TIDMDVO
RNS Number : 0575G
Devro PLC
03 August 2016
3 August 2016
Devro plc
INTERIM RESULTS FOR THE SIX MONTHSED 30 JUNE 2016
Devro plc ("Devro" or the "group"), one of the world's leading
manufacturers of collagen products for the food industry, announces
its interim results for the six months ended 30 June 2016.
Financial highlights 2016 2015
Unaudited Unaudited
Revenue GBP112.9m GBP112.7m
Underlying EBITDA* GBP26.4m GBP23.8m
Underlying operating profit* GBP18.0m GBP15.6m
Underlying profit before GBP13.7m GBP13.6m
tax*
Underlying basic earnings
per share* 6.3p 6.9p
Interim dividend per share 2.7p 2.7p
Financial highlights
(statutory)
Operating profit GBP4.6m GBP11.6m
Profit before tax GBP0.3m GBP9.6m
Basic earnings per share (0.7p) 4.4p
* Underlying figures are stated before exceptional items and are
presented in order to reflect better the underlying movement in
trading results. Exceptional items represent incremental costs
related to the three year transformation programme.
Results highlights for 2016
* Revenue unchanged year on year, with exchange rate
benefits offsetting effects of lower sales volumes
* Underlying operating profit GBP2.4 million ahead of
prior year
* Improved manufacturing efficiencies in Scotland and
Australia, lower input costs and exchange rate
benefits more than compensated for the effects of
reduced year on year sales volumes on underlying
operating profits
* Transformation of manufacturing footprint now in
final phase
o Old US plant closure completed in June 2016
o New plants, in China and US, both commenced production
in the first half of 2016
o Products from new plants in process of being qualified
with customers
o Due to complexity in US and current market in
China the transition period is expected to be longer
than originally planned
o Exceptional costs expected to be approximately
GBP20 million for the full year
Peter Page, Chief Executive of Devro, commented
"Underlying operating profit was ahead of prior year for the
first half. Improved manufacturing efficiencies, lower input costs
and exchange rate benefits more than offset the effects of reduced
year on year sales volumes.
"The Board's expectations for the full year underlying operating
profit remain unchanged.
"The transformation programme has reached its final phase. The
next stage of strategic development will focus on growing sales
through improved commercial capabilities, introducing the next
generation of differentiated products and further improving
manufacturing efficiencies."
Contacts
Peter Page Chief Executive 020 3727 1340
Group Finance
Rutger Helbing Director 020 3727 1340
Richard Mountain/Nick
Hasell FTI Consulting 020 3727 1340
There will be a presentation today at 9.30am for investors and
analysts at the offices of FTI Consulting, 200 Aldersgate,
Aldersgate Street, London, EC1A 4HD. A live audio feed will be
available to those unable to attend this meeting in person. To
connect to the webcast facility, please go to the following link:
http://view-w.tv/943-1289-17389/en approximately 10 minutes before
the start of the briefing (9.20am). The presentation will also be
available on the company's website.
Half year results update
Sales
Revenue for the first half was unchanged year on year, having
benefited from exchange rates which offset a 7% reduction in sales
volumes.
Of this reduction in sales volumes 40% related to China, but
this had little impact on profit given the low margins earned on
products that have historically been imported. In addition
approximately 40% of the reduction related to the Europe segment,
in particular Russia which continues to experience difficult
economic conditions. Of the remaining reduction approximately half
related to Latin America, which is the region most significantly
impacted by our manufacturing transformation programme.
A summary of the change in revenue by geographic region is set
out in the table below:
Europe Americas Asia Pacific Group
----------- ------- --------- ------------- ------
Volume -4% -4% -13% -7%
----------- ------- --------- ------------- ------
Price/mix - +1% +2% -
----------- ------- --------- ------------- ------
Exchange +5% +7% +8% +7%
----------- ------- --------- ------------- ------
Total +1% +4% -3% -
----------- ------- --------- ------------- ------
Europe
Revenue in the UK & Ireland was broadly in line with prior
year, a good performance in this mature market.
In Continental Europe, revenue started the year slowly but
improved to prior year levels for the second quarter. Sales in some
markets in this region were impacted by competitive pressure, but
overall revenue for the first half was up 8% (unchanged in local
currency) after including revenue from Devro BV which was acquired
in the second half of 2015.
The economic environment in Russia continued in line with that
experienced in the second half of 2015. Devaluation of the local
currency has increased the cost of importing and Devro has
responded by developing a specific product offering for this
market. Overall revenue was down 19% (down 26% in local
currency).
Americas
Sales in North America continued to perform well, with revenue
increasing 8% (broadly unchanged in local currency).
Latin America is the region most affected by the 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. Revenue was down 9% in the first half (down
15% in local currency).
Asia Pacific
Our business in Japan continued to perform well with revenue up
25% (up 6% in local currency).
In China, Devro's strategy continues to be targeting customers
in the premium sector, who value the performance, differentiation
and full traceability provided by its products. The long term
opportunities for this emerging and growing sector remain
strong.
At the lower end of the market in China there is currently an
oversupply of product. Devro has historically supplied some
customers in this sector, but has avoided competing to retain those
customers who are solely focused on price. This has resulted in a
short term reduction in revenue, which was down 52% in the first
half (down 53% in local currency).
