China’s growing economy, and its growing appetite for western delicacies, have pushed up the price of meat products – squeezing the profits of sausage-skin maker Devro.

In a statement ahead of its annual meeting on Wednesday, the company reported that higher demand for gelatine from the global food industry was increasing the price of animal hides. As Devro relies on the same animal hides for its collagen sausage casings, it has had to absorb rising raw material costs.

While revenues in 2012 were up 6 per cent on the previous year to £241.1m, its operating margin slipped from 18.7 per cent in 2011 to 17.9 per cent, and its return on capital dropped to 19.5 per cent from 21.5 per cent the year before.

Overall, the group’s output increased by 7 per cent last year, thanks mainly to a £33m investment to upgrade facilities in the Czech Republic, the US, Scotland and Australia. Devro plans to spend another £35m on further upgrades this year.

However, the group’s pre-tax profit dropped from £43.0m in 2011 to £40.8m in 2012, hampered by the cost of raw materials.

Steve Hannam, chairman of Devro, said: “The major capital investment programme in the Czech Republic is proceeding as planned, with significant additional volume scheduled to come on stream in the second half of this year in order to support further growth in 2014.”

Peter Page, chief executive, said the company was relying on the capital investment programme and increased prices to mitigate the rising cost of raw materials. “Capital investment gives us more volume, a lower unit cost, and continuous improvement to yield and productivity,” he said.

While the company expects the price of animal hides to continue rising, it also expects overall sales to grow – particularly in emerging markets, where demand is forecast to be driven by economic growth and increasing meat consumption.

Devro said it is looking for sales growth in western Europe, as well, as sausage makers stop using sheep gut casings, and switch to collagen casings.

However, Devro warned in its 2012 results that sales had been held back in the past by its own limited manufacturing capacity.

Shares in Devro fell by 3.4 per cent on Thursday to 324p.

Get alerts on Devro PLC when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article