UPDATE 2-Devro to trim sausage skin output as appetite fades

Tue Mar 4, 2014 7:28am EST

* Sausage-skin demand falls in UK, Australia, eastern Europe

* Company says to match inventories to lower demand

* Full-year pretax profit falls 4.5 pct

* Shares fall as much as 11.5 pct

By Noor Zainab Hussain

March 4 (Reuters) - Devro Plc will cut production of its sausage casings this year and run down inventories to match dwindling appetite for British breakfast bangers and pepperoni.

Devro's stock fell as much as 11.5 percent, making it the biggest percentage loser on the FTSE-250 Midcap Index, after the company also reported a drop in full-year profit.

Devro, which makes edible collagen casings for bratwurst, salami and chorizo, said demand was "flat or diminished" in developed markets, where record pork prices have turned cost-conscious consumers away from sausages.

"Devro will lower production volumes during the year to balance short-term supply and demand," the company said, adding that it had built up inventories last year in anticipation of stronger demand.

Chief Executive Peter Page said production cuts would be implemented at those factories where the cost of production is highest.

"What we will do through this year is balance our output to manage inventories," he told Reuters.

Devro, which says it makes enough collagen casing in a year to stretch to the moon and back several times, runs plants in Scotland, the United States, Australia and the Czech Republic.

Devro said its profit took a 2-million-pound hit last year from "manufacturing issues" at its 35-year-old Sandy Run plant in the U.S. state of South Carolina, the company's oldest.

A sharp rise in raw material costs, as well as lower demand, also contributed to a 4.5 percent drop in full-year pretax profit, the company said.

The volume of sausages sold in the UK fell 5 percent over the two-year period of 2012 and 2013, a result of pork prices reaching an all-time high, Devro said.

Demand in western Europe was "subdued" due to an overall slowdown in consumer spending, the company said. In Australia, a decline in consumption of processed sausage has meant lower demand for collagen casings.

CHINA PLANT

The company said sterling's strength relative to the foreign currencies in which it earns most of its revenue was likely to weigh on its 2014 results. Devro earns only about 10 percent of its revenue in sterling.

Analysts from Panmure Gordon cut their rating on Devro's stock to "hold" from "buy", citing "poor volume visibility in developed markets and increased FX headwinds in 2014".

Bucking the trend of weak demand this year, sales to Germany and parts of Latin America could increase, Devro said. Its biggest potential growth market, though, promises to be Asia.

Devro, which expects sales to rise this year in China and Japan, on Tuesday announced plans to spend 50 million pounds ($83.6 million) on construction of a plant in China, which it expects to start production in 2016.

The company said it would seek debt funding for the project in the first half of this year.

"Part of what we are doing is transforming and modernising our manufacturing base to have it better aligned to future growth," Page said.

Devro recommended a final dividend of 6.10 pence per share, taking its total full-year dividend to 8.80 pence.

Shares in the company, which is based in Moodiesburn, near Glasgow, were down 9.0 percent at 277.6 pence at 1221 GMT on the London Stock Exchange.

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