2016 Preliminary Results Announcement

RNS Number : 8859I

Dechra Pharmaceuticals PLC

05 September 2016

 

5 September 2016

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 2016

"Accelerating our global growth strategy"

"With three acquisitions, pipeline product launches, successful trading in our new subsidiaries and solid growth in our focus portfolio, Dechra has delivered another strong performance in the 2016 financial year."

Ian Page, Chief Executive Officer

Highlights

Strong financial performance:

·     Revenue growth in our existing EU Pharmaceuticals Segment was 5.7% (at CER) driven by solid performance in Companion Animal Products (CAP) and return to growth of Food producing Animal Products (FAP). ·     Continued excellent performance in our existing NA Pharmaceuticals Segment, with revenue increased by 37.9% (at CER); all core therapeutic sectors performing well. ·     Consolidated revenue increased by 21.7% (at CER) ·     Underlying cash generation of 106.8% allowed us to absorb the costs associated with the acquisitions whilst maintaining a prudent cash position. Strategic progress made: ·     Three value added acquisitions completed.

·     Product development pipeline continues to deliver results: recently launched products Osphos® and Zycortal® gaining good market penetration.

·     Geographical expansion enhancing revenue growth with good performance in Poland and Canada and new start-up in Austria.

Financial Summary

Underlying	2016 Existing £m	2016 Acquisition £m	2016 Consolidated £m	2015 £m	Growth % at AER		Growth % at CER
					Existing	Consolidated	Existing	Consolidated
Revenue	225.9	21.7	247.6	203.5	11.0%	21.7%	11.2%	21.7%
Gross profit	129.9	8.6	138.5	116.1	11.9%	19.3%	12.7%	20.0%
Gross profit %	57.5%	39.6%	55.9%	57.1%
Underlying Operating profit	51.6	1.3	52.9	44.4	16.2%	19.1%	17.8%	20.9%
Underlying EBIT %	22.8%	6.0%	21.4%	21.8%
Underlying EBITDA	55.9	2.1	58.0	48.0	16.5%	20.8%	18.3%	22.7%
Underlying diluted EPS (p)			42.65	39.90		6.9%		8.9%
Dividend per Share			18.46	16.94		9.0%		9.0%

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

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.

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 2016

 

Chairman's and Chief Executive Officer's Statement

We are pleased to report that the Group has delivered a strong financial performance, has continued to implement its strategic objectives and has invested in its infrastructure, people, product development and acquisitions to further its future objectives. Progress has been made in all aspects of our key strategic growth drivers:

·     Portfolio Focus: we continue to outperform in the majority of therapeutic areas and markets in which we trade, significantly so within the US;

·     Pipeline Delivery: our product development pipeline has delivered two novel global products and several regional and national registrations in the period;

·     Geographical Expansion: we benefited from a solid performance in territories established in the previous financial year and have established positions in Austria, the Adriatic region and Mexico within the financial year;

·     Acquisitions: three acquisitions have been made in the year, providing critical mass and an enhanced product development pipeline in the US market, poultry vaccine development capabilities to broaden our EU Food producing Animal Products (FAP) business and a marketing and registration platform for Dechra's portfolio in Mexico.

Portfolio Focus

Dechra Veterinary Products Europe (DVP EU)

Growth in the existing DVP EU business during the year was modest at 5.7% at CER. Including the eight months contribution from Genera, it was 13.9% at CER.

Our Companion Animal Product (CAP) sales were driven predominantly by strong performance in endocrinology, and anaesthetics and analgesics. Within endocrinology, Vetoryl^® continues to grow in all major territories and the launch of Zycortal into 14 countries has strengthened our position in this key therapeutic sector. Our equine portfolio has also performed well. Osphos has been launched across all major territories and is performing to our expectations. We are also re-positioning Equipalazone^® following palatability trials.

The recovery in FAP that was reported in the first half has continued in the remainder of the financial year. The decline in antibiotic sales in Germany has slowed and after several years of decline in the Netherlands we are now seeing sales flatten. Against this background, overall growth has been achieved by increasing market penetration in Poland and in countries where we had a lower market share historically, such as the UK, France, Italy and Spain. We have also launched Solamocta^®, a new antibiotic lifecycle improvement which will be key to our recovery in Germany. Other new product registrations have been received within FAP and are being prepared for imminent launch in Europe which should ensure that we continue to see positive momentum within this important therapeutic sector.

Diet sales have not fully returned to previous levels following the supply problems in the previous financial year. We have appointed an experienced manager to focus on developing our therapeutic diets business and have recently won two new contracts with major veterinary groups which should ensure an improved position in the future.

DVP North America (DVP NA)

Performance within our existing North American business remains exceptional with revenue growth of 37.9% at CER. Including Putney and Brovel since acquisition it was 59.5% at CER. The US has driven the majority of this growth as we continue to gain strong market penetration in our key focus areas of dermatology and endocrinology. This growth has been enhanced by a good performance from Phycox^®, strong growth and traction with Osphos and the successful launch of Zycortal in March 2016. Furthermore, our biggest product, Vetoryl capsules, delivered double digit growth as we have maintained our educational and marketing campaign and introduced a low dose 5mg capsule to increase flexibility on dosing options. DVP Canada delivered a good performance across the portfolio which was also enhanced by the launch of Osphos and Zycortal. The business has also benefited from the acquisition and launch of HY-50^® in the territory, a product which we have marketed in Europe since its acquisition in January 2012.

The primary focus of the management team towards the end of the trading period was to integrate the commercial team from the recent acquisition of Putney. The enlarged team will give Dechra improved penetration and more direct contact with US veterinary practices to enhance sales of the Dechra and Putney range of veterinary pharmaceuticals. Brovel, the newly acquired Mexican business, is managed by an internally promoted Country Manager, Arturo Bravo, and a newly appointed Finance Director, Rocío Aguirre, and reports under our DVP NA segment.

Pipeline Delivery

Team Integration

Following the acquisition of Putney and the assessment of the drivers behind the team's success, we have promoted its Director and Head of the Development function, Dr Anthony Lucas, to lead the enlarged Group's product development teams. Dr Anthony Lucas will retain his current regulatory team at Putney and will work closely with Dr Susan Longhofer to ensure effective utilisation of the Group's resources.

Successful Approvals

Zycortal, a novel canine endocrine product for the treatment of Addison's disease, has received approval throughout the EU, USA, Canada and Australia.

Following the successful registration of Osphos last year in the US and UK, approval was subsequently received in 17 additional EU countries in September 2015. Osphos is a unique product which treats navicular syndrome in horses.

We have also had numerous successes in our FAP portfolio in Europe: two new water soluble antibiotics, Solamocta and Phenocillin^® have been approved in 17 member states; a liquid antibiotic, Metaxol, was approved in 18 member states; and our existing antibiotic aerosol, Cyclospray^®, was extended into 12 new territories.

Our new Croatian facility has achieved approval for a poultry vaccine, Avishield ND, to treat Newcastle disease in 12 major European markets and has also achieved a number of other national registrations including Egypt and Ukraine. 

We continue to gain international approvals to enhance our geographical expansion and have received several registrations in both established and developing markets around the globe.

Pipeline Progress

In the period, we have terminated an early stage project for canine ophthalmology and a canine cardiology project. We have, however, initiated eight new projects across both FAP and CAP. Furthermore, successful development has continued on the Genera vaccines and Putney generics since acquisition with significant filings being made from both locations. To facilitate the increased number of projects we have created a third pharmaceutical development laboratory in Zagreb, Croatia, staffed with five scientists who will expand our formulation and analytical development capabilities.

Geographical Expansion

Geographical expansion is progressing well. In addition to the acquisition of Brovel, which creates a foothold and an opportunity to develop a presence in the significant Mexican market, the acquisition of Genera provides access to the smaller markets of Croatia, Bosnia-Herzegovina, Serbia and Slovenia. 

