CVS Group Regulatory News (CVSG)

CVS Group plc

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

Interim report for the six months to 31 December 2012

CVS, one of the UK's leading providers of veterinary services, is pleased to announce its interim results for the six months ended 31 December 2012.

Financial highlights

* 

·; Sales growth of 8.1%

·; Like-for-like sales3 increase of +4.0%

·; Adjusted EBITDA up at £8.2m (+5.2%). Adjusted EPS 8.3p (+6.4%)

·; Further £0.2m reduction in net debt despite £2.6m spent on acquisitions

·; Net debt £30.7m (June 2012: £30.9m)

·; Four acquisitions during the period with two further subsequently

·; Loyalty scheme membership increased by over 33% to 87,000 members

1See page 5 for a reconciliation of profit before income tax for the period to adjusted earnings before income tax, net finance expense (including exceptional finance expense), depreciation, amortisation, costs relating to business combinations and share option expense ("adjusted EBITDA")

2 See note 6 of the interim financial information, for a reconciliation of basic and diluted earnings per share to adjusted earnings per share

3 See note 2 of the interim financial information for a definition of like-for-like sales

Chief Executive Comment

"I am pleased to announce that CVS continues to deliver strong core growth, whilst adding new acquisitions to the business. Our new initiatives in the areas of loyalty schemes and online are driving our like-for-like sales growth and increasing our competitiveness and stability."

Simon Innes

Chairman's statement

Introduction

I am pleased to announce the results of CVS Group plc ("CVS", "the Group", or "the Company") for the six month period ended 31 December 2012. The Group has delivered a strong set of results showing further growth in revenue and underlying profit, in line with the Board's expectations.

Practice acquisitions in the period comprised the purchase of Carmarthen Veterinary Centre based in Carmarthen, in November 2012, Stow Veterinary Surgeons, based in Stow-on-the-Wold, in December 2012 and Dam Vets in Selby, also in December 2012. Our second crematorium, Valley Pet Crematorium, was acquired in December 2012.

Subsequent to the period end we acquired two further veterinary practices: in January we acquired Cranmore Veterinary Services, primarily a second opinion practice located in Chester, and in March we acquired Archway Veterinary Practice Limited, a single site small animal practice located in Petersfield, Hampshire.

I am pleased to report that since acquisition these businesses have performed in line with expectations. Per the last set of accounts publicly available for each business, these newly acquired businesses had historical revenue of circa £6.4m per annum and EBITDA, adjusted for a normal level of salaries and rent, of £0.4m.

Results

Overall the Group has grown revenue in the period to £58.3m (2011: £54.0m). In the period like-for-like sales increased by 4.0%, continuing the trend of sustained improvement that is particularly pleasing in an economic environment where consumer spending remains under considerable pressure.

Adjusted EBITDA rose to £8.2m (2011: £7.8m) and adjusted EBITDA margin fell slightly to 14.1% (2011 full year: 14.4%, 2011 half year: 14.5%), primarily reflecting the competitive pressures in our laboratory business.

Operating profit increased to £3.6m (2011: £3.5m) and adjusted profit before tax increased to £3.0m (2011: £2.7m after adding back the exceptional interest expense of £1.6m).Basic earnings per share increased from 1.7p to 3.7p and adjusted earnings per share rose from 7.8p to 8.3p.

Cash generated from operations reduced to £7.4m (2011: £7.9m) mainly due to the increase in the scale of the Healthy Pet Club and the associated timing of cash flows.

After the Group funded £2.6m of acquisitions and paid a dividend of £0.9m net debt reduced by £0.2m.

Divisional performance

Practice

CVS is the leading national veterinary surgery group. At the half year, it operated 240 veterinary surgeries (2011: 225) across the UK under a number of well-established local brands, primarily focused on the small animal market. We estimate that CVS has an 11% share of the total UK small animal veterinary market.

This is the principal operating division of the Group, accounting for £54.7m (91.3%) of Group revenues. The division grew revenue by £4.1m over the comparative period, approximately half through the impact of acquisitions and the remainder through growth in the online platform, Animed Direct, and the practices. Animed Direct continues to grow strongly; its range of pet products has been expanded and, whilst the vast majority of sales are to UK customers, a few sales have been made into Europe.

Adjusted EBITDA for the practice division grew by 10.5% from £9.1m to £10.1m. Adjusted EBITDA margins for the division grew from 18.0% to 18.4%. Gross margins in the practices grew slightly whilst gross margins generated by Animed Direct remained low as it continued to build its presence in this strategically important distribution channel.

