.

OPERATING AND FINANCIAL REVIEW

Introduction 

2008 has been a very positive year for Devro plc, with a 16.4% improvement in adjusted operating profit (operating profit for continuing operations before exceptional items) to £20.6 million (2007: £17.7 million), and a 21.4% improvement including the discontinued BioFilm operations in the 2007 results. Net debt has been reduced by 12.0%, to just under £24.0 million.

Sales

For 2008, we projected that sales volume growth would be in line with the market, and this is exactly what was achieved, with a 2.4% increase in the volume of collagen casings sold, with stronger growth in edible collagen. The increased sales volumes were achieved from a combination of improved inventory management and enhanced productivity from existing facilities, as we continue to effectively manage our operating capital.

Reported sales increased by 17.2% to £183.1 million (2007: £156.3 million) on a like for like basis. Of this, 11.0% related to foreign currency movements, and in particular the fall of the pound against most other currencies in the second half of the year had a positive impact on reported revenues. Currency also had a significant impact on group earnings, with an overall positive impact of £2.4 million in the year, most of this arising in the last quarter. At the half year, the impact was £0.3 million negative. The fall in sterling gave rise to gains on the translation of overseas profits, and there were transactional gains related to sales into Asia denominated in US dollars and Yen, along with gains on sales in Europe denominated in euros. Gains on transactions would have been higher but for operational hedges in place. The group does not hedge translation exposure. 

 

Pricing

In the Operational Review in January 2008, we committed to achieving better sales prices, and indicated that this would take precedence over both volume and market share. For the full year, we increased volumes and maintained market share, while comparable prices in all product groups increased by 3.2%. On a constant currency basis, price increases accounted for a £5.0 million increase in revenues year-on-year.

Sales territories

UK & Eire: 2008 saw a recovery in the volumes and value of collagen-cased sausages sold by retailers. Devro's sales volumes increased in the UK & Eire and overall prices held constant, with increases later in the year offsetting the effects of further consolidation among key customers in the first half of the year. This strong performance in the market was helped by Devro's patent-protected porcine casing, which is gaining increasing approval among retail buyers.

Eastern Europe, Russia and Ukraine continued to generate growth during 2008, with volumes of our Cutisin Fine casings increasing across all these markets, and sales prices rising. Volumes in Scandinavia and Western Europe have declined, partly due to product specification and performance issues.

Latin American volumes and prices increased significantly, and in the USA, trade in both casings and gel was maintained or increased with all Devro's key accounts.

There was encouraging volume growth in Japan, where at the same time we achieved our first price increases for over 15 years. 

Asia as a whole grew strongly, with volumes in China rising, whilst prices were raised by more than in other regions in order to reduce a historic disparity. Across other Asian markets, such as Korea, Thailand and the Philippines, a strong volume increase reflected keen interest in both the Devro and Cutisin brands, particularly as prices also strengthened.

Australia and New Zealand are mature and well-established markets, so it was encouraging to see steady growth in both countries, encouraged by the comprehensive and knowledgeable technical support that Devro has developed there over many years.

 

Target markets

Two markets had been identified for particular attention in 2008. In Russia, Devro has established its own representative office managed by a direct employee of the group. This strengthened local presence has led to much closer relations with Devro's key distributors, which is proving to be particularly valuable as the economic climate in Russia becomes more challenging. In China, Devro has successfully developed much closer relations with key customers, reflected in regular technical support visits and more shared forward planning of product requirements and availability.

Gut conversion

An important feature of the sales growth in most markets in 2008 was the rate of conversion by customers using gut casing to Devro's collagen casing. It is estimated that new business equivalent to 4.0% of Devro's 2008 sales volumes was transferred from gut, in markets ranging from leading UK retail outlets to cost-conscious manufacturers in Latin America and new capacity in Asia.

