Cost-cutting could save Devro’s skin
Last year’s headlines were dominated by the rationalisation and modernisation of the company’s Scottish operations, which saw approximately 130 jobs go from its Lanarkshire factories.
This streamlining exercise, along with a similar restructuring of its Australian operations, was completed during the first quarter of 2015 and was set to deliver £5M of cost savings this year.
“Restructuring actions are now delivering cost reductions and are on track to contribute £5M to operating profit for the year as expected,” said the company in its interim results statement published on Wednesday (August 5).
Three-year programme
130 jobs go at Lanarkshire
Approximately 130 jobs were lost when Devro shut its Lanarkshire factories in August last year.
The decision to close the facilities followed a 45 day consultation with workers and formed part of the firm's wider restructuring plans.
The restructuring is part of a three-year programme to “transform Devro’s manufacturing footprint”, which the company says was “going to plan”.
Other elements of the programme included investment in new plants in the US and China, which were reportedly running to schedule and to budget, and were due to come on stream in 2016.
Last month, in an apparent diversion from its core strategy, Devro signed a deal to buy Dutch collagen gel manufacturer PV Industries for £12.5M.
Devro’s sales volumes and revenue grew by 5% in constant currency terms to £112.7M, compared with £109.7M for the same period in 2014, with China, Japan and South East Asia the best performing markets.
The company said this sales growth was “underpinned by strong market demand for high quality products”.
The City responds
City analyst Investec maintained its ‘buy’ recommendation and target share price of 350p.
But Shore Capital’s director and head of research Clive Black issued more of a lukewarm ‘hold’ recommendation, on the basis that “a lack of visibility makes a more positive recommendation challenging”.
“Devro has a lot on,” Black said.“The company has been in a state of seemingly perpetual flux with the material re-engineering of its manufacturing base for some years … All of this work has arguably made the underlying position of Devro a little unclear for some time and will continue to do so in the immediate future.”
Black believed the “warm moods” of management needed to be reflected in a “significant stepped upward adjustment in medium-term profits, earnings and dividends”– in other words, the company needed to start talking about returns.
“Returns is a term that is somewhat absent from the interim results, which is a little surprising and perhaps disconcerting to our minds,” he said.
He pointed out that Devro’s current investment programme would exceed £100M, making for a high proportion of debt to equity – H1 debt was £106.7M, up from £69M at the December 2014 year end, and the interim dividend proposed was flat year-on-year.
“What is clear to our minds is that on £100M of spend, a material step-up in trading profits and earnings needs to come through,” he said.
