Animalcare Group plc

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

Preliminary Unaudited Results for the year ended 31 December 2022

28 March 2023. Animalcare Group plc (AIM: ANCR), the international animal health business, announces its preliminary unaudited results for the year ended 31 December 2022.

Financial Highlights

●     Revenues of £71.6m (2021: £74.0m) reflecting growth from product launches offset by moderation in post-pandemic demand, conclusion of distribution agreements and application of EU laws in Spain to reduce antibiotic use

●     Focus on Top 40 brands and an improved sales mix drove marked 3.5% improvement in gross margins

●     Careful targeting of SG&A investment, including Orthros-related R&D, contributed to underlying* EBITDA of £13.1m (2021: £13.5m); underlying* EBITDA margin 18.3% (2021: 18.2%)

●     Reported profit before tax was £2.5m (2021: £0.9m)

●     Underlying* basic earnings per share increased by 5.0% to 12.6 pence (2021: 12.0 pence); reported basic earnings per share of 3.3 pence (2021: 0.1 pence loss per share)

●     Supported by good rates of cash conversion, net debt was £5.4m at year end (2021: £5.3m) maintaining the Group's capacity to invest in growth strategy

●     Board proposes final dividend of 2.4 pence per share, in line with 2021

Strategic and Operational Highlights

●     Daxocox becomes a top 10 selling product in the Group's portfolio

●     Plaqtiv+ dental range launched after receiving accreditation from Veterinary Oral Health Council

●     Identicare re-positioned as subscription-based services business under specialist digital leadership

●     Preclinical pipeline projects initiated following licensing and R&D collaboration agreement with Orthros Medical to explore therapeutic potential of VHH antibodies

●     Tailored talent management programme implemented to identify and develop future leaders

●     Doug Hutchens and Sylvia Metayer joined the Group Board as Non-Executive Directors

●     Sustainability Task Force established to develop and drive Group-wide ESG strategy

* Alternative Performance Measures (APMs) are reconciled to reported results in the Chief Financial Officer's review and within the notes to the unaudited consolidated financial statements.

Commenting on the full year results, Chief Executive Officer, Jenny Winter said: "The way that Animalcare responded to a series of headwinds in 2022 underlines the resilience and agility of our business and the attractive fundamentals of the animal health market.

"Revenue growth for the full year was impacted by a combination of moderating market demand, the discontinuation of some distribution contracts and implementation of EU laws to limit the use of antibiotics. Nevertheless, I am pleased that we were able to deliver against several of our key performance indicators, notably gross margins which benefited from our continuing focus on the Top 40 selling brands. Good rates of cash conversion kept our year-end net debt position well below our leverage target, maintaining the strong financial platform that supports the Group's pursuit of its long-term growth strategy.

"It's clear that much of the growth in veterinary pharmaceuticals is attributable to innovative new products. That's reflected in our numbers. Daxocox, our treatment for osteoarthritic pain in dogs continues to grow, comfortably becoming a Top 10 Animalcare brand during the year. In addition, Plaqtiv+ our dental health range, the first brand to emerge from our STEM joint venture, was launched in the second quarter to an enthusiastic response from many of our customers. This was also a year that Identicare began to come to the fore. Returning double-digit revenue growth over the period, Identicare responded positively to the re-positioning of the business to a subscription-based services model under specialist digital leadership.

"Operationally, we continue to make progress against our strategic objectives, including the ongoing pursuit of growth opportunities through M&A, partnerships and in-licensing. The licensing and research collaboration agreement with Orthros Medical, which we signed in March 2022, provides us with an exciting foothold in the promising field of VHH antibodies and strengthens our early-stage pipeline. Investing in our people is critically important to the success of our business, not least in the field of sales and marketing excellence. Alongside this we reached all parts of our business with our tailored behavioural programme in 2022 and are now implementing a consistent approach to the development of our future leaders.

"Looking ahead to 2023, we have confidence in the continued resilience of our business and the attractive fundamentals of our markets. And while we recognise the inherent uncertainties in the current macroeconomic climate we anticipate a return to revenue growth over the full year."

