RESULTS FOR THE YEAR ENDED 31 DECEMBER 2011

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2011

Devro plc ("Devro" or the "group"), the world's leading manufacturer of collagen products for the food industry, is pleased to announce its results for the year ended 31 December 2011.

Commenting on the results and the outlook for 2012, Steve Hannam, Chairman said,

"I am delighted to report that 2011 was a year of further growth in the business, improved financial performance and significant progress with our strategy. The continued strong performance has allowed the Board to recommend a final dividend of 5.5 pence per share, bringing the full year dividend to 8.0 pence per share, a 14.3% increase. The fundamental growth prospects for our global markets remain encouraging. With our evolving product range and strategic capital investment programme, we are well placed to take advantage of this opportunity. The strong performance in the second half of 2011 and the continuing strength of the balance sheet give us confidence for the future."

Enquiries:

There will be a presentation today at 11.00am for investment analysts. This will be held at the offices of Investec Investment Banking, 2 Gresham Street, London, EC2V 7QP. 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://mediaserve.buchanan.uk.com/2012/devro210212/registration.asp approximately 10 minutes (10.50am) before the start of the briefing. The presentation will also be available on the group's website.

2011 Chairman's Statement

I am delighted to report that 2011 was a year of further growth in the business, improved financial performance and significant progress with our strategy. Compared with 2010, operating profit before exceptional items increased 15.5% and strong cash flow generation enabled net debt to be kept to £22.7 million despite significant investment in capital expenditure during the year. The continued strong performance has allowed the Board to recommend a final dividend of 5.5 pence per share, bringing the full year dividend to 8.0 pence per share, a 14.3% increase.

Financial highlights

On a continuing operations basis revenue was £227.7 million in 2011 (2010: £213.6 million), an increase of 6.6%. The performance in the second half of the year showed an improvement over the first half with revenue growing by 10.6% in H2 compared to 2.4% in H1. Growth in sales to Russia and Eastern Europe and the success of Select in Japan and Europe have particularly contributed to this continued improvement.

Operating profit before exceptional items increased by 15.5% to £42.7 million (2010: £37.0 million). The operating margin increased from 17.3% to 18.7% which reflects our focus on higher value sales and more efficient manufacturing.

Basic earnings per share was 20.8 pence, up by 22.4% compared with 17.0 pence in 2010 (excluding exceptional gains).

As expected, net debt rose to £22.7 million at the end of 2011 (2010: £12.2 million) due to significant capital expenditure in 2011.

The business renegotiated its banking facilities in September 2011 and has a new 5 year revolving facility of £51 million.

Discontinued operations refer to the sale of Devro GmbH which was completed on 30 September 2011.

Profit before tax and exceptionals rose by 22.4% to £43.0 million (2010: £35.2 million). In 2010 there was an exceptional gain of £18.9 million due to changes to the UK pension scheme.

Dividend

The Board is proposing a final dividend of 5.5 pence per share (2010: 5.0 pence), bringing the total for the year to 8.0 pence per share (2010: 7.0 pence). The dividend will be paid on 4 May 2012 to those on the register on 30 March 2012. The increase in the dividend reflects the Board's confidence in the group and its financial strength.

The Board retains its policy of reviewing the amount distributed annually with the intent of moving dividends in line with underlying earnings, whilst taking into account the future prospects and cash requirements of the business.

Business

The global market for collagen casings continues to grow, driven by economic expansion and increased meat consumption in emerging markets. High sheep gut prices and limited availability are also providing more opportunities in developed markets for substitution by collagen casing.

Our Select range of products, which was launched last year specifically to replace sheep gut in premium sausages, has made excellent progress in Japan and Northern Europe. Sales have increased month by month and represented 4.3% of total sales in 2011. Additional trials are under way and Select presents an excellent opportunity for further growth in 2012.

In developing markets, we saw further good sales growth in Latin America, Eastern Europe, and Russia. During the year the sales team in Hong Kong was strengthened and a representative office was opened in Beijing. The increased focus has already produced higher sales in South East Asia and a number of customer trials are underway in China.

The year was very much one of two halves with earthquakes, floods and severe weather affecting the markets and production performance in several regions in the first half. These were not a factor in the second half and the business had a strong finish to the year. Yield improvement and cost reduction programmes have continued to produce benefits and each of our sites has been accredited to FS22000, the new global standard for food hygiene management.