Now that products are becoming available from the new plant,
Devro's primary focus is on qualifying these products with target
customers in the premium sector. Early trials of products from the
new plant have performed as expected, and we have now progressed to
the phase of refining these products to meet specific customer
needs.
Sales performance in South East Asia was mixed with good growth
in Korea and Indonesia, but weaker trading in Thailand. Revenue was
down 6% (down 13% in local currency).
In Australia & New Zealand overall demand was lower in a
market where Devro has a major market share. Revenue for the first
half was down 5% (down 7% in local currency).
Transformation plan update
Now that commercial production has commenced at both of the new
plants in China and the US, the manufacturing transformation
programme has reached its final stage.
The China plant commenced production in the first half ahead of
plan, and has already achieved the initial planned level of
manufacturing efficiencies. Commercialisation of products with
customers has commenced, focused on the target customer base in the
premium segment. This process is expected to continue until the end
of 2017 and, as a result, the new China plant is now expected to
contribute to profits from the beginning of 2018.
In the US the old factory is now closed, a major milestone in
this investment project. Production commenced at the new plant in
the first half and we are now in the process of transferring almost
all customers in the Americas to products from different
manufacturing locations as part of this transformation of our
manufacturing footprint. This involves working closely with
customers through their requalification process, refining the
products to meet customers' needs and scaling up production of the
final products. Due to the complexity of the transformation the
transition period for the new plant will be longer than originally
planned, although is still expected to be completed by the end of
2016.
Operating profit
Underlying operating profit in the first half was GBP18.0m,
ahead of prior year by GBP2.4m. Improved manufacturing
efficiencies, lower input costs and translation exchange gains more
than offset the impact of lower sales volumes.
The largest element of the increase in underlying operating
profit compared with prior year was input cost reductions
(+GBP2.1m), mainly in relation to further reductions in hide prices
and energy costs.
Manufacturing efficiencies were favourable for underlying
operating profit (+GBP1.9m), with improved production in Scotland
and Australia where manufacturing in the first half of the prior
year was temporarily affected by the restructuring actions
implemented in late 2014.
Translational exchange gains also improved underlying operating
profit (+GBP1.4m), due to the weakening of sterling.
Incremental profits from Devro BV, which was acquired in the
second half of 2015, also contributed to underlying operating
profit for the first half of 2016 (+GBP0.5m).
Sales volumes were down 7%, which partially offset the gains to
underlying operating profit (-GBP2.4m). As noted above a
significant element of this reduction in volumes related to China,
which had little impact on underlying operating profit due to the
low margins earned on products that have historically been
imported.
Other movements in underlying operating profit compared with
prior year (-GBP1.1m) included wage inflation.
Underlying EBITDA in the first half was GBP26.4 million, ahead
of prior year by GBP2.6 million. The larger increase compared with
operating profit relates to increased depreciation in the first
half of 2016.
Reported operating profit for the period was GBP4.6 million,
which was lower than the prior year primarily due to higher
exceptional items.
Exceptional items
Exceptional items represent the incremental costs directly
related to the transformation programme, and totalled GBP13.4
million for the first half of 2016. In the US these mainly related
to costs associated with winding down the old factory and costs
incurred prior to the commencement of normal production for the new
plant. In China exceptional items primarily related to the costs
incurred prior to the commencement of normal production for the new
plant.
A summary of exceptional items for the first half of 2016 is set
out in the table below:
Six months Six months
ended 30 June ended 30 June
2016 2015
GBPm GBPm
------------------ --------------- ---------------
China investment 3.9 2.0
US investment 9.5 2.0
------------------ --------------- ---------------
Total 13.4 4.0
------------------ --------------- ---------------
As noted above, due to the complexity of the transformation, the
transition period for the new US plant is now expected to be longer
than originally planned, although will be completed by the end of
2016. This longer transition period, combined with a strengthening
of the US dollar exchange rate, has resulted in an increase in
forecast exceptional costs for the full year in 2016 to
approximately GBP20 million, which would be approximately GBP6
million higher than previously indicated.
Foreign currency
Devro operates worldwide and with multiple currencies. Major
transactional exposures arise from sales in euros, US dollars and
Japanese yen whereas manufacturing costs are in Australian dollars,
Czech koruna, US dollars and sterling. Devro operates a hedging
programme to manage the volatility associated with transactional
exposures. Translational exposures arise from the conversion of the
results of all our businesses into sterling.
In the first half of 2016 there was a general weakening of
sterling, with a significant further movement in the last month
following the EU Referendum vote on 23 June 2016. These movements
contributed GBP1.4m of translational exchange benefit to underlying
operating profit for the first half, and if current rates remain in
place for the remainder of the year we would expect further benefit
in the second half.
Finance income/expense
Finance expense for the period (excluding pensions) was GBP3.2
million, which was net of the effects of capitalisation of interest
of GBP0.5 million related to the debt to fund construction of the
new plants in China and the US.
The increase of GBP2.3 million over the prior year was due to a
number of factors including the higher level of net debt, which
also attracts a higher level of interest, and the ceasing of
capitalisation of interest during the first half once the new
plants moved into production.
Finance expense for the full year (excluding pensions) is
expected to be approximately GBP6-7 million.
Net finance cost on pensions for the period amounted to GBP1.1
million (2015: GBP1.1 million).
Tax
The group's underlying tax charge for the period was GBP3.1
million. The group expects a full year effective tax rate of
approximately 22%, with the increase from the 2015 full year rate
of 12% due to investment incentives in the Czech Republic becoming
fully utilised in 2015.
