24 Mar 2017 16:00
24 March 2017
Devro plc
("Devro" or the "Company")
2016 Annual Report
Devro plc (LSE: DVO) announces that it has posted its 2016 Annual Report to those shareholders who have requested this, together with the notice of Annual General Meeting and Proxy Form. Copies of these documents have been submitted to the National Storage Mechanism and will be available for viewing shortly at www.morningstar.co.uk/uk/NSM. The documents are also available (with the exception of the Form of Proxy) on the Company's website - www.devro.com.
The Company's 2017 Annual General Meeting will be held at 11am on 26 April 2017 at The Westerwood Hotel, St Andrews Drive, Cumbernauld, G68 0EW.
Devro announced its results for the year ended 31 December 2016 on 6 March 2017. A condensed set of financial statements was attached to the Company's results announcement which included full disclosure of important events that occurred during the year.
The Company today provides the following additional regulated information as required to be made public under the Disclosure Guidance and Transparency Rules.
A description of the principal risks and uncertainties extracted from the 2016 Annual Report is set out in Appendix 1 below, and the information on related party transactions contained in Note 36 to the 2016 Financial Statements, is set out in Appendix 2 below. Page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the 2016 Annual Report.
Statement of Directors' Responsibilities
The 2016 Annual Report contains a responsibility statement in compliance with DTR4.1.12 signed on behalf of the Board by the Company Secretary. This states that on 15 March 2017, the date of approval of the 2016 Annual Report, each of the directors (whose names and functions are listed below) confirms that, to the best of each person's knowledge and belief:
· the financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and of the group included in the consolidation taken as a whole; and
· the management report required by DTR4.1.8R (set out in the Strategic Report and the Directors' Report) includes a fair review of the development and performance of the business and the position of the Company and group included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position, performance, business model and strategy.
Directors:
Gerard Hoetmer, Chairman
Peter Page, Chief Executive
Rutger Helbing, Group Finance Director
Jane Lodge, Non-Executive Director
Paul Neep, Non-Executive Director
Paul Withers, Non-Executive Director
John Meredith
Company Secretary
24 March 2017
Appendix 1
Principal Risks and Uncertainties
Like any other business, Devro's operations are exposed to risks which could potentially have an adverse impact on the group.
The directors have carried out a robust assessment of the principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity. The main risks identified are set out in the following pages. Additional risks which are not presently known to management could also have an adverse effect on the company.
The Board has taken into consideration the principal risks when considering the adoption of the going concern basis of accounting, and when assessing the prospects of the company for the purpose of the viability statement.
The going concern and viability statements can be found on page 43.
In addressing and overseeing risk, the Board is supported by the Risk Committee. The Committee submits four formal reports to the Board in the course of the year.
A report from the Committee can be found on page 42.
The Financial Reporting Council has encouraged companies to consider how Brexit might impact them, so we have separated this out from the list of other risks for a more detailed analysis in the box below:
Brexit
Following the UK's decision to leave the EU, the Government has now clarified its position: the UK will leave the EU, the Single Market and the current customs union, perhaps as early as mid-2019. This has a number of implications for Devro. For example, while our Scottish factories mainly manufacture for the UK, some product is currently exported to the EU, and our Czech and Dutch plants send small amounts of their product to the UK. Our people move freely between our European plants. All of the above could cease on Brexit, and while the UK Government has stated, with confidence, its intention to negotiate replacement trade agreements with the EU and other countries, it is not possible at this stage to gauge how successful they will be. The risk for UK-based exporters such as Devro Scotland, is that the proposed new international trading arrangements may not be secured before the existing framework is removed, or may be on disadvantageous terms compared to the current conditions. We are therefore preparing contingency plans based on various "worst-case" scenarios. With six manufacturing operations around the world, Devro is well placed to reconfigure its global routes to market in order to adapt to changing regulatory restrictions. A review of the various potential supply permutations is underway. Our Regulatory Affairs Director has established strong working relationships within government, and is working to ensure that collagen food products do not get overlooked in future trade discussions. It is important to keep this in perspective: the great majority of Devro group production and trade is unaffected. The total volumes which could conceivably be impacted amount to no more than 8% of group output. The potential Brexit-related opportunities both here in the UK and overseas which could offset any downside are also under review. With our global footprint, and contingency planning underway, we are well placed to deal with whatever emerges from the post-Brexit negotiations. |
