Chairman’s Statement November 2010
Complete Annual Report 2010 Including Chairman's Statement (PDF)
Introduction and review of operations
I am pleased to announce the results of CVS Group plc (“CVS”, “the Group”, or “the Company”) for the year ended 30 June 2010. The Group has continued to deliver improvements in many key financial metrics despite the challenges presented by a tougher operating climate.
The Group has grown revenue by 11.6% to £85.5m (2009: £76.6m) and adjusted EBITDA by 4.6% (see page 32 for reconciliation to profit before income tax) to £13.1m (2009: £12.5m). Adjusted EBITDA as a percentage of sales has declined from 16.3% to 15.3%, primarily reflecting changes to the Group’s cost base in conjunction with softer second half like-for-like sales brought about by a more challenging operating environment. In addition, there was strong cash delivery with cash generated from operations of £12.6m (2009: £12.4m). However, operating profit fell to £5.7m (2009: £7.0m), reflecting transaction costs being expensed which would previously have been capitalised due to changes in accounting standards, additional acquisition related amortisation charges and increased non cash share option charges.
Continued uncertainty in the general economy has affected the business as increasingly hard pressed consumers look to make savings in areas of discretionary spending. Veterinary products and services have not been immune to this and as a result the Group is engaged in a number of activities to counter these trends including the development of an on-line dispensary and pet shop (Animed Direct).
The business was also affected in the year by a prolonged period of severe winter weather. This made it almost impossible in some areas for both customers and staff to reach our surgeries and as a consequence revenue was lost, with a disproportionately large impact on adjusted EBITDA due to the Group’s relatively high operating margins.
During the last four months of the year the Group acquired the strategically important Veterinary Enterprises and Trading Limited (“VET” or “Pet Doctors”) group of 27 surgeries and one laboratory. This addition to CVS is considered to be significant not only because of its size but also as it has removed a competitor for future acquisitions, enhanced the Group’s ability to generate economies of scale and it fits well geographically with the existing business, particularly in the South East of England where it has a strong presence. I am pleased to report that Pet Doctors has performed in line with expectations post acquisition.
Cash flow and funding position
Cash flow generated from operations increased by 2.0% to £12.6m. The ability of the Group to convert profit into cash is clearly demonstrated with adjusted EBITDA (see page 32 for reconciliation to profit before income tax) at £13.1m.
Overall net debt increased slightly during the year to £42m, as £6.5m of internally generated cash was used to assist in the funding of acquisitions. Any future acquisition activity is expected to be funded from cash generated from operations.
The Group has complied with all bank covenants throughout the period, and is projected to continue to do so.
In the year under review, £1.9m of debt has been repaid. Since the year end, £2.1m has been repaid, with a further £3.1m scheduled to be repaid during the remainder of this financial year (ending 30 June 2011) and this has been reflected in our cash flow forecasts.
Dividends
The Board, at this point in time, believes that cash generated from operations should be reinvested in the business, and as such the Directors propose that no dividend should be declared for the year ended 30 June 2011. The Board will continue to review its dividend policy on an ongoing basis.
Our people
The Group continues to be the largest employer in the UK veterinary profession with approximately 2,200 staff today. Of those, around 500 are vets out of an estimated total of approximately 12,000 practising vets in the UK, giving further indication of the significant scope left for expansion in the UK market. Our people are our best asset in enabling the Group to deliver its strategy. I would like to thank all of our people, including those new to CVS in the year, for their expertise and professionalism in providing the best possible care and service.
Further business development
We estimate that CVS has 9-10% of the UK small animal veterinary market measured by wholesaler spend, which demonstrates the opportunity for further consolidation.
In late July 2010, following the financial year end, Animed Direct, our on-line dispensary and pet shop division, was launched further broadening our offering of veterinary related services.
Outlook
Following on from the tough second half to the last financial year, the first quarter of the new financial year has been encouraging with the adverse trend in like-for-like sales improving to a decrease of 1.4% compared to a decrease of 2.8% in the fourth quarter of last year.
Owing to the timing of acquisitions in the year ended 30 June 2010, the majority taking place in the last third of the year, the Board expects that there will be a material uplift in revenues in the year to 30 June 2011.
We continue to focus on developing the organic business by furthering ways to extract operational efficiency, improve business performance and create new revenue streams together with the subsequent generation of cash and profit.
The Board remains cautiously optimistic about the Group’s future with further growth opportunities supported by strong cash generation and a slow return to more favourable economic conditions.
Richard Connell
Chairman
4 October 2010