Sausage skin maker Devro upbeat as analysts praise transformation

THE transformation plan at sausage skin manufacturer Devro has been given the thumbs up by analysts as the Moodiesburn-based firm served up volume growth for the fourth successive quarter.

Devro, which highlighted strong performances in China, Japan, Germany and North America, made 130 staff redundant at its plants in Moodiesburn and Bellshill last year as inefficient technology was replaced.

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 their confidence in the three-year transformation plan. 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 at 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 its new £50m plant coming on stream in 2016.

He pointed out 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. The factory will replace technology now 40 years old. Mr Page also highlighted to shareholders the introduction of Select Fresh, a thin walled casing for people to cook sausages at home which grocery multiples are interested in.

The chief executive, who was re-elected to the board with his fellow directors yesterday, insisted the longterm prospects for the collagen skin sector are strong.

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.”

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, adding: “As long as we differentiate to [find] opportuni- ties, we will be able to find business.”

Mr Page conceded the redundancy programme had been “very difficult for a lot of colleagues”, but noted the £30m Devro has invested in its Scottish plants in the last five years showed its commitment to the country.

Speaking after the AGM, Mr Page 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.”