Eco Animal Regulatory News (EAH)

ECO Animal Health Group plc (''ECO")

(AIM: EAH)

Results for the six months ended 30 September 2020

ECO REPORTS A BUOYANT FIRST HALF AND POSITIVE FULL YEAR INDICATIONS

HIGHLIGHTS

Financials

· Sales at £42.5m (2019 restated*: £28.3m)

· EBITDA at £6.7m (2019 restated*: £1.7m)

· Profit before taxation of £4.5m (2019 restated profit*: £1.1m)

· Profit after taxation of £3.9m (2019 restated profit*: £1.3m)

· Earnings per share of 3.13p (2019: restated Earnings per share*: 1.68p)

· Cash generated by operations of £3.5m (2019 restated*: £1.3m)

· Net cash at 30th September 2020 of £12.9m (2019: £13.4m)

* Prior period figures have been restated to reflect adjustments arising from the March 2020 audit.

Operations

· Exceptionally strong recovery in China following the African Swine Fever impact in 2019

· USA recovery following the easing in geopolitical trade tensions between China and the USA

· Latin America performing strongly, led by Brazil

· New marketing authorisation from the European Medicines Agency for the use of Aivlosin® 625 mg/g Water Soluble Granules in pigs for the treatment of Mycoplasma hyopneumoniae

· Strong trading in the third quarter

Dr Andrew Jones, Non-executive Chairman of ECO Animal Health Group plc, commented:

"This set of results for the first half builds upon the strong trading seen in China during the latter part of last year with an acceleration in sow restocking and an appreciation of the benefits that Aivlosin® brings to animal health and productivity. We are pleased to be releasing these Interim results at the same time as the audited final results for March 2020 and together they mark a turning point in the reassessment of the Group's prior accounting. We are experiencing strong forward trading as evidenced by the successive trading updates and we are also excited with the continued new product development successes. The Directors are confident and excited about the future prospects for the business."

The information contained within this announcement is deemed by the Group to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

Contacts:

ECO Animal Health Group plc ("ECO" or "the Group") researches, develops and commercialises products for livestock. Our business strategy is to generate shareholder value by achieving the maximum sales potential from the existing product portfolio whilst investing in Research and Development ("R&D") for new products, particularly vaccines, and seeking to in-license new products.

Chairman's statement

I am pleased to report that despite the considerable challenges presented by Covid-19 we report a set of interim results which demonstrate considerable strength in revenue and profitability.

We welcome Dr Frank Armstrong to our Board. Frank joined us on the 1st May 2020 and he brings a wealth of experience in life sciences - businesses large and small - and in particular around the areas of management of Research and Development. This is an increasing feature of our business and his experience will add greatly to our future endeavours.

Audit of the Group's results for the Year ended 31st March 2020

We are releasing this Interim statement on the same day as the delayed release of the Annual report for the year ended 31st March 2020. We are pleased that the first audit by our new auditors, BDO, is complete and the thorough review undertaken, together with the comprehensive prior year restatements sets the Group on a positive footing for future periods.

Covid-19

This trading period has coincided with the primary outbreak of Covid-19 in Europe and the USA and necessary transition to remote working and social distancing has by and large been a smooth and uninterrupted process. Certainly in terms of order volumes, reaching customers and the logistics of order fulfilment we could not have hoped for a better process. The adoption of new ways of working and utilising all that modern on-line communication offers has been a great credit to the skills of our staff members, customers and suppliers and on behalf of the Board I would like to express our gratitude to them.

Financial Performance

Revenue was sharply higher in the first six months to 30th September 2020 at £42.5 million (30th September 2019 - £28.3 million, driven in the main by a resurgence in China. This is further discussed in the Business Performance comments below. At £42.5 million this first half period is at roughly the same run-rate with the £43.8 million revenue recorded in the second half of the year ended 31st March 2020. Given the historical pattern of second half weighting to revenue this underlines the strength of the revenue performance in this period.

The gross margin in the first six months has been an average of 48%. This is ahead of the full year ended 31st March 2020 (46%) and considerably stronger than that recorded in the six months ended 30th September 2019 (43%). As reported last year the gross margins were negatively impacted in the USA and as a result of the stronger pork market in the USA the margins have recovered to previously seen levels.

Administrative expenses of £10.5 million (2019 - £7.2 million) were incurred, the increase being associated with variable costs such as performance related bonus accruals, investment in new members of staff and certain exceptional costs.