A greenfield start-up subsidiary has been established in Austria which commenced trading in January 2016. Initial sales are progressing well. Our subsidiaries in Canada and Poland, established in the prior financial year, are performing well, with Poland being above our expectations.

Acquisitions

Genera

In October 2015 Dechra acquired a controlling interest in the shares of Genera d.d. for €36.6 million (£26.8 million) which was funded from existing cash and revolving debt facilities. The objective of the acquisition was to broaden our EU FAP business by entering into the fast growing poultry vaccines market. The business also provides us with a variety of dose form manufacturing and technical know-how in a low cost environment and extends our geographical reach into the Adriatic region. We have successfully completed the first major steps of integration. Following consultation with the Croatian authorities and trade unions, we have rationalised the business to improve efficiency and effectiveness and have integrated the commercial, manufacturing and product development teams into our global operations. Additional focus has been provided to the poultry vaccines unit which historically sold products solely into less regulated developing markets. It is now pleasing to report that they have received their first approval for an EU registered vaccine. Whilst one vaccine on its own will not be commercially significant, it does demonstrate that we have the correct quality and regulatory capabilities in place to register the core range necessary to market poultry vaccines in Europe and other important world markets. 

Brovel

In January 2016, Dechra acquired 100% of the share capital of Laboratorios Brovel S.A. de C.V. (Brovel), a veterinary pharmaceuticals company based in Mexico City. The Group paid US$5.0 million (£3.3 million) consideration in cash on completion and a further US$1.0 million (£0.6 million) is contingent upon Brovel reaching successful registration milestones for Dechra's products in Mexico. Brovel was a family owned business with more than 52 years' experience in the production and distribution of pharmaceutical veterinary products. It has a diverse product portfolio with a turnover of MxP$66.2 million (£2.6 million). The Board believes this acquisition will help open the significant Mexican animal health market to Dechra as well as offer the potential to access other Latin American markets in the future. The primary objective of this acquisition is to use it as a platform to register and market Dechra's product portfolio. Several of our products have been identified as suitable for the Mexican market and the registration process with the authorities has commenced.

Putney

In April 2016, Dechra acquired Putney Inc. for US$200.0 million (£134.2 million) which was funded by the refinancing of the existing debt facilities and a placing of new shares of approximately 5% of the Group's issued share capital. The acquisition was the most complementary US opportunity we had identified and provides significant scale and access to a strong drug pipeline in the key North American market. The business, which had a turnover of US$49.6 million in the year ended December 2015, markets 11 approved products and has a further 10 generic products in its pipeline which are expected to be launched over the next five years. Since acquisition we have started to deliver synergies with the rationalisation of duplicated functions and the integration of our commercial teams. The product development team, who have successfully registered 43.0% of all generic CAP approvals in the US since 2012, are a key resource for Dechra.

Strategic Enablers

People

Our people remain the most important enabler to deliver success to the Group. We have continued throughout the year to invest in performance and talent management systems and have also recently implemented a new Oracle-based integrated HR system in 16 countries enabling us to better standardise and monitor performance and reward packages throughout the organisation. The HR team have also been heavily engaged in our recent acquisition activity in the due diligence, communication, consultation and restructuring of the businesses.

We are currently undergoing significant change in our Board and Senior Executive Team (SET). The current Chairman, Michael Redmond, will step down from the Board in October 2016 at our Annual General Meeting. We have recruited his successor, Tony Rice, who has been appointed to the Board as a Non-Executive Director and will be appointed as Chairman with effect from the conclusion of the Company's Annual General Meeting, subject to his election. Chris Richards stepped down from the Board as a Non-Executive Director after almost six years of service with the Company to further other opportunities. We are currently engaged in the recruitment process to add additional expertise to the Non-Executive Directors on the Board. Anne-Francoise Nesmes, the Chief Financial Officer during the 2016 financial year, who supported significant changes for Dechra over the last three years, has also resigned from the Board. She left the Company at the end of July 2016 to take up a role as Chief Financial Officer with a FTSE 100 business. As announced on 17 August 2016, Richard Cotton is expected to join the Company in January 2017 as Chief Financial Officer. As outlined earlier in this report, the SET is also being strengthened with the promotion of Dr Anthony Lucas to head up the Group's product development teams, and the appointment of a new Group Manufacturing and Logistics Director, Greig Rooney.

Technology

Oracle Roll Out

The roll out of the Oracle ERP system continues to be one of the primary operational objectives of the business. In April 2016 the core Oracle solution was successfully implemented into DVP US. Following our go-live for the Oracle Group Financial Consolidation solution in June 2015, the full Oracle roll out programme continues. We are currently targeting a roll out to most sites in 2017 followed by an upgrade to the current Manufacturing Oracle system.

Technology Upgrades

We have commenced Windows 10 deployment across all Group devices and utilising Surface Pro 4 devices as standard laptops for all personnel. New firewall security models have been implemented and new cyber security initiatives have been taken to enhance system security and improve user awareness. The Group now operates on an MPLS network across all major sites following the transition of DVP NA early in the financial year. Work has begun to bring the recently acquired businesses onto the Group's standardised systems.

Communication Tools

We have developed and launched a Group Learning Management System, Delta, enabling us to train employees across the globe in a structured and standardised way. Initial modules focus on policies such as Anti-Bribery and Anti-Corruption and also, from a commercial perspective, on sales team training and the key technical and unique selling points of our major products. The Dechra Academy, which provides online certified training for veterinarians and veterinary nurses in our key therapeutic sectors, has been enhanced and is well received by veterinary professionals. We are also developing social media marketing tools with regular communications to our customers across several media platforms. The Group intranet is also undergoing complete redevelopment to provide improved capabilities for internal communication.

Manufacturing

People

Mike Annice, our Group Manufacturing Director, retired in July of this year following 25 years with the Group. In preparation for his retirement we have recruited his successor, Greig Rooney, who has extensive experience in the pharmaceutical, automotive and food industries. Greig will operate out of our Head Office site in Northwich and will have responsibilities for all our global manufacturing sites, Group logistics and supply chain management. To assist Greig we have appointed a new Manufacturing Finance Director, Milton McCann, who commenced his role with the Group in January 2016. We have also promoted Andrew Parkinson to Group Quality Director and have appointed Chris Ashcroft as the Skipton Site Director. 

Efficiency Improvements

In our previous financial year we made an investment to upgrade the pre-mix department in Bladel to increase batch sizes and reduce the cost of goods. This department is now fully commissioned and product transfer to the new lines is under way.  We have also invested in a new tablet and capsule blister packaging line in Skipton which will increase volumes and speed, therefore improving efficiency. This is currently being commissioned and it is anticipated it will be effective from the beginning of our new financial year. Other initiatives to reduce the cost of goods and improve efficiencies have been implemented, resulting in raw material price reductions, predominantly for our FAP. We have also seen a small reduction in material wastage rates and batch reject rates are lower than the previous year.

Contract Manufacturing

Manufacturing volumes have increased overall due to internal sales increasing; however, like-for-like external sales have decreased by 4.8% at CER due to reduced volume with some customers. Overall contract manufacturing has increased following the Genera acquisition. Contract manufacturing assists the Group in utilising capacity and contributes to fixed overheads, thereby improving the unit cost of goods for all products, including Dechra's own products. Service to customers has increased with on-time delivery ahead of internal targets and the previous year.

Dividend

The Board is proposing a final dividend of 12.91 pence per share (2015: 11.82 pence per share). Added to the interim dividend of 5.55 pence per share, this brings the total dividend for the financial year ended 30 June 2016 to 18.46 pence per share, representing 9.0% growth over the previous year.

Subject to shareholder approval at the Annual General Meeting to be held on 21 October 2016, the final dividend will be paid on 18 November 2016 to shareholders on the Register at 28 October 2016. The shares will be become ex-dividend on 27 October 2016.

Outlook

Although we anticipate a degree of uncertainty following Brexit, the business is naturally hedged by its geographical spread and international sourcing. Any significant downturn in the UK economy may impinge on growth rates; however, we do not anticipate any material effect on the Group.

Good progress has been made on the integration of the acquisitions. Our pipeline has also been strengthened through both new internally generated ideas and the integration of acquired development programmes. We have continued to invest in people and the infrastructure to ensure we maximise revenues and execute our strategy successfully.

The Group continues to deliver growth and identify opportunities across all aspects of our strategy; we therefore continue to look forward to the future with confidence.

 

Financial Review

Group underlying operating profit growth was 20.9% at CER for 2016. This pleasing growth has been delivered whilst continuing to invest in our existing business, integrating three strategic acquisitions, establishing new subsidiaries and continued product launches.

Overview of Reported Financial Results

During the 2016 financial year, Dechra made three acquisitions. To assist with the understanding of our financial results, we have shown in the table below the performance of the existing Dechra business separately from the performance of the acquired entities. In the current year, the acquisitions profit after tax has reflected the cost of acquisition related restructuring programmes and fair value inventory adjustments.

Including non-underlying items, the Group's reported profit after tax of £12.5 million decreased by 27.7% at CER (35.9% at AER), due primarily to the one-off acquisition costs. Dechra's existing business grew by 5.1% at CER (declined by 1.0% at AER), with reported profit after tax of £19.3 million (growth was adversely impacted by foreign exchange losses of £0.8 million in the year compared to foreign exchange gains of £2.2 million in 2015).

As Reported	2016 Existing £m	2016 Acquisition £m	2016 Consolidated £m	2015 £m	Growth % at AER		Growth % at CER
					Existing	Consolidated	Existing	Consolidated
Revenue	225.9	21.7	247.6	203.5	11.0%	21.7%	11.2%	21.7%
Gross profit	129.9	2.5	132.4	116.1	11.9%	14.0%	12.7%	15.2%
Gross profit %	57.5%	11.5%	53.4%	57.1%
Operating profit/(loss)	29.4	(9.9)	19.5	26.0	13.1%	(25.0%)	18.1%	(17.3%)
EBIT %	13.0%	(45.6%)	7.9%	12.8%
Profit/(loss) after tax	19.3	(6.8)	12.5	19.5	(1.0%)	(35.9%)	5.1%	(27.7%)
Diluted EPS (p)			13.90	21.99		(36.8%)		(28.9%)

 

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 the amortisation and write off of acquired intangibles, non-underlying charges and other non-underlying items as defined later in the Financial Review. A reconciliation of underlying results to reported results as at 30 June 2016 is shown in the table below:

	2016 Underlying results £m	Non-cash uplift on acquired inventory £m	Non-underlying items			2016 Total reported results £m
			Amortisation  and related costs  of acquired intangibles £m	Acquisition and restructuring costs £m	Finance expenses £m
Revenue	247.6					247.6
Gross profit	138.5	(6.1)				132.4
Selling, General and Administrative Expenses	(75.3)		(21.8)	(5.5)		(102.6)
R&D expenses	(10.3)					(10.3)
Operating profit	52.9	(6.1)	(21.8)	(5.5)		19.5
Net finance costs	(3.2)				(1.8)	(5.0)
Profit before tax	49.7	(6.1)	(21.8)	(5.5)	(1.8)	14.5
Taxation	(11.3)	1.7	5.7	1.4	0.5	(2.0)
Profit after tax	38.4	(4.4)	(16.1)	(4.1)	(1.3)	12.5
Diluted EPS (p)	42.65					13.90

We delivered underlying operating profit of £52.9 million, representing a growth of 20.9% compared to the previous year. This was achieved through a solid trading performance in our existing business, growing at 17.8%, together with a small benefit from the acquisitions made in the year. 

Underlying	2016 Existing £m	2016 Acquisition £m	2016 Consolidated £m	2015 £m	Growth % at AER		Growth % at CER
					Existing	Consolidated	Existing	Consolidated
Revenue	225.9	21.7	247.6	203.5	11.0%	21.7%	11.2%	21.7%
Gross profit	129.9	8.6	138.5	116.1	11.9%	19.3%	12.7%	20.0%
Gross profit %	57.5%	39.6%	55.9%	57.1%
Underlying Operating profit	51.6	1.3	52.9	44.4	16.2%	19.1%	17.8%	20.9%
Underlying EBIT %	22.8%	6.0%	21.4%	21.8%
Underlying EBITDA	55.9	2.1	58.0	48.0	16.5%	20.8%	18.3%	22.7%
Underlying diluted EPS (p)			42.65	39.90		6.9%		8.9%
Dividend per Share			18.46	16.94		9.0%		9.0%

All growth rates for both underlying and reported financial results included in this review are at constant exchange rates (CER) unless otherwise stated. This shows the year-on-year growth as if exchange rates had remained the same as in the previous year.

Revenue

Total revenue grew by 21.7% to £247.6 million. Growth in the sales force together with the launch of new products and sales from our new operations in Canada and Poland led to revenue growth in our existing business of 11.2%.

Revenue by Segment

European Pharmaceuticals Segment revenue grew by 13.9% to £188.9 million. This was due to strong performances in key markets such as the UK and France; the impact of new subsidiaries, Poland and Austria; and the additional revenue contributed by Genera during the year. This offsets lower revenue in Germany, which, whilst the decline due to the reduced use of antibiotics has slowed over the course of the year, continues to impact negatively on the FAP revenues. In addition, growing momentum in some key Rest of World territories has contributed to continued growth in the existing business and allows us to maintain focus on developing this key strategic area.

Revenue in our North American Pharmaceuticals Segment grew by 59.5% to £58.7 million. The sales force, which has seen significant investment, continues to drive revenue in key therapeutic areas and, combined with the full year impact of our Canadian subsidiary (which started trading in January 2015), and the acquisition of both Brovel and Putney during the year have resulted in the continued growth of this Segment.

Overall, the three acquisitions contributed £21.7 million to our revenue.

Revenue by Categories

All our revenue streams performed well, except for Diets which showed a small decline.

CAP sales grew by 19.4% fuelled by momentum in our key therapeutic areas of endocrinology, dermatology, cardiovascular disease, and analgesia and anaesthesia in the EU and US. Notably, Vetoryl grew by 25.4% globally and our dermatology range, DermaPet, in the US by 32.4%. Cardisure grew by 47.7%, and our analgesia and anaesthesia therapeutic area also performed well in Europe.

Equine revenue has grown by 19.4% following the launch of Osphos.

For the first time after several years of decline, FAP grew by 43.2%, due to the growth in our newly established Polish business; market share gain in countries where previously we had a smaller presence; the slowdown of the decline in Germany; and the Netherlands returning incrementally to growth. The integration of Genera also contributed to the FAP revenue growth. Excluding the sales from the new acquisitions, FAP revenue in the existing business grew by 13.6% compared to the previous year.

Unfortunately, our sales of Diets did not recover as expected with a sales decline of 1.2%. Whilst we are experiencing growth in a number of key markets, this was offset by the loss of a large corporate account in Scandinavia and palatability issues for some of the cats diet products.

Other sales, which include third party manufacturing and other non-core businesses in Genera, increased by 36.5% reflecting the increased capabilities and non-core activities acquired as part of Genera. This offset lower third party revenues in the existing business which arose due to an increased focus on own manufactured products during the period.

	2016 £m	2015 £m	Actual exchange rate	Constant exchange rate
CAP	137.7	113.9	20.9%	19.4%
Equine	20.5	17.0	20.6%	19.4%
FAP	38.1	27.3	39.6%	43.2%
Subtotal Pharma	196.3	158.2	24.1%	23.5%
Diets	24.4	25.6	(4.7%)	(1.2%)
Other	26.9	19.7	36.5%	36.5%
Total	247.6	203.5	21.7%	21.7%

 

Gross Profit

Gross margins for the existing business increased to 57.5% from 57.1%. This growth in margin reflects the changing product mix and improved manufacturing efficiencies within the business.

It is also important to note that the recent acquisitions have a dilutive effect on gross margin moving from 57.5% for the existing business to 55.9% for the consolidated business, as expected at the time of the deal announcements.

Selling, General and Administrative Expenses (SG&A)

Underlying SG&A expenses grew by 19.3% to £75.3 million as we continued to invest in supporting the future growth of the Group and incorporate the costs of the acquired companies.

Whilst increases in prior year infrastructure functions have had a full year impact in 2016, during the year we further invested in the sales organisation in DVP US. Additionally, we made selected investments in DVP EU, such as setting up a FAP Business Unit to drive growth.

Research and Development Expenses (R&D)

Our R&D spend in the 2016 financial year was £10.3 million. This is commensurate with our pipeline progress. It also reflects the addition of Genera and Putney pipelines, which have resulted in much larger R&D and regulatory teams to support our expanded pipeline of new products.

Non-Underlying Items

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

·     Non-Cash Inventory Adjustment
The non-cash inventory adjustment, which increases the value of stock by £6.1 million relates to the acquisition of Brovel, Putney and Genera. 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
This includes the amortisation of the acquired intangible assets and the write-off relating to existing intangibles and related deferred consideration following the acquisition of Putney, where it was decided to suspend development of a US generic pharmaceutical product (£1.1 million). We also impaired an acquired intangible due to a competitor registration in the US (£0.6 million).

·     Acquisition and Rationalisation Costs
This includes the transaction costs associated with acquiring Genera, Brovel and Putney and other costs related to the integration and restructuring programmes.

·     Finance Expenses
This includes the extinguishment expense related to the refinancing of the debt facility to fund the Putney acquisition as well as the unwind of discount on the deferred consideration balances relating to previous acquisitions.  

Non-underlying items of £35.1 million before taxation are £15.8 million above the previous year due to acquisition costs and higher acquired intangible amortisation. Full details are shown in notes 4 and 5.

Segmental Profit

Operating leverage (EBIT %) has reduced as the Group has experienced the dilutive effect of the acquisitions made during the year with EU and NA at 27.4% and 29.8% respectively.

Operating Segment (Pharmaceuticals)

The full segmental analysis can be found in note 2.

During 2016, following the three acquisitions and reflecting the way we manage the Group and meeting the criteria defined under IFRS 8, the Board reviewed our reporting Segments and concluded that the North American Pharmaceuticals Segment should be expanded to include Putney and Brovel and that Genera should be included within the European Pharmaceuticals Segment.

	2016 £m	2015 £m	Actual exchange rate	Constant exchange rate
Revenue	247.6	203.5	21.7%	21.7%
- EU	188.9	168.7	12.0%	13.9%
- North America	58.7	34.8	68.7%	59.5%
Operating Profit
- EU	51.7	48.0	7.7%	11.0%
- North America	17.5	10.6	65.1%	57.5%
EBIT %
- EU	27.4%	28.5%
- North America	29.8%	30.5%

Earnings per Share and Dividends

Underlying diluted EPS for the year was 42.65 pence, 8.9% growth versus last year.

The increase in interest payments following the additional borrowings, together with the share dilution impact of the equity placing for the Putney acquisition, impacted negatively on the reported EPS growth.  We benefited last year from the positive impact of transactional exchange gains of £2.2 million, whereas in 2016 this is a loss of £0.8 million, which contributed a reduction of 0.90 pence to the EPS (2015: positive impact of 2.12 pence).

The reported diluted EPS for the year was 13.90 pence (2015: 21.99 pence).

The Board is proposing a final dividend of 12.91 pence per share (2015: 11.82 pence). Added to the interim dividend of 5.55 pence, it brings the total dividend per share for the year to 18.46 pence, representing 9.0% growth over the previous year. Dividend cover based on underlying diluted EPS is 2.3 times.

Net Debt Position

During the year we increased our Revolving Credit Facility to £150.0 million to fund the Putney acquisition, whilst retaining the accordion facility of £30.0 million. As a result, we ended the year in a net debt position of £116.6 million, representing a Net Debt/Underlying EBITDA ratio of 2.0 times.

Whilst the exchange rate volatility in the last week of June adversely impacted the translation of our Euro and US Dollar borrowings, we met the covenants on our loan facilities throughout the full year.

Integration and Financial Impact of the Acquisitions

During the period, we completed three acquisitions: Genera, Brovel and Putney. In all of the acquisitions, there were immediate portfolio benefits which can be seen in the revenue growth within the Group. In addition, as part of each acquisition, we undertook a review of the newly acquired operations to ensure that they were aligned with the Dechra strategic pillars and enablers.

This review resulted in rationalisation programmes in Genera and Putney which reduced headcount and reorganised the business to reflect the increased focus on activities which are core to Dechra's strategy. We have also put in place plans to exit some non-core activities. In Brovel, the focus on registering Dechra's own products remains the key long term driver of expected growth.

In the period since acquisition, the three entities generated revenue of £21.7 million and underlying operating profit of £1.3 million. A summary of the income statement is shown in Consolidated Income Statement.

Following a detailed valuation review conducted by an independent third party, we capitalised £122.9 million in intangible assets and £56.4 million of goodwill.

The acquisitions were financed by cash for Brovel, a combination of available cash and debt for Genera, and debt and equity placing for Putney. As a result, our borrowings have increased by £123.2 million compared to last year. We also raised
£47.0 million (net of expenses) from the issue of 4.4 million shares.

Balance Sheet

Net assets at 30 June 2016 were £276.6 million, a £82.1 million increase compared to 2015. During 2016 the shape of the balance sheet has changed to reflect the significant increases in non-current assets of £214.6 million and related deferred tax liabilities of £32.3 million which have originated from the new acquisitions and the associated increase in debt to fund some of these acquisitions. In addition to these non-recurring changes, the ongoing shift in exchange rates year on year has resulted in a net assets increase which is reflective of the significant amount of Group assets being held in Eurozone countries.

	2016 £m	2015 £m
Total non-current assets (excluding deferred tax assets)	398.1	183.5
Working capital	63.1	31.7
Net (debt)/cash	(116.6)	13.4
Corporate and deferred tax	(57.3)	(25.0)
Other liabilities	(10.7)	(9.1)
Total net assets	276.6	194.5
Cash conversion	142.4%	107.1%

Total non-current assets (excluding deferred tax assets) include intangibles which amounted to £360.4 million
(2015: £166.7 million) as at 30 June 2016.

Total working capital increased during the year from £31.7 million to £63.1 million. The increase in working capital within the existing business is driven by the expansion and growth plans during the year. As expected, the three acquisitions are also capital intensive, with a one-off increase in working capital at acquisition of £25.8 million. Combined, the new acquisitions accounted for £20.9 million of the working capital at the year end.  

Return on Capital Employed (ROCE)

Following the increase in net assets from the acquisitions during the year, which without the full year impact of the additional profitability significant dilutes the ROCE performance, ROCE for the Group was 16.1% for 2016. Whilst this has decreased from 20.0% in 2015 it has still met our target key performance indicator of 15.0%.

Currency Risk

During 2016, we have been exposed to transactional and translational currency risk. In addition to the one-off transactional loss of £0.8 million being recognised in the Consolidated Income Statement, £32.1 million foreign exchange gain translational impact was recognised in the Consolidated Statement of Comprehensive Income in 2016.

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.

Initial Views on Brexit

The decision by the UK to leave the European Union has created uncertainty and volatility in the market. While 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 another set of strong financial results in the 2016 financial year. Our existing business is showing good organic growth and momentum, with investments made in prior years driving growth and allowing us to continue to invest for the future through acquisitions and pipeline development.

