Preliminary Results

RNS Number : 9664O

CVS Group plc

27 September 2011

 



For Immediate Release

27 September 2011

CVS GROUP plc

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

Preliminary Results for the year ended 30 June 2011

CVS, one of the UK's leading providers of veterinary services, is pleased to announce its preliminary results for the year ended 30 June 2011.

Financial highlights

	Year ended 30 June  2011	Year ended 30 June 2010	Movement %
Adjusted results:
Adjusted EBITDA1	£14.5m	£13.1m	+11.1
Adjusted earnings per share2	14.0p	11.9p	+17.6
Reported results:
Revenue	£101.5m	£85.5m	+18.7
Operating profit	£6.4m	£5.7m	+11.8
Profit before income tax	£4.3m	£3.8m	+10.8
Profit after income tax	£3.5m	£3.1m	+14.0
Cash generated from operations	£17.6m	£12.6m	+39.7
Basic earnings per share	6.2p	5.7p	+8.8

-    Significant increase in Group revenue and profit generation, leading to 17.6% and 8.8% increases in adjusted and basic EPS respectively

-    Underlying like-for-like sales³ growth of 0.4%

-    Cash generated from operations increased by 39.7%

-    Net debt reduced by £8.4m to £33.5m

-    Successfully acquired and integrated 12 surgeries. Of these acquired sites, 9 were completed in the second half of the year bringing the total number of sites at the year end to 223 surgeries and 6 laboratories

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

-    Proposed maiden dividend of 1p per share

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

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

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

Commenting on the results Chief Executive, Simon Innes, said:

 "I am pleased to report that CVS has delivered sustained growth in revenue, profit generation and operating cash flow in the year.  Like-for-like sales showed slight growth, which is encouraging during a period of tougher trading conditions.  The Group continues to focus on organic growth whilst also developing new revenue streams and continuing to grow through selective strategic acquisitions."

Contacts:

CVS Group plc Simon Innes, Chief Executive Paul Coxon, Financial Director	01379 644 288
Buchanan Communications Richard Oldworth/Suzanne Brocks/Christian Goodbody	020 7466 5000

Chairman's statement

Introduction and review of operations for the year

I am pleased to announce the results of CVS Group plc ("CVS", "the Group", or "the Company") for the year ended 30 June 2011.  The Group has continued to deliver significant improvements in many key financial metrics despite the challenges presented by a tougher operating climate.

The Group has grown revenue by 18.7% to £101.5m (2010: £85.5m) and Adjusted EBITDA by 11.1% to £14.5m (2010: £13.1m). Adjusted EBITDA as a percentage of sales has declined from 15.3% to 14.3%, primarily reflecting the tougher operating environment impacting like-for-like sales and the corresponding impact on Adjusted EBITDA owing to the Group's relatively high operating margin. There was strong cash delivery with cash generated from operations of £17.6m (2010: £12.6m).  Operating profit grew by 11.8% to £6.4m (2010: £5.7m) and Adjusted EPS grew by 17.6% to 14.0p (2010: 11.9p).

Continued uncertainty in the general economy has affected the business as increasingly hard pressed consumers look to make savings in areas of discretionary spending.  Veterinary products and services have not been immune to this and as a result the Group is engaged in a number of activities to counter these trends including growth of the Group's customer loyalty schemes and further development of the rapidly growing on-line dispensary and pet shop (Animed Direct).

The Group's customer loyalty programmes comprise the Healthy Pet Club for adult dogs and cats; the Healthy Horse Club (launched in the first half of the financial year); the Healthy Puppy and Kitten Club (launched in the latter part of the financial year) and the Healthy Rabbit Club (launched post year end). These schemes have been established to bond clients to the practice; to improve loyalty; to increase compliance (particularly with respect to vaccinations, worming and flea treatment); and protect loss of drug sales revenue from surgeries to on-line retailers. In the business and financial review (pages 10 to 15) we demonstrate the significant increase in client membership.

I am pleased to report that the launch of Animed Direct during the year has been successful and further growth from our e-commerce operations is expected.

The Group acquired and integrated 12 surgeries in the year, enhancing CVS's presence in the UK veterinary profession.  I am pleased to report that these surgeries have performed in line with expectations post acquisition.

