Devro : Half Year 2021 Results

For Immediate Release

29 July 2021

Devro plc

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2021

Growth accelerating, momentum set to continue

Devro plc ("Devro" or the "Group"), one of the world's leading manufacturers of collagen products for the food industry, announces its unaudited half year results for the six months ended 30 June 2021.

	Underlying results*	Statutory results
	H1 2021	H1 2020	H1 2021	H1 2020
		(restated)
Revenue (£m)	119.9	119.0	119.9	119.0
Operating profit (£m)	20.3	18.5	21.0	17.2
Operating profit margin	16.9%	15.5%	17.5%	14.5%
Profit before tax (£m)	17.7	14.8	18.4	13.5
Basic earnings per share (pence)	8.7p	7.2p	9.3p	6.6p
Interim dividend per share (pence)	2.8p	2.7p	2.8p	2.7p
Final dividend per share (pence)		6.3p		6.3p

• Underlying figures are stated before exceptional items (see Alternative Performance Measures section of the Half Year Financial Results Update for definitions, reconciliation to equivalent statutory measures and explanation of restatement). Restatement of prior period results relates to net finance cost on pensions, previously included within the non-underlying, now included within the underlying results.

Financial Highlights

• Group constant currency revenue up 3.1% to £122.7m on the prior year primarily driven by market share gains and improving pricing discipline reflecting the continued success in the execution of our growth strategy. Reported revenue marginally higher reflecting foreign exchange headwinds.
• Volumes of edible collagen casings up 4.2%.
• • Emerging market volume up 10% driven by South East Asia, China and Latin America.
  • Mature markets volume up 1% driven by strong growth in North America offset by weaker market conditions in UK & Ireland and Australia.
• Underlying operating profit of £20.3m, up 9.7%, and operating margin increased to 16.9% (H1 2020: 15.5%) benefiting from revenue growth, improving price/mix and ongoing cost savings which were partially offset by inflationary pressures.
• Underlying basic earnings per share up 20.8% to 8.7p.
• Improved free cash flow generation of £9.4m (H1 2020: £7.2m).
• Covenant net debt i of £103.1m (H1 2020: £121.5m, FY 2020: £109.5m), representing net debt to
  EBITDA ii of 1.6x (H1 2020: 1.9x, FY 2020: 1.8x). Further progress expected in H2 2021.
• Given the Group's financial position, trading performance and outlook, the Board has declared a modestly increased interim dividend of 2.8p.

Strategic Highlights

Continued progress on 3Cs strategy including:

• Targeted sales initiatives delivering profitable growth.
• Bellshill anticipated savings being realised.
• New product development pipeline building and now focused on both core and alternative technologies and products.
• ESG targets in place, inaugural CDP submission and new purpose launched internally.
• Planning for an investor seminar in late September focused on purpose, values and sustainability.

1

Commenting on the outlook Rutger Helbing, Chief Executive Officer of Devro, said:

"Devro's constant currency revenue growth has accelerated and has driven significant profit growth in the first half, demonstrating the successful execution of the strategy, and we enter the second half with good momentum across the business, and confidence in our future prospects. In the shorter term, for the second half we expect the strong underlying performance to continue, however reflecting the uncertainties relating to COVID-19 pandemic and foreign exchange headwinds, the Board's full year expectations are unchanged. The Board's confidence in the Group's prospects and the continued strengthening of the balance sheet has resulted in an increase in the dividend for the first time in four years, as well as an incremental increase in investments required to facilitate the sustainable growth we foresee based on underlying market dynamics, as well as our targeted sales actions."

Contacts
Rutger Helbing	Chief Executive Officer	020 3727 1340
Rohan Cummings	Chief Financial Officer	020 3727 1340
Richard Mountain	FTI Consulting	020 3727 1340

The audiocast and presentation will be available from 7:00am on Thursday 29 July 2021 and will be accessible using the link: https://streamstudio.world-television.com/943-1289-29481/en

The presentation will also be available on the company's website.

www.devro.com

_______________

1. Covenant net debt is shown before the impact of IFRS 16; see Alternative Performance Measures section of the Half Year Financial Results Update for definition and explanation.
2. EBITDA for covenant purposes is shown on underlying basis (before exceptional items) and before the impact of IFRS 16; see Alternative Performance Measures section of the Half Year Financial Results Update for definition and explanation.