The strategic acquisitions made during the year support our medium to long term ambitions. In the short term, as we build the businesses, we acknowledge that they are dilutive to our gross margin, ROCE and impact our operating leverage.

With the enlarged Group, we can leverage economies of scale as we integrate the various R&D teams and prioritise a broader combined product pipeline with projects from the existing business and the three acquired entities.

Finally we have achieved our results by maintaining sound financial discipline and balance sheet management, which will help in a more volatile macroeconomic environment.

Consolidated Income Statement

For the year ended 30 June 2016

	Note	2016			2015
		Underlying £000	Non- underlying items* (notes 4 & 5) £000	Total £000	Underlying £000	Non- underlying items* (notes 4 & 5) £000	Total £000
Revenue	2	247,562	-	247,562	203,480	-	203,480
Cost of sales		(109,052)	(6,070)	(115,122)	(87,338)	-	(87,338)
Gross profit		138,510	(6,070)	132,440	116,142	-	116,142
Selling, general and administrative expenses		(75,298)	(27,294)	(102,592)	(63,120)	(18,371)	(81,491)
Research and development expenses		(10,355)	-	(10,355)	(8,671)	-	(8,671)
Operating profit	2	52,857	(33,364)	19,493	44,351	(18,371)	25,980
Finance income	3	21	-	21	2,242	-	2,242
Finance expense	4	(3,200)	(1,766)	(4,966)	(1,496)	(920)	(2,416)
Profit before taxation		49,678	(35,130)	14,548	45,097	(19,291)	25,806
Income taxes	6	(11,288)	9,252	(2,036)	(9,790)	3,443	(6,347)
Profit for the year		38,390	(25,878)	12,512	35,307	(15,848)	19,459
Attributable to:
Owners of the parent		38,376	(25,708)	12,668	35,307	(15,848)	19,459
Non-controlling interests	13	14	(170)	(156)	-	-	-
Profit for the year		38,390	(25,878)	12,512	35,307	(15,848)	19,459
Earnings per share
Basic	8			14.00p			22.14p
Diluted	8			13.90p			21.99p
Dividend per share (interim paid and final proposed for the year)	7			18.46p			16.94p

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

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2016

	2016 £000	2015 £000
Profit for the year	12,512	19,459
Other comprehensive income:
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit pension scheme	(1,551)	(111)
Income tax relating to components of other comprehensive income	385	97
	(1,166)	(14)
Items that may be reclassified subsequently to profit or loss:
Effective portion of changes in fair value of cash flow hedges	(154)	(136)
Cash flow hedges recycled to income statement	233	178
Losses arising on available for sale financial assets	(450)	(37)
Foreign currency translation differences for foreign operations	32,116	(18,525)
Income tax relating to components of other comprehensive income	1,234	(4)
	32,979	(18,524)
Total comprehensive income for the period	44,325	921
Attributable to:
Owners of the parent	44,202	921
Non-controlling interests	123	-
	44,325	921

Consolidated Statement of Financial Position

At 30 June 2016

	Note	2016 £000	2015 £000
ASSETS
Non-current assets
Intangible assets	9	360,381	166,684
Property, plant and equipment		37,718	16,822
Deferred tax assets	10	197	1,397
Total non-current assets		398,296	184,903
Current assets
Inventories		54,375	31,744
Trade and other receivables		68,938	30,932
Cash and cash equivalents		39,142	45,948
Total current assets		162,455	108,624
Total assets		560,751	293,527
LIABILITIES
Current liabilities
Borrowings	11	(1,672)	(8)
Trade and other payables		(60,220)	(31,025)
Deferred and contingent consideration		(467)	(4,417)
Current tax liabilities		(3,897)	(8,659)
Total current liabilities		(66,256)	(44,109)
Non-current liabilities
Borrowings	11	(154,093)	(32,519)
Deferred and contingent consideration		(3,166)	(3,412)
Employee benefit obligations		(3,721)	(1,311)
Provisions	12	(3,334)	-
Deferred tax liabilities	10	(53,569)	(17,688)
Total non-current liabilities		(217,883)	(54,930)
Total liabilities		(284,139)	(99,039)
Net assets		276,612	194,488
EQUITY
Issued share capital		927	880
Share premium account		172,451	124,801
Own shares		(21)	(303)
Hedging reserve		(15)	(94)
Foreign currency translation reserve		5,524	(27,547)
Merger reserve		1,770	1,770
Retained earnings		93,995	94,981
Total equity attributable to equity holders of the parent		274,631	194,488
Non-controlling interests	13	1,981	-
Total equity		276,612	194,488

Consolidated Statement of Changes in Shareholders' Equity

For the year ended 30 June 2016

Year ended 30 June 2015	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 2014	877	124,429	(606)	(132)	(9,022)	1,770	87,490	204,806	-	204,806
Profit for the period	-	-	-	-	-	-	19,459	19,459	-	19,459
Effective portion of changes in fair value of cash flow hedges, net of tax	-	-	-	(140)	-	-	-	(140)	-	(140)
Losses arising on available for sale financial assets	-	-	-	-	-	-	(37)	(37)	-	(37)
Foreign currency translation differences for foreign operations, net of tax	-	-	-	-	(18,525)	-	-	(18,525)	-	(18,525)
Remeasurement of defined benefit pension scheme, net of tax	-	-	-	-	-	-	(14)	(14)	-	(14)
Cash flow hedges recycled to income statement, net of tax	-	-	-	178	-	-	-	178	-	178
Total comprehensive income	-	-	-	38	(18,525)	-	19,408	921	-	921
Transactions with owners:
Dividends paid	-	-	-	-	-	-	(13,857)	(13,857)	-	(13,857)
Share-based payments	-	-	-	-	-	-	2,243	2,243	-	2,243
Shares issued	3	372	-	-	-	-	-	375		375
Own shares recycled to retained earnings	-	-	303	-	-	-	(303)	-	-	-
Total contributions by and distributions to owners	3	372	303	-	-	-	(11,917)	(11,239)	-	(11,239)
At 30 June 2015	880	124,801	(303)	(94)	(27,547)	1,770	94,981	194,488	-	194,488
Year ended 30 June 2016
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

 

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 2016

	Note	2016 £000	2015 £000
Cash flows from operating activities
Profit for the period		12,512	19,459
Adjustments for:
Depreciation		3,763	2,412
Amortisation	9	21,552	19,126
Loss on disposal of tangible assets		69	-
Impairment of intangible assets		4,162	45
Finance income	3	(21)	(2,242)
Finance expense	4	4,966	2,416
Equity settled share-based payment expense		2,058	1,767
Income tax expense		2,036	6,347
Operating cash flow before changes in working capital		51,097	49,330
Decrease/(increase) in inventories		11,782	(4,527)
Increase in trade and other receivables		(16,393)	(2,553)
Increase in trade and other payables		9,965	4,738
Cash generated from operating activities before interest and taxation		56,451	46,988
Interest paid		(1,393)	(1,338)
Income taxes paid		(11,483)	(4,667)
Net cash inflow from operating activities		43,575	40,983
Cash flows from investing activities
Interest received		33	16
Acquisition of subsidiaries (net of cash acquired)	15	(166,173)	(908)
Acquisition of non-controlling interests	13	(390)	-
Purchase of property, plant and equipment		(2,802)	(2,081)
Capitalised development expenditure	9	(570)	(1,035)
Purchase of other intangible non-current assets	9	(4,133)	(643)
Net cash outflow from investing activities		(174,035)	(4,651)
Cash flows from financing activities
Proceeds from the issue of share capital		47,697	375
New borrowings		103,841	-
Expenses of raising borrowing facilities		(360)	(1,235)
Repayment of borrowings		(10,572)	(102)
Dividends paid	7	(15,292)	(13,857)
Net cash inflow/(outflow) from financing activities		125,314	(14,819)
Net (decrease)/increase in cash and cash equivalents		(5,146)	21,513
Cash and cash equivalents at start of period		45,948	26,773
Exchange differences on cash and cash equivalents		(1,660)	(2,338)
Cash and cash equivalents at end of period		39,142	45,948
Reconciliation of net cash flow to movement in net (borrowings)/cash
Net (decrease)/increase in cash and cash equivalents		(5,146)	21,513
New borrowings		(103,841)	-
Repayment of borrowings		10,572	102
Expenses of refinancing borrowing facilities		360	1,235
Acquisition of subsidiary borrowings		(15,027)	-
Exchange differences on cash and cash equivalents		(1,660)	(2,338)
Retranslation of foreign borrowings		(14,308)	(1,442)
Other non-cash changes		(994)	(659)
Movement in net (borrowings)/cash in the period		(130,044)	18,411
Net cash/(borrowings) at start of period		13,421	(4,990)
Net (borrowings)/cash at end of period		(116,623)	13,421

Notes to the Preliminary Results

For the year ended 30 June 2016

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 5 September 2016.

