My first year as CEO has been insightful and has only served to increase my appreciation of the opportunity ahead.
In addition to the strategic priorities as set out at the start of the year it has been my priority to provide clear focus on delivery of profitable growth and to create a culture and mind-set of a global business.
The business has many positive attributes, but after the major transformation programme, needed a more focused approach. Detailed plans, built around the 3Cs strategy, on how to grow the business sustainably in a cost effective way have been developed and the implementation started. We will provide more details on these plans and progress at our Capital Markets Event on the 19 March 2019.
Also during the year I have personally visited all of our sites to communicate our key messages directly with the workforce. The response to this has been positive and we will continue to engage with the workforce through regular communications, town halls and an annual engagement survey, which we kicked off in 2018.
In order to deliver our plans successfully, a strengthening and streamlining of the senior management team was required, which includes the appointment of Jackie Callaway as the new CFO and a new Global Commercial Director, Peter Whitmore, who joined in November from Amcor. The executive leadership team now consists of 7 members, and 5 of those have joined from 2016 onwards and they bring a range of relevant ‘blue chip’ experience to the team.
Overall I am pleased about the progress we have made in putting in place the building blocks for success, but as ever, more remains to be done to make sure Devro is to achieve what it is capable of. The new executive team under my leadership is excited and fully committed to continue to work on that in 2019 and beyond.
In 2018 we focused on significantly improving the efficiency of our US plant. This was achieved, with production yields at Sandy Run now amongst the highest in the group. This supported our growth ambitions in the North American markets, where we grew volumes by 8% in the year.
Our Fine Ultra product platform was further rolled out in our target markets of Japan, South East Asia and in selected European markets in the second half of the year. Although sales volumes were modest, in the year we tested and qualified our products with selected customers and we believe this platform will be a key driver for growth in 2019 and beyond.
Our Devro 100 savings programme delivered £4.5 million of savings in 2018 and £11.5 million over the two years since we started. We are now on track to deliver £16 million versus our original estimate of £13-16 million over the three year period to 2019.
In 2018 we also further defined our roadmap towards our mid-term ambition and longer-term vision. This is now based on our 3Cs strategy:
We made good progress with the 3Cs strategy by defining and applying a new customer and market segmentation; by developing plans to increase capacity to support the mid-term growth ambition
cost effectively within the current infrastructure; and by defining and implementing a new global operating model to deliver cost savings and fund growth investments.
Finally, in 2018, we implemented the last step towards creating a global organisation with the appointment of a new Global Commercial Director to span all sales areas. This finalises the
plan started in 2016 to move from a regional to a global organisation and will be instrumental in delivering our 3Cs strategy and realising our ambition and vision.
Devro’s total sales volumes of edible collagen casings, which represent over 85% of the group’s sales, were broadly flat for the year, with strong growth in North America, Latin America and South
East Asia offset by market challenges in Russia and Japan.
Sales volumes in North America increased 8%, with a continued strong snacking market. Sales volumes in Latin America grew 9%, mainly due to strong sales into Brazil, including significant growth in sales of products from our China plant.
Overall sales volumes in Continental Europe grew 4%. We saw a slowdown, as anticipated, in the second half due to stronger comparatives. Full year growth was particularly strong in Germany (11%). Sales volumes into the Middle East and Africa recovered in the second half after the impact of a listeria outbreak in South Africa during the first half and volumes in the year grew 4%.
In South East Asia we continued to see growth. After an increase of 29% in 2017, we saw volumes in 2018 grow 6%, with a strong performance in the second half which was supported by initial sales of our new Fine Ultra products. China reported volumes for the year were down 8%, but adjusting for the impact of the discontinued imported product, underlying volumes were 5% ahead of the prior year. Aligned with our strategy, the average selling price was up 16%, benefiting from an improved customer mix.
Sales volumes in the mature markets in UK and Australia were broadly flat in the year, with a modest decline in UK, offset by modest growth in Australia. In Russia and surrounding countries sales volumes have historically been volatile and impacted by movements in the Russian rouble. In 2018 we saw a weakening of the rouble versus the euro and, as anticipated, we saw the impact of that in the second half of the year. Overall volumes in the year were down 12%. In Japan sales of collagen cased sausages declined in the year due to higher promotional activity of sausages in sheep gut, with increased export volumes from China. After many years of continued growth in Japan we saw volumes decline 7% in the year.
Despite overall flat sales volumes, underlying operating profit before non-recurring items grew 5%, due to the impact of positive mix on the average selling price, Devro 100 costs savings and tight cost management, partly offset by inflationary pressure on utilities costs and wages, and adverse foreign exchange.
Safety is a core value and there was a year-on-year improvement in our performance. In 2018 we have implemented global safety standards as we strive for consistency and best practice across each site. We have introduced the ‘hearts and minds’ behavioural programme with the objective that we all ‘Think Safe, Work Safe and Go Home Safe’ each and every day.
Chief Executive Officer