TIDMDVO
RNS Number : 7750Q
Devro PLC
02 March 2021
For Immediate Release 2 March 2021
Devro plc
AUDITED FULL YEAR RESULTS FOR THE YEARED 31 DECEMBER 2020
Good strategic progress, improved profitability and robust cash
delivery
Devro plc ("Devro" or the "Group"), one of the world's leading
manufacturers of collagen products for the food industry, announces
its results for the year ended 31 December 2020.
Underlying results
(*) Statutory results
2020 2019 2020 2019
Revenue (GBPm) 247.6 250.0 247.6 250.0
Operating profit/(loss)
(GBPm) 40.8 39.1 36.2 (14.0)
Operating profit margin
(%) 16.5% 15.6% 14.6% (5.6)%
Profit/(loss) before
tax (GBPm) 35.4 33.1 29.4 (21.8)
Basic earnings per share
(pence) 16.5p 15.2p 13.8p (24.8)p
Total dividend per share
(pence) 9.0p 9.0p 9.0p 9.0p
* Underlying figures are stated before exceptional items and net
finance cost on pensions (see Alternative Performance Measures
section of the Financial Review for definitions, explanation, and
reconciliation to equivalent statutory measures).
Financial Highlights
-- Volume of edible collagen casings increased 1%
o Emerging markets up 13%: driven by Latin America, Russia and
South East Asia, reflecting our targeted growth agenda
o Mature markets down 5%: growth of 9% in North America offset
by COVID-19 related decline in food services sector and distributor
destocking in Europe
o COVID-19 negative impact estimated at 2%
-- Group revenue marginally lower than prior year due to adverse
mix and other products declining
-- Underlying operating profit of GBP40.8m, up 4% on prior year,
and operating margin increased 90 bps to 16.5% benefiting from cost
savings
-- Underlying basic earnings per share up 9% to 16.5p (2019: 15.2p)
-- Robust free cash flow generation leading to covenant net debt
i of GBP109.5m (2019: GBP123.8m),
representing net debt to EBITDA ii of 1.8x (2019: 1.9x)
-- Proposed final dividend of 6.3p. Total dividend of 9.0p, flat on the prior year
Strategic Highlights - good progress on 3Cs strategy
-- Structured process to identify and convert sales pipeline delivering:
o High conversion rate achieved in 2020
o Strong pipeline of opportunities for 2021
o 10% increase in commercial headcount to drive growth - mainly
focused on emerging markets
-- Bellshill closed, delivering substantial annualised cost savings
-- Continued delivery of operational cost savings through
efficiencies in maintenance and automation
-- ESG agenda progressing: Defined new Purpose and
Sustainability agenda focused on Climate, Water, Waste and People
& Our Communities. Actions to be accelerated in 2021.
Rutger Helbing, Chief Executive Officer of Devro, commented:
"I am proud that in a year where we had to deal with the impact
of COVID-19 we continued to make good progress with both our
trading performance and strategic priorities. This progress in such
challenging circumstances highlights the considerable efforts of
the whole Devro team and I would like to put on record my gratitude
for this; it's been a huge effort.
"The progress we made in all areas of our 3Cs strategy in 2020
provides a strong foundation for further strategic and trading
performance improvements in 2021. We also expect another year of
good free cash generation.
"Encouragingly, the year has started positively, although
caution remains as many of the COVID-19 related challenges
experienced in 2020 are still evident. Despite this we expect to
make further progress in 2021 driven by our sales pipeline actions,
solid underlying demand and the ongoing benefits of operational
improvements. Devro is well positioned for the future."
Contacts
Rutger Helbing Chief Executive Officer 020 3727 1340
Rohan Cummings Chief Financial Officer 020 3727 1340
Richard Mountain/Nick Hasell FTI Consulting 020 3727 1340
The audiocast and presentation will be available from 7:00am on
Tuesday 2 March 2021 and will be accessible using the link:
https://streamstudio.world-television.com/943-1289-27124/en
The presentation will also be available on the company's
website.
www.devro.com
_________________________
i Covenant Net debt is shown before the impact of IFRS 16; see
Alternative Performance Measures section of the Financial Review
for definition and explanation.
ii EBITDA for covenant purposes is shown on underlying basis
(before exceptional items) and before the impact of IFRS 16; see
Alternative Performance Measures section of the Financial Review
for definition and explanation.
CHAIRMAN'S STATEMENT
INTRODUCTION
In 2020 Devro made positive financial and strategic progress
while responding very capably to the market, operational and
workplace challenges posed by COVID-19. I would like to record my
appreciation to the leadership team and all their colleagues across
the Group who have worked safely, flexibly and tirelessly in
support of all of our stakeholders during 2020. I am also pleased
to report the completion of our Board refresh. We have added
important new skills and diverse experiences to the Board to
support the delivery of our growth strategy.
Despite the adverse financial impacts of COVID-19, the Group
delivered a robust performance in 2020. Financial progress was
driven by strong growth in emerging markets, material improvements
to margins, and high cash conversion resulting in a substantial
reduction in net debt. It is clear that the recent changes to the
organisational structure and the associated investment in
capabilities have been instrumental to our 2020 delivery and we
expect to be able to build on this good progress.
OUR COVID-19 RESPONSE
The Group responded rapidly to the changing circumstances at the
beginning of 2020. Our response was built around three clear
priorities: protecting our people and communities, maintaining our
position in the food supply chain and safeguarding our financial
position. Strong governance structures and enhanced communication
processes were established immediately. We were able to maintain
consistent production throughout the Group, ensure that our
important role to service customers in the food supply chain
continued during 2020, whilst keeping our employees and communities
safe. The additional costs involved in implementing additional
protective measures including a track and trace system, securing
key raw materials and providing wellbeing support to our teams,
were essential investments underpinning our successful management
of the pandemic to date.
OUR SUSTAINABLE FUTURE
Devro is very aware of its responsibilities to all stakeholders.
We have for many years aimed to reduce our impact on the
environment, and have made good progress, as well as improving
social outcomes including those of our employees. Making a positive
contribution towards our environmental, social and governance
responsibilities is key to our future and there is commitment
throughout the organisation from the Board down on this. The Group
is currently working on a major sustainability enhancement and
development of how we articulate our Company Purpose, all of which
will be widely communicated in 2021, covering all aspects of
sustainability and taking into consideration the views and
priorities of all stakeholders. Actions are already well underway
and we look forward to sharing further details in due course.
DIVID
We understand the importance of the dividend to all our
shareholders and we are delighted to have been able to maintain our
long track record of distributions. In the early stages of the
pandemic, as a precautionary measure, the Board decided to postpone
the payment of the proposed final 2019 dividend. The postponement
allowed us time to confirm the likely ongoing impact of COVID-19 on
the business and ensured that our financial position was preserved
throughout this evaluation period. Given robust trading in the
first half of the year, in July we were able to reinstate the final
2019 dividend, which was paid in October 2020, as well as announce
the 2020 interim dividend, which was paid in January 2021.
The Board is proposing a final dividend of 6.3p per share (2019:
6.3p) bringing the total for the year to 9.0p per share (2019:
9.0p). Subject to shareholder approval at the Annual General
Meeting in April, the dividend will be paid on 1 October 2021, to
those shareholders on the register at 20 August 2021.
GOVERNANCE AND BOARD
The Board leads an ongoing programme to ensure the highest
standards of corporate governance and integrity across the Group.
We regard this as critical to the Group's success. The Board's
interactions and communication with executive management continues
to be excellent and as a result, the Board is well placed to
challenge, guide and support executive management in the delivery
of the 3Cs strategy. Due to COVID-19, there has been a considerable
increase in our interactions as a Board which have mainly taken
place virtually in 2020. We look forward to more face to face
meetings when conditions permit.
After announcing her resignation at the interim results in July
we saw the departure of Jackie Callaway, our CFO and Board member,
on the 30 November 2020. We wish to thank her for her important
contribution to the Group and the Board over the last few years.
Our new CFO and Board member Rohan Cummings joined Devro on 1
December 2020 from Asahi Group Holdings and brings significant
financial, commercial and growth experience which we consider to be
invaluable in driving strategy execution at Devro.
The process to refresh the non-executive membership of the Board
which commenced towards the end of 2019 was completed in 2020. We
welcomed as Audit Committee Chair and Senior Independent Director,
Lesley Jackson, ex-Group CFO for Stock Spirits PLC and
Non-Executive Director Jeremy Burks, Executive Vice President at
Roquette Group. We were also pleased to announce the non-executive
appointment of Chantal Cayuela (with effect from the start of
2021), a Vice President of Kellogg's European business and leader
of its R&D and Innovation team, thereby completing the renewal
of the Board and equipping it with a wealth of skills and
experience to challenge and support the development and execution
of the Group's strategy. Our two long-serving Board members, Paul
Withers and Jane Lodge, retired from the Board during the year. We
thank them both for their invaluable service to the Board
throughout their respective tenures and we wish them both well.