Since year end we have acquired a single site practice in Hertfordshire with an annualised turnover in the region of £1 million.

Cash flow and funding position

Cash flow generated from operations increased significantly by 39.7% to £17.6m.  The ability of the Group to convert profit into cash is clearly demonstrated with Adjusted EBITDA at £14.5m being complemented by an improvement in agreed supplier payment terms.

Overall net debt decreased in the year to £34m from £42m, with a corresponding decrease in the gearing of the Group with EBITDA to net debt ratio reducing from 3.21 to 2.31.  In the year under review, £5.2m of debt has been repaid.  A further £4.0m is scheduled to be repaid during the year ending 30 June 2012 and this has been reflected in our cash flow forecasts.

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

Internally generated cash will continue to be used to fund future acquisition activity.

Chairman's statement (continued)

Dividends

The Directors believe that the cash generative nature and resilience of the Group's model is sufficiently proven to enable the Company to commence the payment of dividends to our shareholders, who have shown their consistent support for CVS.

The Board is therefore recommending a maiden dividend of 1.0p per share, a payment that is covered 6.2 times by basic earnings per share and 14.0 times by adjusted earnings per share. The Group will continue to review its dividend policy on an ongoing basis with particular regard to the Group's profitability and cash generation.

If approved at the Annual General Meeting, the maiden dividend will be paid on 20 December 2011 to shareholders on the register on 16 December 2011.  The ex-dividend date will be 14 December 2011.

Our people

The Group continues to be the largest employer in the UK veterinary profession with approximately 2,200 staff today, including around 500 vets. Our people are our best asset in enabling the Group to deliver its strategy and I would like to thank them all, including those new to CVS in the year, for their expertise and professionalism in providing the best possible veterinary care and service.

Further business development

We estimate that CVS has around 10% of the UK small animal veterinary market measured by wholesaler spend, which demonstrates the opportunity for further consolidation.

Outlook

We continue to focus on developing the business organically by furthering ways to extract operational efficiency, improve business performance, grow through selective acquisitions and create new revenue streams together with the subsequent generation of cash and profit.

The Group has delivered marginally positive like-for-like sales growth since the year end.

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

Richard Connell

Chairman

26 September 2011

Business and financial review

CVS has continued to deliver growth over the prior year in terms of revenues, cash and profit generation.  Group revenue increased to £101.5m (2010: £85.5m), cash generated from operations increased to £17.6m (2010: £12.6m) and Adjusted EBITDA increased to £14.5m (2010: £13.1m). Operating profit and Profit before tax were ahead of the prior year at £6.4m (2010: £5.7m) and £4.3m (2010: £3.8m) respectively.

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

Factors that have influenced the improvement in the Adjusted EBITDA figure compared with the prior year include the full year effect of previous year acquisitions augmented by acquisitions made during the year. 

Although Adjusted EBITDA grew in absolute terms, the Adjusted EBITDA margin fell from 15.3% to 14.3%, as discussed more fully in the divisional performance below. This margin reduction reflects the more difficult trading conditions within the general economic environment.

Adjusted earnings per share (as defined in note 5 to the financial information) was 14.0p (2010: 11.9p).  Basic earnings per share was also above prior year at 6.2p (2010: 5.7p).

Divisional performance

Practice

The Group is the leading national veterinary surgery consolidator, primarily focused on the small animal market. Revenue amounted to £94.7m, an increase of 19.7% on the prior year.

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

In the year CVS acquired 12 surgeries, largely in the second half of the year.  These surgeries contributed £1.8m of revenue in the year, which corresponds to around £4m in a full year.

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

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

-    Regional practice performance benchmarking.

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

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

-    Enhanced e-commerce activity with the launch of the Group's on-line dispensary during the year and, post year end, the trialling of an enhanced client offering through on-line shops (being an integral part of practice websites).

The Healthy Pet Club loyalty scheme has continued to grow in the year with 7,000 pets (11,000 including the new Puppy and Kitten Scheme) being added to the scheme. This benefits the division by driving customer loyalty, encouraging clinical compliance and bringing more customers into the surgery.  At the year end total pet members stood at more than 24,000 in total (28,000 including the Puppy and Kitten Scheme). Monthly subscription revenue generated in the year amounted to £2.4m (2010: £1.2m).

