Devro drives volumes up as analysts back strategy

Along with investment in new plants in the US and China and foreign currency headwinds, the restructure led to profits falling dramatically in 2014.

However, analysts have signalled the three-year transformation has positioned Devro well for future growth.

Sahill Shan at broker N+1 Singer said: "The big call on Devro is whether it is past the nadir and can it execute a recovery in margins. We believe it can.

"It has already addressed a number of legacy issues impeding profitability, whilst the growth investment is well thought through. As such, we feel Devro is a favourable inflection point to create shareholder value over the next two to three years."

Speaking at the company's annual general meeting in Glasgow, chief executive Peter Page noted that "2014 had been a good year in many ways", notwithstanding the challenges brought by the restructuring of its operations in Scotland and Australia. Devro expects those changes to deliver annual cost reductions totalling £5m this year.

Mr Page said the year had brought volume growth of three per cent, thanks largely to trading in the second half, and good cash generation, highlighting that volumes had been geared up in China ahead of the new, £50m plant coming on stream in 2016.

He pointed out that volumes had grown in Germany, for a fifth year in a row, in Japan thanks to a new application in the confectionery market, and the US, helped by demand for casings in beef sector. Devro is on course to open its new plant in South Carolina in June after an investment totalling £45m, with the factory ultimately replacing technology now 40 years old.

Mr Page said the investment will take it a "step forward" in the US, cutting unit costs and allowing it to introduce a wider range of products.

The technology Devro is introducing in China and the US will give it "more control and consistency" in production terms, he explained.

Mr Page also highlighted to shareholders the introduction of Select Fresh, a thin walled casing for people to cook sausages at home that several multiple grocers are interested in listing.

The chief executive, who was re-elected to the board with his fellow directors yesterday, insisted the long-term prospects for the collagen skin sector are strong, while emphasising the importance of the firm being able to introduce new products allowing it to stand apart from its rivals.

Mr Page said: "We are in the midst of a quite considerable transformation of the business. We're moving from old to new, from the west to the east, and we're moving business to where consumption will grow in the future. We are leaving behind technology and factories that are unsustainably [increasing] our production costs."

He added: "Everything I see suggests long-term growth in the market."

Responding to one shareholder who voiced concern over increasing global capacity in the collagen casing sector, Mr Page said Devro was not adding capacity, but replacing it with more efficient systems with the restructuring and new plants.

He said: "Our view now is that it's not a commodity. As long as we differentiate to [find] opportunities, we will be able find business."

Mr Page said the redundancy programme in Scotland had been "very difficult for a lot of colleagues", but said the £30m it has invested in its plants in the last five years showed its commitment to the country. He noted that the Moodiesburn site was "busier than it ever has been", adding that the kit in Bellshill will be used to supply the Chinese market this year and the US in 2016.

Speaking after the AGM, Mr Page conceded the company had moved into uncharted waters with the transformation plan, but said it was progressing on schedule. He said: "The important bit is to get to next year and then make sure the plants come into operation well, that we get the costs we expect and really work at getting the return on the investment, which is the big challenge."