CVS Group Regulatory News (CVSG)

CVS Group plc

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

Interim report for the six months to 31 December 2013

CVS, the UK's leading provider of veterinary services, is pleased to announce its interim results for the six months ended 31 December 2013.

Financial highlights

· Revenue growth of 18.0%

· Like-for-like sales increase of +4.6%

· Adjusted EBITDA up at £9.5m (+15.3%)

· Adjusted EPS 9.8p (+22.5%)

· Net debt £32.1 (June 2013: £30.0)

· Seven practice acquisitions during the period

· Our third Crematorium, Silvermere Haven, acquired after the period end

· Loyalty scheme membership increased by over 24% to 139,000 members

1 Adjusted EBITDA is profit before income tax, net finance expense, depreciation, amortisation, costs relating to business combinations, share option expense and exceptional items.

2 Adjusted profit before income 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 period.

4 Percentage increases have been calculated throughout this document based on the underlying values.

Richard Connell, Chairman of the Company, said:

"The Board is pleased to report that trading since the half year has been in line with Board expectations. The mild weather in January and February 2014 compared to the prior year has helped like for like sales since the half year end with the like for like growth percentage improving compared to the first half of the year.

The Board remains confident in the strategy and outlook for the Group and sees significant opportunities for growth across the Group's activities."

The full half-yearly report will shortly be made available on the Company's website www.cvsgroupplc.com.

Contacts:

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 2013. The Group has delivered a strong set of results showing further growth in revenue and underlying profit, generated both organically and through acquisitions.

Results

Overall the Group has grown revenue in the period by 18.0% to £68.8m (2012: £58.3m). Like-for-like sales increased by 4.6%, continuing an improving trend over recent years.

Adjusted EBITDA rose by 15.3% to £9.5m (2012: £8.2m). The adjusted EBITDA margin fell slightly to 13.7% (2012: 14.1%), although this primarily reflected the greater growth of the Laboratory and Animed Direct Divisions where the EBITDA margin is lower than in the Practice Division.

Adjusted profit before tax increased to £7.1m (2012: £6.1m) and operating profit increased to £3.8m (2012: £3.6m). Basic earnings per share increased from 3.7p to 4.6p and adjusted earnings per share rose from 8.0p to 9.8p.

Cash generated from operations increased to £10.5m (2012: £7.4m) in part due to improved trading but also due to improved working capital.

Net debt was £32.1m after funding seven practice acquisitions for a combined consideration of £7.2m in the period.

Divisional performance

Practice Division

CVS is the UK's leading veterinary surgery group. At the half year, it operated 255 veterinary surgeries (2012: 240) 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.

Practice revenues were £61.3m, a 16.5% increase on the £52.6m achieved in the comparative period. Like-for-like sales growth of 2.0% combined with an additional day trading in the period generated £1.6m of additional revenue; the annualisation impact of prior year acquisitions, which were mostly in the second half of the previous financial year, added £5.3m and current year acquisitions added a further £1.8m. The like-for-like increase was supported both by the opening of two out of hours centres and the continued development of the Healthy Pet Club schemes.

Adjusted EBITDA for the Practice Division grew by 18.2% from £10.0m to £11.8m. Adjusted EBITDA margins grew from 19.1% to 19.4% despite a slight fall in gross margins from 84.5% to 84.1%.

Practice acquisitions in the period were:

Acquisitions continue to be primarily of small animal practices, although the addition of four multi-discipline practices reflects the Group's intention to develop its large animal and equine business.

A total of £7.2m was paid for the acquisitions; per the last set of accounts publicly available for each business, these newly acquired businesses had aggregate historical revenues of approximately £8.9m per annum and EBITDA, adjusted for a normal level of salaries and rent, of £1.6m. Since acquisition these businesses have performed in accordance with management's expectations.

The Healthy Pet Club schemes have grown significantly with membership at 31 December 2013 in excess of 139,000 pets, an increase of over 24% over the six month period. Income from Healthy Pet Club schemes represented 10.5% of the income of the division for the six month period. The schemes offer discounted products and services, helping to improve clinical compliance levels amongst members and protecting practice sales by bonding pet owners to their local surgery.

A third MiPet, own brand product, Inductofol (a pre-anaesthetic), was introduced during the period and two further products have been introduced since the period end. Further MiPet products are planned.

During the period the Group has recruited further specialist veterinary surgeons in order to develop its referral business. Plans have also been developed to open new centres but these plans will take some time to come to fruition over the next two years.