Business and financial review (continued)

Benefits from increasing economies of scale continue to be enjoyed by the Practice division in terms of drug buying, overheads and infrastructure.  However, these improvements were offset by the impact of more difficult trading conditions on the division's predominantly fixed employment cost structure which resulted in a slight fall in overall profit margin.

Animed Direct, our on-line trading platform, was launched on 27 July 2010, delivering sales of £0.9m during the year and trading ahead of expectations.

The Adjusted EBITDA for the division grew significantly by £1.8m to £17.7m and the Profit before tax by £1.2m to £11.5m, primarily due to the impact of acquisition activity in the current and prior year partially offset by the factors outlined above.

As a result of the weaker general economy, the Directors believe that the outlook for veterinary and related services is subject to a degree of uncertainty.  However, as a counterbalance, stable pet populations, increases in animal longevity, advances in veterinary medical science, changes in the demographic profile of the human population and growth in the pet insurance industry and the initiatives instigated by our operations team all provide positive support.

As the Practice division grows it will continue to support growth in the other, complementary, Laboratory and Crematorium divisions.

Laboratory

The Group operates 6 laboratories in the UK which provide diagnostic services to third party veterinary surgeries (72% of revenues) as well as CVS owned veterinary surgeries (28% of revenues). Services are generally provided via courier and postal services allowing complete coverage of the UK.

The laboratory division delivered an encouraging performance in spite of the economic factors already mentioned, whilst operating within a continuing competitive operating landscape.  Revenue rose by £0.7m however Profit before tax fell by £0.1m, reflecting the competitive trading environment within the veterinary diagnostic market.

The Director of Laboratory Operations continues to focus on growth and has enhanced the sales team in order to retain existing customers and help broaden the client base.

Crematorium

The Rossendale crematorium, now in its second full financial year under CVS ownership, delivered revenue of £0.8m (2010: £0.7m) and an adjusted EBITDA of £0.3m (2010: £0.3m), being 39.9% of sales (2010: 42.0%).

In addition to services provided to non group practices and the general public, the division also serves CVS practices in the North and Midlands which account for 32% of its revenues.

Central administration

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

On an adjusted basis, the total costs for the central administration segment increased from £4.3m to £4.5m, but decreased to 4.4% of revenue (2010: 5.0%), illustrating management's ability to control central costs.  Further leverage is expected to be delivered as the Group grows.

The Loss before tax for the central administration segment increased from £7.3m to £8.1m, being 8.0% of revenue (2010: 8.6%), due primarily to the fair value movements on derivative financial instruments.

Business and financial review (continued)

Other financial highlights

Net finance expenses of £2.1m represent an increase of £0.3m (13.7%) compared to the previous year, reflecting the non-cash movement in the fair value of the Group's derivative financial instrument offset by a benefit from interest rate reductions on its floating rate debt and the commencement of debt repayments in the year.

The Group recorded an increase in Profit for the year of £0.4m to £3.5m representing an increase of 14.0% on the previous year.

Cash generated from operations also improved on last year showing a 39.7% increase. The extent of cash generated has allowed the Group to self-fund all acquisitions made during the year whilst significantly reducing net debt (by £8.4m).  The Group continues to convert profit into cash with cash generated from operations of £17.6m compared to Adjusted EBITDA of £14.5m. 

Business and financial review (continued)

Key performance indicators ('KPIs')

