Animalcare Grp Regulatory News (ANCR)

30 April 2019

Animalcare Group plc

("Animalcare", the "Company" or the "Group")

Full Year Results for the 12 months ended 31 December 2018

Animalcare Group plc (AIM: ANCR), the European Animal Health business, announces its full year results for the year ended 31 December 2018.

Financial Highlights

· Reported revenue growth of 16.3% to £72.5m (2017: £62.3m)

o Up 2.7% on a proforma basis

· Underlying* EBITDA increased by 21.7% to £11.8m (2017: £9.7m)

o Up 2.8% on a proforma basis

· Statutory loss before tax, which incorporates non-underlying items, decreased to £0.4m (2017: £0.4m profit) with reported basic loss per share decreased to 1.7p (2017: 0.2p earnings per share)

· Improved underlying* cash conversion to 79.9% (2017: 65.9%) with net debt reduced by £2.3m to £23.6m

· Proposed final dividend of 2.4 pence per share giving a total dividend of 4.4 pence per share for 2018

Operational Highlights (including post-period)

· Jenny Winter, formerly of AstraZeneca, appointed Chief Executive Officer in October 2018

· Leadership team strengthened by appointment of Group Functional leaders in Supply Chain, Commercial, New Product Opportunities (CSO) and Technical / Regulatory functions and HR. In addition, we have appointed new country managers in Spain, the UK and Belgium

· Portfolio prioritisation performed including the sale of the non-core Wholesale business in Q3 2018, in line with focus on the higher-margin veterinary pharmaceuticals business

· Ten new products launched in 2018 with an additional six submissions made for products that are scheduled for launch in 2019 or early 2020

· Strategy was focussed to reflect the new combined Animalcare group and was approved by the Board post period. It builds on the experience and success of the legacy companies and reflects the rapidly growing and changing marketplace. The Board believe the five strategic priorities below will drive the future success of Animalcare and will contribute to both the short and long-term sustainable growth.

o Build strong financial basis through revenue growth, cash conversion, EPS growth and EBITDA margin growth

o Grow the business through a focussed portfolio of existing products and build a robust future pipeline in five key therapy areas in the companion animal and equine markets

o Build on existing customer relationships with vets and other stakeholders to deliver trusted products and services

o Business development focus with partners to in license and acquire innovative products

o Organisation for success, building leadership strength and attract, retain and develop talent for the future

*underlying measures are before the effect of non-underlying items which excludes fair value adjustments on acquired inventory, amortisation of acquired intangibles and acquisition and integration costs. A reconciliation to statutory measures is provided in the Chief Financial Officer's Review.

Jan Boone, Chairman of Animalcare Group plc, commenting on the results said: "Animalcare made good progress in 2018 as we focus on creating a competitive platform for future growth in the global animal health sector. We continue to improve the underlying profitability of the Group, and the disposal of our Wholesale Division was in line with our strategy to focus on the higher-margin veterinary pharmaceuticals business, a key growth driver. In order to maximise our potential as a significant player in the European and international animal health sector, we appointed Jenny Winter as CEO in October 2018 to maximise the potential of the business. With Jenny's leadership and expertise, I look forward to delivering our financial goals and strategic objectives over the coming years."

Jenny Winter, CEO of Animalcare Group plc, said: "Since joining Animalcare in October last year, I have been impressed by the competitive strengths of the business and the size of the growth opportunity. I have conducted a detailed review of all areas of the business and set out a strategy to enable us to build upon our capabilities. Our goal is to deliver sustainable and profitable growth and to achieve this, we will focus on meeting the needs of vets in therapeutic areas where we have existing strengths and can further add value. Improving cash generation is a key focus for the business and we will continue to drive improvements in supply chain efficiency and closely monitor our cost base, whilst selectively investing in future innovation. Achieving this will build an effective and focused organisation that is fit for the future and deliver growth over the next three to five years. "

Analyst briefing today

Jenny Winter, Chief Executive Officer, and Chris Brewster, Chief Financial Officer, will host a meeting and conference call for analysts to provide an update the Company, followed by a Q&A session, at 09:00am BST today at the offices of Panmure Gordon & Co, One New Change, London, EC4M 9AF.

Dial-in details:

International and UK dial-in:

+44 (0) 2071 928000

Belgium dial-in:

080048740

Conference ID:

5769312

Presentation slides will be made available on Animalcare's website, www.animalcaregroup.co.uk, prior to the conference call.