With Paul Withers' retirement, Malcolm Swift, who has been a
Non-Executive Director of the Company since 2017, took over the
chairmanship of our Executive Remuneration Committee from the date
of our 2020 AGM, 30 April.
I look forward to working with the newly constituted Board in
delivering the Group's growth-led strategy.
PEOPLE
It's been a very difficult year for everybody as we strove to
mitigate the impact of COVID-19 on our personal and working lives.
Our leadership team and all their colleagues have responded very
positively to these challenges, resolutely addressing short term
issues whilst not losing sight of our longer-term goals. It's been
a huge team effort and on behalf of the Board I'd like to thank
them for their commitment and professionalism.
We have continued to work on enhancing engagement with
employees, which has been particularly important during these
unprecedented times. Our annual ' TellDev !' employee engagement
survey highlighted an improved level of both participation and
engagement which we are encouraged by. We will continue to target
further progress in 2021. We also engaged extensively with our
colleagues in relation to our sustainability priorities and how we
articulate our Company P urpose through a series of workshops in H2
2020. The Board considers it crucial to reflect on their collective
views when building our future sustainability plans.
LOOKING AHEAD
Devro is well positioned for the future and we expect that as
the impact of COVID-19 lessens this should become clearer in our
financial performance. In 2021 we will continue to focus on our
growth agenda, in building a fully integrated sustainability plan
and in further improving our financial performance and
strength.
Steve Good
Chairman
BUSINESS REVIEW
2020 was a challenging but overall a positive year for Devro.
The COVID-19 pandemic and our management of it quickly became our
priority, which continued throughout the year and into 2021. We
were also successful in leveraging recent investments in our
structure, processes and competencies to make good progress on both
our strategic and financial priorities.
The pandemic impacted all aspects of our lives however the
Company performed well and demonstrated its robustness and
flexibility in the most challenging of conditions. I am proud that
we delivered on all of our COVID-19 related priorities, as well as
making significant progress with both our trading performance and
strategic priorities. This is testament to our people, and I would
again like to put on the record my gratitude for all their selfless
hard work and commitment.
COVID-19
The initial impact of the pandemic was felt during Q1 2020 in
our Chinese business and manufacturing site, and we took our best
practice learnings and rolled these out across the Group as
necessary as the virus spread.
We immediately established three clear priorities ensuring the
health and safety of our colleagues and communities; continuing to
contribute in a positive way to the food supply chain and
maintaining a robust financial position.
We responded to the pandemic swiftly and effectively,
introducing precautionary health and safety measures which, as a
minimum, were based on government guidelines but in many cases
applied more stringent measures. These measures were maintained
throughout the year and served us well. As a principal, we aimed to
be 'ahead of the curve' in the introduction of precautionary
measures and 'behind the curve' in terms of their relaxation. This
approach helped us to maintain our operational performance
throughout the year ensuring a good service to our customers and
fulfilling our role in the food supply chain. Whilst we were
successful in maintaining the continuity of our operations, this
was not without challenges. In the second quarter of 2020, we faced
issues securing hide supplies, a key raw material, but our close
relationship with key suppliers allowed us to navigate this
potential problem. We also had to manage periods where many
colleagues had to self-isolate, and our teams have shown great
flexibility to manage through this successfully. In the second half
of the year our sites set up 'track and trace' processes which have
been very effective in reducing the spread of the virus.
In some of our markets sales were impacted by COVID-19. We saw
an uptick in retail driven end customer volumes (e.g. supermarkets)
which contrasted to those volumes into the food service industry
(e.g. hotels, educational facilities, sporting events) that were
severely adversely affected. We estimate that the net impact of
this, based on our geographical exposure, particularly in some
important mature markets, was of circa 2% on edible casing volumes
in 2020. Adjusting for this impact we would have delivered Group
volume growth within our targeted long-term range of 2-4%.
BUSINESS PERFORMANCE
Despite the COVID-19 challenges, which we estimate had a net 2%
adverse impact on our edible collagen (EC) volumes, total EC
volumes grew 1% in the year, driven by strong growth in emerging
markets (+13%) and offset by a decline in mature markets (-5%)
mainly due to the COVID-19 impact and distributor de-stocking in
Continental Europe. Overall Group revenue was marginally down (-1%)
but underlying operating profit was up 4% driven by strong margins
resulting from significant supply chain savings. Underlying basic
earnings per share increased by 9% to 16.5 pence (2019: 15.2 pence)
further supported by lower finance costs. Despite higher
exceptional items, related to the Bellshill closure, cash
generation was also strong and net debt ended the year at GBP110
million, an improvement of almost GBP15 million in the year and the
covenant ratio improved to 1.8 times net debt to EBITDA. The
delayed final 2019 dividend was paid in October 2020 and the 2020
interim dividend was paid in January 2021 maintaining our long-term
track record of distributions.
EMERGING MARKETS
Devro's growth ambition is based on delivering growth in
emerging markets of between 6--10% per annum. In H2 2019 we saw an
acceleration of growth in emerging markets and this momentum
continued throughout 2020. Emerging markets growth was 13% with all
sales areas contributing, except for the Middle East and Africa
region, where sales were adversely impacted by COVID-19. Throughout
the year we saw exceptional growth in Latin America (+76%), driven
by new customer gains, as well as good growth in South East Asia
(+14%) and Russia and East (+16%). China sales grew moderately at
+3% partly impacted by COVID-19 but also due to a strong comparator
in H2 2019. Emerging markets represented 28% of the Group revenue,
a 300 bps increase year on year.
MATURE MARKETS
Devro has strong market positions in mature markets. We continue
to see growth opportunities in these markets mainly through gut
conversion and the snacking category with an overall expectation,
on average, of growth between 0-2% per annum. In 2020 we
experienced two specific challenges, namely food service declines
due to COVID-19 lockdowns across several important markets and the
anticipated distributor partner de-stocking in H1 2020 in
Continental Europe. Overall edible casing volumes in mature markets
were down 5%, but with an improvement seen in the trend during H2
2020 (-6% H1 and -3% H2). Edible casing volumes grew strongly in
North America (+9%) and were in positive territory in Australia
& NZ (+2%) and Japan (+1%), but this was offset by lower
volumes in Continental Europe (-16%), where sales were impacted by
distributor de-stocking and a more general collagen casings market
weakness in the UK and Ireland (-9%). In both of these areas
volumes were also impacted by COVID-19 related declines in
foodservice.
STRATEGIC PROGRESS
Despite the challenges presented by COVID-19 we made very good
progress on our strategic priorities in the year. After the
introduction of the 3Cs strategy in 2018 considerable progress has
been made to further strengthen the foundation of the business with
amongst others the implementation of our global operating model and
supporting processes like Integrated Business Planning and
introduction of the sales cycle. The focus in 2020 shifted from
building and designing those to using them to drive our growth
agenda.
Win with the winning CUSTOMERS
In 2020 the focus was on delivering the first year of the
three-year commercial plans for each of our sales areas. A key part
of these plans is to identify of growth opportunities and manage
the delivery of those growth opportunities through our sales cycle
management, for the current year, as well as setting-up further
growth opportunities for the following year. We had notable
successes in 2020, which was reflected in strong volume growth of
13% in our emerging markets and of almost 10% in North America. We
continued to cultivate our sales pipeline in 2020 which we believe
bodes well for future growth.
Delivering volume growth is supported by focussed investment in
both people and product. Given, our ambition to grow between 6 to
10% per annum on average in emerging markets, we invested
particularly in those sales areas. Across the Group we increased
our commercial headcount by approximately 10%, the majority of
which are focused on emerging markets. In addition, we upgraded our
capabilities in five of our key commercial roles through a mixture
of internal promotions and external recruitment. Further
recruitment is planned for 2021.
In 2020 we again reviewed our route to market strategy for our
different sales areas to be able to deliver our growth agenda more
effectively in the future.
The Group continued to focus, accelerate, and expand its product
development activities. In 2020 there were three main priorities.
First, supporting our near-term growth opportunities as customers
take our product to market. Second, the product development team
helped support the transfer of production to the Czech site from
Bellshill. The third important priority to ensure our long-term
success, was to drive our new category plans relating to the
opportunities in gut conversion, snacking and emerging market
growth, amongst other areas such as new technologies.
