Preliminary Results Announcement -year end 30.6.17

RNS Number : 6614P

Dechra Pharmaceuticals PLC

04 September 2017

 

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"

"As we complete our 20th year since inception of the Company, we are pleased to report that the Group has delivered another strong financial performance."

Ian Page, Chief Executive Officer

Highlights

Strategic progress made: ·      Core portfolio growth solid in EU, excellent in NA; major therapeutic sectors continue to grow. ·      Strong performance from prior year acquisitions. ·      Apex (Australia) completed and integrated, and 33.0% share of Medical Ethics Pty Ltd acquired. ·      New geographic territories performing well; new Dechra Veterinary Products International team to create greater focus. ·      Significant pipeline delivery with two new FAP EU registrations and numerous international approvals. ·      Exploring several new pipeline opportunities.

Strong financial performance: ·      Strong revenue growth of 28.3% at constant exchange rates (CER). ·      Solid revenue growth in Companion Animal Products (CAP), Food producing Animal Products (FAP), and Equine. ·      36.9% growth at CER in underlying operating profit. ·      Strong operational leverage and full year synergies from acquisitions lifts EBIT margin 140 bps to 22.6%. ·      Consistently strong cash conversion of 115.9%, driving Net Debt / underlying EBITDA leverage down from 2.0 to 1.4 times. ·      Underlying diluted EPS growth of 35.1%; increase in full year dividend to 21.44 pence.

Financial Summary

Underlying	2017 £m	2016 £m	Growth at AER	Growth at CER
Revenue	359.3	247.6	45.1%	28.3%
Underlying Operating profit	81.3	52.9	53.7%	36.9%
Underlying EBIT %	22.6%	21.4%	120bps	140bps
Underlying profit before tax	77.0	49.7	54.9%	38.4%
Underlying EBITDA	88.2	58.0	52.1%	35.5%
Net cash generated from operations	94.3	56.5	66.9%	-
Underlying diluted EPS (p)	64.33	42.65	50.8%	35.1%
Dividend per Share	21.44	18.46	16.1%	16.1%

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

Results Briefing today: A presentation of the Annual Result's will be held today at 10.30am at the office of Investec Bank plc, 2 Gresham Street, London, EC2V 7QP. Dial in: Ref: Dechra - Standard International Access London [phone]. For assistance please contact Fiona Tooley on [phone] or at Investec on + 44 (0) 20 7597 5970.

Enquiries:
Dechra Pharmaceuticals PLC
Ian Page, Chief Executive Officer	Office:  [phone]
Richard Cotton, Chief Financial Officer e-mail: [e-mail]	Office:  [phone]
TooleyStreet Communications Ltd
Fiona Tooley, Director e-mail: [e-mail]	Office:  [phone] Mobile: [phone]

About Dechra Dechra is an international specialist veterinary pharmaceuticals and related products business.  Its expertise is in the development, manufacture and sales and marketing of high quality products exclusively for veterinarians worldwide.  Dechra's business is unique as the majority of its products are used to treat medical conditions for which there is no other effective solution or have a clinical or dosing advantage over competitor products.  For more information, please visit: www.dechra.com Stock Code: Full Listing (Pharmaceuticals): DPH Trademarks Trademarks appear throughout this document in italics.  Dechra and the Dechra 'D' logo are registered Trademarks of Dechra Pharmaceuticals PLC.  The Malaseb Trademark is used under licence from Dermcare-Vet Pty. Ltd. Forward Looking Statement This document contains certain forward-looking statements.  The forward-looking statements reflect the knowledge and information available to the Company during the preparation and up to the publication of this document.  By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involve a degree of uncertainty.  Therefore, nothing in this document should be construed as a profit forecast by the Company. Market Abuse Regulation (MAR) The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014.  Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

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 20^th 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.

As Reported	2017 Existing £m	2017 Acquisition £m	2017 Consolidated £m	2016 £m	Growth at AER		Growth at CER
					Existing %	Consolidated %	Existing %	Consolidated %
Revenue	269.6	89.7	359.3	247.6	19.3%	45.1%	6.5%	28.3%
Gross profit	159.2	32.5	191.7	132.4	22.6%	44.8%	10.5%	29.8%
Gross profit %	59.1%	36.2%	53.4%	53.5%	160bps	(10bps)	220bps	60bps
Operating profit/(loss)	43.3	(10.1)	33.2	19.5	47.3%	70.3%	21.4%	42.6%
EBIT %	16.1%	(11.3%)	9.2%	7.9%	310bps	130bps	180bps	90bps
Profit/(loss) before tax	43.4	(14.8)	28.6	14.5	57.2%	97.2%	29.0%	66.2%
Diluted EPS (p)	-	-	27.93	13.90	-	100.9%	-	69.1%

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.

		Non-underlying Items
	2017 Underlying Results £m	Non-cash uplift on acquired inventory £m	Amortisation and related costs of acquired intangibles £m	Acquisition, impairments and restructuring costs £m	Finance expenses £m	2017 Reported Results £m
Revenue	359.3	-	-	-	-	359.3
Gross profit	195.9	(4.2)	-	-	-	191.7
Selling, general and administrative expenses	(99.6)	-	(29.0)	(3.5)	-	(132.1)
R&D expenses	(15.0)	-	(11.4)	-	-	(26.4)
Operating profit	81.3	(4.2)	(40.4)	(3.5)	-	33.2
Net finance costs	(4.2)	-	-	-	(0.2)	(4.4)
Share of associate loss	(0.1)	-	-	(0.1)	-	(0.2)
Profit before tax	77.0	(4.2)	(40.4)	(3.6)	(0.2)	28.6
Taxation	(16.9)	1.5	12.6	0.2	0.1	(2.5)
Profit after tax	60.1	(2.7)	(27.8)	(3.4)	(0.1)	26.1
Diluted EPS (p)	64.33	-	-	-	-	27.93

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.

