CVS Group Regulatory News (CVSG)

CVS GROUP plc

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

Interim Results for the six months ended 31 December 2010

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 2010.

Financial highlights

·; Sales growth of 21.7%

·; Like-for-like sales3 decrease of 2.1%

·; Adjusted EBITDA slightly up at £7.2m as growth from acquisitions was offset by impact of declining like-for-like sales

·; Profit before income tax reduced by £0.6m impacted by increased non-cash charges for amortisation and depreciation (combined £0.8m)

·; Significant increase in cash generated from operations by 32.5% contributing to an overall reduction in net debt during the period of £4.1m after funding acquisitions and debt repayment

·; Following the acquisition of St David's Veterinary Hospital, a three site practice in Devon, CVS operates 214 veterinary surgeries (2009: 170)

·; Our on-line retail platform, Animed Direct, was successfully launched in the period and is trading ahead of expectations

1See page 5 for a reconciliation of profit before income tax for the period to adjusted earnings before income tax, net finance expense, depreciation, amortisation, transaction costs 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 report that overall revenue and operating cash flows continue to grow significantly. Financial performance has been impacted by continued economic uncertainty as well as adverse winter weather that affected the country during November and December. CVS continues to develop new revenue streams as demonstrated by the successful launch of Animed Direct, an on-line dispensary and pet shop and growing subscriptions to the Healthy Pet Club loyalty scheme. The Group will maintain its focus on developing the underlying business, maximising potential revenue opportunities, identifying cost reduction opportunities and growing through selective strategic acquisitions."

Simon Innes

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 2010. The Group has delivered further growth in revenue and cash generated from operations although the continued uncertain economic conditions and severe winter weather in November and December have impacted profitability in the period. In spite of these challenges first half trading has been in line with the Board's expectations as well as what seems to have been the performance of the veterinary profession as a whole.

Acquisition activity in the period comprised our previously announced purchase of St David's Veterinary Hospital based in Exeter for £1.6m which enhances the Practice division in the South West. I am pleased to report that since ownership the acquisition has performed in line with expectations.

Subsequent to the half year end, we have acquired Campbells, a single site practice in Swansea, which complements the Group's presence in South Wales. Both of these acquisitions have been funded from internally generated cash resources.

Results

Overall the Group has grown revenue in the period to £50.5m (2009: £41.5m), with this growth arising from acquisitions, most notably £6.7m of sales from the Veterinary Enterprises and Trading Limited group ('Pet Doctors') which was acquired in March 2010 and therefore not included in the comparative period. Revenue was impacted by the severe winter weather which is estimated to have cost the business £0.4m in lost sales.

Like-for-like sales decreased by 2.1% for the period, which is indicative of the challenging market conditions throughout the period under review.

Adjusted EBITDA rose slightly to £7.2m (2009: £7.1m) albeit adjusted EBITDA margin reduced to 14.2% (2009 full year: 15.3%, 2009 half year: 17.2%). Again, this reduction in margin is reflective of the tougher operating environment impacting like-for-like sales and the corresponding significant impact on adjusted EBITDA owing to the Group's relatively high operating margins.

Operating profit reduced due to increased non-cash charges over the prior period, specifically amortisation of (£0.6m) and depreciation of (£0.2m), which together contributed to a fall in operating profit from £3.8m to £3.2m.

Against this background it is pleasing to note that cash generated from operations increased to £8.8m (2009: £6.6m) mainly due to working capital reductions despite the increase in revenues. The strong performance of this key performance measure demonstrates the continued ability of the Group to convert profit into cash.

Divisional performance

Practice

The Group is the leading national veterinary surgery group, operating 214 veterinary surgeries (2009: 170) at the half year across the UK, primarily focused on the small animal market operated under a number of well-established local brands. We estimate that CVS has a 10% share of the total UK small animal veterinary market.

This is the principal operating division of the Group, accounting for 93.3% (£47.1m) of Group revenues. The division has delivered £8.9m of revenue growth over the comparative period which reflects the impact of the acquisition of 44 new surgeries; 27 of which relate to Pet Doctors which continues to trade in line with expectations. Adjusted EBITDA for the practice division grew by 6.1% from £8.1m to £8.6m, again reflecting growth from these acquisitions, although this was partially offset by falls in like-for-like sales. The reduction in like-for-like sales impacted the profitability of the division, due to the relatively fixed nature of the cost base. Accordingly, adjusted EBITDA margins for the division fell from 21.3% to 18.3%.

