# ECO Animal Health Group report solid recovery in key markets

- Link: https://www.directorstalkinterviews.com/eco-animal-health-group-report-solid-recovery-in-key-markets/412958744
- Published: 2021-02-04T07:13:00+00:00
- Author: Giles

**ECO Animal Health Group plc** (LON:EAH) have provided results for the year ended
31st March 2020.

**HIGHLIGHTS**

**Financials**

·      Sales 7% higher at £72.1m (2019 restated: £67.3m)

·      Gross margin consistent to within 1% (2020 46%, 2019 47%)

·      Increased R&D investment results in adjusted EBITDA 33% lower at £8.4m (2019
restated: £12.5m)

·      Earnings per share 65% lower at 3.82p (2019 restated: 10.86p)

·      Strong cash generation from operations of £5.5m (2019 restated: £7.1m)

·      New product development expenditure 17% higher at £10.9m (2019 £9.3m)

·      Net cash lower at £9.8m (2019 restated: £16.9m)

**Operations**

·      Demand for Aivlosin^(®) continued to grow strongly, with two new marketing
authorisations gained in Europe and Indonesia for breeding chickens and laying chickens,
respectively.

·      Strong revenue in China in second half as market recovers from worst effects
of African Swine Fever (ASF).

·      Sales growth and margin recovery in the USA as trade tensions between the
USA and China recede.

·      Two new poultry vaccine collaborations signed during the year with the Pirbright
Institute.

·      Transition to remote working and COVID-19 safe working seamless and uninterrupted

·      Continued corporate governance improvements.

> **Marc Loomes, CEO of ECO Animal Health Group plc, commented:** “These results
> reflect a solid recovery in our key markets, particularly in the second half of
> the year and we have continued our investment at record levels in new product 
> development.  We are proud of the Group’s ability to seamlessly adapt to safe 
> working during the Coronavirus pandemic.  We are confident that our development
> programmes will deliver exciting new products which will augment the natural growth
> from current products and sustain long term growth. For the year ahead we expect
> to report profitable growth and to perform in line with the market expectations.”

**CHAIRMAN’S STATEMENT**

**FOR THE YEAR ENDED 31 MARCH 2020**

This has been a challenging year for our business.  The combination of the ASF outbreak
in Asia and the USA trade war with China particularly impacted our business in the
first half of the year, although this was partly offset by very strong performance
in other parts of the world.  Performance in the second half of the year saw substantial
recovery in revenues from the USA and China.  The net result was revenue ahead of
the prior year but below our internal budget.

The ECO Board is confident that our R&D portfolio has the potential to deliver major
value to our shareholders and so despite the lower than budget top line revenue,
we decided to maintain the budgeted increased investment in R&D to keep our portfolio
progressing towards commercialisation.

This has resulted in a reduction in our immediate profits in the 2019-20 year, but
we are confident this will be more than offset by the growth in long term value 
of the company through progression of our R&D portfolio.

We have decided not to pay a dividend for the financial year 2019-20 in order to
maintain cash reserves at a prudent level, particularly in the light of the economic
uncertainty arising from the COVID-19 pandemic, and to build value by continued 
investment in key R&D programs.

The Board places the highest priority on good corporate governance.  We have taken
several actions in this important area during the year:

·    We appointed new auditors and undertook a major revision of the application
of accounting standards across our business and we are now confident that our approach
is fully compliant and reflects best practice.

·    We recruited a new, highly experienced CFO and have significantly expanded 
and strengthened the finance team. We have also established an internal audit capability.

We have worked with a major city advisor to thoroughly review our key codes and 
policies and procedures and to institute training programs where needed.

We made significant changes at Board level during the year including the addition,
shortly after the year end, of a new and highly experienced Non-Executive Director.
The board now has a good base of experience and skills to lead the Company from 
the current period of challenge and change through its next stage of development
and value-based growth.

We are disappointed that the release of our annual results was delayed due to the
scale of work needed for the audit combined with the restrictions in working associated
with COVID-19, but believe it was essential to enable completion of an extensive
and thorough review of our accounting policies and statements with our new auditors.