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

	2011	2010	Definition, method of calculation and analysis
Revenue	£101.5m	£85.5m	Total Revenue of the Group. Positives - Acquisitions, growth in the Group's customer loyalty scheme membership, and the e-commerce activities of the Group. Negatives - Adverse trading conditions.
Adjusted EBITDA	£14.5m	£13.1m	Adjusted EBITDA represents earnings before income tax, net finance expense, depreciation, amortisation, costs relating to business combinations and share option expense. Positives - Acquisitions and improved buying terms. Negatives - Adverse trading conditions.
Adjusted EPS	14.0p	11.9p	Earnings, adjusted for amortisation, share option expense, costs relating to business combinations, non-recurring tax credits and fair value adjustments, net of the notional tax impact of the above, divided by the number of issued shares.  The increase reflects the above effects to adjusted EBITDA augmented by reductions in finance costs and the effective tax rate.
Cash generated from operations	£17.6m	£12.6m	Cash generated from operations has increased with the improvement in adjusted EBITDA supported by favourable working capital movements.
Like-for-like sales performance	0.4%	(1.2%)	Revenue generated from all operations compared to prior year (on a pro-forma basis, i.e. including pre-acquisition revenues in respect of acquisitions in the current and comparative periods), after adjusting for sites under refurbishment and discontinued operating activities. Positives - successful launch of our on-line dispensary during the year. Negatives - Adverse weather and trading conditions, and additional bank holiday in April 2011.
Return on investment	31.9%	20.4%	Annualised EBITDA relating to business and subsidiaries acquired during the year compared to the consideration paid. Positives - acquisitions trading ahead of expectations. Negatives - fewer acquisitions made during the year.

 Business and financial review (continued)

Funding and treasury management

As at 30 June 2011, the Group had net debt of £33.5m (2010: £41.9m) comprising debt of £36.7m (net of issue costs) and cash of £3.2m.   During the year £5.2m of the Group's term debt facility was repaid.

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

The Group has a centralised treasury function to manage interest rate risk. Derivative instruments are used solely to mitigate these risks. Interest rate collar arrangements are used to manage exposure to interest rate fluctuations, whilst allowing some benefit of reductions in interest rates. At the year end, the Group had interest hedging arrangements in place covering £27.5m (75%) of bank debt. The Group sweeps funds daily from its various bank accounts into deposit accounts to optimise interest generation.

The Board anticipate that borrowings will reduce further in the coming months as scheduled bank loan repayments are made.

Business environment

The Group has seen a further impact in the year under review from the unfavourable economic climate with like-for-like sales increase being just 0.4% in the current year. The achievement of marginal growth in such a tough economic climate  is regarded by the Board as being an indicator of the resilience of the business and the veterinary market.

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

Principal risks and uncertainties

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

Competition

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

Key personnel

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

Clinical standards

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

Economic environment

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

Business and financial review (continued)

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

Adverse weather

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

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

 

Key contractual arrangements

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

Future developments

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

Simon Innes

Chief Executive

26 September 2011

Forward looking statements

Certain statements in these preliminary results are forward-looking.  Although the Board believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

Consolidated income statement for the year ended 30 June 2011

	Note	2011 £'000	2010 £'000 Re-presented*
Revenue	2	101,491	85,527
Cost of sales		(64,817)	(53,696)
Gross profit		36,674	31,831
Administrative expenses		(30,316)	(26,142)
Operating profit		6,358	5,689
Fair value adjustments in respect of financial assets and liabilities		(183)	149
Other finance expense		(1,945)	(2,028)
Other finance income		24	29
Net finance expense		(2,104)	(1,850)
Profit before income tax	2	4,254	3,839
Income tax expense	4	(767)	(781)
Profit for the year attributable to owners of the Parent		3,487	3,058
Earnings per ordinary share for profit attributable to owners of the Parent (expressed in pence per share) ("EPS")
Basic	5	6.2p	5.7p
Diluted	5	6.1p	5.7p

* The comparatives for Cost of sales and Administrative expenses have been re-presented to more accurately reflect the nature of the underlying transactions.  The net effect on Profit for the year and Net assets is £nil.

All amounts relate to continuing operations, including the impact of business combinations arising during the year.

The following table is provided to show the comparative earnings before interest, tax, depreciation and amortisation ("EBITDA") after adjusting for costs relating to business combinations and share option expense.