Earnings per share
Six months Six months
ended 30 ended 30
June June
2016 2015
--------------------------- ----------- -----------
Underlying basic earnings
per share 6.3p 6.9p
Basic earnings per share (0.7p) 4.4p
--------------------------- ----------- -----------
Underlying basic earnings per share was 6.3 pence, with the
increase in underlying operating profit compared with prior year
being more than offset by higher finance expenses and tax charges.
Basic earnings per share was further reduced by the increase in
exceptional items reported for the period.
Cash flow and net debt
Devro continues to be a highly cash generative business. In
order to fund the significant investments made as part of the
transformation of the manufacturing footprint, additional long term
facilities were put in place in 2014 to supplement the shorter term
facilities.
As the three year investment programme comes to an end, net debt
increased to GBP147 million at 30 June 2016 (or GBP153 million
including derivative liabilities), compared with GBP126 million at
year end 2015. This includes the effect of a significant weakening
of sterling in June 2016 (given that a part of the group's debt is
denominated in US dollars) following the result of the EU
Referendum vote on 23 June 2016, which increased the reported net
debt figure at 30 June 2016 by approximately GBP15 million
(including the effect on derivative liabilities).
At 30 June 2016 the net debt to EBITDA ratio was 2.9 times and
the EBITDA to net interest payable ratio was 9 times, meaning both
ratios were within their limits (of <3.25 times and >4 times
respectively) despite the recent changes in exchange rates.
There will still be some cash outflow in the second half related
to the transformation, both in terms of capital expenditure and
exceptional items, but by the end of the year the Board expects the
net debt to EBITDA covenant ratio to be lower than at 30 June
2016.
Following completion of the transformation, cash generated from
the business will enable net debt levels to be reduced, resulting
in the covenant ratios returning nearer to historic levels.
Dividend
The Board is pleased to announce an interim dividend of 2.70
pence (2015: 2.70 pence). The interim dividend will be paid on 7
October 2016 to shareholders on the register at 26 August 2016.
Pensions
The group's net pension obligations increased to GBP77.9 million
at 30 June 2016, from GBP56.4 million at 31 December 2015, which
primarily reflects a decrease in discount rates across the group
schemes.
Principal risks
The group operates a structured risk management process, which
identifies and evaluates risks that could impact its performance
and reviews mitigation activity.
The key areas of potential risk identified in the group's 2015
Annual Report and Accounts were loss of market share/profit margins
due to increased competitive pressures, downturn in consumer
demand, disruption to the group's manufacturing capability from
poor operational performance or major disruptive events, a vote to
exit in the June 2016 referendum on the UK's continued membership
of the European Union, financial risks such as foreign exchange
rate movements and the availability of short and long-term funding,
disruption to supply or increase in price of key raw materials, and
development of non-casing technologies. No new key risks have been
identified since the Annual Report was published.
The referendum on the UK's continued membership of the European
Union was held in June 2016, which resulted in a vote to leave. The
immediate impact on the group of this vote to leave was a
significant movement on exchange rates in June 2016; the impacts of
this movement, on net debt, covenant ratios related to the group's
borrowing facilities and reported profit, are set out in the
'foreign currency' and 'cash flow and net debt' sections above.
Whilst there will remain longer term uncertainty until new trading
and regulatory relationships are negotiated, exports from the
group's plants in Scotland amount to only approximately 10% of
group revenue and Devro is working with the relevant trade
associations to minimise the impact on the business.
These risks are carefully monitored and managed and further
details are set out on pages 22 to 25 of the 2015 Annual Report and
Accounts which is available on the Devro plc website:
www.devro.com
Going concern
This half year results update sets out the group's performance
for the period and financial position at period end, together with
factors likely to affect its future development, performance and
position. The 2015 Annual Report outlines the business activities
of the group and note 23 describes the group's objectives and
procedures for managing its capital, its financial risk management
policies, details of financial instruments and exposure to market,
credit and liquidity risk.
At 30 June 2016 the group was operating within the banking
covenants related to its revolving credit facility and US private
placement facilities. The group's detailed financial forecasts
indicate that there is sufficient headroom in the facilities for
the foreseeable future and that they can be repaid in line with the
expected terms.
After making enquiries, the directors have a reasonable
expectation that the group has adequate resources to continue in
operation for the foreseeable future. For this reason, they
continue to adopt the going concern basis in preparing the
financial statements.
Outlook
The Board's expectations for the full year underlying operating
profit remain unchanged.
The transformation programme has reached its final phase. The
next stage of strategic development will focus on growing sales
through improved commercial capabilities, introducing the next
generation of differentiated products and further improving
manufacturing efficiencies.