For further information, please contact:

About Animalcare (www.Animalcaregroup.co.uk)

Animalcare Group plc is a UK AIM listed veterinary sales and marketing organisation resulting from the merger of Animalcare and Ecuphar NV in July 2017. Animalcare operates in 32 countries in Europe and a further 16 worldwide. The company is focused on bringing new and innovative products to market through its own development pipeline, partnerships and via acquisition.

CHAIRMAN'S STATEMENT

Animalcare continued to make steady progress in 2018 as we focus on creating a competitive platform for future growth in the international animal health sector. Group revenues from continuing operations were up 16.3% to £72.5m from £62.3m with underlying EBITDA increasing by 21.7% to £11.8m (2017: £9.7m). On a proforma basis, which is used by the Board for comparison of financial performance, as set out in the unaudited income statement in the Chief Financial Officer's Review, revenue and underlying EBITDA growth versus 2017 was 2.7% and 2.8% respectively. After underlying adjustments totalling £9.4m, the loss before tax for the year on a reported basis was £0.4m (2017: £0.4m profit).

Sales growth was affected towards the end of the year by supply challenges related to third-party manufacturers, some of which impacted the wider market. We also experienced some delays to new product launches and lower demand in the large animal portfolio, particularly for antibiotics which was reflective of an overall market decline in demand.

Strategically, we decided to dispose of the Wholesale Division in order to focus resources on the higher-margin veterinary pharmaceuticals business. We also continued to focus on integration, supply chain efficiency and optimising portfolios and product launches across our expanded network.

The Board is confident of the long-term prospects of the animal health market and is actively preparing the business to make the most of the opportunities. Our key competitive advantages include a significant presence across Europe, with products sold in 32 markets directly and through partners. We also benefit from specialisation in key therapeutic areas for the companion animal and equine markets and believe we can capitalise on a growing reputation as a chosen partner for non-European companies and researchers wanting to commercialise innovative products in Europe.

In order to maximise the potential of the business, the Board appointed Jenny Winter as CEO in October 2018. Jenny has an excellent track record in the pharmaceutical industry, most recently with AstraZeneca, with particular expertise in supply chain effectiveness, which we believe is fundamental to improving our overall performance. We are grateful to Chris Cardon for his contribution as CEO and for taking on the role of Chief Strategy Officer.

Jenny has initiated a full review and identified a clear path for Animalcare as a business focused around core therapy areas and higher margin products with the vet as our primary customer. We are also setting out financial goals, including growing faster than the markets in which we operate and improving cash generation to enable us to invest in future growth and innovation.

Further details of the new strategy are set out in the Chief Executive Officer's Review and are linked to our Key Performance Indicators.

I would like to thank our employees for their support and dedication during 2018. We look forward to 2019 and beyond with confidence. We believe Animalcare is excellently placed to leverage its geographic, structural and therapeutic strengths, and has the opportunity to become a significant and recognised brand across Europe, with global potential for innovative products through best-in-class partnerships.

We look forward to keeping you updated on our progress during the year.

Jan Boone

Non-Executive Chairman

CHIEF EXECUTIVE OFFICER'S REVIEW

Since joining Animalcare in October 2018, I have been impressed by the competitive strengths of the business and the quality of the growth opportunity. Since joining and following the disposal of our wholesale business in September 2018, a thorough review has been undertaken. Following this review and detailed discussions with the Board, I have set out a strategy to enable us to build on the existing portfolio, experience and capabilities to become an important player in the European animal health market and beyond. I have also reviewed our pipeline and established the principles we will use to build a sustainable future.

The strategy is built around five pillars:

· Strong finances

· Growth portfolio

· Customer relationships

· Focused business development

· The organisation for success 

In the seven European markets where we have commercial operations we market and sell our own products. We also market and sell products from other companies through our established sales teams. In countries where we do not have sales teams, we work with our network partners to commercialise our own products. With this footprint we are active in 32 countries in Europe and a further 16 in the rest of the world.

We employ over 110 fully trained sales representative and technical experts who are working closely with our customers including dedicated Key Account Managers who work with our larger Corporate Partners

We have a broad portfolio of licensed drugs, vaccines and care products including nutraceuticals in the companion animal, equine and production animal segments of the market. In the UK we are also one of the leading providers of pet microchips and have a successful pet reunification service.

2018 Operational performance:

Financials

On a proforma basis, sales in 2018 increased by 2.7% to £72.5m versus the prior year and were in line with the market growth for the countries and segments in which we operate. This increase is driven by organic growth in companion animals (+6.0%) offset by a decline in production animal sales of 3.6%.

