DVO.L Regulatory News (DVO)

Loss of market share/profit margins due to increased competitive pressures

The group operates in competitive markets throughout the world.

A major change in the production capacities, pricing policies or behaviour of our competitors, or consolidation between either competitors or major customers, could have a significant adverse effect on sales revenues and profitability.

In addition to substantial capital investment, the group invested over £6 million in research and development activities in 2015 to extend and differentiate the product range and improve the quality of our products.

We also expand the total collagen casings market by developing products which convert gut casing applications to collagen.

Devro provides a high level of technical support to key customers.

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.

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 impact on 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 seven facilities 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

Brexit

The June 2016 referendum on the UK's continued membership of the European Union could result in a vote to exit.

The EU single market for goods, services and people is beneficial to Devro's European operations. Trading and regulatory relationships beyond Europe are in many cases facilitated by EU membership.

A vote to leave would result in these arrangements lapsing, thereby leading to a period of uncertainty while new relationships were negotiated. New arrangements may not be secured before the existing framework falls, or may be on disadvantageous terms compared to the current conditions.

With seven manufacturing plants across the world, the group's diversity provides significant protection against this risk. Exports from our Scottish plants amount to c.10% of group turnover.

Increased

Financial risks

The main financial risks relate to foreign exchange rate movements, and the availability of short and long-term funding.

Adverse foreign exchange rate movements could reduce revenues and the sterling value of reported profits. Almost 90% of the group's revenues are currently invoiced in currencies other than sterling.

Failure to operate within the agreed financial framework could lead to inability to support long-term investment or to raise capital for funding growth.

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 12 months using forward contracts.

All term debt is arranged and managed centrally and appropriate covenant headroom is maintained.

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.

We monitor developments and changes in the global abattoir and leather Industries to maintain and develop appropriate relationships.

Decreased

Development of non-casing technologies

More than 85% 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 "coextrusion" 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 the sale 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 PV Industries B.V. (now "Devro B.V."), continues to be a world leader in this specialist category.

Unchanged

Impact of changes in regulations affecting food production

As a supplier to the food industry, the group complies with all relevant food safety regulations. These regulations are not only those of the jurisdictions where products are manufactured (the European Union, the USA and Australia), but also the regulations of the many countries in which products are sold. Regulatory authorities routinely enact changes to food safety legislation.

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 facilities.

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.

Increased

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

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

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

IT systems

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.

We ensure that our systems are regularly updated with appropriate external firewalls and security features. Regular penetration testing is conducted.

Increased

2015

£'m

2014

£'m

Emoluments payable to Executive and Non-Executive Directors

Short-term employee benefits

1.5

1.0

Post-employment benefits

0.1

0.1

1.6

1.1

Emoluments payable to remainder of the Executive Board

Short-term employee benefits

1.4

1.2

Post-employment benefits

-

0.1

Compensation for loss of office

-

1.0

1.4

2.3

Total emoluments payable to key management

3.0

3.4

2015

£'m

2014

£'m

Sale of services to subsidiary undertakings

4.4

4.3

Purchase of services from subsidiary undertakings

0.2

0.1

Royalty income received from subsidiary undertakings

0.6

1.1

Interest received from subsidiary undertakings

2.9

1.2

Interest paid to subsidiary undertakings

0.1

0.1

2015

£'m

2014

£'m

Derivative assets

1.0

1.9

Derivative liabilities

0.3

0.7

Receivables

- current

10.9

7.8

- non-current

78.1

63.2

Payables

- non-current

23.1

15.8