To concentrate further on our core business of collagen casings and to strengthen sales activities in Europe, Devro GmbH was sold to ViskoTeepak Holdings Ab Ltd on 30 September 2011. This disposal will improve group margins by virtually eliminating future sales of low margin distributed products.

Capital expenditure

2011 was a significant year for capital projects with total expenditure of £43.4 million.

The majority of the expenditure has been on replacing old manufacturing lines in Scotland with our latest high speed lines and preparing an older manufacturing building in the Czech Republic for line replacement through 2012. The full benefit of this will be available in 2013.

During the year we have also installed a high speed line in the USA. This has been commissioned and is currently trialling products suited to the Americas region. If successful, we would have the opportunity to upgrade our USA production with these lines.

This approach of replacing older lines with more efficient modern lines is cost effective and low risk. Projects are justified on the cost savings made on existing volumes, whilst providing additional volumes at low cost.

Two other investments that were successfully completed during the year include the project to convert Devro to a single ERP system. This well managed project will now allow us to build on our base systems to provide real time management and financial information.

In Australia a natural gas powered co-generation plant has been installed which will reduce energy costs and carbon emissions.

Safety

The Board has continued to place a considerable emphasis on safety with the Health and Safety Committee having regular direct contact with the Safety Committees at each of our sites. During visits to two sites the whole board participated in behavioural audits. There is great commitment to safety across the group and during the year we operated without lost day incidents for periods of up to six months. It therefore continues to be disappointing that a number of small incidents resulted in 287 lost days, albeit a substantial improvement on last year.

Employees

The rate of growth and change in the group requires the continuing commitment and flexibility of all Devro employees. I am delighted to say that they have risen to this challenge. From locations across the globe, colleagues have worked as one team to successfully install the new ERP system. During the year we have seen manufacturing teams from the USA and Scotland spending time in the Czech Republic for training on the new production lines, and teams from the Czech Republic helping with commissioning in the USA and Scotland.

The scale of some of the capital projects carried out on sites that continue to manufacture has presented new challenges for our staff, not least in the area of safe working. Their approach to these challenges has been commendable.

A single Continental European sales organisation has been put in place to establish a uniform marketing approach and single point of contact for customers. This required changes in working practices and close contact between various parts of the group.

The Board would like to thank all the Devro team for their continuing efforts and commitment as we continue to raise our standards and create a truly global company.

Board changes

As announced last year, Simon Webb joined the Board on 17 January 2011 and took over as Group Finance Director from Peter Williams who retired on 6 April 2011.

On 28 April 2011, Paul Withers was appointed as an additional Non-Executive Director. Paul is an experienced Non-Executive Director who has a technical marketing background with considerable exposure to emerging markets, gained during his 20 years with BPB plc.

After six years with Devro, Stuart Paterson will not be standing for re-election at the annual general meeting. Stuart has been Chairman of the Audit Committee during that time and both in this role, and as a director, he has made a valuable and committed contribution to the group. I would like to thank Stuart for his efforts over the years, particularly as he has held full time executive roles throughout this time.

A search is in progress for a replacement Non-Executive Director and chair of the Audit Committee, and an announcement will be made in due course. Our approach to Board level recruitment, following the publication of the Davies Report last year, will be set out in the Corporate Governance section in our forthcoming annual report. 

Outlook

The fundamental growth prospects for our global markets remain encouraging. With our evolving product range and strategic capital investment programme, we are well placed to take advantage of this opportunity. The strong performance in the second half of 2011 and the continuing strength of the balance sheet give us confidence for the future.

Steve Hannam

Chairman

BUSINESS REVIEW

2011 is the fourth year in succession that Devro has increased operating profits before exceptional items, while also making significant capital investments in capacity for the future. The continued progress is very pleasing, with 2012 set to be another year of growth and development in line with our long-term strategy.

Sales and markets

In 2011, the global demand for edible collagen casings continued to increase, albeit with considerable variations between markets and regions. Developed markets were generally subdued, reflecting the economic situation. In emerging markets, there is long-term growth arising from increasing disposable income and urbanisation, generating stronger demand for all proteins. Current estimates indicate that the global market for collagen grew by as much as 10% in 2011, with China again making a significant contribution to this.

For Devro, with a strategy of seeking value and profitable sales, total volume growth during 2011 was 4.6%. This was largely due to the growing demand for Select casings, a highly innovative product introduced in 2010, specifically designed for developed markets to replace sheep gut in premium sausages. In 2011, 4.3% of Devro's edible collagen sales volume, was Select casings.

