CVS Group Regulatory News (CVSG)

CVS GROUP plc

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

Preliminary Results for the year ended 30 June 2012

CVS, one of the UK's leading providers of veterinary services, is pleased to announce its preliminary results for the year ended 30 June 2012.

Financial highlights

- Increase in Group revenue of 7.1%, leading to 7.9% increase in adjusted EBITDA to £15.7m

- Proposed dividend of 1.5p per share, representing a 50% increase on prior year

- Like-for-like sales3 growth of 2.9%

- Profit before income tax and Basic earnings per share are reported after an exceptional finance expense of £1.6m incurred as part of the successful and strategically important refinancing secured in December 2011

- Increase in loyalty scheme members from 28,000 to 65,000 during the year

- Acquired and successfully integrated 8 surgeries, bringing the total number of sites at the year end to 231 surgeries

- Significant growth of e-commerce activities with revenue of £3.0m for the year (2011: £0.9m)

- Net debt reduced by £2.6m to £30.9m, after spending £3.8m on acquisitions.

1See page 10 of the financial information for a reconciliation of profit before income tax for the year to adjusted earnings before income tax, net finance expense, depreciation, amortisation, costs relating to business combinations and share option expense ("adjusted EBITDA").

2 See note 5 of the financial information for a reconciliation of basic and diluted earnings per share to "adjusted earnings per share".

3 See note 1 of the financial information for definition of like-for-like sales.

Chief Executive Comment

"I am pleased to report that we have delivered a good performance in the year, despite difficult economic conditions. The progress made in growing the membership of our loyalty schemes and the expansion of our e-commerce activities have been notable achievements in the year. We continue to focus on organic growth whilst also developing new revenue streams and continuing to grow through selective strategic acquisitions."

Contacts:

Chairman's statement

Introduction and review of operations for the year

I am pleased to announce the results of CVS Group plc ("CVS", "the Group", or "the Company") for the year ended 30 June 2012. The Group has delivered a strong performance in the year.

I am also pleased to confirm that new banking facilities were completed in December 2011.

The Group has grown revenue by 7.1% to £108.7m (2011: £101.5m) and like-for-like sales have increased by 2.9%. Adjusted EBITDA has increased by 7.9% to £15.7m (2011: £14.5m), and as a percentage of sales has increased marginally from 14.3% to 14.4%. Cash generated from operations amounted to £15.5m (2011: £17.6m); the prior year reflects the benefit of a one-off improvement in supplier payment terms of approximately £2.0m. Operating profit increased by 6.7% to £6.8m (2011: £6.4m), and Adjusted EPS grew by 12.9% to 15.8p (2011: 14.0p).

Adjusted profit before tax increased to £5.3m (2011: £4.3m) after adding back the exceptional finance expense of £1.6m. This charge resulted from the termination of the hedging arrangement attached to the debt financing replaced during the year, and reflects the acceleration of future interest charges that would have been incurred over the instrument's term. Interest expense savings are expected to be achieved over the 5 year duration of the replacement facilities, with average interest payable of around 3.5% under the hedged element of the new facilities compared to 5.5% under the hedged element of the previous arrangement.

The Group has progressed several initiatives to counter the trends we all face given the uncertainty in the general economy. These initiatives include significant growth in the Group's customer loyalty schemes; rapid expansion of the on-line dispensary (Animed Direct); roll-out of on-line pet shops under the branding of our existing practices; and the launch of our in-house locum agency.

The Group's customer loyalty programmes comprise the Healthy Pet Club for adult dogs and cats; the Healthy Horse Club (launched in the prior year); the Healthy Puppy and Kitten Club (launched in the latter part of the prior year) and the Healthy Rabbit Club (launched in this financial year). These schemes have been established to bond clients to the practice; to improve loyalty; to increase compliance (particularly with respect to vaccinations, worming and flea treatment); and protect loss of drug sales revenue from surgeries to on-line retailers. The significant increase in client membership is detailed in the business and financial review on page 4.

The Group acquired and integrated 8 surgeries in the year for a combined consideration of £3.8m. These enhance the Group's presence in the UK veterinary profession and I am pleased to report that these surgeries have performed in line with expectations post acquisition.

The Group has also continued to drive increased sales in the laboratory division as a result of the successful introduction of an expanded sales team.

Cash flow and funding position

Cash flow generated from operations was £15.5m, after funding acquisitions of £3.8m. The Board remains satisfied that the Group is successfully converting profit into cash.

Overall net debt decreased in the year to £31m from £34m, with a corresponding decrease in the gearing of the Group with EBITDA to net debt ratio reducing from 2.31 to 1.98.