This is my first statement as Chairman, having succeeded Richard Wood in August 
2019; I am grateful for his leadership and implementing various change initiatives.

I started my report by noting that is has been a challenging year for the Company.
I am hugely grateful for how the Board, Executive and wider ECO team have risen 
to the challenges, delivered a strong performance considering the conditions and
have kept motivation and energy to keep ECO moving and developing value. Finally,
I sincerely thank our shareholders for their patience and much valued strong support
through this period.

**Current trading and prospects**

Performance in the current financial year ending 31 March 2021 has been strong with
the strength seen in both our Chinese and US markets towards the end of the last
financial year continuing into the current financial year. In October 2020, we announced
that the revenue performance in the first six months of the current financial year
was “significantly ahead of management expectations and the prior year”.   We also
advised that notwithstanding the historical second half weighting to the Group’s
revenue, if these revenue trends continued through the second half of the financial
year the Board expected that the Group’s full year revenue for the year ending 31
March 2021 would exceed market expectations. This resulted in an upgraded market
expectation both for revenue and profitability

On 24 November 2020 we confirmed that strong trading had continued during November
and, being mindful of the continuing global uncertainties and four months remaining
until the end of the financial year, we were confident of meeting the upgraded market
expectations.  

On 21 January 2021 we issued a positive trading update, confirming Group revenues
and EBITDA were expected to be significantly ahead of market expectations for the
year ending 31 March 2021.  We noted that the strength in the Chinese market, supported
by the rebuilding of pig herds and the high price for pork, continued through the
third quarter and the outlook for the final quarter sales continued these strong
trading trends.

We look forward to the rest of this financial year and our reporting prospects for
2021 with continuing optimism.

Dr Andrew Jones

Chairman

3 February 2021

**CHIEF EXECUTIVE’S REPORT**

**FOR THE YEAR ENDED 31 MARCH 2020**

I am pleased to report that ECO demonstrated considerable fortitude during a particularly
challenging year for the Company. The impact of African Swine Fever (ASF) in China
which then spread into neighbouring territories, the ongoing tensions between Washington
and Beijing and the onset of the COVID-19 pandemic presented significant challenges
to the business. The determination, dedication and resilience of our employees combined
with the value of our product offering delivered a strong second half performance
during the year ended 31 March 2020 with results for the full year being in line
with the adjusted market expectations.

**Operational Review**

Global revenue grew by 7% to £72.1 million illustrating the value of ECO’s global
footprint, with sales generated in more than seventy countries, in the face of significant
headwinds, and the commoditised nature of pork and poultry production.

Sales of Aivlosin®, our patented antimicrobial which is used under veterinary prescription
for the treatment of economically important diseases in pigs and poultry, increased
by 16%, accounting for 84% of total revenue.

Sales of the smaller Ecomectin® anti-parasitic range at £4 million, increased by
7% and represented 6% of the Group revenue.

Sales of all other products were £7.5 million (2019 – £11.4 million) and mainly 
comprised a range of supportive antimicrobial products for pigs in China.

The China revenue from external customers declined by 17% reflecting a year of two
remarkably different periods. In December 2019, we reported for the six month period
ended 30 September 2019 (“Interims”) that the well-publicised effects of the ASF
outbreak in China provided significant headwinds in our largest market whist noting
encouraging signs for the second half of the financial year with a reported reduction
in the rate of new ASF outbreaks in China and an indication of some restocking of
pig herds by certain high value producers, including some of our customers. These
early encouraging signs were supported by rapidly rising pork prices resulting in
a strong second half (“H2”) with revenue ahead of the prior year. Our Chinese subsidiary
has focused on the respiratory health of replacement breeding sows whose numbers
at the major producers have increased rapidly in response to the pork shortage and
very high pork prices. The high value of these sows and their offspring has enabled
the subsidiary to secure the business of an increasing number of key accounts.

Revenue in Japan rose by 16%, driven again by growth in the swine business to large
producers.

North American revenue from external customers increased by 10% reflecting the growing
importance of Aivlosin®’s low yet effective dose rate and short treatment duration
in medication protocols as veterinarians and producers adhere to responsible use
of antimicrobial guidelines.