Margins

Operating margin held firm at 11.2% for the year, compared to 11.3% for 2007. A write-down of fixed assets in a Cutisin plant of £0.6 million, relating to a test line which is no longer operational, had an adverse impact of 0.3% on margins in 2008, while currency movements were approximately 0.3% favourable.

Manufacturing

Manufacturing operations, through consistency, productivity and efficiency, made a substantial contribution to the improved profitability of the business. Close attention to managing the quality of raw materials at all sites ensured that there were fewer interruptions in production and lower levels of inventory destructions and wastage. 

As an indication of the progress in our operations, the volume of product manufactured from the same facilities increased 2.5%, compared to 2007, due to yield and productivity improvements. Physical stock levels have been reduced by 6.2%, whilst the number of active product lines has been cut back by 4.1%, both without adverse impact on customers or sales.

Costs

Input costs proved a real challenge in 2008. The commodities boom saw us starting the year with genuine concerns about the cost and availability of glycerine. The price of glycerine peaked in the first quarter, but has since returned to more normal levels, only to be followed by the widely-publicised increases in gas, diesel and electricity prices. Due to the nature of utility supply contracts, these costs will continue at late 2008 levels during the first half of 2009, even though reported prices have fallen steeply. The current economic downturn has brought the automobile, furniture and aerospace industries almost to a standstill. This has significantly reduced the demand for leather and therefore split hides, and curtailed the availability of raw collagen to unprecedented low levels. Managing the supply of hides is a major challenge for Devro and the collagen industry, and we anticipate cost increases in this prime raw material. 

Underlying labour costs have risen during the year in line with inflation. There was an increase in profit-related remuneration as a result of the strong performance of the group. 

Exceptional items

In our interim report we reported exceptional items amounting to £2.9 million, being the impairment of an asset in our Czech operations, less an amount received in the UK for sale of land. We also noted that a further £0.6 million would be taken as an exceptional charge in the second half, being the redundancy and transfer costs associated with the closure of the Kořenov plant for which the half year impairment was taken. Total exceptional items for the year therefore amounted to a charge of £3.5 million before tax. 

Capital investment

 Capital expenditure in the year was £12.7 million. Capital expenditure projects included:

investments for enhanced product quality in the UK; 

compliance with EU Food Hygiene regulations and increased waste water treatment capacity in the Czech Republic; 

some very innovative manufacturing developments in Australia; and 

general facility improvements in the US.

 

Health and safety

Our Health and Safety performance during the year was not as good as we have come to expect. We were disappointed that in 2008 we had an increased incidence of Lost Working Day Injuries. This increase is despite the efforts all around the group to make Devro a world leader in providing a safe working environment for all our employees.

Financing

Net debt has been reduced from £27.3 million at the start of the year to just under £24.0 million at 31 December 2008, reflecting the positive cash flow in the year. This gives a gearing ratio of 21.5% (2007: 28.7%), while net debt to EBITDA, a widely used solvency measure, is below 1. We believe that Devro is well financed, and has sufficient liquidity to fund the capital additions required to continue to grow the business. Management has a policy of distributing debt between the various currencies in which it operates; therefore the net debt figure may fluctuate based on exchange rate movements. 

Net interest cost for the year was £2.4 million (2007: £2.7 million). All of this reduction occurred in the second half as a result of lower debt and the significant fall in interest rates towards the year-end. If interest rates continue at their current level, net interest cost will be significantly lower in 2009.

Devro has committed borrowing facilities of £51 million that fall due for renewal in January 2012. At 31 December 2008, the group was operating comfortably within the covenants relating to these facilities.

The group places importance on Return on Capital Employed (ROCE) as a Key Performance Indicator (KPI). ROCE is calculated as operating profit over average net assets, and is a measure of how much profit is generated for a given amount of capital used. We believe that optimising ROCE is an important factor in achieving above average shareholder returns. ROCE for 2008 was 20.0% compared to 21.0% for 2007. This reduction reflects the fact that currency movements caused a larger increase in net assets than in operating profit. 

