CVS Group Regulatory News (CVSG)

CVS GROUP plc

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

Final Results for the year ended 30 June 2020

CVS, one of the UK's leading providers of integrated veterinary services, is pleased to announce its final results for the year ended 30 June 2020. The financial statements have been prepared under the requirements of IFRS 16 - 'Leases' for the first time. To aid comparability with the prior period, adjusted financial information (which is shown before the impact of IFRS 16) is also shown in the table below. The impact of IFRS 16 on the Group financial statements has been to decrease underlying profit before tax by £1.8m.

Financial Highlights

· Revenue up 5.2% to £427.8m

· Like-for-like sales5 growth for the Group in the first 8 months was 7.9%, reducing to 0.7% for the full year due to a significant reduction in revenue during the Covid-19 pandemic

· Healthy Pet Club members up 3.5% to 415,000

· Pre-IFRS 16 Adjusted EBITDA up 1.5% to £55.3m

· Pre-IFRS 16 Operating profit up 3.8% to £16.2m and post-IFRS 16 up 18.6% to £18.5m

· Pre-IFRS 16 Adjusted earnings per share decreased 5.6% to 44.1 pence per share

· Pre-IFRS 16 Cash generated from operations up 46.8% to £76.5m

· Leverage of 1.14x at 30 June 2020

Notes

1 Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is profit before income tax adjusted for interest (net finance expense), depreciation, amortisation, costs relating to business combinations and exceptional items.

2 Adjusted profit before tax is calculated as profit on ordinary activities before amortisation, taxation, costs relating to business combinations and exceptional items.

3 Adjusted earnings per share is calculated as adjusted profit before income tax less applicable taxation divided by the weighted average number of ordinary shares in issue in the year.

4 Percentage changes have been calculated throughout this document based on the unrounded values.

5 Like-for-like sales are defined as revenue generated from like-for-like operations compared to the prior year, adjusted for the number of working days. For example, for a practice acquired in September 2018, revenue is included in the like-for-like calculations in September 2019. This shows the underlying growth in revenue across all divisions, excluding the impact of current year acquisitions.

The annual report and accounts will be made available on the Group's website, www.cvsukltd.co.uk, together with this announcement from 24 September 2020 and will be posted to shareholders in due course.

This announcement is released by CVS Group plc and contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 ("MAR"), encompassing information relating to trading for the Company's current financial year, and is disclosed in accordance with the Company's obligations under Article 17 of MAR.

For the purposes of MAR and Article 2 of Commission Implementing Regulation (EU) 2016/1055, this announcement is being made on behalf of the Company by the directors named below.

Contacts:

Chairman's statement

"We emerge strong from the initial COVID-19 pandemic, ready to explore further growth opportunities"

Introduction

On behalf of the Board I would like to take this opportunity to thank all CVS employees who have worked tirelessly throughout the COVID-19 pandemic, often in challenging circumstances and with less support than usual. I would also like to thank those employees who agreed to be placed on furlough. The continued dedication and professionalism of our employees has helped to protect the business whilst enabling us to provide urgent and emergency care to our clients and our patients during this very difficult period. Detailed business planning and actions taken have enabled our continuing focus on customer experience and patient care. These combined factors give the Group a greater resilience in the face of previously unseen challenges.

Financial performance

We generated revenue for the year of £427.8m, a 5.2% increase over the prior year (2019: £406.5m). This increase reflects a focus on our core business and organic growth opportunities coupled with robust like-for-like sales growth of 0.7% for the Group as a whole (2019: 5.2%).

Adjusted EBITDA pre-IFRS 16 increased by 1.5% to £55.3m (2019: £54.5m) with the strong growth in the first eight months of the year partially offset by the initial phase of COVID-19. Adjusted EPS pre-IFRS 16 decreased by 5.6% to 44.1p (2019: 46.7p).

Cash generated from operations pre-IFRS 16 increased by 46.8% to £76.5m (2019: £52.1m) primarily due to the deferral of VAT payments to March 2021. Pre-IFRS 16 profit before tax remained constant at £11.7m (2019: £11.7m). This reflects an increase in exceptional costs mainly from impairment of assets and provisions of £4.3m following the decision to close 33 of our smaller branch sites, representing less than 1% of overall Group revenue, which were marginal or loss making; partially offset by a reduction in acquisition costs from both reduced activity and deferred payments. Basic EPS pre-IFRS 16 decreased by 13.8% to 10.0p (2019: 11.6p).

CVS finished the year with net debt of £62.1m (2019: £102.0m) and leverage of 1.14x (2019: 2.08x).

Culture, values and strategy

Our purpose is to give the best possible care to animals and our vision is to be the veterinary company people most want to work for. This is supported by our four strategic pillars. During the year under review, considerable work has been done in this area through engagement with our employees, by management and the Board. Find out more on our strategy in the Chief Executive Officer's Statement below.

CVS now employs 6,758 staff (2019: 6,548) including 1,859 veterinary surgeons (2019: 1,829) and 2,367 nurses (2019: 2,376).

Our colleagues are at the heart of our business and we are committed to investing in their continued development and wellbeing. Last year we announced the launch of our new wellbeing and mental health awareness programme in support of our colleagues with on-site support provided through trained mental health workplace champions. In November 2019 we signed the Time to Change Mental Health Pledge in recognition of our commitment in this area.

One of the key structural issues facing the veterinary profession in the UK has been the shortage of vets and nurses. CVS continues to take a number of actions and we are encouraged by the improvement seen in the vet vacancy rates, averaging 6.9% for the year to 30 June 2020 (2019: 9.1%). We will continue to invest in our people and our existing practices in order to position CVS as the employer of choice.

Governance

We are committed to ensuring we have the right balance of skills and experience within the Board. During the year we made changes to the Board, promoting Richard Fairman to Chief Executive Officer in November 2019 replacing Simon Innes. Ben Jacklin joined the Board as Chief Operating Officer and Robin Alfonso as Chief Financial Officer in November 2019.

Post year-end we also appointed a new Non-Executive Director, Richard Gray, in July 2020.

Dividends

Having taken advantage of government support during the COVID-19 pandemic, and in line with the approach taken by many other companies, the Board does not intend to recommend the payment of a final dividend.