In the USA, revenue was 22% higher, reflecting a strong H2 performance. The first
half had been marred by China-USA trade tensions which had left US pig producers
with limited ability to capitalise on the anticipated export market created by the
pork shortage in China which led to overproduction of pigs with depressed prices
and margins. The strong H2 was marked by better pork prices linked to global supply
shortages brought about by ASF in China, an increase in commercial activities by
a strengthened sales and technical team during the autumn and winter months armed
with adjusted customer incentive programmes for the year 2020. Canadian revenue 
fell by 11% largely as a result of restrictions imposed by China on Canadian pork
imports.  These restrictions were lifted but the poor first half performance was
not fully recovered in the second half of the financial period.

Latin America revenue rose strongly by 17%, with the Brazilian and the Mexican subsidiaries
up 80% and 23% respectively, reflecting the benefits of ECO’s key account management
approach and the development of strong partnerships with local third party distributors
in these two key markets. Argentina delivered a record result and important tenders
were again won in Cuba although these results were tempered by challenging market
conditions in Central America and other Latin American countries such as Columbia
and Peru.

In South and Southeast Asia, revenue was 75% higher. Thailand was the best performing
market with Aivlosin® on all major account approved product lists resulting in both
swine and poultry revenue growth. New business was won in Malaysia resulting in 
almost a doubling of sales over the prior year. These two outstanding performances
were moderated by extremely challenging conditions in India, where the poultry market
contracted significantly amidst a transition to a more consolidated integrated market
with higher quality standards and away from an informal market characterised by 
small producers, and in Vietnam and The Philippines, both affected by ASF.

European revenue declined by 4%. Aivlosin® sales were strong in key markets such
as Spain and Poland although overall revenue into continental markets fell slightly.

Sales in the United Kingdom, which represent just over 2% of global revenue, rose
25%, across all products, led by strong Aivlosin® sales during an outbreak of swine
dysentery.

In Russia, an increasingly active exporter of meat, revenue was affected by disease
outbreaks in swine and in poultry although market share gains were made with the
most important customers. The previously reported delays to the inspection of manufacturing
facilities and laboratories by the Russian authorities have been resolved.

Sales in the Rest of the World declined by half a million pounds to £1.2million 
reflecting in equal parts a declining presence in South Africa and softer demand
in Middle East and North Africa.

**Product Research and Development**

The Company’s early stage research and proof of concept development activities are
outsourced to leading research institutions and universities with later stage full
development work managed in-house. This model mitigates the significant costs associated
with in-house laboratories and owned research functions.

**Product Approvals**

Two Aivlosin® for poultry marketing authorisations were received. The first, from
the European Medicines Agency (EMA), allowed  ECO to market Aivlosin® 625 mg/g Water
Soluble Granules in Europe for the treatment and metaphylaxis (control) of respiratory
infections caused by Mycoplasma gallisepticum in breeding chickens, whilst the second
allows the use of the same Aivlosin® formulation in chickens laying eggs for human
consumption, with a zero day drug withdrawal period for eggs in Indonesia the most
important market in Southeast Asia for laying birds. The Aivlosin® approval for 
high value breeding chickens will, like the commercial layer indication, be rolled
out to the multi-million dollar international poultry markets.

**Pipeline**

ECO is building a significant product portfolio pipeline with a mix of well-established
concepts and novel, highly competitive technologies, and approaches with the emphasis
on vaccines and other new products to complement our existing antimicrobial business.
The pipeline is focused on providing solutions to respiratory and gastrointestinal(
gut) diseases of major economic importance in pigs and poultry. Two worldwide exclusive
research partnerships with The Pirbright Institute, United Kingdom were signed in
September 2019 to develop novel poultry vaccines against respiratory and systemic
viral diseases in commercial chicken flocks globally. Several additional new proprietary
concepts and third-party opportunities entered ECO’s product development screening
programme during the year. New product development expenditure in the year rose 
by 17% to £10.9 million (2019: £9.3 million) and is being continued at a significant
level in 2020/21. This will ensure that we have several mid and late stage projects
able to deliver early revenues from 2022/23.