The product development and marketing efforts that we have devoted to Select worldwide form the first part of our strategy to grow sales in established markets, where the total demand for sausages is not increasing but where there are still significant opportunities to replace sheep gut at good prices, especially where Devro already has well-established distribution arrangements and sales teams in place. Throughout the world, supply of top quality sheep gut was constrained in 2011, resulting in further price increases.

In Japan, retail prices of food products have been held constant and as a result this has encouraged a transition from gut to collagen. In this market Devro's total volumes increased 30% over 2010, entirely due to Select manufactured at our plant in Australia. Introduced to customers in January and February, the first retail product was listed with Japan's largest supermarket chain in June, and now 12 customers are regularly manufacturing products with Select casings from Devro. The rate of progress in this very challenging market is impressive, with several more opportunities ready to be developed in 2012 and 2013.

In Europe, Select casings manufactured at our Scottish and Czech plants are now being sold to over 40 customers in 13 countries, from the Baltics and Scandinavia to Russia and Ukraine. A prime objective for Select is to increase Devro's share of the German market, where Select accounted for 29.1% of our sales during the year. We are particularly pleased that the branded Rügenwalder Mühlen-Würstchen introduced in September 2010 with Select casing continues to grow, whilst an innovative poultry-based wiener in Select has passed earlier stages of evaluation to the point where it is now distributed in more than 30 leading discount stores in southern Germany.

In the UK, strong supermarket discounting and promotion of certain segments led to a slight reduction in the share of sausages sold in collagen casings. The resultant effect on Devro's sales volumes was offset by improved UK pricing and the opportunity to export a greater proportion of our UK production to meet growing demand in other markets.

In the USA, lower disposable incomes and increased pork costs, due to high corn prices, led to a significant move from fresh sausage in edible casings to extruded, non-cased meat products as part of a low-price frozen meal. However, this was compensated for by a large beefstick manufacturer completing the transition from co-extrusion to collagen casing resulting in an increase in sales of collagen casing. Whilst this had a small, adverse impact on our sales of collagen gel used in co-extrusion, we increased sales of gel to other key accounts and we continue to be optimistic about the longer-term prospects for collagen gel as a substitute for plastic and cellulose casings.

Natural and climatic events have affected demand in some markets. Australia and New Zealand, both large markets for fresh sausage, have been adversely affected by rainfall, floods and earthquakes. Australian volumes declined slightly but in New Zealand, despite the earthquakes, Devro volume remained stable, in part attributable to the six-week Rugby World Cup.

The second part of our strategy for growth in sales is to gain volume in emerging markets where the combination of rising populations, higher disposable incomes, urbanisation, and industrialisation of food manufacturing provide real opportunities for collagen casing.

Latin American volumes and average prices continued to rise as distributors succeed in developing new accounts and in expanding existing business.

Eastern European sales increased significantly, in large part due to the ongoing success of FINE casings manufactured at our plant in the Czech Republic. Sales in Russia grew further, as Devro maintained a market-leading position and locally manufactured supply appeared to have been curtailed.

The overall market growth in China moderated slightly compared to the rates of expansion in the three previous years. This was due to food price inflation directly linked to higher pork prices, and also a small number of food related scares. The long-term prospects for China remain attractive. During 2011, Devro established a representative office in Beijing and strengthened the sales and technical team in Hong Kong, enabling a much higher level of activity throughout South East Asia. Volumes in Thailand, Indonesia, South Korea, Taiwan and the Philippines all benefitted from more promotional and technical activity. Although 2011 sales volumes in China were very limited, Devro products have been introduced to, and trialled at, all of the leading sausage manufacturers, with a view to developing business in 2012 and 2013.

The third part of our strategy for sales growth is to achieve higher average prices per unit of edible collagen sold. In 2011, the average price increased 4.2%, as a result of several factors, including the higher proportion of Select in our total sales, a continuing shift in the mix of markets, products, and customers, and negotiated price increases with customers and distributors. We are acutely aware of the cost pressures faced by our customers, and always seek to find ways of adding value in proportion to any cost increases resulting from price rises.

Devro has a diverse product portfolio. Among various changes in the product mix, it is worth noting that 3.2% of 2011 edible collagen sales came from "gut conversions" achieved in 2009 and 2010, and a further 3.9 % of sales volumes in 2011 came from gut conversions achieved during the past year.