Tax

The group had an effective tax rate, before exceptional items, of 29.4% for 2008, (2007: 33.7%, for the continuing business).

2008 benefited from a release of prior year provisions, amounting to £2.0 million, which has been treated as an exceptional tax credit.

Pensions

The group operates a number of defined benefit pension schemes around the world. All of these are closed to new participants, but the liabilities related to existing schemes are considerable. During the year, the value of the assets in these schemes fell significantly along with worldwide equity and bond markets. Offsetting this, the value of liabilities has decreased because discount rates have risen. The net impact of this is an increase in the accounting deficit of the schemes, which at 31 December 2008 amounted to £25.8 million (2007: £7.4 million). It is likely that further additional contributions will be made to these schemes during 2009 to reduce this deficit. At the same time, management will continue to seek ways of controlling the liabilities involved. 

In previous years, the financing charge on pension plan liabilities and anticipated return on pension plan assets were treated as part of operating income. We no longer believe that this treatment gives the reader of our accounts the most relevant information. Therefore we have changed the disclosure of these items to include them with financing costs. The impact of this is to reduce operating profit by £0.6 million in both 2008 and 2007, with a similar reduction in net finance costs. 

For 2009, it is anticipated that there will be a finance charge of approximately £1.4 million, rather than a credit as in 2008. This change is largely related to a reduction in the anticipated return on plan assets. The translation of US dollar liabilities into sterling will also have an adverse impact. 

On 30 January 2009, Devro Inc closed its post-retirement health care benefit scheme. This will give rise to an exceptional credit of approximately £1.8 million in the first half of 2009, and a reduction in on-going contributions of £0.15 million per annum. 

Outlook

The global economic outlook for 2009 and its impact on Devro is difficult to predict. However, Devro is well positioned to improve operational performance and shareholder value in the future.

Our expectations are that global volume demand growth for edible collagen in 2009 will continue the circa 4% increase of recent years, but this growth is expected to vary significantly between markets. Devro is a global organisation with manufacturing operations in three continents and strategically situated sales teams, so we will be able to take advantage of market growth wherever it occurs.

The benefits of 2008's pricing work are clear to see. Our approach has been to achieve sustainable price increases that are real but also respect the challenges our customers face. Some markets, particularly those supplied from the UK, require further progress in pricing to generate the appropriate level of return on our assets. All our management teams will be working on this throughout 2009.

The Technical Marketing team, which was established from existing resources at the start of 2008, has made real progress in identifying opportunities and initiating new product development work which is commercially focused on opportunities in our existing markets. The prospects for the longer term are encouraging.

There will continue to be consolidation among the larger food manufacturers, particularly in Europe. Devro is the world's largest and only global collagen casing manufacturer, and is well placed to meet the demands of larger and more sophisticated customers. We continue to invest in research and development (R&D) to ensure product superiority in our core market segments, with a total R&D spend in 2008 of £5.2 million, (2007: £4.4 million).

Movements in foreign currencies have had a significant impact on this year's figures. Given the global spread of Devro's business, the results will always be subject to foreign exchange rate fluctuations. While we hedge transactions within our operating businesses, we do not feel that it is appropriate to hedge translation exposure. 

Inputs and costs are unpredictable, with the improving situation in utilities being counteracted by the previously-mentioned shortage of split hides. The latter will certainly cause an increase in raw material costs, and may present real challenges to maintaining manufacturing output, but we are confident that our purchasing and technical teams will manage the situation well. 

Developments at Cutisin in the Czech Republic are very exciting. As we announced in August 2008, we will be investing approximately £5.0 million in our Jilemnice plant to add further capacity to our ultra high-speed lines. This will enable us to cease using our 1930's lines at Kořenov, and save an estimated £2.0 million per year in operating costs from 2010. Plans are all in place for this investment, with the new equipment now under construction.

