# Eco Animal Health Group Plc ‘Credible results for a year that was adversely depressed’

- Link: https://www.directorstalkinterviews.com/eco-animal-health-group-plc-credible-results-for-a-year-that-was-adversely-depressed/412785451
- Published: 2019-06-19T07:08:53+01:00
- Author: Giles Arbor

**Eco Animal Health Group Plc** (LON: ECO) has today provided results for the year
ended 31 March 2019.

**ECO REPORTS ANOTHER STRONG PERFORMANCE**

**HIGHLIGHTS**

**Financials**

 * Sales 11% higher at £74.6m (2018: £67.2m)
 * Adjusted EBITDA higher at £20.1m (2018: £19.6m)
 * Profit before taxation 10% higher at £15.2m (2018: £13.9m)
 * Profit after taxation 16% higher at £13.6m (2018: £11.6m)
 * Earnings per share 24% higher at 17.60p (2018: 14.19p)
 * Dividend 20% higher at 11.04p (2018: 9.2p)
 * Special dividend of 3.5p paid in January 2019
 * Strong cash generation from operations of £13.3m (2018: £15.8m)
 * Net cash lower at £18.1m (2018: £21.3m)

**Operations**

 * Demand for Aivlosin® continued to grow strongly, with new marketing authorisations
   gained in Europe, Vietnam and India.
 * Revenue in China flat despite challenging market conditions triggered by the 
   African Swine Fever (ASF) outbreak.
 * Strong sales growth in the other strategically important markets; North America,
   Latin America, Thailand and India.
 * Five new vaccine and product development licensing agreements signed for pigs
   and poultry.
 * Accelerated investment in vaccine development programme and people to drive future
   growth.

**Marc Loomes, CEO of ECO Animal Health Group plc, commented: **

> “These are credible results for a year that was adversely depressed by both ASF
> and a trade war between the USA and China, our two largest markets. We are confident
> that our accelerated development programmes in vaccines and other products will
> add long term growth. For the year ahead we expect to report continued growth 
> and to perform in line with the Board’s expectations.”

**CHAIRMAN’S STATEMENT**

**FOR THE YEAR ENDED 31 MARCH 2019**

I am delighted to have joined the Board in March 2019 as Chairman and look forward
to leading the Board in the next exciting phase of the Group’s development. Although
not involved with the business last year, I am pleased to be able to report that
ECO had another successful year and the business is in good heart.

Sales were 11 per cent higher than in 2017/8. Profit after taxation rose by 16 per
cent to £13.6m, and earnings per share increased by 24 per cent to 17.6p. Dividends
paid in the year totalled 12.7p per share including the ‘one off’ distribution in
January 2019. The Group cash balance remained strong at the year end at £18.1m.

Our strategy of concentrating on growth opportunities in the important and growing
markets of the USA, Latin America, China and the Far East paid off but the outbreak
of African Swine Fever (ASF) in China curtailed sales in China in the second half
of the year. This constraint is likely to continue in 2019 and until the disease
has been contained, at which point we would expect to see further market growth,
as the herd is rebuilt. In the meantime, Chinese food shortages will probably be
bridged by imports particularly from Latin America and the USA if trade restrictions
are lifted, so opportunities in those markets should improve in tandem.

Mid-year, when the Board was reviewing the potential of the Company’s R & D investment,
the science team brought forward a compelling list of opportunities that convinced
the Board that R&D expenditure should be increased to drive both medium term growth
and business diversity. From the opportunities presented, the Board selected a mix
of medium and long-term projects that comprise an affordable balance of risk and
opportunity.

For 2019/20, development expenditure will rise above £9 million (2019: £5.3 million)
to accelerate the development of our new vaccine range. However, it should be noted
that even with this new investment, the development and regulatory timelines are
such that we do not expect to see sales before 2022/23.

Last year, the Board decided to recommend to shareholders that it should use some
of the accumulated cash balances to pay a one-off exceptional dividend of 3.5 pence
per share and that was paid to shareholders on 9 January 2019.

There is no intention to repeat last year’s special distribution. The Board is now
proposing a dividend for the year of 11.04 pence per share, which subject to shareholder
approval will be paid on 16 October 2019 to shareholders on the register on 27 September
2019. The ex-dividend date will be 26 September 2019. This dividend represents an
increase of 20 per cent over the previous year after finalisation, in line with 
our progressive dividend policy.

We have completed the transfer of our Aivlosin® API manufacturing process to a new
facility in China which has greater capacity and the latest environmental controls.
The purpose-built plant was validated and approved by the EU & US regulators.

