DEVRO, the maker of collagen casings for the food industry, has warned its full-year profits will come in at the lower end of expectations - in spite of improving trading profits and margins as its new production plant came on stream in the Czech Republic.
The Glasgow-based manufacturer took steps towards an improved second half performance as revenue grew in the third quarter, with its performance also boosted by the impact of first-half price increases.
While Devro signalled its confidence of achieving "growth in full-year earnings" at the interim stage on July 31, the firm said yesterday that profits would come in on the lower side of forecasts. Devro, which employs 500 staff in Moodiesburn and Bellshill, also noted profits in 2014 would be hit by £3 million because of currency exchange rates as current hedging arrangements unwind.
The firm said strong growth in Latin America, China and south east Asia was offset by a slower performance in Europe, Australia and North America, where trading was below expectations. This left sales volumes unchanged from the third quarter last year.
Analysts reflected the update by cutting their profits forecasts, with Investec lowering its forecast of pre-tax profits by 5% or
£2 million to £41m, and Panmure Gordon by £2.1m to £40.8m.
In spite of the shifting consensus, chief executive Peter Page said the third quarter had seen "some good developments and improvements", including strong sales in Latin America, China and Germany, and the impact made by its plant in the Czech Republic.
Mr Page said the plant has boosted its capacity by 9%, helping it to meet demand in emerging markets, and lowering the unit cost of production by 25%.
He said: "The factories are running well and we have completed what was a very complex and challenging investment programme in the Czech Republic. That took three years and the best part of £25 million but that all finished on time, on budget and completed safely."
Devro said its next major capital expenditure programme would take place in South Carolina in the US, where the board has approved a £40m spend on a new manufacturing hall at its existing site.
Devro expects the investment to save it around £8m a year by 2016.
He said: "The factory we have there is over 35 years old and it is actually different technology to the ones we have in Glasgow. It is a lot less efficient, so although the products are quite good it is very costly to produce them."
Devro told investors it is considering whether to expand production in China, and would make a decision in early 2014.
Mr Page highlighted China's importance by revealing it accounts for more than 50% of global collagen casing consumption, with demand driven by an increasingly urbanised population . He does not believe China is ready for Select, a casing developed by Devro for premium foods, but anticipates this changing in the "medium to long term".
On the firm's sluggish volumes in Europe and the US, Mr Page said the performance reflected changing shopping patterns, as people do fewer big weekly shops and more "top ups" in local stores.
Asked whether he was disappointed Devro had lowered its profit expectations, he said: "I'm a realist, to be honest. We have had a great run. We are now producing profits that are well over double when I joined six years ago.
"I always like to make more progress but in the last two years we have certainly had adverse effects of very significant raw material cost increases and volumes haven't grown as we expected them to.
"It just makes me want to redouble our efforts and grow our business in any way we can."
Shares in Devro closed down 3.3p at 316.7p.
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