CVS Group Regulatory News (CVSG)

18 Mar 2008 07:01

CVS Group plc18 March 2008 For Immediate Release 18 March 2008 CVS Group plc INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2007 CVS, one of the UK's leading providers of veterinary services, is pleased toannounce maiden interim results since its AIM flotation in October 2007. KEY POINTS Six months ended % Change 31.12.07 31.12.06 £'000 £'000 Revenue 28,542 16,349 +74.6Adjusted EBITDA** 4,404 2,152 +104.6EBITDA 2,640 2,152 +22.7Adjusted profit before tax** 2,449 867 +182.5(Loss)/profit before tax (1,587) 312 n/aEarnings per shareAdjusted** 4.3p 1.3p +230.8Basic and diluted (3.5p) 0.2p n/a For ease of comparison the figures above are shown on an underlying basis aswell as an actual basis. ** Adjusted figures are before IPO costs, one-off finance expenses (includingfair value adjustments on hedge instruments) and amortisation. • Revenue growth of 74.6% with like for like revenue growth of 5.4% • Significant EBITDA growth £2.25m - increase of 104.6% • Strong cash generation of £3.96m in the period (2006/7: £2.02m) - increase of 96.4% • Continued acquisition growth - 134 surgeries at period end - increase of 54% - 12 surgeries post period end and one major laboratory acquisition more than doubling revenue of laboratory division • Bank funding secured including acquisition facility of £12.0m • Successful AIM flotation in October 2007 Commenting on the outlook, Chairman Richard Connell said: "The focus on delivering growth both organically and through acquisition and, inparticular, cash and profit generation, is expected to continue. The recentlyannounced acquisitions provide a good platform for second half performance,which has started well, and discussions are ongoing in relation to otherprospective acquisitions". Contacts: CVS Group plc Simon Innes, Chief Executive Paul Coxon, Finance Director 01379 644 288 Buchanan Communications Richard Oldworth/Suzanne Brocks 020 7466 5000 Chairman's statement Introduction I am pleased to announce the maiden interim results of CVS Group plc ("CVS","the group", or "the company") for the six months ended 31 December 2007. This has been both a very important and successful period for the group,encompassing a change from private equity ownership following our admission tothe Alternative Investment Market ("AIM") on 10 October 2007. CVS was formed in August 1999 to acquire and operate veterinary practices whichwere well established within their local community and had a reputation for highquality clinical care and service. In line with that strategy, CVS acquired 13 surgeries in the six months ended 31December 2007, and a further 12 surgeries and one diagnostic laboratory so farin the second half. Results The group has grown significantly since the comparable half year. The number ofsurgeries increased by 54.0% to 134 at 31 December 2007 compared to 87 a yearearlier. Reflecting the increased number of surgeries, revenue grew 74.6% from£16.35m to £28.54m. Like for like revenue growth, which relates to sites thathave been owned by the group for the whole of the current and comparableperiods, was 5.4%. The group considers that adjusted EBITDA and adjusted earnings per share (asdescribed in the financial summary) provide a more meaningful basis forassessing the underlying performance of the group, albeit that these terms arenot defined by International Financial Reporting Standards and therefore may notbe directly comparable with other companies' adjusted profit measures. The group recorded adjusted earnings before interest, tax, depreciation andamortisation ("adjusted EBITDA") of £4.40m and a loss for the period aftertaxation of £1.83m. A reconciliation of the two numbers is provided on page 4 ofthe interim report. Adjusted EBITDA has grown by 104.6% from £2.15m to £4.40m and has increased from13.2% to 15.4% of revenue. This is due to a combination of factors including: • acquisitions • like for like revenue growth • improved buying terms • productivity improvements (as % of sales) • central overhead cost reductions (as % of sales) Cash generated from operations (before exceptional payments) increased by 96.4%to £3.96m from £2.02m. Cash generated from operations (after exceptionalpayments) increased to £2.81m, an increase of 39.5% over the comparable period.The difference is due to payments of £1.15m (of the £1.76m charge) in relationto non-recurring IPO related costs. Adjusted earnings per share were 4.3p, up from 1.3p in the comparable period.Basic and diluted loss per share after exceptional items were 3.5p per share. Areconciliation of the two numbers is provided in note 6 to the interimconsolidated financial information. Funding On 4 October 2007 the group entered into a banking facility agreement with TheRoyal Bank of Scotland plc and Barclays Bank plc comprising a £32.0m term loan,an acquisition facility of £12.0m and a working capital facility of £2.0m. The group used the £32.0m term loan to refinance its previous term loan of£20.2m and repay the secured loan stock and redeemable preference shares(together with the associated premiums) that were outstanding at the date offlotation. The group spent £5.0m on acquisitions in the first half, of which £2.5m wasfunded from internally generated cash and the balance of £2.5m from the £12.0macquisition facility. Chairman's statement (continued) Hedging In respect of the £32.0m term loan facility the group has entered into aninterest rate swap to hedge against interest rate volatility. This uses a capand collar to limit the group's exposure to rate increases whilst allowing it totake advantage of potential interest rate reductions. The group previously partially hedged its exposure to interest rate movements inrespect of the previous term loan. Movements in interest rates in the periodresulted in a fair value charge to the income statement of £0.64m in the period. Acquisitions The pipeline of potential acquisitions remains strong. In the six months to 31December 2007, 13 new surgeries were acquired. A further 12 surgeries, togetherwith a strategically important laboratory (Axiom Veterinary Laboratories Limited("AVL")), were acquired since the period end. The diagnostic services offered by AVL complement the existing diagnosticservices of the group. The enhanced laboratory division consisting of 7 siteswill more than double the number of existing sites and will be able to offer abroader range of diagnostic services to clients. The acquisition will increaselaboratory turnover by c. 140% (annualised). Staff Our people continue to be key to the group in delivering its strategy. I wouldlike to thank each of them for their co-operation