After many years as a successful Chairman and continued substantial shareholder 
in the Company, Peter Lawrence, the founder of ECO, decided to retire during the
final quarter of the year. The Board and the staff of the Company would like to 
thank him for his excellent stewardship during his tenure.

Looking forward, I will be reviewing, with the Board, the three-year corporate strategy
over the next six months and will report more to shareholders with the interim results.

In my short time with the Company, I can report that the documenting of our corporate
governance processes is well in hand and further work will continue during the current
year.

In this regard, we have already made some changes to our annual reporting and shareholders
will see these changes in this report. Reporting will evolve further during 2019.

In closing, I would like to say how much I am looking forward to helping guide ECO
through its next stage of business development and growth.

**Outlook**

The beginning of the year will remain challenging because of the continued impact
of African Swine Fever in China but we believe that there will be some compensating
buoyancy elsewhere as other nations move to fill the food shortages in China.

We are excited by our accelerated development programmes in vaccines and other products
which are expected to result in long term growth.

For the full year ahead, we expect to report continued growth and to perform in 
line with the Board’s expectations.

Richard Wood

Chairman

18 June 2019

**CHIEF EXECUTIVE’S REPORT**

**FOR THE YEAR ENDED 31 MARCH 2019**

Global revenue grew by 11 per cent to £74.6 million in a year dominated by an outbreak
of African Swine Fever (ASF) in China and an ongoing trade war between the USA and
China, our two principal markets. This year’s result, once again, demonstrated both
the value of our global footprint, with sales generated in more than seventy countries,
and the commoditised nature of pork and poultry production.

Sales of Aivlosin®, our patented molecule for the treatment of economically important
diseases in pigs and poultry, increased by 14 per cent, accounting for 78 per cent
of total revenue. Sales of the smaller Ecomectin® anti-parasitic range, which were
adversely affected by European manufacturing issues and altered distribution purchasing
patterns, declined by 7 per cent. Sales of all other products rose by 6 per cent,
principally driven by increased sales in Mexico.

The Chinese subsidiary’s revenue was held at last year’s level, despite the ASF 
outbreak which exploded in August 2018 and spread rapidly throughout China. The 
severe movement restrictions, imposed by both the authorities and producers whose
herds had remained free of disease, curtailed on farm selling but our team found
new and innovative ways to reach customers. Margins did soften and credit terms 
were adjusted to retain business, during this period, resulting in Group debtors
increasing by over £12 million during the year under review.

Recent analysis by Rabobank indicates that China has lost up to 200 million pigs(
30 per cent of Chinese swine production). This figure exceeds the total USA production
of about 120 million pigs per year. The 30 per cent loss of the breeding herd equates
to double the total number of sows in the USA.

To combat this downturn and continued uncertainty in the short term, our focus for
Aivlosin® in China has now shifted from being almost exclusively directed at the
pig sector, to include poultry. In this new area, we are making good progress and
look forward to reporting on developments.

North American revenue increased by 20 per cent. In the USA, revenue was 17 per 
cent higher, driven by Aivlosin for use in Swine Respiratory Disease. Margins softened
as market pig prices were low and swine producers were making trading losses, in
what was a difficult year for farmers. However, by March 2019, the $20 loss per 
market pig being experienced at the end of 2018 had reversed to a $30 per pig profit,
because of a combination of cheapening feed prices and global supply shortages brought
about by ASF in China. Canadian revenue rose 27 per cent, buoyed by the introduction
of new veterinary prescription regulations for in-feed medication and adjusted commercial
terms.

In South and Southeast Asia, revenue was 4 per cent higher. Highlights from the 
region included strong growth in India, Thailand and Pakistan. The improvement in
India was a consequence of the establishment of ECO India and an adjustment to our
route to market. For Thailand the improvement was as a result of implementing key
account management strategies for both pig and poultry producers with our local 
third-party distributor. In Pakistan a number of accounts were switched to Aivlosin
® from a competing product. These results were tempered by challenging conditions
in Indonesia, Vietnam and Malaysia. In Indonesia a ban on all in-feed antimicrobial
medication in early 2018 suspended trading for 8 months until Aivlosin® was successfully
re-registered. Weak pork prices and the shutting of exports to China from Vietnam
reduced potential in that territory.

Latin America revenue rose strongly by 62 per cent, with buoyant trade through the
subsidiaries in Mexico and in Brazil, up 34 per cent and 47 per cent respectively.
In both cases the benefits of following key account management strategies were increasingly
evident. New business was written in Chile, tenders were won in Cuba and Colombia
also performed particularly strongly.