Underlying	2017 Existing £m	2017 Acquisition £m	2017 Consolidated £m	2016 £m	Growth at AER		Growth at CER
					Existing %	Consolidated %	Existing %	Consolidated %
Revenue	269.6	89.7	359.3	247.6	19.3%	45.1%	6.5%	28.3%
Gross profit	159.2	36.7	195.9	138.5	22.6%	41.4%	10.5%	26.4%
Gross profit %	59.1%	40.9%	54.5%	55.9%	160bps	(140bps)	220bps	(80bps)
Underlying Operating profit	64.0	17.3	81.3	52.9	24.0%	53.7%	11.8%	36.9%
Underlying EBIT %	23.7%	19.3%	22.6%	21.4%	90bps	120bps	120bps	140bps
Underlying EBITDA	69.3	18.9	88.2	58.0	23.5%	52.1%	11.6%	35.5%
Underlying Diluted EPS (p)	-	-	64.33	42.65	-	50.8%	-	35.1%
Dividend per share	-	-	21.44	18.46	-	16.1%	-	16.1%

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.

Reported	2017 Existing £m	2017 Acquisition £m	2017 Consolidated £m	2016 £m	Growth at AER		Growth at CER
					Existing %	Consolidated %	Existing %	Consolidated %
Revenue by segment
EU Pharmaceuticals	200.3	26.6	226.9	188.9	14.4%	20.1%	3.6%	7.9%
NA Pharmaceuticals	69.3	63.1	132.4	58.7	36.4%	125.6%	16.5%	93.7%
Total	269.6	89.7	359.3	247.6	19.3%	45.1%	6.5%	28.3%
Operating profit/(loss) by segment
EU Pharmaceuticals	56.0	4.7	60.7	51.7	11.1%	17.4%	5.0%	9.9%
NA Pharmaceuticals	24.5	18.7	43.2	17.5	54.1%	146.9%	31.4%	110.9%
Pharmaceuticals Research and Development	(8.9)	(6.1)	(15.0)	(10.4)	(1.1%)	(44.2%)	3.4%	(31.7%)
Segment operating profit	71.6	17.3	88.9	58.8	24.5%	51.2%	13.6%	36.1%
Corporate and unallocated costs	(7.6)	-	(7.6)	(5.9)	(28.8%)	(28.8%)	(28.8%)	(28.8%)
Underlying operating profit	64.0	17.3	81.3	52.9	24.0%	53.7%	11.8%	36.9%
Non-underlying operating items	(20.7)	(27.4)	(48.1)	(33.4)	-	-	-	-
Reported operating profit	43.3	(10.1)	33.2	19.5	47.3%	70.3%	21.4%	42.6%

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.

Underlying	2017 Existing £m	2017 Acquisition £m	2017 Consolidated £m	2016 £m	Growth at AER		Growth at CER
					Existing %	Consolidated %	Existing %	Consolidated %
Revenue	200.3	26.6	226.9	188.9	14.4%	20.1%	3.6%	7.9%
EBITDA	59.0	6.0	65.0	55.0	11.1%	18.2%	4.9%	10.4%
EBITDA %	29.5%	22.6%	28.6%	29.1%	(80bps)	(50bps)	40bps	70bps
EBIT	56.0	4.7	60.7	51.7	11.1%	17.4%	5.0%	9.9%
EBIT %	28.0%	17.7%	26.8%	27.4%	(80bps)	(60bps)	40bps	50bps

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.

Underlying	2017 Existing £m	2017 Acquisition £m	2017 Consolidated £m	2016 £m	Growth at AER		Growth at CER
					Existing %	Consolidated %	Existing %	Consolidated %
Revenue	69.3	63.1	132.4	58.7	36.4%	125.6%	16.5%	93.7%
EBITDA	24.6	19.0	43.6	17.6	53.8%	147.7%	31.3%	111.4%
EBITDA %	35.5%	30.1%	32.9%	30.0%	400bps	290bps	400bps	270bps
EBIT	24.5	18.7	43.2	17.5	54.1%	146.9%	31.4%	110.9%
EBIT %	35.4%	29.6%	32.6%	29.8%	410bps	280bps	400bps	270bps

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.

					Growth at AER		Growth at CER
	2017 Existing £m	2017 Acquisition £m	2017 Consolidated £m	2016 £m	Existing %	Consolidated %	Existing %	Consolidated %
R&D expenses	(8.9)	(6.1)	(15.0)	(10.4)	(1.1%)	(44.2%)	3.4%	(31.7%)
% of Sales	3.3%	6.8%	4.2%	4.2%

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.

	2017 £m	2016 £m	% Change at AER	% Change at CER
CAP	223.8	137.7	62.5%	42.8%
Equine	27.2	20.5	32.7%	19.5%
FAP	47.3	38.1	24.1%	8.9%
Subtotal Pharmaceuticals	298.3	196.3	52.0%	33.8%
Nutrition and Diets	27.5	24.4	12.7%	(1.2%)
Other	33.5	26.9	24.5%	14.5%
Total	359.3	247.6	45.1%	28.3%

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.

	Average rates
	2017	2016	% Change
£/€	1.1681	1.3432	(13.0%)
£/$	1.2735	1.4870	(14.4%)

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.

	2017 £m	2016 £m
Total non-current assets	452.3	393.0
Working capital	63.2	63.3
Net debt	(120.0)	(116.6)
Corporate and deferred tax	(51.0)	(52.4)
Other liabilities	(41.9)	(10.7)
Total net assets	302.6	276.6

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%.

	2017 £m	2016 £m
Underlying operating profit	81.3	52.9
Depreciation and amortisation	6.9	5.1
EBITDA	88.2	58.0
EBITDA %	24.5%	23.4%
Working capital movement	6.9	(1.6)
Other	2.9	4.7
Net cash generated from operations before non-underlying items	98.0	61.1
Non-underlying items	(3.7)	(4.6)
Net cash generated from operations	94.3	56.5
Cash conversion (%)	115.9%	106.8%

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.

