Sausage skin maker Devro saw its shares tumble more than 10 per cent today after warning of an £8 million hit to profits this year as it seeks to overcome weak sales by shifting work to more efficient production lines.
Although sales in the likes of China, Germany and the US were described as “strong”, the North Lanarkshire company said overall volumes since the start of January have been lower than a year ago, hampered by currency devaluations in Latin America, difficult European markets and a Russian ban on EU pork imports.
As a result, prices and volumes for the full year are expected to be flat, prompting the firm to bring forward plans to “streamline” its manufacturing operations.
Shore Capital analyst Darren Shirley said the trading update made for “disappointing reading” and cut his pre-tax profit forecast for the current year from £37.2m to £27.2m.
Shares in Devro, which last month reported a 4.6 per cent drop in profits to £37.5m for 2013, slumped 25.5p to end the day at 211.5p.
The Moodiesburn-based firm, led by chief executive Peter Page, said: “Over the next year, Devro will move from older, higher-cost production lines to a greater proportion of manufacturing being on our most cost-efficient technology.
“This decision, coupled with the revised expectation for sales for the year, is expected to reduce profits for 2014 by approximately £8m.”
Although the move is aimed at reducing manufacturing costs by £4m in 2015, the firm will take one-off charges totalling £16m over the next two years.
The maker of edible collagen casings for bratwurst, chorizo and salami also said it expected revenues to be £13m lower than previously thought due to the impact of a strong pound.
In the wake of the update, house broker Investec slashed its pre-tax profit forecast for the current year by 25 per cent to £28.5m. Analyst Nicola Mallard expects profits of £34.5m in 2015, down from a previous prediction of £40.7m.
Panmure Gordon said the combination of weak demand in core developed markets and the impact of new capacity in China and Uruguay was not yet fully recognised, and reiterated its “sell” rating on the shares.
Devro last month said it would be spending £50m to build a plant in China, having already announced plans to invest £40m on expanding its manufacturing presence in the United States in a bid to trim its running costs.
The group told investors today that it has secured $100m (£59.4m) through a private placing, of which $50m has already been received, to “ensure long-term funding is in place to support these two projects”.
It added: “The board remains confident that, with a low-cost manufacturing base and a world-class product range, Devro will be in a strong position to benefit from the growing demand for collagen casing, driven by protein consumption worldwide.”