Shareholder engagement

Prior to COVID-19, the Directors regularly held one-to-one meetings and calls with shareholders. Although the Directors temporarily suspended issuing guidance due to COVID-19, we continue our regular interactions with shareholders.

Outlook

CVS operates in a sector with favourable market and consumer trends, with pet owners who remain willing to spend money on their pets and medical enhancements increasing the range of services we can offer.

COVID-19 severely impacted our business in the last quarter of this financial year, reducing our revenues. CVS was eligible for, and successfully accessed, the Coronavirus Job Retention Scheme and placed over half of all employees on furlough. CVS also accessed support from taxation authorities in the UK and the Netherlands. I am pleased to say that post year-end, all of our employees have now returned from furlough leave.

As described more fully in the CEO's statement, trading in the first two months has been encouraging.

Despite continued uncertainty over Brexit, I am confident that CVS is well positioned to avoid significant adverse impacts from the UK's decision to exit the EU. Pharmaceutical manufacturers and wholesalers are increasing their stock levels in order to reduce the risk of supply shortages and, following the acquisition of Vet Direct in 2018, CVS now controls more directly its equipment and consumables supplies.

Looking ahead, we welcome the positive environment for acquisitions and are well placed to take advantage of growth opportunities.

The pace of growth in the UK economy may be impacted by Brexit and COVID-19 uncertainty, but the veterinary sector has proven to be resilient in past periods of economic downturn and the Board believes that CVS is well-positioned to withstand any potential future downturn.

Richard Connell

Chairman

24 September 2020

Chief Executive Office's statement

"Well positioned for future growth"

Introduction

I am pleased to share our 2020 Annual Report, my first as Chief Executive Officer of CVS Group plc. The past financial year reflects two distinct periods: the first eight months in which we delivered strong financial performance across all our business areas; and the final four months in which we experienced unprecedented disruption to our business as a result of the COVID-19 pandemic and the lockdown restrictions imposed.

Throughout the past financial year, the dedication, hard work and professionalism of all CVS colleagues has enabled us to continue to provide the highest levels of veterinary care to our clients and our patients. This has been particularly evident in the final four months of the financial year with colleagues working tirelessly to maintain services, often in challenging circumstances and with less support than normal, whilst others have supported in a different way through agreeing to be placed on furlough. I would like to thank all CVS colleagues for their outstanding contribution in the past financial year.

Through the efforts of all colleagues and the outstanding leadership provided by managers across our business in taking timely and, at times, difficult decisions, the Group finished the year with revenues recovering to pre COVID-19 levels and with leverage reduced. As we enter a new financial year, the Group is well positioned to deliver further organic growth through the provision of outstanding clinical care, to invest in our people and facilities and to consider opportunities for additional growth through acquisition.

Our COVID-19 impact and response

On 23 March 2020, strict lockdown measures were introduced by the UK government. The Royal College of Veterinary Surgeons ("RCVS") and the British Veterinary Association ("BVA") immediately issued a joint statement, restricting the work of veterinary surgeons to maintaining the food supply chain and carrying out urgent and emergency veterinary work only in practices. Similar restrictions were introduced by government and regulatory bodies in our non-UK territories.

The Group took swift and decisive action to maintain effective social distancing and safe working practices, with the primary focus on providing a safe environment for our employees and our clients. In line with the temporary relaxation by the RCVS of remote prescribing rules, we launched a new teleconsultation service for clients with patients requiring non-urgent / non-emergency services. Operationally, action was taken to protect our employees and the business, with teams split and shift patterns altered. Wherever possible we have promoted working from home. We enhanced the level of communication to all employees and maintained effective feedback mechanisms for all our staff. Individual risk assessments were carried out with local site employee consultation, appropriate measures implemented and "Staying COVID-19 Secure" posters displayed. In addition, appropriate Personal Protective Equipment ("PPE") was made available. Throughout the crisis the health, safety and wellbeing of our employees has been our key priority and we continue to work collaboratively with our employees to ensure they have a safe environment to work in.

As would be expected, the result of the restrictions was a significant reduction in our revenue streams in our small animal first opinion practices, our specialist referral centres, our associated integrated services and in our Equine Division. Farm practices were less impacted due both to the requirement to protect the food chain and the ambulatory nature of the veterinary work. Reflecting the reduced activity levels, we took swift action to temporarily close half of our small animal practices by number, representing approximately a third of our capacity by caseload. During this period, we undertook a detailed review of all of our practices and made a decision not to re-open 33 sites.

The Group was eligible for, and successfully accessed, the Coronavirus Job Retention Scheme ("CJRS") and placed over half of all employees on furlough. CVS also accessed support from taxation authorities in the UK and the Netherlands, in the form of tax payment deferrals, with the majority of UK VAT deferred until 31 March 2021, previously due to be paid in April 2020. Furthermore, the Group took action to preserve cash including, but not limited to, the reduction of non-essential spend, agreements with major suppliers to defer payments and voluntary temporary reductions in Director and senior manager salaries.

Our performance

In light of the strong performance in the first eight months of the financial year, and the gradual recovery in revenues post the initial impact of COVID-19, we delivered Revenue of £427.8m representing year-on-year growth of 5.2%, and adjusted EBITDA pre-IFRS 16 of £55.3m. The Group had like-for-like growth for the first eight months of the year of 7.9%, which reduced to 0.7% for the full year as a result of COVID-19. In addition, revenue of £18.3m was generated from current year acquisitions and the annualisation of prior year acquisitions.

We continue to see improvements in our leverage, driven by our improved cash generation across our operations and close control of working capital. Notwithstanding the impact of COVID-19, our leverage reduced to 1.14x at June 2020. Our improved balance sheet strength provides a strong platform for future growth in the coming year.

Strategy

CVS continues to operate an integrated veterinary platform, with veterinary practices and specialist referral hospitals at the core of our business, supported by a range of complementary services from Laboratories, Crematoria, Buying Groups, Vet Direct and Animed Direct. This platform will enable us to continue to provide outstanding service to our clients through the provision of the best possible care to our patients.