	£m
Net Debt 30 June 2016	(116.6)
Net cash generated from operations before non-underlying items	98.0
Non-underlying items	(3.7)
Capital expenditure	(10.7)
Acquisition of subsidiaries, associates and minority interests	(46.6)
Expenses on new borrowings	(0.1)
Interest and tax	(16.9)
Net equity issued	0.3
Dividend paid	(17.7)
Foreign exchange on cash and borrowings	(6.0)
Net Debt 30 June 2017	(120.0)
Net Debt: underlying EBITDA ratio	1.4

·     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

	Note	2017			2016
		Underlying £000	Non- underlying* (notes 4 & 5) £000	Total £000	Underlying £000	Non- underlying* (notes 4 & 5) £000	Total £000
Revenue	2	359,275	-	359,275	247,562	-	247,562
Cost of sales		(163,335)	(4,225)	(167,560)	(109,052)	(6,070)	(115,122)
Gross profit		195,940	(4,225)	191,715	138,510	(6,070)	132,440
Selling, general and administrative expenses		(99,613)	(32,469)	(132,082)	(75,298)	(27,294)	(102,592)
Research and development expenses		(14,978)	(11,441)	(26,419)	(10,355)	-	(10,355)
Operating profit	2	81,349	(48,135)	33,214	52,857	(33,364)	19,493
Finance income	3	805	-	805	21	-	21
Finance expense	4	(5,056)	(242)	(5,298)	(3,200)	(1,766)	(4,966)
Share of loss of investments accounted for using the equity method	6	(101)	(58)	(159)	-	-	-
Profit before taxation		76,997	(48,435)	28,562	49,678	(35,130)	14,548
Income taxes	7	(16,865)	14,413	(2,452)	(11,288)	9,252	(2,036)
Profit for the year		60,132	(34,022)	26,110	38,390	(25,878)	12,512
Attributable to:
Owners of the parent		60,127	(34,022)	26,105	38,376	(25,708)	12,668
Non-controlling interests	14	5	-	5	14	(170)	(156)
Profit for the year		60,132	(34,022)	26,110	38,390	(25,878)	12,512
Earnings per share
Basic	9			28.09p			14.00p
Diluted	9			27.93p			13.90p
Dividend per share (interim paid and final proposed for the year)	8			21.44p			18.46p

*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

	2017 £000	2016 £000
Profit for the year	26,110	12,512
Other comprehensive income/(expense):
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit pension scheme	2,074	(1,551)
Income tax relating to components of other comprehensive income/(expense)	(535)	385
	1,539	(1,166)
Items that may be reclassified subsequently to profit or loss:
Effective portion of changes in fair value of cash flow hedges	-	(154)
Cash flow hedges recycled to income statement	15	233
Recycle of losses/(losses) arising on available for sale financial assets	343	(450)
Foreign currency translation differences for foreign operations	12,877	32,116
Income tax relating to components of other comprehensive income	-	1,234
	13,235	32,979
Total comprehensive income for the period	40,884	44,325
Attributable to:
Owners of the parent	40,719	44,202
Non-controlling interests	165	123
	40,884	44,325

Consolidated Statement of Financial Position

At 30 June 2017

	Note	2017 £000	Restated 2016 £000
ASSETS
Non-current assets
Intangible assets	10	396,262	355,258
Property, plant and equipment		45,197	37,718
Investments		10,854	-
Deferred tax assets	11	780	466
Total non-current assets		453,093	393,442
Current assets
Inventories		56,507	54,375
Trade and other receivables		67,269	68,869
Cash and cash equivalents		61,200	39,142
Total current assets		184,976	162,386
Total assets		638,069	555,828
LIABILITIES
Current liabilities
Borrowings	12	(973)	(1,672)
Trade and other payables		(61,309)	(59,946)
Deferred and contingent consideration		(1,617)	(467)
Current tax liabilities		(2,512)	(3,897)
Total current liabilities		(66,411)	(65,982)
Non-current liabilities
Borrowings	12	(180,186)	(154,093)
Deferred and contingent consideration		(33,373)	(3,166)
Employee benefit obligations		(3,009)	(3,721)
Provisions	13	(3,180)	(3,334)
Deferred tax liabilities	11	(49,273)	(48,920)
Total non-current liabilities		(269,021)	(213,234)
Total liabilities		(335,432)	(279,216)
Net assets		302,637	276,612
EQUITY
Issued share capital		932	927
Share premium account		173,376	172,451
Own shares		(667)	(21)
Hedging reserve		-	(15)
Foreign currency translation reserve		18,241	5,524
Merger reserve		1,770	1,770
Retained earnings		107,422	93,995
Total equity attributable to equity holders of the parent		301,074	274,631
Non-controlling interests	14	1,563	1,981
Total equity		302,637	276,612