Peter Page Rutger Helbing
Chief Executive Group Finance Director
3 August 2016
Consolidated income statement (unaudited)
for the six months ended 30 June 2016
6 months ended 30 6 months ended 30
June 2016 June 2015
Before Exceptional Total Before Exceptional Total
exceptional items exceptional items
items items
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
Revenue (note
6) 112.9 - 112.9 112.7 - 112.7
--------- --------- --------- --------- --------- ---------
Operating profit
(notes 5,6) 18.0 (13.4) 4.6 15.6 (4.0) 11.6
Finance cost (3.2) - (3.2) (0.9) - (0.9)
Net finance
cost on pensions (1.1) - (1.1) (1.1) - (1.1)
----------- --------- --------- -------- -------- --------
Profit before
tax 13.7 (13.4) 0.3 13.6 (4.0) 9.6
Tax (note 7) (3.1) 1.6 (1.5) (2.1) (0.2) (2.3)
----------- ------------- ---------- -------- -------- --------
Profit/(loss)
for the period
attributable
to owners of
the parent 10.6 (11.8) (1.2) 11.5 (4.2) 7.3
====== ====== ===== ===== ===== =====
Earnings per
share
(note 8)
Basic (0.7p) 4.4p
Diluted (0.7p) 4.4p
Interim consolidated statement of comprehensive income
(unaudited)
for the six months ended 30 June 2016
6 months 6 months
ended ended
30 June 30 June
2016 2015
GBP'm GBP'm
(Loss)/profit for the period (1.2) 7.3
--------- --------
Other comprehensive (expense)/income
for the period
Items that will not be reclassified
to profit or loss
Pension obligations:
- re-measurements (19.3) 11.0
- movement in deferred tax 4.4 (2.6)
---------- --------
Total items that will not be reclassified
to profit or loss (14.9) 8.4
-------- --------
Items that may be reclassified
subsequently to profit or loss
Cash flow hedges:
- net fair value (losses)/gains (2.7) 1.1
- reclassified and reported in
operating profit 0.2 0.1
- movement in deferred tax 0.5 (0.3)
Net investment hedges:
- fair value (losses)/gains (0.7) 1.8
- movement in deferred tax 0.1 (0.4)
Net exchange adjustments 15.2 (10.1)
--------- --------
Total items that may be reclassified
subsequently to profit or loss 12.6 (7.8)
--------- --------
Other comprehensive (expense)/income
for the period, net of tax (2.3) 0.6
-------- --------
Total comprehensive (loss)/income
for the period attributable to
owners of the parent (3.5) 7.9
====== =====
Interim consolidated balance sheet
at 30 June 2016
30 June 31 December 30 June
2016 2015 2015
(unaudited) (audited) (unaudited)
GBP'm GBP'm GBP'm
ASSETS
Non-current assets
Goodwill 3.1 3.1 -
Intangible assets (note 10) 6.3 6.1 3.8
Property, plant and equipment
(note 11) 303.2 270.1 242.4
Deferred tax assets 31.9 25.5 21.5
Trade and other receivables 4.2 3.2 2.2
---------- ---------- ----------
348.7 308.0 269.9
---------- ---------- ----------
Current assets
Inventories 37.0 28.5 32.6
Current tax assets - - 0.2
Trade and other receivables 29.4 35.2 32.2
Derivative financial instruments
(note 4) 0.2 3.5 2.3
Cash and cash equivalents (note
17) 17.4 9.6 19.6
---------- ---------- --------
84.0 76.8 86.9
---------- ---------- ----------
Total assets 432.7 384.8 356.8
===== ===== =====
LIABILITIES
Current liabilities
Borrowings (note 17) 1.8 1.9 1.3
Derivative financial instruments
(note 4) 5.9 2.3 1.2
Trade and other payables (note
13) 37.1 31.1 22.9
Current tax liabilities 4.9 5.4 5.1
Provisions for other liabilities
and charges 5.6 5.5 3.6
--------- -------- --------
55.3 46.2 34.1
--------- -------- --------
Non-current liabilities
Borrowings (note 17) 162.6 133.2 123.9
Deferred tax liabilities 15.1 14.8 15.2
Pension obligations (note 14) 77.9 56.4 47.4
Other payables 3.3 2.6 2.4
Provisions for other liabilities
and charges 0.5 0.5 2.6
---------- --------- ---------
259.4 207.5 191.5
---------- ---------- ---------
Total liabilities 314.7 253.7 225.6
===== ===== =====
Net assets 118.0 131.1 131.2
===== ===== =====
EQUITY
Capital and reserves attributable
to owners of the parent
Ordinary shares 16.7 16.7 16.7
Share premium 9.4 9.3 9.3
Other reserves 66.0 52.9 48.9
Retained earnings 25.9 52.2 56.3
---------- --------- ---------
Total equity 118.0 131.1 131.2
===== ===== =====
The above consolidated balance sheet should be read in
conjunction with the accompanying notes.