Analyst webcast

A briefing for analysts will be held at 10:30 BST on Tuesday 28 March 2023 via Zoom webcast. Analysts wishing to join should use the following link to register and receive access details.

https://stifel.zoom.us/webinar/register/WN_ircSmi85QaSaRkXPtuScog

A copy of the analyst presentation will be made available on the Group website shortly after the webcast.

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

About Animalcare

Animalcare Group plc is a UK AIM-listed international veterinary sales and marketing organisation. Animalcare operates in seven countries and exports to approximately 40 countries in Europe and worldwide. The Group is focused on bringing new and innovative products to market through its own development pipeline, partnerships and via acquisition.

For more information about Animalcare, please visit www.animalcaregroup.com or contact:

Chair's Statement

Animalcare's performance in 2022 highlighted the resilience of our business and the markets in which we operate as we continued to make progress against our strategic priorities.

Revenues for the full year were £71.6m, a 3.3% decline that reflects a moderation in post-pandemic demand combined with factors such as the conclusion of product distribution agreements and the application of EU laws in Spain designed to reduce antibiotic usage.

At £13.1m, underlying EBITDA declined broadly in line with revenues thanks to a favourable product mix and disciplined management of SG&A costs. After adjusting for underlying items totalling £6.5m (2021: £8.6m), profit before tax on a reported basis was £2.5m (2021: £0.9m).

A good cash conversion rate of 78% (2021: 109%) maintained the healthy state of the Group's financial platform with net debt standing at £5.4m (2021: £5.3m) by the year end and leverage well below our stated target range of one to two times underlying EBITDA. This solid balance sheet position continues to support the Group's pursuit of value-creating opportunities that have the potential to grow our business over the coming years.

In March 2022 we reached an agreement with Netherlands-based Orthros Medical to secure a global licence for innovative VHH antibody candidates, initially addressing canine osteoarthritis. This exciting early-stage research and development collaboration helps build our pipeline in a fast-growing disease area that we know well. Elsewhere, we continue to seek out investments that can extend our geographic footprint and add to our product line-up in the shorter term, whether through M&A or partnerships.

Rationalisation of the Group's portfolio, which is now materially complete, continues to bear fruit. Management focus on larger more profitable products, combined with the discontinuation of several lower value "tail" treatments, has concentrated our firepower to the benefit of our gross margins. Against this backdrop it was particularly satisfying to see Daxocox, our innovative treatment for osteoarthritis-related pain in dogs, enter the top 10 selling products in our portfolio less than two years after coming to market. It was also pleasing to see the Plaqtiv+ dental range contribute to earnings following planned launches in the second quarter.

The Group's proven resilience and robust financial position support the Board's decision to propose a final dividend of 2.4 pence per share (2021: 2.4 pence per share).

The experience and skills of the Animalcare team drive our business forward. It's vital, therefore, that we continue to build the capabilities we need, now and into the future. In 2022 we rolled out a tailored programme to develop the next generation of leaders across the Group. We also invested in the sales and marketing excellence required to succeed in this dynamic and increasingly innovation-driven market.

In our previous Annual Report, we laid out our Group-wide approach to the environmental, social and governance (ESG) pillars of sustainable development. During the last 12 months we have noted an increasing interest in ESG-related topics among a number of our stakeholders. While recognising that we are at the early stage of our journey in this area, we have established important foundations with the creation of a dedicated Sustainability Task Force chaired by CFO Chris Brewster to advise on aspects of sustainability, including identification of material issues to our stakeholders and the potential impact on our business.

Despite the uncertain economic environment, we see reasons for optimism as we look ahead. The attractive fundamentals of our animal health markets and the strong position of the Group provide us with the confidence to continue investing in our long-term growth strategy.

Following the appointment of Doug Hutchens as a Non-Executive Director at the beginning of the year, we welcomed Sylvia Metayer to the Board in May 2022. Subsequently, she took over as Chair of the Audit and Risk Committee at the Group's AGM. Sylvia brings a wealth of financial and commercial experience gained most recently at Sodexo SA, a global leader in food and facility management outsourcing. I know that Sylvia will be of huge value as the Group continues to implement its long-term growth strategy.