The Group made scheduled loan repayments of £1.0m during the first half year in relation to the replaced facilities. In accordance with the new facilities negotiated in December 2011, no loan repayments are due until December 2013.

The Group has complied with all bank covenants throughout the year, and is projected to continue to do so.

Internally generated cash will be used to fund organic growth, the increased on-line initiatives, and other growth opportunities including future acquisition activity.

Chairman's statement (continued)

Dividends

A maiden dividend of 1.0p per share was paid in December 2011, a payment that was covered 6.2 times by basic earnings per share and 14.0 times by adjusted earnings per share.

Owing to the solid performance and positive outlook of the Group, the Board recommends a further dividend of 1.5p per share, at a cost of £0.9m this is covered 3.4 times by basic earnings per share and 10.5 times by adjusted earnings per share. The Group will continue to review its dividend policy on an ongoing basis with particular regard to the Group's profitability, cash generation and prospects.

If approved at the Annual General Meeting, the dividend will be paid on 21 December 2012 to shareholders on the register on 7 December 2012. The ex-dividend date will be 5 December 2012.

Our people

The Group continues to be the largest employer in the UK veterinary profession with approximately 2,300 staff today, including around 550 vets. Our people are our best asset and enable the Group to deliver its strategy. I would like to thank them all, including those new to CVS in the year, for their expertise and professionalism in providing the best possible veterinary care and service.

Paul Coxon has informed the Board of his desire to step down from his role as Finance Director by the end of the calendar year; a replacement is being sought. The Board would like to thank Paul for his contribution over the last 9 years and wish him well in the future.

Further business development

We estimate that CVS has around 11% of the UK small animal veterinary market measured by wholesaler spend, which demonstrates the opportunity for further growth and consolidation.

Outlook

We continue to focus on developing the business profitably by furthering ways to extract operational efficiency, improve business performance, grow through selective acquisitions and generate new revenue streams.

The Board remains cautiously optimistic about the Group's future and sees further growth opportunities supported by strong cash generation and a return to more favourable economic conditions.

Richard Connell

Chairman

24 September 2012

Business and financial review

CVS has continued to deliver growth in terms of revenues and pre-exceptional profits over the prior year. Group revenue increased to £108.7m (2011: £101.5m), and Adjusted EBITDA increased to £15.7m (2011: £14.5m). Operating profit was ahead of the prior year at £6.8m (2011: £6.4m), however reported Profit before tax at £3.8m showed a decline against the prior year (£4.3m) primarily due to the £1.6m exceptional finance expense recognised as a result of terminating existing hedging arrangements during the year.

Management uses Adjusted EBITDA and Adjusted earnings per share ("EPS") financial measures as the basis for assessing the underlying financial performance of the Group. These terms are not defined by International Financial Reporting Standards and therefore may not be directly comparable with other companies' adjusted profit measures.

Factors that have influenced the improvement in the Adjusted EBITDA figure compared with the prior year include the full year effect of previous year acquisitions, augmented by acquisitions made during the year, and growth of e-commerce activities.

Following the decline in Adjusted EBITDA margin in the prior year, it is pleasing to report that a slight improvement has been achieved in the current year at 14.4% (2011: 14.3%), particularly in light of the dilutive margin effect of the growing revenues from the e-commerce activities. These activities are strategically important to expand the Group's operations into a growing market where CVS buying power provides opportunity to price aggressively and provide a greater product range. This is resulting in a rapid expansion, however these activities do, by their nature, have a lower margin rate of return than the rest of the business operations.

Adjusted earnings per share (as defined in note 5 to the financial information) was 15.8p (2011: 14.0p). Basic earnings per share was below prior year at 5.1p (2011: 6.2p) as a result of the exceptional finance expense incurred in the year.

Divisional performance

Practice

The Group is the leading national veterinary surgery operator and consolidator, and is primarily focused on the small animal market. Revenue amounted to £101.8m, an increase of 7.5% on the prior year.

The Practice division's activities are carried on under a number of well established local brands and it is the Group's policy to retain these following acquisition.

In the year, CVS acquired 6 practices, operating from 8 locations. These practices contributed £1.8m of revenue in the year, which corresponds to around £5m in a full year.

The practice division is led by our Director of Practice Operations who is supported by our Director of Clinical Services and a divisional management structure underpinned by a combination of local practice and regional area managers. These provide a combination of clinical and retail management experience.

A number of ongoing initiatives have been implemented to improve the operational effectiveness of the division, including:

- Regional practice performance benchmarking.

- Identifying and agreeing priority measures to support poorer performing sites.

- Further developing the client membership of the Group's customer loyalty schemes.

