Sausage-skin maker Devro issues profit warning
Sausage-skin maker Devro has released a warning stating its profits will be hit by a major fall in sales over the next year.
The business’s latest trading update reveals the company’s share price falling more than 20%. It has seen its market valuation drop 44% since March and is now taking steps to drive “production efficiencies”.
The company is based in Lanarkshire and makes collagen-based casings, mainly for sausages, with plants in Australia, the USA, China, the Czech Republic as well as in the UK.
The trading update states: “Sales volume trends were broadly similar to those experienced in the first half, enhanced by improvements in Russia and South East Asia, but impacted by further reductions in Latin America due to the previously highlighted issues, which are being addressed, related to the transformation of our global manufacturing footprint. Combined, these factors have had an adverse impact on margins, offset by further benefits from lower input costs and foreign exchange. As a result, the Board’s full year expectations for underlying operating profit remain unchanged.
“Our new factories in the US and China are now integrated into the Group’s manufacturing base, completing the transformation of our global manufacturing footprint. As expected, in the second half £8 million of exceptional costs related to these capital investment projects have been incurred, including £1 million of additional foreign exchange movements.”
Looking at 2017 and beyond, the company commented: “Based on current trends, sales volumes in 2017 are now expected to be approximately 10% lower than previously anticipated, which will result in an under-utilisation of available capacity.
“Actions are being taken to rebalance the use of capacity across our global manufacturing base. The under-utilisation is expected to have a further adverse impact on margins.”
The Board has decided to accelerate and implement more extensively the next stage of the Group’s strategic development, focusing on growing sales through improved commercial capabilities, introducing the next generation of differentiated products, and further improving manufacturing efficiencies to reduce unit costs.
The company added: “This improvement project will deliver a fundamentally more competitive position. The benefits will offset the effects of the lower volumes, partially in 2017 and fully in 2018. Consequently, the Board now expects underlying operating profit for 2017 to be lower than previous expectations.
“There will be additional costs and capital expenditure associated with the improvement project. Given the nature and scale of the planned actions, these costs will be charged as exceptional items, of which approximately £3 million is expected to be incurred in the final quarter of 2016.”
David Cheetham of FX & CFD broker XTB.com told Meat Management: “The announcement of a forecasted 10% drop in sales volumes for 2017 has been met with a sense of panic in the markets and the stock plunged by more than a quarter in early trade. The Americas is a key market for the firm and account for around 27% of total revenue and the glitch in the final phase of a three-year programme to upgrade its factories that began in 2014 which will see Latin American sales in particular hit hard.
“Longer term the strategy may well generate higher revenues but in the time being it is clearly hindering performance and many investors have rushed for the exit door following today’s news.”
Entry for the British Pie Awards 2017 will open next week