Growth in Companion Animals was driven by the launch of new products including Cosequin (Spain) and the annualised impact of products launched in 2017. Equine sales were flat and the decline in sales in production animals is driven by the reduction in the use of antibiotics and our antibiotics sales versus 2017 declined at 15%. Belgium and Italy saw the largest decline.

Our top three selling products in 2018 were Dinalgen Injection for the treatment of pain, Conofite, an antifungal treatment and Orozyme, an established oro-dental product and accounted for 12% of sales.

The top 20 products accounted for 47% of our total sales. Filavac (+38%), Aqupharm fluids (+27%) and Cosequin (joint supplement) (+230%) were the most significant growth drivers in the portfolio. Our microchip business in the UK continued to perform well with growth of 31%. Whilst overall sales in farm animal declined, Dinalgen Injection performed strongly with revenue up 31%.

Our operating overheads increased by +0.7% with a mix of increases in employee costs and decreases in other operational expenses.

Underlying EBITDA increased by 2.8% driven by growth in Germany and the UK, offset by a decline in Belgium and Spain. Overall growth was impacted by some out of stocks due to supply chain challenges, some delays in approvals for new products and the pace of the decline in antibiotic prescribing.

New product launches and regulatory filings.

We have been building our product portfolio and technical efficiencies in 2018. We have made 17 submissions for products that are either new to our portfolio, or new in a specific country both within Europe and Globally. We have made over 50 submissions including extensions to the life cycle of existing products that will increase efficiency and decrease costs.

We launched ten new products in 2018 and will see the full year impact of these launches in 2019.

In 2018 we completed a strategic review of our development pipeline and re focused our activities to drive growth in the next five years.

We have accelerated the development programme for our novel pain treatment by four months and we terminated the development of two products, either due to commercial or technical reasons.

Six projects were submitted to the regulatory authorities in 2018 including extensions to our "Care" range across multiple countries that will strengthen our portfolio in the key therapeutic areas. Launches are planned for these products throughout 2019 and into early 2020.

People

We have continued the work that was done in 2017 to strengthen our Leadership Team and have established a core team to drive simplicity and avoid duplication. We have appointed Martin Gore as our Group Head of Commercial, to drive excellence within our Sales and Marketing teams. Stephen Pearson has been appointed Group Head of Supply Chain and will be focussed on improving customer service and on time in full delivery to our customers as well as managing inventory. Karolyn Tapper continues to lead our Technical team and Christiaan Cardon has taken the role of Chief Strategy Officer with responsibility for identifying new opportunities for the Group.

The newly created Leadership Team consists of the Group functions and Country Managers to ensure that we remain close to our customers through the leaders in each country. Post year end, we have further strengthened our Country Manager team with the appointment of Sara Maddens to lead the team in Benelux.

Having the right people in place is critical to our long-term success. I am determined that Animalcare will develop a positive and unified culture, with a rewards system and career development path to attract and retain the best talent in our industry. We plan to introduce a Long-Term Incentive Plan in May 2019 to reward senior employees for sustained performance.

Integration

Animalcare has not yet seen the benefit of the combined organisation in the financial returns however great progress has been made on the 5 key areas outlined in plan in the past six months. Our highest priorities are:

1. Drive maximum value from the combined portfolio.

2. Establish a robust supply chain.

3. Align our pipeline to the growth strategy

4. Align our people strategy including our reward system.

5. Drive commercial excellence

We have established a new Leadership Team and organisational structure to facilitate the implementation of the integration plan and to drive performance including through simplification, focus and cross functional working. Clear targets are in place to track our progress.

Our growth strategy

To deliver sustainable and profitable growth we will focus on therapeutic areas where we have existing capabilities and with the greatest growth potential, through higher margin innovation, expansion of our geographic reach and careful control of our costs. By growing faster than the markets where we operate, controlling OPEX and improving operating cash conversion, we can focus resources where they will bring the best returns while continuing to reward shareholders.

Our future Pipeline

Our pipeline will focus on five therapeutic areas in the companion animal and equine markets where we are already strong and have the potential to add value through innovation. These are pain management, dermatology, dental, disease prevention and surgery. Animalcare also owns identichip, the UK's leading pet microchipping business and database, with significant scope for growth in the UK and internationally.

We will continue to support our production animal business through targeted products with specific customer groups.

Our customers

We will focus on vets and veterinary groups as our main customers, benefiting from our existing expertise and strong relationships. We want to become the chosen partner in Europe for innovative animal health products for companies around the world. We will seek to improve the quality and profitability of our portfolio by in-licensing and acquiring late- and commercial-stage products, and accelerating our own R&D through targeted investment.