Consolidated Statement of Changes in Shareholders' Equity

For the year ended 30 June 2017

Year ended 30 June 2016	Attributable to owners of the parent
	Issued share capital £000	Share premium account £000	Own shares £000	Hedging reserve £000	Foreign currency translation reserve £000	Merger reserve £000	Retained earnings £000	Total £000	Non-controlling interests £000	Total equity £000
At 1 July 2015	880	124,801	(303)	(94)	(27,547)	1,770	94,981	194,488	-	194,488
Profit/(loss) for the period	-	-	-	-	-	-	12,668	12,668	(156)	12,512
Effective portion of changes in fair value of cash flow hedges, net of tax	-	-	-	(154)	-	-	-	(154)	-	(154)
Losses arising on available for sale financial assets	-	-	-	-	-	-	(450)	(450)	-	(450)
Foreign currency translation differences for foreign operations, net of tax	-	-	-	-	33,071	-	-	33,071	279	33,350
Remeasurement of defined benefit pension scheme, net of tax	-	-	-	-	-	-	(1,166)	(1,166)	-	(1,166)
Cash flow hedges recycled to income statement, net of tax	-	-	-	233	-	-	-	233	-	233
Total comprehensive income	-	-	-	79	33,071	-	11,052	44,202	123	44,325
Transactions with owners:
Dividends paid	-	-	-	-	-	-	(15,292)	(15,292)	-	(15,292)
Share-based payments	-	-	-	-	-	-	3,536	3,536	-	3,536
Shares issued	47	47,650	-	-	-	-	-	47,697	-	47,697
Acquisition of non-controlling interests	-	-	-	-	-	-	-	-	1,858	1,858
Own shares recycled to retained earnings	-	-	282	-	-	-	(282)	-	-	-
Total contributions by and distributions to owners	47	47,650	282	-	-	-	(12,038)	35,941	1,858	37,799
At 30 June 2016	927	172,451	(21)	(15)	5,524	1,770	93,995	274,631	1,981	276,612
Year ended 30 June 2017
At 1 July 2016	927	172,451	(21)	(15)	5,524	1,770	93,995	274,631	1,981	276,612
Profit for the period	-	-	-	-	-	-	26,105	26,105	5	26,110
Recycle of losses arising on available for sale financial assets	-	-	-	-	-	-	343	343	-	343
Foreign currency translation differences for foreign operations, net of tax	-	-	-	-	12,717	-	-	12,717	160	12,877
Remeasurement of defined benefit pension scheme, net of tax	-	-	-	-	-	-	1,539	1,539	-	1,539
Cash flow hedges recycled to income statement, net of tax	-	-	-	15	-	-	-	15	-	15
Total comprehensive income	-	-	-	15	12,717	-	27,987	40,719	165	40,884
Transactions with owners:
Dividends paid	-	-	-	-	-	-	(17,664)	(17,664)	-	(17,664)
Share-based payments	-	-	-	-	-	-	3,104	3,104	-	3,104
Shares issued	5	925	-	-	-	-	-	930	-	930
Acquisition of non-controlling interests	-	-	-	-	-	-	-	-	(583)	(583)
Own shares purchased	-	-	(646)	-	-	-	-	(646)	-	(646)
Total contributions by and distributions to owners	5	925	(646)	-	-	-	(14,560)	(14,276)	(583)	(14,859)
At 30 June 2017	932	173,376	(667)	-	18,241	1,770	107,422	301,074	1,563	302,637

 

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

	Note	2017 £000	Restated 2016 £000
Cash flows from operating activities
Operating profit		33,214	19,493
Non-underlying items		48,135	33,364
Underlying operating profit		81,349	52,857
Adjustments for:
Depreciation		4,913	3,763
Amortisation and impairment		1,942	3,890
Loss on disposal of intangible assets		309	-
Loss on disposal of tangible assets		212	69
Equity settled share-based payment expense		2,268	2,058
Underlying operating cash flow before changes in working capital		90,993	62,637
(Increase)/decrease in inventories		(1,552)	5,712
Decrease/(increase) in trade and other receivables		6,360	(16,393)
Increase in trade and other payables		2,122	8,571
Cash generated from operating activities before interest, taxation and non-underlying items		97,923	60,527
Cash outflows in respect of non-underlying items		(3,653)	(4,076)
Cash generated from operating activities before interest and taxation		94,270	56,451
Interest paid		(4,836)	(1,393)
Income taxes paid		(12,008)	(11,483)
Net cash inflow from operating activities		77,426	43,575
Cash flows from investing activities
Interest received		32	33
Acquisition of subsidiaries (net of cash acquired)		(34,966)	(166,173)
Acquisition of non-controlling interests	14	(583)	(390)
Acquisition of investments in associates		(11,013)	-
Purchase of property, plant and equipment		(4,221)	(2,802)
Capitalised development expenditure	10	(1,258)	(570)
Purchase of other intangible non-current assets	10	(5,266)	(4,133)
Net cash outflow from investing activities		(57,275)	(174,035)
Cash flows from financing activities
Proceeds from the issue of share capital		930	47,697
Own shares purchased		(646)	-
New borrowings		25,000	103,841
Expenses of raising borrowing facilities		(150)	(360)
Repayment of borrowings		(5,879)	(10,572)
Dividends paid	8	(17,664)	(15,292)
Net cash inflow from financing activities		1,591	125,314
Net increase/(decrease) in cash and cash equivalents		21,742	(5,146)
Cash and cash equivalents at start of period		39,142	45,948
Exchange differences on cash and cash equivalents		316	(1,660)
Cash and cash equivalents at end of period		61,200	39,142
Reconciliation of net cash flow to movement in net (borrowings)/cash
Net increase/(decrease) in cash and cash equivalents		21,742	(5,146)
New borrowings		(25,000)	(103,841)
Repayment of borrowings		5,879	10,572
Expenses of raising borrowing facilities		150	360
Acquisition of subsidiary borrowings		-	(15,027)
Exchange differences on cash and cash equivalents		316	(1,660)
Retranslation of foreign borrowings		(6,282)	(14,308)
Other non-cash changes		(141)	(994)
Movement in net borrowings in the period		(3,336)	(130,044)
Net (borrowings)/cash at start of period		(116,623)	13,421
Net borrowings at end of period		(119,959)	(116,623)

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:

	2017 £000	2016 £000
Revenue by segment
European Pharmaceuticals              - total	226,930	188,859
NA Pharmaceuticals                           - total	132,345	58,703
	359,275	247,562
Operating profit/(loss) by segment
European Pharmaceuticals	60,706	51,653
NA Pharmaceuticals	43,195	17,500
Pharmaceuticals Research and Development	(14,978)	(10,355)
Segment operating profit	88,923	58,798
Corporate and other unallocated costs	(7,574)	(5,941)
Underlying operating profit	81,349	52,857
Amortisation of acquired intangibles	(40,444)	(20,149)
Impairment of acquired intangibles and associated deferred consideration	-	(1,675)
Impairment of assets available for sale	(602)	-
Fair value uplift of inventory acquired through business combinations	(4,225)	(6,070)
Rationalisation costs	(809)	(1,581)
Expenses relating to acquisition activities	(2,055)	(3,889)
Total operating profit	33,214	19,493
Finance income	805	21
Finance expense	(5,298)	(4,966)
Share of losses in investment accounted for using the equity method	(159)	-
Profit before taxation	28,562	14,548
Total liabilities by segment
European Pharmaceuticals	(73,738)	(47,498)
NA Pharmaceuticals	(20,165)	(15,890)
Pharmaceuticals Research and Development	(404)	(776)
Segment liabilities	(94,307)	(64,164)
Corporate loans and revolving credit facility	(181,143)	(155,741)
Corporate accruals and other payables	(8,197)	(6,494)
Current and deferred tax liabilities	(51,785)	(52,817)
	(335,432)	(279,216)

Revenue by product category	2017 £000	2016 £000
CAP	223,826	137,686
Equine	27,246	20,518
FAP	47,315	38,101
Diets	27,457	24,383
Other	33,431	26,874
	359,275	247,562
Additions to intangible non-current assets by segment (including through business combinations)
European Pharmaceuticals	64,502	15,809
NA Pharmaceuticals	4,409	161,011
Pharmaceuticals Research and Development	1,373	55
Corporate and central costs	104	2,404
	70,388	179,279

	2017 £000	2016 £000
Additions to Property, Plant and Equipment by segment (including through business combinations)
European Pharmaceuticals	10,117	19,443
NA Pharmaceuticals	567	924
Pharmaceuticals Research and Development	82	36
Corporate and central costs	-	69
	10,766	20,472
Depreciation and amortisation by segment
European Pharmaceuticals	22,697	18,984
NA Pharmaceuticals	23,367	5,901
Pharmaceuticals Research and Development	500	345
Corporate and central costs	735	85
	47,299	25,315
The total depreciation and amortisation charge is made up of the following:
Non-underlying
Amortisation - selling, general and administrative expenses	29,003	20,149
Amortisation - research and development expenditure	11,441	-
	40,444	20,149
Underlying
Amortisation	1,942	1,403
Depreciation	4,913	3,763
	6,855	5,166

 

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:

	2017 Revenue £000	2017 Non- current assets £000	2016 Revenue £000	2016 Non- current assets £000
UK	56,317	15,567	54,420	19,624
Germany	37,410	2,404	34,105	2,326
Rest of Europe	113,118	192,461	91,794	162,138
USA	124,128	193,166	53,912	206,364
Rest of World	28,302	49,495	13,331	2,990
	359,275	453,093	247,562	393,442

 

3. Finance Income

	2017 £000	2016 £000
Finance income arising from:
- Cash and cash equivalents	204	21
- Foreign exchange gains	601	-
	805	21

 

4. Finance Expense

Underlying	2017 £000	2016 £000
Finance expense arising from:
- Financial liabilities at amortised cost	5,016	2,372
- Net interest on net defined benefit obligations	40	17
- Foreign exchange losses	-	811
Underlying finance expense	5,056	3,200

Non-underlying	2017 £000	2016 £000
Loss on extinguishment of debt	-	844
Fair value and other movements on deferred and contingent consideration	242	922
Non-underlying finance expense	242	1,766
Total finance expense	5,298	4,966

 

5. Non-underlying Items

Non-underlying items charged to operating profit comprise:

	2017 £000	2016 £000
Amortisation of acquired intangibles
- classified within selling, general and administrative expenses	29,003	20,149
- classified within research and development expenses	11,441	-
Impairment of investments	602	-
Impairment of acquired intangibles and associated deferred consideration	-	1,675
Fair value uplift of inventory acquired through business combinations	4,225	6,070
Rationalisation costs	809	1,581
Expenses relating to acquisition activities	2,055	3,889
	48,135	33,364

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

1 July 2016	-
Additions	11,013
Share of underlying loss after tax	(101)
Share of amortisation of intangible asset identified on acquisition	(58)
30 June 2017	10,854

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

	2017 £000	2016 £000
Current tax            - UK corporation tax	4,406	1,629
- overseas tax at prevailing local rates	7,846	7,755
- adjustment in respect of prior years	(942)	(218)
Total current tax expense	11,310	9,166
Deferred tax          - origination and reversal of temporary differences	(9,475)	(7,116)
- adjustment in respect of tax rates	(34)	(62)
- adjustment in respect of prior years	651	48
Total deferred tax expense	(8,858)	(7,130)
Total income tax expense in the Consolidated Income Statement	2,452	2,036

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:

	2017 £000	2016 £000
Profit before taxation	28,562	14,548
Tax at 19.75% (2016: 20.0%)	5,641	2,910
Effect of:
- expenses not deductible	162	235
- acquisition expenses	565	167
- one-off costs (foreign exchange/acquisition costs) in relation to the acquisition of Putney Inc.	-	1,314
- research and development related tax credits	(57)	(231)
- patent box tax credits	(2,086)	(1,118)
- impact of financing (income not taxable)	(741)	(405)
- share of results of associate	31	-
- effects of overseas tax rates	(745)	(608)
- adjustment in respect of prior years	(291)	(170)
- difference between current and deferred tax rates	7	4
- change in tax rates	(34)	(62)
Total income tax expense in the Consolidated Income Statement	2,452	2,036

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

	2017 £000	2016 £000
Corporation tax on foreign currency translation	-	1,234
Deferred tax on employee benefit obligations	(535)	385
Tax recognised in Consolidated Statement of Comprehensive Income	(535)	1,619
Corporation tax on equity settled transactions	758	1,366
Deferred tax on equity settled transactions	78	112
Total tax recognised in Equity	836	1,478

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

	2017 £000	2016 £000
Final dividend paid in respect of prior year but not recognised as a liability in that year: 12.91 pence per share (2016: 11.82 pence per share)	11,979	10,401
Interim dividend paid: 6.11 pence per share (2016: 5.55 pence per share)	5,685	4,891
Total dividend 19.02 pence per share (2016: 17.37 pence per share) recognised as distributions to equity holders in the period	17,664	15,292
Proposed final dividend for the year ended 30 June 2017: 15.33 pence per share (2016: 12.91 pence per share)	14,288	11,974
Total dividend paid and proposed for the year ended 30 June 2017: 21.44 pence per share (2016: 18.46 pence per share)	19,973	16,865

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.

	2017 Pence	2016 Pence
Basic earnings per share
- Underlying*	64.68	42.95
- Basic	28.09	14.00
Diluted earnings per share
- Underlying*	64.33	42.65
- Diluted	27.93	13.90

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

	2017 £000	2016 £000
Earnings for underlying basic and underlying diluted earnings per share	60,132	38,390
Earnings for basic and diluted earnings per share	26,110	12,512

	Number	Number
Weighted average number of ordinary shares for basic earnings per share	92,962,967	89,380,414
Impact of share options	516,032	628,307
Weighted average number of ordinary shares for diluted earnings per share	93,478,999	90,008,721

* 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

	Goodwill £000	Software £000	Development costs £000	Patent rights £000	Marketing authorisations £000	Acquired intangibles £000	Total £000
Cost
At 1 July 2015	49,326	5,663	10,640	3,680	853	185,614	255,776
Additions	-	2,796	570	1,337	-	-	4,703
Acquisitions through business combinations	52,323	108	-	-	-	122,145	174,576
Impairment	-	(151)	(1,537)	-	-	(4,277)	(5,965)
Foreign exchange adjustments	11,530	752	592	-	-	36,699	49,573
At 30 June 2016 and 1 July 2016 (restated)	113,179	9,168	10,265	5,017	853	340,181	478,663
Additions	-	3,237	1,258	299	104	34,183	39,081
Acquisitions through business combinations	9,906	78	-	-	-	21,323	31,307
Disposals	-	(100)	(317)	-	-	-	(417)
Foreign exchange adjustments	5,049	349	488	-	-	13,668	19,554
At 30 June 2017	128,134	12,732	11,694	5,316	957	409,355	568,188
Accumulated Amortisation
At 1 July 2015	-	2,226	5,298	2,138	-	79,430	89,092
Charge for the year	-	202	796	405	-	20,149	21,552
Impairment	-	(151)	(1,319)	-	-	(333)	(1,803)
Foreign exchange adjustments	-	264	354	-	-	13,946	14,564
At 30 June 2016 and 1 July 2016 (restated)	-	2,541	5,129	2,543	-	113,192	123,405
Charge for the year	-	375	984	583	-	40,444	42,386
Disposals	-	(96)	-	-	-	(12)	(108)
Foreign exchange adjustments	-	102	31	-	-	6,110	6,243
At 30 June 2017	-	2,922	6,144	3,126	-	159,734	171,926
Net book value
At 30 June 2017	128,134	9,810	5,550	2,190	957	249,621	396,262
At 30 June 2016 (restated)	113,179	6,627	5,136	2,474	853	226,989	355,258

	2017 £000	2016 £000
Software assets in the course of construction included above	9,403	1,451

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

	Commercial relationships £000	Pharmacological process £000	Brand £000	Capitalised development costs £000	Product rights £000	Total £000
Cost
At 1 July 2015	-	-	-	20,719	164,895	185,614
Acquired through business combinations	1,370	45,464	11,546	63,765	-	122,145
Impairment	-	-	-	-	(4,277)	(4,277)
Foreign exchange adjustments	192	3,371	886	8,597	23,653	36,699
At 30 June 2016 and 1 July 2016 (restated)	1,562	48,835	12,432	93,081	184,271	340,181
Additions	-	-	-	-	34,183	34,183
Acquired through business combinations	-	-	374	17,956	2,993	21,323
Foreign exchange adjustments	126	1,712	441	3,462	7,927	13,668
At 30 June 2017	1,688	50,547	13,247	114,499	229,374	409,355
Accumulated Amortisation
At 1 July 2015	-	-	-	6,009	73,421	79,430
Charge for the year	188	759	309	3,367	15,526	20,149
Impairment	-	-	-	-	(333)	(333)
Foreign exchange adjustments	19	55	24	1,297	12,551	13,946
At 30 June 2016 and 1 July 2016 (restated)	207	814	333	10,673	101,165	113,192
Charge for the year	358	11,441	1,984	9,102	17,559	40,444
Disposals	(12)	-	-	-	-	(12)
Foreign exchange adjustments	20	(172)	(23)	643	5,642	6,110
At 30 June 2017	573	12,083	2,294	20,418	124,366	159,734
Net book value
At 30 June 2017	1,115	38,464	10,953	94,081	105,008	249,621
At 30 June 2016 (restated)	1,355	48,021	12,099	82,408	83,106	226,989