Operations and manufacturing

2011 was a challenging time for Devro's manufacturing operations, with extreme weather-related events in the early part of the year, and a large amount of engineering and installation work at all sites. Overall, our output of saleable collagen casing was unchanged from prior year, although recent capital investment projects added nearly 4% to capacity compared with 2010. Current capital investment work will add capacity in 2012 and 2013 equivalent to a further 8% of 2010's capacity in each of these two years, as previously announced.

In order to maintain margins, part of our strategy is to optimise the use of existing assets, and this is achieved by improving performance through a combination of work process activities involving operators, and modifications to remove constraints and limitations. On the former, continuous improvement projects using techniques such as 5S and Six Sigma have continued to provide benefits. Low cost capital projects in Scotland and Australia have raised productivity and reduced marginal costs on older lines. The commitment and enthusiastic involvement of so many operators and shift leaders has made these continuous improvement projects a valuable contributor to our profitability and it is greatly appreciated by the Board.

Capital expenditure of £4.6 million has been invested in a new line in the USA, using high-speed technology developed in Europe. During 2012, this installation will be developed and evaluated in anticipation of further investments.

£12 million of investment at our Bellshill factory funded the replacement of some of the oldest lines with our newest high-speed technology. The attraction of this type of modernisation investment is that it installs proven, bespoke process equipment within existing infrastructure, to be managed and operated by experienced colleagues, leading to the benefits of both lower unit costs and higher volumes of output.

At our plant in Jilemnice, in the Czech Republic, we completed substantial preparatory works so that, in 2012, the original edible casing manufacturing hall can undergo a full programme of replacement and modernisation, again with proven technology being placed within existing infrastructure.

The final part of our manufacturing strategy is to reduce unit costs. Whilst improved yields and productivity make a large contribution to this, we are seeking any opportunity to improve in this area. During 2011, we installed a natural gas powered co-generation plant at Bathurst in Australia. This generates electricity through a turbine and generator, and provides steam for the manufacturing process. It is expected to reduce energy costs in Australia, and in reducing CO2 emissions by 30%, it will bring our Australian operation in line with the requirements of forthcoming legislation.

Safety

My top priority is that Devro should be a safe place to work, for employees, visitors and contractors. Huge efforts by all employees have contributed to a much higher level of awareness, and I am very pleased with the progress we have made. Whilst statistics such as Lost Work Day Injury rates and Severity levels tell part of the story, our real measure is "Safe Days Worked" when no injury leading to absence from work occurs. Earlier in the year we achieved a period of 111 Safe Days, and from July to December we had a run of 163 Safe Days worked. I am very encouraged and, again, am very grateful for everyone's contribution. Personally, I keep in touch with Safety issues by accompanying Behavioural Audits whenever I visit a plant, by taking time to meet and hear from colleagues who have suffered a time-loss injury at work, and promptly receiving reports of all incidents and near-misses.

Corporate activities

There were several developments and achievements which were completed at a corporate or group level.

At the end of 2011 we introduced a new corporate identity. During 2012, this single marque will come to represent the one global company philosophy at Devro, and it will replace the four brands and logos arising from the legacy of acquisitions and past corporate developments. To support this change, Cutisin s.r.o. was renamed as Devro s.r.o. during the year as our regional business unit for Continental Europe.

Throughout 2011, many colleagues from all regions and disciplines have worked late and over week-ends as they completed the upgrade and transfer to a single ERP System. Now that this is completed, work will begin in 2012 to ensure that we benefit from faster and less complex financial reporting, better visibility and consistency of inventory data, and a single demand planning and sales forecasting system.

I am very pleased that every one of our manufacturing locations was accredited to FS22000, the new global standard for food hygiene management systems throughout the food chain. As the only collagen casings manufacturer with this demanding accreditation, it is a clear sign of Devro's commitment to providing customers and consumers with the highest possible levels of assurance in food safety.

At the end of September we completed the sale of our Hamburg-based distribution company, Devro GmbH. This business unit was a legacy from a 1990's acquisition, and as 80% of its sales revenue came from non-Devro products, it did not fit with our strategy for developed markets. We will work closely with the acquirer during a transition phase in 2012, when Devro will establish direct sales arrangements more in line with our strategy of working closely with key accounts.