Our footprint

We have established networks in 25 countries in Europe and another 16 globally. We will continue to develop these networks to maximise the sales of our products and where it makes sense to establish a presence we will do so - either as a stand-alone business or in partnership.

Summary and outlook

We are building an effective and focussed organisation that is fit for the future and we have a clear strategy to grow over the next 3 to 5 years. One of the critical things for our organisation is to track progress and we have established goals, objectives and measures so we can ensure we achieve our financial targets. We have established clear milestones and will report against those. To deliver on the expectations we set,we will focus on generating cash for investing, for rewarding our shareholders and for paying our debt. Success will be driven by the 5 pillars of our strategy - Strong finances, a portfolio for growth, our customer relationships, our business development and most importantly - our organisation of highly engaged and talented people.

I look forward to sharing more details over the coming weeks, months and years as we implement our strategy for success.

Jenny WinterChief Executive Officer

CHIEF FINANCIAL OFFICER'S REVIEW

Introduction and presentation of results

On 13th July 2017, Animalcare Group plc completed the reverse acquisition of Ecuphar NV. 2018 therefore reflects the first full year of trading as a combined Group. On a statutory basis, and in accordance with IFRS3, the results for the comparative year ended 31st December 2017 represent twelve months of Ecuphar NV and approximately five and a half months of Animalcare Group plc as previously constituted.

In addition, following the divestment of our Wholesale business on 4th September 2018, both the 2018 and 2017 financial information have been presented to show the Pharmaceuticals segment as continuing operations separately from the Wholesale segment, which has been classified as discontinued.

Accordingly, to help Shareholders to assess the Group, an unaudited Proforma Consolidated Income Statement has been provided, which reflects twelve months of trading from the continuing Pharmaceuticals segment for both entities for 2018 and 2017. The Board believes that this statement provides the most appropriate basis for comparison of current and future operating performance. On this basis, the Group has delivered proforma revenue growth of 2.7% to £72.5m (2017: £70.6m) and proforma underlying EBITDA growth of 2.8% to £11.8m (2017: £11.5m). On a statutory basis, including non-underlying items, the Group delivered a loss after tax of £0.8m (2017: £0.2m profit).

Underlying and Statutory Results

To provide comparability across reporting periods, the Group presents its results on both an underlying and statutory (IFRS) basis. The Directors believe that presenting our financial results on an underlying basis, which exclude non - underlying items, provides a clearer understanding of business performance. IFRS results include these items to provide the statutory results. All figures are reported at actual exchange rates (AER) unless otherwise stated. Commentary will include references to constant exchange rates (CER) to identify the impact of foreign exchange movements. A reconciliation between underlying and statutory results is provided at the end of this financial review.

Financial Review

Pro forma Consolidated Income Statement (unaudited)

Compared to the statutory results for 2018, the unaudited Pro forma Consolidated Income Statement set out below represents the continuing pharmaceuticals segment for both 2018 and 2017, with the 2017 comparatives including an additional 28 weeks of Animalcare Group plc's results prior to the reverse acquisition. This has the impact of increasing 2017 revenue and underlying EBITDA by £8.3m and £1.8m respectively as set out in the table below

:

Revenue

On a proforma basis, the Group delivered revenue growth of 2.7% to £72.5m (2017: £70.6m), split by product category as shown in the table below:

Companion Animals revenue continues to be the largest proportion of the Group's business, representing 61.4% of total sales, up from 59.4%. As our existing portfolio continues to mature and be impacted by pricing pressure and changes in the competitor landscape, new products remain the main driver for the overall revenue growth of 6.0% to £44.5m (2017: £41.9m). We launched seven new products during the year including the nutritional supplement Cosequin in Spain, which contributed £2.4m sales in total. This was supplemented by £0.8m annualised growth of products launched in 2017 that were sourced from our partners, principally in Germany. Overall growth was impacted by supply challenges towards the year end relating to certain third-party manufacturers.

Production Animals revenue contracted by 3.6% versus prior year period largely driven by lower demand for antibiotics offset in part by higher export sales of in particular Dinalgen (anti-inflammatory). Equine and other sales were broadly flat at £5.2m.

Underlying proforma continuing EBITDA increased by 2.8% to £11.8m with corresponding margin consistent with prior year at 16.3%. Gross margins at 51.5% modestly declined compared to prior year (2017: 52.1%) primarily reflecting lower margin sales mix in Companion Animals and the competitive environment. SG&A costs as a percentage of revenue reduced in the year from 35.9% to 35.2% as the business has continued to focus on costs efficiencies whilst investing in our people to support the integration and future growth.