Interim consolidated statement of changes in equity
(unaudited)
for the six months ended 30 June 2016
Ordinary Share Other Retained Total
shares premium reserves earnings equity
GBP'm GBP'm GBP'm GBP'm GBP'm
Six months ended 30 June
2016
Balance at 1 January 2016 16.7 9.3 52.9 52.2 131.1
Comprehensive income
Loss for the period - - - (1.2) (1.2)
-------- -------- --------- --------- ----------
Other comprehensive income/(expense)
Cash flow hedges, net of
tax - - (2.0) - (2.0)
Net investment hedges,
net of tax - - (0.6) - (0.6)
Pension obligations, net
of tax - - (14.9) (14.9)
Exchange adjustments - - 15.2 - 15.2
-------- -------- --------- --------- ----------
Total other comprehensive
income/(expense) - - 12.6 (14.9) (2.3)
-------- -------- --------- --------- ----------
Total comprehensive income/(expense) - - 12.6 (16.1) (3.5)
-------- -------- --------- --------- ----------
Transactions with owners
Performance Share Plan
charge - - 0.6 - 0.6
Performance Share Plan
credit in respect of shares
vested - - (0.1) - (0.1)
Issue of ordinary shares - 0.1 - - 0.1
Dividends paid - - - (10.2) (10.2)
-------- -------- --------- --------- ----------
Total transactions with
owners - 0.1 0.5 (10.2) (9.6)
-------- -------- --------- --------- ----------
Balance at 30 June 2016 16.7 9.4 66.0 25.9 118.0
====== ====== ====== ====== =====
Six months ended 30 June
2015
Balance at 1 January 2015 16.7 9.3 56.5 50.7 133.2
Comprehensive income
Profit for the period - - - 7.3 7.3
-------- -------- --------- --------- ----------
Other comprehensive income/(expense)
Cash flow hedges, net of
tax - - 0.9 - 0.9
Net investment hedges,
net of tax - - 1.4 - 1.4
Pension obligations, net
of tax - - - 8.4 8.4
Exchange adjustments - - (10.1) - (10.1)
-------- -------- --------- --------- ----------
Total other comprehensive
income/(expense) - - (7.8) 8.4 0.6
-------- -------- --------- --------- ----------
Total comprehensive income/(expense) - - (7.8) 15.7 7.9
-------- -------- --------- --------- ----------
Transactions with owners
Performance Share Plan
charge - - 0.3 - 0.3
Performance Share Plan
credit in respect of shares - - - - -
vested
Transfer of lapsed Performance
Share Plan awards - - (0.1) 0.1 -
Issue of ordinary shares - - - - -
Dividends paid - - - (10.2) (10.2)
-------- -------- --------- --------- ----------
Total transactions with
owners - - 0.2 (10.1) (9.9)
-------- -------- --------- --------- ----------
Balance at 30 June 2015 16.7 9.3 48.9 56.3 131.2
===== ===== ===== ===== ======
Interim consolidated cash flow statement (unaudited)
for the six months ended 30 June 2016
6 months 6 months
ended ended
30 June 30 June
2016 2015
GBP'm GBP'm
Cash flows from operating activities
Cash generated from operations
(note 16) 13.8 10.7
Interest paid (3.5) (2.3)
Tax paid (3.0) (2.3)
----------- ----------
Net cash generated from operating
activities 7.3 6.1
----------- ----------
Cash flows from investing activities
Purchase of property, plant
and equipment (11.3) (33.3)
Purchase of intangible assets (0.4) (0.4)
Capital grants received 0.7 -
--------- ---------
Net cash used in investing activities (11.0) (33.7)
--------- ---------
Cash flows from financing activities
Proceeds from the issue of ordinary 0.1 -
shares
Proceeds from other borrowings 17.1 46.9
Dividends paid (10.2) (10.2)
Proceeds from financial instruments 3.4 -
--------- ----------
Net cash generated from financing
activities 10.4 36.7
--------- ----------
Net increase in cash and cash
equivalents 6.7 9.1
Net cash and cash equivalents
at beginning of period 7.7 9.4
Exchange gain/(loss) on cash
and cash equivalents 1.2 (0.2)
Cash and cash equivalents 17.4 19.6
Bank overdrafts (1.8) (1.3)
--------------------------------------- ------------ -----------
Net cash and cash equivalents
at end of period 15.6 18.3
====== ======
Notes to the condensed interim consolidated financial statements
(unaudited)
for the six months ended 30 June 2016
1 General information
Devro is one of the world's leading providers of collagen
products for the food industry. Collagen is one of the most common
forms of protein, which is transformed into strong but flexible
edible casings and other related products by highly sophisticated
biochemical processing technologies.
The company is a public limited company incorporated and
domiciled in the UK. The address of its registered office is
Moodiesburn, Chryston, Scotland, G69 0JE.
The company is listed on the London Stock Exchange.
These condensed interim consolidated financial statements were
approved for issue on 3 August 2016.
These condensed interim consolidated financial statements do not
comprise statutory accounts within the meaning of Section 434 of
the Companies Act 2006. The consolidated interim financial
statements are unaudited but have been reviewed by our auditors and
their report is set out on page 24. Statutory accounts for the year
ended 31 December 2015 were approved by the Board of Directors on
16 March 2016 and delivered to the Registrar of Companies. The
report of the auditors on those accounts was unqualified, did not
contain an emphasis of matter paragraph and did not contain any
statement under Section 498 of the Companies Act 2006.
2 Basis of preparation
These condensed interim consolidated financial statements for
the six months ended 30 June 2016 have been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct
Authority and with International Accounting Standard ("IAS") 34,
"Interim financial reporting" as adopted by the European Union. The
condensed consolidated interim financial statements should be read
in conjunction with the annual financial statements for the year
ended 31 December 2015 which have been prepared in accordance with
International Financial Reporting Standards ("IFRSs") as adopted by
the European Union.
Critical estimates and judgments
The preparation of financial statements in conformity with IFRSs
requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Although these estimates are
based on management's best assessments of amounts, events or
actions, actual results ultimately may differ from those estimates.
The key uncertainties that have a significant risk of causing
material adjustment to the carrying amounts of assets and
liabilities within the next six months relate to the accounting for
the group's investment projects (in particular whether items should
be expensed as exceptional or capitalised), the carrying value of
inventory, the measurement of pension obligations and tax.
Going concern basis
The financial statements have been prepared on a going concern
basis. This is discussed in the half year results update on page
7.
