Animalcare Grp Regulatory News (ANCR)

25 September 2018

Animalcare Group plc

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

Interim Results for the six months ended 30 June 2018

Animalcare Group plc (AIM: ANCR), the pan-European Animal Health business, announces its interim results for the financial period ended 30th June 2018.

Financial Highlights

· Pro-forma revenue growth of 6.4% at AER (4.8% CER) to £47.8m (2017: £44.9m)

· Pro-forma underlying* EBITDA (excluding non-underlying items) increased by 5.1% to £6.3m (2017: £6.0m) reflecting improved translation of revenue growth through to profit through both focus on gross margin and cost control

· £1.6m net cash generated from operations including a cash outflow from non-underlying items totaling £0.8m

· 76.7% increase in statutory net profit to £3.7m (2017: £2.1m) from total operations, resulting in basic underlying EPS of 6.2 pence (2017: 8.9 pence)

· Proposed interim dividend of 2.0 pence per share, recognising the need to transition to a payment structure that reflects the change of year end to December

o Total dividends per share since the reverse acquisition to 8.7 pence per share

Operational Highlights (including post-period)

· Completed sale of Medini NV, Animalcare's wholesaling company, to Vetdis Holding for a total consideration of up to approximately £2.65 million

o Sale consistent with Group's goal to focus on higher-margin veterinary pharmaceuticals business

o Proceeds to be used initially to improve the Group's debt position and provide further support for product development, both organically and through strategic acquisitions

· Strengthened management team with appointment of Jenny Winter as Chief Executive Officer of the Group from 1st October 2018

· Restructured UK commercial team, in response to corporate consolidation of veterinary clinics in the UK, with greater focus on supporting larger corporate customers as well as continuing to provide strong service levels to independent practices.

· Received positive opinion from the Committee for Medicinal Products for Veterinary European Medicines for a centralised registration for a new product (Cortacare), which will be launched in the UK in Q4 2018

· Decentralised procedures for four new products submitted during the period with a further two planned in H2 2018. These six new products expected to be launched across a number of territories in 2019.

*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

Jan Boone, Chairman of Animalcare Group plc, commenting on the results said: "Our focus is to become a leading pan-European animal health company and delivering maximum future value for our shareholders. Over the first half we have made good progress in line with this as well as improving the overall profitability of the Group. The sale of our Wholesale Division was an important further step in the process and underlines our strategy to concentrate resources on our higher-margin veterinary pharmaceuticals business, which we believe will continue to be the main driver growth in the business. This is an exciting time for Animalcare and we look forward to working with Jenny, our newly appointed CEO and presenting a further update on the Group's integration and growth strategy in due course." 

For further information, please contact:

About Animalcare (www.animalcaregroup.co.uk)

Animalcare Group plc is a UK AIM listed veterinary sales, marketing and product development company resulting from the merger of Animalcare and Ecuphar NV.

Post-merger Animalcare is a pan-European animal health company, with a broad geographic footprint. The Company now has direct sales in seven countries (UK, Belgium, Netherlands, Spain, Portugal, Italy and Germany) and exports to approximately 50 markets worldwide.

The enlarged Company has nearly 100 sales representatives and 28 agents operating across Europe and owns 50 licensed drugs, eight vaccines and over 100 care and nutraceutical products.

Animalcare invests in developing its own pharmaceutical products, seeks distribution partnerships and product acquisitions.

For more information see Animalcare Ltd (www.animalcare.co.uk) and Ecuphar NV (www.ecuphar.com).

Chairman's Statement

Animalcare has made good progress over the first half of 2018 towards delivering the integration of our operations and improving the profitability of the Group, in line with the Board's expectations. Our rationale behind this transformational merger remains: to create a growing and successful pan European animal health business. The divestment of the wholesale business post-period end allows Animalcare to solely focus on developing and growing our higher margin veterinary pharmaceuticals business and combined with the recent appointment of Jenny Winter as Chief Executive Officer, we believe we have a strong foundation from which to create long-term shareholder value.

Financial Review

The Group completed the reverse acquisition of Ecuphar NV ("Ecuphar") on 13 July 2017. Accordingly, our statutory results for the half year to 30th June 2018 reflect six months trading of Ecuphar and Animalcare Group plc as previously constituted. The 2017 comparatives are for the Ecuphar business only. Following the divestment of the Wholesale business both the 2018 and 2017 half year financial information have been presented to show the Pharmaceuticals segment as continuing operations separately from the Wholesale segment, which has been classified as discontinued.

In order to help shareholders assess like-for-like performance, a pro-forma consolidated income statement has been prepared, which reflects six months trading from both Animalcare and Ecuphar for both 2018 and 2017 (including wholesale). On this pro-forma basis, the Group has delivered revenue growth of 6.4% at AER (4.8% CER) to £47.8m (2017: £44.9m). Underlying EBITDA (which excludes non-underlying items) increased by 5.1% to £6.3m (2017: £6.0m), demonstrating progress in improving the translation of revenue growth through to profit through both focus on gross margin and cost control. Our pharmaceuticals segment was the key driver of both the growth in revenue and in particular, underlying EBITDA.

The Group generated £1.6m net cash from operations in the first half which includes a cash outflow from non-underlying items totaling £0.8m. We have continued to invest in our product pipeline which is important to our future growth. Spend during the period was £1.8m and we remain on track to launch six new products across several territories during 2019.

On a statutory basis, Group revenue in our Pharmaceuticals segment increased by 40.1% to £35.3m (2017: £25.2m) driven by organic growth in the Ecuphar business which contributed £27.9m and £8.0m from the original Animalcare operations. Underlying EBITDA (which excludes non-underlying items as detailed in note 3) increased by 54.7% to £6.3m (2017: £4.0m) with £1.5m contributed by the Animalcare business which incorporates additional central costs including the enlarged Board of £0.2m. Including non-underlying items, which increased by £1.9m largely as a result of amortisation of acquired intangibles, the Group's profit after tax decreased to £0.7m (2017: £1.0m).

Further details on the financial performance, together with the impact of the sale of our wholesales business, can be found in the Business Review.

Board

We announced on 3rd August 2018 that Jenny Winter will join the Group as Chief Executive Officer from 1st October 2018. Jenny succeeds Chris Cardon, who will transition to Chief Strategy Officer, also effective from 1st October 2018. Jenny joins Animalcare from AstraZeneca with over twenty years' experience working in the pharmaceutical sector in various senior commercial roles. Jenny's wealth of experience will be pivotal in refining and executing Animalcare's post-acquisition strategy with a focus on creating a strong platform to drive growth. I would like to take the opportunity again to welcome Jenny to the Board and thank Chris for his significant achievements as Chief Executive Officer.

Dividend

The Board is proposing an interim dividend of 2.0 pence per share, recognising the need to transition to a payment structure that reflects the change of year end to December. This brings total dividends per share since the reverse acquisition to 8.7 pence per share. The Board intends to closely monitor the current dividend policy to ensure an appropriate balance between investment for future growth and dividend flow to deliver overall value to our shareholders.

Summary and Outlook

The Board is pleased with the continued revenue growth of the Group during the period and improving translation through to profit. Our ability to capitalise on growth in the wider market has now been improved by the divestment of the wholesale business, which will enable us to focus our resources on our higher-margin veterinary pharmaceuticals business. More broadly, management continues to work hard in continuing to deliver the integration of Animalcare and Ecuphar, which has created critical scale for the Group within the European animal health market and continues to progress. With Jenny joining the Company in October, it is our intention to present a further update on our integration and growth strategy at the time of the Group's full year trading update in January 2019.

This is an exciting time for Animalcare and with our strengthened leadership team, we are well placed to continue building Animalcare into a leading pan-European Animal Health company and delivering long-term value for our shareholders.

Jan Boone, Chairman

Business Review

Introduction

The Group completed the reverse acquisition of Ecuphar NV ("Ecuphar") on 13th July 2017. Accordingly, the Group's financial results for the six months period ended 30th June 2018 comprise the consolidated results of the Group with comparatives for the six months ended 30th June 2017 comprising the results of Ecuphar NV only.

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

To help Shareholders to assess the Group, a Proforma Consolidated Income Statement has been provided, which reflects six months of trading from both entities for 2018 and 2017. On this basis the Group has delivered revenue growth of 6.4% at AER (4.8% at CER) to £47.8m (2017: £44.9m) and underlying EBITDA growth of 5.1% to £6.3m (2017: £6.0m).

Financial Review

Underlying financial results

A summary of the underlying financial results, which the Directors believe provides a clearer understanding of business performance, is shown below:

Revenue

The Group delivered total revenue from continuing operations of £35.3m, an increase of 40.1% versus the prior year. This included £27.3m from the Ecuphar business, an increase of 8.5% (6.0% at CER) and £8.0m contribution from the acquired Animalcare operations. Revenue in all of our major markets in which we operate has shown growth, with the exception of Spain which has been adversely impacted by lower sales in productions animals.

Revenue by Product Category

Companion Animals revenue increased by 69.7% to £23.6m, 57.6% of which was driven by the acquired Animalcare business with the balance of 12.1% delivered by the Ecuphar operations. Organic growth was primarily driven by strong annualised growth of rabbit vaccines launched in Germany in H1 2017 supported by growth of our key products including Orozyme (oral hygiene).

Production Animals revenue declined by 1.3% on prior period largely driven by a 11.4% decline in sales of antibiotics to £3.1m (2017: £3.5m). This was offset by higher sales of in particular Dinalgen (anti-inflammatory) within our export business.

Equine sales increased by 24.1% to £2.9m due to phasing differences of export sales into the UK.

Operating results

Underlying EBITDA from continuing operations (which excludes non-underlying items as described below and detailed in note 3) increased by 54.7% to £6.2m (2017: £4.0m) with £1.5m contributed by the Animalcare business which incorporates additional central costs including the enlarged Board of £0.2m. Ecuphar's underlying EBITDA increased by 17.4% to £4.7m driven by strong growth in Spain and Germany partially offset by decline in both our Benelux and Italian operations.

Underlying EBITDA margin improved to 17.6% (2017:16.0%) reflecting the higher margin Animalcare business together with a 0.9% increase in the Ecuphar operations, largely driven by positive sales mix towards companion animal products and cost control. The latter is reflected in our operating costs, which have increased by £3.4m to £13.3m (2017: £9.9m) however have declined as a % of sales to 36.9% (2017:39.3%).

Non-underlying items

Non-underlying items incurred in the period are detailed in note 3 and primarily relate to acquisition related amortisation of £3.0m and integration and reorganisation costs of £0.7m (all figures are pre-tax)

Discontinued business

The sale of our wholesale division, announced on 4th September 2018, is consistent with our goal to focus on our higher-margin veterinary pharmaceuticals business. Of the £2.65m estimated total consideration, the Group has received an initial cash consideration of £2.05m including £1.72m in respect of intercompany loan balances due from the Wholesale Division to other Animalcare group companies. A further £0.37m payable to the Group on 30th June 2019 in relation to the remaining intercompany balance owed. The balance of approximately £0.23m is subject to achieving specific revenue targets between 1st July 2019 and 30th June 2020 and payable in July 2020.

We believe that the consideration is a fair valuation for our wholesaling business and see Vetdis Holding as an ideal company to take the business forward. The proceeds of the disposal will be used initially to improve the Group's debt position, but also provide further support for product development, both organically and through strategic acquisitions.

The disposed business has been accounted for as discontinued and the results of the wholesaling business are shown as loss on discontinued operations. This loss includes a £0.7m non-recurring impairment to the net asset value of the wholesaling business as at 30th June 2018 in order to account for such assets at their fair value, being the estimated total consideration of £2.65m noted above.

Earnings per share and dividend

The Group delivered a 76.7% increase in net profit to £3.7m (2017: £2.1m) from total operations, which, after taking into account the significant increase in the weighted average number of shares resulting from the reverse acquisition (see note 5), resulted in basic underlying EPS of 6.2 pence (2017: 8.9 pence).

The reported basic EPS, which incorporates non-underlying items, decreased to 0.1 pence (2017: 4.3 pence).

The Board is proposing an interim dividend of 2.0 pence per share, recognising the need to transition to a payment structure that reflects the change of year end to December. This brings total dividends per share since the reverse acquisition to 8.7 pence per share. The Boards intends to continue the current dividend policy, ensuring an appropriate balance between investment for future growth and dividend flow to deliver overall value to our shareholders.

Cash flow, net debt and borrowing facilities

The Group generated £1.6m net cash from operations (2017: £2.4m) which includes a cash outflow from non-underlying items totalling £0.8m. Working capital increased by £3.2m. This firstly reflects higher stocks in Belgium and Southern Europe, the latter reflecting a transition period of localising distribution facilities in Italy and Portugal. The balance primarily relates to decreased trade payables largely due to the unwind of supplier payables in relation to strategic stock build towards the end of 2017.

Net capital expenditure of £2.0m largely comprises investment in our product development pipeline of £1.8m from which six new products launches are expected in 2019.

The net borrowing position at the end of the period of £26.0m was in line with the previous FY17 year end, representing net debt to underlying EBITDA banking covenant leverage of 2.2 times (maximum covenant ratio is 3.5 times). At 30th June 2018, total facilities were £45.6m, of which £31.3m, net of cash balances, was being utilised leaving headroom of £14.3m. 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 expansion.

Operational Review

Product development

The product pipeline has continued to progress in line with expectations over the first half. In June we received a positive opinion from the Committee for Medicinal Products for Veterinary European Medicines for a centralised registration for a new product (Cortacare), which will be launched in the UK late 2018. During the Period, decentralised procedures for four new products were submitted and a further two are planned in the second half of the year. It is expected that these six new products will be launched across a number of territories in 2019.

New products through strategic partnerships

We continue to seek to broaden our product portfolio through strategic partnerships and there are a number of opportunities we are exploring. Several new launches were due to take place in the first half of 2018 however these have been subject to delays by distribution partners. We expect to launch these products during H1 2019.

In June we commenced distribution of Cosequin from US-based Nutramax, a nutritional supplement which promotes canine joint health. Sales to date have been above expectations. In July we signed an agreement with Assisi Animal Health for the distribution of "The Assisi Loop® or "Euro-loop 2.0" in Europe. This product is currently in pre-marketing phase with a modest impact expected in 2019.

People

We announced on 3rd August 2018 that Jenny Winter will join the Group as Chief Executive Officer from 1st October 2018. This will see Chris Cardon transition to Chief Strategy Officer, also effective from 1st October 2018, who will work with Jenny on delivering the Group's strategic objectives including new product introduction and identifying selective value-accretive acquisitions. We believe these changes create an optimal executive structure to take the business forward.

We continue to review and assess the roles required to deliver the integration of our operations and remain focused on, in particular, the optimal structure to manage and deliver benefits across the Group's increasingly complex supply chain.

Market changes

The Corporate consolidation of veterinary clinics in the UK is continuing at pace and is emerging across Northern Europe. Our UK business has recently restructured its commercial team to put more focus on supporting the 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 our operations accordingly.

Integration

As noted above, we completed the sale of our wholesale division post-period end. The sale of our wholesale division is consistent with our goal to focus on our higher-margin veterinary pharmaceuticals business including the integration of our pharma operations. More specifically, we have commenced work on the implementation of SAP within the UK, which we expect to complete in H1 2019, delivering a common IT platform across the group to leverage benefits and efficiencies including more automation of the financial consolidation process.

We remain on track to deliver the first meaningful cross-selling commercial benefits during 2019. We also continue to closely monitor our cost base and focus on efficiencies as we deliver the integration.

Brexit

The outcome of ongoing Brexit negotiations remains unclear. However, the Company continues to assess the potential impact of all eventualities on its business with a view to being fully prepared post March 2019. Our priority is to maintain commercial supply of product to our customers. The acquisition enables the new Group to transfer its UK registered Marketing Authorisations for products sold in the EU to an existing legal entity within the Group. We will continue to closely monitor the Brexit situation and take the necessary actions to ensure business continuity.

Summary and outlook

The Group has delivered continued revenue growth in the period and translation through to profit is beginning to improve. The Board remains confident in the Group's ability to deliver revenue and profit growth compared to H2 FY17 in the second half in line with expectations, despite the delays in the launch of certain new products from our distribution partners.

Strategically and operationally it continues to be a transformational time for the Group with the continuing integration of our businesses, the divestment of our wholesale operation together with the changes in Executive personnel and structure. Such changes, we believe, will allow greater focus on our pharmaceutical operations and application of our strategic objectives to deliver growth and long-term value creation for our shareholders. With Jenny Winter joining on 1st October 2018, the Board and management team will provide a more in-depth update on the integration and growth strategy in January 2019.

Pro forma Consolidated Financial Information

As noted previously, to help Shareholders to assess the Group, a Proforma Consolidated Income Statement has been produced, which reflects six months of trading from both entities as below. Pro forma information has been prepared in a manner consistent with the accounting policies adopted by the Group in preparing the audited financial statements for the year ended 31st December 2017.