Laboratory Division

Our laboratories provide diagnostic services to third party owned veterinary surgeries as well as our own practices. Services are generally offered via post and courier allowing complete coverage of the UK. Third party sales accounted for 72% (2012: 68%) of the division's revenue with the balance derived from CVS owned surgeries.

Laboratory revenues grew by 11.7% to £4.9m (2012: £4.4m). Whilst pricing pressures remain, the division's gross margin was maintained at 76.7%, the same as in the second half of the 2013 financial year albeit lower than the 78.7% achieved in the first half of that year. EBITDA improved to £0.6m (2012: £0.5m) reflecting a strict focus on costs.

The Laboratory Division has entered into distributorship agreements with Fuji and Boule Medical to supply in-house analysers and related consumables. The analysers are being rolled out to the Practice Division replacing old equipment in the practices and adding about 1.6% to the Laboratory Division's revenue in the period. Analyser sales to third parties are currently very small but will become an increased focus in 2015 once the roll-out of this equipment to the Practice Division is complete.

Animed Direct

Animed Direct, our on-line dispensary, has grown revenues by over 76.5% to £3.7m (2012: £2.1m). The employment of a search engine optimisation specialist early in 2013 has helped drive a significant improvement in sales. Sales to Europe remain relatively small but the development of local language websites for five European countries is expected to be completed later this year and should, in due course, drive significant additional business. Gross margins fell slightly due to changes in product mix and some increases in carriage costs. EBITDA of the division remained at £0.1m with some additional costs incurred in the period on the development of the local language websites, installing additional racking into the warehouse to meet increased demand and setting up distribution for our own brand products.

Crematoria Division

On 27th January 2014, we acquired Silvermere Haven Limited a well located pet crematorium and cemetery set in 11 acres of copses and fields in Cobham, Surrey. Existing sales are about half of those of the rest of the Division. It is planned that, over time, this crematorium will take on most of the work of our practices that is currently performed by a third party, thus saving significant costs.

The small Valley Pet Crematorium acquired in December 2012 has been upgraded and has begun to take on more work from our own practices.

Rossendale and Valley Pet crematoria continue to deliver excellent results with like-for-like revenue up by 16.6% and total revenue at £0.6m (2012: £0.5m). Adjusted EBITDA is £0.2m (2012: £0.2m).

Central administration

Central administration costs were £3.2m (2012: £2.6m) and as a percentage of revenue increased from the 4.5% to 4.7% for the half year. This cost increase reflects the growth of administration for the Healthy Pet Club schemes, the development of own brand products and the development of MiVetClub, our buying group.

The Group continues to invest in the development of systems, both to facilitate the provision of better quality management information and improved efficiency. The Robovet practice management system is expected to be implemented in all of our practices by the end of the year, enabling better quality data for the division to be gathered more easily.

Cash flow and funding position

Net debt stood at £32.1m at 31 December 2013, an increase of £2.1m from 1 July 2013.

Reflecting the Group's continuing strategy of making successful investment in growth opportunities whilst delivering returns to shareholders, £7.2m was spent on acquisitions during the period (2012: £2.6m), £2.5m on capital expenditure (2012: £2.1m) and £1.1m was returned to investors in dividends (2012: £0.8m).

Repayments of the bank loan commenced in December 2013 and further repayments of £0.7m to £1.0m will be made in each future quarter. As previously reported, in September 2013 the Group entered into a Revolving Credit Facility agreement to borrow up to £10m. None of this facility was utilised at 31st December 2013 and it remains available to fund future acquisitions, which the Group is continually evaluating. The bank loan interest remained 60% hedged throughout the period.

Dividends

A dividend in respect of the year ended 30 June 2013 of 2.0p per share was paid in December 2013. The Board will continue to review its dividend policy and expects that a final dividend will be paid in December 2014, which, in the absence of any unforeseen change in market conditions, will be at least equal value to that of 2013.

Our people

Our people are key in enabling the Group to continue to deliver strong results and I would like to thank all of them for their skill and professionalism in providing the best possible care and service.

CVS has continued to enhance its internal training at all levels across all divisions and has recruited further specialist veterinary surgeons to improve its ability to perform more referral work in-house.

The Group continues to be the largest employer in the veterinary profession with over 2,700 staff across the UK as at 31 December 2013. Even so, the Group only employs an estimated 4% of practising vets in the UK (in small animal, large animal and equine practices), which indicates the significant potential for further expansion in the UK market.