No review of the year would be complete without recognition for the skills and commitment of the Animalcare team across all our markets. Our progress in 2022 was made possible through their efforts. I'd also like to thank you, our shareholders, for your continued support in our Company as we strive to achieve better animal health.

Jan Boone

Non-Executive Chair

Chief Executive Officer's Review

Looking back at 2022, we have reasons to be pleased with several of our key indicators - not least positive margin growth and good cash conversion - as we continue to benefit from a strong balance sheet in the pursuit of our long-term growth strategy.

Strong finances

Revenues for the full year reflected a moderation in demand after the pronounced spike in post-pandemic veterinary activity seen in 2021 across Europe. Termination of certain Companion Animals distribution agreements and the application of EU regulations in Spain designed to reduce the widespread use of antibiotics in Production Animals, exerted further downward pressure on overall revenues. As a result, the headline sales figure of £71.6m was down 3.3% at actual exchange rates (2.5% at constant exchange rates).

Our focus on bigger-selling, more profitable products in our portfolio continued to deliver results, driving much improved gross margins of 56.8% (2021: 53.3%). Carefully targeted interventions on pricing also helped us mitigate the impact of inventory and logistics inflation.

Following on from the significant progress we have made in recent years to reduce our debt and improve our balance sheet, the Group delivered positive cash conversion in line with our goals. As a result, net debt stood at £5.4m at the year end with leverage well below the target range of one to two times underlying EBITDA (0.4 times underlying EBITDA). Maintaining such a strong financial platform is critical to our strategy, enabling us to pursue value-creating opportunities through a combination of M&A, partnerships and pipeline projects.

Key leadership

In 2022 we continued to invest in building the skills and behaviours that will drive our business forward. Identifying and developing the next generation of leaders has been a clear theme over the course of the year with the introduction of a consistent approach to the management of our talent. This initiative is also designed to dovetail with our branded "High Challenge High Support" programme of behavioural development.

Market data show that innovative products are driving much of the growth in the animal health sector. This dynamic is hard-wired into our business strategy. It's crucial, therefore, that our people are equipped with industry-leading skills to engage with customers and explain how these new technologies can benefit animal health and wellbeing in the appropriate settings. That's why we intensified our focus on sales and marketing excellence during 2022.

In partnership with Gallup, we carry out an annual survey of employee engagement. Recognising that we recorded a decline of 2% in our overall 2022 score, the data we gather through this process provides us with a rich source of insights as we seek to identify areas for improvement down to team level.

We extended a warm welcome to two new Non-Executive Directors in 2022. Doug Hutchens joined the company in February while Sylvia Metayer assumed her role in May. Doug's impressive background in veterinary medicine and R&D and Sylvia's senior level commercial leadership experience are already making a positive mark on the Group.

Growth portfolio

Our product portfolio acts as both a solid platform and a driver of growth. In recent years we have refined our product line-up, concentrating attention on larger-selling, higher margin brands while disposing of smaller "tail" products, some of which offered little more than a distraction. This rationalisation programme is now effectively complete with approximately 150 brands offering a comprehensive yet manageable portfolio. Though our Production Animals business remains a valuable part of the overall mix, it is evident that the Companion Animals segment offers greater growth potential. Consequently, that's where we direct more of our investment.

In 2022, our top 40 selling brands accounted for approximately 78% of total product sales, marginally down on the prior year. It was particularly satisfying to see Daxocox, our novel treatment for osteoarthritis-related pain in dogs, comfortably enter the top 10 ranking of Animalcare products. Additionally, our Plaqtiv+ dental health range, the first product to emerge from the STEM joint venture with Kane Biotech Inc., contributed to earnings following the later than expected accreditation from the influential Veterinary Oral Health Council (VOHC).

Identicare Ltd, the Group's UK-based pet microchipping and pet owner-focused services company, which we carved out from our pharmaceutical business under specialist leadership during 2021, delivered double-digit revenue growth over the period.