Underlying proforma continuing basic EPS increased by 8.3% for the year to 11.7p, based on a weighted average number of shares of 60.0m applied to both 2018 and 2017. The effective tax rate was 22.3% (2017: 23.0%) primarily reflecting increased research and developments tax credits and partial utilisation of tax losses.

Underlying and Statutory Results

As a result of the reverse acquisition of Ecuphar NV, both the underlying and statutory basis for reporting results for the year ended 31st December 2017 include approximately five and a half months of Animalcare Group plc as previously constituted. The 2018 results are those noted in the unaudited Proforma Consolidated Income Statement above.

Overview of Underlying financial results - Continuing Operations

We delivered revenue of £72.5m and underlying EBITDA of £11.8m, representing growth of 16.3% and 21.7% respectively compared to the previous year. This was achieved through a combination of modest underlying growth as noted in the proforma results review together with a full year trading impact of the acquired Animalcare operations.

Underlying EBITDA margin improved to 16.3% largely reflecting the higher margin Animalcare business together with overall focus on costs to improve operating leverage. This focus includes a restructuring of our UK commercial team to put more emphasis on supporting larger corporate customers as well as continuing to provide strong service levels to independent practices. We expect this trend to continue and will closely monitor and adapt the Group's operations accordingly.

Basic underlying EPS decreased to 11.7 pence reflecting the 35.6% increase in underlying profit after tax to £7.0m offset by the significant increase in the weighted average number of shares resulting from the full year impact of the reverse acquisition (see note 8).

Overview of reported financial results

Including the loss from the discontinued operations and non-underlying items, the Group reported a loss after tax of £1.0m (2017: £0.2m profit).

A reconciliation of underlying results to reported results for the year to 31st December 2018 is shown in the table below:

The sale of our wholesale division was completed on 4th September 2018 with financial effect from 1st July 2018. The loss from discontinued operations was £0.8m which primarily represents the loss on disposal. Additional details are shown in note 4. Of the total £3.0m consideration, £2.4m has been received with a further £0.4m payable to the Group on 30th June 2019 in relation to the remaining intercompany balance owed. The balance of approximately £0.2m is subject to achieving specific revenue targets between 1st July 2019 and 30th June 2020 and payable in July 2020.

The amortisation and impairment of intangibles charge of £7.4m (pre-tax) principally comprises £4.6m charge arising on the acquired intangibles relating to the reverse acquisition and £2.5m charge in respect of previous acquisitions made by Ecuphar NV, namely Esteve SA which was acquired on 30th April 2015.

The remaining statutory items totalling £2.0m largely relate to restructuring and integration costs as detailed in note 5. Restructuring costs of £1.2m principally relate to executive changes, senior management restructuring and the UK commercial team reorganisation as noted earlier.

The reported basic loss per share, which incorporates non-underlying items, decreased to 1.7 pence (2017: 0.2 pence earnings per share).

Dividends

The Board is proposing a final dividend of 2.4 pence per share, adding to the interim dividend of 2.0 pence per share paid in November 2018, giving a total dividend of 4.4 pence per share for the year ended 31st December 2018, the first full financial year as a combined Group. The Board continues to monitor the dividend policy, recognising the need for a balance between investment to support future growth and dividend flow to deliver overall value to our shareholders.

Cash flow, net debt and borrowing facilities

The Group is committed to improving cash generation, important to generate the funds we need to invest for growth and to maintain dividend payments. We will monitor progress using cash conversion as a percentage of underlying EBITDA as set out in the table below:

The Group's underlying cash conversion significantly improved during the year to 79.9%, with net cash flow generated by our operations increasing to £7.4m (2017: £2.4m). Working capital increased by £0.9m, largely relating to further increased stocks. Our Group Head of Supply Chain has a clear target to reduce inventory levels over the next two years. Cash taxes of £2.2m were significantly higher than 2017 largely due to settlement of prior year taxes in Belgium and higher cash tax in Spain.

Net capital expenditure of £4.8m largely comprises investment in our product development pipeline of £4.2m from which six new products are expected to be launched during 2019 and into early 2020. The balance of expenditure largely relates to investment in our IT infrastructure which has made strong progress. This includes a new CRM system in Italy and SAP in the UK which went live on 1st January 2019. Both represent important steps in delivering our objective of common platforms across the Group which will help to drive integration and improve efficiencies.

