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Devro shares plunge as demand slumps

SHARES in Devro, the Glasgow-based maker of collagen skins for sausage manufacturers, have dived by 9% after it revealed lower than expected demand will cause it to scale back production this year.

TOUGH TIMES: Devro, which makes collagen skins for sausages, saw its share price plunge after the news.
TOUGH TIMES: Devro, which makes collagen skins for sausages, saw its share price plunge after the news.

The company, which employs 500 staff in Scotland, saw pre-tax profits fall by 4.6% to £37.5 million as sales growth in emerging markets, including Latin America, China and south east Asia, was offset by a slowdown in developed territories.

Revenue edged up 1% to £242.7m as the business grappled with a sharp rise in raw material costs during the first half, including the effects of pork meat prices reaching an all-time high in the UK.

Devro also faced first-half production challenges in the US, where the inefficiency of its ageing South Carolina plant caused it to miss out on bidding for a key account.

However, it has moved to resolve those issues by triggering a £40m investment to build a new factory at its US site.

The completion of the firm's new Czech Republic plant has also provided capacity to recover its position across the Atlantic.

The results were announced as chairman Steve Hamman said "personal circumstances dictate" he will step down at the annual meeting in April after five years in the role.

Devro, which revealed plans yesterday to spend £50m on a new factory in China, declared its satisfaction with its performance.

Chief executive Peter Page said: "We have made considerable progress and I think everyone has done well to maintain both sales and profits.

"There has been a whole number of challenges to sales, whether it is consumer confidence or the economic outlook or you look at the retailers reporting falling volumes of sales because of some of the issues that affected the food industry early in the year.

"I think we have done very well to maintain sales and maintain the profits for 2013, and shareholders always like to see the earnings per share rising and the dividend rising.

"The investment projects we have announced for China today, and the new investment in the US to reduce costs, which we announced last October, are all things that take the whole group forward."

Mr Page said Devro would scale back production across its five manufacturing plants to avoid further increasing its inventory levels, with demand this year not likely to be as high as previously forecast.

Although growth is expected in China, Japan, Latin America and Germany, where volume and revenue grew 30% in local currency terms last year, the outlook for the UK, Russia, the US and Australasia is "less clear".

Mr Page said the move breaks a run of seven years where plants had generally sold out what they have produced, but noted the firm had faced similar challenges in the past.

Asked how this would affect the company's individual sites, he said: "Different factories manufacture different products. I can't simply say it's across the board. It is trying to trim the balance of products to where the demand is and where the demand is likely to be."

Mr Page said the biggest challenge facing Devro in the UK was the price of pork meat, with the horsemeat scandal sparking increased demand from manufacturers and retailers for 100% UK-sourced pork.

While the higher prices have led to a 4% decline in the volume of sausage sold over the past two years, there has been a 5% increase in revenue from pork meat due to the increased price.

Mr Page said price fluctuation of this nature was typical in the global food industry and insisted the firm enjoyed a strong position in the UK food industry.

He added: "For the long term, I don't see it as a trend or an issue."

Shares in Devro closed down 28p or 9.18% at 277p.

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