Business development

Achieving growth via inorganic business development routes is a core strategic objective for the Group. This is made possible by a financial platform that has been materially strengthened in recent years. Over the course of 2022 our dedicated business development team focused their efforts on the identification and pursuit of value-creating deals that can build our pipeline, add to revenues at attractive levels of profitability and extend our operational footprint and sales and marketing reach.

Our agreement with Netherlands-based Orthros Medical, signed in March 2022, secured an exclusive licence for VHH antibody technology with an initial focus on canine osteoarthritis. Though still in the early stages, the partnership has all the hallmarks of a collaborative template for our business.

Innovative pipeline

In 2022 the Group stepped up R&D investment as we continued to build an innovative pipeline that is capable of generating sustainable growth; we expect to further increase spend as a proportion of sales in 2023.

The aforementioned licensing      and collaboration agreement with Orthros Medical has generated a number of preclinical projects exploring the potential for VHH antibodies, initially for the treatment of osteoarthritis-related pain in dogs. This is an expanding area of the market in which we are recognised for our knowledge and expertise. Following the European approval of Daxocox in 2021, we are also leveraging our product development capability to pursue life cycle management opportunities that can extend the therapeutic and commercial reach of our long-acting COX-2 inhibitor.

Summary and outlook

Though the Group fell short of its revenue expectations in 2022 due to a combination of moderating market demand and other more specific factors, we made positive progress on gross margins, helping us maintain our strong financial position, and with it our ability to invest in growth opportunities.

Looking ahead, we remain confident in the resilience of our business and the wider animal health market which has seen record levels of pet ownership in many countries. We continue to be mindful of macroeconomic uncertainties, including inflationary pressures, but we anticipate a return to revenue growth for the full year.

Our people deserve huge credit for the commitment they have shown in 2022. I'd like to record my thanks for their hard work as we continue to deliver on our long-term growth strategy.

Jenny Winter

Chief Executive Officer

Chief Financial Officer's Review

Underlying and statutory results

To provide comparability across reporting periods, the Group presents its results on both an underlying and UK-adopted international accounting standards ("IFRS") basis. The Directors believe that presenting our financial results on an underlying basis, which excludes non-underlying items, offers a clearer picture of business performance. IFRS results include these items to provide the statutory results. All figures are reported at actual exchange rates (AER) unless otherwise stated. Commentary will include references to constant exchange rates (CER) to identify the impact of foreign exchange movements. A reconciliation between underlying and statutory results is provided at the end of this financial review.

Overview of underlying financial results

Trading activity in 2022 reflected the continued moderation of market growth across Europe from the exceptionally high levels of post pandemic-related demand in 2021. The continuing commercial focus on our larger, higher margin brands was the main driver of much-improved gross margins. The Group's strong balance sheet and good levels of cash generation allow us to continue to invest to support future growth.

Revenues were £71.6m (2021: £74.0m), a decline of 3.3% at AER (2.5% at CER). An analysis by product category is shown in the table below:

Companion Animals revenue, which continues to represent around 70% of Group turnover, declined by 2.2% to £50.2m, impacted by moderating demand levels across Europe as noted above together with the loss of distribution rights of certain key brands. In part, this was offset by sales growth from new products, which contributed £2.1m (2021: £2.2m), predominantly driven by Daxocox and Plaqtiv+, the latter launching during Q2 following the later than expected VOHC (Veterinary Oral Health Council) accreditation. In addition, Identicare, the Group's small but growing UK-based pet microchipping and pet owner-focused services business, delivered 13% revenue growth over the period. One year on from bringing in specialist leadership, we are pleased with the progress in transitioning the business to a subscription-based services model with recurring revenues.

Production Animal revenues, which are largely generated by our South Region business, declined by 7.7% versus the prior year to £15.7m, predominantly due to the application of EU laws in Spain designed to further reduce the widespread use of antibiotics.

Equine and other sales were broadly flat versus 2021 at £5.7m during a period in which we took Danilon, one of our largest brands, back into the UK business, giving the Group more control over supply and our commercial offering.