Research and development expenditure shown on the income statement and together with the amount capitalised represented a cash investment of 10% of revenue in the six months ended 30 September 2020 (17% in the six month period ended 30th September 2019 restated). In response to the Covid-19 pandemic the Board instigated a prioritisation exercise in the R&D portfolio to conserve cash. Additionally, the revenue in the period was ahead of budget which also results in a slightly lower ratio for a budgeted amount of R&D expenditure.

Earnings before interest, tax, depreciation, amortisation, share based payments and foreign exchange movements ("Adjusted EBITDA") were £6.7 million (2019 restated: £1.7 million). This increase in profitability was directly a result of the higher revenue at greater gross margins and partially offset by increased R&D investment and overheads.

Cash generated from operations was £3.5 million (2019: £1.3 million). This was a particularly strong performance which was inline with the cash generated in 2019 allowing for an element of inventory build which was planned ahead of Brexit.

Net cash at 30th September 2020 was £12.9 million (31st March 2020: £9.8 million). The higher cash position arose from stronger trading and judicious control of cash expenditure in the midst of uncertainty surrounding Covid-19 and its impact on world economies. This consolidated cash position at 30th September 2020 includes £9.7 million (March 2020 - £5.3 million) which is held in the Group's subsidiary in China. A portion of this cash is repatriated from China once per annum by dividend declaration; the Group's share which is received in the UK is 51%.

Business Performance

The geographical analysis of the Group's revenue in the six months ended 30th September 2020 compared to the prior period in 2019 and the full year ended 31st March 2020 was as follows:

Group revenue improved by 50% to £42.5 million compared to the prior period in 2019 - a period which continued to be dominated by the unprecedented impact of Covid-19.

The recovery from ASF in China has been widely reported. The rate of restocking of the pig herd has been ahead of most predictions; the strong pork commodity price driving a number of mechanisms to increase the number of breeding sows and resulting in extraordinary farm profitability. This is turn has resulted in the greater use of premium medications such as Aivlosin®. It is believed that the efficacy benefits that new users have experienced will result in a number of new, long term, customers.

Revenue in North America, USA in particular, has been strong with a return to pre-2019 levels of business and margins. This has been a result of a normalisation in pork prices in that market as well as export markets (China) becoming available.

India had a steady six months; the poultry market has been badly affected during the Covid-19 pandemic but commentators are expecting a recovery during 2022.

Brazil continues to record strong revenue resulting from a buoyant domestic and export swine market as well as an effective in-country distributor.

Research and Development

In our core product area, a marketing authorisation was obtained from the European Medicines Agency for the use of Aivlosin® Water Soluble Granules in the treatment of pigs for Mycoplasma hyopneumoniae. This, together with the equivalent authorisation in the USA and Canada received in January 2021 further demonstrates the strength and depth of our cornerstone product family and the "evergreening" of the Group's core offering.

The Group will continue to invest in building a product pipeline targeting both viral and bacterial diseases of economic importance in pigs and poultry, with the intention of developing a range of vaccines and new products to complement our existing antimicrobial business. The product pipeline contains a mix of well-established concepts as well as novel, potentially disruptive technologies and approaches. These are in various stages of development thereby ensuring that the Group has several mid and late stage projects able to deliver revenues from 2022/23. We were very pleased to announce the approval of the first of these vaccine projects - this was received in January 2021 in Brazil and is for the combined vaccination of pigs against Porcine Circovirus Type2 and Mycoplasma hyopneumoniae.

Brexit

The Group has successfully transferred all EU marketing authorisations to a new European subsidiary, ECO Animal Health Europe Limited with a registered address in Dublin, Republic of Ireland. All contingency planning is in place and the financial and operational impact of Brexit is expected to be minimal.

Prior to 31st December 2020, the vast majority of orders for delivery in the first quarter of the calendar year 2021 were delivered to insulate the Group from any possible effects of logistical issues, port delays and transport interruptions.

Dividend

The directors recognise the importance of the dividend to shareholders. However, having due regard to the Group's significant investment in new product development, operating cash flow, and cash balances, the directors consider it prudent to defer the declaration of a dividend at this time.