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

Significant assets	Description	Carrying value £'000	Sub-Total carrying value £'000	Remaining amortisation period
Intangible assets arising from the acquisition of VetXX Holding A/S	Product, marketing and distribution rights	4,855	4,855	½ year
Intangible assets arising from the acquisition of Dermapet	Product, marketing and distribution rights	26,183	26,183	8 ½ years
Intangible assets arising from the acquisition of Genetrix	Product, marketing and distribution rights	1,912	1,912	3 ½ years
Intangible assets arising from the acquisition of Eurovet	Technology, product, marketing and distribution rights	41,585	41,585	5 years
Intangible assets arising from the acquisition of PSPC Inc	Product, marketing and distribution rights	4,517	4,517	7 years
Intangible asset acquired from Pharmaderm Animal Health	Marketing and distribution rights	838	838	5 years
HY-50 intangible asset acquired from Bexinc Limited	Marketing and distribution rights	2,344	2,344	4 ½ years
Intangible assets arising from the acquisition of Genera	Product, brand, technology, marketing and distribution rights	1,286		5 ½ years
		470		8 ½ years
		8,572		13 ½ years
			10,328	Genera - total
Intangible assets arising from the acquisition of Putney	Product, brand, technology, pharmacological process, marketing and distribution rights	10,178		9 years
		38,478		9 years
		56,146		11 years
			104,802	Putney - total
Intangible asset arising from the acquisition of Apex	Product and technology	16,342		16 years
		3,003		13 years
			19,345	Apex - total
Intangible asset relating to Animal Ethics	Marketing and distribution rights	29,079	29,079	10 years
Intangible assets relating to a US dental licensing agreement	Marketing and distribution rights	3,832	3,833	10 years
			249,621

 

11. Deferred Taxes

 Recognised Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are attributable to the following:

	Assets		Liabilities		Net
	2017 £000	Restated 2016 £000	2017 £000	Restated 2016 £000	2017 £000	Restated 2016 £000
Intangible assets	-	-	(61,316)	(63,711)	(61,316)	(63,711)
Property, plant and equipment	-	-	(3,772)	(3,604)	(3,772)	(3,604)
Inventories	831	-	-	(74)	831	(74)
Receivables/payables	3,488	1,555	-	-	3,488	1,555
Share-based payments	1,581	1,370	-	-	1,581	1,370
Losses	8,414	14,042	-	-	8,414	14,042
R&D tax credits	1,289	793	-	-	1,289	793
Employee benefit obligations	992	1,175	-	-	992	1,175
	16,595	18,935	(65,088)	(67,389)	(48,493)	(48,454)

Deferred tax assets and liabilities are offset to the extent that there is a legally enforceable right to offset current tax assets against current tax liabilities.

12. Borrowings

	2017 £000	2016 £000
Current liabilities:
Bank loans	965	1,648
Finance lease obligations	8	24
	973	1,672
Non-current liabilities:
Bank loans	180,529	154,435
Finance lease obligations	8	-
Arrangement fees netted off	(351)	(342)
	180,186	154,093
Total borrowings	181,159	155,765

In October 2016, the Group increased its existing facility from £150.0 million plus an accordion of £30.0 million to a multi-currency revolving credit facility of £205.0 million with no accordion until September 2019. During the year £25.0 million was drawn from this revised facility. This facility is not secured on any specific assets of the Group but is supported by a joint and several cross-guarantee structure. Interest will be charged at 1.8% over LIBOR. All covenants were met during the year ended 30 June 2017. This facility has since been refinanced post year-end.

At 30 June 2016, it was noted that the £1.6 million of the facility exceeded the £150.0 million limit due to exchange rate movements, as such, this was disclosed within the current portion of borrowing.

Genera also has borrowing facilities of £7.4 million, of which £4.7 million was drawn down at 30 June 2017. Interest is fixed at 3.2%.

The maturity of the bank loans and overdrafts is as follows:

	2017 £000	2016 £000
Payable:
Within one year	965	1,648
Between one and two years	1,158	-
Between two and five years	179,371	154,435
	181,494	156,083

The minimum lease payments and the present value of minimum lease payments payable under finance lease obligations are:

	Minimum lease payments		Present value of minimum lease payments
	2017 £000	2016 £000	2017 £000	2016 £000
Within one year	8	24	8	24
Between one and two years	7	-	7	-
Between two and five years	1	-	1	-
Total minimum lease payments	16	24	16	24
Future finance charges	1	2	1	2
Present value of lease obligations	17	26	17	26

 

13. Provisions

	Deferred Rent £'000	Provision for PPE grant £'000	Environmental Health & Safety £'000	Total £'000
At start of period	(559)	(2,603)	(172)	(3,334)
Provision recognised	-	-	(300)	(300)
Provision utilised	37	514	118	669
Foreign exchange differences	(20)	(178)	(17)	(215)
At end of period	(542)	(2,267)	(371)	(3,180)

The Group has received advanced payment for rental income on its facilities in Portland. This has been recognised at amortised cost and is being utilised over the period of the rental contract.

Genera has received advanced funding for the refurbishment of the manufacturing facility for a third party manufacturing contract. The funding has been recognised at amortised cost and is being utilised over the life of the property, plant and equipment.

On the acquisition of Genera, the Group acquired a fair value provision to address existing legal and environmental compliance. A provision is recognised at the present value of the costs to be incurred for the remediation of the manufacturing site.

 

14. Non-Controlling Interests

Following the acquisition of Genera in October 2015, the following non-controlling interest has been recorded in the Group financial statements;

	2017 £'000	2016 £'000
At start of period	1,981	-
Acquired through business combinations	-	2,248
Additional consideration paid to non-controlling interests	(583)	(390)
Profit/(loss) for the period	5	(156)
Foreign exchange differences	160	279
At end of period	1,563	1,981

On 8 November 2016, the Group purchased 0.12% of the voting shares for a consideration of HRK 344,000 (£0.04 million). On 5 December 2016, the Group purchased another 1.62% of the voting shares for a consideration of HRK 4,810,000 (£0.54 million). The Group now holds 95.13% of the equity share capital of Genera.

15. Foreign Exchange Rates

The following exchange rates have been used in the translation of the results of foreign operations:

	Average rate for 2016	Closing rate at 30 June 2016	Average rate for 2017	Closing rate at 30 June 2017
Danish Krone	10.0162	9.0010	8.6901	8.4571
Euro	1.3432	1.2099	1.1681	1.1372
US Dollar	1.4870	1.3433	1.2735	1.2978

 

16. Acquisitions

Acquisition of Apex

On 14 October 2016, Dechra acquired certain trade and assets of Apex Laboratories Pty Ltd, a veterinary pharmaceuticals company based in New South Wales, Australia. The Group paid £34.2 million (AUS$ 55.0 million) consideration in cash on a debt free, cash free basis.