Revenues generated by our Top 40 brands, collectively accounting for approximately 78% of sales, reduced by 0.9%, predominantly impacted by the conclusion of distribution rights within our Companion Animals portfolio as noted earlier. The continuing commercial focus on these larger, higher-margin brands, together with a more favourable sales mix, are the key drivers of the 3.5% improvement in our gross margins. While the Group has been affected by inventory and logistic price increases, the net impact on gross and EBITDA margins during the year has not been significant as we have taken mitigating pricing actions where possible. However, we remain alert to the accelerating inflationary pressures impacting our overall cost base as we progress into 2023.

Underlying EBITDA declined by 2.4% to £13.1m, broadly in line with revenues. Disciplined management of SG&A costs in the light of the moderating revenues enabled us to deliver EBITDA margins at approximately the same level as the prior year. SG&A expenses increased during the year to £27.5m (2021: £26.0m) as we continue to invest in our people and drivers of future growth such as new products and pipeline projects, the latter including R&D expenditure related to the early-stage collaboration with Orthros Medical.

The underlying effective tax rate of 16.4% (2021: 24.4%) has decreased versus 2021 primarily reflecting the geographic mix of profits and the prior year one-off impact of the enactment of the increase in corporate tax rates in the UK (from 19% to 25% effective 1 April 2023) on deferred tax balances. We continue to optimise research and development tax credits.

Reflecting the points noted above, underlying basic EPS was 5.0% ahead of prior year at 12.6 pence (2021: 12.0 pence).

Overview of statutory financial results

Statutory Group profit after tax for the year (after accounting for the non-underlying items shown in the table and discussed below) was £2.0m (2021: £0.1m loss), with statutory earnings per share at 3.3 pence (2021: 0.1 pence loss per share).

Underlying EBITDA is reconciled to the statutory measures in the table above and within the notes to the unaudited consolidated financial statements.

Non-underlying items totalling £6.5m (2021: £8.6m) relating to profit before tax have been incurred in the year, as set out in note 4. These principally comprise:

1.   Amortisation and impairment of acquisition-related intangibles of £5.4m (2021: £8.3m). The current year charge primarily comprises amortisation in relation to the reverse acquisition of Ecuphar NV and previous acquisitions made by Ecuphar NV (£4.5m) and a non-cash impairment charge of Research & Development assets that formed part of the acquired development pipeline, the principal driver for which was manufacturing challenges that have significantly impacted the timing and costs to resume supply with appropriate commercial returns.

2.   Expenses relating to acquisition, business development, integration, restructuring and other costs of £1.1m (2021: £0.3m) including the reorganisation and restructuring of our Benelux and UK operations, the latter relating to the carve-out of Identicare in 2021, manufacturing transfers and relocation of our Spain and UK offices.

Dividends

An interim dividend of 2.0 pence per share was paid in November 2022.

The Board is proposing a final dividend of 2.4 pence per share (2021: 2.4 pence per share). Subject to shareholder approval at the Annual General Meeting to be held on 13 June 2023, the final dividend will be paid on 14 July 2023 to shareholders whose names are on the Register of Members at close of business on 16 June 2023. The ordinary shares will become ex-dividend on 15 June 2023.

The Board continues to closely monitor the dividend policy, recognising the Group's need for investment to drive future growth and dividend flow to deliver overall value to our shareholders.

Cash flow and net debt

We entered 2022 in a healthy position following the significant progress made during 2021 in reducing our debt and increasing the Group's financial strength. With the net debt to underlying EBITDA leverage ratio comfortably below our stated target range of one to two times, we continue to pursue value-creating opportunities through M&A, partnerships and pipeline projects.

The Group delivered good cash generation during the year following the very strong cash conversion performance in 2021. In line with our expectations, our cash conversion moderated during the financial year, while remaining on average within the previous target 90-100% range over 2021 and 2022.