The Group continues to develop its Healthy Pet Club schemes, providing an attractive and growing source of recurring revenue. The schemes aim to protect practice sales by bonding pet owners to their local surgery, offering discounted products and services and improving clinical compliance levels amongst members. The schemes have grown significantly with membership at 31 December 2012 in excess of 87,000 pets, an increase of over 33% over the six month period. As at 28 February 2012, membership had increased to 94,800 pets. Income from Healthy Pet Club represented 7% of the income of the division for the six month period.

The Practice division continues to support development in the complementary services offered by both the Laboratory and Crematorium divisions.

Laboratory

Our laboratories provide diagnostic services to third party owned veterinary surgeries as well as our own practices. Services are generally offered via postal and courier services allowing complete coverage of the UK. Third party sales accounted for 68%(2011: 70%) of the division's revenues with the balance derived from CVS owned surgeries.

The laboratory division continued to experience some improvement in revenues during the period, which were up by 6.5% to £4.7m. However, whilst volumes have increased significantly competitive pressures have reduced prices and margins, therefore adjusted EBITDA fell by £0.2m to £0.5m. This also reflects some timing differences which increased costs in the period and we expect these to reverse in the second half of the year.

Crematorium

The Rossendale crematorium provides the majority of its services (2012: 65%, 2011: 66%) to non-Group practices and the general public. In addition it services CVS practices in the North and Midlands. Rossendale continues to deliver excellent results with revenue up on the prior period by 7.2% at £0.5m (2011: £0.4m) and adjusted EBITDA up by 12.2% at £0.2m (2011: £0.2m).

The acquisition of Valley Pet Crematorium was completed in December 2012 and had no significant impact on the results the division. Plans are currently being made to start expansion of this business within the next six months.

Central administrative function

An integral part of the Group's strategy is to centralise administration and management, enabling other divisions to maintain their focus on operational matters. In a market where the administrative burden is increasing, this makes CVS one of the acquirers of choice within the sector.

On an adjusted basis the total costs for the segment were £2.6m (2011: £2.2m), as a percentage of revenue this has increased from the 4.1% for the year ended 30 June 2012 to 4.4% for the half year. This cost increase was due to one off recruitment costs and some increase in staff costs to build and launch new initiatives.

The Group continues to invest in systems development to facilitate the provision of better quality management information and improved efficiency. It is anticipated that the on-going investment in systems will continue to be funded from within the normal capital expenditure budget.

Cash flow and funding position

Net debt stands at £30.7m at 31 December 2012 (see note 12), an overall reduction of £0.2m.

In the period £2.6m was spent on acquisitions (2011: £1.4m) and £2.2m on capital expenditure (2011: £0.9m). This increase in capital expenditure was primarily due to property refurbishments.

The bank loan interest remained 60% hedged throughout the period. Repayments of the loan commence in December 2013 when £0.8m is payable, with further payments at each quarter end subsequently.

Earnings per share

Adjusted earnings per share increased by 0.5p (6.4%) to 8.3p from 7.8p in the comparable period.

Reported basic and diluted earnings per share were 3.7p and 3.6p respectively (2011: 1.7p and 1.6p) with the comparative number being impacted by the one off exceptional finance expense in 2011.

Dividends

A dividend in respect of the year ended 30 June 2012 of 1.5p per share was paid in December 2012. The Board will continue to review its dividend policy on an on-going basis and expects that a final dividend will be paid in December 2013, which, in the absence of any unforeseen change in market conditions, will be at least equal value to that of 2012.

Our people

The Group continues to be the largest employer in the veterinary profession with over 2,500 staff at 31 December 2012. Even so, the Group only employs an estimated 4% of practising vets in the UK, which indicates the significant scope left for further expansion in the UK market.

Our people enable the Group to deliver its strategy and I would therefore like to thank each of them, including those new to CVS, for their skill and professionalism in providing the best possible care and service.

Non-executive Director changes

David Timmins has informed the Board that he wishes to leave the company with effect from 31 March 2013 to focus his attentions on his other business interests. I am sorry to see David leave and would like to thank him for the valuable guidance and assistance that he has provided to the Board over the past 5 years and for his professional Chairmanship of the Audit Committee for that period.

Mike McCollum has agreed to join the Board with effect from 2 April 2013. Mike is Chief Executive of Dignity plc and I anticipate that his knowledge and experience of a business that encounters many similar issues to those of CVS will be invaluable.

The Board announced last year that it intended to increase the number of non-executive directors to three and has already begun that process.

Further business development

The Board estimates that CVS accounts for approximately 11% of the UK small animal veterinary sector and believes that this fragmented market will provide opportunities for further consolidation and strategic acquisitions. In addition to the small animal sector, the Group sees significant long term potential in the equine and large animal sectors. The Group will continue to build on the strength and benefits of its existing business and is developing plans for its own brand products and a buying group. It will also seek to improve its operating efficiency.