The new investment project in the Czech Republic will be in addition to Devro's recurrent levels of capital expenditure, bringing the projected group total for 2009 to £19.0 million. Of this, £6.3 million will be used for replacements and 

maintenance and £3.0 million will be for the hygiene compliance and expanded waste water treatment projects in the Czech Republic. The balance will be spent on product and process enhancements across our factories.

Whilst we are making advances in the areas raised in the January 2008 Operational Review, senior management are now devoting increasing amounts of time and effort to longer-term strategic opportunities. We are pursuing a number of potential synergies in established markets which would make a worthwhile contribution to profits, and we are excited by a number of real prospects in emerging and developing markets.

Dividend

The Board is proposing a final dividend of 3.025 pence per share (2007: 3.025 pence), bringing the total for the year to 4.45 pence (2007: 4.45 pence) payable to shareholders on the register as at 17 April 2009. Based on the proposal for the full year, dividend cover excluding exceptional items will be 1.8 times. 

  

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December 2008

	2008			2007
	Before  Exceptional Items £'000	Exceptional  Items £'000	Total £'000	Before Exceptional Items £'000	Exceptional Items £'000	Total £'000
Continuing operations:
Revenue	183,125	-	183,125	156,252	-	156,252
Operating profit	20,595	(3,478)	17,117	17,692	651	18,343
Net finance income on pension and post-retirement health plan assets/liabilities	622	-	622	585	-	585
Finance income	255	-	255	338	-	338
Finance expense	(2,654)	-	(2,654)	(3,048)	-	(3,048)
Profit before tax	18,818	(3,478)	15,340	15,567	651	16,218
Taxation	(5,532)	2,641	(2,891)	(5,244)	1,044	(4,200)
Profit for the year - continuing operations	13,286	(837)	12,449	10,323	1,695	12,018
Discontinued operation:
Loss before tax	-	-	-	(734)	-	(734)
Taxation	-	-	-	159	-	159
Loss for the year - discontinued operation	-	-	-	(575)	-	(575)
Profit for the year	13,286	(837)	12,449	9,748	1,695	11,443
Earnings per share - continuing and discontinued operations
- Basic	8.2p	(0.6)p	7.6p	6.0p	1.0p	7.0p
- Diluted	8.2p	(0.6)p	7.6p	6.0p	1.0p	7.0p
Earnings per share - continuing operations
- Basic	8.2p	(0.6)p	7.6p	6.4p	1.0p	7.4p
- Diluted	8.2p	(0.6)p	7.6p	6.4p	1.0p	7.4p

  

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE

for the year ended 31 December 2008

	2008	2007
	£'000	£'000
Cash flow hedges
- net fair value (losses)/gains, net of tax	(794)	428
- reclassified and reported in operating profit, net of tax	(406)	(219)
Actuarial (loss)/gain recognised in group pension schemes	(18,067)	12,040
Actuarial (loss)/gain recognised in US post retirement benefit obligations	(41)	146
Movement in deferred tax on retirement benefit obligations	5,713	(4,018)
Net exchange adjustments	24,436	9,289
Net income/(expense) recognised directly in equity	10,841	17,666
Profit for the year	12,449	11,443
Total recognised income/(expense) for the year	23,290	29,109

 

 

 CONSOLIDATED BALANCE SHEET

at 31 December 2008

	2008	2007
	£'000	£'000
ASSETS
Non-current assets
Intangible assets	1,799	1,562
Property, plant and equipment	134,729	115,076
Deferred tax assets	11,300	5,349
Other receivables	61	99
	147,889	122,086
Current assets
Inventories	25,753	22,311
Current tax assets	603	32
Trade and other receivables	33,067	22,872
Derivative financial instruments	709	746
Cash and cash equivalents	6,690	9,635
	66,822	55,596
LIABILITIES
Current liabilities
Borrowings	3,135	768
Derivative financial instruments	2,550	214
Trade and other payables	28,811	21,620
Current tax liabilities	1,955	4,064
	36,451	26,666
Net current assets/(liabilities)	30,371	28,930
Non-current liabilities
Borrowings	27,531	36,119
Deferred tax liabilities	11,564	10,892
Retirement benefit obligations	27,688	8,772
Other non-current liabilities	159	173
	66,942	55,956
Net assets	111,318	95,060
EQUITY
Capital and reserves attributable to equity holders
Ordinary shares	16,287	16,287
Share premium	6,097	6,097
Other reserves	81,283	57,836
Retained earnings	7,651	14,840
Total equity	111,318	95,060