- Enhanced e-commerce activity with the re-launch of the website for the Group's on-line dispensary during the year and establishment of 5 on-line shops to complement the practice websites.

Business and financial review (continued)

The Healthy Pet Club loyalty scheme has continued to grow in the year with 37,000 pets being added to the scheme, of which 25,000 relate to pets on the Puppy and Kitten scheme launched in the prior year. This benefits the division by driving customer loyalty, encouraging clinical compliance, protecting revenue from drug sales, and bringing more customers into the surgery. At the year end total pet members stood at more than 65,000 (2011: 28,000), an increase of 132% over the previous year. Monthly subscription revenue generated in the year more than doubled to £5.2m (2011: £2.4m).

Benefits from increasing economies of scale continue to be enjoyed by the Practice division in terms of drug buying, overheads and infrastructure. However, these improvements were offset slightly by the impact of lower margin sales in respect of on-line trading.

Animed Direct, our on-line trading platform, has continued to trade ahead of expectations, delivering sales of £3.0m during the year (2011: £0.9m).

The Adjusted EBITDA for the Practice division grew by £1.0m to £18.7m and the Profit before tax by £0.6m to £12.1m, primarily due to the impact of acquisition activity in the current and prior year together with the growth of the on-line activities.

As the Practice division grows it will continue to complement the growth in the Laboratory and Crematorium divisions.

Laboratory

The Group operates 6 laboratories in the UK which provide diagnostic services to third party veterinary surgeries (68% of revenues) as well as CVS owned veterinary surgeries (32% of revenues). Services are generally provided via courier and postal services allowing complete coverage of the UK.

The laboratory division delivered an encouraging performance in spite of the economic factors already mentioned, whilst operating within a landscape that continues to be competitive. Revenue rose by £0.5m and Adjusted EBITDA rose by £0.2m, despite the competitive trading environment within the veterinary diagnostic market.

The Director of Laboratory Operations continues to focus on growth and has enhanced the sales team in order to retain existing customers and help broaden the client base. It is pleasing to note that the growth in the division has largely been achieved through the enhancements made to the sales team during the year.

Crematorium

The Rossendale crematorium delivered revenue of £0.9m (2011: £0.8m) and an Adjusted EBITDA of £0.4m (2011: £0.3m), being 40.8% of sales (2011: 39.9%).

In addition to services provided to non group practices and the general public, the division also serves CVS practices in the North and Midlands which account for 36% of its revenues.

Central administration

The Group's approach to centralising the administrative and management functions continues to be an integral part of the strategy of the business which enables the other divisions to focus on clinical and operational matters and enjoy the benefits of a centralised support function.

On an adjusted basis, the total costs for the central administration segment remained at £4.5m, representing 4.2% of revenue (2011: 4.4%), illustrating management's ability to control central costs.

The Loss before tax for the central administration segment increased from £8.1m to £9.3m, being 8.6% of revenue (2011: 8.0%), due to the £1.6m exceptional finance charge arising on the termination of the previous hedging arrangement during the year, as referred to above. On a pre-exceptional basis, central administration costs were down year on year.

Other financial highlights

Net finance expenses of £3.0m represent an increase of £0.9m (43.1%) compared to the previous year, reflecting the exceptional finance expense of £1.6m and interest expense savings of £0.7m due to lower debt and better financing arrangements.

The Group recorded a decrease in reported Profit before tax for the year of £0.5m to £3.0m representing a decrease of 13.5% on the previous year. This decrease was primarily due to the exceptional finance expense incurred on termination of existing hedge arrangements during the year; adjusted profit before exceptional finance increased by 31.5% to £4.6m.

Cash generated from operations amounted to £15.5m, which has allowed the Group to self-fund acquisitions with a consideration of £3.8m made during the year whilst significantly reducing net debt by £2.6m to £30.9m.

Business and financial review (continued)

Key performance indicators ('KPIs')

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

 Business and financial review (continued)

Funding and treasury management

As at 30 June 2012, the Group had net debt of £30.9m (2011: £33.5m) comprising debt of £35.8m (net of issue costs) and cash of £4.9 m.

The Group secured new bank funding during the year, comprising a £36.0m 5 year term loan with a 2 year capital repayment holiday, and £4.0m overdraft facility.

The Board considers that maintaining a reasonably leveraged balance sheet is appropriate for the Group, given the strong and stable nature of its cash flows.

The Group has a centralised treasury function to manage interest rate risk. Derivative instruments are used solely to mitigate these risks. Interest rate swap arrangements are used to manage exposure to interest rate fluctuations, whilst allowing some benefit of reductions in interest rates. At the year end, the Group had interest hedging arrangements in place covering £21.6m (60%) of bank debt. The Group sweeps funds daily from its various bank accounts into deposit accounts to optimise interest generation.

Business environment

The Group generated a like-for-like sales increase of 2.9% in the current year. This achievement of growth is regarded by the Board as being an indicator of the resilience of the business and the veterinary market.

The Board is focused on a number of initiatives as outlined previously to combat prevailing economic conditions.

Principal risks and uncertainties

The Group's operations are subject to a number of risks that include the impact of competition, continued employment and recruitment of key personnel and the maintenance of clinical standards.

Competition

The Group is exposed to a degree of risk through the actions of competitors. However, the geographic spread of the Group's businesses and the fragmented nature of the market mean that the Directors do not consider this to be a significant risk. Furthermore, the expansion of the Group's customer loyalty schemes and the growth of Animed Direct, our on-line dispensary and pet shop, provide further mitigation against the risk of competition.

Key personnel

The Group has limited risk in relation to the ability to attract and retain appropriately qualified veterinary surgeons. The Group is committed to the development of its employees and will continue to recruit specialist and qualified professionals to promote its services. The involvement of senior personnel is encouraged through the operation of the Group's LTIP scheme which has been offered more widely to senior management in the year. A further SAYE scheme, available to all staff, was set up in the year.

Clinical standards

It is of the utmost importance to the Group that the clinical care delivered to our patients is at the standard expected by customers, industry forums and regulatory authorities. The Group has established a formal organisation structure that allows clinical policies and procedures to be developed and ensure day-to-day compliance monitoring. The Group has further mitigated any risk by ensuring that suitable insurance policies are taken out at both an individual and corporate level.

Economic environment

The current economic environment potentially poses a risk to the Group through reduced consumer spending on veterinary, laboratory and crematorium services. In the year under review, the Group has shown some resilience to the challenging economic conditions.

Business and financial review (continued)

The Practice division has continued to grow its payment plan based customer loyalty schemes during the year as a way of mitigating this risk. The plans have significant benefits in terms of stimulating customer loyalty, ensuring clinical compliance for the pet, protecting revenue from drug sales, and bringing customers into the surgery.

Adverse weather

In common with many businesses the Group's revenue is adversely affected during sustained periods of severe winter weather.

As the Group continues to widen its geographical presence the exposure to this risk will be mitigated to some extent.

Key contractual arrangements

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

Future developments

The Group will focus its activities on developing its organic business in all three operating divisions. In addition, selective acquisitions may continue.

Simon Innes

Chief Executive

24 September 2012

Consolidated income statement for the year ended 30 June 2012

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 year ended 30 June 2012

Consolidated balance sheet as at 30 June 2012

Consolidated balance sheet as at 30 June 2012 (continued)

The financial information comprising the consolidated income statement, the statement of consolidated comprehensive income, the consolidated balance sheet, the consolidated statement of changes in shareholders' equity, the consolidated cash flow statement and the related notes, were authorised for issue by the Board of Directors on 24 September 2012 and were signed on its behalf by:

Consolidated statement of changes in equity for the year ended 30 June 2012

Consolidated cash flow statement for the year ended 30 June 2012

Notes to the consolidated financial information for the year ended 30 June 2012

1. Summary of significant accounting policies

Statement under s498 - publication of non-statutory accounts

The financial information set out in this preliminary announcement does not constitute statutory financial statements for the years ended 30 June 2012 or 2011, for the purpose of the Companies Act 2006, but is derived from those financial statements. Statutory financial statements for 2012, on which the Group's auditors have given an unqualified report which does not contain statements under Section 498(2) or (3) of the Companies Act 2006, will be filed with the Registrar of Companies subsequent to the Group's next annual general meeting. Statutory financial statements for 2011 have been filed with the Registrar of Companies. The Group's auditors have reported on those accounts; their reports were unqualified and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.

Basis of preparation

The consolidated financial statements, from which this preliminary announcement is derived, have been prepared on a going concern basis and under the historical cost convention, except for certain financial instruments that have been measured at fair value. The Group has operated within the levels of its current debt facility and complied with both the financial and non-financial covenants contained in the facility agreement therein throughout the year under review and to the date of the approval of the financial statements. The Group is forecasting that it will continue to operate within the levels of its current facility and comply with the financial and non-financial covenants contained in the facility agreement. On this basis the Directors consider it appropriate to prepare the consolidated financial statements on the going concern basis.

Whilst the financial information included in this preliminary announcement has been prepared in accordance with the International Financial Reporting Standards (IFRSs) as adopted for use in the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRS. Other than as stated below, the accounting policies applied in preparing this financial information are consistent with the Group's financial statements for the year ended 30 June 2012.

Changes in accounting policy and disclosure

Standards, amendments and interpretations effective in the year ended 30 June 2012

The following amendments to existing standards and interpretations were effective for the current period, but the adoption of these amendments to existing standards and interpretations did not have a material impact on these financial statements:

·; Annual improvements to IFRSs (2010).

·; Amendment to IFRS 1, 'First time adoption', on fixed dates and hyperinflation.

·; Amendments to IFRS 7, 'Financial instruments: Disclosures' on derecognition.

·; IAS 24 (Revised), 'Related Party Disclosures.'

·; Amendment to IFRIC 14, 'IAS 19 - The limit on a defined benefit assets, minimum funding requirements and their interaction', effective for annual periods beginning on or after 1 January 2011.

1. Summary of significant accounting policies (continued)

Use of non-GAAP measures

Adjusted EBITDA

The Directors believe that adjusted EBITDA provides additional useful information for shareholders on underlying trends and performance. These measures are used for internal performance analysis. Adjusted EBITDA is not defined by IFRS and therefore may not be directly comparable with other companies' adjusted profit measures. It is not intended to be a substitute for, or superior to, IFRS measurements of profit. Adjusted EBITDA is calculated by reference to profit/(loss) before income tax, adjusted for interest (net finance expense), depreciation, amortisation, share option expense and costs relating to business combinations.

Like-for-like sales

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.

2. 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 costs.

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.

Operating segments

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

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

2. Segmental reporting (continued)

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

3. Costs relating to business combinations

IFRS 3 (revised) requires all costs relating to business combinations to be expensed directly in the income statement. The charge for the year ended 30 June 2012 was £280,000 (2011: £139,000), of which £105,000 (2011: £94,000) related to transaction costs and £175,000 (2011: £45,000) related to contingent deferred consideration in respect of business combinations in the current and prior year which is linked to ongoing employment of the vendor.

4. Income tax expense

Factors affecting the current tax charge

UK corporation tax is calculated at 25.5% (2011: 27.5%) of the estimated assessable profit for the year. The standard rate of UK corporation tax changed from 26% to 24% with effect from 1 April 2012.

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:

5. 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 year.

5. Earnings per ordinary share (continued)

Non-GAAP measure: Adjusted earnings per share

Adjusted earnings per Ordinary share is calculated by dividing the profit after taxation excluding amortisation, share option expense, costs relating to business combinations, non-recurring tax credits and fair value adjustments, and having adjusted for the tax effects of such adjustments, by the weighted average number of shares in issue during the year.

 6. Business combinations

Details of business combinations in the year ending 30 June 2012 are set out below, in addition to an analysis of post acquisition performance of the respective business combinations, where practicable. All business combinations have been accounted for under the acquisition method. All intangible assets are recognised at their respective fair values.

Given the nature of the veterinary surgeries acquired (mainly partnerships or sole traders) and the records maintained by such practices it is not practicable to disclose the revenue or profit/loss of the combined entity for the year as though the acquisition date for all business combinations effected during the year had been the beginning of that year. It is not practicable to disclose the impact of the business combinations on the consolidated cash flow statement as full ledgers were not maintained for each business combination in relation to all related assets and liabilities post acquisition.

6. Business combinations (continued)

Trade and assets acquisitions

The table below summarises the trade and assets acquisitions in the year ended 30 June 2012:

1Intangible assets acquired represents patient data records (£3,339,000).

Of the above consideration, £50,000 remains unpaid at the balance sheet date.

In addition to the payments detailed above, contingent deferred consideration of £75,000 has been recognised in respect of the above business combinations. In accordance with IFRS 3 (revised), these costs will be recognised in the income statement based on the crystallisation of the contingent event.

£115,000 of deferred consideration payments in relation to the acquisition of practices for the year ended 30 June 2011 has been paid in this period, as shown in the consolidated statement of cash flows.

Analysis of post acquisition performance:

1Post-acquisition revenue represents revenue from the date of acquisition to 30 June 2012.

2Post-acquisition EBITDA represents the direct operating result of practices prior to the allocation of central overheads, on the basis that it is not practicable to allocate these, from the date of acquisition to 30 June 2012.

7. Dividends

The Directors have proposed a final dividend of 1.5p (2011: 1.0p) per share (total £850,000), payable on 21 December 2012 to shareholders on the register at the close of business on 7 December 2012.

The dividend has not been included as a liability as at 30 June 2012.

8. Borrowings

9. Cash flow generated from operations