and devotion in giving ourclients the best possible clinical care and service. The group continues to be the largest employer in the veterinary profession with1,516 staff. The group currently employs an estimated 2.6% of practising vets inthe UK, which gives some indication of the significant scope left for expansionin the UK market. Business environment The group is a market leader in acquiring and managing veterinary practiceswithin the UK. The directors believe that CVS has 6.4% of the UK small animalveterinary market measured by number of surgeries, which demonstrates thesignificant further consolidation opportunity. Strategy We will continue our strategy of growth through acquisition in the fragmented UKveterinary market combined with organic growth of existing practices. We aim todeliver continuing improved returns post acquisition of veterinary practices bygrowing and managing those practices more efficiently, centralisingadministration and leveraging the buying power of the augmented group. Future outlook The focus on delivering growth both organically and through acquisition and, inparticular, cash and profit generation, is expected to continue. The recentlyannounced acquisitions provide a good platform for second half performance,which has started well, and discussions are ongoing in relation to otherprospective acquisitions. Richard ConnellChairman Consolidated income statement for the six month period ended 31 December 2007(unaudited) Note Six months Six months Year ended 30 ended 31 ended 31 June 2007 December 2007 December 2006 (Unaudited) (Unaudited) (Audited) £'000 £'000 £'000-------------------- --------- -------- -------- --------Revenue 4 28,542 16,349 38,972Cost of sales (16,241) (9,688) (22,818)-------------------- --------- -------- -------- --------Gross profit 12,301 6,661 16,154-------------------- --------- -------- -------- --------Exceptionaladministrativeexpenses 3 (1,764) - -Otheradministrativeexpenses (9,701) (5,351) (13,260)-------------------- --------- -------- -------- --------Totaladministrativeexpenses (11,465) (5,351) (13,260)-------------------- --------- -------- -------- --------Operatingprofit 836 1,310 2,894-------------------- --------- -------- -------- --------Fair valueadjustments inrespect offinancialassets andliabilities 5 (642) 44 351Exceptionalfinanceexpense 5 (287) - -Other financeexpense 5 (1,598) (1,115) (2,682)Finance income 5 104 73 210-------------------- --------- -------- -------- --------Net financeexpense (2,423) (998) (2,121)-------------------- --------- -------- -------- --------(Loss)/profitbefore incometax 4 (1,587) 312 773Income taxexpense 7 (243) (213) (427)-------------------- --------- -------- -------- --------(Loss)/profitfor the periodattributableto equityshareholders (1,830) 99 346-------------------- --------- -------- -------- -------- (Loss)/earnings per ordinary share for (loss)/profit attributable to the equityholders of the company (expressed in pence per share) ("EPS")Basic anddiluted 6 (3.5p) 0.2p 0.7p-------------------- --------- -------- -------- -------- The above results relate to continuing operations, including acquisitions(further details of which are provided in note 11). Non-GAAP measure: Adjusted EBITDA* Note £'000 £'000 £'000(Loss)/profit before income tax (1,587) 312 773Adjustments for:Exceptional administrative expenses 3 1,764 - -Net finance expense 5 2,423 998 2,121Depreciation 461 243 577Amortisation 8 1,343 599 1,617Adjusted EBITDA 2 4,404 2,152 5,088 *Adjusted EBITDA represents earnings before interest (net finance expense), tax,depreciation, amortisation and exceptional administrative expenses. Consolidated balance sheet as at 31 December 2007 (unaudited) 31 December 31 December 30 June 2007 2006 2007 (Unaudited) (Unaudited) (Audited) Note £'000 £'000 £'000--------------------- --------- -------- -------- --------Non-current assetsIntangible assets 8 29,614 16,400 26,283Property, plant and 5,156 2,818 4,245equipmentInvestments 23 23 23Deferred income tax assets 513 439 578Derivative financial - 66 373instruments --------------------- --------- -------- -------- -------- 35,306 19,746 31,502--------------------- --------- -------- -------- --------Current assetsInventories 1,452 771 1,226Trade and other 3,697 2,237 2,904receivablesCash and cash equivalents 736 1,009 2,622--------------------- --------- -------- -------- -------- 5,885 4,017 6,752--------------------- --------- -------- -------- --------Total assets 4 41,191 23,763 38,254--------------------- --------- -------- -------- --------Current liabilitiesTrade and other payables (8,736) (4,561) (7,380)Current income tax (235) - (116)liabilitiesBorrowings 10 (30) (10,248) (11,119)Derivative financial 11 (269) - -instruments --------------------- --------- -------- -------- -------- (9,270) (14,809) (18,615)--------------------- --------- -------- -------- --------Non-current liabilitiesBorrowings 10 (33,912) (9,943) (20,028)Deferred income tax (1,351) (802) (1,155)liabilities --------------------- --------- -------- -------- -------- (35,263) (10,745) (21,183)--------------------- --------- -------- -------- --------Total liabilities 4 (44,533) (25,554) (39,798)--------------------- --------- -------- -------- --------Net liabilities (3,342) (1,791) (1,544)--------------------- --------- -------- -------- -------- Consolidated balance sheet as at 31 December 2007 (unaudited) (continued) 31 December 31 December 30 June 2007 2006 2007 (Unaudited) (Unaudited) (Audited) Note £'000 £'000 £'000--------------------- -------- -------- -------- --------Capital and reservesattributable toequity holders of theCompanyShare capital 103 103 103Revaluation reserve 125 125 125Merger reserve (61,420) (61,420) (61,420)Retained earnings 57,850 59,401 59,648--------------------- -------- -------- -------- --------Total equity (3,342) (1,791) (1,544)--------------------- -------- -------- -------- -------- The interim financial information was approved by the board of directors on 17March 2008. Consolidated statement of changes in equity for the six month period ended 31December 2007 (unaudited) Share Revaluation Merger Retained Total capital reserve reserve earnings equity £'000 £'000 £'000 £'000 £'000----------------- -------- -------- -------- --------- --------At 1 July 2006(audited) 103 125 (61,420) 59,302 (1,890)Retainedprofit for theperiod - - - 99 99----------------- -------- -------- -------- --------- --------At 31 December2006(unaudited) 103 125 (61,420) 59,401 (1,791)----------------- -------- -------- -------- --------- -------- Share Revaluation Merger reserve Retained Total equity capital reserve earnings £'000 £'000 £'000 £'000 £'000 ----------------- -------- -------- -------- --------- --------At 1 July 2006(audited) 103 125 (61,420) 59,302 (1,890)Retainedprofit for theyear - - - 346 346----------------- -------- -------- -------- --------- --------At 30 June2007 (audited) 103 125 (61,420) 59,648 (1,544)----------------- -------- -------- -------- --------- -------- Share Revaluation Merger reserve Retained Total equity capital reserve earnings £'000 £'000 £'000 £'000 £'000 ----------------- -------- -------- -------- --------- --------At 1 July 2007(audited) 103 125 (61,420) 59,648 (1,544)Retained lossfor the period - - - (1,830) (1,830)Employee shareoption scheme: - Value of employee services - - - 33 33 - Deferred tax on share options - - - (1) (1)----------------- -------- -------- -------- --------- --------At 31 December2007(unaudited) 103 125 (61,420) 57,850 (3,342)----------------- -------- -------- -------- --------- -------- Revaluation reserve The revaluation reserve is used to record any surplus following a revaluation ofproperty, plant and equipment. The revaluation reserve arose on the revaluationof a property in the subsidiary undertaking Precision Histology InternationalLimited (the revalued amount was frozen as deemed cost on transition to IFRS).The revaluation reserve is not a distributable reserve until realised. Merger reserve The merger reserve resulted from the acquisition of CVS (UK) Limited andrepresents the difference between the value of the shares acquired (nominalvalue plus related share premium) and the nominal value of the shares issued. Consolidated cash flow statement for the six month period ended 31 December 2007(unaudited) Six months Six months Year ended 30 ended 31 ended 31 June December 2007 December 2006 2007 Note (Unaudited) (Unaudited) (Audited) £'000 £'000 £'000---------------------- -------- -------- -------- --------Cash flows from operatingactivities ---------------------- -------- -------- -------- --------Cash generated fromoperations beforeexceptional payments 3,959 2,016 6,509Exceptionaladministrativeexpenses* (1,146) - ----------------------- -------- -------- -------- --------Cash generatedfrom operations 12 2,813 2,016 6,509Interest received 104 73 210Interest paid (1,003) (521) (1,227)---------------------- -------- -------- -------- --------Net cash generated from operatingactivities 1,914 1,568 5,492---------------------- -------- -------- -------- --------Cash flows from investingactivitiesAcquisition ofbusinesses 9 (3,284) (4,730) (10,319)Acquisition ofsubsidiaries(net of cashacquired) 9 (1,752) - (5,843)Purchase of property,plant and equipment (642) (441) (1,349) Purchase of intangibleassets (35) (73) (143)Proceeds fromsale of property,plant and equipment - - 4---------------------- -------- -------- -------- --------Net cash used in investing activities (5,713) (5,244) (17,650)---------------------- -------- -------- -------- --------Cash flows from financingactivitiesFinance lease principalpayments (4) (7) (9)Repayment of loan stock,preference shares andassociated redemptionpremiums (11,714) - -Repayment of bank loan (20,252) - -Receipt of borrowings(net of debt issue costs) 33,883 2,229 12,326---------------------- -------- -------- -------- --------Net cash fromfinancingactivities 1,913 2,222 12,317---------------------- -------- -------- -------- --------Net (decrease)/increase in cash and cashequivalents (1,886) (1,454) 159Cash and cashequivalents atstart of period 2,622 2,463 2,463---------------------- -------- -------- -------- --------Cash and cashequivalents atend of period 736 1,009 2,622---------------------- -------- -------- -------- -------- *Cash paid in respect of exceptional administrative expenses incurred inrelation to the company's admission to the Alternative Investment Market - seenote 3 for further details. Notes to the interim consolidated financial information The notes below represent an extract from the Interim Financial Statements. 1. Basis of preparation The interim consolidated financial information of CVS Group plc is for the sixmonths ended 31 December 2007 and is unaudited. The group has chosen not toadopt the full disclosure requirements of IAS 34, 'Interim Financial Reporting'.Therefore, this interim financial information is not fully in compliance withInternational Financial Reporting Standards. However, the interim consolidatedfinancial information has been prepared in accordance with all other applicableInternational Financial Reporting Standards that are expected to apply to thegroup's financial statements for the year ended 30 June 2008. These accounting policies are based on the EU-adopted International FinancialReporting Standards ("IFRS") and International Financial ReportingInterpretation Committee ("IFRIC") interpretations that the group expects to beapplicable at 30 June 2008. The IFRS and IFRIC interpretations that will beapplicable at 30 June 2008 including those that will be applicable on anoptional basis, are not known with certainty at the time of preparing theinterim financial information and therefore may change. The interim consolidated financial information includes the financialinformation of the company and its subsidiary undertakings, made up to 31December 2007. A reconstruction of the CVS Group took place during the period,as described below, in preparation for the admission of the company's shares tothe AIM market of the London Stock Exchange in October 2007. The company was incorporated as CVS Group Limited on 13 July 2007. On 22 August2007, the company acquired the entire issued share capital of CVS (UK) Limitedby way of a one-for-one share exchange. On 17 September 2007, the company wasre-registered as a public limited company and its name was changed to CVS Groupplc. As a result of the above reconstruction, the results of CVS Group plc and itssubsidiary undertakings have been consolidated using the principles of mergeraccounting. As such, although the consolidated interim financial information hasbeen prepared in the name of the legal parent, the company, they are insubstance a continuation of the consolidated financial statements of the legalsubsidiary, CVS (UK) Limited. The following accounting treatment has beenapplied in respect of merger accounting: • The assets and liabilities of the legal subsidiary, CVS (UK) Limited,are recognised and measured in the consolidated interim financial informationwithout restatement to fair value; and • The retained (loss)/earnings and other equity balances recognised inthe consolidated interim financial information reflects the retained earningsand other equity balances of CVS (UK) Limited immediately