CVS is a people business with our outstanding and dedicated Clinical teams and support staff at the core of our strategy. We are committed to continue positioning CVS as the veterinary company people most want to work for.

We will continue to drive organic growth through recommending and providing the best possible clinical treatments to our clients. We continue to provide industry leading clinical training, with a commitment to evidence-based medicine whilst ensuring our clinicians have access to the right medicines at the right time. We also operate a robust quality improvement framework and were the first corporate to publish an annual Quality Improvement Report, evidencing our commitment to ensuring continuous learning and development.

We are committed to making CVS a great place to work and have a career in the profession. Our integrated model and scale provide an opportunity for our staff to have a diverse and varied career, whether in clinical roles or in leadership positions within the business. We provide flexibility to our employees wherever possible and we offer the best learning education and development in the profession.

We continue to invest in our practice facilities and equipment with investments made in the year including the relocation of our Buttercross veterinary practice and the opening of a shared service centre in Wetherby. We are committed to ensure that all our practices meet RCVS Practice Standards Scheme ("PSS") accreditation and are proud that 159 of our practices have achieved "outstanding" awards under this scheme. We continue to invest in our estate to ensure our facilities meet an excellent standard with leading clinical equipment to support our commitment to providing the best clinical care.

Wellbeing and mental health

We are committed to providing support to our colleagues in order to promote their positive wellbeing and positive mental health, I chair our wellbeing and mental health committee, which meets regularly. We have made considerable progress over this past year and trained over 243 Mental Health Champions which are active at a local level sharing mental health awareness initiatives, providing support to colleagues and signposting resources. In May we launched the 'going home' checklist to coincide with Mental Health Awareness Week and our working safely initiative which landed during the COVID-19 pandemic. This enabled us to encourage more awareness of the importance of self-care.

SignVideo Service

In February 2020, we were delighted to launch our new SignVideo service to make it easier for deaf pet owners who use British Sign Language ("BSL") to contact our practices and access veterinary advice and facilitate wider pet ownership. The new service allows deaf clients who use BSL to make telephone calls to CVS veterinary practices and attend in-practice consultations using fully qualified BSL interpreters via video calls and is shown to markedly improve the customer experience.

I would like to take this opportunity to thank Julie Rutter, an Animal Nursing Assistant whose enormous efforts and outstanding dedication have been instrumental in the launch of this new service. Julie gave a compelling presentation on deaf access to the CVS Equality, Diversity and Inclusion working party in the summer of 2019 and presented her proposals at our annual staff conference in November 2019.

Julie, a pet owner, who has been deaf since birth, explained the challenges that deaf people face in day-to-day life including the difficulties accessing veterinary services. As a result, CVS is the first veterinary group in the UK to deliver the SignVideo service at our 449 UK practices.

The service is available in CVS UK small animal, equine, farm and referral practices between the hours of 8am-6pm Monday-Friday (excluding bank holidays).

Sustainability

We take our responsibilities seriously and that extends to ensuring CVS is a sustainable business across the areas of Environmental Protection, Economic Viability and Social Equality. During the year, we have reviewed our sustainability strategy and created a new internal Sustainability Group to continue to drive the sustainability of CVS.

Our stakeholders

We continue to engage with stakeholders across our business, maintaining effective communication with our key stakeholders. A key focus during the height of the COVID-19 pandemic was ensuring regular and effective communication with our employees, industry bodies and our wider stakeholders. This focus enabled us to adapt rapidly to changing guidelines.

Outlook

Through the actions taken during the COVID-19 pandemic, and the support and professionalism of our colleagues, CVS is well positioned to withstand any future Brexit or COVID-19 disruption and deliver future growth.

We saw a continuing strong recovery from the close of the last financial year, which was faster than expected to reach pre COVID-19 levels. Trading for the first two months of this year are ahead of budget and up 3.5% on the prior year, with LFL sales similarly up 3.9%. Adjusted EBITDA was also comfortably ahead of that seen in the prior year (+6.4%). This primarily reflects continued clinical care and increased referrals. Cash generation remained strong in the first two months and leverage further reduced to 0.8x creating a further buffer against business disruption and the ability to invest in future growth.

I look forward to delivering our new strategy and sharing further success in the future.

Richard Fairman

Chief Executive Officer

24 September 2020

Operational review

"Developing our operations"

Over the last twelve months I am proud to say we have made great progress across our operations, and our businesses have performed well thanks to the hard work and dedication of all our teams. Central to that progress has been our commitment to creating a great environment to recruit, motivate and ultimately retain our talented people. We are a people business and our unrelenting focus on our employees has begun to reap significant rewards.

Our vision to become the veterinary company people most want to work for has permeated all our activities, and driven much of our success. Our vet vacancy rates have fallen significantly over the year to 6.9% (30 June 2019: 9.1%), as our attrition rates have continued to fall and our hiring rates improve. In November 2019, we became the first large veterinary employer in the UK to offer enhanced maternity pay for our colleagues, and this is one of many key steps in our effort to ensure talented veterinary staff can join CVS and have a long and flexible career with us.

Outstanding leadership driving improved clinical care

We continue to pride ourselves on the provision of the very best clinical advice, diagnostics and treatment to our patients. Alongside £12.4m investment in our equipment and facilities we have invested in a new clinical leadership structure across our veterinary practices, and we now boast some of the best clinical leaders in the profession across a range of roles including Clinical Directors, Hub Clinical Leads and Regional Directors. This improved leadership team has empowered our clinical teams in the delivery of the best possible clinical care. Our team of Hub Clinical Leads is formed of experienced veterinary surgeons and delivers guidance, support and training across all areas of clinical practice. Specific projects during the year have included driving higher levels of cytology and bacteriology in cases of ear infections, to ensure we are minimising excess use of antibiotics at the same time as giving patients the very best treatments. Similarly, we have rolled out our laparoscopic "keyhole" neutering expertise across large areas of our Small Animal Division, to ensure our clients have access to the latest technology in clinical care. By focusing on helping all our teams deliver better clinical care, we can improve the retention of clinical staff, improve our client satisfaction and most importantly do the very best for our patients.

