Spring sales slump set to cost Devro £3m

Sausage skin maker Devro said that two months of poor sales combined with rising raw material costs will slice about £3 million from its profits in the current half.

The Moodiesburn-based group had already warned investors that it faced a bad patch this spring, but it expects to turn around its fortunes in the second half when its factory expansion in the Czech Republic comes online.

Devro said its businesses in Australasia and the UK have suffered lower sales volumes than the same period a year before. In both cases the company says that reflects “a slight decline in the general market and particularly challenging trading conditions for our customers”.

It added: “Overall, as a result of slower than expected sales, particularly in April and May, combined with the raw material cost increases and temporary manufacturing issues in the USA, operating profits for the first half are expected to be approximately £3m below last year. June is seeing a recovery in sales and this improvement is expected to continue into the second half of the year.”

It said sales of its premium Select range have increased by 13 per cent globally, with particularly strong growth in Germany and Japan.

Last year, first-half profits stood at £20.7m. Devro said its management “remains confident” that a strong second half will ensure growth in full-year earnings.

But analyst Charles Pick, at Numis, said cuts to profit forecasts were inevitable given the extent of the first half setback.

“The message after the first-quarter interim management statement was that downgrades were unnecessary but this is no longer true,” he said. “We have cut by 4.5 per cent.”

Numis now expects Devro to book profits before tax and pension interest of £42.8m for the current financial year. It also reduced projections for the following year by £2m, but kept its “add” recommendation on the shares, albeit with a slightly lower price target.

Nicola Mallard, at Investec, also trimmed her forecasts for Devro by about 4 per cent and kept her “buy” rating.

She noted that the cost of collagen appeared to be steadying and sales had already picked up.

She added: “Finally, there has been some success in product testing on the development line in the US, enabling management to progress plans for its investment in the coming years.”

Devro says its prospects remain attractive, with continuing growth in global demand. It said the expansion programme at its Czech plant will be fully-commissioned in August, one month ahead of schedule and on budget.

The company then has plans to invest in its US plant over the next three years, where new products are in the pipeline.