Gerard Hoetmer
Gerard Hoetmer
Chairman

Chairman's Statement

IN 2015, OVERALL VOLUMES OF CASINGS SOLD INCREASED, MOST NOTABLY IN KEY MARKETS SUCH AS JAPAN, NORTH AMERICA AND SOUTH EAST ASIA.

The construction and launch of the new plants in the USA and China are central to the transformation of the manufacturing footprint for the group.
 

We entered 2015 with three main areas of focus for the executive team: to develop our market position; to complete the restructuring of our operations in Scotland and Australia; and to maintain momentum on the implementation of our major investment projects in the USA and China.

In tough market conditions, overall volumes of casings sold increased, most notably in key markets such as Japan, North America and South East Asia, and many key accounts have been retained elsewhere in the face of strong competing offers. Sales of co-extrusion gel in North America continued to grow well and the acquisition of PV Industries has now firmly established Devro as the market leader for gel in Europe as well.

As part of our restructuring we took out capacity of older, less efficient technology at one of our factories in Scotland, which was an important step in aligning our product portfolio with market opportunities. In Australia we initiated the outsourcing of hide preparation operations. There was some disruption as we worked through the planned actions, but I am pleased to report that we have delivered annualised cost savings of £5.8 million, slightly ahead of the targeted amount.

In the USA and China we are undertaking two strategic investment projects to build new plants in these locations. It has been challenging to support two such significant projects in parallel, but we have made good progress this year and the projects remain on track for completion as planned in 2016.

FINANCIAL HIGHLIGHTS

Operating profit before exceptional items was £33.3 million (2014: £30.3 million), representing 10% growth over 2014, primarily relating to the delivery of cost savings from the restructuring actions. Profits would have increased more had it not been for adverse foreign exchange movements of £2.1 million (2014: adverse of £4.3 million). Whilst I am pleased with the growth in profits, there is clearly more to do on sales and this will be an area of focus for 2016.

A more complete explanation of the financial performance for the year, including a breakdown of the £14.1 million of exceptional items, is set out in the Financial Review on pages 18 to 21.

STRATEGIC INVESTMENTS

The construction and launch of the new plants in the USA and China are central to the transformation of the manufacturing footprint for the group.

The new factory in the USA will improve manufacturing efficiency by establishing an advanced technology production facility. This will enable us to largely decommission the existing plant, which has continued to underperform in 2015 as it reaches the end of its useful economic life.

As previously indicated we expect an additional contribution to annual operating profit of £8 million from this USA investment, with the benefits starting mid-2016. A key component of this improvement will be the decommissioning of the old production lines, and the realisation of the associated cost savings.

In China the new plant will establish a manufacturing presence in the world's largest collagen casing market, adding capacity to support future sales growth. The new factory continues to progress well, with construction now complete and commissioning of the newlyinstalled equipment due to commence in the first half of 2016. Demand for premium products has continued to increase in China during 2015, despite the overall market in China declining, reflecting the ongoing development and segmentation of the market.

BOARD

As announced last year, Simon Webb, Group Finance Director, will retire in March 2016. The Board sincerely thanks Simon for his significant contribution to the business over the past five years.

Rutger Helbing will join us as Group Finance Director on 4 April 2016

EMPLOYEES

Devro's success is built upon the commitment of our employees. Supporting two major projects in parallel has tested this commitment and has significantly stretched our global resources. I have been impressed by the way our employees have stepped up and delivered at this critical time. On behalf of the whole Board, I would like to thank all of our employees for their contribution across our business.

2016 will be another important year as we complete the fundamental transformation of the manufacturing footprint of our business. To be successful we will again need to call upon the dedication and experience of our employees, but I am confident that the team will rise to the challenge.

I would like to take this opportunity to acknowledge the large number of employees leaving the business as part of the transition to more efficient manufacturing technology. I am very grateful for the professionalism they have demonstrated throughout the transformation and wish them well for the future.

DIVIDEND

The Board is proposing to maintain the final dividend at 6.1p per share (2014: 6.1p) bringing the total for the year to 8.8p per share (2014: 8.8p). Subject to shareholder approval at the Annual General Meeting ("AGM") in April, the dividend will be paid on 13 May 2016, to those on the register at 29 March 2016.

RETURN ON INVESTMENTS

With our transformation programme nearing completion we must now demonstrate a return on the £110 million in capital investments we have made over the past three years. 2016 will be the year in which we start to see this return reflected in our profits with the new plant in the USA completing in the first half. Additional profit growth will follow in 2017 from the new plant in China, enabling us to increase capacity and support further revenue growth.

2016 is an important year for Devro given the complexities of starting up two new factories, but with the detailed planning in place we are on course to develop into the most advanced collagen casings company in the world. Devro will then be well placed to benefit from a dynamic and expanding global market, to create long-term value for our shareholders.

Gerard Hoetmer
Chairman