We have expanded our MiNightVet services, and now operate 29 practices across the Group (30 June 2019: 22 practices). This enables us to outsource night work from our first opinion small animal vets, creating a great place for first opinion vets to work, whilst internalising that work within our Group. This allows us to retain revenues and crucially to have governance of the standard of clinical work offered to our clients and patients out of hours.

Commitment to continuous improvement

We have continued to lead the profession in all areas of quality improvement and clinical governance as reflected in our annual Quality Improvement Report. Specific areas of focus during the year have included a large scale project on the use of protected antimicrobials, which saw a 30% decrease for dogs and a 42% decrease for cats in the use of antimicrobials during the project period. Clinical governance and critical incident reporting is embedded within our practice operations and is an essential part of ensuring we continue to find new ways in which we can improve patient outcomes.

Acquisitions

We also made four acquisitions (seven surgeries) during the year which were all performing favourably to expectations prior to the onset of COVID-19 restrictions. Our increased focus on integration, as well as aligning our Operations and Acquisitions teams on practice selection, leaves us well placed to integrate future acquisitions successfully should opportunities arise.

Continued investment

We have made major strides over the past year in the effective operation of our business areas, through continued training and development of our Leadership teams in our front line businesses and empowering them to succeed. In the coming year we will continue to invest in these efforts, ensuring we give our front line teams the appropriate environment to deliver the best possible patient care, as well as doing everything we can to continue our progress towards being the veterinary company people most want to work for.

Ben Jacklin

Chief Operating Officer

24 September 2020

Financial review

"Resilient financial performance and strengthened balance sheet"

Despite the impact of COVID-19 CVS has continued to deliver growth in revenue and adjusted EBITDA with revenue by the financial year-end returning to pre COVID-19 levels. From 1 July 2019, CVS has adopted IFRS 16 Leases and utilised the cumulative catch up approach for initial recognition of assets and liabilities. Therefore, historic numbers remain unchanged. To aid comparability commentary on performance is initially on a pre-IFRS 16 basis and where applicable the impact of IFRS 16 is separately disclosed.

 Key financial highlights are shown below:

* Adjusted financial measures are defined on page 3 of the Annual Report and reconciled to the financial measures defined by International Financial Reporting Standards ("IFRS") below and on page 110 of the annual report (adjusted profit before tax and adjusted earnings per share). Management uses adjusted EBITDA and adjusted earnings per share ("EPS") as the basis for assessing the financial performance of the Group. These figures exclude costs relating to business combinations and exceptional items and hence assist in understanding the performance of the Group. These terms are not defined by IFRS and therefore may not be directly comparable with other companies' adjusted profit measures.

An explanation of the difference between the reported operating profit figure and adjusted EBITDA is shown below:

Pre-IFRS 16 performance

Revenue increased by 5.2% from £406.5m to £427.8m with the strong Group like-for-like growth in the first 8 months of 7.9% and subsequent recovery towards the end of the year offsetting the significant reduction in revenue streams experienced in the final 4 months during lockdown. Revenue in the year was also adversely impacted by the deferment of Healthy Pet Club ("HPC") revenue recognition from this financial year into the next as the ability to service performance obligations under the customer contracts during lockdown was restricted.

Adjusted EBITDA increased by 1.5% from £54.5m to £55.3m. As a percentage of revenue adjusted EBITDA decreased from 13.4% to 12.9% with the margin impacted by additional bad debt provision, increased share options costs and impact of deferring HPC revenue recognition. During the period CVS accessed the CJRS scheme with the £8.2m grant income included within employment costs.

Adjusted profit before tax decreased 3.1% from £41.4m to £40.1m with the increase in adjusted EBITDA, offset by a one-off increase in interest from the loan fee write off following the refinancing in January and increase in depreciation. Adjusted EPS (as defined in note 2 to the financial statements) marginally decreased 5.6% to 44.1p from 46.7p. Adjusted profit before tax and adjusted EPS exclude the impact of amortisation of intangible assets, business combination costs and exceptional items.

Pre-IFRS 16 profit before tax for the year remained constant at £11.7m. This reflects the movement in adjusted profit before tax, an increase in exceptional costs, offset partially by a reduction in acquisition costs from both reduced activity and deferred payments. Exceptional costs mainly arise from impairment of assets totalling £4.3m following the decision to close 33 of our smaller branch sites, representing less than 1.0% of overall Group revenue, which were marginal or loss making. Basic EPS decreased 13.8% to 10.0p from 11.6p.

Impact of IFRS 16

On 1 July 2019 the Group adopted IFRS 16 which replaced IAS 17 Leases and became effective for annual periods beginning on or after 1 January 2019. IFRS 16 effectively removes the distinction between finance and operating leases for lessees putting all lease arrangements onto the statement of financial position. On adoption the Group recognised right-of-use assets of £107.8m and lease liabilities of £105.8m in respect of leased properties, vehicles and equipment. In the income statement the charge for lease rentals, previously included within adjusted EBITDA, is replaced by a finance charge on the lease liability and a depreciation charge in respect of the right-of-use assets. Profit before tax is adversely impacted from the finance charge on lease liabilities being higher in early years than in later years. The net impact of IFRS 16 is to reduce the profit before tax from £11.7m pre-IFRS 16 to £9.9m post-IFRS 16. A full reconciliation of pre and post IFRS 16 measures are shown note 34 of the financial statements.

Taxation

The Group's effective tax rate was 42.3% (2019: 29.9%). A reconciliation of the expected tax charge at the standard rate to the actual charge in millions of pounds and as a percentage of profit before tax is shown below:

All of the Group's revenues and the majority of its expenses are subject to corporation tax. The main expenses that are not deductible for tax purposes are costs relating to acquisitions and depreciation on fixed assets that do not qualify for tax relief. Tax relief for some expenditure, mainly fixed assets, is received over a longer period than that for which the costs are charged in the financial statements.

The tax charge has increased by £0.7m from £3.5m to £4.2m whilst profit before taxation has decreased by £1.8m from £11.7m to £9.9m post IFRS 16. The increase in the tax charge is predominantly due to the re-measurement of deferred tax balances in respect of UK jurisdictions from 17.0% to 19.0% following the UK announcement to repeal the 17.0% rate from April 2020.