2

HALF YEAR REVIEW

CEO REVIEW

We are pleased with the first half performance, which demonstrates what the Group is capable of achieving. While we are mindful of ongoing challenges, we are well positioned for the full year 2021 and have a strong platform for long term growth driven by our clear and consistent strategy.

The performance in the first half of the year highlighted good constant currency revenue growth, strong profit growth and ongoing robust cash generation. The significant multi-functional improvements we have made since 2018 in our structure, processes and competencies, has enabled us to continue to make strong progress against our strategic and financial priorities.

In the first half Group constant currency revenue growth was 3.1% to £122.7m, with edible casings volumes up 4.2%, improving price/mix, offset by a small decline in other products sales. In edible casings we saw volume growth in both emerging (+10%) and mature (+1%) markets. Our emerging markets showed good growth in H1 2021 with the exception of Russia and East where the performance was impacted by weakening currencies. In mature markets, North America (+19%) continues to drive our performance and in Continental Europe (+1%) we benefited from more favorable comparatives (impacted by de-stocking in H1 2020). Our reported results were impacted by the strengthening of Sterling against a basket of currencies, particularly US dollars, and revenue in the half was at £119.9m, up 0.8%. Underlying operating profit increased by 9.7% to £20.3m benefiting from operating leverage on higher revenue and further annualised cost savings (including from the closure of our Bellshill site at the end of June 2020). Free cash generation was £2.2m ahead of the prior year, and our covenant net debt/EBITDA ratio improved further to 1.6 times, from 1.8 times at year end 2020.

The Group has responded well to the ongoing challenges posed by COVID-19. Despite being faced by numerous challenges, we have continued to be able to safely operate our manufacturing sites as normal and have been able to meet all customer demand. We continue to operate our precautionary measures and our policy to be 'behind-the-curve' in terms of relaxation of those measures. In the first half there have not been material additional costs associated with COVID-19. From a revenue perspective we have seen some benefit in the year on year comparisons in China but only limited recovery in mature markets, with foodservice still impacted by lockdowns, particularly in the UK and Continental Europe.

With the significant progress we have made in our structure, processes and competencies, and the growth engine delivering momentum, we have started to prepare for the next phase of our development. An important foundation for this is the unearthing of our Purpose, Vision, Mission and Values. With the help of our employees, through an extensive engagement process, we have defined Devro's purpose as:

Creating the Added Layer of Value

Together Responsibly Better

Our Purpose will help us to broaden our business over time and to support that we are investing in product development for alternative technologies and markets.

We will further update on Purpose including corresponding values framework, and sustainability initiatives and efforts, at a separate investor event planned for the end of the third quarter of this year.

With our robust actionable growth plans, a strong operational platform and the longer-term market dynamics looking positive, we are confident that our strategy is working and that we will deliver sustainable long term growth. We also expect profit growth will continue to convert into robust cash generation allowing the Group to invest in incrementally growing and upgrading its manufacturing capacity to meet future needs, as well as in initiatives to further broaden our business while continuing to de-lever the balance sheet and paying a dividend.

3

HALF YEAR FINANCIAL RESULTS UPDATE

The Group delivered a positive performance in H1 2021 with a significant improvement in revenue growth, excellent profit leverage and ongoing robust cash generation.

For the six months ended June 2021 the Group achieved volume growth of 4.2% in edible collagen casings. Volumes in emerging markets grew 10% driven by South East Asia, China and Latin America. Volumes in mature markets were up by 1%, mainly driven by North America with continued growth in the Snacks category. The UK & Ireland and Australia were impacted from lower demand in the food service industry and generally weak market conditions.

Group revenue was up 3.1% on a constant currency basis and up 0.8% on a reported basis to £119.9m due to foreign exchange headwinds. The Group was encouraged by the positive progress made on price and mix especially during the second quarter. This reflects the better geographical mix, as well as price increases and targeted actions undertaken by the Group.

Underlying operating profit of £20.3m was 9.7% higher than the prior year (H1 2020: £18.5m) and the

underlying operating profit margin was up 140 basis points to 16.9% (H1 2020: 15.5%), benefiting from revenue growth, improving price/mix and continued cost savings which were partially offset by inflationary pressures.