The net borrowing position at the end of the year was £23.6m, representing net debt to underlying EBITDA leverage of 2.0 times (maximum bank covenant ratio is 3.5 times). At 31st December 2018, total facilities were £46.4m, of which £29.8m, net of cash balances, was utilised, leaving headroom of £16.6m. These bank facilities, together with the Group's operational cash flow, indicate that the Group has sufficient facilities available to fund its operations and allow for future investment.

Brexit

Whilst the outcome of the Brexit negotiations remain unclear our contingency preparations are on track to maintain commercial supply. We expect to incur one-off costs of circa £0.3m in relation to transfer of product registrations during 2019.

Summary and outlook

The Group delivered continued revenue growth in the year and translation through to both underlying profit and cash conversion is beginning to improve. We remain focused on our medium to long-term objective of delivering sustainable profit growth and improved cash generation, with cash flow expected to be supported by lower inventories.

Strategically and operationally it continues to be a time of change for the Group with the pace of integration of our businesses accelerating given the greater focus by our Leadership Team. During 2019, the drive for improved efficiency and integration across the business will continue including the integration of our Product Development and Regulatory teams. We will also focus on portfolio optimisation, improving service and driving efficiencies in our supply chain, all of which will require investment.

Whilst our performance was not as strong as originally expected, we have made steady progress across the business over the last 12 months and delivered growth at a time of much change within our business and the market. We will continue to seek opportunities to grow our business and I believe we are well placed to deliver medium to long-term shareholder value.

Chris Brewster

Chief Financial Officer

CONSOLIDATED INCOME STATEMENT

YEAR ENDED 31ST DECEMBER 2018

In order to aid understanding of underlying business performance, the Directors have presented underlying results before the effect of exceptional and other items. These exceptional and other items are analysed in detail in note 4 to this financial information. The accompanying notes form an integral part of these consolidated financial information.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

YEAR ENDED 31ST DECEMBER 2018

* May be reclassified subsequently to profit & loss

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

YEAR ENDED 31ST DECEMBER 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYYEAR ENDED 31ST DECEMBER 2018

Reverse acquisition reserve

Reverse acquisition reserve represents the reserve that has been created upon the reverse acquisition of Animalcare Group plc.

Other reserve

Other reserve mainly relates to currency translation differences. These exchange differences arise on the translation of subsidiaries with a functional currency other than Sterling.

CONSOLIDATED CASH FLOW STATEMENT

YEAR ENDED 31ST DECEMBER 2018

1. Financial information

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31st December 2018 but is derived from the 2018 accounts. The statutory accounts of Animalcare Group plc for the year ended 31st December 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered in due course. The external auditor has reported on those accounts; the report was (i) unqualified, (ii) did not include references to any matters to which the external auditor drew attention by way of emphasis without qualifying the reports and (iii) did not contain statements under section 498(2) or (3) of the Companies Act 2006.

2. Basis of preparation

The Group financial statements have been prepared and approved by the Directors under the historical cost convention, except for the revaluation of certain financial instruments, in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union "adopted IFRSs") and the Companies Act 2006 as applicable to companies reporting under IFRS. They have also been prepared in accordance with the requirements of the AIM Rules.

This is the first set of the Group's annual financial statements in which IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have been applied.

The consolidated financial statements cover the year ended 31st December 2018 and comprise the consolidated results of the Group. On 13th July 2017 the Group completed the reverse acquisition of Ecuphar NV ("Ecuphar"). In the comparatives financial statements, for the year ending 31st December 2017, the results of the group are included as of the 13th of July 2017. For the period from 1st January 2017 to the date of the reverse acquisition the results of Ecuphar, the substance of the reverse acquisition, are solely shown.

Wholesale divestment 2018

Following the divestment of the Wholesaling business Medini NV registered in Belgium, Legeweg 157i, 8020 Oostkamp on 4th September 2018, 2017 financial information have been restated in accordance with IFRS 5, to show continuing operations separately from discontinued operations. Both continuing and discontinued operations were restated to include elements relating to transactions between entities which were previously eliminated in the consolidation as intra-group.

Reverse acquisition Animalcare Group Plc 2017

The accounting policy adopted by the Directors applies the principles of IFRS 3 (Revised) 'Business Combinations' in identifying the accounting parent as Ecuphar NV and the presentation of the Group consolidated statements of the Company (the legal parent) as a continuation of financial statements of the accounting parent or legal subsidiary (Ecuphar NV).