Outlook

The Board is pleased to report that trading since the half year has been in line with expectations. Like for like sales in January and February 2013 grew by 3.4%. This was slightly lower than the 4.0% growth in the first half of the year due to the impact of the snow in January.

Richard Connell

Chairman

12 March 2013

Consolidated income statement for the six month period ended 31 December 2012 (unaudited)

The above results relate to continuing operations, including acquisitions (further details of which are provided in note 10).

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 share option expense.

Statement of consolidated comprehensive income for the six month period ended 31 December 2012 (unaudited)

Consolidated balance sheet as at 31 December 2012 (unaudited)

Consolidated balance sheet as at 31 December 2012 (unaudited) (continued)

The interim financial information on pages 5 to 22 was approved by the board of directors on 12 March 2013.

Consolidated statement of changes in equity for the six month period ended 31 December 2012 (unaudited)

Consolidated statement of changes in equity for the six month period ended 31 December 2012 (unaudited) (continued)

Consolidated statement of cash flows for the six month period ended 31 December 2012 (unaudited)

Notes to the interim consolidated financial information

1. General information

The principal activity of the Group is to operate companion animal veterinary practices, complementary veterinary diagnostic businesses and pet crematoria.

CVS Group plc is a public limited company incorporated and domiciled in England and Wales and its shares are quoted on the AIM market of the London Stock Exchange.

The address of the registered office is CVS House, Vinces Road, Diss, Norfolk, IP22 4AY and the registered number of the Company is 06312831.

This interim consolidated financial information does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The statutory accounts of CVS Group plc in respect of the year ended 30 June 2012 have been delivered to the Registrar of Companies, upon which the Company's auditors have given a report which was unqualified and did not contain any statement under Section 498 of the Companies Act 2006.

Forward looking statements

Certain statements in this interim report are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

2. Basis of preparation

The interim consolidated financial information of CVS Group plc is for the six months ended 31 December 2012. It is unaudited and has been prepared in accordance with the AIM Rules for Companies and with IAS 34, "Interim Financial Reporting" as adopted by the European Union. The interim consolidated financial information should be read in conjunction with the annual financial statements for the year ended 30 June 2012, which have been prepared in accordance with IFRSs adopted by the European Union. 

The interim consolidated financial information has been prepared on a going-concern basis.Use of non-GAAP measures

Adjusted EBITDA, adjusted EPS and like-for-like sales

The Directors believe that adjusted EBITDA and adjusted EPS provide additional useful information for shareholders on underlying trends and performance. These measures are used for internal performance analysis. 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, share option expense and exceptional costs. Adjusted EPS is calculated by dividing the profit for the period attributable to equity shareholders excluding amortisation, share option expense, fair value adjustments in respect of financial assets and liabilities and costs relating to business combinations by the weighted average number of shares in issue during the period.

Like-for-like sales comprise the revenue generated from all operations compared to the prior year (on a pro forma basis, i.e. including pre acquisition revenues in respect of acquisitions in the current and comparative periods), after adjusting for sites under refurbishment and discontinued operating activities.

3. Summary of significant accounting policies

The accounting policies adopted are consistent with those set out on pages 41 to 50 of the consolidated financial statements of CVS Group plc for the year ended 30 June 2012 (which are available upon request from the Company's registered office or on the Company's website), except as described below. 

Adoption of new and revised standards

The following accounting standards and amendments, issued by the International Accounting Standards Board (IASB) or IFRS Interpretations Committee (IFRIC), are effective for the first time in the current financial year and have been adopted by the Group with no impact on this interim consolidated financial information:

·; Amendments to IAS 1 "Financial statement presentation"

·; Annual improvements to IFRSs (2011)

4. Segmental reporting

Segment 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. 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/liabilities, costs relating to business combinations and head office salary and premises.

Geographical segments

The business operates predominantly in the UK. It performs a small amount of laboratory work and sells a small quantity of goods on-line for European based clients. 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.

Operating segments

The Group is split into three operating segments; veterinary practices, laboratories, crematorium and a centralised support function (head office) for business segment analysis:

1Inter-segment revenue representing laboratory sales and crematoria fees to veterinary practices eliminated on consolidation.

1Inter-segment revenue representing laboratory sales and crematoria fees to veterinary practices eliminated on consolidation.

1Inter-segment revenue representing laboratory sales and crematoria fees to veterinary practices eliminated on consolidation.