Outlook

Performance so far in the current financial year ending 31st March 2021 has been strong with the strength seen in both our Chinese and US markets continuing into the second half of our current financial year. In October 2020, we announced that notwithstanding the historical second half weighting to the Group's revenue, if the first half revenue trends continued through the second half of the financial year the Board expected that the Group's full year revenue for the year ending 31st March 2021 would exceed market expectations. This resulted in an upgraded market expectation both for revenue and profitability.

On 24th November 2020 we confirmed that strong trading had continued during November and, being mindful of the continuing global uncertainties and four months remaining until the end of the financial year, we were confident of meeting the upgraded market expectations.  

On 21st January 2021 we issued a positive trading update, confirming Group revenues and EBITDA were expected to be significantly ahead of market expectations for the year ending 31st March 2021. We noted that the strength in the Chinese market, supported by the rebuilding of pig herds and the high price for pork, continued through the third quarter and the outlook for the final quarter sales continued these strong trading trends.

We look forward to the rest of this financial year and our reporting prospects for 2021 with continuing optimism.

Dr Andrew Jones

Non-Executive Chairman

3 February 2021

NOTES TO THE PRELIMINARY RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2020

1. Basis of preparation

The financial information for the period to 30 September 2020 does not constitute statutory accounts as defined by Section 435 of the Companies Act 2006. It has been prepared in accordance with the accounting policies set out in, and is consistent with, the audited financial statements for year ended 31 March 2020.

The Group applies revised IAS 1 "Presentation of Financial Statements (2007)". As a result, the Group presents all non-owner changes in equity in consolidated statements of comprehensive income and all owner changes in equity in consolidated statements of changes in equity.

These Interim Statements have not been audited or reviewed by the Group's auditors.

2. Statement of compliance

This interim financial statement is prepared in accordance with IAS 34 "Interim Financial Reporting". Accordingly, whilst the interim statements have been prepared in accordance with IFRS, and the primary statements follow the format of the annual financial statements, only selected notes are included - those that provide an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual reporting date. IAS 34 states a presumption that anyone who reads the Group's interim report will also have access to its most recent annual report. Accordingly, annual disclosures are not repeated in these interim condensed reports.

3. Changes to significant accounting policies and other restatements

The principal accounting policies which are adopted by the Group in the preparation of its financial statements are set out in in the consolidated financial statements of the Group for the year ended 31 March 2020. These policies have been consistently applied to all prior years. Where necessary, and as detailed in the consolidated financial statements of the Group for the year ended 31 March 2020, any corrections to the application of the Group's accounting policies to comply with International Financial Reporting Standards have been made as restatements of prior period financial statements for the correction of errors in accordance with IAS8. The correct application of the Group's accounting policies in accordance with IFRS continued into the six months ended 30 September 2020.

Since the September 2019 interim accounts the group has completed its review of the capitalization of historic development expenditure, and reviewed the amortization policy applied to such assets. This has had the effect of increasing the net book value of intangible assets held at September 2019. Full details are given in the Annual Report and Accounts for the year ended 31 March 2020, but the financial effect is summarized below.

Development costs adjustment: Impact on the Balance Sheet and Income Statement

NOTES TO THE PRELIMINARY RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2020 (Continued)

3. Changes to significant accounting policies and other restatements (continued)

In addition, during the completion of the audit of the Group's financial statements for the year ended 31 March 2020 the Group identified some amendments that needed to be made to previously reported prior year adjustments. These amendments arose in respect of changes to the tax rates applied to the previously reported adjustments. The effect of these changes is reported in the Consolidated Statement of Changes in Equity that forms part of these results, and full details are contained in the Group's Annual Report and Accounts for the year ended 31 March 2020.

4. Revenue is derived from the Group's animal pharmaceutical businesses.

5. Principal risks and uncertainties

These were set out on pages 20-22 of the Group's Annual Report and Accounts for the year ended 31 March 2020. The key exposures are to foreign currency exchange rates, potential delays in obtaining marketing authorisations, single sources of supply for some raw materials and trade debtor recovery and have remained unchanged since the year end. In addition, the Annual Report and Accounts highlighted disease impact to growth in emerging markets as a key risk and this, in the form of ASF, is a principal uncertainty.

6. Earnings per share

NOTES TO THE PRELIMINARY RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2020 (Continued)

7. Intangible non-current assets

This financial information was approved by the board on 3 February 2021.

Copies of this interim report are being sent to all the Company's shareholders.