DPH.L Regulatory News (DPH)

Monday,4 September 2017

Dechra Pharmaceuticals PLC

(Dechra or the Group)

Preliminary Results Announcement

International veterinary pharmaceutical business, Dechra issues audited preliminary results for the year ended 30 June 2017

"20 Years of Strategic Growth"

Financial Summary

Underlying results excludes amortisation of acquired intangibles and impairment of acquired intangibles, impairment of investments, acquisition expenses, fair value uplift of inventory acquired through business combinations, rationalisation costs, loss on extinguishment of debt, and fair value and other movements on deferred and contingent consideration

Dechra Pharmaceuticals PLC

Preliminary Results for the year ended 30 June 2017

Non-Executive Chairman's and Chief Executive Officer's Statement

As we complete our 20th year since the inception of the Company, we are pleased to report that the Group has delivered another strong financial performance. This has been driven by growth from our existing portfolio, good market penetration from recent pipeline launches and the pleasing performance of the acquisitions made in the preceding financial year. This has resulted in strong cash generation and deleveraging of our balance sheet. Furthermore, we have completed two acquisitions within the 2017 financial year, the first of which extends our geographical footprint into Australia and New Zealand and the second is a minority stake together with the global marketing rights in a business that may transform our Food producing Animal Product (FAP) business in the long term through the development of a novel approach to farm animal pain relief.

Portfolio Focus

EU Pharmaceuticals Segment

During the 2017 financial year our EU Pharmaceuticals Segment increased its total reported revenues by 7.9% at constant exchange rate (CER). Our existing EU Pharmaceuticals business, excluding third party contract manufacturing and acquisitions, increased by 5.3%. Third party contract manufacturing revenues, which are reported under our EU Pharmaceuticals Segment, declined by 9.7% in the 2017 financial year. This was a conscious strategic move as we start to implement an efficiency improvement plan across our manufacturing sites (this is covered in more detail later in this Statement).

Our Companion Animal Product (CAP) sales were the predominant driver of revenue growth in our core EU business; FAP and Equine also delivered growth of 1.3% and 0.7% respectively. The UK, France and Germany, the three main contributors to EU revenues, performed well; we also delivered strong revenue growth in Italy and Poland. After a slow start to our recently formed subsidiary in Austria, performance is now reaching our expectations.

CAP revenue increased by 9.0% driven by a strong performance of Zycortal®, our novel endocrine product launched last year and also from established products such as Cardisure®, Vetoryl® and our analgesia and anaesthesia range.

We are pleased to report our FAP portfolio has delivered its second successive year of growth, albeit modest. This performance is set against a historical decline in antibiotic sales due to concerns over antimicrobial resistance which is continuing in most markets. Despite this, we are beginning to see signs of a recovery in sales of our water soluble antibiotics. We believe that our Solustab® range is now well positioned to provide veterinarians with a robust portfolio of suitable options for prudent use of antibiotics in the treatment of the majority of infectious diseases in pigs and poultry. The first of the poultry vaccines developed for the EU, Avishield® ND, was launched in Germany, the Netherlands and Belgium. Although we do not yet have a full range to offer our customers, we were still able to gain a market share of approximately 15% due to the product's excellent efficacy and safety profile.

The Equine portfolio growth has predominantly been driven by Osphos®, although we believe that sales are a long way from reaching full potential and will continue to grow as veterinarians gain a better understanding of this unique treatment. Generic competition to Equipalazone®, a long standing product in our portfolio, partly offset the sales growth in this category.

The Nutrition and Diets market continues to be very competitive; we are maintaining sales of our brand, Specific® following historical supply issues and are initiating a number of projects that we hope will re-invigorate the range in the near term. We have, towards the end of this financial year, launched two new hypo-allergenic wet diets for dogs and cats.

The overall EU Pharmaceuticals Segment benefited from a full year's contribution from the acquisition of Genera, the Croatian business acquired in October 2015 and eight months' contribution from Apex, the Australian business acquisition completed in October 2016 (Dechra Veterinary Products International revenue, including Apex, are included in this Segment). Apex is performing well with the recently modernised factory achieving regulatory approval from the authorities in Australia in April 2017.

Excellent progress continues to be made on the integration of the Genera acquisition. Significant cost savings have been delivered from the workforce rationalisation and major improvements have been made in the solid dose and liquids manufacturing facilities, into which new products are being transferred to benefit from this low cost location. The primary reason for the acquisition was to access their range of poultry vaccines for broilers; the first of these has now been launched, the next five are in registration and progress is being made with a further four products.