European revenue declined by 4 per cent. Although sales in the United Kingdom, which
represent just under 2 per cent of global revenue, rose 24 per cent, across all 
products. Aivlosin® sales were strong in key markets such as Denmark, Poland and
Germany but were offset by a change in stock holding policy by a regional distributor
for a number of other key markets such as Spain and Italy. This reduced sales potential
from ECO but not on sales in the market. The total value of product supplied to 
European distributors before the end of March to mitigate any potential Brexit related
supply interruption risks, was negated by production issues. These resulted in some
sales being postponed into the new financial year. Delays to the inspection of manufacturing
facilities and laboratories, and delays in receiving licences in Russia, also impacted
negatively on revenue. These issues are expected to be fully resolved within the
coming year.

Sales in the Rest of the World rose 14 per cent, principally through increased sales
of Aivlosin ® for use in the poultry sector in Egypt and Aivlosin ® sales for pigs
in South Africa.

Revenue in Japan rose by 14 per cent, driven by growth in the swine business to 
large producers.

**Product Pipeline**

The Board made a strategic decision to increase annual investment in product research
and development to ensure that the new product pipeline has a mix of well-established
concepts as well as novel, potentially highly competitive technologies and approaches.
Rather than carry the significant cost of an in-house R&D function, the Company’s
early stage R&D activities are outsourced to leading research institutions. However,
all on-farm development work is managed in-house. External development expenditure
in the year rose by 43 per cent to £5.3 million (2018: £3.7 million) and will be
increased by more than 70 per cent to over £9 million in 2019/20. This will ensure
that we have several mid and late stage projects able to deliver revenues from 2022/
23. The pipeline is focused on pigs and poultry, targeting both viral and bacterial
diseases of economic importance in both species. However, there will be a shift 
in emphasis towards developing a range of vaccines and new products to complement
our existing antimicrobial business.

During the year, two new international Aivlosin® marketing authorisations were secured,
notably Aivlosin® 625 mg/g Water Soluble Granules (WSG) for chickens laying eggs
for human consumption with a zero-day drug withdrawal period in India, and in Vietnam
for the treatment of pigs and poultry. A further licence was obtained from the European
Medicines Agency for the use of Aivlosin® WSG in breeding chickens just after the
year end and this approval will now be rolled out beyond the EU into the multi-million
dollar international poultry markets.

ECO established a joint venture called ECO-Pharm Limited, in the Republic of Ireland,
with Pharmgate LLC of Wilmington, North Carolina, USA. The JV company will progress
the registration and commercialisation of several swine vaccine products already
licensed in the USA and Canada for use in the United Kingdom, the EU, the Commonwealth
of Independent States, Brazil and Japan.

A further four licensing deals have been signed (including University of Georgia
in the USA and the University of Ghent, for poultry vaccine development, and with
Agrinnovation and Yissum Research Development Company of the Hebrew University of
Jerusalem for a swine antimicrobial). All of these opportunities are currently being
taken through rigorous proof-of-concept evaluations in well-designed studies before
any commitment to further development funding is made.

**Competition**

The veterinary market is consolidating rapidly at all levels. The top 10 veterinary
pharmaceutical companies accounted for 88 per cent of the global market and had 
an average growth rate of 7 per cent in 2018.

We believe that ECO’s key competition comes from the branded antimicrobial products
for pig and poultry supplied by the major multinationals.

During 2018/9, we believe that the Aivlosin® global market share rose by 2 per cent
to 10 per cent. This gain arose from displacing older branded products in this sector.

**Brexit**

ECO has successfully transferred all EU marketing authorisations to a new European
subsidiary, ECO Animal Health Europe Limited with registered address in Dublin, 
Republic of Ireland. All contingency planning is in place and the financial and 
operational impact of Brexit is expected to be minimal.

**People**

ECO’s achievements are a direct result of the hard work, dedication and professionalism
of our staff, now numbering more than 200 globally. We would like to thank all our
employees for their individual and team contributions to ECO’s continued success.

Marc Loomes

Chief Executive Officer

**FINANCE DIRECTOR’S REPORT**

**FOR THE YEAR ENDED 31 MARCH 2019**

ECO has traded well in tough market conditions with revenues increasing 11 per cent
to £74.6 million. Whilst some markets performed well, the trading challenges of 
ASF and the US trade war highlighted in the CEO’s report resulted in pressure on
margins which fell 2.5 per cent to 45.4 per cent.

Management’s early intervention to control overheads minimised the impact on operating
profit which rose by 4 per cent to £14.7 million (2018 £14.1 million). ASF reduced
the Chinese subsidiary’s reported operating profit by over £1 million, to £5.2 million,(
2018: £6.4 million). The Group’s global footprint enabled us to compensate for this
as operating profit in the rest of the Group increased.