 

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December 2008

	2008	2007
	£'000	£'000
Continuing operations:
Cash flows from operating activities
Cash generated from operations	31,280	23,435
Interest received	243	325
Interest paid	(2,724)	(3,075)
Tax paid	(5,177)	(3,845)
Net cash from operating activities	23,622	16,840
Cash flows from investing activities
Purchase of property, plant and equipment	(12,949)	(10,469)
Proceeds from sale of property, plant and equipment	67	30
Purchase of intangible assets	(457)	(298)
Payments to former minority shareholders of Cutisin a.s.	(1)	(3)
Net cash used in investing activities	(13,340)	(10,740)
Cash flows from financing activities
Proceeds from the issue of ordinary share capital	-	31
Net (repayments)/borrowing under the loan facilities	(9,187)	689
Dividends paid to shareholders	(7,243)	(7,245)
Net cash used in financing activities	(16,430)	(6,525)
Net decrease in cash and cash equivalents - continuing operations	(6,148)	(425)
Discontinued operation:
Cash flows from operating activities
Cash used in operations	-	(412)
Tax received	-	123
Net cash used in operating activities	-	(289)
Net decrease in cash and cash equivalents - discontinued operation	-	(289)
Net decrease in cash and cash equivalents	(6,148)	(714)
Cash and cash equivalents at beginning of year	9,495	8,232
Exchange gains on cash and cash equivalents	896	1,977
Cash and cash equivalents	6,690	9,635
Bank overdrafts	(2,447)	(140)
Net cash and cash equivalents at end of year	4,243	9,495

 

NOTES TO THE PRELIMINARY ANNOUNCEMENT OF THE FINAL RESULTS 

for the year ended 31 December 2008

(1) Restatement of 2007 income statement

(a) Net finance income on pension and post-retirement health plan assets and liabilities was previously included in pension costs in operating profit. It is now included as a separate element of finance income and expense. The impact on operating profit is as follows:

	Before Exceptional Items	Exceptional  Items	Total
Continuing operations
Operating profit as previously reported	18,277	651	18,928
Net finance income on pensions and post-retirement health plan assets and liabilities	(585)	-	(585)
Restated operating profit	17,692	651	18,343

(b) As noted in last year's accounts, deferred tax balances at 31 December 2007 were remeasured as a result of changes to corporation tax rates in the UK and the Czech Republic. The amount involved, a credit of £1,344,000, has now been shown as an exceptional item in order to provide a better understanding of underlying tax rates.

(2) Analysis of operating profit before exceptional items

Continuing operations	2008 £'000	Restated 2007 £'000
Revenue	183,125	156,252
Cost of sales	133,431	111,532
Gross profit	49,694	44,720
Selling and distribution costs	13,655	11,528
Administrative expenses	11,768	10,291
Research and development expenditure	5,156	4,328
Other expenses	996	1,122
	31,575	27,269
Less: other operating income	2,476	241
Net operating expenses	29,099	27,028
Operating profit before exceptional items	20,595	17,692

  

Discontinued operation	2008 £'000	2007 £'000
Revenue	-	706
Expenses	-	(1,214)
Operating loss	-	(508)
Loss on disposal of net assets	-	(226)
Loss before tax	-	(734)
Taxation	-	159
Loss for the year on discontinued operation	-	(575)

The discontinued operation related to the disposal on 28 December 2007 of BioFilm Limited ("BioFilm"), a subsidiary undertaking specialising in the manufacture and sale of thin films. BioFilm was sold to a new company backed by Tate & Lyle Ventures LP and Scottish Enterprise's Scottish Venture Fund for a nominal initial consideration plus a sum in respect of working capital.  The consideration was received in February 2008. The agreement provided for a potential further payment of up to £3.6 million in the event of a subsequent sale of the business.