before the groupreconstruction, and the results of the period from 1 July 2006 to the date ofthe group reconstruction are those of CVS (UK) Limited as the company did nottrade prior to the group reconstruction. However, the equity structure appearingin the consolidated interim financial information reflects the equity structureof the legal parent, CVS Group plc, including the equity instruments issued toeffect the group reconstruction. The statutory accounts of CVS (UK) Limited in respect of the year ended 30 June2007 have been delivered to the Registrar of Companies, upon which the company'sauditors have given a report which was unqualified and did not contain astatement under Section 237(2) or 237(3) of the Companies Act 1985. The preparation of the interim report requires management to make estimates andassumptions that affect the reported income and expense, assets and liabilitiesand disclosure of contingencies at the date of the interim report. Althoughthese estimates and assumptions are based on management's best judgement at thedate of the interim report, actual results may differ from these estimates. The group has net liabilities as at 31 December 2007. The group has tradedprofitably since the balance sheet date with the profits generated contributingto the funding of the group's working capital requirements. In addition, thegroup has a £2m working capital facility, of which there had been no draw downat the balance sheet date. On this basis the directors consider it appropriateto prepare the interim consolidated financial information on the going concernbasis. 1. Basis of preparation (continued) First time adoption of IFRS For accounting periods up to 30 June 2006, the financial statements of CVS (UK)Limited group were prepared under UK Generally Accepted Accounting Principles("UK GAAP"). From 1 July 2006, CVS (UK) Limited elected to prepare its annual financial statements in accordance withInternational Financial Reporting Standards ("IFRS") as adopted by the EuropeanUnion (EU) and implemented in the UK. The group used 1 July 2004 as itstransition date to IFRS and translated its balance sheet at that date. Inaddition results previously published under UK GAAP were re-stated under IFRSfor the years ending June 2005 and 2006. The reconciliation of net liabilitiesand profit under UK GAAP to IFRS are set out in the consolidated financialstatements of CVS (UK) Limited for the year ended 30 June 2007, which areavailable upon request from the company's registered office. 2. Summary of significant accounting policies The accounting policies used are consistent with those set out on pages 19 to 26of the consolidated financial statements of CVS (UK) Limited for the year ended30 June 2007 (which are available upon request from the company's registeredoffice) with the exception of: Share-based payments Certain employees of the group receive part of their remuneration in the form ofshare-based payment transactions, whereby employees render services in exchangefor shares or rights over shares (equity-settled transactions). The fair values of equity-settled transactions are measured at the dates ofgrant using option-pricing models, taking into account the terms and conditionsupon which the awards are granted. The fair value of share-based payments undersuch schemes is expensed on a straight-line basis over the vesting period, basedon the group's estimate of shares that will eventually vest and adjusted for theeffect of non market-based vesting conditions. Derivative financial instruments and hedging activities The group uses derivative financial instruments to hedge its exposure tointerest rate risks arising from financing activities. The group does not holdor issue derivative financial instruments for trading purposes, however ifderivatives do not qualify for hedge accounting they are accounted for as such. Derivative financial instruments are recognised and stated at fair value. Thefair value of derivative financial instruments is determined by reference tomarket values for similar financial instruments, by discounted cash flows, or bythe use of option valuation models. Where derivatives do not qualify for hedgeaccounting, any gains or losses on re-measurement are immediately recognised inthe income statement. Where derivatives qualify for hedge accounting,recognition of any resultant gain or loss depends on the nature of the hedgerelationship and the item being hedged. The group documents at the inception of the transaction the relationship betweenhedging instruments and hedged items, as well as its risk management objectivesand strategy for undertaking various hedging transactions. The group alsodocuments its assessment, both at hedge inception and on an ongoing basis, ofwhether the derivatives that are used in hedging transactions are highlyeffective in offsetting changes in cash flows of hedged items. The full fair value of a hedging derivative is classified as a non-current assetor liability when the remaining hedged item is more than twelve months and as acurrent asset or liability when the remaining maturity of the hedged item isless than twelve months. Cash flow hedging Derivative financial instruments are classified as cash flow hedges when theyhedge the group's exposure to variability in cash flows that are eitherattributable to a particular risk associated with a recognised asset orliability, or a highly probable forecasted transaction. The effective portion of changes in the fair value of derivatives that aredesignated and qualify as cash flow hedges is recognised in equity. The gain orloss relating to the ineffective portion is recognised immediately in the incomestatement. 2. Summary of significant accounting policies (continued) Amounts accumulated in equity are recycled in the income statement in theperiods when the hedged item affects the income statement. The classification ofthe effective portion when recognised in the income statement is the same as theclassification of the hedged transaction. Any element of the re-measurement ofthe derivative instrument which does not meet the criteria for an effective hedge isrecognised immediately in the income statement within finance costs. When a hedging instrument expires or is sold, or when a hedge no longer meetsthe criteria for hedge accounting, any cumulative gain or loss existing inequity at that time remains in equity and is recognised in the income statementwhen the forecast transaction is ultimately recognised in the income statement.When a forecast transaction is no longer expected to occur, the cumulative gainor loss that was reported in equity is immediately transferred to the incomestatement. Exceptional items Exceptional items are those significant items which are separately disclosed byvirtue of their size or incidence to enable a full understanding of the group'sfinancial performance. Transactions which may give rise to exceptional costs areprincipally financial restructuring costs, group re-organisation costs(including AIM admission costs), and costs in respect of key management changes. Use of non-GAAP profit measures Adjusted EBITDA and adjusted earnings per share The directors believe that adjusted EBITDA and adjusted earnings per sharemeasures provide additional useful information for shareholders on underlyingtrends and performance. These measures are used for internal performanceanalysis. Adjusted EBITDA is not defined by IFRS and therefore may not bedirectly comparable with other companies' adjusted profit measures. It is notintended to be a substitute for, or superior to, IFRS measurements of profit. Adjusted EBITDA is calculated by reference to (loss)/profit before income tax,adjusted for interest (net finance expense), depreciation, amortisation andexceptional items (see below). Adjusted earnings per share, is calculated byreference to (loss)/profit after income tax, adjusted for amortisation,exceptional items (see below) and fair value adjustment required by IAS 32 andIAS 39 (see below). • IAS 32 and IAS 39 'Financial Instruments' - fair value re-measurements- under IAS 32 and IAS 39, the group applies hedge accounting to its varioushedge relationships (principally interest rate swaps) when it is allowed underthe rules of IAS 39 and practical to do so. The group is not always able toapply hedge accounting to the arrangements, but continues to enter into thesearrangements as they provide certainty or active management of the interestrates applicable to the group. The group believes these arrangements remaineffective and economically and commercially viable hedges despite the inabilityto apply hedge accounting. Where hedge accounting is not applied to certain hedging arrangements, thereported results reflect the movement in fair value of related derivatives dueto changes in interest rates. This may mean that the income statement charge ishighly volatile, whilst the resulting cash flows may not be as volatile. Theadjusted profit measure removes this volatility to help better identifyunderlying business performance. • Exceptional items - due to their significance and special nature,certain other items which do not reflect the group's underlying performance areexcluded from adjusted profit. These gains or losses can have a significantimpact on both absolute profit and profit trends, consequently, they areexcluded from the adjusted EBITDA and earnings per share of the group. 3. Exceptional administrative expenses Exceptional administrative expenses relate to legal and professional feesincurred in relation to the company's admission to the Alternative InvestmentMarket on 10 October 2007. 4. Segmental reporting Segment information is presented in respect of the group's business andgeographical segments. The primary format, business segments, is based on thegroup's management and internal reporting structure. Inter-segment pricing is determined on an arm's length basis. Segment results, assets and liabilities include items directly attributable to asegment as well as those that can be allocated on a reasonable basis.Unallocated items comprise mainly interest-bearing borrowings and associatedcosts, taxation related assets/liabilities, intangible assets and relatedamortisation and head office salary and premises costs. Segment capital expenditure is the total cost incurred during the period toacquire segment assets that are expected to be used for more than one period,including acquisitions through business combinations. Geographical segments The business operates predominantly in the UK. It performs a small amount oflaboratory work for European based clients. In accordance with IAS 14 'Segmentreporting" no segmental results are presented for trade with European clients asthe geographical location of the assets generating the revenue is the UK. Business segments The group is split into veterinary practices and laboratories for businesssegment analysis: Six month period ended 31 Veterinary Laboratories Head office GroupDecember 2007 practices £'000 £'000 £'000 £'000------------------- --------- --------- --------- ---------Revenue1 27,103 1,439 - 28,542Amortisation - - 1,343 1,343Depreciation 395 36 30 461Profit/(loss)before incometax 3,108 243 (4,938) (1,587)Total assets 9,343 1,698 30,150 41,191Totalliabilities (7,429) (1,307) (35,797) (44,533)Capitalexpenditure 1,347 25 4,674 6,046------------------- --------- --------- --------- --------- 1Inter-segment revenue of £453,000, representing laboratory sales to veterinarypractices, has been eliminated on consolidation.------------------- --------- --------- --------- --------- Six month period ended 31 Veterinary Laboratories Head office GroupDecember 2006 practices £'000 £'000 £'000 £'000------------------- --------- --------- --------- ---------Revenue1 13,143 3,206 - 16,349Amortisation - - 599 599Depreciation 176 53 14 243Profit/(loss)before incometax 1725 97 (1,510) 312 4. Segmentalreporting(continued) 15,884 1,592 6,287 23,763Total assetsTotalliabilities (12,481) (1,270) (11,803) (25,554)Capitalexpenditure 700 45 4,501 5,246------------------- --------- --------- --------- --------- 1Inter-segment revenue of £218,000, representing laboratory sales to veterinarypractices, has been eliminated on consolidation. Year ended 30 June 2007 Veterinary Laboratories Head office Group practices £'000 £'000 £'000 £'000 ------------------- --------- --------- --------- ---------Revenue1 36,316 2,656 - 38,972Amortisation - - 1,617 1,617Depreciation 440 84 53 577Profit/(loss)before incometax 6,690 299 (6,216) 773Total assets 9,085 1,597 27,572 38,254Totalliabilities (5,981) (1,119) (32,698) (39,798)Capitalexpenditure 2,260 51 15,599 17,910------------------- --------- --------- --------- --------- 1Inter-segment revenue of £588,000, representing laboratory sales to veterinarypractices, has been eliminated on consolidation. 5. Finance (income) and expense Other finance expense Six months Six months Year ended 30 ended 31 ended 31 June December 2007 December 2006 2007 (Unaudited) (Unaudited) (Audited) £'000 £'000 £'000----------------------- -------- -------- --------Bank loans and overdraft 947 357 1,021Debt finance costs 44 29 70Loan stock redemptionpremium 427 597 1,195Preference share redemptionpremium 22 24 51Participating dividend onpreferred ordinary shares 156 108 344Finance charges payable under finance leases 2 - 1----------------------- -------- -------- --------Other finance expense 1,598 1,115 2,682----------------------- -------- -------- --------Exceptional finance expenseWrite off of debt issuecosts relating to bank loans redeemed inthe period 287 - ------------------------ -------- -------- -------- Fair value adjustments inrespect of financialassets and liabilities 642 (44) (351)----------------------- -------- -------- -------- Bank interest receivable (104) (73) (210)----------------------- -------- -------- --------Net finance expense 2,423 998 2,121----------------------- -------- -------- -------- Fair value adjustments in respect of financial assets and liabilities reflectmovements in the valuation of a hedging instrument taken out to partially hedgeinterest rate exposure on a term loan facility. This derivative financialinstrument did not qualify for hedge accounting, and as such, the fair valuemovement is recognised in the income statement. 6. (Loss)/earnings per ordinary share (Loss)/earnings per ordinary share are calculated by dividing the (loss)/profitafter taxation by the weighted average number of shares in issue during theperiod. The group has potentially dilutive ordinary shares being the contingentlyissueable shares under the group's long term incentive plan ("LTIP") scheme. Theperformance criteria for the vesting of the awards under the scheme cannot beassessed at the balance sheet date. Consequently, these contingently issueableshares have been excluded from the diluted EPS calculations. There are no otherdilutive or potentially dilutive shares in issue. Details of the earnings and weighted average number of shares used in eachcalculation are set out below: ----------------------------- -------- -------- -------- Six months Six months Year ended ended 31 ended 31 December 2007 December 2006 30 June (Unaudited) (Unaudited)* 2007 £'000 £'000 (Audited)* £'000 ----------------------------- -------- -------- --------Weighted average number of ordinary Number Number Numberand preferred ordinary shares inissueTotal ordinary andpreferred ordinaryshares 51,563,475 51,563,475 51,563,475----------------------------- -------- -------- -------- £'000 £'000 £'000(Loss)/earningsattributable toordinary shareholders (1,830) 99 346----------------------------- -------- -------- -------- Pence Pence PenceBasic and diluted(loss)/earnings pershare (3.5p) 0.2p 0.7p----------------------------- -------- -------- -------- Non-GAAP measure: Adjusted earnings per share Adjusted earnings per ordinary share is calculated by dividing the profit onordinary activities after taxation excluding exceptional items and fair valueadjustments, by the weighted average number of shares in issue during theperiod. £'000 £'000 £'000----------------------------- -------- -------- --------(Loss)/earnings attributable to ordinary (1,830) 99 346shareholdersAdjustments for:Amortisation (note 8) 1,343 599 1,617Exceptional administrative expenses (note 3) 1,764 - -Fair value adjustments in respect of financialassets 642 (44) (351)and liabilities (note 5)Exceptional finance expense (note 5) 287 - ------------------------------ -------- -------- --------Adjusted profit after income tax and earningsattributable to ordinary shareholders 2,206 654 1,612----------------------------- -------- -------- -------- Pence Pence PenceAdjusted earnings per share 4.3p 1.3p 3.1p----------------------------- -------- -------- -------- \* The number of shares used for the calculation of EPS for the year ended 30 June2007 has been re-stated to the number of shares in issue following the capitalre-structuring of the company completed on 2 October 2007. This did not resultin an increase in the overall share capital but was an increase in the number ofshares and a reduction to the nominal value (see note 4). 7. Income tax expense Income tax expense is recognised based on management's best estimate of theweighted average annual statutory income tax rate expected for the fullfinancial year as a percentage of taxable profit ("the effective tax rate"). 8. Intangible assets Goodwill Patient data Capitalised Total records software £'000 £'000 £'000 £'000--------------------- ---------- -------- -------- --------CostAt 1 July 2006 4,411 8,666 211 13,288Additions throughbusiness combinations 21 4,407 - 4,428Additions - - 73 73--------------------- ---------- -------- -------- --------At 31 December 2006 4,432 13,073 284 17,789Additions throughbusiness combinations 27 10,804 - 10,831Additions - - 70 70--------------------- ---------- -------- -------- --------At 30 June 2007 4,459 23,877 354 28,690Additions throughbusiness combinations(note 9)* - 4,639 - 4,639Additions - - 35 35--------------------- ---------- -------- -------- --------At 31 December 2007 4,459 28,516 389 33,364--------------------- ---------- -------- -------- -------- AmortisationAt 1 July 2006 - 636 154 790Amortisation for theperiod - 559 40 599--------------------- ---------- -------- -------- --------At 31 December 2006 - 1,195 194 1,389Amortisation for theperiod - 977 41 1,018--------------------- ---------- -------- -------- --------At 30 June 2007 - 2,172 235 2,407Amortisation for theperiod - 1,326 17 1,343--------------------- ---------- -------- -------- --------At 31 December 2007 - 3,498 252 3,750--------------------- ---------- -------- -------- -------- Net book amountAt 31 December 2007 4,459 25,018 137 29,614At 30 June 2007 4,459 21,705 119 26,283At 31 December 2006 4,432 11,878 90 16,400--------------------- ---------- -------- -------- -------- \* The purchase price allocation exercise in relation to certain businesscombinations in the period has not been completed as at 31 December 2007. Assuch, provisional values have been used in this report. The final purchase priceallocation will be presented in the full year report. The directors do notanticipate material differences to the provisional values. 9. Business combinations Details of business combinations in the six month period ended 31 December 2007are set out below, in addition to an analysis of pre and post acquisitionperformance of the respective business combinations. Given the nature of the practices acquired (mainly partnerships or sole traders)and the records maintained by such practices it is not practicable to disclosethe revenue or profit/loss of the combined entity for the period as though theacquisition date for all business combinations effected during the period hadbeen the beginning of that period. 9. Business combinations (continued) It is not practicable to disclose the impact of the acquisitions on theconsolidated cash flow statement as full ledgers were not maintained for eachacquisition in relation to all related assets and liabilities post acquisition. Pre-acquisition performance represents the results for the last year prior toacquisition for which accounts are available. The profit before tax figuresgiven for the practice acquisitions exclude any salary or drawings in respect ofthe partners/proprietors working within the practices. Six month period ended 31 December 2007: Assets and trade Date of Fair value of property Fair value of Cash paid2------------------ acquisition plant and equipment intangible -------- acquired £'000 assets ----------- acquired1 £'000 £'000 --------- ---------A practice in:Hampshire &Surrey 02/07/2007 173 2,213 2,386Buckinghamshire 03/09/2007 - 78 78Hampshire 03/12/2007 50 424 474Yorkshire 11/12/2007 10 336 346------------------ -------- ----------- --------- --------- 233 3,051 3,284 ------------------ -------- ----------- --------- --------- 1Intangible assets acquired represents patient data records. 2Cash paid includes professional fees of £60,000. Analysis of pre and post acquisition performance: Previous year Pre-acquisition Post-acquisitio Post-acquisitio ----------------- end performance1 n revenue2 n contribution3 -------- £'000 £'000 £'000 ----------- --------- ---------A practice in:Hampshire &Surrey 31/03/2007 489 1,140 264Buckinghamshire 31/03/2007 50 52 (13)Hampshire 31/03/2007 14 53 (2)Yorkshire 30/04/2007 126 21 (7)----------------- -------- ----------- --------- --------- 679 1,266 242 ----------------- -------- ----------- --------- --------- 1Pre-acquisition performance represents profit before tax excluding partners' orproprietors' drawings for the last full year prior to acquisition. 2Post-acquisition revenue represents revenue from the date of acquisition to theperiod end. 3Post-acquisition contribution represents the direct operating result ofpractices prior to the allocation of central overheads, on the basis that it isnot practicable to allocate these, from the date of acquisition to the periodend. Acquisition of Petmedics Limited and Beechwood Veterinary Practice Limited On 26 November 2007, the group acquired the whole of the issued share capital ofPetmedics Limited ("PML") for a total consideration of £1,518,000. On 30November 2007 the group acquired the whole of the issued share capital ofBeechwood Veterinary Practice Limited ("BVPL") for a total consideration of£600,000. Immediately following the respective acquisitions the trade andrelated assets were transferred from PML and BVPL to CVS (UK) Limited. The bookvalues of the non-intangible assets and liabilities of PML and BVPL, and thefair value of the intangible assets, at the date of acquisition are set outbelow. The directors consider that the book values are equivalent to the fairvalues. 9. Business combinations (continued) PML BVPL Total £000 £000 £000------------------------ --------- ---------- ----------Intangible assets - patient data records 1,134 454 1,588Property, plant and equipment 449 48 497Inventories 93 11 104Trade and other receivables 290 32 322Cash and cash equivalents 88 146 234Current income tax liabilities (80) (39) (119)Deferred income tax liabilities (14) (3) (17)Trade and other payables (442) (49) (491)------------------------ --------- ---------- ----------Net assets acquired 1,518 600 2,118------------------------ --------- ---------- ---------- Consideration satisfied by:Cash (including related costs ofacquisition amounting 1,491 495 1,986to £101,000)Accrued consideration 27 105 132------------------------ --------- ---------- ---------- 1,518 600 2,118------------------------ --------- ---------- ---------- For the year ended 30 September 2006, PML reported an unaudited post tax profitof £115,000. For the unaudited period ended 26 November 2007, the turnover was£3,736,000, operating profit £402,000 and the tax charge £78,000. Thepost-acquisition turnover of PML amounted to £280,000 and the post-acquisitioncontribution amounted to £25,000 (contribution represents the direct operatingresult prior to the allocation of central overheads on the basis that it is notpracticable to allocate these, from the date of acquisition to the period end). For the year ended 30 November 2006, BVPL reported an unaudited post tax profitof £114,000. For the unaudited period ended 30 November 2007, the turnover was£698,000, operating profit £153,000 and the tax charge £32,000. Thepost-acquisition turnover of BVPL amounted to £43,000 and the post-acquisitioncontribution amounted to £11,000 (contribution represents the direct operatingresult prior to the allocation of central overheads on the basis that it is notpracticable to allocate these, from the date of acquisition to the period end). 10. Borrowings --------------------------- -------- -------- --------- 31 December 31 December 30 June 2007 2006 (Unaudited) (Unaudited) 2007 £'000 £'000 (Audited) £'000--------------------------- -------- -------- ---------CurrentBank loan 24 - -Secured loan stock - 8,950 9,559Finance leases 6 11 10Accrued participating dividendon preferred ordinary shares - 389 625Redeemable preference shares,including redemption premium - 898 925--------------------------- -------- -------- --------- 30 10,248 11,119--------------------------- -------- -------- --------- --------------------------- -------- -------- --------- 31 December 31 December 30 June 2007 2006 (Unaudited) (Unaudited) 2007 £'000 £'000 (Audited) £'000---------------------------- -------- -------- ---------Non-CurrentBank loan 33,912 9,928 20,028Finance leases - 15 ----------------------------- -------- -------- --------- 33,912 9,943 20,028 ---------------------------- -------- -------- --------- On 4 October 2007 the group entered into a banking facility agreement with TheRoyal Bank of Scotland plc and Barclays Bank plc comprising a £32,000,000 termloan to refinance existing bank and other indebtedness, and an acquisitionfacility of £12,000,000 (£2,490,000 of which has been drawn down as at 31December 2007). The term loan is repayable over a four year period, the firstquarterly payment being due on 31 December 2009. The acquisition facility isrepayable over a three year period, the first quarterly payment being due on 30September 2010. The facility is secured over the assets of the company and its subsidiaryundertakings. The non-current bank loan balance is shown net of issue costs of£585,000 which are being amortised over the life of the bank loan. In addition to the above, the group had an undrawn working capital facility of£2,000,000 at 31 December 2007. 11. Financial instruments On 24 December 2007, the group entered into an interest rate swap limiting thegroup's exposure to interest rate increases by means of a cap whilst allowing itto take advantage of potential rate reductions by having a collar in place. Theswap hedges 100% of the £32.0m term loan facility by means of an amortisinghedge which matches the debt amortisation. Contractually, the swap becameeffective on 31 December 2007. The group classifies its interest rate swap as a cash flow hedge and utiliseshedge accounting to minimise profit and loss volatility in relation to movementsin the swap value. At 31 December 2007, the group recognised a liability in relation to the breakcosts on a £12.7m interest rate swap agreement that was terminated post yearend, amounting to £269,000. This derivative financial instrument did not qualifyfor hedge accounting, and as such, the fair value loss in the period has beenrecognised in the income statement. 12. Reconciliation of (loss)/profit for the period to net cash generated fromoperations Six months Six months Year ended 30 ended 31 ended 31 June December 2007 December 2006 2007 (Unaudited) (Unaudited) (Audited) £'000 £'000 £'000---------------------------- -------- -------- --------(Loss)/profit for the period (1,830) 99 346Income tax expense 243 213 427Net finance expense 2,423 998 2,121Amortisation of intangibleassets 1,343 599 1,617Depreciation of property,plant and equipment 461 243 577Share-based payments 33 - -(Increase) in inventories (122) (126) (416)(Increase) in trade andother receivables (471) (597) (986)Increase in trade andother payables 733 587 2,823---------------------------- -------- -------- --------Total net cash generated fromoperations 2,813 2,016 6,509---------------------------- -------- -------- -------- 13. Post balance sheet events On 9 January 2008, the group acquired the whole of the issued share capital ofAxiom Veterinary Laboratories Limited ("AVLL"). The total consideration will notbe known until the completion accounts have been finalised for this acquisition.The total consideration, the purchase price allocation and details of revenue,profits or recognised gains and losses for the period from the prior period endto the date of acquisition will be disclosed in the full year financialstatements of the group. For the year ended 31 December 2006, AVLL reported anaudited post tax profit of £266,000. On 25 February 2008, the group acquired the trade and related assets of aveterinary practice based in Manchester for an estimated total consideration of£850,000. The final consideration will be subject to the finalisation ofprofessional fees. The purchase price allocation exercise has not yet beencompleted, and will be disclosed in the full year financial statements of thegroup. Given the nature of the records maintained by the practice it is notpracticable to provide details of revenue, profits or recognised gains andlosses for the period from the prior period end to the date of acquisition. Forthe year ended 30 April 2007, the practice reported an unaudited pre-tax profit(excluding any salary or drawings in respect of the partners/proprietors workingwithin the practice) of £140,000. On 17 March 2008, the group acquired the trade and related assets of aveterinary practice based in Hampshire for an estimated total consideration of£1,600,000 before professional fees. The total consideration will be subject tothe finalisation of professional fees. The purchase price allocation exercisehas not yet been completed, and will be disclosed in the full year financialstatements of the group. Given the nature of the records maintained by thepractice it is not practicable to provide details of revenue, profits orrecognised gains and losses for the period from the prior period end to the dateof acquisition. For the year ended 31 March 2007, the practice reported anunaudited pre-tax profit (excluding any salary or drawings in respect of thepartners/proprietors working within the practice) of £441,000. Independent review report to CVS Group plc Introduction We been engaged by the company to review the interim consolidated financialinformation in the interim report for the six months ended 31 December 2007,which comprises the interim consolidated income statement, interim consolidatedbalance sheet, interim consolidated statement of changes in equity, interimconsolidated cash flow statement and related notes. We have read the otherinformation contained in the interim report and considered whether it containsany apparent misstatements or material inconsistencies with the information inthe interim consolidated financial information. Directors' responsibilities The interim report is the responsibility of, and has been approved by, thedirectors. The directors are responsible for preparing the interim report inaccordance with the AIM Rules for Companies which require that the financialinformation must be presented and prepared in a form consistent with that whichwill be adopted in the company's annual financial statements. This interim report has been prepared in accordance with the basis set out inNotes 1 and 2. Our responsibility Our responsibility is to express to the company a conclusion on the condensedset of financial information in the interim report based on our review. Thisreport, including the conclusion, has been prepared for and only for the companyfor the purpose of the AIM Rules for Companies and for no other purpose. We donot, in producing this report, accept or assume responsibility for any otherpurpose or to any other person to whom this report is shown or into whose handsit may come save where expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410, 'Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity' issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly, wedo not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the interim report for the sixmonths ended 31 December 2007 is not prepared, in all material respects, inaccordance with the basis set out in Note 12 and the AIM Rules for Companies. PricewaterhouseCoopers LLPChartered AccountantsNorwich 17 March 2008 Notes: a) The maintenance and integrity of the CVS Group plc website is theresponsibility of the directors; the work carried out by the auditors does notinvolve consideration of these matters and, accordingly, the auditors accept noresponsibility for any changes that may have occurred to the interim financialinformation since it was initially presented on the website. b) Legislation in the United Kingdom governing the preparation and disseminationof financial information may differ from legislation in other jurisdictions. This information is provided by RNS The company news service from the London Stock Exchange