Financial impact of COVID-19

The impact of COVID-19 and lockdown was a significant reduction in our revenue streams. The chart below shows the rolling seven day average revenue in our GBR small animal practices relative to the level seen in early March 2020, prior to the UK lockdown and the guidance from RCVS and BVA. The data excludes recurring HPC revenue. Clearly, the initial impact of COVID-19 on the Group's revenue was swift and sharp. However, from the low point in the early part of April 2020, the gradual easing of lockdown and amended RCVS/BVA guidance, together with the adaptations we have made to our working regime, have resulted in a steady increase in revenues which have now recovered to pre-COVID-19 levels.

To mitigate the impact of reduced revenue, action was taken to preserve cash and reduce operating costs to protect adjusted EBITDA and financial covenants. Measures taken included, but were not limited to, access to CJRS, deferment of VAT payments and reduction in non-essential spend.

Click on, or paste the following link into your web browser, to view the associated PDF document.http://www.rns-pdf.londonstockexchange.com/rns/9484Z_1-2020-9-23.pdf

Timeline

• On 9 April 2020, the RCVS issued new guidance to allow more work to be undertaken whilst continuing to minimise contact and reduce the spread of COVID-19.

• On 19 May 2020, the RCVS issued further revised guidance removing the reference to consider whether treatment could be delayed for two months without causing patient welfare issues. In light of this, on 28 May 2020 the BVA issued updated guidance with the intention to "support veterinary practices to make the transition to providing a more normal range of veterinary services".

Statement of financial position

Pre-IFRS 16 performance

As at 30 June 2020 intangible assets amount to £229.8m (2019: £244.5m) primarily consisting of Patient data records and goodwill in relation to business combinations, in addition to £1.9m computer software. The net reduction of £14.7m relates primarily to further business combinations of £7.2m net of amortisation in the year of £22.2m.

Property plant and equipment of £51.6m (2019: £51.4m) relates to owner-occupied property, plant and equipment, vehicles and computer hardware across the Group. The net increase of £0.2m primarily relates to additions of £11.1m reflecting our continuing commitment to investing in our facilities net of depreciation in the year of £10.7m.

Other non-current assets primarily relate to investments and deferred tax assets totalling £1.2m (2019: £0.4m).

Current assets is £86.3m comprises inventories £18.7m (2019: £17.0m); trade and other receivables of £43.4m (2019: £51.6m); and cash and cash equivalents of £21.5m (2019: £12.5m). The reduction in trade and other receivables of £5.5m primarily relates to the HPC contract asset reducing from £8.5m to £6.0m.

Current liabilities are primarily comprised of trade and other payables of £87.7m (2019: £73.7m); provisions of £6.4m (2019: £nil); and current income tax liabilities of £0.8m (2019: £4.9m). The increase in trade and other payables is largely driven by VAT payment deferral of £15.0m. The increase in provisions of £6.4m is related to the closure of 33 underperforming sites. The reduction in corporation tax liability of £4.1m is a result of the move to the new quarterly instalment payment regime in the UK which brought forward an additional two quarters' payments which previously would have been paid in arrears.

Non-current liabilities of £105.9m (2019: £135.4m) is primarily comprised of borrowings of £83.5m (2019: £114.2m), deferred income tax liabilities of £21.5m (2019: £21.2m) and derivative financial instruments of £0.9m (2019: £nil).

Equity has increased by £4.9m to £168.0m mainly as a result of total comprehensive income of £6.9m, new shares issued and shares disposed from the EBT for £1.0m to settle obligations under the Group's SAYE scheme, transactions in relation to share based payments and associated deferred tax of £1.0m offset by the dividend payment of £3.9m.

Impact of IFRS 16

The impact of IFRS 16 is to recognise right-of-use assets of £98.1m (2019: £nil), current lease liabilities of £8.8m (2019: £nil) and non-current lease liabilities of £89.8m (2019: £nil), after adjusting for a property provision of £1.4m (2019: £nil). Corporation tax liability is also reduced by £0.4m and therefore equity reduces by £1.4m.

Bank facilities

The Group renewed and extended its bank facilities in January 2020. The facility was extended from ending on 23 November 2021 to 31 January 2024. The Group reduced the total facilities from £195.0m to £175.0m, a reduction of £20.0m, to reflect the continued focus and greater emphasis on organic growth and strong operating cash generation of the Group. The facilities are provided by a syndicate of four banks, NatWest, HSBC, BOI and AIB, and comprise the following elements:

• a fixed term loan of £85.0m, repayable on 31 January 2024 via a single bullet repayment;

• a four-year revolving credit facility ("RCF") of £85.0m, that runs to 31 January 2024;

• an envisaged, but not committed, accordion facility of up to £100.0m, which runs to 31 January 2024; and

• in addition, the Group has a £5.0m overdraft facility renewable annually.

The two financial covenants associated with these facilities remain unchanged and will continue to be calculated based on the Group's accounting policies applicable at 30 June 2019 for the duration of the facilities i.e. pre-IFRS 16.Cash flow and net debt movement

Net debt decreased by £39.9m from £102.0m in 2019 to £62.1m. The movement in net debt is explained as follows:

Pre-IFRS 16 performance

Cash flow from operating activities increased 46.8% from £52.1m to £76.5m. The increase primarily reflects growth in EBITDA and deferral of VAT payments. In addition, cash was collected on HPC contracts for which the recognition of revenue was deferred from this financial year into the next as we were unable to fully perform the performance obligations due to COVID-19.

The analysis of capital expenditure in the table above reflects a broad split between expenditure that we expect to increase profit and that which we believe will primarily maintain profit. This split can only ever be approximate. Development capital expenditure includes expenditure on new sites, relocations, significant extensions and significant new equipment. All other expenditure is included as maintenance.

No corporation tax relief is received on the majority of the amortisation and transaction costs which are deducted in arriving at the unadjusted profit before taxation figure. Therefore, taxation paid moves broadly in line with the adjusted profit before tax of the Group. The increase in taxation paid in the year is primarily as a result of the new quarterly instalment payment regime in the UK which required the Group to pay quarterly instalments for year ended 30 June 2020 four months earlier than in previous periods.

The interest payment of £2.9m was marginally lower than last year's £3.4m reflecting the lower average net debt during the financial year

Cash available for discretionary expenditure ("free cash flow") increased from £32.5m to £55.4m.

Development capital expenditure of £2.3m was incurred in the year on relocating practices and £1.4m on refurbishing existing sites. Acquisition costs of £7.2m was paid for the seven surgeries acquired during 2020 and £0.7m was paid in respect of completion net asset adjustments for businesses acquired in the 30 June 2019 financial year. In relation to the seven surgeries £nil consideration was payable at 30 June 2020 in respect of completion net asset adjustments.

Exceptional items of £0.7m were paid in relation to Board restructuring costs.

Proceeds from Ordinary shares and sale of treasury shares arose due to the exercise of options under the Group's approved SAYE scheme which allows staff to save regular amounts each month over a three-year period and benefit from increases in the Group's share price over that time.

The movement in debt issue costs was £0.7m, which represents the £1.0m amortisation of costs during the year, which is partly offset by the capitalisation of costs of £1.7m associated with the January 2020 refinancing.

Impact of IFRS 16

The impact of IFRS 16 moves the cash flow in respect of lease rentals from cash generated from operations to repayment of the right-of-use liability.

Net debt and borrowing covenants

The Group's net debt comprises the following:

The total borrowings principally consist of:

· a £85.0m term loan (gross of unamortised issue costs) (2019: £95.0m). The term loan is repayable in one bullet payment in 2024; and

· £nil drawn down under the RCF (gross of unamortised issue costs) (2019: £20.0m). The RCF is available until 2024.

£85.0m of the RCF remained unutilised at 30 June 2020 (2019: £75.0m). The Board remains committed to expanding the Group through organic growth and selective acquisitions.

The two financial covenants associated with the Group's bank facilities are based on Group borrowings to EBITDA and Group EBITDA to interest ratios. EBITDA is based on the last twelve months' performance adjusted for the full year impact of acquisitions made during that period. The EBITDA to interest ratio must not be less than 4.5x. At 30 June 2020 it was 19.3x.

The covenant levels allow a maximum Group borrowing to EBITDA ratio of 3.25x, although it is not the Group's intention to operate at this level. The gearing ratio decreased during the year from 2.08x at 30 June 2019 to 1.14x at 30 June 2020. This decrease in ratio reflects the decrease in net debt. The Group manages its banking arrangements centrally. Funds are swept daily from its various bank accounts into central bank accounts to optimise the Group's net interest payable position.

Interest rate risk is also managed centrally and derivative instruments are used to mitigate this risk. On 28 February 2020, the Group entered into two four-year fixed interest rate swap arrangements to hedge fluctuations in interest rates on £70.0m of its term loan facility.

Going concern and viability

At the Statement of Financial Position date the Group had cash balances of £21.5m and an unutilised overdraft facility of £5.0m. Total facilities of £175.0m are available to support the Group's organic and acquisitive growth initiatives over the coming years, comprising a term loan of £85.0m and an RCF of £85.0m. The Directors consider that the £5.0m overdraft and the £170.0m facility enable them to meet all current liabilities when they fall due. Since the year end, the Group has continued to trade profitably and to generate cash.

After consideration of market conditions, the Group's financial position (including the level of headroom available within the bank facilities), financial forecasts for the three years to 30 June 2023, its profile of cash generation and the timing and amount of bank borrowings repayable, and principal risks, the Directors have a reasonable expectation that both the Company and the Group will be able to continue in operation and meet their liabilities as they fall due over the period. For this reason, the going concern basis continues to be adopted in preparing the financial statements.

The three year period is appropriate since it aligns to the forecasting period.

Long-term growth

The Group has generated consistent growth in the scale of its business and profits over recent years. A summary of the compound annual growth rates ("CAGR") over the past five years in key financial figures is as follows:

At the year end the market capitalisation was £727.8m (1,030p per share), compared to £511.1m (724p per share) at the previous year end.

The Directors consider that the Group has only one significant third party supplier contract which is for the supply of veterinary drugs. In the event that this supplier ceased trading the Group would be able to continue in business without significant disruption in trading by purchasing from alternative suppliers.

Certain statements in the Annual Report are forward looking. Although the Board believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.  

Robin Alfonso

Chief Financial Officer

24 September 2020

Key performance indicators

Financial KPIs

The Directors monitor progress against the Group strategy by reference to the following financial KPIs. Performance during the year is set out in the table below:

Non-financial KPIs

Our non-financial measures help us track important data which allows us to allow us to monitor our core strategic goals.

These new non-financial KPIs align with our new strategy however data is only available for (1) one year, (2) three years, (3) five years

Principal risks and uncertainties

Risk management structure

The Board has overall responsibility for ensuring risk is appropriately managed across the Group. The day-to-day identification, management and mitigation of risk is delegated to the Group's senior management.

Risk registers are prepared which evaluate the risks most likely to impact the Group. Staff across the business are involved in the process to ensure all potential areas of risk are adequately identified and recorded. Controls that are currently in place are assessed in order to determine the extent to which they mitigate risk and actions are determined where it is considered appropriate to reduce risk further.

The Group's businesses are subject to a wide variety of risks. Some of the most significant risks are explained below together with details of actions that have been taken to mitigate these risks.

The key roles and delegated responsibilities

Risk appetite

The effectiveness of our risk management approach relies upon a culture of transparency and openness that is encouraged by both the Board and senior management. The Group's appetite for risk is considered low; whilst some risk is required in order to develop the business and invest in future growth, the Group has no appetite for major risks which cannot be effectively mitigated through appropriate controls.

Assessment of principal risks

During the year the Board undertook a robust, in-depth and comprehensive assessment of the emerging and principal risks facing the Group and specifically those that might threaten the delivery of its strategic business model, its future performance, solvency or liquidity. A summary of the principal risks and uncertainties that could impact on the Group's performance is shown on pages 43 to 53 of the Annual Report.