	Fair value £000
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment	6,545
Software	78
Inventories	2,120
Trade and other receivables	1,575
Trade and other payables	(462)
Non-current liabilities	(171)
Identifiable intangible assets	21,323
Net deferred tax liability	(6,683)
Net identifiable assets	24,325
Goodwill	9,906
Total consideration	34,231
Satisfied by:
Cash	34,231
Total consideration transferred	34,231
Net cash outflow arising on acquisition
Cash consideration	34,231
	34,231

The fair values shown above are provisional and may be amended if information not currently available comes to light. The provisional fair value adjustments principally relate to harmonisation with Group IFRS accounting policies, including the application of fair values on acquisition, principally being the recognition of fair value uplift on acquired inventory and intangibles in accordance with IFRS 3.

The goodwill of £9.9 million arising from the acquisition consists of technical expertise of the assembled workforce, access to the Australasian and Asia Pacific regions to continue geographical expansion, and future sales expected to be achieved through the registration of Dechra products in these countries. None of the goodwill is expected to be deductible for income tax purposes.

Acquisition related costs (included in operating expenses) amounted to £1.6 million. Apex's results are reported within the EU Pharmaceuticals Segment. Apex contributed £7.1 million revenue and £1.1 million to the Group's pre-tax profit for the period between the date of acquisition and the balance sheet date. If the acquisition of Apex had been completed on the first date of the financial year, the contribution to Group revenues for the period would have been £9.9 million and the Group pre-tax profit would have been £2.1 million.

Prior Year Acquisitions

In the prior year the Group acquired Putney and Brovel. The fair values of the assets and liabilities acquired have been reconsidered as part of the hindsight period.

In relation to Putney, there was a reduction in provisions of £0.4 million to true-up the position at acquisition. Intangible assets were reduced by £0.8 million to reflect an agreement that at the point of acquisition was not required due to the existence of other supplier relationships. Hindsight adjustments have also been made in respect of deferred tax assets on losses (£2.9 million), inventory (£0.2 million), R&D credits (£0.6 million), intangibles (£0.3 million) and receivables (£0.3 million).

In relation to Brovel, there was a reduction in receivables (£0.1 million) and an increase in payables of £0.1 million following a true-up of the final working capital position. A deferred tax asset of £0.3 million has been recognised following a detailed assessment of the recoverability of these assets.

Following the acquisition of Genera in October 2015, the disclosure of the final fair values of the assets and liabilities acquired have been included in the financial statements for the year ended 30 June 2016.

Acquisition of Brovel

The revised fair values of the acquired assets and liabilities on the acquisition of Brovel are detailed below:

	Fair value £000
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment	243
Inventories	1,152
Trade and other receivables	346
Cash and cash equivalents	202
Trade and other payables	(465)
Net deferred tax asset	120
Net identifiable assets	1,598
Goodwill	2,466
Total consideration	4,064
Satisfied by:
Cash	3,473
Contingent consideration arrangement	591
Total consideration transferred	4,064
Net cash outflow arising on acquisition
Cash consideration	3,473
Less cash and cash equivalents acquired	(202)
	3,271

Acquisition of Putney

The revised fair values of the acquired assets and liabilities on the acquisition of Putney are detailed below:

	Fair value £000
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment	466
Inventories	14,037
Trade and other receivables	5,699
Cash and cash equivalents	1,541
Trade and other payables	(7,160)
Provisions	(546)
Debt	(6,299)
Identifiable intangible assets	112,580
Net deferred tax liability	(31,517)
Net identifiable assets	88,801
Goodwill	45,391
Total consideration	134,192
Satisfied by:
Cash	134,192
Total consideration transferred	134,192
Net cash outflow arising on acquisition
Cash consideration	134,192
Less cash and cash equivalents acquired	(1,541)
	132,651

17. Events after the Reporting Period

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: HSBC, BNP Paribas, Fifth Third, Santander, Lloyds, Bank of Ireland and Raiffeisen. The RCF has an Accordian 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

·      Interest cover: underlying EBITDA to Net Finance Charges not less than 4:1

There is a non-utilisation fee of 35.0% of the applicable margin. The margin over LIBOR (or equivalent) ranges from 1.3% for gearing below 1 time, up to 2.2% for gearing above 2.5 times.

Following the refinancing, the existing capitalised arrangement fees of £0.4 million will be accelerated to the income statement.

18. Other information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June 2017 or 2016 but is derived from the 2017 accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered in due course. The external auditor has reported on those accounts; the report was (i) unqualified, (ii) did not include references to any matters to which the external auditor drew attention by way of emphasis without qualifying the reports and (iii) did not contain statements under section 498(2) or (3) of the Companies Act 2006.

19. Preliminary Statement

This Preliminary statement is not being posted to Shareholders.  The Report and Accounts for the year ended 30 June 2017 will be sent to shareholders shortly.  Further copies will be available from the Company's Registered Office: 24 Cheshire Avenue, Cheshire Business Park, Lostock Gralam, Northwich CW9 7UA.  Email: [e-mail].  Copies are also available on the Company website www.dechra.com.

20. Directors' Responsibility Statement Required under the Disclosure and Transparency Rules

The responsibility statement below has been prepared in connection with the Company's full Annual Report for the year ended 30 June 2017.  Certain parts of that Report are not included with this announcement.

We confirm to the best of our knowledge:

a)            the Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 'Reduced Disclosure Framework', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company;

b)            the Group financial statements, prepared in accordance with the IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of Group; and

c)             the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that they face.

Approved by the Board and signed on its behalf by:

Ian Page Chief Executive Officer

Richard Cotton Chief Financial Officer

4 September 2017

 

END

 

 

FR BRGDCSBGBGRX