7 Apr 2020 16:00
For Immediate Release | 7 April 2020 |
Devro plc
("Devro" or the "Company")
2019 Annual Report and Notice of AGM
Devro plc (LSE: DVO) announces that it has published today its 2019 Annual Report and its 2020 notice of Annual General Meeting (AGM). Copies of these documents and of the Form of Proxy for the 2020 AGM have been submitted to the National Storage Mechanism and will be available for viewing shortly at https://data.fca.org.uk/#/nsm/nationalstoragemechanism. The documents are also available (with the exception of the Form of Proxy) on the Company's website - www.devro.com. They have also been posted today to shareholders who have elected to receive paper communications.
The Company's 2020 AGM will take place at midday on 30 April 2020 in its London office, Devro plc, 1st Floor MidCity Place, 71 High Holborn, London, WC1V 6EA. Following the introduction of mandatory 'stay-at-home' measures in the UK prohibiting the gathering in public of more than two people (in response to the Coronavirus outbreak), no more than two directors will be present at our AGM (in order to satisfy minimum quorum requirements) and the business of the meeting will be restricted to the formal business only. We are unable to invite any other shareholders to attend the AGM in person and anyone seeking to attend will be refused entry. Shareholders are strongly encouraged to exercise their rights at the AGM by voting remotely on all the resolutions, by appointing the chair of the meeting as a proxy. Details of how to vote by proxy are set out in the 2020 AGM notice.
Devro announced its results for the year ended 31 December 2019 on 4 March 2020. 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 2019 Annual Report is set out in Appendix 1 below, and the information on related party transactions contained in Note 34 to the 2019 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 2019 Annual Report.
Statement of Directors' Responsibilities
The 2019 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 3 March 2020, the date of approval of the 2019 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 the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
· the Strategic Report and the Directors' Report include a fair review of the development and performance of the business and the position of the Company and the undertakings 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 the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.
Directors:
Steve Good, Chairman
Rutger Helbing, Chief Executive Officer
Jackie Callaway, Chief Financial Officer
Jane Lodge, Non-Executive Director
Malcolm Swift, Non-Executive Director
Paul Withers, Non-Executive Director
The Company's LEI is 549300Z9YLY7LEMLJ904
Andrew Money
Company Secretary
7 April 2020
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 emerging and principal risks facing the Group, 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.
In addressing and overseeing risk, the Board is supported by the Risk Committee and by the Executive Management Team through additional integrated business planning structures introduced during the latter part of 2019. The Committee commissioned a report in 2019 about how the Company could enhance its risk management framework. This has resulted in greater visibility about how individual risks might impact the Company's delivery of individual elements of our 3Cs strategy and associated key areas of focus. The process for identifying, and bringing to the Board's attention, key risks has also been updated. In addition to existing structures for functional teams to report the highest risks to the Risk Committee, a process for each functional team to formalise its assessment of all known material risks is being introduced which will assist the Board to monitor emerging risks.
Broadly speaking, our risk profile is unchanged, although we have identified this year as an emerging environmental risk, potential future water shortages at two of our manufacturing locations, in response to which initiatives to reduce our water usage and to increase our water recycling are underway, alongside an investigation into alternative sustainable sources of water supply.
In 2020 we have also monitored as a developing risk to the business, the outbreak of COVID-19 virus. Our assessment is that it has the potential:
• to disrupt manufacturing, should restrictions take effect which obstruct the supply of raw materials or of labour;
• to hamper customer deliveries; and
• to cause a sales downturn in affected areas, if logistical obstacles also disrupt our customers' businesses or consumer access to their products.
At the date of this report, our one manufacturing site in China is operating at normal capacity and is not facing labour or supply shortages. We are actively reviewing developments both in China and outside of China in order to maintain business continuity plans aimed at mitigating the risk.
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 viability and going concern statements can be found on pages 36 and 50, respectively.