Outlook

We expect 2012 will be another year of sales growth, as the Select projects continue in Japan and Europe, and as we increase volumes sold to emerging markets. Pricing, as always, will be a challenge, with customers under pressure from retailers, and competitors taking the opportunity to offer lower prices.

Manufacturing capacity will rise in line with recent investments and input costs should be manageable, although increases are expected, particularly in energy in the UK and Czech Republic. As always, every effort will be made to maintain margins through productivity and process improvements.

In 2012, there will be further investment in Research, Product Development, and Process Technology, in order to ensure that we continue to deliver shareholder returns in the current year and beyond.

Peter Page

Chief Executive FINANCIAL REVIEW

Continuing basis

Following the sale of Devro GmbH on 30 September 2011, the numbers and values in the statement refer to continuing business unless stated otherwise. The results of this business contributed sales of £16.4 million and operating profits of £0.04 million in 2011 (9 months), (2010 (12 months): sales of £23.4 million and operating profit of £1.2 million).

Revenue

Reported revenue for 2011 was £227.7 million (2010: £213.6 million), representing an increase of £14.1 million, or 6.6%, over 2010. Of this increase, £6.3 million related to volume, £4.7 million to sales price and mix, and £3.1 million to foreign currency movements.

Sales revenues by product group were as follows:

Sales volumes of edible collagen rose by 4.6% in 2011 due to the growth experienced in many of the developing markets and the continued conversion of gut to collagen in established markets.

Distributed product sales, which included cellulose and fibrous casing, are no longer shown separately as the majority of these sales were part of Devro GmbH which was sold in September 2011 as referred to above.

Other Products, which includes collagen gel, collagen film and plastic casings, showed a decline of 11% due to the conversion back to casing from co-extrusion by a large USA beefstick producer.

Year on year revenue growth between 2008 and 2011 can be further analysed as follows:

Sales volumes increased overall, but there were significant movements between markets. Pricing and sales mix improved again in 2011, reflecting underlying price increases and a change in mix to higher value customers, products and markets.

2011 revenue growth by geographical region compared to 2010 can be analysed as follows:

The above analysis covers all product ranges. Within this analysis, edible collagen average price increased by 4.2% including the favourable impact of exchange.

European sales increased in volume terms, and showed price growth in part due to increased sales of Select casing. Growth in the Americas was driven by encouraging sales in Latin America. There was also a movement back to casing from collagen gel by one large American customer. Selling prices continued to move ahead, but the adverse impact of selling lower-value products meant that the overall price/mix effect was flat. Progress in this region was hampered by adverse exchange rate movement. In Asia /Pacific, there was an overall reduction in volumes, but this was this was limited to China and Australia, with other countries in South East Asia and Japan showing strong growth.

Operating Profit

The movement between 2010 and 2011 operating profit before exceptional items can be analysed as follows:

Price/Mix

Overall, we achieved a profit improvement of £5.1 million from higher sales prices and a better sales mix. Of this, £2.4 million resulted from actual increases in sales prices and £2.7 million from changes to customers, markets and product mix.

Volume

Profit impact of volume represents the gross margin earned on net additional sales between 2010 and 2011 by product group.

Manufacturing

We continue to invest in new equipment to improve manufacturing efficiencies and productivity. These benefits will come through in 2012 with the Bellshill lines and the USA investment coming on stream and in 2013 with the completion of the capital expenditure in Czech Republic. These projects will also help expand capacity.

Foreign currency

Devro operates worldwide and with multiple currencies. Its major transactional exposures arise from sales in euros, US dollars and Japanese yen whereas the manufacturing costs are in Australian dollars, Czech koruna, US dollars and sterling. Translational exposures arise from the conversion of the results into sterling.

The overall impact of exchange on the results was low, showing a gain of £0.3 million compared to 2010 There was an overall translation gain of £1.4 million which reflected the strength of the Czech koruna, US dollar and Australian dollar against sterling, offset by £1.1 million of transaction loss. This transactional loss was primarily due to the weakening of the euro against the Czech koruna.

Euro sales make up 30% of the group's total sales. The group holds an average of €3 million in cash and the level of euro receivables is approximately €9 million. The group's policy is to take out cash flow hedges across all currencies up to one year ahead, to mitigate the impact of future exchange rate volatility.

Input costs

Input costs rose by £5.1 million during the year, of which inflation on wages and salaries accounted for £2.3 million.

The remainder reflects increases in hide and other raw material costs as well as investments in facilities particularly in China, Hong Kong and South East Asia.