3 Accounting policies
The accounting policies adopted are consistent with those of the
annual financial statements for the year ended 31 December 2015, as
described in those annual financial statements.
New standards, amendments to standards or interpretations
effective in 2016
The following new standards, amendments to standards or
interpretations became mandatory for the first time during the
financial year beginning 1 January 2016. All were either not
relevant for the group or had no material impact on the financial
statements of the group:
Effective
date
1 January
* IFRS 10 (amendment) - Consolidated financial 2016
statements
1 January
* IFRS 11 (amendment) - Joint arrangements 2016
1 January
* IFRS 12 (amendment) - Disclosure of interests in 2016
other entities
1 January
* IFRS 14 - Regulatory deferral accounts 2016
1 January
* IAS 1 (amendment) - Presentation of financial 2016
statements
1 January
* IAS 12 (amendment) - Income taxes 2016
1 January
* IAS 16 (amendment) - Property, plant and equipment 2016
1 January
* IAS 27 (amendment) - Separate financial statements 2016
1 January
* IAS 28 (amendment) - Investments in associates 2016
1 January
* IAS 38 (amendment) - Intangible assets 2016
1 January
* Annual improvements 2014 2016
New standards, amendments to standards or interpretations not
applied
At the date of approval of these financial statements, the
following amendments to standards and interpretations were in issue
but have not been applied in these financial statements:
Effective
date
1 January
* IAS 12 (amendment) - Income taxes 2017
1 January
* IAS 7 (amendment) - Statement of cash flows 2017
1 January
* IFRS 9 - Financial instruments 2018
1 January
* IFRS 15 - Revenue from contracts with customers 2018
1 January
* IFRS 16 - Leases 2019
It is expected that the group will adopt these standards,
amendments to standards and interpretations on their effective
dates.
4 Financial risk management
The group's activities expose it to a variety of financial
risks: market risk (including interest rate risk and foreign
exchange risk), credit risk and liquidity risk.
The condensed interim consolidated financial statements do not
include all financial risk management information and disclosures
required in annual financial statements, and should be read in
conjunction with the group's annual financial statements for the
year ended 31 December 2015.
Liquidity risk
At 30 June 2016, the group had in place unsecured floating rate
committed loan facilities totalling GBP110.0 million (31 December
2015: GBP110.0 million) and outstanding unsecured private placement
notes totalling $100 million. In addition to the committed
facilities, local uncommitted working capital facilities at 30 June
2016 of GBP5.0 million (31 December 2015: GBP5.0 million), US
dollars 2.0 million (31 December 2015: US dollars 2.0 million) and
Czech koruna 175 million (31 December 2015: Czech koruna 120
million).
The committed loan elements are a single syndicated revolving
credit facility with four banks expiring on 19 December 2019. The
private placement notes mature in three tranches between 17 April
2021 and 17 April 2026. The uncommitted facilities are renewable
within one year.
Fair value of derivative financial instruments
The fair values of derivative financial instruments are as
follows:
Assets Liabilities
GBP'm GBP'm
At 30 June 2016
Forward foreign currency contracts
- cash flow hedge - 4.0
- net investment hedge - 1.9
- other 0.2 -
----- -----
0.2 5.9
=== ===
At 31 December 2015
Forward foreign currency contracts
- cash flow hedge 0.3 1.0
- net investment hedge - 1.1
- other 0.2 0.2
Cross currency interest rate 3.0 -
swaps
----- -----
3.5 2.3
=== ===
Derivative financial instruments that are measured at fair value
are disclosed by level of the following fair value measurement
hierarchy:
Level 1 - Quoted prices (unadjusted) in active markets for
identical assets or liabilities
Level 2 - Inputs other than quoted prices included within level
1 that are observable for the asset or liability either directly
(that is, as prices) or indirectly (that is, derived from
prices)
Level 3 - Inputs for the asset or liability that are not based
on observable market data (that is, unobservable inputs)
All of the group's derivative financial instruments that are
measured at fair value are classified as Level 2 at 30 June 2016
(31 December 2015: Level 2) and comprise forward foreign exchange
contracts and cross currency interest rate swaps as disclosed in
the table above. The valuation techniques employed are consistent
with the year-end annual report. There are no financial instruments
measured as Level 3.
The carrying value of non-derivative financial assets and
liabilities, comprising cash and cash equivalents, trade and other
receivables, trade and other payables and borrowings is considered
to materially equate to their fair value.
5 Exceptional items
Exceptional charges included in operating profit are GBP13.4
million (2015: GBP4.0 million).
6 months 6 months
ended 30 ended 30
June 2016 June 2015
--------------- ---------------
Investment Investment
projects projects
GBP'm GBP'm
Redundancy and retention
costs (i) 0.6 0.3
Training (ii) 0.5 -
Pre-operating costs to
establish new manufacturing
plants (iii) 4.1 3.3
Start-up production costs 8.2 -
(iv)
Accelerated depreciation
(v) - 0.4
-------- --------
13.4 4.0
====== ======
Exceptional items comprise incremental costs that are directly
related to the actions being taken to transform the business.
During 2016 and 2015 this principally comprises the two investment
projects to establish new plants in the USA and China.
(i) Costs have been incurred in the USA where the completion of
the new plant will require significantly fewer operators compared
with the previous less efficient operation. The main redundancy
programme was announced during 2014 and associated costs recognised
at that point. There have been extensions to the programme
announced in both 2015 and 2016 resulting in further redundancy
costs and retention payments.
(ii) Costs incurred related to training staff prior to the
commencement of production, in the use of the group's latest
technology that will be used in the new manufacturing
facilities.
(iii) Costs related to the projects to establish new
manufacturing plants in the USA and China, including project
management, legal and professional fees, and other incremental
costs incurred prior to the commencement of commercial production
that are not eligible for capitalisation.
(iv) Incremental costs of production incurred during the initial
start up phase for each of the new plants whilst commercial
production volumes are below the levels expected once the plants
are operating normally. Commercial production in both new plants
commenced during the six months ended 30 June 2016.
(v) Accelerated depreciation charge incurred on assets that will
be replaced earlier than their previously estimated useful economic
lives due to the group's planned investment in the new USA plant.
The 2014 charge also included amounts related to the restructuring
actions in Scotland and Australia.
6 Segment information
The chief operating decision maker has been identified as the
Board. The Board reviews the group's financial results on a
geographical segment basis with three identifiable operating
segments:
-- Americas: which includes North America and Latin America
-- Asia-Pacific: which includes Australia, New Zealand, Japan,
China and the rest of South East Asia
-- Europe: which includes Continental Europe, UK, Ireland and Africa
The Board assesses the performance of the operating segments
based on operating profit. This measurement basis excludes the
effects of exceptional income and expenditure from the operating
segments. The Board assesses the operating segments based on group
profit for external sales in each region, rather than statutory
profit for the region which also includes profit on intercompany
sales.
Finance income and cost, and net finance cost on pensions, are
not included in the segment results that are reviewed by the
Board.
Information provided to the Board is consistent with that in the
financial statements.
Americas Asia - Pacific Europe Total group
--------------------------- ------------------------- ------------------------- -------------------------
30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June
2016 2015 2016 2015 2016 2015 2016 2015
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
Revenue
Sales to
external
customers 32.5 31.4 33.1 34.3 47.3 47.0 112.9 112.7
-------- -------- -------- -------- -------- -------- -------- ---------
Operating
profit
before
corporate
overheads
and
exceptional
items 4.7 2.3 7.2 5.7 7.8 8.8 19.7 16.8
-------- --------- -------- -------- -------- --------
Corporate
overheads (1.7) (1.2)
-------- ----------
18.0 15.6
Exceptional
items (9.5) (2.0) (3.9) (2.0) - (13.4) (4.0)
-------- --------
Operating
profit
after
exceptional
items 4.6 11.6
Finance cost (3.2) (0.9)
Net finance
cost on
pensions (1.1) (1.1)
-------- --------
Profit
before tax 0.3 9.6
===== =====
7 Tax
The charge for tax for the six months ended 30 June 2016
corresponds to a rate of tax of 22% on profit before exceptional
items (six months ended 30 June 2015: 15%). This reflects the
anticipated effective rate for the year ending 31 December 2016.
The charge on exceptional items comprises an adjustment to a
previously recognised tax credit. The charge for tax comprises a UK
corporation tax charge of GBPnil (2015: credit of GBP0.6 million)
and a foreign tax charge of GBP1.5 million (2015: GBP2.9
million).
8 Earnings per share
6 months 6 months
ended ended
30 June 30 June
2016 2015
GBP'm GBP'm
(Loss)/profit attributable to equity
holders (1.2) 7.3
------- -------
Profit attributable to equity holders 10.6 11.5
before exceptional items ------- -------
Number of shares:
Weighted average number of shares
in issue through the period 166,933,166 166,924,470
Dilutive potential shares 2,199,846 1,263,615
----------------- ----------------
Weighted average number of shares
including effect of all dilutive potential
shares 169,133,012 168,188,085
----------------- -----------------
Earnings per share
- Basic (0.7p) 4.4p
- Basic before exceptional items 6.3p 6.9p
- Diluted (0.7p) 4.4p
Share options are only treated as dilutive in the calculation of
diluted earnings per share if their exercise would result in the
issue of shares at less than the average market price of the shares
during the period. Shares arising from share options, the deferred
bonus scheme or the performance share plan are only treated as
dilutive where the effect is to reduce earnings per share.
9 Dividends
The final dividend of 6.10 pence per share in respect of the
year ended 31 December 2015 was paid on 13 May 2016, absorbing
GBP10.2 million of equity.
The interim dividend of 2.70 pence per share, which will absorb
an estimated GBP4.5 million of equity, will be paid on 7 October
2016 to shareholders on the register at 26 August 2016. This
compares with the 2015 interim dividend of 2.70 pence per share,
which absorbed GBP4.5 million of equity.
10 Intangible assets
Movements in intangible assets are summarised as follows:
6 months 6 months
ended ended
30 June 30 June
2016 2015
GBP'm GBP'm
Opening net book value at 1 January 6.1 4.0
Exchange differences 0.2 -
Additions 0.4 0.4
Amortisation (0.4) (0.6)
--------- ---------
Closing net book value at 30 June 6.3 3.8
===== =====
11 Property, plant and equipment
Movements in property, plant and equipment are summarised as
follows:
6 months 6 months
ended ended
30 June 30 June
2016 2015
GBP'm GBP'm
Opening net book value at 1 January 270.1 230.3
Exchange differences 24.8 (8.6)
Additions 17.6 28.7
Depreciation (9.3) (8.0)
--------- ---------
Closing net book value at 30 June 303.2 242.4
===== =====
Additions during the period were largely attributable to
expenditure on the investment projects in the USA and China.
12 Capital commitments
Capital expenditure contracted for but not provided in the
financial statements:
30 June 31 December 30 June
2016 2015 2015
GBP'm GBP'm GBP'm
Property, plant and equipment 2.8 14.3 22.5
===== ===== =====
13 Trade and other payables
Trade and other payables include capital accruals of GBP10.7
million (December 2015: GBP4.9 million; June 2015: GBP3.6
million).
14 Pension obligations
The net pension obligations disclosed as non-current liabilities
in the balance sheet are as follows:
30 June 31 December 30 June
2016 2015 2015
GBP'm GBP'm GBP'm
77.9 56.4 47.4
Pension obligations ----------- ---------- ----------
The increase in the group's net pension obligations at 30 June
2016 compared with 31 December 2015 primarily reflects a decrease
in discount rates.
A summary of the discount rates used in the principal countries
is:
30 June 31 December 30 June
2016 2015 2015
Australia 3.20% 4.00% 4.00%
United Kingdom 3.00% 3.75% 3.80%
United States 3.25% 3.95% 4.25%
The net pension obligations have moved as follows
6 months 6 months
ended ended
30 June 30 June
2016 2015
GBP'm GBP'm
Opening net liability 56.4 59.0
Employer contributions (3.4) (2.9)
Service cost 0.7 0.7
Scheme administrative expenses 0.4 0.6
Net finance cost 1.1 1.1
Re-measurements 19.3 (11.0)
Exchange losses/(gains) 3.4 (0.1)
--------- ----------
Closing net liability 77.9 47.4
===== =====
15 Equity securities issued
Details of ordinary shares of 10 pence each issued during the
six months ended 30 June 2016 are as follows:
6 months 6 months 6 months 6 months
ended ended ended ended
30 June 30 June 30 June 30 June
2016 2015 2016 2015
Shares Shares GBP'm GBP'm
Shares vested under the
Devro 2003 Performance Share 16,490 11,490 0.1 -
Plan ======== ======== ==== ====
16 Cash flows from operating activities
6 months 6 months
ended ended
30 June 30 June
2016 2015
GBP'm GBP'm
Profit before tax 0.3 9.6
Adjustments for:
Finance cost 3.2 0.9
Net finance cost on pensions 1.1 1.1
Depreciation of property, plant and
equipment 9.3 8.0
Amortisation of intangible assets 0.4 0.6
Release from capital grants reserve - (0.1)
Additional cash contributions to pension
schemes (2.5) (2.2)
Pension cost adjustment for normal
contributions 0.4 0.6
Performance Share Plan 0.6 0.3
Changes in working capital:
Increase in inventories (4.7) (0.3)
Decrease/(increase) in trade and other
receivables 8.8 (2.2)
Decrease in trade and other payables (2.7) (2.9)
Decrease in provisions (0.4) (2.7)
--------- --------
Cash generated from operating activities 13.8 10.7
==== =====
Of which:
Cash generated from underlying operations 26.3 17.0
Exceptional items cash outflow (12.5) (6.3)
---------- ----------
13.8 10.7
===== =====
17 Analysis of net debt
30 June 31 December 30 June
2016 2015 2015
GBP'm GBP'm GBP'm
Cash and cash equivalents 17.4 9.6 19.6
Bank overdrafts (1.8) (1.9) (1.3)
--------- ---------- ---------
15.6 7.7 18.3
Borrowings:
- Due after more than one
year (162.6) (133.2) (123.9)
---------- ---------- ----------
(147.0) (125.5) (105.6)
====== ====== ======
18 Related party transactions
The group had no related party transactions other than key
management compensation during the six months ended 30 June 2016
and 30 June 2015.
Statement of directors' responsibilities
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by
the EU;
-- the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules , being
an indication of important events that have occurred during the
first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules , being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so
The directors of Devro plc are as listed in the company's Annual
Report for the year ended 31 December 2015 with the exception of
Simon Webb, who left the company and was replaced by Rutger Helbing
from 4 April 2016. A list of the current directors is maintained on
the company's website: www.devro.com.
By order of the Board
Peter Page Rutger Helbing
Chief Executive Group Finance Director
3 August 2016 3 August 2016
INDEPENT REVIEW REPORT TO DEVRO PLC
Introduction
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2016 which comprises the Interim
consolidated income statement, Interim consolidated statement of
comprehensive income, Interim consolidated balance sheet, Interim
consolidated statement of changes in equity, Interim consolidated
cash flow statement and the related explanatory notes. We have read
the other information contained in the half-yearly financial report
and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set
of financial statements.
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the Disclosure and Transparency Rules ("the DTR")
of the UK's Financial Conduct Authority ("the UK FCA"). Our review
has been undertaken so that we might state to the company those
matters we are required to state to it in this report and for no
other purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the company
for our review work, for this report, or for the conclusions we
have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 2, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the EU.
The condensed set of financial statements included in this
half-yearly financial report has been prepared in accordance with
IAS 34 Interim Financial Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(UK and Ireland) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2016 is not prepared, in all material respects, in accordance
with IAS 34 as adopted by the EU and the DTR of the UK FCA.
Anthony Sykes (Senior Statutory Auditor)
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London, E14 5GL
3 August 2016
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR VLLFBQVFZBBD
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