**Covid-19 Impact**

ECO transitioned smoothly to home working during the final weeks of the year building
on the new ways of communicating with customers developed during the ASF outbreak
and without losses of efficiency. Outsourced manufacturing and the Group’s supply
chain operated smoothly through the year end.

**Brexit**

ECO’s EU marketing authorisations have been transferred to the European subsidiary,
ECO Animal Health Europe Limited registered in Dublin, Republic of Ireland and all
our Brexit contingency plans are in place. The financial and operational impact 
of Brexit is expected to be minimal, particularly given the recently announced trade
deal between the UK and the EU. ECO’s sales to the EU (excluding the UK) represented
8% of total revenue for the year.

**People**

I would like to thank all our employees for their extraordinary levels of energy,
engagement, and professionalism in addressing the challenges of the year. Individually
and collectively their ability to innovate and to adapt combined with sheer hard
work underpins these results and ECO’s prospects.

Marc Loomes

Chief Executive Officer

3 February 2021

**FINANCE DIRECTOR’S REPORT**

**FOR THE YEAR ENDED 31 MARCH 2020**

**Introduction**

I was delighted to join ECO in September 2019 as Group Finance Director.

It has been a significant year of change for the Group.  In addition to the many
commercial challenges faced by the Group during the year such as African Swine Fever
in China, USA-China trade tensions and, in the latter part of the financial period,
the advent of the COVID-19 pandemic, we have continued our journey of improvements
in governance.  These improvements have been previously signalled and were introduced
in last year’s Annual Report.  During the year ended 31 March 2020 we appointed 
new external auditors (this is their first audit report on ECO), we established 
a new internal audit function, overhauled much of the control environment around
the group – in particular around financial controls and processes and, with the 
assistance of external professional advisors, moved the governance agenda forward,
particularly in relation to the group leadership and the Board.  The financial control
environment has been significantly strengthened – specifically in relation to custodianship
of assets, banking and cash.  These actions protect the business and individuals
working within the business with customary segregation of duties and multiple authorisations.
From a finance and governance point of view we are now well positioned to support
the strong growth the Group is experiencing and driving.

**Prior Year Restatements**

One of the results of the changes described in my introductory comments was to consider
the accounting policies adopted by the Group previously and to review the implementation
of IFRS across the Group.  In a number of areas, technical non – conformance with
IFRS was identified and in other areas, interpretation of the relevant standard 
was considered to have been incorrect.  As a result, in our interim report, released
in December 2019, we published extensive prior year restatements, describing the
nature of the adjustments and their financial effect.  Those restatements form part
of these Financial Statements and have been audited for the first time.  The principles
of the prior year restatements are as previously described and fall into the following
categories:

·    Accounting for revenue in accordance with IFRS15 – revenue recognition and 
accounting for sales discounts (note 3.1)

·    Accounting for expenditure on research and development – in particular the 
portion of expenditure which should be capitalised under IAS38 (note 3.2)

·    Accounting for our Joint Arrangements in the USA and Canada under IFRS11 (note
3.3)

·    Accounting for bonus payments on an accruals basis (note 3.4)

·    Accounting for leases under IFRS16 (note 3.5)

·    Accounting for foreign exchange (note 3.6)

·    Accounting for Free Goods Incentive (note 3.7)

·    Accounting for share based payments (note 3.8 and 3.9(Company only))

The notes to these accounts describe these changes in detail.

**Audit**

As stated earlier this was the first audit of the group performed by BDO.  This 
also coincided with a period of remote working and lock-down amidst COVID-19 affecting
the world.  This added some distinct challenges to the audit task. 

The first and most obvious challenge was that, except in China where COVID-19 was
ahead of the initial European and US impact, the auditors were unable to physically
attend our year end stock takes.  Attendance at stock takes is a fundamental audit
test.  The Institute of Chartered Accountants in England and Wales suggests that
auditors seek alternative means of satisfying themselves in the event of being unable
to attend stock takes.  Notwithstanding that the Group’s stock is held at third 
party warehouses (and third party certification of quantities on hand was provided
by these warehouses) and there was no indication that the valuation of inventory
was incorrect, the audit opinion is limited in scope regarding inventory. The stock
take was attended in China and therefore this limitation in scope qualification 
is in respect of stock held elsewhere in the group and amounted to 82% of the stock
value (£14 million).

The effect of the prior year restatements, described above, was to reduce profitability
in the year ended 31 March 2019.  Accordingly, our new auditors considered that 
the materiality threshold to which our previous auditors worked (£757,000) was no
longer appropriate and took a decision to reduce it.  As a result, BDO have performed
a re-audit of the statement of financial position at 31 March 2019.  A significant
balance within this statement of financial position is the net book value of Intangible
Assets representing the accumulated capitalised and amortised costs historically
incurred by the Group. These costs are in the main related to the development and
commercialisation of Aivlosin® and Ecomectin®, the Group’s main families of marketing
authorisations. The capitalised net book value of these intangible assets at 31 
March 2020 was £22.9 million and the revenue during the year ended 31 March 2020
derived from Aivlosin® and Ecomectin® was £64.6 million; the net book value of these
assets was therefore only about one third of the annual revenue derived from their
usage.  However, in order to verify the original costs within the net book value
of these assets our auditors required evidence of costs dating back to 2004.  The
Group retains invoices and records from third parties for seven years in line with
statutory practice but, unfortunately, we were unable to provide some support for
the audit sampling requests prior to this.  In addition, for expediency, it was 
decided that provision of evidence to support the audit would be confined to the
trading periods being audited.  As a result, BDO has further limited the scope of
their audit opinion in respect of Intangible assets. The net book value at 31 March
2020 relating to costs capitalised more than seven years previously (and therefore
the element of audit sampling not able to be supported by physical invoices) was
£8.4 million.

**Trading   **

During the year ended 31 March 2020, ECO recorded its highest second half revenue
weighting to date being 60% of the full year revenue.  This compares to an equivalent
second half weighting in the year ended 31 March 2019 of 55%.  Year on year the 
second half of this financial year was 18% greater than the prior year reversing
a shortfall at the half year and resulting in an overall revenue improvement for
the year ended 31 March 2020 of 7% compared with the year ended 31 March 2019.  
The primary driver of this strong second half performance was a recovery in China(
from the effects of African Swine Fever, described in our Chief Executive’s report)
and strong performance in the USA.  A geographical analysis of revenue is as follows:

| Revenue Summary | Year ended 31 March  |   |   |   | 
|   | 2020 |  | 2019 |  | % change |  | 
|   | (£’m) |  | (£’m) |  | 2019 to 2020 |   | 
|   |  |  | Restated |  |  |   | 
| China and Japan | 23.1 |  | 26.8 |  | -14% |   | 
| North America (USA and Canada)  | 11.6 |  | 10.5 |  | 10% |   | 
| South and South East Asia | 14.2 |  | 8.1 |  | 75% |   | 
| Latin America | 12.6 |  | 10.8 |  | 17% |   | 
| Europe | 7.6 |  | 7.9 |  | -4% |   | 
| Rest of World and UK | 3 |  | 3.2 |  | -6% |   | 
|   | 72.1 |   | 67.3 |   | 7% |   |

Revenue from China in the second half of the year was £14.4 million compared to 
the equivalent six months ended 31 March 2019 of £12.4 million underlining the recovery
in that market.  Trade with India (included within Asia in the above analysis) softened
towards the end of the financial year, however the rest of the region including 
Indonesia, Malaysia, Thailand and the Philippines continued the trend set in the
first half of the year resulting a year on year increase in Asia of 75% becoming
the Group’s second largest segment this year.  The thawing in trade tensions between
the USA and China resulting in strengthening swine market conditions in the second
half of the year is also evident in the second half revenue from the USA of £5.8
million (2019 – £3.6 million).  Latin America, and in particular Brazil, continued
to benefit from pig exports to China, resulting in buoyant commodity prices and 
a consequent strong market for the Group’s products.  Europe benefitted from pork
exports to China, in particular from Spain.

Gross margins at 46% in the year ended 31 March 2020 (2019: 47%) were reasonably
consistent and represented a strong recovery from poor first half margins (43%) –
this being associated in the main with improvements in the USA. 

Overheads, at £28.3million were significantly greater in the year ended 31 March
2020 compared with the year ended 31 March 2019 (£21.8million).  The greatest contributors
to this increase were expenditure on Research and Development, employment costs 
and foreign exchange movements.  Expensed research and development expenditure increased
from £5.8 million in the year ended 31 March 2019 to £8.8 million in the year ended
31 March 2020.  This increase of £3.0 million reflects the nature of the earlier
stage projects being undertaken (and therefore expensed to the income statement)
particularly in respect of vaccine development as well as an overall increase of
18% in the cash expenditure in R&D.  Expensed employment costs increased from £9
million in the year ended 31 March 2019 to £10 million in the year ended 31 March
2020.  Whilst the staff numbers reduced from an average of 217 in 2019 to 204 in
2020, the amount of capitalised in house labour in research and development also
fell resulting in the greater charge to the income statement.  The foreign exchange
loss in 2020 amounted to £0.5 million whereas a gain of £0.7 million was recorded
in 2019. 

Total cash expenditure on research and development in the year was £10.9 million(
2019: £9.3 million).  This expenditure was expensed to the extent that it related
to projects at the research phase and capitalised in accordance with IAS38 to the
extent that it related to projects in the later stage (development phase) of the
project life-cycle. The total cash expenditure in R&D can be analysed as follows:

|   | Year ended 31 March | 
|   | 2020 £000’s | 2019 £000’s (Restated) | 
| Research expenditure – included in administrative expenses | 8,775 | 5,868 | 
| Development expenditure – capitalised in intangible assets |   2,115 | 3,477 | 
| Total cash expenditure (excluding employment costs) | 10,890 | 9,345 |

EBITDA is considered by the Board and the Group leadership team to represent a key
performance measure; the removal of amortisation (which is a significant annual 
non-cash charge to profits) and depreciation provides a good indication of the underlying
trading performance of the business.  The EBITDA margin (EBITDA expressed as a percentage
of revenue in the period) was 11.6% in the year ended 31 March 2020 compared with
18.5% in the year ended 31 March 2019.  This reduction arises in part from the small
reduction in gross margin (1%) as well as the increased investment in R&D, referred
to previously.

The Group continues to benefit from a low effective tax rate.  In the year ended
31 March 2020 the effective tax rate for the Group was 19.8% (2019 – 12.3%).  The
historical low effective tax rate is largely a result of the significant R&D investment
on which the Group receives tax credits.  These tax credits continue but in 2020
a prudent assessment has been taken of the likely taxes due in foreign jurisdictions
carrying a higher tax rate than the UK and no account has been taken of the likely
benefit that will accrue from “patent box claims”.  Historic tax losses result in
zero tax payable in the year.  Discussions with HMRC will commence concerning the
tax treatment of the prior year restatements; the accounting treatment to expense
previously capitalised R&D investment may result in a reduction in prior year taxable
profits.  No benefit of this tax re-computation has been recognised in this Annual
Report.

The consolidated cash position in the Group has declined from £16.9 million at 31
March 2019 to £11.9 million at 31 March 2020.  This consolidated cash position at
31 March 2020 includes £5.3 million (2019 – £4.0 million) which is held in the Group’s
subsidiary in China.  A portion of this cash is repatriated from China once per 
annum by dividend declaration; the Group’s share which is received in the UK is 
51%.

The cash generated from operations was 23% lower in the year ended 31 March 2020
at £5.5 million (2019 – £7.1 million) which fell less than the lower profitability
due to better working capital management.  From operating cash, dividends of £8.4
million were paid in September 2019 and investment of £2.1 million in capitalised
development costs, together with income tax paid of £1.1 million, acquisitions of
tangible fixed assets (£0.8 million) and other sundry cash movements (£0.2 million)
resulted in an overall net cash draw down of £7.1 million and the lower cash balance
at 31 March 2020.

Post balance sheet event

There have been no material post balance sheet events to note.

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