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.

The European Pharmaceuticals Segment comprises Dechra Veterinary Products EU, 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 Genera.

The North American (NA) Pharmaceuticals Segment consists of Dechra Veterinary Products US, Putney, Dechra Veterinary Products Canada, and Dechra-Brovel, which sell Companion Animal and Equine Products into those territories. The Segment expanded during the prior year with the opening of the Canadian subsidiary, and during the current year with the acquisition of Putney Inc. and Laboratorios Brovel S.A. de C.V. (now known as Dechra-Brovel S.A. de C.V.).

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.

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

	2016 £000	2015 £000
Revenue by segment
European Pharmaceuticals - total	188,859	168,665
- inter segment	-	(32)
NA Pharmaceuticals          - total	58,732	34,870
- inter segment	(29)	(23)
	247,562	203,480
Operating profit/(loss) by segment
European Pharmaceuticals	51,653	48,030
NA Pharmaceuticals	17,500	10,637
Pharmaceuticals Research and Development	(10,355)	(8,671)
Segment operating profit	58,798	49,996
Corporate and other unallocated costs	(5,941)	(5,645)
Underlying operating profit	52,857	44,351
Amortisation of acquired intangibles	(20,149)	(17,871)
Impairment of acquired intangibles and associated deferred consideration	(1,675)	-
Fair value uplift of inventory acquired through business combinations	(6,070)	-
Rationalisation costs of acquired entities	(1,581)	(9)
Expenses relating to acquisition activities	(3,889)	(491)
Total operating profit	19,493	25,980
Finance income	21	2,242
Finance expense	(4,966)	(2,416)
Profit before taxation	14,548	25,806
Total liabilities by segment
European Pharmaceuticals	(47,498)	(24,567)
NA Pharmaceuticals	(15,890)	(11,486)
Pharmaceuticals Research and Development	(776)	(710)
Segment liabilities	(64,164)	(36,763)
Corporate loans and revolving credit facility	(155,741)	(32,519)
Corporate accruals and other payables	(6,768)	(3,410)
Current and deferred tax liabilities	(57,466)	(26,347)
	(284,139)	(99,039)
Revenue by product category
CAP	137,686	113,888
Equine	20,518	17,040
FAP	38,101	27,278
Diets	24,383	25,575
Other	26,874	19,699
	247,562	203,480
Additions to intangible non-current assets by segment (including through business combinations)
European Pharmaceuticals	15,809	802
NA Pharmaceuticals	165,790	-
Pharmaceuticals Research and Development	55	422
Corporate and central costs	2,404	454
	184,058	1,678

 

Additions to Property, Plant and Equipment by segment (including through business combinations)
European Pharmaceuticals	19,443	1,688
NA Pharmaceuticals	924	214
Pharmaceuticals Research and Development	36	102
Corporate and central costs	69	77
	20,472	2,081
Depreciation and amortisation by segment
European Pharmaceuticals	18,984	17,156
NA Pharmaceuticals	5,901	3,828
Pharmaceuticals Research and Development	345	497
Corporate and central costs	85	57
	25,315	21,538

 

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:

	2016 Revenue £000	2016 Non- current assets £000	2015 Revenue £000	2015 Non- current assets £000
UK	61,086	19,624	59,673	17,368
Germany	34,105	2,326	34,052	1,983
Rest of Europe	85,128	162,138	65,796	123,976
USA	53,912	211,368	32,848	41,576
Rest of World	13,331	2,840	11,111	-
	247,562	398,296	203,480	184,903

 

3. Finance Income

	2016 £000	2015 £000
Finance income arising from:
- Cash and cash equivalents	21	23
- Loans and receivables	-	3
- Foreign exchange gains	-	2,216
	21	2,242

 

4. Finance Expense

Underlying	2016 £000	2015 £000
Finance expense arising from:
- Financial liabilities at amortised cost	2,372	1,460
- Net interest on net defined benefit obligations	17	36
- Foreign exchange losses	811	-
Underlying finance expense	3,200	1,496

 

Non-underlying	2016 £000	2015 £000
Loss on extinguishment of debt (note 11)	844	392
Fair value and other movements on deferred and contingent consideration	922	528
Non-underlying finance expense	1,766	920
Total finance expense	4,966	2,416

 

5. Non-underlying Items

Non-underlying items comprise:

	2016 £000	2015 £000
Amortisation of acquired intangibles	20,149	17,871
Impairment of acquired intangibles and associated deferred consideration	1,675	-
Fair value uplift of inventory acquired through business combinations	6,070	-
Rationalisation costs of acquired entities	1,581	9
Expenses relating to acquisition activities	3,889	491
	33,364	18,371

Rationalisation costs relate to the integration and restructuring programmes implemented since the acquisitions of Genera d.d. and Putney Inc.

Expenses relating to acquisition activities includes legal and professional fees incurred during the acquisitions.

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.

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.

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.

6. Income Tax Expense

	2016 £000	2015 £000
Current tax - UK corporation tax	1,629	2,146
- overseas tax at prevailing local rates	7,755	6,185
- adjustment in respect of prior years	(218)	257
Total current tax expense	9,166	8,588
Deferred tax      - origination and reversal of temporary differences	(7,178)	(3,123)
- adjustment in respect of prior years	48	882
Total deferred tax expense	(7,130)	(2,241)
Total income tax expense in the Consolidated Income Statement	2,036	6,347

The tax on the Group's profit before tax differs from the standard rate of UK corporation tax of 20.0% (2015: 20.75%). The differences are explained below:

	2016 £000	2015 £000
Profit before taxation	14,548	25,806
Tax at 20.0% (2015: 20.75%)	2,910	5,355
Effect of:
- expenses not deductible	235	434
- acquisition expenses	167	-
- one-off costs (FX/acquisition costs) in relation to the acquisition of Putney Inc.	1,314	-
- research and development related tax credits	(231)	-
- patent box tax credits	(1,118)	(923)
- impact of financing (income not taxable)	(405)	(387)
- effects of overseas tax rates	(608)	587
- adjustments in respect of prior years	(170)	1,139
- difference between current and deferred tax rates	4	150
- change in tax rates	(62)	(8)
Total income tax expense in the Consolidated Income Statement	2,036	6,347

Recurring items in the tax reconciliation include: research and development related tax credits and patent box incentives; expenses not deductible; and the impact of financing.

Tax Credit/(Charge) Recognised Directly in Equity

	2016 £000	2015 £000
Corporation tax on foreign currency translation	1,234	-
Deferred tax on effective portion of changes in fair value of cash flow hedges	-	(4)
Deferred tax on employee benefit obligations	385	97
Tax recognised in Consolidated Statement of Comprehensive Income	1,619	93
Corporation tax on equity settled transactions	1,366	157
Deferred tax on equity settled transactions	112	319
Total tax recognised in Equity	1,478	476

The Government has announced that it intends to reduce the rate of corporation tax to 17% with effective from 1 April 2020. As this legislation was not substantively enacted as at 30 June 2016, the impact of the anticipated rate change is not reflected in the tax provisions reported in these accounts. 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 1 April 2017 and 18% from 1 April 2020. Accordingly, deferred tax balances have been revalued to the lower rate of 19% in these accounts which has resulted in a credit to the Consolidated Income Statement of £63,000 and a debit to retained earnings of £36,000. To the extent that the deferred tax reverses after 1 April 2020, then the impact on the net deferred tax liability will be reduced.

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 BEPS actions. 

7. Dividends

	2016 £000	2015 £000
Final dividend paid in respect of prior year but not recognised as a liability in that year: 11.82 pence per share (2015: 10.65 pence per share)	10,401	9,355
Interim dividend paid: 5.55 pence per share (2015: 5.12 pence per share)	4,891	4,502
Total dividend 17.37 pence per share (2015: 15.77 pence per share) recognised as distributions to equity holders in the period	15,292	13,857
Proposed final dividend for the year ended 30 June 2016: 12.91 pence per share (2015: 11.82 pence per share)	11,974	10,398
Total dividend paid and proposed for the year ended 30 June 2016: 18.46 pence per share (2015: 16.94 pence per share)	16,865	14,900

In accordance with IAS 10 'Events After the Balance Sheet Date', the proposed final dividend for the year ended 30 June 2016 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 2017. There are no income tax consequences. The final dividend for the year ended 30 June 2015 is shown as a deduction from equity in the year ended 30 June 2016.

8. 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.

	2016 Pence	2015 Pence
Basic earnings per share
- Underlying*	42.95	40.17
- Basic	14.00	22.14
Diluted earnings per share
- Underlying*	42.65	39.90
- Diluted	13.90	21.99

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

	2016 £000	2015 £000
Earnings for underlying basic and underlying diluted earnings per share	38,390	35,307
Earnings for basic and diluted earnings per share	12,512	19,459

 

	Number	Number
Weighted average number of ordinary shares for basic earnings per share	89,380,414	87,890,277
Impact of share options	628,307	604,887
Weighted average number of ordinary shares for diluted earnings per share	90,008,721	88,495,164

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

At 30 June 2016, there are 309,407 options that are excluded from the EPS calculations as they are not dilutive for the period presented but may become dilutive in the future.

9. Intangible Assets

	Goodwill £000	Software £000	Development costs £000	Patent rights £000	Marketing authorisations £000	Acquired intangibles £000	Total £000
Cost
At 1 July 2014	54,978	5,587	9,777	3,680	853	198,148	273,023
Additions	-	643	1,035	-	-	-	1,678
Disposals	-	(52)	(86)	-	-	-	(138)
Foreign exchange adjustments	(5,652)	(515)	(86)	-	-	(12,534)	(18,787)
At 30 June 2015 and 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	56,350	108	-	-	-	122,897	179,355
Impairment	-	(151)	(1,537)	-	-	(4,277)	(5,965)
Foreign exchange adjustments	11,830	752	592	-	-	36,755	49,929
At 30 June 2016	117,506	9,168	10,265	5,017	853	340,989	483,798
Amortisation
At 1 July 2014	-	2,269	4,793	1,802	-	67,977	76,841
Charge for the year	-	187	732	336	-	17,871	19,126
Disposals	-	(52)	(41)	-	-	-	(93)
Foreign exchange adjustments	-	(178)	(186)	-	-	(6,418)	(6,782)
At 30 June 2015 and 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	-	-	13,958	14,576
At 30 June 2016	-	2,541	5,129	2,543	-	113,204	123,417
Net book value
At 30 June 2016	117,506	6,627	5,136	2,474	853	227,785	360,381
At 30 June 2015	49,326	3,437	5,342	1,542	853	106,184	166,684

 

	2016 £000	2015 £000
Software assets in the course of construction included above	1,451	1,121

 

10. Deferred Taxes

Recognised Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities are attributable to the following:

	Assets		Liabilities		Net
	2016 £000	2015 £000	2016 £000	2015 £000	2016 £000	2015 £000
Intangible assets	-	-	(64,028)	(17,235)	(64,028)	(17,235)
Property, plant and equipment	-	-	(3,604)	(1,806)	(3,604)	(1,806)
Inventories	-	165	(321)	-	(321)	165
Receivables/payables	1,191	480	-	-	1,191	480
Share-based payments	1,370	1,210	-	-	1,370	1,210
Losses	10,951	99	-	-	10,951	99
R&D tax credits	162	129	-	-	162	129
Employee benefit obligations	907	667	-	-	907	667
	14,581	2,750	(67,953)	(19,041)	(53,372)	(16,291)

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.

A deferred tax asset of £10,655,000 in relation to losses arising on the acquisition of Putney Inc. has been recognised as future taxable profits associated with the future sale of products are expected to be available for offset.

11. Borrowings

	2016 £000	2015 £000
Current liabilities:
Bank loans	1,648	-
Finance lease obligations	24	8
	1,672	8
Non-current liabilities:
Bank loans	154,435	33,496
Arrangement fees netted off	(342)	(977)
	154,093	32,519
Total borrowings	155,765	32,527

In April 2016, the Group refinanced its existing bank facility, which gave rise to a loss on extinguishment of debt of £0.8 million in the year ending 30 June 2016. The Group's revised borrowing facility comprises a £150.0 million multi-currency revolving credit facility and a £30.0 million Accordion facility committed until September 2019 and various finance lease obligations.

If the borrowings drawn down in foreign currencies exceed the £150.0 million limit at the reset date according to the exchange rates on the reset date, then resetting of foreign currency borrowings occurs and a repayment is required to ensure the movements in foreign exchange rates do not result in the committed revolving credit facility being exceeded. At the year end exchange rates the drawn down borrowings in US Dollars and Euros equated to £151.6 million, of which the £1.6 million above the £150.0 million has been classified as a current liability. At the last reset date in July 2016, the Group chose to repay £5.7 million to reduce the borrowings below the £150.0 million facility limit. No further repayments were required at the August 2016 reset date.

The revised borrowing 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 1.3% over LIBOR. All covenants were met during the year ended 30 June 2016.

Genera also has borrowing facilities of £7.4 million, of which £4.4 million was drawn down at 30 June 2016. Interest is fixed at 3.2%.

The maturity of the bank loans and overdrafts is as follows:	2016 £000	2015 £000
Payable:
Within one year	1,648	-
Between two and five years	154,093	32,519
	155,741	32,519

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
	2016 £000	2015 £000	2016 £000	2015 £000
Within one year	24	8	24	8
Total minimum lease payments	24	8	24	8
Future finance charges	2	-	2	-
Present value of lease obligations	26	8	26	8

 

12. Provisions

	Deferred Rent £'000	Provision for PPE grant £'000	Environmental Health & Safety £'000	Total £'000
At start of period	-	-	-	-
Impairment provision recognised/(released)	26	-	-	26
Acquired through business combinations	(546)	(2,644)	(402)	(3,592)
FX differences	(39)	(334)	(30)	(403)
Impairment provision utilised		375	260	635
At end of period	(559)	(2,603)	(172)	(3,334)

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.

13. Non-Controlling Interests

	2016 £'000	2015 £'000
At start of period	-	-
Acquired through business combinations	2,248	-
Additional consideration paid to non-controlling interests	(390)	-
Loss for the period	(156)	-
FX differences	279	-
At end of period	1,981	-

On 21 October 2015, Dechra acquired 92.26% of the controlling interest in Genera d.d. (Genera). The non-controlling interest was calculated using the fair value method.

On 6 May 2016, the Group purchased another 1.13% of the voting shares for a consideration of HRK 3,756,000. The Group now holds 93.39% of the equity share capital of Genera. The carrying amount of the non-controlling interests in Genera on the date of acquisition was £2,248,000. The Group derecognised non-controlling interests of £390,000.

14. Foreign Exchange Rates

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

	Average rate for 2015	Closing rate at 30 June 2015	Average rate for 2016	Closing rate at 30 June 2016
Danish Krone	9.7175	10.4869	10.0162	9.0010
Euro	1.3045	1.4057	1.3432	1.2099
US Dollar	1.5834	1.5728	1.4870	1.3433

 

15. Acquisitions

Acquisition of Genera

On 3 August 2015, Dechra announced that it had signed a conditional share purchase agreement to acquire 63.30% of the authorised shares (equivalent to 69.00% voting rights) in Genera d.d. (Genera), a Croatian pharmaceutical business. Under the Croatian Takeover Rules, the conditional offer required Dechra to make a mandatory offer for the remaining issued share capital of Genera. On 20 October 2015, the closing date for the Takeover Offer, Dechra had received further valid acceptances in respect of 82,390 Genera shares, amounting to 20.73% of Genera's share capital. Accordingly, the agreement with Mr. Marijan Hanžekovic, the majority shareholder in Genera, to acquire his 63.30% holding (equivalent to 69.00% voting rights) became unconditional. The majority shares were transferred on 20 October 2015 and the minority shares on 21 October 2015. At the acquisition date, the Group owned 1,549,417 shares in Genera, amounting to 92.26% of the voting rights (83.99% of the share capital) of Genera. The aggregate cost of acquiring the 92.26% controlling interest in Genera has been €36.6 million which has been funded from our existing cash and debt facilities. The non-controlling interest has been calculated using the fair-value method. The input to value the non-controlling interest was the prevailing share price for Genera at 21 October 2015. This strategic acquisition gives us an entry point into the fast growing poultry vaccines market and broadens our EU FAP business.

	Fair value £000
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment	16,961
Inventories	6,781
Trade and other receivables	10,310
Cash and cash equivalents	283
Trade and other payables	(4,538)
Provisions	(3,046)
Debt	(8,728)
Identifiable intangible assets	9,674
Net deferred tax liability	(3,121)
Net identifiable assets	24,576
Non-controlling interests	(2,248)
Goodwill	4,466
Total consideration	26,794
Satisfied by:
Cash	26,794
Total consideration transferred	26,794
Net cash outflow arising on acquisition
Cash consideration	26,794
Less cash and cash equivalents acquired	(283)
	26,511

The fair value adjustments principally relate to the application of fair values on acquisition, being the recognition of fair value uplift on acquired inventory and intangibles in accordance with IFRS 3.

The goodwill of £4,466,000 arising from the acquisition represents the technical expertise of the assembled workforce (including their in-house knowledge in vaccines development), access to the Adriatic region to continue geographic expansion, and broadening of the Group's contract manufacturing capabilities. None of the goodwill is expected to be deductible for income tax purposes.

Acquisition related costs (included in operating expenses) amounted to £0.5 million. Genera's results are reported within the EU Pharmaceuticals Segment. Genera contributed £13.8 million revenue and £3.2 million loss to the Group's pre-tax profit for the period between the date of acquisition and the balance sheet date. If the acquisition of Genera had been completed on the first date of the financial year, Group revenues for the period would have been £253.3 million and the Group pre-tax profit would have been £14.5 million.

On 6 May 2016, the Group purchased another 1.13% of the voting shares for a consideration of HRK 3,756,000 (£0.4 million). The group now holds 93.39% of the equity share capital of Genera. Refer to note 13 for further details.

Acquisition of Brovel

On 13 January 2016, Dechra acquired 100% of the share capital of Laboratorios Brovel S.A. de C.V. (Brovel), a veterinary pharmaceuticals company based in Mexico City. The Group paid US$5.0 million consideration in cash on completion and a further US$1.0 million is contingent upon Brovel successfully reaching registration milestones for Dechra's products in Mexico.

	Provisional 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 liability	(131)
Net identifiable assets	1,347
Goodwill	2,575
Total consideration	3,922
Satisfied by:
Cash	3,331
Contingent consideration arrangement	591
Total consideration transferred	3,922
Net cash outflow arising on acquisition
Cash consideration	3,331
Less cash and cash equivalents acquired	(202)
	3,129

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 the application of fair values on acquisition, being the recognition of fair value uplift on acquired inventory in accordance with IFRS 3. A review to identify any intangible assets on acquisition was performed with no identifiable intangible assets being recognised.

The goodwill of £2,575,000 arising from the acquisition represents the geographical expansion potential provided through access to the Latin America market 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 £0.5 million. Brovel's results are reported within the NA Pharmaceuticals Segment. Brovel contributed £1.5 million revenue and £0.1 million loss to the Group's pre-tax profit for the period between the date of acquisition and the balance sheet date. If the acquisition of Brovel had been completed on the first date of the financial year, Group revenues for the period would have been £249.1 million and the Group pre-tax profit would have been £14.4 million.

Acquisition of Putney

On 22 April 2016, Dechra acquired 100% of the share capital of Putney Inc. (Putney), a veterinary pharmaceuticals company based in Maine, USA. The Group paid US$200.0 million consideration in cash on a debt free, cash free basis.

	Provisional 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	(7,501)
Net deferred tax liability	(35,845)
Provisions	(546)
Debt	(6,299)
Identifiable intangible assets	113,331
Net identifiable assets	84,883
Goodwill	49,309
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

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 the recognition of fair value uplift on acquired inventory and intangibles in accordance with IFRS 3.

The goodwill of £49,309,000 arising from the acquisition represents the technical expertise within the assembled workforce in relation to their regulatory expertise, as well as their in-house knowledge and skill at completing the product development process for future pipeline developments. In addition, the goodwill reflects the synergies that are expected to be realised as a consequence of a greater presence in the North American market. None of the goodwill is expected to be deductible for income tax purposes.

Acquisition related costs (included in operating expenses) amounted to £1.5 million. Putney's results are reported within the NA Pharmaceuticals Segment. Putney contributed £6.5 million revenue and £6.7 million loss to the Group's pre-tax profit for the period between the date of acquisition and the balance sheet date. If the acquisition of Putney had been completed on the first date of the financial year, Group revenues for the period would have been £277.8 million and the Group pre-tax profit would have been £14.8 million.

Acquisition of Phycox

On 20 May 2014, the Group acquired certain trade and assets of PSPC Inc. for a maximum total consideration of US$14.2 million. PSPC's principal product is Phycox, a patented nutraceutical which competes in the US veterinary joint health supplement market. US$4.2 million of the consideration is contingent on future sales. During the year ended 30 June 2016, US$0.6 million (£0.5 million) of the contingent consideration was paid.

Acquisition of DermaPet Inc.

On 22 October 2010, the Group acquired 100% of the share capital of DermaPet Inc., a Florida based business which develops and markets a range of dermatological preparations, including shampoos, conditioners and ear products, for the US market. During the period, the Group paid a further US$5.0 million (£3.2 million) which was contingent upon revenue exceeding US$20.0 million in any rolling 12 month period. There is no further consideration outstanding.

16. Other information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June 2016 or 2015 but is derived from the 2016 accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 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.

17. Preliminary Statement

This Preliminary statement is not being posted to Shareholders.  The Report and Accounts for the year ended 30 June 2016 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.

18. 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 2016.  Certain parts of that Report are not included with this announcement.

We confirm to the best of our knowledge:

a)         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 the Parent Company and the undertakings included in the consolidation taken as a whole;

b)         the Strategic Report includes a fair review of the development and performance of the business and the position of the Parent Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

c)         the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

Approved by the Board and signed on its behalf by:

Michael Redmond Chairman

Ian Page Chief Executive Officer

5 September 2016

 

END

 

 

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