KEY RISK | IMPACT | MITIGATION | MOVEMENT |
LOSS OF MARKET SHARE/PROFIT MARGINS DUE TO INCREASED COMPETITIVE PRESSURES The group operates in competitive markets throughout the world. | Expansion by competitors could lead to overcapacity in the industry and the consequent risk of loss of volume or price pressure. | The group invested £8.0m in research and development activities in 2016, to extend and differentiate the product range and improve the quality of our products. Our capital investment programme has started to reduce our unit costs with further actions planned for 2017 and 2018. We also aim to expand the total collagen casings market by developing products which convert animal intestine applications to collagen casing. | Unchanged |
FINANCIAL RISKS The main financial risks relate to the availability of short and long-term funding. | Failure to operate within the agreed financial framework could lead to inability to support long-term investment or to raise capital for funding growth. Interest rate increases could impact earnings. | All term debt is arranged and managed centrally and appropriate covenant headroom is maintained. | Unchanged |
FOREIGN EXCHANGE RISK Almost 90% of the group's revenues are invoiced in currencies other than sterling. | Adverse foreign exchange rate movements could reduce revenues and the sterling value of reported profits. | The financial impact of exchange rate fluctuations within our operating units is mitigated by a policy of hedging a substantial portion of transactional foreign exchange risk for periods of up to 15 months using forward contracts. | Increased |
DOWNTURN IN CONSUMER DEMAND Consumer preferences evolve over time, and are influenced by a number of issues outside our control, including economic factors and health considerations. | A decline in consumer demand could lead to increased competition in the marketplace and reduced sales revenue/profitability.
| Devro's wide range of products allows flexibility to respond to customer and market demands. We continue to invest heavily in our products and processes with the aim of increasing quality while reducing our cost base to remain competitive.
| Unchanged |
OPERATIONAL DISRUPTION The group is at risk of disruption to its manufacturing capability from poor operational performance, or major disruptive events, such as fire or flooding. | Prolonged operational disruption could result in sustained loss of capacity or capability, and could affect our ability to deliver to customers. This, in turn, could adversely affect the group's financial performance. | The group maintains industry-leading operational processes and procedures to ensure effective operational management at each of our plants. With six manufacturing operations in various locations, the group has manufacturing flexibility, and this enables effective contingency planning. Our business continuity and disaster recovery plans are regularly tested and continually updated. Appropriate insurance policies are in place. | Unchanged |
DISRUPTION TO SUPPLY OR INCREASE IN PRICE OF KEY RAW MATERIALS The group's most important raw material is collagen, a naturally occurring animal protein obtained from cattle and sow hides. There is a risk that changes may occur in the supply or demand for food grade collagen, resulting in significant cost increases for the group's business. | Raw collagen represents approximately 15% of the group's total operating costs. Increase in price would adversely impact the group's operating costs. Disruption to supply could adversely affect manufacturing performance. | The group manages the collagen sourcing risk by, where possible, entering into long-term arrangements with specialised suppliers in various parts of the world. | Unchanged |
DEVELOPMENT OF NON-CASING TECHNOLOGIES More than 80% of the group's revenue is derived from the manufacture and sale of edible collagen casing, primarily for sausages. For many years, several manufacturers of machinery used in the food industry have been promoting "co-extrusion" systems for sausages which do not require casing. | If there were to be a significant conversion to co-extrusion, there could be an adverse effect on sales of casing, revenues and profits. | The group makes substantial investments in product development and manufacturing processes to sustain competitive advantage. Where there have been conversions to co-extrusion in the past, the group has often been successful in obtaining the business to supply the collagen gel required for such applications, and, following the 2015 acquisition of Devro B.V., continues to be a world leader in this specialist category. | Unchanged |
POLITICAL AND REGULATORY RISK As a supplier to the food industry, the group complies with all relevant food safety regulations. Regulatory authorities routinely enact changes to food safety legislation. Political uncertainty leaves international trading companies exposed to the risk of restrictions on cross-border sales. | As a global trading company, political change (including, but not limited, to Brexit) could impact our ability to operate internationally. Changes to food safety regulations could result in restrictions on the movement of the group's products, or its raw materials, between territories, or necessitate changes to the production processes at one or more of the group's manufacturing operations. | The Global Quality and Regulatory Affairs Director actively monitors planned and actual changes to regulations in all relevant jurisdictions in order to minimise disruption to our business. The group is a founder member of the Collagen Casings Trade Association, which represents the industry and promotes its excellent record in regulatory and health issues. Supplier approval and traceability are under constant review. See Brexit analysis on page 24. | Increased |
RISK | IMPACT | MITIGATION | MOVEMENT |
PEOPLE Shortage of people with relevant expertise. | There is considerable competition for highly-trained staff in certain areas. Devro's strategy of significant investment in the company's manufacturing base requires the recruitment and retention of highly-skilled technical managers and employees. | A number of internal programmes have been introduced to train and develop key employees. | Unchanged |
INCREASED FUNDING REQUIREMENTS OF PENSION SCHEMES Estimates of the amount and timing of future funding obligations for the group's defined benefit pension schemes are based on various assumptions, including the projected investment performance of the pension scheme assets, future bond yields, changes to assumptions about the longevity of the schemes' members and statutory requirements. | Any significant deterioration in the schemes' asset values or unforeseen increases in scheme liabilities might increase the group's funding obligations and could adversely affect the group's profits and financial strength. | The position and performance of each of the pension schemes are continually monitored by the group, in conjunction with pension trustees and professional advisers All defined benefit schemes are closed to new entrants, and the group is actively working to match assets to expected future cashflow. | Unchanged |
IT SYSTEMS/CYBER RISK IT systems are central to our business operations. Vulnerability to an external attack is a growing worldwide issue. | An outage for a period of time could have an impact on our operations. Loss of commercial or personal data could damage the business or our reputation, and result in increased financial penalties. | We ensure that our systems are appropriately secured and employ firewalls and other security features. Regular penetration testing is conducted. | Increased |
PRODUCT CONTAMINATION Raw materials and ingredients may contain impurities, contamination or disease. | Contamination could lead to a product recall, loss of reputation, or significant costs of compensation. | All of our manufacturing sites have achieved FS22000 approval. This requires a Hazard Analysis and Critical Control Point programme to be implemented with the aim of preventing contamination. | Unchanged |
Appendix 2
Related party transactions
Key management are deemed to be the Executive and Non-Executive Directors and the Executive Management Team of the group as together they have the authority and responsibility for controlling group activities. The compensation paid or payable to key management for employee services is shown below:
| 2016 £'m | 2015 £'m |
Emoluments payable to Executive and Non-Executive Directors |
|
|
Short-term employee benefits | 1.2 | 1.5 |
Performance Share Plan charge | 0.2 | 0.2 |
Post-employment benefits | 0.1 | 0.1 |
| 1.5 | 1.8 |
Emoluments payable to remainder of the Executive Management Team |
|
|
Short-term employee benefits | 1.5 | 1.4 |
Performance Share Plan charge | 0.1 | 0.1 |
Post-employment benefits | 0.2 | - |
Compensation for loss of office | 0.7 | - |
| 2.5 | 1.5 |
Total emoluments payable to key management | 4.0 | 3.3 |
Transactions with the group's pension schemes are disclosed in note 25. Amounts due to the pension schemes at 31 December 2016 are £0.4m (2015: £0.4m).
The group had no further related party transactions.
Related party transactions carried out by the company during the year ended 31 December 2016 were as follows:
| 2016 £'m | 2015 £'m |
Sale of services to subsidiary undertakings | 8.2 | 4.4 |
Purchase of services from subsidiary undertakings | 0.2 | 0.2 |
Royalty income received from subsidiary undertakings | - | 0.6 |
Interest received from subsidiary undertakings | 4.7 | 2.9 |
Interest paid to subsidiary undertakings | 0.1 | 0.1 |
Balances at 31 December arising from transactions with subsidiary undertakings:
| 2016 £'m | 2015 £'m |
Derivative financial assets | 1.9 | 1.0 |
Derivative financial liabilities | 0.9 | 0.3 |
Receivables |
|
|
- current | 13.8 | 10.9 |
- non-current | 113.3 | 78.1 |
Payables |
|
|
- non-current | 22.1 | 23.1 |
Current receivables from subsidiaries arise mainly on the sale of services and tax losses surrendered. The receivables are unsecured and do not bear interest. No provisions are held against receivables from subsidiaries, and all sales are made on an arm's length basis.
Non-current receivables and payables principally relate to loans to and from subsidiaries and interest is charged on them at commercial rates.