North America Pharmaceuticals Segment

Total North American Segment revenues increased by 93.7%. Existing business sales increased by 16.5% with our US and Canadian businesses both performing well. The principal drivers of this growth are CAP and Equine products. All major products have delivered growth with excellent sales of Zycortal, Vetivex® (a range of intravenous fluids for critical care) and Osphos.

A number of new products were launched during the 2017 financial year including Amoxi-Clav (the first major product approval from Putney since we acquired the business in April 2016), three new extensions to our Vetivex range, Carprovet flavoured tablets to increase our CAP pain management range and two topical dermatology products in a new mousse format.

Overall the Segment benefited from an exceptional performance by Putney. The integration has been implemented extremely well; significant cost savings have been delivered, new sales channels opened and sales synergies from the enlarged team have been delivered to both Putney and our existing product ranges.

The Mexican business, Brovel, acquired in January 2016 continues to focus on the registration of Dechra products; initial approvals have now been received. A new management team was appointed during the 2016 financial year and there has been a notable improvement in performance.

Product Pipeline

Integrated Team

We have invested in and commissioned a new development laboratory in Genera, Croatia. We have also implemented a new management structure to monitor and control all global pipeline activities, and have successfully integrated the pipeline activities and team members from all our recent acquisitions.

Pipeline Delivery

The most significant approval, as announced on 9 September 2016, was for a generic antibiotic tablet, Amoxi-Clav. There have been numerous other global registrations, the most significant of which are:

· Revozyn®, a cattle antibiotic for mastitis, in the Netherlands, UK and Germany with applications having been made for a further ten European markets;

· Cyclospray® aerosol and Vetoryl 5mg in Canada;

· Cardisure®, Zycortal, Osphos, Doxy paste and Benazapril oral solution in Australia;

· Osphos in Mexico;

· Isathal® and Canaural in Korea;

· Domidine®, Atipam® and Sedator® in Thailand and South Africa; and

· Altidox®, a water soluble antibiotic, in 13 EU territories.

Filling the Pipeline

Our pipeline has been significantly enhanced by recent acquisitions and remains strong. As the Company increases in scale, we recognise that the pipeline needs to increase commensurately, and are therefore constantly reviewing new technologies and developing relationships to introduce new products into the programme. Within the year we have signed three agreements to conduct Proof of Concept studies on new, innovative and potentially material pharmaceuticals for the veterinary market. We also continue to look at opportunities to secure products from other companies and have, in the 2017 financial year, licensed in a range of CAP generic tablets from a key partner for Europe, a dental and a dermatological product from Kane Biotech Inc. for the US and Canada and a dermatological product from Premune for the EU.

Acquisitions

On 14 October 2016, we completed the acquisition of the trade and assets of Apex Laboratories Pty Ltd (Apex), based in Somersby near Sydney, Australia for AUD$55.0 million (£34.2 million). The acquisition, which is expected to be earnings enhancing in the first 12 months of ownership, manufactures, markets and sells branded non-proprietary prescription and other related CAP in Australia and New Zealand. Prior to the acquisition it had revenues for the year ended 30 June 2016 of AUD$14.8 million (£8.4 million) and operating profit of AUD$5.2 million (£3.0 million). The principal reason for the acquisition was to provide Dechra with direct access to the established and growing Australian CAP and Equine markets, in which Dechra currently operates through partners.

On 31 March 2017, we acquired a 33.0% stake in, Medical Ethics Pty Ltd, the parent company of Animal Ethics Pty Ltd (Animal Ethics) for a total consideration of AUD$18.0 million (£11.0 million). Separately, we also announced that we had entered into a long term Intellectual Property Licensing Agreement with Animal Ethics who are an Australia-based company focused on developing ethical pain relief products for animal health. This agreement gives Dechra the rights to sell and market Animal Ethics' patented product Tri-Solfen® for all animal species in all international markets, excluding Australia and New Zealand. Tri-Solfen is a topical product that is sprayed onto wounds which simultaneously anaesthetises, relieves pain, controls bleeding and protects against infection for routine treatments in farm animals such as castration, tail docking, de-budding and de-horning. There is increasing pressure from retailers, animal welfare and consumer groups to improve the ethical treatment of animals. We believe that Dechra's access to Tri-Solfen will provide us with a unique position to increase our presence in FAP markets globally.