In order to participate in the growing on-line market and to help combat revenue pressure the Group successfully launched its on-line dispensary and pet shop (Animed Direct) in July 2010. The principal objective of Animed Direct is to sell competitively priced animal medicines and a wide range of pet products directly to UK consumers thus widening the range of products and services offered by the Group. Animed Direct benefits from the significant buying power of CVS particularly in the area of medicines, and the additional volumes that it generates will ensure that further buying efficiencies can be shared with our practices. The Board believes that Animed Direct is strategically important as it will capture a share of the increasing amount of veterinary products sold on-line. It is encouraging to note that initial trading has exceeded the Board's expectations and is already profitable.

The Group continues to develop its subscription based Healthy Pet Club loyalty scheme providing a growing source of recurring revenue. The scheme aims to protect practice sales, bonding pet owners to their local surgery by offering discounted products and services and improving clinical compliance levels amongst members. The scheme has grown significantly in the period with membership now in excess of 21,000 pets an increase of some 22% over the six month period.

The Board is also focused on reducing its cost base by the more efficient use of resources and continuing to improve buying terms wherever possible.

The growth in this division continues to support development in both the Laboratory and Crematorium divisions.

Laboratory

The Group operates 6 (2009: 5) laboratories in the UK which provide diagnostic services to third party owned veterinary surgeries as well as our own practices. Services are generally provided via postal and courier services allowing complete coverage of the UK. Third party sales accounted for 74% (2009: 77%) of the division's revenues with the balance attributable to CVS owned surgeries.

The laboratory division generated 8.4% (£4.3m) of Group revenues. Revenue was 5.9% up on the prior period due to the effect of acquisitions. However, as a result of a fall in like-for-like sales brought about by a highly competitive operating sector, adjusted EBITDA reduced by £0.2m to £0.5m. The reliance on courier services means that this division is disproportionately affected by severe winter weather which, coupled with the previously mentioned factors, have impacted adjusted EBITDA.

Crematorium

The Rossendale crematorium provides the majority of its services (67%) to non-group practices and the general public in addition to CVS practices in the North and Midlands.

The crematorium division continues to deliver results ahead of expectations with revenue and adjusted EBITDA both up by 26% on the prior period at £0.4m (2009: £0.3m) and £0.2m (2009: £0.1m) respectively.

Central administrative function

An integral part of the Group's strategy is to centralise administration and management, enabling other divisions to focus on operational matters, a proposition that makes CVS one of the acquirers of choice within the sector.

On an adjusted basis the total costs for the segment were £2.1m (2009: £1.8m) which, in line with the strategy, was lower as a percentage of revenue at 4.1% (2009: 4.4%).

Cash flow and funding position

Cash flow from operations increased by 32.5% to £8.8m through our continuing focus on management of working capital. Overall, net debt in the period has been reduced by £4.1m since the last fiscal year end and stands at £37.8m at 31 December 2010 (see note 12). Internally generated cash was used to fund the £1.6m purchase of St David's Veterinary Hospital in November 2010, the balance due on prior year acquisitions of £0.9m and the £0.2m purchase of Campbells in Swansea subsequent to the half year in January 2011.

All bank covenants throughout the period have been complied with and the Group has made scheduled term loan repayments of £3.2m since 30 June 2010.

Earnings per share

Adjusted earnings per share decreased by 0.9p (12.5%) to 6.3p from 7.2p in the comparable period. Basic and diluted earnings per share were 2.6p per share (2009: 3.9p per share) reflecting the reduction in operating profits combined with an increase in the average number of shares in issue.

Dividends

The Board, at this point in time, is of the view that cash generated from operations should be reinvested in the business and therefore believes that no dividend should be declared for the period ended 31 December 2010. The Board will continue to review its dividend policy on an on-going basis.

Our people

The Group continues to be the largest employer in the veterinary profession with over 2,200 staff at 31 December 2010. 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.

Christopher Marsh stepped down from the board as a non-executive director in December after retiring by rotation and not seeking re-election. I would like to take this opportunity to sincerely thank Christopher on behalf of CVS for his valued input and expertise during his time on the board and wish him well for the future.

Further business development

The Board estimates that CVS accounts for approximately 10% of the UK small animal veterinary sector measured by wholesaler spend and believes that this fragmented market will provide opportunities for further consolidation and strategic acquisitions. The Group will continue to focus on profitably developing the organic business by further enhancement to revenue streams and delivery of improvements to operating efficiency.

Outlook

Trading since the half year has been in line with Board expectations.

Richard Connell

Chairman

16 March 2011

Consolidated income statement for the six month period ended 31 December 2010 (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 transactions costs and share option expense.

Statement of consolidated comprehensive income for the six month period ended 31 December 2010 (unaudited)

Consolidated balance sheet as at 31 December 2010 (unaudited)

Consolidated balance sheet as at 31 December 2010 (unaudited) (continued)

The interim financial information on pages 5 to 21 was approved by the board of directors on 16 March 2011.

Consolidated statement of changes in equity for the six month period ended 31 December 2010 (unaudited)

Consolidated statement of changes in equity for the six month period ended 31 December 2010 (unaudited) (continued)

Consolidated statement of cash flows for the six month period ended 31 December 2010 (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 a pet crematorium.

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 2010 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 2010. 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 2010, 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, transaction costs and share option expense. 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 acquisition transaction costs 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 40 to 49 of the consolidated financial statements of CVS Group plc for the year ended 30 June 2010 (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 standards and interpretations to published standards are mandatory for accounting periods on or after 1 July 2010 but do not have a significant impact on the Group's operations: 

·; Amendments to IFRS 2 "Share-based payment - Group Cash-Settled Transactions"

·; Amendment to IAS 32, "Financial instruments: Presentation - Classification of rights issues" 

·; Amendment to IFRS 1, "First-time adoption of International Financial Reporting Standards -Limited exemption from comparative IFRS 7 disclosures for first-time adopters" 

·; IFRIC 19 "Extinguishing financial liabilities with equity instruments" 

·; Annual improvements to IFRSs (2009)

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group 

The following standards and amendments to existing standards have been published but the Group has not early adopted them: 

·; IFRS 9 "Financial instruments" 

·; IAS 24 (revised) "Related party disclosures"

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, transaction costs and head office salary and premises.

Geographical segments

The business operates predominantly in the UK. It performs a small amount of laboratory work 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. 

4. Segmental reporting (continued)

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 crematorium fees to veterinary practices eliminated on consolidation.

4. Segmental reporting (continued)

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

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

5. Finance (income) and expense

Fair value adjustments in respect of financial assets and liabilities for the six month period ended 31 December 2010 reflect the ineffective portion of derivative financial instruments that qualify for hedge accounting less the recycling of fair value adjustments in respect of the time value of the option accumulated in equity prior to the adoption of the amendment to IAS 39.

6. Earnings per ordinary share

Basic earnings per ordinary share are 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. 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.

* In accordance with the provision of IAS 33 - "Earnings per Share," the comparatives have been adjusted to reflect the impact of the placing in the year ended 30 June 2010 (being the impact of the discount applied to the market price, on the weighted average number of shares).

6. Earnings per ordinary share (continued)

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

**In accordance with the provision of IAS 33 - "Earnings per Share," the comparatives have been adjusted to reflect the impact of the placing in the year ended 30 June 2010 (being the impact of the discount applied to the market price, on the weighted average number of shares). 

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 6 October 2010 LTIP4 was issued with an option life of 3 years over 984,560 shares, of which 959,702 were outstanding at the period end. The share price at the grant date was £1.01 with an exercise price of 0.2p.

During the six months to 31 December 2010, directors and employees exercised [194,779] (2009: nil) share options will a nominal value of £400 (2009: nil), in respect of the LTIP1 scheme.

The share based payment charge for the period in respect of the options issued under the LTIP schemes amounted to £139,000 (2009: £278,000) and has been charged to administrative expenses. National Insurance contributions amounting to £15,000 (2009: £44,000) 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.

SAYE3 scheme was opened for subscription in November 2010 (with options granted December 2010). It granted 751,676 shares of which 686,051 where outstanding at the period end. The exercise price was £0.80p

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 £20,000 (2009: £10,000) 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").  

9. Non-current assets

10. Business combinations

Details of business combinations in the six month period ended 31 December 2010 are set out below.

1Intangible assets acquired represents patient data records (£1,550,000).

In addition to the payment detailed above contingent deferred consideration of £300,000 relating to the Devon business combination has not been recognised at the period end. In accordance with IFRS 3 (revised), these costs will be recognised in the income statement in future periods based on the crystallisation of the contingent event.

£152,000 of deferred consideration relating to the acquisition of subsidiaries and £707,000 in relation to the acquisition of practices for the year ended 30 June 2010 has been paid in this period, as shown in the consolidated statement of cash flows. 

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.

Relnternational Holdings Limited and OSI International Foods Limited are both members of the Gands (UK) group.Foods Limited.

13. Post balance sheet events

On 10 January 2011 the Group acquired the trade and related assets of a veterinary practice based in Swansea for cash consideration of £150,000.