Energy cost increases in 2011 were relatively small at £0.4 million as the businesses agree their electricity contracts forward by one year wherever possible. We expect these costs to be approximately £2 million higher in 2012 as contracts were renewed in view of the rise in global energy costs.

Operating margin

Operating margin increased to 18.7% for the year, compared to 17.3% for 2010.

Analysis of results by half year

The first half of the year showed a slower growth in sales, which reflected the strong comparisons in Q1 2010, particularly in China and UK, and also there was a series of natural disasters including severe weather, a tsunami in Japan and an earthquake in New Zealand. In spite of these natural events, the group successfully grew its operating margins from 16.7% to 18.2% with improved pricing and stronger mix helping this growth.

During the second half of the year, sales momentum grew strongly with Select contributing to an improvement in Japan and Europe, with Russia and Eastern Europe continuing to expand.

Margins further strengthened in the second half in line with the increased volumes and the positive mix effect of Select.

Capital investment

Capital expenditure in the year was £43.4 million. The major items of investment related to the upgrade of some lines in the Bellshill factory in Scotland, one line in USA and work on the building in Jilemnice which will house replacement lines in the Czech Republic. The benefits of the Bellshill and USA lines will come through in 2012 and the Czech investment in 2013.

Other significant expenditure included the installation of a gas co-generation plant in our factory in Bathurst, Australia at the end of December 2011. This project will help reduce the carbon emissions of the business and control future energy costs.

Wherever we invest in capital expenditure the business targets a return on capital employed sufficient to at least maintain the current return on capital presently enjoyed by Devro.

For 2012 we expect capital investments to be over £30.0 million as the group looks to continue to expand capacity and improve manufacturing facilities.

Working capital

Cash generation and optimising working capital remain a priority for Devro.

Gross inventory levels increased by 8% which reflect the building of inventory in anticipation of the work in Jilemnice in 2012 as new lines are installed.

Trade receivables increased in line with sales with the number of days outstanding increasing due to a greater proportion of sales to Japan, where payment terms tend to be longer.

Financing

Key financial measures are as follows:

Net debt rose by £10.5 million in 2011 as a result of capital investments offset by the strong EBITDA. It is our intention to maintain a prudent level of gearing in the business in the future.

As expected, return on capital employed reduced slightly in 2011 as a result of the significant capital investment in 2011, the benefits of which will flow through in 2012 and 2013.

Interest

Total net interest was an income figure in 2011 due to the net finance income on pensions. This income is in spite of the overall gross deficit and reflects the difference between the expected returns on assets and the interest on liabilities.

In 2012, the net finance income on pensions will revert to an interest cost of £1.2m for the full year, which is more in line with the level experienced in 2010 (£1.1m cost)

Tax

The group had an effective tax rate of 20.5% for 2011 (2010: 21.6% before exceptional items).

The group continues to benefit from a lower tax rate in the Czech Republic in 2011 as a result of a local investment scheme, the benefits of which are expected to continue until 2015.

Earnings per share

Basic earnings per share for 2011 was 20.8 pence, up 22.4% (2010: 17.0 pence before exceptional items). This reflected the improved operating margin and the net finance income on the pensions.

Dividend

With the improvement in performance, the Board is proposing an increase of 14.3% in the dividend for the year, making a final dividend of 5.5 pence per share (2010: 5.0 pence), bringing the total for the year to 8.0 pence per share (2010: 7.0 pence). This will be payable on 4 May 2012 to shareholders on the register as at 30 March 2012. Based on the proposal for the full year, dividend cover will be 2.6 times.

Pensions

The group operates a number of defined benefit schemes around the world. All of these are closed to new entrants although the liabilities to existing schemes are considerable.

During the year the value of the scheme assets was relatively stable. However, the present value of the pension liabilities increased as a result of the fall in discount rates. The UK scheme is the largest of the schemes and the discount rate decreased from 5.4% to 4.7% in 2011, generating £25 million of additional net liabilities.

In 2010, the UK scheme was restructured which has helped limit the volatility. Work is ongoing with advisers to look at developing the group pension strategy in order to manage the underlying risks.

Further additional contributions will be made to the schemes in 2012 to reduce the deficit. The results of triennial valuation for the UK scheme as at 31 March 2011 will be concluded in the first half of 2012.

As a result of the increase in the pension deficit, the related deferred tax asset has risen to £13.8m from £5.4m in 2010.