COVID-19

The Board has reviewed the risks and opportunities that may arise through COVID-19 or similar pandemic and as a result has implemented a number of risk management plans in areas which could be impacted. The medium to longer-term effects of COVID-19 remain unclear but the Board and Executive Committee continue to monitor developments and plan accordingly.

The key risk areas for COVID-19 are:

· Our people - The current COVID-19 pandemic has the potential to cause a significant impact on the Group's business. It has impacted staffing levels with the need for employees to self-isolate and others required to work from home. This may have a significant impact on our ability to effectively staff practices and provide ongoing care to our patients.

· The economy - The pandemic could have a significant medium-term impact on the economy and clients' ability to spend on their pets. This could affect the Group's ability to comply with its bank facilities and the availability of liquidity in the market. Whilst the sector has proven resilient in past economic downturns, there is considerable uncertainty at the current time.

· Our supply chain - The COVID-19 pandemic creates a new and potentially serious risk to ongoing supplies. Manufacturers are taking actions to prevent supply issues. However, there is a risk of an ongoing fall in the level of supply.

Brexit

Brexit continues to present various risks and uncertainties which the Board and senior management continue to manage. The key areas of focus are:

· Our people;

· The economy; and

· Our supply chain.

Principal risk occurrence

 Consolidated income statement

 For the year ended 30 June 2020

All activities derive from continuing operations.

Reconciliation of adjusted financial measures

The Directors believe that adjusted profit provides additional useful information for shareholders on performance. This is used for internal performance analysis. This measure is not defined by IFRS and is not intended to be a substitute for, or superior to, IFRS measurements of profit. The following table is provided to show the comparative earnings before interest, tax, depreciation and amortisation ("EBITDA") after adjusting for costs relating to business combinations and exceptional items.

* Includes amounts paid in respect of acquisitions in prior years expensed to the income statement.

Consolidated statement of comprehensive income

for the year ended 30 June 2020

Consolidated Statement of financial position

as at 30 June 2020

Company registration number: 06312831

The financial information comprising the consolidated income statement, the statement of consolidated comprehensive income, the consolidated balance sheet, the consolidated statement of changes in shareholders' equity, the consolidated cash flow statement and related notes, were authorised for issue by the Board of Directors on 24 September 2020 and were signed on its behalf by:

Richard Fairman Robin Alfonso

Director Director

Consolidated statement of changes in equity

for the year ended 30 June 2020

Consolidated Statement of cash flow

for the year ended 30 June 2020

Notes to the consolidated financial statements for the year ended 30 June 2020

for the year ended 30 June 2020

1. Summary of significant accounting policies

Statement under s498 - publication of non-statutory accounts

The financial information set out in this preliminary announcement does not constitute statutory financial statements for the years ended 30 June 2020 or 2019, for the purpose of the Companies Act 2006, but is derived from those financial statements. Statutory financial statements for 2020, on which the Group's auditors have given an unqualified report which does not contain statements under Section 498(2) or (3) of the Companies Act 2006, will be filed with the Registrar of Companies subsequent to the Group's next annual general meeting. Statutory financial statements for 2019 have been filed with the Registrar of Companies. The Group's auditors have reported on those accounts; their reports were unqualified and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.

Basis of preparation

The consolidated financial statements, from which this preliminary announcement is derived, have been prepared in accordance with EU-adopted International Financial Reporting Standards ("IFRS") and International Financial Reporting Interpretations Committee ("IFRIC") interpretations and in line with those provisions of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, except for certain financial instruments and share-based payments that have been measured at fair value.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing these financial statements. Further details are provided in the Corporate Governance Statement on pages 56 to 60 of the Group's Annual Report.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all years presented in the financial information.

Use of non-GAAP measures

Adjusted EBITDA, and adjusted profit before tax ("adjusted PBT") and adjusted EPS

The Directors believe that adjusted EBITDA, adjusted PBT and adjusted EPS provide additional useful information for shareholders on the Group's underlying performance. These measures are used by the Board and management for planning and internal reporting and are aligned to our strategy and KPIs. A subset is also used by management in setting Director and management remuneration. The measures are also used in discussions with the investment analyst community. These measures are not defined by IFRS and therefore may not be directly comparable with other companies' adjusted measures. It is not intended to be a substitute for, or superior to, IFRS measurements of profit or earnings per share.

Adjusted EBITDA is calculated by reference to profit before income tax, adjusted for interest (net finance expense), depreciation, amortisation, costs relating to business combinations and exceptional items.

Adjusted profit before income tax is calculated as profit on ordinary activities before amortisation, taxation, costs relating to business combinations and exceptional items.

Adjusted earnings per share is calculated as adjusted profit before income tax less applicable taxation divided by the weighted average number of Ordinary shares in issue in the period.

Like-for-like sales

Like-for-like sales comprise the revenue generated from all operations compared to the prior year. Revenue is included in the like for like calculation with effect from the month in which it was acquired in the previous year adjusted for the number of working days; for example, for a practice acquired in September 2018, revenue is included from September 2019 in the like for like revenue calculation.

Net debt

Net debt is calculated as borrowings less gross cash and unamortised borrowing costs.

2. Segmental reporting

Segmental information is presented in respect of the Group's business and geographical segments. The primary format, operating segments, is based on the Group's management and internal reporting structure and monitored by the Group's CODM. Inter-segment pricing is determined on an arm's length basis.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly interest-bearing borrowings and associated costs, taxation related assets and liabilities, costs relating to business combinations, and Head Office salary and premises costs.

Geographical segments

The business operates predominantly in the UK. As at 30 June 2020, it has 25 veterinary practices in the Netherlands and 6 in the Republic of Ireland. It performs a small amount of laboratory work for Europe-based clients and Animed Direct Limited distributes a small quantity of goods to European countries. In accordance with IFRS 8 Operating Segments, no segmental results are presented for trade with European clients as these are not reported separately for management reporting purposes and are not considered material for separate disclosure.

Revenue comprises £293.6m of fees and £134.2m of goods (2019: £287.0m and £119.5m respectively). Revenue from contracts totalled £46.8m in the year (2019: £45.4m).

Operating segments

The Group is split into four operating segments (Veterinary Practices, Laboratories, Crematoria and Animed Direct) and a centralised support function (Head Office) for business segment analysis. In identifying these operating segments, management generally follows the Group's service lines representing its main products and services.