5. Finance (income) and expense

Fair value adjustments in respect of financial assets and liabilities reflect the ineffective portion of derivative financial instruments that qualify for hedge accounting amounting to £nil (31 December 2011: £11,000), the recycling of fair value adjustments in respect of the time value of the option accumulated in equity prior to the adoption of the amendments to IAS 39 amounting to £nil (31 December 2011: £45,000), and the gain on settlement of derivative financial instruments terminated during the period amounting to £nil (31 December 2011: £71,000). For the year ended 30 June 2012, a gain of £26,000 was recognised in respect of the recycling of fair value adjustments accumulated in equity.

The interest rate collar arrangement was terminated in December 2011 and, in accordance with IAS 39, fair value gains and losses previously recognised directly in equity in respect of that arrangement were recycled to the income statement and classified as exceptional.

6. 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 period.

Diluted earnings per share is calculated by adjusting the weighted average number of Ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has potentially dilutive Ordinary shares being the contingently issueable shares under the Group's long term incentive plan schemes and Save As You Earn schemes. For share options, a calculation is undertaken to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

Adjusted earnings per ordinary share is calculated by dividing the profit on ordinary activities after taxation excluding amortisation, share option expense, fair value adjustments, exceptional costs and costs relating to business combinations, by the weighted average number of shares in issue during the period.

7. Share-based payments

Long Term Incentive Plans

The Group operates an incentive scheme for certain senior executives, the CVS Group Long Term Incentive Plan ("LTIP"). The LTIP scheme was introduced after the flotation of the Company on AIM in October 2007.

Under the LTIP scheme awards are made at an effective nil nominal cost (0.2p), vesting over a three year performance period conditional upon the Group's adjusted earnings growth. On vesting, the LTIP scheme awards are settled in equity.

On 23 July 2012, LTIP6 was issued with an option life of 3 years over 373,882 shares, of which 373,882 were outstanding at the period end. The share price at the grant date was £1.23 with an exercise price of 0.2p. A further 301,020 options were granted on 28 September 2012 under this scheme, with a grant date share price of £1.52 and an exercise price of 0.2p.

During the six months to 31 December 2012, directors and employees exercised 439,831 (2011: 194,896) share options with a nominal value of £880 (2011: £390), in respect of the LTIP3 scheme.

The share-based payment charge for the period in respect of the options issued under the LTIP schemes amounted to £136,000 (2011: £187,000) and has been charged to administrative expenses. National Insurance contributions amounting to £69,000 (2011: £73,000) have been accrued in respect of the LTIP scheme transactions and are treated as cash-settled transactions.

Save As You Earn (SAYE)

The Group operates an incentive scheme for all staff, the CVS Group Save As You Earn ("SAYE") plan, an HM Revenue and Customs approved scheme. Under the SAYE schemes awards are made at a 20% discount of the closing mid-market price on date of invitation, vesting over a three year period. There are no performance conditions attached to the SAYE scheme.

SAYE5 scheme was opened for subscription in November 2012. 5,335 options were granted in November 2012, with the first salary deductions taking place in December 2012 and a contract start date of 1 January 2013. The exercise price was £1.30p.

Options were valued using the Black-Scholes option pricing model and the share-based payment charge for the period in respect of the options issued under the SAYE schemes amounted to £120,000 (2011: £44,000) and has been charged to administrative expenses.

8. Income tax expense

Income tax expense is recognised based on management's best estimate of the weighted average annual statutory income tax rate expected for the full financial year as a percentage of taxable profit ("the effective tax rate").

The charge in the half year ended 31 December 2011 was reduced by the impact of deferred tax arising primarily from the change in taxation rates.

9. Non-current assets

10. Business combinations

Provisional details of business combinations in the six month period ended 31 December 2012 are set out below.

1Intangible assets acquired represents patient data records.

£50,000 of deferred consideration payments in relation to the acquisition of practices for the year ended 30 June 2012 has been paid in the period under review, as shown in the consolidated statement of cash flows.

£50,000 of consideration in relation to the acquisition of practices in the period ended 31 December 2012 remained outstanding at the balance sheet date.

11. Cash generated from operations

12. Analysis of movement in net debt

Non-cash movements relate to the amortisation of issue costs on bank loans and transfers between categories of borrowings.

13. Post balance sheet events

On 15 January 2013, the Group acquired the trade and related assets of a veterinary practice based in Chester for cash consideration of £1,595,000. The assets acquired comprised plant and equipment of £249,000, intangible patient data records with a provisional fair value of £1,301,000 and stocks of £45,000.

On 11 March 2013, the Group acquired the whole of the issued share capital of Archway Veterinary Practice Limited, for a total consideration of £650,000.

14. Dividends

The dividends paid in December 2012, representing the final dividend payable for the year ended 30 June 2012, amounted to £850,000 (1.5p per share) (2011: £567,000; 1p per share).

END

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