After a review, the Group decided this year, to include net pension costs in the underlying results to better reflect the nature of these costs. Our full year total finance charge guidance including net pension finance cost remains unchanged.

The half-year underlying tax charge of £3.1m (H1 2020: charge of £2.8m) corresponds to a tax rate of 18% on underlying profits. The tax charge benefited from a one off revaluation of the UK deferred tax asset due to the change in the UK tax rate from 19% to 25% effective from 2023. Excluding this one off benefit the effective rate was 24%.

Underlying basic earnings per share increased 20.8% to 8.7 pence (H1 2020: 7.2 pence).

Free cash flow of £9.4m (H1 2020: £7.2m) reflects strong ongoing cash generation. Covenant net debt reduced to £103.1m and 1.6 times EBITDA.

REVENUE

		Reported	Constant	Reported		Change at		Change at
		Currency
		H1 2021	H1 2020		reported		constant
		H1 2021
		£m	£m		currency		currency
		£m
Revenue		119.9	122.7	119.0		+0.8%		+3.1%
REVENUE BRIDGE
% change				H1 2021 vs		H1 2020 vs
				H1 2020			H1 2019
Volume (EC*)					3.5%		1.4%
Price/country/product mix (EC*)				-0.1%		-1.8%
Other products					-0.3%		-1.1%
Foreign exchange					-2.3%		1.3%
Total					0.8%		-0.2%
*EC - Edible Collagen

Reported revenue increased 0.8% and was significantly impacted by currency translation. Constant currency revenue grew 3.1% as a result of edible collagen casings increasing by 3.5%, with emerging markets growing faster than mature markets. The decrease in other products reflected weaker collagen co-extrusion markets in Europe. Foreign exchange movements are mainly related to the strengthening of Sterling against the US Dollar and Japanese Yen.

4

EDIBLE COLLAGEN VOLUMES

Overall Group volumes grew by 4.2% in the first half. Emerging markets volume growth of +10% was driven by new business wins along with market share gains with existing customers in several target geographies. Our strongest growth in volumes were seen in South East Asia (+28%), China (+18%), and Latin America (+8%). Russia & East declined -21% due to foreign exchange headwinds impacting our competitiveness. Emerging markets contributed 31% to Group edible collagen revenues, 100 bps increase year on year.

Mature markets volume growth of +1% was driven by North America (+19%) from incremental business with existing customers. Continental Europe and Japan both saw a volume uplift of (+1%). This increase was offset by declines in the UK (-13%) and Australia and New Zealand (-7%), impacted by weaker collagen market conditions and the continuing adverse COVID-19 impact on foodservice channels.

The impact of price-mix and foreign exchange on edible collagen revenue in emerging and mature markets is set out below:

	Price/Mix	Foreign
		exchange
Emerging	-5%	-3%
Mature	2%	-2%

OPERATING PROFIT

Operating profit for the six months ended 30 June 2021 can be analysed as follows:

	2021	2020	Change
	£m	£m
Underlying EBITDA	31.0	29.5	5.1%
Depreciation & amortisation	(10.7)	(11.0)	2.7%
Underlying operating profit	20.3	18.5	9.7%
Exceptional items	0.7	(1.3)
Operating profit	21.0	17.2	22.1%

Underlying operating profit of £20.3m (H1 2020: £18.5m) was up by 9.7%. An increase in volumes and ongoing cost savings, led to strong operating profit growth.

Statutory operating profit of £21.0m (H1 2020: £17.2m) included £0.7m of exceptional income largely related to profit recognised on sale of Bellshill site.

An analysis of the overall movement in underlying operating profit is set out below:

		£m
	Underlying profit for H1 2020	18.5
	Price/country/product mix (EC*)	-
	Volumes (EC*)	1.5
	Contribution from other products	(0.2)
	Manufacturing cost savings	4.5
	Inflation	(2.7)
	Operating expenses	(0.5)
	Foreign exchange and other	(0.8)
	Underlying operating profit for H1 2021	20.3
*	EC - Edible Collagen
Inflation represents an increase in salary costs, raw materials and other manufacturing costs.
5