Each of these operating segments is managed separately as each segment requires different specialisms, marketing approaches and resources. Intra-group sales eliminations are included within the Head Office segment. Head Office includes costs relating to the employees, property and other overhead costs associated with the centralised support function together with finance costs arising on the Group's borrowings.

3. Income tax expense

a) Analysis of income tax expense recognised in the income statement

Factors affecting the current tax charge

UK corporation tax is calculated at 19.0% (2019: 19.0%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

b) Reconciliation of effective income tax charge

The total income tax expense for the year differs from the theoretical amount that would arise using the standard rate of UK corporation tax of 19.0% (2019: 19.0%) as follows:

The standard rate of UK corporation tax for the period was 19.0% (2019: 19.0%). A UK corporation tax rate of 19.0% (effective 1 April 2020) was substantively enacted on 17 March 2020, reversing the previously enacted reduction in the rate from 19.0% to 17.0%. This change had been substantively enacted at the consolidated and Company statement of financial position date and, therefore, it is reflected in the deferred tax balances in this financial information.

The effective tax rate on reported profits is 42.3% (2019: 29.9%) and has increased mainly due to the re-measurement of deferred tax balances in respect of UK jurisdictions from 17.0% to 19.0% as a result of the repeal of the previously enacted UK corporation tax rate of 17.0% from 1 April 2020.

4. Earnings per Ordinary share

Basic earnings per Ordinary share is calculated by dividing the profit after taxation by the weighted average number of shares in issue during the year.

Non-GAAP measure: adjusted earnings per share

Adjusted earnings per Ordinary share is calculated as adjusted profit before income tax less applicable taxation divided by the weighted average number of Ordinary shares in issue in the period.

5. Business combinations

Details of business combinations in the year ended 30 June 2020 are set out below, in addition to an analysis of post-acquisition performance of the respective business combinations, where practicable. The reason for each acquisition was to expand the CVS Group business through acquisitions in meeting our goals outlined on pages 20 and 21 of the Group's Annual Report.

All businesses were acquired via 100% share purchase agreement unless indicated as such in the table above.

Given the nature of the veterinary surgeries acquired and the records maintained by such practices, it is not practicable to disclose the revenue or profit/loss of the combined entity for the year as though the acquisition date for all business combinations effected during the year had been at the beginning of that year.

The table below summarises the total assets acquired in the year ended 30 June 2020:

Goodwill recognised represents the excess of purchase consideration over the fair value of the identifiable net assets. Goodwill reflects the synergies arising from the combination of the businesses; this includes cost synergies arising from shared support functions and buying power synergies. Goodwill includes the recognition of deferred tax in respect of the acquired patient data records and customer lists.

Post-acquisition revenue and post-acquisition adjusted EBITDA were £4.3m and £0.8m respectively. The post-acquisition period is from the date of acquisition to 30 June 2020. Post-acquisition EBITDA represents the direct operating result of practices from the date of acquisition to 30 June 2020 prior to the allocation of central overheads, on the basis that it is not practicable to allocate these.

Goodwill and intangible assets recognised in the year relating to business combinations are not expected to be deductible for tax purposes.

The acquisition costs incurred in relation to the above business combinations amounted to £0.5m for the year and are included within other expenses.

The Directors do not consider that any individual in year acquisition to be material to the Group and therefore have not separately disclosed these.

Business combinations in previous years

Details of business combinations in the comparative year are presented in the consolidated financial statements for the year ended 30 June 2019.

Business combinations subsequent to the year end

Subsequent to the year end, the Group has made no acquisitions.

6. Dividends

The Directors have proposed a final dividend of £nil (2019: 5.5p) per share, giving a total of £nil (2019: £3.9m). During the year a dividend of 5.5p per share amounting to £3.9m was paid (2019: £3.5m).

7. Borrowings

Borrowings comprise bank loans and hire purchase agreements and are denominated in Sterling. The repayment profile is as follows:

The balances above are shown net of issue costs of £1.5m (2019: £0.8m), which are being amortised over the term of the bank loans. The carrying amount of borrowings is deemed to be a reasonable approximation to fair value.

The Group renewed and extended its bank facilities in January 2020. The Group has reduced the total facilities from £190.0m to £170.0m, a reduction of £20.0m, to reflect the continued focus and greater emphasis on organic growth and strong operating cash generation of the Group. These facilities are provided by a syndicate of four banks, NatWest, HSBC, BOI and AIB, and comprise the following elements:

• a fixed term loan of £85.0m, repayable on 31 January 2024 via a single bullet repayment; and

• a four-year revolving credit facility ("RCF") of £85.0m that runs to 31 January 2024.

In addition, the Group has a £5.0m overdraft facility renewable annually.

The two financial covenants associated with these facilities have remained unchanged, and are based on Group borrowings to EBITDA and Group EBITDA to interest. The Group borrowings to EBITDA ratio must not exceed 3.25x. The Group EBITDA to interest ratio must not be less than 4.5x. The facilities require cross guarantees from the most significant of the CVS Group's trading subsidiaries but are not secured on the assets of the Group. EBITDA is based on the last twelve months' performance adjusted for the full year impact of acquisitions made during the period.

Bank covenants are tested quarterly and the Group has considerate headroom in both financial covenants and in its undrawn but committed facilities as at 30 June 2020.

Interest rate risk is also managed centrally and derivative instruments are used to mitigate this risk. On 28 February 2020, the Group entered into a four-year interest rate fixed swap arrangement to hedge fluctuations in interest rates on £70.0m of its term loan.

At the consolidated and Company statement of financial position date £70.0m of the term loan was hedged using an interest rate swap. The remainder of the debt is not hedged.

Undrawn committed borrowing facilities

At 30 June 2020 the Group has a committed overdraft facility of £5.0m (2019: £5.0m) and an RCF of £85.0m (2019: £95.0m). The overdraft facility was undrawn at 30 June 2020 and 30 June 2019. £85.0m of the RCF was undrawn at 30 June 2020 (2019: £75.0m).

8. Cash flow generated from operations