This policy reflects the commercial substance of this transaction as follows:

· The original shareholders of the legal subsidiary undertaking were the most significant shareholders following admission to AIM, owning 46.9% of the issued share capital;

· The assets and liabilities of the legal subsidiary Ecuphar NV are recognised and measured in the Group financial statements at the pre-combination carrying amounts without restatement to fair value;

· The retained earnings and other equity balances recognised in the Group financial statements reflect the retained earnings and other equity balances of Ecuphar NV immediately before the business combination;

· The results of the period from 1st January 2017 to the date of the business combination are those of Ecuphar NV;

· The equity structure appearing in the Group financial statements reflects the equity structure of the legal parent, including the equity instruments issued under the share for share exchange to effect the business combination and adjusted in accordance with IFRS 3. This results in the creation of a 'reverse acquisition reserve' as at 1st January 2017, being the difference between the Company equity structure and that of Ecuphar NV.

3. Business Combinations and disposals of subsidiaries

Business combinations

Reverse acquisition of Animalcare Group plc

On 13th July 2017 Animalcare Group plc acquired 100% of the share capital of Ecuphar NV for a total consideration of £133,775k, satisfied through a combination of a share-for-share exchange and £33,145k in cash net of commissions.

The acquisition of Ecuphar NV by Animalcare Group plc is deemed to be a reverse acquisition under the provisions of IFRS 3 "Business Combinations".

In accounting for a reverse acquisition (rather than an acquisition) the combined financial statements are deemed to be a continuation of the books of the legal acquiree (Ecuphar NV) rather than a continuation of those of the legal acquirer (Animalcare Group plc).

The assets and liabilities of the Ecuphar NV are recognised and measured in the Group financial statements at the pre-combination carrying amounts, without restatement to fair value and no goodwill arises in relation to them.

Conversely, the assets of Animalcare Group plc and Animalcare Ltd are consolidated at their fair values.

The overall effect is that the consolidated financial statements are prepared from an Ecuphar NV perspective rather than Animalcare Group plc, and in summary this means:

Goodwill arises on the reverse acquisition when comparing the deemed fair value consideration of Animalcare Group plc acquiring the shares of Ecuphar NV. The fair value of the consideration is the market capitalisation of Animalcare Group plc at the acquisition date based on the closing share price on 12th July of 355p per share.

Reverse Acquisition Animalcare Group Plc

The acquisition consideration, net assets and goodwill are based upon the reverse acquisition of Animalcare Group plc by Ecuphar NV. The fair value of the consideration is the market capitalisation of Animalcare Group plc at the closing share price of 355p per share on 12th July 2017. Transaction costs of equity transactions relating to the issue and readmission of the Company's shares are accounted for as a deduction from equity where they relate to the issue of new shares.

The fair value of the net assets acquired and shown in the table above was £34,290k. The fair value of the consideration was £75,338k resulting in goodwill on reverse acquisition of £41,048k. In addition, the fair value uplift of inventory amounted to £401k, the fair value uplift of the identified intangibles amounted to £30,957k. Deferred tax assets and liabilities respectively were increased by £885k and £(6,843)k.

Disposal of subsidiaries

On 4th September 2018, the Group announced and completed the disposal of its Wholesaling business Medini NV registered in Belgium, Legeweg 157i, 8020 Oostkamp.

The Group recognised a loss including expenses in relation to the disposal of £682k during the year ending 31st December 2018. This is based on the total consideration of £2,989k and a net asset value of £3,622k, excluding intercompany debt.The Group has received an initial cash consideration of £2,413k including intercompany loan balances due from the Wholesale Division to other Animalcare Group Plc companies. A further £362k is payable to on 30th June 2019 in relation to the remaining intercompany balance owed. The balance of approximately £214k is subject to achieving specific revenue targets between 1st July 2019 and 30th June 2020 and payable in July 2020.

In accordance with IFRS 5, the income statement for the twelve months ended 31 December 2017 and 2018 have been restated to show continuing operations separately from discontinued operations. Both continuing and discontinued operations were restated to include elements relating to transactions between entities which were previously eliminated in the consolidation as intra-group. The effect of including these elements is shown as consolidation adjustments.

The net cash flow by discontinued operations can be found below:

The major classes of assets and liabilities of the Wholesaling business at the disposal date can be found below:

4. Non-Underlying items

The amortisation charge of acquisition-related intangibles largely relates to the Esteve acquisition of £2,037k (2017: £2,017k) and the reverse acquisition of Animalcare Group plc of £3,676k (2017: £1,685k, which was the amortization impact from the acquisition date, 12th of July 2017, until the 31st of December 2017).

Restructuring costs of £1,235 k include £203k in relation to compensation for loss of office in respect of Iain Menneer and a further £382k for other senior management.

5. Segment information - from continuing operations

For management purposes, the Group was organised into 2 segments: the Pharmaceuticals and the Wholesale segments. From 2018 onwards, the Group will only report one segment, being Pharmaceuticals, due to the sale of its Wholesaling business.

The Pharmaceutical segment is active in the development and marketing of innovative pharmaceutical products that provide significant benefits to animal health.

The Wholesale segment focused on the sale of veterinary pharmaceuticals, supplies and instruments in the Belgian market and is presented under discontinued operations in the financial information.

The measurement principles used by the Group in preparing this segment reporting are also the basis for segment performance assessment. The Board of Directors of the Group acts as the Chief Operating Decision Maker. As a performance indicator, the Chief Operating Decision Maker controls performance by the Group's revenue, gross margin, Underlying EBITDA and EBITDA. EBITDA is defined by the Group as net profit plus finance expenses, less financial income, plus income taxes and deferred taxes, plus depreciation, amortisation and impairment. Underlying EBITDA equals EBITDA plus non-underlying items.

The following table summarises the segment reporting from continuing operations for each of the reportable periods. As management's controlling instrument is mainly revenue-based, the reporting information does not include assets and liabilities by segment and is as such not presented per segment.

The segment EBITDA is reconciled with the consolidated net profit of the year as follows:

Non-current assets excluding deferred tax assets and financial instruments located in Belgium, Spain, Portugal, the United Kingdom and other geographies are as follows:

Revenue by product category

Revenue by geographical area:

Revenue by category:

Product revenue is recognised when the performance obligation is satisfied at a point in time. Service revenue is recognised by reference of the stage of completion.

Share Options:

During the year Iain Menneer exercised 5,142 share options granted in 2014 under the Save As You Earn scheme (SAYE) at an option price of £1.05 per share. The value of this exercise was £5,399. The SAYE options held by Chris Brewster, totalling options over 8,571 shares, lapsed during the year. As at 31st December 2018, no options are held or have been granted to the Directors.

6 Financial expenses - from continuing operations

Financial expenses includes the following elements:

7 Financial income - from continuing operations

Financial income includes the following elements:

8 Income tax - from continuing operations

Income tax

The following table shows the breakdown of the tax expense for 2018 and 2017:

The total tax expense can be reconciled to the accounting profit as follows:

The tax credit of £2,151k (2017: £1,454k) shown within "non-underlying items" on the face of the consolidated income statement, which forms part of the overall tax credit of £135k (2017, tax charge of £292k) relates to the items in note 5.

The tax rates used for the 2018 and 2017 reconciliation above are the corporate tax rates of 29.58% in 2018 and 33.99% in 2017 (Belgium), 25% (the Netherlands), 30.7% in 2018 and 29% in 2017 (Germany), 33% (France), 25% (Spain), 24% in (Italy), 21% (Portugal) and 19% (the United Kingdom). These taxes are payable by corporate entities in the above mentioned countries on taxable profits under tax law in that jurisdiction.

Changes to the UK corporation tax rate were substantially enacted as part of the Finance Bill 2017 (on 6th September 2016). They include reductions to the main rate to reduce the rate to 17% from 1st April 2020.

A similar tax reform in Belgium was substantially enacted in December 2017. The tax rate will gradually decrease from 33.99% (current) to 29.58% in 2018 and 2019 and to 25% from 2020 onwards.

Deferred taxes at the balance sheet date have been measured using the enacted tax rates and reflected in these financial statements.

Deferred tax

(a) Recognised deferred tax assets and liabilities

(b) Movements during the year

Movement of deferred taxes during 2018:

Movement of deferred taxes during 2017:

Tax losses

The Group has unused tax losses, tax credits and notional interest deduction available in an amount of £3,141k for 2018 (2017: £2,636k).

Deferred tax assets have been recognised on available tax losses carried forward for some legal entities, resulting in amounts recognised of £788k (2017: £699k). This was based on management's estimate that sufficient positive taxable basis will be generated in the near future for the related legal entities with fiscal losses.

9. Earnings per share

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holder of the parent Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all potential dilutive ordinary shares.

The following income and share data was used in the earnings per share computations: 

Profit / (loss) from continuing and discontinuing operations

Average number of shares (basic and diluted)

Basic earnings/(loss) per share

Diluted earnings/(loss) per share

10. Goodwill

On acquisition, goodwill acquired in a business combination is allocated to the cash-generating units which are expected to benefit from that business combination. These cash-generating units correspond to the nature of the business, following the separate divisions Pharmaceuticals and Wholesale. The goodwill has been allocated to the cash-generating units ("CGU") as follows: