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Devro shares plunge after profits warning

SHARES in Devro have plunged after it warned profits would be £8 million lower than expected this year, with the company accelerating plans to streamline its manufacturing capacity.

STREAMLINED: Despite a drop in share value, Devro has insisted its Scottish operations will not face cuts.
STREAMLINED: Despite a drop in share value, Devro has insisted its Scottish operations will not face cuts.

But chief executive Peter Page insisted the measures would not hit its operations in Scotland, where it employs more than 500 staff at plants in Bellshill and Moodiesburn.

Shares in Devro, which makes collagen casings for sausage products, tumbled by more than 11% as it followed a profits fall last year with a sluggish opening quarter to the current year.

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The company said volumes were down on the same period last year, and highlighted the challenges brought by currency devaluation in Latin American markets such as Brazil, patchy consumer confidence in Europe and a ban in Russia on pork meat imports from the European Union. It noted sales showed signs of improvement in March, with the trend continuing into April.

With volumes and prices now expected to be flat for the current year, Devro has brought forward plans to streamline its manufacturing footprint.

It told investors that exceptional cash costs relating to these measures are expected to total about £6m in the next two years, alongside non-cash costs of around £10m. However it said the actions will allow it to trim manufacturing costs by £4m in 2015.

The streamlining move comes after Devro announced in March that production will be scaled back at its five plants - in Scotland, the US, the Czech Republic and Australia - to avoid further building up inventory levels.

Mr Page said the measures would not affect its presence in Scotland, declaring that Devro's forthcoming investment in new plants in the US and China is consistent with a policy of replacing older lines with more efficient technology that has been in place since he joined in 2007.

That ongoing investment saw Devro bring a new plant on stream in the Czech Republic last year.

Mr Page said: "[In] the Czech Republic we've pretty well completed the renewal. We've still got some old lines that are economic to use when you are sold out, but otherwise we won't be using them.

"The same goes for Scotland. We said in February that we would be balancing supply with demand. Yes, we've had some lines temporarily shut down. It's all part of a process of trying to manage the portfolio of both factories' capacity as well as the technology and product mix.

"To be absolutely clear, we are committed to Scotland."

Asked whether the company planned to invest further in its production facilities in Scotland, he added: "Over the last while we have been constantly improving the productivity at both the sites here.

"We spent £15m at Bellshill in 2011 so yes, that investment is going on."

Mr Page said that trading in the opening quarter had been "interesting", with tough conditions caused by currency devaluation in Brazil and economic issues in European countries such as France and Romania offset by growth in China, as well as Germany, Japan and the US.

He said: "It's tough doing business on the world market. Overall what we are actually saying is that the board's view is that volumes this year will be the same as last year, whereas previously we'd still be hoping to get some volume growth.

"That's a pretty strong positive picture for a business that trades in over 100 countries."

In spite of the political unrest in Ukraine, Mr Page said that "sales continue" in that market.

He noted a greater problem has been caused by Russian's continuing ban on pork meat imports from the EU, initially brought in after some wild boar with African swine fever were found in Lithuania.

Mr Page said: "I had hoped that they would lift that ban, but with the whole Ukraine issue that is not going to happen."

Reacting to the update, Investec reduced its full-year profit guidance on the company from £38.1m to £28.5m for 2014. Panmure Gordon reiterated its recommendation to sell and set a new target price of 175p.

Shares in Devro closed down 25.5p or 10.76% at 211.5p.

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