Devro slumps as it warns on 2017 volumes and operating profit

Devro slumped after it cautioned that sales volumes and underlying operating profit in 2017 will be lower than expected, mainly on the back of sales declines in Latin America.

The group said in its half-year report back in August that Latin America was the region most affected by its transformation programme, in terms of the scale and complexity of the transfer of customers onto new products and also temporary capacity constraints during the transition.

Devro, which makes sausage casings, said on Thursday that sales volumes are now expected to be 10% lower than previously anticipated next year. It did not specify how much lower operating profit would be.

The company said the expected decline in sales volumes next year will lead to an under-utilisation of available capacity. Actions are being taken to rebalance the use of capacity across the group’s global manufacturing base and the under-utilisation is expected to have a further adverse impact on margins.

It now plans to accelerate and implement more extensively the next stage of its strategic development, focusing on growing sales through improved commercial capabilities, introducing the next generation of differentiated products, and further improving manufacturing efficiencies to reduce unit costs.

These improvements are expected to deliver a fundamentally more competitive position and benefits will offset the effects of the lower volumes, partially next year and fully in 2018.

The improvement project will lead to additional costs and capital expenditure and given the nature and scale of the planned actions, these costs will be charged as exceptional items, of which around £3m is expected to be incurred in the final quarter of 2016.

Devro said sales volume trends in the period from 1 July to the current date were broadly similar to those in the first half, helped by improvements in Russia and South East Asia, but hit by further reductions in Latin America.

“Combined, these factors have had an adverse impact on margins, offset by further benefits from lower input costs and foreign exchange. As a result, the board's full year expectations for underlying operating profit remain unchanged,” it said.

At 1040 GMT, the shares were down 21.5% to 177.38p.