* 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 ofits sausage casings this year and run down inventories to matchdwindling appetite for British breakfast bangers and pepperoni.
Devro's stock fell as much as 11.5 percent, making it thebiggest 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" indeveloped markets, where record pork prices have turnedcost-conscious consumers away from sausages.
"Devro will lower production volumes during the year tobalance short-term supply and demand," the company said, addingthat it had built up inventories last year in anticipation ofstronger demand.
Chief Executive Peter Page said production cuts would beimplemented at those factories where the cost of production ishighest.
"What we will do through this year is balance our output tomanage inventories," he told Reuters.
Devro, which says it makes enough collagen casing in a yearto stretch to the moon and back several times, runs plants inScotland, the United States, Australia and the Czech Republic.
Devro said its profit took a 2-million-pound hit last yearfrom "manufacturing issues" at its 35-year-old Sandy Run plantin 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 pretaxprofit, the company said.
The volume of sausages sold in the UK fell 5 percent overthe two-year period of 2012 and 2013, a result of pork pricesreaching an all-time high, Devro said.
Demand in western Europe was "subdued" due to an overallslowdown in consumer spending, the company said. In Australia, adecline in consumption of processed sausage has meant lowerdemand for collagen casings.
CHINA PLANT
The company said sterling's strength relative to the foreigncurrencies in which it earns most of its revenue was likely toweigh on its 2014 results. Devro earns only about 10 percent ofits revenue in sterling.
Analysts from Panmure Gordon cut their rating on Devro'sstock to "hold" from "buy", citing "poor volume visibility indeveloped markets and increased FX headwinds in 2014".
Bucking the trend of weak demand this year, sales to Germanyand parts of Latin America could increase, Devro said. Itsbiggest potential growth market, though, promises to be Asia.
Devro, which expects sales to rise this year in China andJapan, on Tuesday announced plans to spend 50 million pounds($83.6 million) on construction of a plant in China, which itexpects to start production in 2016.
The company said it would seek debt funding for the projectin the first half of this year.
"Part of what we are doing is transforming and modernisingour manufacturing base to have it better aligned to futuregrowth," 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, nearGlasgow, were down 9.0 percent at 277.6 pence at 1221 GMT on theLondon Stock Exchange.