Further business development

The Board believes that the fragmented UK small animal veterinary sector will continue to provide opportunities for further consolidation and strategic acquisitions. In addition, 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: further developments of its out of hours business and referral businesses are planned and it is planning to expand its range of own brand products and to further develop its 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 Board expectations. The mild weather in January and February 2014 compared to the prior year has helped like for like sales since the half year end with the like for like growth percentage improving compared to the first half of the year.

The Board remains confident in the strategy and outlook for the Group and sees significant opportunities for growth across the Group's activities.

Richard Connell

Chairman

20 March 2014

Consolidated income statement for the six month period ended 31 December 2013 (unaudited)

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 2013 (unaudited)

Consolidated balance sheet as at 31 December 2013 (unaudited)

The interim financial information was approved by the Board of Directors on 20 March 2014.

Consolidated statement of changes in equity for the six month period ended 31 December 2013 (unaudited)

Consolidated statement of cash flows for the six month period ended 31 December 2013 (unaudited)

Notes to the interim consolidated financial information

1. General information

The principal activities of the Group are to operate companion animal veterinary practices, complementary veterinary diagnostic businesses, pet crematoria and an on-line dispensary business.

CVS Group plc is a public limited company incorporated and domiciled in England and Wales and its shares are quoted on the Alternative Investment Market ('AIM') 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 2013 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 2013. 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 2013, 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 items. Adjusted EPS is calculated by dividing the profit for the period attributable to equity shareholders excluding amortisation, fair value adjustments in respect of financial assets and liabilities, costs relating to business combinations and exceptional items (all net of taxation) by the weighted average number of shares in issue during the period. This measure has been changed from that used in prior years in order to bring it into line with the measure more normally used by city analysts.

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 33 to 40 of the consolidated financial statements of CVS Group plc for the year ended 30 June 2013 (which are available upon request from the Company's registered office or on the Company's website: www.cvsgroupplc.com), except as described below.

Adoption of new and revised standards

Amendments to IAS 1 "Financial statement presentation" regarding other comprehensive income, (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.

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 and liabilities, costs relating to business combinations and central administration 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 administration function for business segment analysis.

1Inter-segment revenue representing Laboratory sales and Crematoria fees to Veterinary Practices eliminated on consolidation.

2 In prior years revenue between Laboratories and between Veterinary Practices was eliminated within the Central Administration division. This elimination is now made within each division and comparatives have been restated.

Finance expense

5. 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 issuable 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 for the period attributable to equity shareholders excluding amortisation, fair value adjustments in respect of financial assets and liabilities, costs relating to business combinations and exceptional costs (all net of tax), by the weighted average number of shares in issue during the period.

6. 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.

During the period LTIP7 was issued with an option life of 3 years over 403,700 shares, of which 403,700 were outstanding at the period end. The share price at the grant date was £2.50 with an exercise price of 0.2p.

During the six months to 31 December 2013, directors and employees exercised 500,944 (2012: 439,831) share options with a nominal value of £1,002 (2012: £880), in respect of the LTIP4 scheme.

The share-based payment charge for the period in respect of the options issued under the LTIP schemes amounted to £0.4m (2012: £0.1m) and has been charged to administrative expenses. National Insurance contributions amounting to £0.2m (2012: £0.1m) 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.

SAYE6 scheme was opened for subscription in November 2013. 637,319 options were granted in November 2013, with the first salary deductions taking place in December 2013 and a contract start date of 1 January 2014. The exercise price was £2.15p.

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 £0.1m (2012: £0.1m) and has been charged to administrative expenses.

7. 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 2013 was reduced by the impact of deferred tax arising primarily from the change in taxation rates.

8. Non-current assets

9. Business combinations

Provisional details of business combinations in the six month period ended 31 December 2013 are set out below.

Business combinations subsequent to the period end

Subsequent to the 31 December 2013, the Group acquired the share capital of Silvermere Haven Limited, based in Cobham, Surrey on 23 January 2014. The total cash consideration for this acquisition was £2.4m, assets acquired comprised mainly property and goodwill with a provisional fair value of £2.4m.

10. Cash generated from operations

11. 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.

12. Dividends

The dividends paid in December 2013, representing the final dividend payable for the year ended 30 June 2013, amounted to £1,144,000 (2.0p per share) (2012: £850,000; 1.5p per share).