Sprue Aegis guides down on profits after new supplier deal

Sprue Aegis has warned profits for the current year will be slightly lower than expected after it revised the terms of the chief supplier of all of its own-branded smoke alarms and accessories.

The AIM-listed company said it now expects operating profit for the year ending 31 December 2016 will be roughly £8.3m, slightly below market expectations.

Sprue has agreed to accept modest product price increases after it requested supplier DTL, part of the Jarden Corporation, made significant investment in its new high technology manufacturing facility and has born increases to its Chinese labour costs.

As a result, Sprue hopes to benefit from the manufacturing facility's significantly greater production capacity as product volumes increase over time.

Sprue has also agreed to take an equal share of the impact of the weaker pound, having previously agreed a fixed rate against of $1.62, as well as agreeing an annual retrospective volume/12 month average foreign exchange rate rebate mechanism.

With sterling at $1.42, this rebate mechanism has resulted in significant product on-cost on all DTL sourced product this year but Sprue's hope is that it will see its share of the benefit if purchase volumes increase and/or the average GBP/USD exchange rate improve from the current level.

"Despite the product on-cost, this is an important agreement for the group with its key supplier DTL," said executive chairman Graham Whitworth.

"The new terms allow Sprue to share equitably the impact of changes in production volumes and movements in the GBP/US dollar exchange rate with DTL whilst ensuring its key supplier has the capacity and an appropriate investment base to deliver the products to support Sprue's strategic plan."

Sprue shares were down 10% to 263.85p just before 1000 GMT on Thursday.