Non-GAAP measure: Adjusted EBITDA	Note	£'000	£'000
Profit before income tax	2	4,254	3,839
Adjustments for:
Net finance expense		2,104	1,850
Depreciation		2,233	1,905
Amortisation		5,348	4,385
Costs relating to business combinations	3	139	530
Share option expense		435	556
Adjusted EBITDA	2	14,513	13,065

 

Statement of consolidated comprehensive income for the year ended 30 June 2011

 

	Note	2011 £'000	2010 £'000
Profit for the year		3,487	3,058
Other comprehensive income
Fair value adjustments in respect of financial assets and liabilities		798	(970)
Revaluation of available for sale investments		3	7
Deferred tax on other comprehensive income		(207)	272
Other comprehensive income/(loss) for the year, net of tax		594	(691)
Total comprehensive income for the year attributable to owners of the Parent		4,081	2,367

Consolidated balance sheet as at 30 June 2011

	Note	2011 £'000	2010 £'000
Non-current assets
Intangible assets		54,486	56,695
Property, plant and equipment		8,465	8,835
Investments		77	74
Deferred income tax assets		697	1,321
		63,725	66,925
Current assets
Inventories		2,633	2,453
Trade and other receivables		8,049	6,602
Cash and cash equivalents		3,193	109
		13,875	9,164
Total assets	2	77,600	76,089
Current liabilities
Trade and other payables		(15,894)	(12,101)
Current income tax liabilities		(932)	(574)
Borrowings	8	(3,962)	(5,350)
		(20,788)	(18,025)
Non-current liabilities
Borrowings	8	(32,777)	(36,655)
Deferred income tax liabilities		(5,795)	(7,076)
Derivative financial instruments		(1,669)	(2,284)
		(40,241)	(46,015)
Total liabilities	2	(61,029)	(64,040)
Net assets		16,571	12,049

Consolidated balance sheet as at 30 June 2011 (continued)

	Note	2011 £'000	2010 £'000
Shareholders' equity
Share capital		113	113
Share premium		8,640	8,640
Capital redemption reserve		592	592
Revaluation reserve		125	125
Merger reserve		(61,420)	(61,420)
Retained earnings		68,521	63,999
Total equity		16,571	12,049

The financial information comprising the consolidated income statement, the statement of consolidated comprehensive income, the consolidated balance sheet, the consolidated statement of changes in shareholders' equity, the consolidated cash flow statement and the related notes, were authorised for issue by the Board of Directors on 26 September 2011 and were signed on its behalf by:

P Coxon Director

S Innes Director

Consolidated statement of changes in equity for the year ended 30 June 2011

 

	Share  capital	Share premium	Capital redemption reserve	Revaluation reserve	Merger reserve	Retained earnings	Total       equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 July 2009	103	-	592	125	(61,420)	61,076	476
Profit for the year	-	-	-	-	-	3,058	3,058
Other comprehensive income
Fair value adjustments in respect of financial assets and liabilities	-	-	-	-	-	(970)	(970)
Revaluation of available for sale investments	-	-	-	-	-	7	7
Deferred tax on other comprehensive income	-	-	-	-	-	272	272
Total other comprehensive income	-	-	-	-	-	(691)	(691)
Total comprehensive income	-	-	-	-	-	2,367	2,367
Transactions with owners
Issue of ordinary shares	10	8,640	-	-	-	-	8,650
Credit to reserves for share-based payments	-	-	-	-	-	556	556
Transactions with owners	10	8,640	-	-	-	556	9,206
At 30 June 2010	113	8,640	592	125	(61,420)	63,999	12,049

 

	Share  capital	Share premium	Capital redemption reserve	Revaluation reserve	Merger reserve	Retained earnings	Total equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 July 2010	113	8,640	592	125	(61,420)	63,999	12,049
Profit for the year	-	-	-	-	-	3,487	3,487
Other comprehensive income
Fair value adjustments in respect of financial assets and liabilities	-	-	-	-	-	798	798
Revaluation of available for sale investments	-	-	-	-	-	3	3
Deferred tax on other comprehensive income	-	-	-	-	-	(207)	(207)
Total other comprehensive income	-	-	-	-	-	594	594
Total comprehensive income	-	-	-	-	-	4,081	4,081
Transactions with owners
Credit to reserves for share-based payments	-	-	-	-	-	435	435
Deferred tax relating to share-based payments	-	-	-	-	-	6	6
Transactions with owners	-	-	-	-	-	441	441
At 30 June 2011	113	8,640	592	125	(61,420)	68,521	16,571

Consolidated cash flow statement for the year ended 30 June 2011

	Note	2011 £'000	2010 £'000
Cash flows from operating activities
Cash generated from operations	9	17,639	12,624
Taxation paid		(1,267)	(1,907)
Interest received		24	29
Interest paid		(1,840)	(1,950)
Net cash generated from operating activities		14,556	8,796
Cash flows from investing activities
Acquisition of businesses	6	(4,040)	(2,146)
Acquisition of subsidiaries (net of cash acquired)	6	(152)	(11,855)
Purchase of property, plant and equipment		(1,803)	(1,965)
Purchase of intangible assets		(141)	(97)
Proceeds from sale of property, plant and equipment		111	20
Net cash used in investing activities		(6,025)	(16,043)
Cash flows from financing activities
Finance lease principal payments		(7)	(9)
Repayment of bank loan		(5,175)	(4,342)
Proceeds from issue of ordinary share capital (net of issue costs)		-	8,650
Net cash (used in)/ generated from financing activities		(5,182)	4,299
Net increase/(decrease) in cash and cash equivalents		3,349	(2,948)
Cash and cash equivalents at beginning of year		(156)	2,792
Cash and cash equivalents at end of year		3,193	(156)

Notes to the consolidated financial information for the year ended 30 June 2011

1.  Summary of significant accounting policies

Statement under s498 - publication of non-statutory accounts

The financial information set out in this preliminary announcement does not constitute statutory financial statements for the years ended 30 June 2011 or 2010, for the purpose of the Companies Act 2006, but is derived from those financial statements. Statutory financial statements for 2011, on which the Group's auditors have given an unqualified report which does not contain statements under Section 498(2) or (3) of the Companies Act 2006, will be filed with the Registrar of Companies subsequent to the Group's next annual general meeting. Statutory financial statements for 2010 have been filed with the Registrar of Companies. The Group's auditors have reported on those accounts; their reports were unqualified and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.

Basis of preparation

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

Whilst the financial information included in this preliminary announcement has been prepared in accordance with the International Financial Reporting Standards (IFRSs) as adopted for use in the European Union and as issued by the International Accounting Standards Board, this announcement does not itself contain sufficient information to comply with IFRS. Other than as stated below, the accounting policies applied in preparing this financial information are consistent with the Group's financial statements for the year ended 30 June 2011.

Changes in accounting policy and disclosure

Standards, amendments and interpretations effective in the year ended 30 June 2011

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

·      Annual improvements to IFRSs (2009)

·      Amendment to IFRS 2, 'Share based payments - Group cash-settled share-based payment transactions'

·      Amendments to IFRS 1, 'First time adoption' on additional exemptions

·      Amendments IAS 32, 'Financial instruments' on presentation on classification of rights issues.

·      Amendment to IFRS 1, 'First time adoption' on financial instrument disclosures

·      IFRIC 15, 'Arrangements for construction of real estates'

·      IFRIC 19, 'Extinguishing financial liabilities with equity instruments'

 

 

1.   Summary of significant accounting policies (continued)

Use of non-GAAP measures

Adjusted EBITDA

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

Like-for-like sales

Like-for-like sales comprise the revenue generated from all operations compared to the prior year (on a pro forma basis, i.e. including pre acquisition revenues in respect of acquisitions in the current and comparative periods), after adjusting for sites under refurbishment and discontinued operating activities.

2.    Segmental reporting

Segment information is presented in respect of the Group's business and geographical segments. The primary format, operating segments, is based on the Group's management and internal reporting structure. Inter-segment pricing is determined on an arm's length basis.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly interest-bearing borrowings and associated costs, taxation related assets/liabilities, costs relating to business combinations and head office salary and premises costs. 

Geographical segments

The business operates predominantly in the UK. It performs a small amount of laboratory work for European based clients. In accordance with IFRS 8 "Operating segments" no segmental results are presented for trade with European clients as these are not reported separately for management reporting purposes.

Operating segments

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

Year ended 30 June 2011	Veterinary practices £'000	Laboratories £'000	Crematorium        £'000	Head office £'000	Group £'000
Revenue	94,704	8,584	835	(2,632) 1	101,491
Profit/(loss) before income tax	11,456	585	294	(8,081)	4,254
Adjusted EBITDA	17,696	994	333	(4,510)	14,513
Total assets	71,316	4,533	1,104	647	77,600
Total liabilities	(14,734)	(1,276)	(64)	(44,955)	(61,029)
Reconciliation of adjusted EBITDA
Profit/(loss) before income tax	11,456	585	294	(8,081)	4,254
Net finance expense	4	(1)	-	2,101	2,104
Amortisation	4,290	261	-	797	5,348
Depreciation	1,946	149	39	99	2,233
Share option expense	-	-	-	435	435
Costs relating to business combinations	-	-	-	139	139
Adjusted EBITDA	17,696	994	333	(4,510)	14,513

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

2.    Segmental reporting (continued)

Year ended 30 June 2010	Veterinary practices £'000	Laboratories £'000	Crematorium £'000	Head     office £'000	Group £'000
Revenue1	79,148	7,859	698	(2,178) 1	85,527
Profit/(loss) before income tax	10,241	710	228	(7,340)	3,839
Adjusted EBITDA	15,898	1,137	293	(4,263)	13,065
Total assets	70,217	4,146	872	854	76,089
Total liabilities	(11,309)	(1,258)	(108)	(51,365)	(64,040)
Reconciliation of adjusted EBITDA
Profit/(loss) before income tax	10,241	710	228	(7,340)	3,839
Net finance expense	-	-	-	1,850	1,850
Amortisation	4,037	259	36	53	4,385
Depreciation	1,620	168	29	88	1,905
Share option expense	-	-	-	556	556
Costs relating to business combinations	-	-	-	530	530
Adjusted EBITDA	15,898	1,137	293	(4,263)	13,065

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

 

3.    Costs relating to business combinations

       IFRS 3 (revised) requires all costs relating to business combinations to be expensed directly in the income statement. The charge for the year ended 30 June 2011 was £139,000 (2010: £530,000), of which £94,000 (2010: £466,000) related to transaction costs and £45,000 (2010: £64,000) related to contingent deferred consideration in respect of business combinations in the current and prior year which is linked to ongoing employment of the vendor.

4.    Income tax expense

(a)        Analysis of income tax expense recognised in the income statement

	2011 £'000	2010 £'000
Current tax expense
UK corporation tax	1,662	1,811
Adjustments in respect of previous periods	(37)	(531)
Total current tax charge	1,625	1,280
Deferred tax expense
Origination and reversal of temporary differences	(593)	(647)
Adjustments in respect of previous periods	146	148
Effect of tax rate change on opening deferred tax balance	(411)	-
Total deferred tax credit	(858)	(499)
Total income tax expense	767	781

Factors affecting the current tax charge

UK corporation tax is calculated at 27.5% (2010: 28%) of the estimated assessable profit for the year.  The standard rate of UK corporation tax changed from 28% to 26% with effect from 1 April 2011.

b)         Reconciliation of effective income tax charge

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

	2011 £'000	2010 £'000
Profit before tax	4,254	3,839
Effective tax charge at 27.5% (2010: 28%)	1,170	1,075
Effects of:
Expenses not deductible for tax purposes	51	89
Effect of tax rate change on opening deferred tax balance	(411)	-
Adjustments to deferred tax charge in respect of previous periods	146	148
Adjustments to current tax charge in respect of previous periods	(37)	(531)
Utilisation of previously unrecognised deferred tax losses	(39)	-
Recognition of previously unrecognised deferred tax asset	(113)	-
Total income tax expense	767	781

 5.    Earnings per ordinary share

 

(a)  Basic

Basic earnings per ordinary share are calculated by dividing the profit after taxation by the weighted average number of shares in issue during the year.

	2011	2010
Earnings attributable to ordinary shareholders (£'000)	3,487	3,058
Weighted average number of ordinary shares in issue	56,408,647	53,361,521
Basic earnings per share (pence per share)	6.2	5.7

(b)  Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of Ordinary shares outstanding to assume conversion of all dilutive potential Ordinary shares. The Company has potentially dilutive Ordinary shares being the contingently issueable shares under the Group's long term incentive plan schemes.  For share options, a calculation is undertaken to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

 

	2011	2010
Earnings attributable to Ordinary shareholders (£'000)	3,487	3,058
Weighted average number of Ordinary shares in issue	56,408,647	53,361,521
Adjusted for contingently issueable shares	1,003,090	635,177
Weighted average number of Ordinary shares for diluted earnings per share	57,411,737	53,996,698
Diluted earnings per share (pence per share)	6.1	5.7

 5.    Earnings per ordinary share (continued)

Non-GAAP measure: Adjusted earnings per share

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

	2011	2010
	£'000	£'000
Earnings attributable to Ordinary shareholders	3,487	3,058
Adjustments for:
Amortisation	5,348	4,385
Share option expense	435	556
Fair value adjustments in respect of financial assets and liabilities	183	(149)
Costs relating to business combinations	139	530
Tax effect of the above adjustments at 27.5% (2010: 28%)	(1,679)	(1,490)
Non-recurring tax credit in respect of expenses previously deemed to be disallowable for tax purposes	-	(525)
Adjusted profit after income tax and earnings attributable to ordinary shareholders	7,913	6,365
Weighted average number of Ordinary shares in issue	56,408,647	53,361,521
Weighted average number of Ordinary shares for diluted earnings per share	57,411,737	53,996,698
	Pence	Pence
Adjusted earnings per share	14.0p	11.9p

 

Diluted adjusted earnings per share                                                                13.8p         11.8p

6.    Business combinations

Details of business combinations in the year ending 30 June 2011 are set out below, in addition to an analysis of post acquisition performance of the respective business combinations, where practicable. All business combinations have been accounted for under the acquisition method.  All intangible assets are recognised at their respective fair values. 

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

6.   Business combinations (continued)

Trade and assets acquisitions

The table below summarises the trade and assets acquisitions in the year ended 30 June 2011:

Assets and trade	Date of acquisition	Fair value of property plant and equipment acquired £'000	Fair value of inventory acquired £'000	Fair value of intangible assets acquired1 £'000	Consideration  £'000
A practice in:
Devon	15/11/20102009	50	50	1,566	1,666
London	04/04/201130/11/2009	30	46	712	788
Other acquisitions2		70	64	720	854
		150	160	2,998	3,308

¹Intangible assets acquired represents patient data records (£2,998,000).

²Other acquisitions represent two practice acquisitions.

In addition to the payments detailed above, contingent deferred consideration of £365,000 has not been recognised at the period end.  In accordance with IFRS 3 (revised), these costs will be recognised in the income statement in future periods based on the crystallisation of the contingent event.

£152,000 of deferred consideration relating to the acquisition of subsidiaries and £732,000 in relation to the acquisition of practices for the year ended 30 June 2010 has been paid in this period, as shown in the consolidated statement of cash flows.

Analysis of post acquisition performance:

			Post-acquisition revenue1   £'000	Post-acquisition contribution2 £'000
A practice in:
Devon			1,151	327
London			314	23
Other acquisitions			342	73
			1,807	423

¹Post-acquisition revenue represents revenue from the date of acquisition to 30 June 2011.

²Post-acquisition contribution represents the direct operating result of practices prior to the allocation of central overheads, on the basis that it is not practicable to allocate these, from the date of acquisition to 30 June 2011. 

7.       Dividends

The Directors have proposed a final dividend of 1.0p (2010: £nil) per share (total £565,000 (2010: £nil)), payable on 20 December 2011 to shareholders on the register at the close of business on 16 December 2011.  The dividend has not been included as a liability as at 30 June 2011.

8.    Borrowings

	2011 £'000	2010 £'000
Current
Bank overdraft	-	265
Bank loans	3,952	5,085
Finance leases	10	-
	3,962	5,350
	2011 £'000	2010 £'000
Non-current
Bank loans	32,737	36,655
Finance leases	40	-
	32,777	36,655

9.      Cash flow generated from operations

	2011 £'000	2010 £'000
Profit for the year	3,487	3,058
Taxation	767	781
Total finance costs	2,128	1,879
Investment income	(24)	(29)
Amortisation of intangible assets	5,348	4,385
Depreciation of property, plant and equipment	2,233	1,905
Loss on disposal of property, plant and equipment	36	-
(Increase) in inventories	(115)	(22)
(Increase) in trade and other receivables	(1,082)	(642)
(Increase) in trade and other payables	4,426	753
Share option expense	435	556
Total net cash flow generated from/(used in) operations	17,639	12,624

 

END

 

 

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