Proforma Consolidated Income Statement

Compared to the statutory results, the unaudited proforma consolidated income statement includes six months of Animalcare Group plc's results in the 2017 comparatives.

On a proforma basis, revenue increased by 6.4% at AER (4.8% at CER) to £47.8m. Revenue growth was balanced across both our pharmaceuticals and (now divested) wholesale operations. Growth in our pharmaceuticals segment was principally driven by a 7% increase in Companion Animals revenue to £23.6m offset by a 1.3% decline in Productions Animals revenue to £8.9m.

Gross margins have declined by 0.6% to 42.8%, in line with our expectations and demonstrating progress when compared to the 1.5% decline for the full year 2017. The gross margin fall in the first half is principally driven by maintaining market share in the competitive environment at expense to margins, notably in the UK, together with lower margin sales mix within our companion animals and equine category, the latter in particular reflecting higher export sales.

Underlying EBITDA increased by 5.1% to £6.3m (2017: £6.0m), the growth being delivered by our pharmaceuticals segment which improved profitability by 6.5% at AER to £6.2m (2017: £5.8m).

The Group will continue to focus on improving the translation of revenue growth through to profit through both focus on gross margin and cost control. The pro-forma results are yet to reflect the full benefits from leveraging the Group's enlarged platform which include commercial synergies, operating efficiencies and optimisation of the R&D function. We will continue to maintain our focus on delivering the wide-ranging integration to deliver more meaningful value creation from 2019.

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 note 3.

Condensed consolidated income statement (continued - unaudited)

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 note 3.

Condensed consolidated statement of comprehensive income (unaudited)

Condensed consolidated statement of changes in equity (unaudited)

Condensed consolidated cash flow statements (unaudited)

Condensed consolidated cash flow statements (continued - unaudited)

Notes to the consolidated interim report

Animalcare Group plc ("the Company") is a company incorporated in England and Wales under the Companies Act 2006 and is domiciled in the United Kingdom. The condensed consolidated financial information as at, and for, the six months ended 30th June 2018 comprises the Company and its subsidiaries (together referred to as the "Group"). The nature of the Group's operations and its principal activities are set out in the latest Annual Report.

Basis of preparation and accounting policies

The condensed consolidated financial information for each of the six month periods ended 30th June 2018 and 30th June 2017 has not been audited and does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006. The comparative information for the year ended 31st December 2017 does not constitute statutory accounts however is based on the statutory accounts for that year, on which the Group's auditors issued an unqualified report and which have been filed with the Register of Companies.

The prior year comparatives represent the substance of the reverse acquisition and are those of Ecuphar NV. More detailed information was set out in the latest Annual Report on page 52.

The condensed consolidated financial information for the six months ended 30th June 2018 was approved by the Board of Directors and authorised for issue on 25th September 2018.

Except as described below, the condensed consolidated financial information for the six months ended 30th June 2018 has been prepared using accounting policies consistent with those of the Company's annual accounts for the year ended 31st December 2017 which were prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("adopted IFRSs"), and which will form the basis of the 2018 Annual Report.

Taxes on income in the interim periods are accrued using the estimated tax rate that would be applicable for the full financial year.

The following standards and amendments were adopted from 1st January 2018, the start of the new financial year. None of them have a material impact on the results of the Group:

- IFRS 9 "Financial Instruments" introduces new requirements for classification and measurement of financial assets and liabilities, impairment methodology and hedge accounts;

- IFRS 15 "Revenue from contracts with customers" provides a single, principles-based five-step model for measuring and recognising revenue arising from contracts with customers.

Restatement of comparative information - Six months ended 30 June 2017

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

In accordance with IFRS 5, the income statement for the six months ended 30 June 2017 has 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.

Going Concern

The principal risks and uncertainties facing the Group remain those set out in the latest Annual Report on pages 24 and 25.

For the purposes of their assessment of the appropriateness of the preparation of the condensed consolidated financial information on a going concern basis, the Directors have considered the current cash position and forecasts of future trading including working capital and investment requirements.

The Group meets its day-to-day general corporate and working capital requirements through existing cash and bank facilities.

The Group's forecasts and projections, taking account of reasonable possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities for at least the next 12 months. Accordingly, the adoption of the going concern basis in preparing the condensed consolidated financial information remains appropriate.