Focus on the CORE profitability drivers
In 2019 we announced the intention to close our Bellshill site
in Scotland. This action targeted GBP5 million of annualised costs
savings to be fully realised in 2021, and aimed to enhance the
agility and flexibility of the Group's supply chain. As planned, on
30 June 2020 we closed the Bellshill site transferring some of the
production lines to our largest site in Czech. The first tranche of
savings were realised in H2 2020 with the 2020 cash costs well
within our original guidance of GBP9 million. The new Czech lines
will be commissioned in Q1 2021 with full year annualised savings
still estimated to be GBP5 million. We are pleased with the
delivery of the overall programme given the challenges posed by
COVID-19.
Whilst 2019 was the last year of our D100 savings programme, the
business continued to deliver ongoing cost savings in 2020, with a
focus on efficiency gains in maintenance and automation, amongst
other areas. The efforts delivered total supply chain savings
(including Bellshill savings), well ahead of our original guidance,
and also an improvement from the stated H1 position. The savings
were partially offset by the unexpected, temporary costs due to
COVID-19, including higher hide prices, as well as ongoing
inflationary pressures driving net cost savings of GBP6.0
million(1) .
To support our growth ambition we continued to focus on
increasing capacity from our existing production lines, and in
2020, both overall yields and line speeds increased through our
strategic capacity enhancement initiatives such as 'Stable Ops'. We
have many opportunities which we can apply our cost effective
capacity enhancement programme, which we piloted for the first time
in 2019 in our US plant, and have incorporated it in the
transferred lines from Bellshill to our Czech site. This programme
allows for increased capacity within our existing footprint without
the requirement for significant capital expenditure based on our
medium-term growth plans.
Strengthening COMPETENCIES
In our journey from a regional to a global business the
Integrated Business Planning process (IBP) has been crucial in
linking our global functional organisation together and to
delivering the 3Cs strategy. In 2020 after designing the process in
2019, we started to embed IBP and I am pleased with the progress we
have made during the year. At the core of IBP is continuous
improvement, which we will continue to focus on, but with IBP and
our 36 months rolling financial forecast we already have a much
better longer-term view which enables us to more effectively align
our resources towards the most promising growth opportunities.
Devro takes its Environmental, Social and Governance (ESG)
responsibilities seriously, and in H2 2020 we began a Group wide
programme to enhance our ambition, disclosure and performance
including as an initial step engaging with our stakeholders. Whilst
we already have, for some years, a significant Sustainability
commitment, we started to define our longer-term ambitions. With
the help of our colleagues and other stakeholders we use the UN
Sustainable Development Goals to review our commitments and decided
to focus our ambition and resources on Climate, Water, Waste and
People & Our Communities with targets and priority projects to
be finalised in H1 2021. We will communicate this further in H2
2021.
Now that we are globally managed, aided by the 3Cs strategy, it
is the right time to redefine Devro's Purpose. We engaged with our
workforce to help in the process and in the later part of the year
over 33% of our workforce participated in workshops and webinars.
Based on this work we will redefine Devro's Purpose, Mission and
Vision in H1 2021 and start 'living' and communicating this both
internally and externally in 2021.
Engagement continues to be high on our agenda. As part of our
3Cs strategy in 2018 we started with our first Group wide
engagement survey and in 2020 we completed our third 'TellDev!'
survey. I am pleased that 73% of our colleagues participated in the
survey and our overall engagement increased by 5 percentage points,
with higher scores, despite all the COVID-19 related challenges we
faced. One of the areas we particularly focussed on in 2020 was to
significantly increase our internal communications efforts
utilising our intranet. This has been well received. Our managers
now have access to their team's engagement feedback and will
decide, as they did in 2020, on the areas they specifically need to
focus on to further increase engagement and contentment in the
workforce.
OUTLOOK
The progress we have made in all areas of our 3Cs strategy in
2020 provides a strong foundation for further strategic
improvements in 2021. Encouragingly, the year has started
positively but many of the COVID-19 related challenges experienced
in 2020 remain providing a level of caution. Despite this we expect
to make further progress in 2021 driven by our sales pipeline
actions, solid underlying demand and the ongoing benefits of
operational improvements including the Bellshill site closure. We
would also expect another year of good free cash generation. Devro
is well positioned for the future.
Rutger Helbing
Chief Executive Officer
_________________________
(1) Refer to page 10 for breakdown of cost savings
FINANCIAL REVIEW
The Group demonstrated robust trading and financial resilience
in 2020 positioning it well for future profitable and cash
generative growth
The Group was able to demonstrate its trading and financial
robustness in 2020. The key highlights included revenue being only
marginally lower, despite the impact of COVID-19, underlying
operating margins improving to 16.5%, up 90 bps year-on-year,
strong cash generation, leading to a substantial reduction in net
debt compared to the prior year, and the maintenance of our
long-term dividend track record. Our strong financial platform
positions the Group well for future profitable and cash generative
growth.
Edible Collagen (EC) volumes grew by 1% in the year, despite the
challenges brought by COVID-19, which we estimate had an adverse
net 2% impact on group volume.
Group revenue was marginally down (-1%) at GBP247.6 million
driven by pricing investments in long term contracts, adverse
product mix in EC and lower sales of other products, primarily
non-edibles.
The divergent performance between our emerging and mature
markets continued in H2 2020 with emerging market volumes growing
13% for the full year, above our expected range, while mature
markets declined 5%. Whilst overall volumes in North America
increased year on year by 9%, this was not sufficient to offset
weaker trading in the UK and Europe, with COVID-19 impacting the
food services sector along with distributor destocking, as
previously outlined, in certain European markets.
Underlying operating profit was up 4% year on year at GBP40.8
million driven by improving margins supported by ongoing supply
chain efficiency savings despite certain COVID-19 related costs.
Consequently, the underlying operating profit margin was up by
90bps to 16.5% (2019: 15.6%).
Underlying basic earnings per share ("EPS") increased by 9% to
16.5 pence (2019: 15.2 pence) further supported by lower finance
costs.
A combination of higher operating profits, together with working
capital efficiencies helped deliver robust cash generation with
free cash flows of GBP22.5 million (2019: GBP30.8 million) and the
covenant net debt/ EBITDA ratio reducing to 1.8 times at 31
December 2020 (1.9 times at 31 December 2019). We expect further
improvement in 2021.
Income statement exceptional items for the year were GBP4.6
million (2019: GBP53.1 million) of which GBP4.0 million related to
the closure of the Bellshill site and GBP0.6 million to the final
stage of implementation of the new global operating model.
REVENUE
2020 2019 Change Change at
GBPm GBPm constant
currency
Revenue 247.6 250.0 -1.0% -1.6%
------ ------ ------- ----------
REVENUE BRIDGE
2020 vs 2019 2019 vs 2018
Volume (EC*) 1.1% 0.0%
Price/country/product mix (EC*) -1.8% -1.5%
Other products -0.8% -1.1%
Foreign exchange 0.5% 1.3%
------------- -------------
Total -1.0% -1.3%
------------- -------------
*EC - Edible Collagen
Revenue for the year was marginally lower than 2019, reported
revenue fell by 1.0% while constant currency fell by 1.6%. This
drop was mainly driven by price investment on long term contracts
and adverse product mix. The decrease in other products revenue
reflected ongoing general weakness in the non-edible collagen
market in Europe and the negative impact of COVID-19 on biomedical.
Foreign exchange rates positively impacted revenue due to the
strengthening of the Japanese Yen and Euro against Sterling during
the year.
EDIBLE COLLAGEN VOLUMES
Overall Group volumes grew by 1.1% in the year with 13% growth
recorded in emerging markets offset by a 5% decline in mature
markets.
Analysis of emerging and mature markets edible collagen revenue
is set out below:
Foreign
Volume Price/Mix exchange
Emerging 13% -1% 1%
------- ---------- ----------
Mature -5% -1% 1%
------- ---------- ----------
Emerging markets volume growth of 13% was driven by new business
wins along with market share gains with existing customers in
several target geographies. Our strongest growth in volumes was
seen in Latin America, up 76%, Russia & East, up 16%, and South
East Asia, up 14%. China's moderate 3% full year growth reflected
the impact of the pandemic but also reflects a strong comparator in
the second half of 2019. Emerging markets contributed 30% of Group
edible collagen revenues, a 300 bps increase year on year.
We saw growth in all of our mature markets except the UK and
Ireland and Continental Europe. These markets declined due to
decreased demand from food service end customers resulting from
COVID-19 lockdowns coupled with distributor partner de-stocking in
Continental Europe. Positively, volumes in North America grew 9%
continuing the strong snacking growth seen in prior years.
Australia & New Zealand and Japan saw volume uplifts of 2% and
1% respectively. Overall the declines in the UK and Continental
Europe more than offset the growth in other mature markets, and
overall sales volumes declined by 5% .
OPERATING PROFIT
Operating profit/(loss) for the year can be analysed as
follows:
2020 2019
GBPm GBPm Change
------- -------
Underlying EBITDA 62.4 65.5 -4.7%
Depreciation & amortisation (21.6) (26.4) 18.2%
------- ------- -------
Underlying operating profit 40.8 39.1 4.3%
------- ------- -------
Exceptional items (4.6) (53.1)
------- ------- -------
Operating profit/(loss) 36.2 (14.0)
------- ------- -------
Underlying operating profit of GBP40.8 million (2019: GBP39.1
million) was up by 4.3%. An increase in volumes and strong supply
chain cost savings offset the impact of adverse revenue mix,
ongoing inflationary pressures and one-off COVID-19 costs, led to
the delivery of a solid operating profit performance. 2020
operating profit was also supported by lower depreciation following
impairment of assets in 2019, as outlined in the prior year.
Operating profit at GBP36.2 million (2019: (GBP14.0) million
loss) included GBP4.6 million of exceptional costs related to the
closure of the Bellshill site and final stages of the
implementation of the global operating model.
An analysis of the overall movement in underlying operating
profit is set out below:
GBPm
Underlying profit for 2019 39.1
Price/country/product mix (EC*) (3.6)
Volumes (EC*) 0.8
Contribution from other products (0.9)
Manufacturing cost savings 6.0
Inflation (2.4)
COVID-19 cost (2.2)
Fixed cost 3.7
Foreign exchange and other 0.3
-------------------------------------- ------
Underlying operating profit for 2020 40.8
-------------------------------------- ------
*EC - Edible Collagen
Manufacturing cost savings include ongoing investments into
manufacturing efficiency initiatives and operating cost reduction
programmes including the final implementation of the new global
operating model, closure of Bellshill site, a focus on sourcing of
raw materials, and optimisation of operational structures. Wage
cost inflation and COVID-19 related costs, as well as a premium
paid on raw materials, were mostly offset by reduction in fixed
cost, which were mainly depreciation savings on impairments booked
in 2019 in the US and China. The cost savings achieved were
modestly ahead of management expectations at H1 2020 and included
in both the manufacturing cost savings and fixed cost lines.
Devro consolidates results from operations around the world in
multiple currencies. Movements in exchange rates had a positive
impact on underlying operating profit. Foreign exchange rates
benefitted from the strengthening of the Japanese Yen and Euro
during the year.
The Group's underlying operating margin increased by 90 bps to
16.5%.
EXCEPTIONAL ITEMS
2020 2019
GBPm GBPm
----- -----
Restructuring costs 3.9 7.2
Impairment of property, plant and
equipment 0.7 44.9
Impairment of intangible assets - 1.0
----- -----
4.6 53.1
----- -----
Restructuring costs include charges associated with the closure
of the Bellshill site of GBP3.3 million (2019: GBP5.6 million) and
GBP0.6 million (2019: GBP1.6 million) relating to the
implementation of the new global operating model. An additional
GBP0.7 million of asset impairments were also identified as a part
of the Bellshill site closure (2019: GBP4.9 million). 2021 will
reflect the sale of the Bellshill site which completed in January
2021.
The 2019 impairment charges also included GBP41.0 million
related to impairment of assets in the US and China CGUs following
changes in sourcing strategy announced at the end of 2019.
CAPITAL INVESTMENT
2020 2019
GBPm GBPm
Capital investment 16.2 13.9
------ ------
Capital investments in 2020 increased to GBP16.2 million
compared to GBP13.9 million in 2019. The key investments in the
year related to reconfiguration and upgrade of our Czech facility
following the closure of Bellshill and transfer of manufacturing
lines from the UK. Due to COVID-19 certain projects were modestly
delayed, and the capital will be spent in 2021. Capital investments
for 2021 will be lower than the depreciation and amortisation cost,
with the amount depending on future growth prospects.
WORKING CAPITAL
2020 2019
GBPm GBPm
Inventories 37.8 39.1
Trade and other receivables 29.7 27.9
Trade and other payables (32.0) (29.4)
Provisions (1.0) (5.6)
------- -------
34.5 32.0
------- -------
Working capital increased by GBP2. 5 million during the year and
reflects: GBP1. 3 million lower inventories, GBP1.8 million higher
receivables following better sales in the latter part of the year
in comparison to the prior year, offset by GBP2.6 million increase
in payables, mainly capital creditors. The decline in current
provisions by GBP4.6 million mainly reflects the payment of
redundancies associated with closure of Bellshill site.
CASH FLOW AND NET DEBT
Devro continues to deliver positive cash flows with the covenant
net debt/ EBITDA ratio reducing to 1.8 times as at 31 December
2020, compared with 1.9 times as at 31 December 2019. The covenant
EBITDA/net interest payable ratio was 12. 2 times as at 31 December
2020 (2019: 11.6 times), and together with the covenant net
debt/EBITDA ratio was well within the covenant.
Key financial measures are as follows:
2020 2019
Net debt GBP110.0m GBP124.6m
Covenant net debt/EBITDA ratio 1.8 times 1.9 times
Underlying operating cash flow before
pension funding deficit and exceptional
items GBP67.8m GBP71.3m
Operating cash flow GBP51.6m GBP59.7m
Return on capital employed (ROCE) 15.7% 13.0%
---------- ----------
Return on capital employed (ROCE) of 15.7% improved due to both
positive working capital movements in 2020 and the reduction in
asset values following the impairment write downs in 2019.
Excluding prior year impairments from the calculation results in an
adjusted ROCE of 12.6% (2019:12.1%) .
FINANCE COSTS
2020 2019
GBPm GBPm
Net finance cost 5.4 6.0
Net finance cost on pensions 1.4 1.8
------ ------
Total net finance cost 6.8 7.8
------ ------
Net finance costs for the year (excluding pensions) were GBP5.4
million. This represents a decrease from 2019 of GBP0.6 million and
reflects lower interest rates and levels of debt throughout the
year.
Net finance costs on pensions for the year reduced by GBP0.4
million, due to lower interest rates compared with the start of
2019.
PENSION SCHEMES
Devro operates a number of defined benefit schemes around the
Group, although all of these are now closed to new entrants. The
net pension obligations of these schemes can be analysed as
follows:
2020 2019
GBPm GBPm
Fair value of scheme assets 256.5 245.2
Present value of scheme liabilities (311.7) (309.3)
-------- --------
Net pension obligations (55.2) (64.1)
-------- --------
The Group's net pension obligation decreased by GBP8.9 million
and this primarily related to increased deficit funding, the return
on assets and an experience gain on liabilities, offset by a
decrease in discount rates.
The net pension obligation has improved significantly from the
balance reported at half year (GBP82.2 million). This improvement
is mainly related to the experience gain on liabilities being
recognised in the second half of the year and majority of
contributions also being made after half year. The return on plan
assets also contributed to the improvement in the second half of
the year and has accrued broadly equally in both halves of the
year.
Devro plays an active role in managing its pension schemes and
related liabilities, ensuring that the assets are appropriately
invested and that additional contributions are made where necessary
to ensure all obligations are met as they fall due. In 2020 the
Group made pension deficit funding contributions of GBP7.4 million
(2019: GBP5.3 million). The increase over 2020 relates to the
phasing out of the legislative taper relief on the US plan discount
rates resulting in higher funding liabilities and consequently
higher deficit funding payments for the US scheme. For 2021,
pension deficit funding is anticipated to remain the same for the
US scheme in dollar values. The triennial UK valuation and
negotiations are underway but no material increases are expected.
Further analysis of the movement in net pension liabilities is set
out in Note 6 to the attached Financial Statements.
TAX
2020 2019
GBPm GBPm
Tax charge on underlying profit before tax 7.9 7.7
Tax charge/(credit) on exceptional items
& exceptional tax charge (1.6) 11.9
------ ------
Tax charge in income statement 6.3 19.6
------ ------
The Group operates around the world and earns profits which are
subject to tax at differing rates in different jurisdictions. The
average tax rate charged to underlying profit before tax was 22.3%
in 2020 (2019: 23.3%), and reported profit before tax, 21.4% (2019:
- 89.9%) .
The underlying tax charge for the year stood at GBP7.9 million.
This is broadly in line with last year, given the similar level of
underlying profit before tax.
In 2020 deferred tax assets of GBP27.2 million have not been
recognised on losses in the US, China and other territories, due to
uncertainty over the timing of future recoverability of accumulated
losses.
EARNINGS PER SHARE
2020 2019
Underlying basic earnings per share 16.5p 15.2p
Basic earnings per share 13.8p (24.8)p
------ --------
We have presented an adjusted underlying earnings per share
(EPS) measure, which excludes exceptional items and net finance
cost on pensions, to provide a better indication of the underlying
performance of the Group (see the Alternative Performance Measures
section below for definitions, explanation and reconciliation to
the equivalent statutory measures).
Underlying basic EPS increased by 1.3 pence, as a result of an
increase in underlying operating profit (+ 1 . 0 pence) , decrease
in finance charges (+0.4 pence) and increase in tax charges (-0.1
pence).
The increase in basic EPS mainly reflects the lower exceptional
charges in 2020 compared to 20 19 , as well as the improved trading
performance.
DIVID
2020 2019
Interim per share 2.7p 2.7p
Recommended final per share 6.3p 6.3p
----- -----
Total 9.0p 9.0p
----- -----
There was a change to the timing of dividend payments in 2020
versus previous years. What was recommended as our 2019 final
dividend of 6.3p per share was ultimately declared as an interim
dividend in July 2020 and paid on 2 October 2020. Our usual interim
dividend of 2.7 pence per share was also declared in July 2020 and
it was paid to shareholders in January 2021.
The Board has recommended a final dividend for 2020 of 6.3 pence
per share, which is unchanged from the value of the final 2019
dividend recommended in March 2020.
BREXIT
The Group comprehensively assessed the potential impacts of
Brexit prior to 1 January 2021. The key risks and potential impact
identified included the potential increase in import duties, import
regulations and impact on UK customers and need for increased
inventory requirements to ensure adequate supply.
UK represents c.10% of group revenue. Our UK site sells c.13% of
its output to affiliates within Europe and sources c.10% of its raw
material requirements from outside the UK. Our products have a long
shelf life (c. 24 months) and we operate a global supply chain,
which has the advantage of maintaining supply continuity.
Nevertheless, we continued through 2020 working on a robust plan
with appropriate measures to ensure minimal disruption to our
customers and supply chain, in case circumstances required it.
Post the period end, in the early part of 2021, we have not
experienced any material disruption related to Brexit.
POST BALANCE SHEET EVENT
As a result of the Bellshill site closure, at the end of June
2020, a site sale process was commenced during the second half of
2020. There were several interested parties and the sale was
completed on 29 January 2021 for a net GBP3.6 million. The proceeds
will be used to reduce the Group's net debt.
ALTERNATIVE PERFORMANCE MEASURES
In addition to statutory financial measures, management uses
certain alternative performance measures (which are not defined by
Adopted IFRS) to assess the operating performance and financial
position of the Group. The alternative performance measures that
Devro uses are 'constant exchange rates', 'underlying', 'earnings
before interest, tax, depreciation and amortisation (EBITDA)',
'covenant EBITDA', 'net debt', 'covenant net debt', 'free cash
flow' and 'return on capital employed (ROCE)'.
Constant exchange rates
The Group has operations across the world in multiple currencies
and is exposed to risk on fluctuations in foreign exchange rates.
As a result, the Group's reported revenue will be impacted by
movements in actual exchange rates. The Group presents revenue
growth on a constant currency basis in order to eliminate the
effect of foreign exchange rate movements, enabling investors to
better understand the operational performance of the Group.
Revenue growth at constant currency is calculated by presenting
both the current and prior year local currency amounts using the
prior period average exchange rates. Constant exchange rates are
used in the Financial Review in the revenue section on pages 8 and
9.
Underlying
Underlying figures are stated before exceptional items (Note 4)
and net finance cost on pensions. Exceptional items are those
significant items which are incremental to normal operations and
are separately disclosed by virtue of their nature or size to
enable a better understanding of the Group's underlying financial
performance. Devro has undergone a major transformation including
implementation of a new global structure initiated in 2018 and the
closure of the Bellshill site which was completed in 2020. The
closure of the Bellshill site coincided with a transfer of its
trade and assets to other manufacturing sites in the G roup notably
to the Group's sites in Czech Republic . This restructuring
transfer incurred a number of costs which have been recognised as
exceptional costs.
In 2020, GBP(3.9)m of exceptional costs were included in cost of
sales (2019: GBP(49.5)m), GBP(0.6)m in administrative expenses
(2019: GBP(3.6)m), and GBP(0.1)m in other expenses (2019: nil).
Net finance cost on pensions are excluded from underlying
results as these costs are volatile, given that they are dependent
upon the pension position at 31 December each year which is subject
to market fluctuations.
A reconciliation from the underlying figures to the equivalent
reported figures is presented below:
2020
Net finance
GBPm unless otherwise Exceptional cost on
stated Underlying items pensions Reported
Operating profit 40.8 (4.6) 36.2
Operating margin (%) 16.5% (1.9)% 14.6%
Profit before tax 35.4 (4.6) (1.4) 29.4
Income tax (7.9) 1.3 0.3 (6.3)
Profit attributable to
owners of the company 27.5 (3.3) (1.1) 23.1
Basic earnings per share
(p) 16.5p (2.0) p (0.7)p 13.8p
----------- ------------ ------------
201 9
Net finance
GBPm unless otherwise Exceptional cost on
stated Underlying items pensions Reported
----------- ------------ ------------
Operating profit 39.1 (53.1) (14.0)
Operating margin (%) 15.6% (21.2%) (5.6%)
Profit before tax 33.1 (53.1) (1.8) (21.8)
Income tax (7.7) (12.3) 0.4 (19.6)
Profit/(loss) attributable
to owners of the company 25.4 (65.4) (1.4) (41.4)
----------- ------------ ------------ ---------
Basic earnings per share (39. 1 (24.8)
(p) 15.2 p )p (0.9)p p
----------- ------------ ------------ ---------
Earnings before interest, tax, depreciation and amortisation
('EBITDA')
EBITDA is defined as operating profit excluding depreciation and
amortisation. This measure is used by management to assess
operational efficiency and, given that it excludes non-cash
depreciation and amortisation, it is a useful approximation for
cash generation from operations. This measure is in common use
elsewhere and a reconciliation from reported figures is shown
below.
2020
GBPm Exceptional
unless otherwise stated Underlying items Reported
Operating profit 40.8 (4.6) 36.2
Depreciation and amortisation 21. 6 2 1 . 6
----------- ------------ ---------
EBITDA 62. 4 ( 4.6 ) 5 7.8
EBITDA margin ( % ) 25. 2 % 23. 3 %
Less: Impact of IFRS 16 (0.4)
----------- ------------ ---------
Covenant EBITDA 62.0
----------- ------------ ---------
2019
GBPm Exceptional
unless otherwise stated Underlying items Reported
Operating profit /(loss) 39.1 (53.1) (14.0)
Depreciation and amortisation 26.4 - 26.4
----------- ------------ ---------
EBITDA 65.5 (53.1) 12.4
EBITDA margin % 26.2% 5.0%
Less: Impact of IFRS 16 (0.6)
----------- ------------ ---------
Covenant EBITDA 64.9
----------- ------------ ---------
Earnings per share ('EPS')
The underlying earnings per share measure, which excludes
exceptional items, is used to provide a better indication of the
underlying performance of the Group. Underlying basic earnings per
share is calculated by dividing the underlying profit attributable
to ordinary shareholders by shares, being the weighted average
number of shares in issue throughout the year (2020: 166,949,022;
2019: 166,949,022). Underlying diluted earnings per share is
calculated by dividing the underlying profit for the year
attributable to ordinary shareholders by the average number of
shares, including the effect of all dilutive potential shares
(2020: 168,909,074; 2019: 166,949,022). Shares arising from the
Performance Share Plan are only treated as dilutive where the
effect is to reduce earnings per share (2020: 1,960,052; 2019:
nil).
2020 2019
Underlying Reported Underlying Reported
----------- ----------- ---------
Profit/(loss) attributable
to owners of the company (GBPm) 27.5 23.1 25.4 (41.4)
Earnings per share
- Basic (p) 16.5p 13.8p 15.2p (24.8)p
- Diluted (p) 16.3p 13.7p 15.2p (24.8)p
----------- --------- ----------- ---------
Net debt
Net debt is defined as the excess of total borrowings over cash
and cash equivalents. It is a measure that provides additional
information on the Group's financial position and is a measure in
common use elsewhere. Whilst net debt is calculated using balances
reported under IFRS, the Group's covenants are based on net debt as
accounted prior to the implementation of IFRS 16 and its impact on
leases. A reconciliation from reported figures to 'covenant net
debt' is presented below:
2020 2019
GBPm GBPm
-------- --------
Current borrowings (20.8) (1.2)
Non-current borrowings (112.9) (148.1)
-------- --------
Total borrowings (133.7) (149.3)
Cash and cash equivalents 23.7 24.7
-------- --------
Net debt (110.0) (124.6)
-------- --------
Add back: impact of IFRS 16 0.5 0.8
-------- --------
Covenant net debt (109.5) (123.8)
-------- --------
Return on capital employed ('ROCE')
Return on capital employed (ROCE) is used as a measure of how
well the Group is utilising its available capital and is a measure
in common use elsewhere. ROCE is calculated by presenting
underlying operating profit as a proportion of average capital
employed.
Capital employed for this purpose is defined as net assets
excluding interest-bearing assets and liabilities, derivative
financial instruments, current and deferred tax balances, pension
obligations and provisions for liabilities and other charges. A
reconciliation from reported figures is presented below:
2020 2019 2018
GBPm GBPm GBPm
------- ------- -------
Intangible assets 10.2 10.5 10.5
Property, plant and equipment 209.2 213.8 278.8
Assets held for sale 2.5 - -
Inventories 37.8 39.1 38.2
Trade and other receivables 31.4 31.8 41.4
Trade and other payables (35.3) (31.9) (32.3)
------- ------- -------
Total capital employed 255.8 263.3 336.6
Average capital employed* 259.6 300.0 335.5
Underlying operating profit 40.8 39.1 39.2
------- ------- -------
Return on capital employed 15.7% 13.0% 11.7%
------- ------- -------
* Average capital employed is calculated as the average between
the balances as at the start of the year and as at the end of the
year.
Cash flow
Underlying operating cash flow and free cash flow provide
management with important information, in respect with how the
underlying business is performing (underlying operating cash flow)
and what cash is available for dividend payments (free cash flow).
The table below provides a reconciliation from underlying operating
cash flow to free cash flow adjusting for items which management
view are outside of their discretion.
2020 2019
GBPm GBPm
------- -------
Underlying EBITDA 62.4 65.5
Working capital/other 5.4 5.8
------- -------
Underlying operating cash flow 67.8 71.3
------- -------
Capital expenditure (14.2) (13.7)
Cash exceptional items (8.8) (6.3)
Pension deficit funding (7.4) (5.3)
Interest paid (5.1) (5.6)
Tax paid (8.3) (9.2)
Other (1.5) (0.4)
------- -------
Free cash flow 22.5 30.8
------- -------
Dividends paid (10.5) (15.0)
FX movements 2.6 2.0
Impact of IFRS 16 (leases) - (0.8)
------- -------
Movement in net debt 14.6 17.0
------- -------
Rohan Cummings
Chief Financial Officer
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
for the year ended 31 December
2020 2019
Note GBPm GBPm
Revenue 2 247.6 250.0
------------------------------------------- ---- ----- -------
3,
Operating profit/(loss) 4 36.2 (14.0)
Finance cost (5.4) (6.0)
Net finance cost on pensions (1.4) (1.8)
------------------------------------------- ---- ----- -------
Profit/(loss) before tax 29.4 (21.8)
Income tax 9 (6.3) (19.6)
Profit/(loss) for the year attributable to
owners of the Company 23.1 (41.4)
------------------------------------------- ---- ----- ---------
Earnings per share
Basic 5 13.8p (24.8)p
Diluted 5 13.7p (24.8)p
All results relate to continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December
2020 2019
GBPm GBPm
Profit/(loss) for the year attributable to
the owners of the Company 23.1 (41.4)
Other comprehensive income/(expense) for the
year
Items that will not be reclassified to profit
or loss
Pension obligations:
* remeasurements 3.4 (13.1)
* movement in deferred tax - 2.3
* remeasurement of an insurance asset held to fund
pension obligation - (0.2)
--------------------------------------------------------- ------ --------
3.4 (11.0)
-------------------------------------------------------- ------ --------
Items that may or may not be reclassified
subsequently to profit or loss
Cash flow hedges:
- net fair value gains 1.4 2.1
- tax on fair value movements (0.3) (0.4)
Net investment hedges:
- fair value gains 2.0 3.4
- tax on fair value movements (0.7) -
Net exchange adjustments 5.3 (9.0)
7.7 (3.9)
Other comprehensive income /(expense) for
the year, net of tax 11.1 (14.9)
--------------------------------------------------------- ------ --------
Total comprehensive income/(expense) for the
year attributable to owners of the Company 34.2 (56.3)
--------------------------------------------------------- ------ --------
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December
2020 2019
Note GBPm GBPm
--------------------------------------- ----- -------- --------
ASSETS
Non-current assets
Property, plant and equipment 209.2 213.8
Intangible assets 10.2 10.5
Deferred tax assets 27.3 25.5
Trade and other receivables 1.7 3.9
248.4 253.7
Current assets
Inventories 37.8 39.1
Trade and other receivables 29.7 27.9
Derivative financial instruments 3.2 1.4
Cash and cash equivalents 23.7 24.7
Assets held for sale 2.5 -
96.9 93.1
--------------------------------------- ----- -------- --------
Total assets 345.3 346.8
--------------------------------------- ----- -------- --------
LIABILITIES
Current liabilities
Trade and other payables (32.0) (29.4)
Current tax liabilities (3.2) (1.6)
Borrowings (20.8) (1.2)
Derivative financial instruments (0.1) (0.6)
Provisions for other liabilities (1.0) (5.6)
(57.1) (38.4)
Non-current liabilities
Borrowings (112.9) (148.1)
Pension obligations 6 (55.2) (64.1)
Deferred tax liabilities (15.5) (16.0)
Other payables (3.3) (2.5)
Provisions for other liabilities and
charges (2.3) (2.8)
(189.2) (233.5)
Total liabilities (246.3) (271.9)
--------------------------------------- ----- -------- --------
Net assets 99.0 74.9
--------------------------------------- ----- -------- --------
EQUITY
Ordinary shares 16.7 16.7
Share premium 9.3 9.3
Other reserves 80.1 72.2
Retained earnings (7.1) (23.3)
Equity attributable to owners of the
Company 99.0 74.9
--------------------------------------- ----- -------- --------
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the year ended 31 December
Ordinary Share Other Retained Total
shares premium reserves earnings equity
GBPm GBPm GBPm GBPm GBPm
------------------------------- -------- -------- --------- --------- -------
Balance at 1 January 2020 16.7 9.3 72.2 (23.3) 74.9
Comprehensive income
Profit for the year - - - 23.1 23.1
Other comprehensive income - - 7.7 3.4 11.1
-------------------------------- -------- -------- --------- --------- -------
Total comprehensive income - - 7.7 26.5 34.2
-------------------------------- -------- -------- --------- --------- -------
Transactions with owners
of the Company
Performance Share Plan charge,
net of tax - - 0.4 - 0.4
Performance Share Plan credit
in respect of awards lapsed - - (0.2) 0.2 -
Dividends paid - - - (10.5) (10.5)
Total transactions with
owners of the Company - - 0.2 (10.3) (10.1)
Balance at 31 December 2020 16.7 9.3 80.1 (7.1) 99.0
-------------------------------- -------- -------- --------- --------- -------
Balance at 1 January 2019 16.7 9.3 77.1 43.4 146.5
Adjustment on initial application
of IFRS 16 (net of tax) - - - 0.1 0.1
----------------------------------- ---- --- ----- ------ ------
Adjusted balance at 1 January
2019 16.7 9.3 77.1 43.5 146.6
----------------------------------- ---- --- ----- ------ ------
Comprehensive expense
Loss for the year - - - (41.4) (41.4)
Other comprehensive expense - - (3.9) (11.0) (14.9)
----------------------------------- ---- --- ----- ------ ------
Total comprehensive expense - - (3.9) (52.4) (56.3)
----------------------------------- ---- --- ----- ------ ------
Transactions with owners
of the Company
Performance Share Plan credit,
net of tax - - (0.4) - (0.4)
Performance Share Plan credit
in respect of awards lapsed - - (0.6) 0.6 -
Dividends paid - - - (15.0) (15.0)
Total transactions with
owners of the Company - - (1.0) (14.4) (15.4)
Balance at 31 December 2019 16.7 9.3 72.2 (23.3) 74.9
----------------------------------- ---- --- ----- ------ ------
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December
2020 2019
Note GBPm GBPm
-------------------------------------------------- ---- ------ ------
Cash flows from operating activities
Cash generated from operations 7 51.6 59.7
Interest paid (5.1) (5.6)
Tax paid (8.3) (9.2)
-------------------------------------------------- ---- ------ ------
Net cash generated from operating activities 38.2 44.9
-------------------------------------------------- ---- ------ ------
Cash flows from investing activities
Purchase of property, plant and equipment (12.8) (12.5)
Purchase of intangible assets (1.4) (1.2)
Proceeds from disposal of property, plant
and equipment and software - 0.2
Net cash used in investing activities (14.2) (13.5)
-------------------------------------------------- ---- ------ ------
Cash flows from financing activities
Proceeds from borrowings 4.0 7.2
Repayment of borrowings (18.5) (3.8)
Payment on settlement of derivatives (1.3) (0.1)
Payment of lease liabilities (0.5) (0.5)
Dividends paid (10.5) (15.0)
-------------------------------------------------- ---- ------ ------
Net cash from financing activities (26.8) (12.2)
-------------------------------------------------- ---- ------ ------
Net increase/(decrease) in cash and cash
equivalents (2.8) 19.2
-------------------------------------------------- ---- ------ ------
Net cash and cash equivalents at 1 January 23.9 5.2
Net increase/(decrease) in cash and cash
equivalents (2.8) 19.2
Exchange gain/(loss) on cash and cash equivalents 0.4 (0.5)
-------------------------------------------------- ---- ------ ------
Net cash and cash equivalents at 31 December 21.5 23.9
-------------------------------------------------- ---- ------ ------
Cash and cash equivalents 23.7 24.7
Bank overdrafts (2.2) (0.8)
-------------------------------------------------- ---- ------ ------
Net cash and cash equivalents at 31 December 21.5 23.9
-------------------------------------------------- ---- ------ ------
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial information
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 December 2020
or 2019.