Net cash flow generated by our operations reduced to £9.4m (2021: £14.0m). Working capital increased by £1.9m in the year compared to a £2.2m reduction during 2021. This movement, chiefly attributable to significantly higher receivables as a result of revenue phasing towards the year end, was largely offset by increased payables. Inventories increased by £2.7m from the lower than expected position at the end of 2021, primarily driven by normalisation of our stock profile following restocking of delayed supply together with some investment in strategic inventories to maintain strong service levels. The increase in working capital was in part offset by a £0.7m reduction in cash taxes mainly due to a combination of geographic mix of profits and lower settlement of prior year taxes.

We are targeting a year-on-year improvement in cash conversion for the financial year ending 31 December 2023, with a profile broadly consistent with the first and second halves of 2022.

Net capital expenditure of £2.8m (2021: £2.7m) largely comprises investment in our product development pipeline of £1.3m, including £0.4m in relation to the first licence milestone payment to Orthros Medical. The balance of expenditure relates chiefly to investment in our business systems, including CRM, ERP and IT infrastructure within Identicare, and the relocation of our UK office.

The net debt to underlying EBITDA leverage ratio was approximately 0.4 times, consistent with 2021 and comfortably below the Group's stated target range of one to two times underlying EBITDA.

Borrowing facilities

The Group has total facilities of €51.5m (£45.7m) to 31 March 2025, provided by a syndicate of four banks comprising a committed revolving credit facility (RCF) of €41.5m (£36.8m) and a €10.0m (£8.9m) acquisition line, the latter of which cannot be utilised to fund operations.

The Group manages its banking arrangements centrally through cross-currency cash pooling. Funds are swept daily from its various bank accounts into central bank accounts to optimise the Group's net interest payable position.

The facilities remain subject to the following covenants which are in operation at all times:

•    Net debt to underlying EBITDA ratio of 3.5 times;

•    Underlying EBITDA to interest ratio of minimum 4 times; and

•    Solvency (total assets less goodwill/total equity less goodwill) greater than 25%.

Net of cash balances totalling £6.0m, £4.4m of the RCF was utilised at the year end, leaving headroom of £38.4m.

As at 31 December 2022 and throughout the financial year, all covenant requirements were met with significant headroom across all three measures.

Going concern

The Directors have prepared cash flow forecasts for a period of at least 12 months from the release of these results (the going concern assessment period). These forecasts indicate that the Group will have sufficient funds and liquidity to meet its obligations as they fall due, taking into consideration market conditions, the profile of cash generation, the Group's financial position (including the level of headroom available within the bank facilities and compliance with the financial covenants associated with these facilities), bank facility maturity and principal risks.

Accordingly, the Directors continue to adopt the going concern basis in preparing the financial statements.

Summary and outlook

While our revenue performance, which was impacted by a combination of factors, was not as strong as expected, the Group has made positive progress on gross margins and demonstrated agility in managing our cost base in line with trading levels. Good levels of cash conversion have also maintained our strong financial platform.

Mindful of the current economic environment, we are confident in the resilience of the Group and the animal health sector, underpinned by historically high levels of pet ownership.

With our strong balance sheet, we believe the Group remains well placed to deliver on our long-term growth strategy and we continue to explore business and product development opportunities.

Chris Brewster

Chief Financial Officer

28 March 2023

Consolidated Income Statement (Unaudited)

Year ended 31 December 2022

In order to aid understanding of underlying business performance, the Directors have presented underlying results before the effect of exceptional and other items. These exceptional and other items are categorised as 'non-underlying' and are analysed in detail in note 4 to these financial statements. The accompanying notes form an integral part of these unaudited consolidated financial statements.

Consolidated statement of comprehensive income (unaudited)

Year ended 31 December 2022

Consolidated statement of financial position (unaudited)

Year ended 31 December 2022

*Restated  as detailed in note 18

Consolidated statement of changes in equity (unaudited)

Year ended 31 December 2022

Reverse acquisition reserve

Reverse acquisition reserve represents the reserve that has been created upon the reverse acquisition of Animalcare Group plc.

Other reserve

Other reserve mainly relates to currency translation differences. These exchange differences arise on the translation of subsidiaries with a functional currency other than Sterling.