Principal risks and uncertainties

There are risks and uncertainties inherent in the group's operations which could have a significant impact on our business, results and financial position. The group's risk management processes identify, assess, monitor, manage and mitigate the risks involved in our operations. The more significant risks to which the group is exposed are:

·; Loss of market share/profit margins due to increased competitive pressures

·; Disruption to supply and increase in price of key raw materials

·; Foreign exchange rate movements

·; Development of non-casing technologies

·; Impact of changes in regulations affecting food production

·; Increases in energy costs

·; Increased funding requirements of pension schemes

·; Customer credit risks

These are generally consistent with those detailed in the 2010 Annual Report.

Going concern

The business renegotiated its banking facilities in September 2011 and has new 5 year revolving facilities of £51 million. As at 31 December 2011 it was operating comfortably within the covenants relating to these facilities.

We believe that Devro is well financed and has sufficient liquidity to fund the future requirements of the business.

After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operation for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Simon Webb

Consolidated income statement (unaudited)

for the year ended 31 December 2011

* The comparatives have been restated to classify Devro GmbH as a discontinued operation, reflecting the requirements of IFRS 5 'Non-current assets held for sale and discontinued operations'.

Consolidated statement of comprehensive income (unaudited)

for the year ended 31 December 2011

Consolidated balance sheet (unaudited)

at 31 December 2011

Consolidated statement of changes in equity (unaudited)

for the year ended 31 December 2011

Consolidated cash flow statement (unaudited)

for the year ended 31 December 2011

NOTES TO THE PRELIMINARY ANNOUNCEMENT OF THE FINAL RESULTS (unaudited)

for the year ended 31 December 2011

(1) Analysis of operating profit before exceptional items

(2) Exceptional items

During 2010, after consultation with employees and pensioners, certain changes were made to the UK defined benefit pension scheme, which resulted in a reduction of £18,851,000 in scheme liabilities.

(3) Analysis of net debt

(4) Discontinued Operation

On 30 September 2011, the group sold Devro GmbH, a wholly-owned subsidiary, to ViskoTeepak Holding Ab Ltd of Finland. The purchase price was based on adjusted net book value (excluding certain pension assets and liabilities). An estimated preliminary price of 1.9 million euros was paid on completion. This will be subject to final adjustment, which is expected to be during the first quarter of 2012.

Approximately 80% of Devro GmbH's sales in the nine months ended 30 September 2011 related to distributed third party products. ViskoTeepak will handle sales of Devro products in Germany on an agency basis for a transitional period, after which Devro will take direct control of sales of collagen casings in Germany. This disposal enables the group to concentrate on its core business of collagen casings and is part of its plan to strengthen sales and marketing activities in Europe.

Financial information relating to the business being disposed of is set out below.

(a) Income statement for discontinued operation

(b) Cash flows from discontinued operation

(5) Retirement benefit obligations

The group operates a number of pension schemes throughout the world. The major schemes are of the defined benefit type and, with the exception of Germany where book reserves are supported by insurance policies, the assets of the schemes are held in separate trustee-administered funds. The defined benefit schemes are closed to new members.

The last formal actuarial valuations of the group's material defined benefit schemes have been updated to 31 December 2011 by qualified independent actuaries. The major assumptions used by the actuaries in the following principal countries were:

*As part of the changes to the United Kingdom plan agreed in 2010, future pensionable salary increases are capped at 1% per annum. No rate of increase in salaries has been assumed in respect of the United States plan as the plan is now frozen.

The net deficit position increased significantly during the year. The value of the scheme assets was relatively stable, however the present value of the pension liabilities increased as a result of the fall in discount rates. The UK scheme discount rate fell from 5.4% to 4.7%, generating £ 25 million of additional liabilities.

Movements in surplus/deficits during the year were as follows:

(6) Accounting year

For practical reasons, the company previously prepared its financial statements based on periods of 52 or 53 weeks. From 2011 onwards, however, the financial statements will be prepared for the period ending 31 December. The financial statements for 2011 reflect the period from 3 January 2011 to 31 December 2011 (2010: 52 week period ended 2 January 2011).

(7) Statutory accounts

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 2011.

The financial information set out in this announcement is unaudited and does not constitute the company's statutory financial statements for the years ended 31 December 2011 or 2010 for the purposes of section 435 of the Companies Act 2006. The financial information for the year ended 31 December 2010 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 2011 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.