Adjusted EBITDA (the profits before tax adjusted for share based payments, foreign
exchange, net finance income, depreciation, amortisation and impairment charges)
increased by 3 per cent to £20.1 million (2018: £19.6 million). Excluding the Chinese
subsidiary’s adjusted EBITDA decrease of £1.0 million, the remainder of the Group
contributed £1.5 million to the increase in adjusted EBITDA. An explanation of how
adjusted EBITDA is calculated, and the rationale for each adjustment can be found
in the accounts.

Profit before taxation rose by 10 per cent to £15.2 million (2018: £13.9 million)
supported by currency gains arising from the reversal of non-cash currency losses,
particularly the US Dollar, from the previous year. As we purchase most of our raw
materials in US Dollars, it is necessary to hold significant operational balances
in that currency. These act as an economic hedge against movements in the exchange
rate of Sterling against the Dollar.

The taxation charge for the year of £1.7 million was 24 per cent lower than in 2018.
The UK trading company makes significant use of enhanced tax allowances for R&D 
expenditure and, more recently, has used the Patent Box regulations on profits deriving
from Aivlosin®, with the result that it currently has over £10 million of accumulated
tax losses in the UK. The lower margins in China that arose from the challenging
market conditions have also contributed in a lower tax charge when compared to last
year.

Profit after taxation rose 16 per cent to £13.6 million. The share of profit attributable
to non-controlling interests (minorities) was £0.5 million lower so that profit 
attributable to the Group rose by the equivalent amount.

Retained profit rose to £11.8 million compared to £9.3 million for 2018, an increase
of over 26 per cent. Basic earnings per share rose by 24 per cent due to a lower
minority charge.

The Group invested just over £5 million in clinical trials for both existing and
new projects. As we approach the end of the Aivlosin® development programme expenditure
has started to shift away from Aivlosin® to other projects such as vaccines and 
other new products. As a result, amortisation will increase in future years, but
this is necessary for the continued development and diversification of the business.

The Group adopted IFRS16 for the first time in the year. This brings most leased
assets onto the balance sheet along with the corresponding lease liabilities. More
details can be found in the notes to the financial statements. The effect on the
Group’s reported profits and on net assets has not been significant.

Group capital expenditure was £0.5 million (2018: £0.3 million), spent on IT systems
and barcoding equipment to meet new Chinese product regulations.

Inventory fell from £17.7 million at the end of financial year 2018 to £16.1 million
as at 31 March 2019. As a Group, to act as a strategic buffer, we normally hold 
around 6 months’ sales of Aivlosin® in inventory but since March’s sales in the 
USA and in China were ahead of the levels achieved in March 2018, inventory levels
at the year-end were reduced to under 5 months’ sales. Inventory has been restored
to normal levels subsequent to the year end.

Trade receivables increased from £15.8 million to £27.8 million predominately due
to extended credit terms in China. The high USA sales before year end also contributed
to the increase. The yearend figure represented less than 3 months’ sales in respect
of both 2018 and 2019.

The Group’s cash balance was held at above £18 million, net of the special dividend
of £2.4 million paid in January. In addition, the normal dividends were 20 per cent
higher than 2018, in line with the Group’s stated progressive dividend policy. Together
with dividend payments to the joint owners of the Chinese subsidiary and an £8 million
investment in product development, the cash balance demonstrates the strong cash
generating capability of the Group.

Having substantial cash reserves, the Group does not have any bank borrowing facilities.
The Group’s Treasury Management Function (TMF) therefore seeks to ensure that funds
necessary for the implementation of approved activities are always available. It
also aims to increase the net worth of the Company by managing funds in the most
appropriate manner.

The main processes used for achieving this are:

 1. Updating 12 months cash flow forecasts every 3 months so that potential shortages
    are addressed in a timely manner.
 2. Working (with the sales function) to ensure that all amounts due to the Group are
    received in a timely manner.
 3. Ensuring as far as possible that all funds are held centrally, thus minimising 
    the amounts held by subsidiaries, while not impeding their operations.
 4. Ensuring that all funds received are deposited with appropriate and financially
    stable institutions, while at the same time maximising returns on those deposits.
 5. Ensuring that funds are held only in currencies to the extent that it is anticipated
    those currencies will be required for use in the future, thus minimising foreign
    exchange risk.
 6. Ensuring that suppliers are paid promptly for goods and services rendered, which
    in turn ensures continuity of supply of those goods and services.

The board keeps these procedures under review but is satisfied that the TMF worked
effectively in the year.

Post balance sheet event

The Company paid a dividend of £2,697,725 on 12 April 2019 to its shareholders.

Kevin Stockdale

Finance Director

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