In 2007, BioFilm contributed £706,000 to revenue and incurred a loss before tax of £734,000 and net cash outflow of £289,000. The loss on disposal of net assets included a goodwill write off of £177,000. The taxation credit of £159,000 related to tax on the operating loss of BioFilm, resulting in a post-tax loss of £575,000.

(3) Exceptional items

Exceptional items are events or transactions that fall within the activities of the group and which by virtue of their size or incidence have been disclosed in order to improve a reader's understanding of the financial statements.

(a) The following exceptional items are included in the operating profit on continuing

operations of £17,117 (2007: £18,343):

	2008	2007
	£'000	£'000
Provision for impairment of fixed assets (i) below	(3,131)	-
Provision for closure costs (i) below	(585)	-
Proceeds from the sale of land (ii) below	238	1,000
Charge in respect of bid approach costs (iii) below	-	(349)
	(3,478)	651

(i) During the year, an operational review of the Kořenov plant in the Czech Republic was undertaken to assess the carrying value of the assets of that facility. In general, the Kořenov assets are older than those of the other plants in the Czech Republic, and would have required considerable expenditure to bring them up to forthcoming environmental and safety standards. They are also significantly less energy efficient. Management determined that the future cash flow from this plant no longer justified the carrying value of the assets. As a result, an impairment charge of £3,131,000 was recorded in the income statement for the year ended 31 December 2008.

In addition to the above, following the decision taken by the Board in August 2008 to close the Kořenov plant, a provision of £585,000 was made in respect of the costs associated with the closure, including redundancies and the transfer of certain plant and equipment to Jilemnice. The closure will take place during 2009.

(ii) Under the terms of the contract for the sale of land at Moodiesburn in 2005, additional income of £238,000 arose during the year ended 31 December 2008 and £1,000,000 arose during the year ended 31 December 2007.

(iii) During the year ended 31 December 2007, there was a charge of £349,000 in respect of bid approach costs.

  

 (b)  The following exceptional items are included in taxation:

	2008	2007
	£'000	£'000
Tax allowance on provision for impairment of fixed assets	592	-
Tax allowance on provision for closure costs	117	-
Tax charge on proceeds from sale of land	(68)	(300)
Release of prior year tax provisions (i) below	2,000	-
Reduction in deferred tax liabilities due to changes in corporation tax rates (ii) below	-	1,344
	2,641	1,044

(i) Tax provisions of £2,000,000 have been released following the agreement of prior year returns with the tax authorities.

(ii) As explained in (1) above, there was a reduction of £1,344,000 in deferred tax balances as a result of changes to corporation tax rates in the UK and the Czech Republic.

(4) Analysis of net debt

	2008	2007
	£'000	£'000
Cash and cash equivalents	6,690	9,635
Bank overdraft	(2,447)	(140)
	4,243	9,495
Borrowings less bank overdraft	(28,219)	(36,747)
	(23,976)	(27,252)

(5) Statutory accounts

The financial information set out in this announcement does not constitute the company's statutory financial statements for the years ended 31 December 2008 or 2007 for the purposes of section 240 of the Companies Act 1985. The financial information for the year ended 31 December 2007 is derived from the statutory financial statements for that year which have been delivered to the Registrar of Companies. The auditors reported on those financial statements; their report was unqualified and did not contain a statement under sections 237 (2) or (3) Companies Act 1985. The statutory financial statements for the year ended 31 December 2008 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's Annual General Meeting.

While the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards ("IFRSs"), this announcement does not itself contain sufficient information to comply with IFRSs. The company expects to publish full financial statements that comply with IFRSs in March 2009.

ENDFR GUUWGPUPBGBQ

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