The consolidated Financial Statements have been prepared using
consistent accounting policies with those of the previous financial
year.
Statutory accounts for the year ended 31 December 2019 have been
delivered to the Registrar of Companies. Statutory accounts for the
year ended 31 December 2020 have been audited and will be delivered
to the Registrar of Companies following the Company's Annual
General Meeting. The auditor has reported for both years was (i)
unqualified, (ii) did not include a reference to any matters to
which the auditors drew attention by way of emphasis without
qualifying their report, and (iii) did not contain a statement
under Section 498 (2) or (3) of the Companies Act 2006.
These accounts were approved by the Board of Directors on 1
March 2021.
Going concern basis
The Annual Report outlines the business activities of the Group
and 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 31 December 2020 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 at
least 12 months from the date of approval of this statement and
that they can be repaid in line with the expected terms. The
Directors have a reasonable expectation that the Group has adequate
resources to continue in operation for at least 12 months from the
date of approval of this statement. For this reason, they continue
to adopt the going concern basis in preparing the financial
statements.
In making this assessment the impact of COVID-19 has been
considered in a range of possible levels of impact on revenue,
profit and cash, and the offsetting effect of controllable
mitigating actions over the course of at least 12 months from the
date of approval of this statement. These include the length of
time various levels of restrictions will be in place and the
severity of the consequent impact of those restrictions on most
exposed areas: raw material inflation (primarily hides), disruption
to supply chain and lower food service demand.
For all of our businesses we have sensitised the revenue (circa
2% - 3% reduction in year on year revenues), profit and cash flow
impact of reduced trading activity. In line with the impacts noted
above, the scenarios are most sensitive to the assumptions made
predominantly in food services markets. We have not assumed any
uplift in our markets under any level of restrictions for the
purpose of the scenario modelling.
The scenarios include an assumption of economic recession
lasting until the end of 2021. This conservative view assumes slow
decline in our market during this time. While COVID-19 is
anticipated to impact our profits and cash generation, as the
economies come out of recession, so should the profits and cash
recover. As we exit both lockdown and our busiest trading periods,
the forecasted COVID-19 impact should also reduce.
In our modelling, mitigating actions are all within management
control, can be initiated as they relate to discretionary spend,
and do not impact our ability to meet demand. These actions include
reduced opex spend and stopping all non-essential and non-committed
capex in the forecasted period.
We believe that the risk of enforced factory closure is low and
have implemented additional health and safety measures in each of
our factories to reduce the risk of a major supply disruption.
Please refer to principal risks section for further details. We are
assuming no significant structural changes to the business will be
needed.
In all the scenarios, significant liquidity headroom under our
existing debt facilities remains at each month end, including the
assumption that repayment of the US dollar private placement
tranche of $25.0m in April 2021 will be made out of existing
facilities. At 31 December 2020, the net debt position was
GBP110.0m and our covenant net debt to EBITDA ratio was 1.8 times
with a covenant EBITDA to net interest payable ratio of 12 times.
Undrawn facilities were GBP47.3m with GBP23.7m of cash holdings as
at 31 December 2020. Covenants are set at less than 3.0 times Net
debt to EBITDA and more than 4.0 times EBITDA to Net Interest
Payable in all our lending agreements.
Under all the scenarios modelled, after taking mitigating
actions as required, forecasts did not indicate breach on any of
those dates.
2. Segment information
The chief operating decision maker has been identified as the
Board. As reported in 2019, the Board started review of the Group's
financial results on a market segment basis because they require
different products and marketing strategies, with two identifiable
operating segments:
-- Emerging markets: Latin America, Russia & East, Middle
East & Africa, South East Asia and China
-- Mature markets: North America, Continental EU, UK &
Ireland, Japan and Australia & New Zealand.
The Board assesses the performance of the operating segments
based on revenue generated from sales to external customers. Each
manufacturing site produces product for multiple sales areas and
performance cannot be allocated to operating segments; the Board
reviews performance by manufacturing plant regularly and manages
underlying operating profit before exceptional items at the Group
level. Finance income and cost and net finance cost of pensions are
not included in the segment results that are reviewed by the Board.
Information provided to the Board is consistent with that reflected
in these Financial Statements.
Mature Emerging Total Group
2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ -------- -------- ------- ------- -------- --------
Revenue from external
customers 177.8 187.3 69.8 62.7 247.6 250.0
------------------------------ -------- -------- ------- ------- -------- --------
Underlying operating
profit 40.8 39.1
Exceptional items (4.6) (53.1)
Operating profit/(loss) 36.2 (14.0)
Finance cost (5.4) (6.0)
Net finance cost on pensions (1.4) (1.8)
------------------------------ -------- -------- ------- ------- -------- --------
Profit/(loss) before
tax 29.4 (21.8)
------------------------------ -------- -------- ------- ------- -------- --------
3. Operating profit
2020 2019
GBPm GBPm
Revenue 247.6 250.0
Cost of sales (158.0) (212.2)
Gross profit 89.6 37.8
Selling and distribution (18.4) (18.2)
Administrative expenses (26.0) (25.9)
Research & development expenditure (6.3) (6.2)
Other expenses (3.4) (2.3)
Total operating expenses (54.1) (52.6)
Other operating income 0.7 0.8
Net operating expenses (53.4) (51.8)
Operating profit/(loss) 36.2 (14.0)
------------------------------------- -------- --------
An additional GBP0.3m (2019: GBP1.1m) of development expenditure
has been capitalised within intangible assets.
4. Exceptional items
Exceptional charges included in operating profit were GBP4.6m
(2019: GBP53.1m).
2020 2019
GBPm GBPm
--------------------------------------------- ------ ------
Restructuring costs 3.9 7.2
Impairment of property, plant and equipment 0.7 44.9
Impairment of intangible assets - 1.0
--------------------------------------------- ------ ------
Total exceptional items 4.6 53.1
--------------------------------------------- ------ ------
In the second half of 2019 the Group undertook a review of its
global manufacturing footprint with the aim to access further
efficiency improvements as well as to align available capacity to
the Group's growth plans. As a result of this review, the Group
closed its Bellshill site in Scotland in 2020 and moved remaining
operating assets to other sites.
Exceptional charges associated with the Bellshill programme
included the site closure costs of GBP3.3m (2019: GBP0.6m) and
assets impairment charge of GBP0.7m (2019: GBP4.9m). In 2019, costs
incurred in relation to the closure of Bellshill site comprised
restructuring GBP4.2m and a curtailment charge associated with
additional pension obligation relating to the UK pension scheme of
GBP0.8m.
The final costs of GBP0.6m (2019: GBP1.6m) were incurred in
relation to the implementation of the new global operating model.
This involved restructuring the business support activities into
global functions to realign the cost base for operating expenses
with strategic priorities.
Whilst the review of global manufacturing footprint improved the
cash generation capacity of the Group's asset base, in 2019, it
also triggered an impairment review that impacted key assumptions
underpinning calculations of net present value from cash flow
forecasts for US and China manufacturing operations. Consequently,
the US CGU assets were impaired by GBP23.0m and China CGU assets by
GBP18.0m.
5. Earnings per share
2020 2019
GBPm GBPm
Profit/(loss) attributable to equity holders 23.1 (41.4)
Earnings per share
---------------------------------------------- ------------ ------------
- Basic 13.8p (24.8)p
- Diluted 13.7p (24.8)p
Shares in issue 2020 2019
---------------------------------------------- ------------ ------------
Weighted average number of shares in the
year 166,949,022 166,949,022
Adjustments for:
- Performance Share Plan 1,960,052 -
---------------------------------------------- ------------ ------------
Weighted average number of shares adjusted
for potential dilution 168,909,074 166,949,022
---------------------------------------------- ------------ ------------
Basic earnings per share is calculated by dividing the
profit/(loss) for the year attributable to owners of the Company of
GBP23.1m (2019: GBP41.4m loss) by 166,949,022 (2019: 166,949,022)
shares, being the weighted average number of shares in issue
throughout the year.
Shares arising from the Performance Share Plan are only treated
as dilutive where the effect is to reduce earnings per share. For
2020, diluted earnings per share is calculated by dividing the
profit for the year attributable to ordinary shareholders of
GBP23.1m by the average number of shares, including the effect of
all dilutive potential shares, of 168,909,074. Given the loss for
full year 2019, the Performance Share Plan does not have a dilutive
effect on earnings per share for 2019.
6. Pension obligations
The Group operates a number of pension schemes throughout the
world. The major schemes are of the defined benefit type and, with
the exception of Germany where book reserves are supported by
insurance policies, the assets of the schemes are held in separate
trustee-administered funds. The defined benefit schemes are closed
to new entrants. The total pension obligation cost for the Group
was GBP7.5m (2019: GBP8.0m), of which GBP3.5m (2019: GBP2.1m)
related to the overseas schemes.
The major assumptions used by the actuaries in calculating the
IAS 19 valuation for the following principal countries were:
% Australia UK USA
2020 2019 2020 2019 2020 2019
--------------------- ----- ----- ----- ----- ----- -----
Discount rate 1.10 2.10 1.30 1.95 2.10 2.95
Rate of increase in
salaries* 2.50 2.50 1.00 1.00 - -
General inflation 2.50 2.50 2.90 3.00 - -
--------------------- ----- ----- ----- ----- ----- -----
* As part of the changes to the UK plan agreed in 2010, future
pensionable salary increases are capped at 1% per annum. No rate of
increase in salaries has been assumed in respect of the USA plan as
the plan is now frozen. The Australia salary assumption is in line
with general inflation.
Net pension assets and liabilities on 31 December were as
follows:
Australia UK USA Other Total
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Total fair
value of
scheme 52.
assets 8.8 8.8 195.4 188.6 3 47.8 - - 256.5 245.2
Present
value
of scheme (77.
liabilities (8.9) (8.8) (221.8) (219.8) 6 ) (77.2) (3.4) (3.5) (311.7) (309.3)
-------- -------- ---------- ---------- --------- --------- -------- -------- ---------- ----------
Deficit (0.1) - (26.4) (31.2) (25.3) (29.4) (3.4) (3.5) (55.2) (64.1)
Related
deferred
tax assets - - 5.0 5.3 5.4 6.3 0.7 0.6 11.1 12.2
Net pension
liabilities (0.1) - (21.4) (25.9) (19.9) (23.1) (2.7) (2.9) (44.1) (51.9)
------------- -------- -------- ---------- ---------- --------- --------- -------- -------- ---------- ----------
Movements in the deficit during the year were as follows:
Australia UK USA Other Total
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------ ------ --------- --------- --------- --------- -------- -------- --------- ---------
Deficit in
scheme at
beginning of
year - - (31.2) (21.9) (29.4) (29.1) (3.5) (3.4) (64.1) (54.4)
Movement in
year:
Pension charge (0.4) (0.4) (2.3) (2.8) (1.5) (1.8) - (0.1) (4.2) (5.1)
Employer
contributions 0.3 0.3 3. 9 4.1 4. 8 2.7 - 0.1 9.0 7.2
Remeasurements - 0.1 3.2 (10.6) - (2.1) 0.2 (0.5) 3.4 (13.1)
Exchange
gains/(losses) - - - - 0. 8 0.9 (0.1) 0.4 0.7 1.3
----------------- ------ ------ --------- --------- --------- --------- -------- -------- --------- ---------
Deficit in
scheme at end
of year (0.1) - (26.4) (31.2) (25.3) (29.4) (3. 4 ) (3.5) (55.2) (64.1)
----------------- ------ ------ --------- --------- --------- --------- -------- -------- --------- ---------
7. Reconciliation of profit or loss before tax to cash generated
from operations
2020 2019
GBPm GBPm
----------------------------------------------------- ------ -------
Profit/(loss) before tax 29.4 (21.8)
Adjustments for:
Finance cost 5.4 6.0
Profit on disposal - 0.1
Net finance cost on pensions 1.4 1.8
Pension cost adjustment for normal contributions 1.2 1.4
Depreciation of property, plant and equipment 20.5 25.3
Impairment of property, plant and equipment 0.7 44.9
Amortisation of intangible assets 1.1 1.1
Impairment of intangible assets 0.2 1.0
Release from capital grants balance (0.1) (0.2)
Pension deficit funding (7.4) (5.3)
Performance Share Plan 0.4 (0.4)
Changes in working capital:
Decrease/(increase) in inventories 1.5 (2.0)
Decrease/(increase) in trade and other receivables 0.8 8.4
(Decrease)/increase in trade and other payables 1.4 (0.2)
(Decrease)/increase in provisions (4.9) (0.4)
----------------------------------------------------- ------ -------
Cash generated from operations 51.6 59.7
----------------------------------------------------- ------ -------
Of which:
Underlying operating cash flows (before
pension deficit funding) 67.8 71.3
Pension deficit funding (7.4) (5.3)
Exceptional items (8.8) (6.3)
----------------------------------------------------- ------ -------
Cash generated from operations 51.6 59.7
----------------------------------------------------- ------ -------
8. Analysis of net debt
2020 2019
GBPm GBPm
Cash and cash equivalents 23.7 24.7
Bank overdrafts (2.2) (0.8)
Net cash and cash equivalents 21.5 23.9
Other bank borrowings (57.7) (72.0)
US dollar private placement (73.3) (75.7)
Lease obligations (0.5) (0.8)
Net debt (110.0) (124.6)
------------------------------- -------- --------
Included within current borrowings amounting to GBP20.8m (31
December 2019: GBP1.2m) are bank overdrafts of GBP2.2m (31 December
2019: GBP0.8m), finance leases of GBP0.3m (31 December 2019:
GBP0.4m) and a tranche of US dollar private placement that expires
in April 2021 of $25.0m (GBP18.3m).
9. Tax
The Group's underlying effective tax rate on profit before
exceptional items is 22.3% (2019: 23.3%). The reported effective
tax rate is 21.4% (2019: -89.9%)
The Group operates around the world and earns profits which are
subject to tax at differing rates in different tax jurisdictions.
The global nature of the Group's operations gives rise to several
factors which could affect the future tax rate. These include mix
of profits, changes to statutory tax rates or tax legislation and
foreign exchange rates applicable when those profits are translated
into sterling.
In 2020, GBP27.2m of deferred tax assets has not been recognised
on losses and other timing differences in the US, China and other
territories as a result of uncertainty over the timing of
recoverability. A Group review of strategy sourcing conducted in
2019 impacted not only impairment testing of US and China plants,
but also profit forecasts of US and China statutory entities,
introducing greater uncertainty over future recoverability of
accumulated losses. This led to full de-recognition of deferred tax
assets on carried forward US and Chinese losses, as well as a
deferred tax asset on other timing differences in the US in
2019.
The quantum of tax losses unrecognised in China is GBP28.7m
(deferred tax assets of GBP7.2m). The quantum of unrecognised tax
losses in the US is GBP76.6m (deferred tax assets of GBP16.1m) and
unrecognised other timing differences is GBP13.9m (deferred tax
assets of GBP2.9m). Tax losses unrecognised in other territories
are GBP3.3m (deferred tax assets of GBP0.7m), with an additional
GBP0.3m unrecognised deferred tax assets related to other timing
differences.
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FR KZGGFRMKGMZM
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