KEY RISK | IMPACT | MITIGATION | MOVEMENT |
LOSS OF PROFIT MARGINS/VOLUME DUE TO INCREASED COMPETITIVE PRESSURES The Group operates in competitive markets throughout the world. | Any increase in effective competition risks sales loss via volume and/or price decline. | To Win with the Winning Customers is a key pillar of our 3Cs strategy and in 2019 we have continued to develop value propositions to drive customer satisfaction. The transition to a global commercial organisation in 2019 has facilitated a more rapid transfer of successful customer offerings and more agile troubleshooting. In 2019, savings of £7.4 million have been delivered in order to keep our cost base competitive. We also aim to continue expanding the total collagen casings market by developing products which convert gut applications to collagen casing. | Broadly unchanged |
DISRUPTION TO SUPPLY OR INCREASE IN PRICE OF KEY RAW MATERIALS Inflationary cost pressures that cannot be mitigated by cost reduction or passing on price risks reduced margins and profitability. | The Group's most important raw material is collagen, a naturally occurring animal protein obtained from cattle and sow hides. It represents up to 20% of the Group's total operating cost of goods. 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. | The Group manages the collagen sourcing risk by, where possible, entering into long-term arrangements with specialised suppliers in various parts of the world. There continues to be an ongoing focus on cost reduction and manufacturing efficiencies, led by our global procurement function, to address inflationary pressures across the entire business. | Broadly unchanged |
FOOD REGULATORY RISK Food safety concerns risks additional regulation and restrictions. | 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. | As a supplier to the food industry, the Group complies with all relevant food safety regulations. We actively monitor 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. | Broadly unchanged |
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. Preferences may be affected both as a result of long-term trends, such as calls advocating consumers to reduce their meat consumption, and short-term trends such as those prompted by the expected temporary effect of African Swine Fever (ASF) on the cost and availability of pork to our customers. | A decline in consumer demand for sausage could lead to increased competition in the marketplace and reduced sales revenue/profitability. | Devro's wide range of products and geographical presence allows flexibility to respond to customer and market demands. We continue to invest in our products and processes with the aim of producing differentiated products while reducing our cost base to remain competitive. ASF may cause (i) an upturn in the number of sausage producers switching production using gut casings to production using collagen; and (ii) consumers to increase their consumption of sausage over higher-priced pork cuts. | Increased |
IT SYSTEMS/CYBER RISK IT systems are central to our business operations. Vulnerability to an external attack is an emerging 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 financial penalties. | We continually review our systems to ensure they are appropriately secured, and we have invested in firewalls and other security features. Employees are regularly trained to detect, avoid and mitigate cyber risks. External auditing of systems is conducted. | Broadly 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. Both collagen and non-collagen co-extrusion gels can be used on such systems. In 2019, there was some evidence of greater acceptance by fresh sausage producers of non-collagen co-extrusion solutions. | 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. It invested £7.3 million in research and development activities in 2019, to extend and differentiate the product range. Where there have been conversions to co-extrusion for processed sausages 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. | Broadly 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. Sterling exchange rate volatility may be impacted in 2020 by negotiations between the UK and the EU on future trading arrangements between them and by ongoing trading tensions between leading industrial nations. | 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. | Broadly unchanged |
RISK | IMPACT | MITIGATION | MOVEMENT |
BREXIT Regulatory changes to arrangements governing trading between the UK and the EU, beyond the current transition period, risks disruption to some Company sales. | An abrupt change to current trading arrangements between the UK and the EU at the end of the current transition period post the UK's withdrawal from the EU may cause short-term disruption of our export sales from Scotland to the EU and of sourcing of raw materials for production in Scotland; while any change to trading arrangements may also be on disadvantageous terms compared to current conditions. This risk impacts sales from product made in Scotland exported to the EU, which represents max. 7% of Group output. (The majority of Devro Group production and trade is unaffected by this risk.) | Comprehensive plans developed to mitigate the effects of an abrupt departure by the UK from the EU have been maintained. These include actions to address identified vulnerabilities such as the build of inventory stocks of key raw materials in the UK and of buffer stocks of UK-manufactured finished goods for sale in the EU. We have substantial manufacturing operations in the Czech Republic from where we continue to be able to supply most EU customers. We continue to engage with trade bodies and with the UK Government to ensure that collagen food products do not get overlooked in trade deal negotiations. | Broadly unchanged |
PEOPLE Shortage of people with relevant expertise and any failure by management to engage with all employees risks obstacles to the delivery of the Company's strategy. | There is 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. The Company has undergone considerable organisational change since 2016, aimed at embedding a global integrated platform, the success of which is dependent on continued engagement with employees. | We offer a competitive pay package to our employees and have launched an Employee Value Proposition to promote the benefits of employment with the Group. See page 47 for our employee engagement initiatives. | Broadly 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. There is currently an increased risk to the liabilities of the US scheme due to the proposed removal of the discount rate tapering in the US. | Any significant deterioration in the schemes' asset values or unforeseen increases in scheme liabilities might increase the Group's funding obligations and could deflect investment in the business. | 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 cash flow. | Increased |
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. | Broadly unchanged |
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. | Broadly unchanged |
Appendix 2
Related party transactions
Key management are deemed to be the Executive and Non-Executive Directors and the Executive Management Team (EMT) 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:
2019 £'m | 2018 £'m | |
Emoluments payable to Executive and Non-Executive Directors | ||
Short-term employee benefits | 1.1 | 1.2 |
Performance Share Plan (credit)/charge | (0.2) | 0.3 |
Post-employment benefits | 0.1 | 0.1 |
1.0 | 1.6 | |
Emoluments payable to remainder of the EMT | ||
Short-term employee benefits | 1.5 | 1.6 |
Performance Share Plan (credit)/charge | (0.1) | 0.2 |
Post-employment benefits | 0.1 | 0.2 |
Compensation for loss of office | 0.1 | - |
1.6 | 2.0 | |
Total emoluments payable to key management | 2.8 | 3.6 |
Transactions with the Group's pension schemes are disclosed in Note 26. Amounts due to the pension schemes at 31 December 2019 are £0.2m (2018: £0.3m)
The Group had no further related party transactions.