Geographical Expansion

Sales in territories outside of Western Europe and our North American Pharmaceuticals Segment are categorised as International and these are reported under our EU Pharmaceuticals Segment; they currently represent 8.6% of total Group sales.

Towards the end of the financial year we established a new business unit, Dechra Veterinary Products International, led by Giles Coley, a long standing senior executive within Dechra, to focus on increasing our international presence. Historically, international sales have not been an area of strategic focus and we are therefore underweight relative to our competitors and the global market. By increasing focus and strategic priority, we believe we can deliver material growth in future years.

Currently, sales outside our core markets are predominantly FAP based. We believe our high quality products, mainly in pig and poultry, will provide us an entry opportunity into markets where quality meat consumption is increasing strongly. In the longer term we are targeting companion animal markets which are beginning to gain growth momentum in several developing countries; we are starting to register products to benefit from this global growth in pet ownership.

As part of the new business unit, we have created a regulatory team to focus on international registrations and are looking to appoint business development managers in key geographies to support our existing distributors and to establish new markets.

Strategic Enablers

Manufacturing

We have commenced the implementation of a strategic five year plan that will create centres of excellence for different dosage forms in our major manufacturing sites and which will lead to significant gains in efficiency throughout the period of the plan.

As part of this project we are reducing third party manufacturing contracts. This was historically important business to utilise capacity in our factories; however, the significantly increased scale of our own production is now being hindered by a number of these smaller, low margin contracts. We will therefore be exiting most of these contracts over the next five years, only retaining a few significant, high volume partnerships.

Following our recent acquisitions, in-sourced production accounts for approximately 50% of all product sales. Our Manufacturing and Supply Chain team have identified opportunities to reduce the complexity of our supplier network by working with preferred partners and bringing more of the currently outsourced production in-house.

Technology

We continue to focus on the implementation of the Oracle DVP EU ERP solution which we announced at the Half Yearly results had fallen behind schedule. We believe that excellent progress has now been made and we are confident that a go live can be implemented prior to the end of the 2018 financial year.

Several other IT developments have been progressed in the year:

· Implementation of the Hyperion Financial Management Group consolidation solution is expected to be completed on plan by the end of the 2017 calendar year;

· A new intranet has been developed to enhance Group internal communications;

· A new platform is in place to host the Dechra Academy providing greater flexibility and functionality;

· The roll out of the Group HR Cloud system is continuing; and

· A new Customer Relationship Management tool has been implemented for our US operations.

People

As previously reported there have been three Board appointments in the year. We are delighted that the Board has been strengthened by the appointment of Tony Rice, who took over the role of Chairman, from Michael Redmond, at our Annual General Meeting on 21 October 2016, following a six month introduction to the Company as a Non-Executive Director. An additional Non-Executive Director, Lawson Macartney, joined the Board with effect from 1 December 2016 to strengthen veterinary, technical and pharmaceutical knowledge on the Board. Richard Cotton also joined the Board in January 2017 as Chief Financial Officer.

On behalf of the Board we would like to thank all employees for their hard work, dedication and innovation throughout the year. Our people are a key asset to the business; we consistently look to invest, to strengthen, educate and motivate our team.

Dividend

The Board is proposing a final dividend of 15.33 pence per share (2016: 12.91 pence per share). Added to the interim dividend of 6.11 pence per share, this brings the total dividend for the financial year ended 30 June 2017 to 21.44 pence per share, representing 16.1% growth over the previous year.

Subject to shareholder approval at the Annual General Meeting to be held on 20 October 2017, the final dividend will be paid on 17 November 2017 to shareholders on the Register at 27 October 2017. The shares will become ex-dividend on 26 October 2017.

Outlook

As outlined in this statement the core business and acquisitions are performing well. The enlarged Group continues to outperform the majority of markets in which we trade and we continue to identify new growth opportunities and operational efficiencies.

Current trading is in line with the Board expectations and we anticipate delivering our strategic objectives in the new financial year.

Financial Review

Overview of Reported Financial Results

To assist with understanding our reported financial results, the consolidated results below are split between existing business and acquisition; acquisition includes those businesses acquired in the current and prior year. Additionally, the table below shows the growth at reported actual exchange rates (AER), and constant exchange rates (CER) to identify the impact of foreign exchange movements. The acquisitions loss is stated after certain non-underlying items. Non-underlying items comprise amortisation of acquired intangibles and impairment of acquired intangibles, impairment of investments, acquisition expenses, fair value uplift of inventory acquired through business combinations, rationalisation costs, loss on extinguishment of debt, and fair value and other movements on deferred and contingent consideration.

Including non-underlying items, the Group's profit before tax increased by 66.2% at CER (97.2% at AER). Dechra's existing business grew by 29.0% at CER (57.2% at AER), with reported profit before tax of £43.4 million.

Overview of Underlying Financial Results

When presenting our financial results, we use a number of adjusted measures which are considered by the Board and management in reporting, planning and decision making. Underlying results reflect the Group's trading performance excluding non-underlying items, as defined above. A reconciliation of underlying results to reported results in the year to 30 June 2017 is provided in the table below. In the commentary which follows, all references will be to CER unless otherwise stated.

In the year, Dechra delivered consolidated revenue of £359.3 million, representing an increase of 28.3% on the prior year. This included £269.6 million from its existing business, an increase of 6.5%, and a £89.7 million contribution from acquisition business.

Consolidated underlying operating profit of £81.3 million, represents a 36.9% increase on the prior year. This included £64.0 million from Dechra's existing business, an increase of 11.8%, and a £17.3 million contribution from acquisition business.

Underlying EBIT margin increased by 140bps to 22.6%, with the dilution from the lower gross margin revenues acquired being offset significantly by the operating leverage from revenue growth.

Underlying EPS grew by 35.1% to 64.33p reflecting the growth from the existing and acquired businesses, increased finance charges from the increase in debt to fund the acquisitions, and the change in mix of the applicable tax rates.

Reported Segmental Performance

Reported segmental performance is presented in note 2. The effect of acquisitions made in the year and prior year was significant, as was the effect of foreign exchange movements. The reported segmental performance is analysed between existing and acquisition businesses, and at AER and CER in the table below. The acquisition elements capture both the additional base business coming into the Group, the growth we generated in them in the year, as well as the synergies we have realised for the Group. This analysis becomes less definitive the further in time from the completion of the acquisition, as the acquisition business is integrated with the existing business.

Underlying Segmental Performance

European Pharmaceuticals

Revenue in European Pharmaceuticals grew by 7.9%. The existing business grew by 3.6%: excluding third party contract manufacturing, which is being reduced in line with our strategy and replaced with own product manufacturing, revenues increased by 5.3%. This growth was driven mainly by the strong contribution from market penetration and new product launches in the core CAP business, and the sustained growth of FAP despite the ongoing pressure to reduce antibiotic prescriptions. The acquisitions of Genera (acquired in October 2015) and Apex (Dechra Veterinary Products International business reported within European Pharmaceuticals, acquired in October 2016) contributed a combined £26.6 million to revenue.

EBIT from existing business grew 5.0%, with operating margin expanding to 28.0% and consolidated operating margin increasing slightly to 26.8% as a result of operating leverage.

North American Pharmaceuticals

Revenue from North American Pharmaceuticals grew by £55.0 million or 93.7%. The existing business grew by 16.5% to £69.3 million from market penetration from existing CAP and Equine products. The acquisitions of Brovel (acquired January 2016) and Putney (acquired April 2016) contributed £63.1 million, almost doubling the size of North American Pharmaceuticals. Putney delivered a particularly strong performance, benefiting from the sales and marketing efforts of the enlarged Dechra team. Brovel in Mexico also delivered good growth.

EBIT from the existing business grew by 31.4% with strong operating leverage from the additional volume, moving the EBIT margin on existing business to 35.4%. Including the acquisitions, EBIT increased from £17.5 million to £43.2 million, with EBIT margin expanding from 29.8% to 32.6%, with the operating leverage more than offsetting the dilutive gross margin from Putney sales.

Pharmaceuticals Research and Development

Pharmaceuticals Research and Development (R&D) expenses increased by 44.2% at AER from £10.4 million to £15.0 million, with existing business research and development decreased slightly by 3.4%. R&D activities of the Genera, Brovel, Putney and Apex businesses added £6.1 million. Overall R&D expenses as a percentage of sales were unchanged at 4.2%: it is the Group's strategy to grow its investment in R&D both organically and by acquisition; the Board expects R&D expenses as a percentage of sales to grow in the coming years as it expands the product pipeline.

Revenue by Product Category

CAP revenue continues to be the largest proportion of Dechra's business at 62.3%, up from 55.6% in the prior year. CAP grew 42.8% in the year from market penetration, product launches and the addition of the Putney sales. Equine revenue grew 19.5% in the year, with very strong growth in the existing North American Pharmaceuticals business. FAP revenue grew for a second successive year, at 8.9% growth over the prior year, despite ongoing pressure on veterinarians to reduce antibiotic prescriptions.

Nutrition and Diets revenue was 1.2% down on the prior year, though progress has been made in the resolution of the supply and palatability issues. Other revenue grew 14.5% to £33.5 million, the growth all coming from non-core business from the acquisitions; Other revenue also includes a 9.7% reduction in third party contract manufacturing, which is being progressively exited in line with our manufacturing strategy, to improve the production efficiency of Dechra's own products.

Underlying Gross Profit

Gross margin for the existing business increased by 220bps to 59.1%. This reflects changing product mix.

The acquisition business gross margin was 40.9%: this reflects the weighting of the acquired Putney business in particular, where margin is lower due to long term manufacturing partnerships.

Consolidated gross margin was 54.5%, down 80bps on the prior year reflecting the margin dilution from acquisitions.

Underlying Selling, General and Administrative Expenses (SG&A)

SG&A costs at AER grew from £75.3 million in the prior year to £99.6 million in the current year, a growth of 18.3%. This represents growth from both acquisitions and the existing business, and infrastructure cost added to manage the acquisitions. Within this Corporate and unallocated costs grew by 28.8% to £7.6 million.

A large proportion of this increase relates to system improvement projects, full year effect of central infrastructure changes and a significant increase in employment taxes on share based incentive schemes arising from the share price growth across the year from 1172p on 30 June 2016 to 1700p on 30 June 2017.

Most significantly, SG&A as a percentage of revenue declined in the year from 30.4% in 2016 to 27.7% in 2017, as the revenue growth in the business generated operating leverage from the cost base.

Non-underlying Items

Non-underlying items incurred in the year relate to the following:

· Non-cash inventory adjustment of £4.2 million - The non-cash inventory adjustment which increases the value of acquisition inventory sold by £4.2 million relates to the acquisition of Apex (October 2016) and Putney (April 2016). It is the result of the fair value exercise carried out in accordance with IFRS 3 'Business combinations' on acquisition.

· Amortisation and related costs of acquired intangibles of £40.4 million - This includes the amortisation of the acquired intangibles, and has grown significantly in the year from £20.1 million to £40.4 million following the four acquisitions in the current and prior year.

· Acquisitions, impairments and restructuring costs of £3.6 million - This includes the transaction costs associated with the acquisition of Apex, and of the minority share of Medical Ethics Pty Ltd (Medical Ethics) and the impairment of the investment in Jaguar Animal Health Inc.

· Finance Expenses of £0.2 million - This represents the unwinding of the present value discounts relating to deferred consideration due and associated foreign exchange.

Taxation

The reported effective tax rate (ETR) for the year is 8.6% (2016: 14.0%); this includes both the underlying and non-underlying business. On an underlying basis the ETR is 21.9% (2016: 22.7%): the main differences to the UK corporation tax rate applicable of 19.75% (2016: 20.0%) relate to patent box allowances, and differences in overseas tax rates, the latter impacted in particular by the extent of growth in North American Pharmaceuticals.

The underlying ETR is expected to increase towards 24% in the coming year as the proportion of overseas profits attributable to higher tax jurisdictions than the UK increases.

Earnings per Share and Dividend

Underlying diluted EPS for the year was 64.33 pence, a 35.1% growth on the prior year. The 36.9% increase in operating profit partially offset by the 7.7% increase in interest costs and 35.2% increase in the tax charge were the main drivers of the increase on a weighted average number of shares of 93.5 million (2016: 90.0 million).

The reported diluted EPS for the year was 27.93 pence (2016: 13.90 pence).

The Board is proposing a final dividend of 15.33 pence per share (2016: 12.91 pence), added to the interim dividend of 6.11 pence, the total dividend per share for the year ended 30 June 2017 is 21.44 pence. This represents 16.1% growth over the prior year. Dividend cover based on underlying diluted EPS is 3 times (2016: 2.3 times). The Board continues to operate a progressive dividend policy recognising investment opportunities as they arise.

Currency Exposure

Following the Brexit referendum in June 2016, the £/€ and £/$ exchange rates weakened materially. This exchange rate weakening was barely reflected in the average rate for the 2016 financial year, instead materialising in the 2017 financial year. The average rate for £/€ has declined by 13.0%, and the £/$ rate by 14.4% in the period. This has had a significant effect in the Consolidated Income Statement and Statement of Financial Position, which is analysed in the above paragraphs of this review between performance at AER and CER. CER analysis compares the performance of the business on a comparable basis.

Currency Sensitivity

Euro €: a 1% variation in the £/€ exchange rate affects underlying diluted EPS by approximately +/- 0.79%.

US Dollar $: a 1% variation in the £/$ exchange rate affects underlying diluted EPS by approximately +/- 0.54%.

Current exchange rates are £/€ 1.08 and £/$ 1.29 as at 30 August 2017. If these rates had applied throughout the period, the underlying diluted EPS would have been approximately 5.4% higher.

Currency Risk

During 2017, we have been exposed to transactional and translational currency risk. In addition to the one-off transactional gain of £0.6 million being recognised in the Consolidated Income Statement, £12.9 million foreign exchange gain translational impact was recognised in the Consolidated Statement of Comprehensive Income in 2017. 

As part of our acquisition strategy, we seek to balance the foreign exchange debt and related interest payable risk associated with non-Sterling acquisitions with the underlying related income and assets in foreign currencies. As we move forward and our business continues to be more diversified, our exposure to currency volatility, in particular in terms of the Euro and the US Dollar, is expected to become more balanced.

Statement of Financial Position

The Statement of Financial Position is summarised in the table below.

· Non-current assets increased to £452.3 million mainly due to the acquisition of Apex (£28.7 million), a 33.0% share of Medical Ethics (£11.0 million) and acquired intangibles for Animal Ethics (£30.1 million).

· Net Debt has increased in the year by £3.4 million to £120.0 million; this is after an increase in Net Debt of £25.0 million to fund the acquisition of Apex, and an increase in Net Debt of £11.0 million to fund the acquisition of the 33.0% share of Medical Ethics. Exchange rate variations adversely affected the Net Debt position by £6.0 million.

· Other liabilities increased to £41.9 million mainly due to contingent consideration of £27.9 million for Animal Ethics.

Cash Flow, Financing and Liquidity

The Group enjoyed strong cash generation during the year. With the EBITDA margin strengthening from 23.4% to 24.5%, and working capital shrinking by £6.9 million, net cash generated from operations before non-underlying items increased to £98.0 million, representing cash conversion of 115.9%.

Net Debt Bridge

Other notable cash items are listed below in the Net Debt reconciliation table:

· Capital expenditure on tangible and intangible assets increased to £10.7 million (2016: £7.5 million) due to the full year effect of the acquisitions and increased investments representing 1.5 times depreciation and amortisation.

· Foreign exchange rate differences generated an adverse movement in Net Debt of £6.0 million due to the 6.0% weakening of Sterling verses the Euro, and the 3.4% weakening of Sterling verses the US Dollar.

· With the strong cash generation from operations of £98.0 million resulting in a Net Debt / underlying EBITDA leverage ratio of 1.4 times (2016: 2.0 times).

Borrowing Facilities

On 25 July 2017, the Group signed a new Credit agreement, refinancing its previous £205.0 million Revolving Credit Facility (RCF). The new committed facilities are a new five year multi-currency RCF with two one year extension options for £235.0 million, through seven banks: Bank of Ireland, BNP Paribas, Fifth Third, HSBC, Lloyds, Raiffeisen and Santander. The RCF has an Accordion facility of a further £125.0 million.

There are two covenants governing the RCF:

· Leverage: Net Debt to underlying EBITDA not greater than 3:1 (30 June 2017: 1.4) compared to the previous covenant of 2.5:1; and

· Interest Cover: underlying EBITDA to Net Finance Charges not less than 4:1, unchanged from the previous facility (30 June 2017: 21.2). 

There is a non-utilisation fee of 35.0% of the applicable margin. The margin over LIBOR (or equivalent) ranges from 1.3% for leverage below 1.0 times, up to 2.2% for leverage above 2.5 times.

The new facility provides the Group with flexible competitively priced facilities to finance its working capital, investment and future acquisition needs.

Return on Capital Employed (ROCE)

In 2016, ROCE declined to 16.1% (2015: 20.0%) mainly due to the increase in assets towards the end of the year following the acquisition of Putney. In 2017, ROCE grew to 17.7% (2016: 16.1%) as the returns from the 2016 acquisitions (in particular Putney) were manifest in the Group's results.

Acquisitions

The Group has made several acquisitions in recent years. Performance of the acquisitions made during the 2016 and 2017 financial years is separately summarised compared to the existing business in the sections above.

In October 2016, the Group acquired the trade and assets of Apex Laboratories Pty Ltd in Australia. The business has been successfully integrated into the Group, and is performing in line with management expectations. This, together with the other recent acquisitions of Genera, Brovel and Putney, has been accounted for on a consolidated basis.

The acquisition of Putney was funded using cash and equity raised from new share issuance: the performance of Putney has exceeded the financial performance thresholds expected by the Company in the period. The integration of Genera and Brovel has also been successful.

In addition the Group acquired 33.0% of the share capital of Medical Ethics. Medical Ethics is the owner of Animal Ethics Pty Ltd with whom the Group signed a product licensing agreement for Tri-Solfen in March 2017.

Brexit Risks

The decision by the UK to leave the European Union has created uncertainty and volatility in markets. Whilst many decisions will be needed to establish how the new trading environment will operate, we do not anticipate changes to our business model in the near to medium term.

We have established a cross-functional project team to assess and monitor the situation, and determine if and when actions are needed. Our current view on the possible changes is:

· in terms of manufacturing and product registration, Dechra is accustomed to trading with multiple countries and different rules and legislation;

· despite the possible additional administrative burden, our distribution model can adapt to changes in tariffs and duties;

· our business is naturally hedged and diversified, which helps in a period of exchange rate volatility;

· material contracts can be renegotiated over time as needed;

· we will monitor the impact on workforce and global mobility to ensure we maintain an effective system for planning people resources; and

· our geographical expansion over the last few years should help support our growth should the European economy slow down substantially.

Summary

We have delivered a strong set of financial results in the year with a good performance from both our existing and acquisition businesses. Our revenue growth has converted strongly to increased operating profit and EPS, up 36.9% and 35.1% respectively on an underlying basis.

Our strong financial disciplines have been maintained in a period of significant change both internally and in the wider economy, with a strong results orientation and focus on sales and margin development.

We have also continued our balance sheet discipline, delivering a reduction in our net debt leverage from 2.0 times to 1.4 times through our strong cash conversion of 115.9% and prudent approach to financing our investments and acquisitions.

Our investments in the existing business and in acquisitions position Dechra strongly for ongoing organic growth and expansion, and the continued creation of shareholder value.

Consolidated Income Statement

For the year ended 30 June 2017

*Non-underlying items comprise amortisation of acquired intangibles and impairment of acquired intangibles, impairment of investments, acquisition expenses, fair value uplift of inventory acquired through business combinations, rationalisation costs, loss on extinguishment of debt, and fair value and other movements on deferred and contingent consideration.

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2017

Consolidated Statement of Financial Position

At 30 June 2017

Consolidated Statement of Changes in Shareholders' Equity

For the year ended 30 June 2017

Hedging Reserve

The hedging reserve represents the cumulative fair value gains or losses on derivative financial instruments for which cash flow hedge accounting has been applied, net of tax.

Foreign Currency Translation Reserve

The foreign currency translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other than Sterling and exchange gains or losses on the translation of liabilities that hedge the Company's net investment in foreign subsidiaries.

Merger Reserve

The merger reserve represents the excess of fair value over nominal value of shares issued in consideration for the acquisition of subsidiaries where statutory merger relief has been applied in the financial statements of the Parent Company.

Consolidated Statement of Cash Flows

For the year ended 30 June 2017

Notes to the Preliminary Results

For the year ended 30 June 2017

1. Status of Accounts

These summary financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (adopted IFRS). These summary financial statements have also been prepared in accordance with the Companies Act 2006.

The Board of Directors approved the preliminary announcement on 4 September 2017.

2. Operating Segments

The Group has three reportable segments, as discussed below, which are based on information provided to the Board of Directors, which is deemed to be the Group's chief operating decision maker. Several operating segments which have similar economic characteristics have been aggregated into the reporting segments. In undertaking this aggregation the assessment determined that the aggregated segments have similar products, production processes, customers and overall regulatory environment.

The European Pharmaceuticals Segment comprises Dechra Veterinary Products EU, Apex Laboratories Pty Limited (Apex), Genera and Dechra Pharmaceuticals Manufacturing. This Segment operates internationally and manufactures and markets Companion Animal, Equine and Food producing Animal Products. This Segment also includes third party manufacturing and other non-core activities sales. The Segment expanded during the year with the acquisition of the trade and assets of Apex.

The North American Pharmaceuticals Segment consists of Dechra Veterinary Products US, Putney, Dechra Veterinary Products Canada, and Dechra-Brovel, which sells Companion Animal, Equine Products and Food producing Animal Products in those territories. The Segment also includes our manufacturing unit based in Melbourne, Florida.

The Pharmaceuticals Research and Development Segment includes all of the Group's pharmaceutical research and development activities. From a Board perspective, this Segment has no revenue income.

Reconciliation of reportable segment revenues, profit or loss and liabilities and other material items:

Geographical Information

The following table shows revenue based on the geographical location of customers and non-current assets based on the country of domicile of the entity holding the asset:

3. Finance Income

4. Finance Expense

5. Non-underlying Items

Non-underlying items charged to operating profit comprise:

Amortisation of acquired intangibles reflects the amortisation of the fair values of future cash flows recognised on acquisition in relation to the identifiable intangible assets acquired.

Impairment of investments relates to the impairment of the investment in Jaguar Animal Heath Inc.

Impairment of acquired intangibles and associated deferred consideration includes the impairment of a US generic pharmaceutical product following the acquisition of Putney Inc., as Putney have already developed a similar product. It also includes the impairment of an acquired intangible due to the cessation of sales following a competitor registration in the US.

The fair value uplift of inventory acquired through business combinations is recognised in accordance with IFRS 3 'Business Combinations' to record the inventory acquired at fair value and its subsequent release into the income statement.

Rationalisation costs relate to the integration and restructuring programmes implemented subsequent to acquisitions or the reorganisation of internal functions. 

Expenses relating to acquisition activities includes legal and professional fees incurred during the acquisitions of Apex (£1.6 million) and Medical Ethics (£0.4 million).

6. Interest in Associate

On 30 March 2017 the Group acquired a 33.0% interest in Medical Ethics Pty Ltd for AUS$18.0 million (£11.0 million), which is the holding company of Animal Ethics Pty Ltd. The company is incorporated in Australia, which is also the principal place of business. The registered address is c/o Level 3, 649 Bridge Road, Richmond, Victoria 3121, Australia. The company has share capital consisting solely of ordinary shares, which are directly owned by the group. Medical Ethics Pty Ltd is a private company and there is no quoted market price available for its shares. There is no contingent liabilities relating to the Group's interest in the associate. Acquisition related costs (included in operating expenses) amounted to £0.4 million in the period.

7. Income Tax Expense

The tax on the Group's profit before taxation differs from the standard rate of UK corporation tax of 19.75% (2016: 20.0%). The current tax rate used for the period is 19.75% based on rates already enacted in previous periods. The differences to this rate are explained below:

Recurring items in the tax reconciliation include: research and development related tax credits and patent box incentives; expenses not deductible; share of results of associate; and the impact of financing. The effective tax rate is 8.6% (excluding non-underlying items the effective tax rate is 21.9%).

Tax Credit/(Charge) Recognised Directly in Equity

The Government has announced in the Finance Act 2016 that it intends to reduce the rate of corporation tax to 17% with effective from 1 April 2020, this was substantively enacted in September 2016. The Finance Act 2015 (No. 2) which was substantively enacted in October 2015 included provisions to reduce the rate of corporation tax to 19% with effect from April 2017. Deferred tax has been calculated using these rates based on the timing of when each individual deferred tax balance is expected to reverse in the future. To the extent that more deferred tax reverses after 1 April 2020 than expected then the impact will be a greater reduction on the net deferred tax liability.

The Group's future tax charge, and its effective tax rate could be affected by several factors including the impact of the implementation of the OECD's Base Erosion and Profit Shifting ('BEPS') actions.

8. Dividends

In accordance with IAS 10 'Events After the Balance Sheet Date', the proposed final dividend for the year ended 30 June 2017 has not been accrued for in these financial statements. It will be shown as a deduction from equity in the financial statements for the year ending 30 June 2018. There are no income tax consequences. The final dividend for the year ended 30 June 2016 is shown as a deduction from equity in the year ended 30 June 2017.

9. Earnings per Share

Earnings per ordinary share has been calculated by dividing the profit attributable to equity holders of the parent after taxation for each financial period by the weighted average number of ordinary shares in issue during the period.

The calculations of basic and diluted earnings per share are based upon:

* Underlying measures exclude non-underlying items as defined in the Consolidated Income Statement.

At 30 June 2017, there are 294,848 options that are excluded from the EPS calculations as they are not dilutive for the period presented but may become dilutive in the future.

10. Intangible Assets

In accordance with the disclosure requirements of IAS 38 'Intangible Assets', the components of acquired intangibles are summarised below:

The table below provides further detail on the acquired intangibles and their remaining amortisation period.

11. Deferred Taxes

 Recognised Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are attributable to the following: